You should read the following discussion and analysis of our financial condition and results of operations together with our condensed financial statements and related notes included in Part I, Item 1 of this report and with our audited financial statements and related notes thereto included as part of our Annual Report on Form 10-K for the year endedDecember 31, 2021 .
Forward-Looking Statements
This discussion contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act). Forward-looking statements are identified by words such as "believe," "will," "may," "estimate," "continue," "anticipate," "intend," "should," "plan," "expect," "predict," "could," "potentially" or the negative of these terms or similar expressions. You should read these statements carefully because they discuss future expectations, contain projections of future results of operations or financial condition, or state other "forward-looking" information. These statements relate to, among other things, our industry, business, future plans, strategies, objectives, expectations, intentions and financial performance, as well as anticipated impacts from, and our responses to, the COVID-19 pandemic and our expectations regarding current supply constraints, and the assumptions that underlie these statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in this report in Part II, Item 1A - "Risk Factors," and elsewhere in this report, as well as in our other filings with theSecurities and Exchange Commission (SEC). Forward-looking statements are based on our management's beliefs and assumptions and on information currently available to our management. These statements, like all statements in this report, speak only as of their date, and we undertake no obligation to update or revise these statements in light of future developments. We caution investors that our business and financial performance are subject to substantial risks and uncertainties.
Overview
Everspin is a pioneer in the successful commercialization of Magnetoresistive Random Access Memory (MRAM) technology. Our portfolio of MRAM technologies, including Toggle MRAM and Spin-transfer Torque MRAM (STT-MRAM), is delivering superior performance, persistence and reliability in non-volatile memories that transform how mission-critical data is protected against power loss. With over 10 years of MRAM technology and manufacturing leadership, our memory solutions deliver significant value to our customers in key markets such as industrial, medical, automotive/transportation, aerospace and data center. We are the leading supplier of discrete MRAM components and a successful licensor of our broad portfolio of related technology intellectual property. We sell our products directly and through our established distribution channels to industry-leading original equipment manufacturers (OEMs) and original design manufacturers (ODMs). We manufacture our MRAM products using both captive and third-party manufacturing capabilities. We purchase industry-standard complementary metal-oxide semiconductor (CMOS) wafers from semiconductor foundries and perform back end of line (BEOL) processing that includes our magnetic-bit technology at our 200mm fabrication facility inChandler, Arizona . We also manufacture full-flow 300mm CMOS wafers with our STT-MRAM magnetic-bit technology integrated in BEOL as part of our strategic relationship with GLOBALFOUNDRIES.
Key Metrics
We monitor a variety of key financial metrics to help us evaluate trends, establish budgets, measure the effectiveness of our business strategies and assess operational efficiencies. These financial metrics include revenue, gross margin, operating expenses and operating income determined in accordance with GAAP. Additionally, we monitor and project cash flow to determine our sources and uses for working capital to fund our operations. We also monitor Adjusted EBITDA, a non-GAAP financial measure, and design wins. We define Adjusted EBITDA as net income or loss adjusted for interest expense, taxes, depreciation and amortization, stock-based compensation expense, and restructuring costs, if
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Adjusted EBITDA. Our management and board of directors use Adjusted EBITDA to understand and evaluate our operating performance and trends, to prepare and approve our annual budget and to develop short-term and long-term operating and financing plans. Accordingly, we believe that Adjusted EBITDA provides useful information for investors in understanding and evaluating our operating results in the same manner as our management and our board of directors. Adjusted EBITDA is a non-GAAP financial measure and should be considered in addition to, not as superior to, or as a substitute for, net income (loss) reported in accordance with GAAP. The following table presents a reconciliation of net income (loss), the most directly comparable GAAP measure, to Adjusted EBITDA for the periods indicated: Three Months Ended March 31, 2022 2021 Adjusted EBITDA reconciliation: Net income (loss) $ 1,935 $ (460) Depreciation and amortization 258 383 Stock-based compensation expense 824 743 Interest expense 75 152 Adjusted EBITDA $ 3,092 $ 818
Effect of the COVID-19 Pandemic on our Business
The COVID-19 outbreak has resulted in government authorities around the world implementing numerous measures to try to reduce the spread of COVID-19, such as travel bans and restrictions, quarantines, "shelter-in-place," "stay-at-home," total lock-down orders, business limitations or shutdowns and similar orders. More recently, new variants of COVID-19, such as the Omicron variant and its subvariants, that are significantly more contagious than previous strains have emerged. The spread of these new strains have caused many government authorities and businesses to reimplement the aforementioned measures to try to reduce the spread that had become less prevalent. While some of these restrictions have begun to be lifted, the lingering impact of the COVID pandemic continues to create significant volatility throughout the global economy, including supply chain constraints, labor supply issues and higher inflation. Accordingly, it is unclear at this point the full impact COVID-19 and its variants will have on the global economy and on our Company. Overall, our business remains operational in the midst of the