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. In addition, statements that "we believe" and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this Quarterly Report on Form 10-Q. While we believe that information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into or review of, all relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely on these statements. 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 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 18 Table of Contents 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 any. 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 reported in accordance with GAAP. The following table presents a reconciliation of net income, the most directly comparable GAAP measure, to Adjusted EBITDA for the periods indicated: Three Months EndedSeptember 30 ,
Nine Months Ended
2022 2021 2022 2021 Adjusted EBITDA reconciliation: Net income $ 1,907 $ 880 $ 5,513 $ 676 Depreciation and amortization 242 361 704 1,117 Stock-based compensation expense 1,152 1,027
3,287 2,474 Interest expense 73 165 218 461 Income tax expense - 22 - 75 Adjusted EBITDA $ 3,374 $ 2,455 $ 9,722 $ 4,803
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 been 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.
The emergence of new variants of COVID-19, and the prevalence of cases of infection globally adds additional uncertainty and could result in further impacts to our business and operations, including those discussed above and in "Risk Factors" in Part II, Item 1A of this report.
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.
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
19 Table of Contents 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 September 30, 2022 2021 2022 2021 (In thousands) (As a percentage of revenue) Product sales$ 14,571 $ 12,037 96 % 81 % Licensing, royalty, patent, and other revenue 670 2,758 4 19 Total revenue 15,241 14,795 100 100 Cost of product sales 6,122 6,043 40 41 Cost of licensing, royalty, patent, and other revenue 155 304 1 2 Total cost of sales 6,277 6,347 41 43 Gross profit 8,964 8,448 59 57 Operating expenses: Research and development 2,879 3,105 19 21 General and administrative 2,971 2,996 19 20 Sales and marketing 1,203 1,272 8 9 Total operating expenses 7,053 7,373 46 50 Income from operations 1,911 1,075 13 7 Interest expense (73) (165) - (1) Other income (expense), net 69 (8) - -
Net income before income taxes 1,907 902 13 6 Income tax expense - (22) - - Net income and comprehensive income$ 1,907 $ 880
13 % 6 % 20 Table of Contents Nine Months Ended September 30, September 30, September 30, 2022 2021 2022 2021 (In thousands) (As a percentage of revenue) Product sales$ 40,465 $ 31,292 91 % 85 % Licensing, royalty, patent, and other revenue 3,830 5,631 9 15 Total revenue 44,295 36,923 100 100 Cost of product sales 17,667 14,629 40 40 Cost of licensing, royalty, patent, and other revenue 750 665 2 2 Total cost of sales 18,417 15,294 42 41 Gross profit 25,878 21,629 58 59 Operating expenses: Research and development 8,014 8,901 18 24 General and administrative 8,560 8,177 19 22 Sales and marketing 3,629 3,304 8 9 Total operating expenses 20,203 20,382 45 55 Income from operations 5,675 1,247 13 4 Interest expense (218) (461) (1) (2) Other expense, net 56 (35) - -
Net income before income taxes 5,513 751 12 2 Income tax expense - (75) - - Net income and comprehensive income$ 5,513 $ 676 12 % 2 %
Comparison of the three months ended
Revenue
We generated 92% and 62% of our revenue from products sold to 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:North America ;Europe ,Middle East andAfrica (EMEA); andAsia-Pacific (APAC). We recognize revenue by geography based on the region in which our customer is located and to which our products are sold, and not to where the end products in which they are assembled are shipped. Our revenue by region and by type of revenue for the periods indicated were as follows (in
thousands): Three Months Ended September 30, 2022 2021 APAC $ 10,030 $ 8,523 North America 2,980 4,197 EMEA 2,231 2,075 Total revenue $ 15,241 $ 14,795 Three Months Ended September 30, Change 2022 2021 Amount % (Dollars in thousands) Product sales$ 14,571 $ 12,037 $ 2,534 21.1 % Licensing, royalty, patent, and other revenue 670 2,758 (2,088) (75.7) % Total revenue$ 15,241 $ 14,795 $ 446 3.0 %
Total revenue increased by$0.4 million , or 3.0%, from$14.8 million during the three months endedSeptember 30, 2021 to$15.2 million during the three months endedSeptember 30, 2022 . The increase was primarily due to an increase 21
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of product sales by$2.5 million , or 21.1%, from$12.0 million to$14.6 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 decreased by$2.1 million , or 75.7%, from$2.8 million during the three months endedSeptember 30, 2021 to$0.7 million during the three months endedSeptember 30, 2022 . The decrease was driven by a decrease 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, along with a patent sale in the third quarter of 2021 resulting in approximately$1.3 million in revenue. There were no patent sales in the third quarter of 2022.
Cost of Sales and Gross Margin
Three Months Ended September 30, Change 2022 2021 Amount % (Dollars in thousands) Cost of product sales$ 6,122 $ 6,043 $ 79 1.3 % Cost of licensing, royalty, patent, and other revenue 155 304 (149) (49.0) % Total cost of sales$ 6,277 $ 6,347 $ (70) (1.1) % Gross margin 58.8 % 60.7