pandemic. However, as a result of the ongoing COVID-19 pandemic and the related responses from government authorities, our business, results of operations and financial condition have been, and continue to be, adversely impacted. For example, we have experienced electronics supply chain and demand disruptions from extended factory shutdowns, particularly in some Asian countries, which created unusual order patterns, and subsequently slowed Toggle MRAM demand, particularly from our industrial customers. We continue to see an impact as reflected in reduced demand from some customers and distributors. While we are working closely with our manufacturing partners and suppliers to support demand for our products, the full impact on our demand from customers remains unknown. Management is thus planning for a broad range of possible demand outcomes in an effort to ensure the success of our business under a variety of end market conditions. Further, in an effort to protect the health and safety of our employees, we transitioned most of our office and support employees and contractors to working from home; suspended all non-essential business travel; and implemented social distancing guidelines for our employees and contractors who must work in our manufacturing and laboratory locations. Consequently, the remote working environment we have implemented for our employees has adversely impacted manufacturing operations given delays in data gathering, analysis and inefficiencies of teams solving technical problems via remote-only means, which has impacted, and continues to impact, our cost of sales.
The recent prospect of lockdowns in
We will continue to monitor the situation and take additional actions as warranted. These actions may include further altering our operations in order to protect the best interests of our employees, customers and suppliers, and to comply with government requirements, while also planning and executing our business to best support our customers, suppliers, and partners. 19
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The ultimate extent of the impact of the COVID-19 pandemic on our business, results of operations and financial condition will depend on future developments, which are highly uncertain, continuously evolving and cannot be predicted, including, but not limited to, the duration and spread of the COVID-19 outbreak, its severity, the emergence and severity of its variants, the actions to contain the virus or treat its impact, such as the availability and efficacy of vaccines (particularly with respect to emerging strains of the virus) and potential hesitancy to use them, general economic factors, such as increased inflation; supply chain restraints; labor supply issues; and how quickly and to what extent normal economic and operating conditions can resume. Accordingly, our current results and financial condition discussed herein may not be indicative of future operating results and trends. See "Risk Factors" in Part II, Item 1A of this report for additional risks we face due to the COVID-19 pandemic. Results of Operations The following table sets forth our results of operations for the periods indicated: Three Months Ended March 31, 2022 2021 2022 2021 (In thousands) (As a percentage of revenue) Product sales$ 12,671 $ 9,068 88 % 88 % Licensing, royalty, patent, and other revenue 1,676 1,212 12 12 Total revenue 14,347 10,280 100 100 Cost of product sales 5,752 4,256 40 41 Cost of licensing, royalty, patent, and other revenue 272 39 2 1 Total cost of sales 6,024 4,295 42 42 Gross profit 8,323 5,985 58 58 Operating expenses: Research and development 2,436 2,439 17 24 General and administrative 2,729 2,843 19 28 Sales and marketing 1,134 987 8 10 Total operating expenses 6,299 6,269 44 62 Income (loss) from operations 2,024 (284) 14 (4) Interest expense (75) (152) (1) (2) Other expense, net (14) (15) - - Net income (loss) before income taxes 1,935 (451) 13 (4) Income tax expense - (9) - - Net income (loss) and comprehensive income (loss)$ 1,935 $ (460) 13 % (4) %
Comparison of the three months ended
Revenue
We generated 75% and 77% of our revenue from products sold through distributors
for the three months ended
In addition to selling our products to our distributors, we maintain a direct
selling relationship, for strategic purposes, with several key customer
accounts. We have organized our sales team and representatives into three
primary regions:
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geography based on the region in which our products are sold, and not to where the end products in which they are assembled are shipped. Our revenue by region for the periods indicated was as follows (in thousands): Three Months Ended March 31, 2022 2021 APAC$ 9,234 $ 7,158 North America 3,105 1,740 EMEA 2,008 1,382 Total revenue$ 14,347 $ 10,280 Three Months Ended March 31, Change 2022 2021 Amount % (Dollars in thousands) Product sales$ 12,671 $ 9,068 $ 3,603 39.7 % Licensing, royalty, patent, and other revenue 1,676 1,212 464 38.3 % Total revenue$ 14,347 $ 10,280 $ 4,067 39.6 % Total revenue increased by$4.1 million , or 39.6%, from$10.3 million during the three months endedMarch 31, 2021 to$14.3 million during the three months endedMarch 31, 2022 . The increase was primarily due to an increase of product sales by$3.6 million , or 39.7%, from$9.1 million to$12.7 million driven by a higher volume of units produced and sold, along with average sales price increases to offset supplier price increases. Licensing, royalty, patent, and other revenue is a highly variable revenue item characterized by a small number of transactions annually with revenue based on size and terms of each transaction. Our best estimate of royalty revenue earned is made through the year, with an annual adjustment recognized for actual sales in the first quarter of each fiscal year. Licensing, royalty, patent, and other revenue increased by$0.5 million , or 38.3%, from$1.2 million during the three months endedMarch 31, 2021 to$1.7 million during the three months endedMarch 31, 2022 . The increase was driven by an increase in licensing revenues from a contractual agreement with a customer for the development of a RAD-Hard product, consisting of a technology license, a design license agreement, and development contract that was entered into in the second quarter of 2021.
Cost of Sales and Gross Margin
Three Months Ended March 31, Change 2022 2021 Amount % (Dollars in thousands) Cost of product sales$ 5,752 $ 4,256 $ 1,496 35.2 % Cost of licensing, royalty, patent, and other revenue 272 39 233 597.4 % Total cost of sales$ 6,024 $ 4,295 $ 1,729 40.3 % Gross margin 58.0 % 58.2 % Cost of product sales increased by$1.5 million , or 35.2%, from$4.3 million during the three months endedMarch 31, 2021 , to$5.8 million during the three months endedMarch 31, 2022 . The increase was due to an increase in product sales, along with price increases from suppliers. Cost of licensing, royalty, patent, and other revenue increased by$233,000 from$39,000 during the three months endedMarch 31, 2021 , to$272,000 during the three months endedMarch 31, 2022 . The increase was primarily due to increases in foundry and licensing activities. Gross margin decreased from 58.2% during the three months endedMarch 31, 2021 , to 58.0% during the three months endedMarch 31, 2022 . The decrease in gross margin was primarily due to price increases from suppliers. We continually look for alternative uses for previously reserved inventory and in certain instances we may receive discounted wafers based on product yields, which could impact individual product margin. 21 Table of Contents Operating Expenses Our operating expenses consist of research and development, general and administrative and sales and marketing expenses. Personnel-related expenses, including salaries, benefits, bonuses and stock-based compensation, are among the most significant component of each of our operating expense categories. Research and Development Expenses. Our research and development expenses consist primarily of personnel-related expenses for the design and development of our products and technologies, development wafers required to validate and characterize our technology, and expenses associated with our joint development activities. Research and development expenses also include consulting services, circuit design costs, materials and laboratory supplies, fabrication and new packaging technology, and an allocation of related facilities and equipment costs. We recognize research and development expenses as they are incurred.
Three Months Ended March 31, Change 2022 2021 Amount % (Dollars in thousands) Research and development$ 2,436 $ 2,439 $ (3) (0.1) % Research and development as a % of revenue 17 % 24 %
Research and development expenses remained relatively consistent during the
three months ended
Three Months Ended March 31, Change 2022 2021 Amount % (Dollars in thousands)
General and administrative$ 2,729 $ 2,843 $ (114) (4.0) % General and administrative as a % of revenue 19 % 28 % General and Administrative Expenses. General and administrative expenses decreased by$0.1 million , or 4.0%, from$2.8 million during the three months endedMarch 31, 2021 , to$2.7 million during the three months endedMarch 31, 2022 . The decrease is primarily due to decreased employee-related costs. Three Months Ended March 31, Change 2022 2021 Amount % (Dollars in thousands) Sales and marketing$ 1,134 $ 987 $ 147 14.9 % Sales and marketing as a % of revenue 8 % 10 % Sales and Marketing Expenses. Sales and marketing expenses increased by$0.1 million , or 14.9%, from$1.0 million during the three months endedMarch 31, 2021 , to$1.1 million during the three months endedMarch 31, 2022 . The increase was primarily due to an increase in variable compensation. Interest Expense Three Months Ended March 31, Change 2022 2021 Amount % (Dollars in thousands) Interest expense$ 75 $ 152 $ (77) (50.7) % Interest expense decreased by$77,000 , or 50.7%, from$152,000 during the three months endedMarch 31, 2021 , to$75,000 during the three months endedMarch 31, 2022 . The decrease was due to lower outstanding balances under the credit facility during the three months endedMarch 31, 2022 , resulting in less interest incurred. 22 Table of Contents Other Expense, Net Three Months Ended March 31, Change 2022 2021 Amount % (Dollars in thousands) Other expense, net$ (14) $ (15) $ 1 (6.7) %
Other expense, net remained relatively consistent during the three months ended
Liquidity and Capital Resources
We have generated significant losses since our inception and had an accumulated deficit of$150.9 million as ofMarch 31, 2022 , compared to$152.8 million as ofDecember 31, 2021 . We have historically financed our operations primarily through the sale of our common stock in our initial public offering (IPO) and follow-on public offering, sales of our common stock under our at-the-market (ATM) program (which was terminated inNovember 2020 ), sales of our redeemable convertible preferred stock, debt financing and the sale of our products. As ofMarch 31, 2022 , we had$19.9 million of cash and cash equivalents, compared to$21.4 million as ofDecember 31, 2021 . We believe that our existing cash and cash equivalents as ofMarch 31, 2022 , coupled with the amount available under our credit facility and our anticipated growth and sales levels, will be sufficient to meet our anticipated cash requirements for the next twelve months and beyond. Our future capital requirements will depend on many factors, including, among other things, our growth rate, the timing and extent of our spending to support research and development activities, the timing and cost of establishing additional sales and marketing capabilities, and the introduction of new products.
For additional information about the 2019 Credit Facility, see Note 6 to our condensed financial statements in Part I, Item 1 of this report.
Cash Flows
The following table summarizes our cash flows for the periods indicated (in thousands): Three Months EndedMarch 31, 2022 2021 (In thousands)
Cash (used in) provided by operating activities
(22) (309) Cash used in financing activities (531) (456)
Cash Flows From Operating Activities
During the three months endedMarch 31, 2022 , cash used in operating activities was$1.0 million , which consisted of net income of$1.9 million , cash provided by non-cash charges of$1.1 million and changes of net operating assets and liabilities of$4.0 million . The non-cash charges primarily consisted of stock-based compensation of$0.8 million , and depreciation and amortization of$0.3 million . The use of cash due to the change in our net operating assets and liabilities was primarily due to an increase in accounts receivable of$2.0 million due to timing of cash receipts for outstanding balances, a decrease in accrued liabilities of$2.0 million primarily due to variable compensation costs, profit sharing, and a decrease in deferred revenue of$0.5 million . These uses were partially offset by an increase in accounts payable of$0.3 million , a decrease in prepaid expenses and other current assets of$0.1 million , and a decrease of inventory of$0.2 million . During the three months endedMarch 31, 2021 , cash provided by operating activities was$1.7 million , which consisted of a net loss of$0.5 million , adjusted by non-cash charges of$1.2 million and a change of$0.9 million in our net operating assets and liabilities. The non-cash charges primarily consisted of stock-based compensation of$0.7 million , depreciation and amortization of$0.4 million , and interest expense related to the amortization of debt issuance costs of$0.1 million . The inflow of cash due to the change in our net operating assets and liabilities was primarily due to 23
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an increase of$3.0 million in deferred revenue, a decrease in inventory of$0.4 million , an increase in accrued liabilities of$0.3 million , an increase of$2.7 million in accounts receivable due to timing of cash receipts for outstanding balances, and a decrease of$0.1 million in accounts payable.
Cash Flows From Investing Activities
Cash used in investing activities during the three months ended
Cash used in investing activities during the three months ended
Cash Flows From Financing Activities
Cash used in financing activities during both the three months endedMarch 31, 2022 , and 2021, was$0.5 million , consisting mainly of$0.6 million of payments of term loan installments offset by$0.1 million in proceeds from the exercise of employee stock options.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements and do not have any holdings in variable interest entities.
Critical Accounting Policies and Significant Judgements and Estimates
Our condensed financial statements have been prepared in accordance with GAAP. The preparation of these condensed financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenue generated, and expenses incurred during the reporting periods. We base our estimates on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There have been no changes to our critical accounting policies and estimates described in the Annual Report on Form 10-K for the year endedDecember 31, 2021 , filed with theSEC onMarch 9, 2022 , that have had a material impact on our condensed financial statements and related notes.
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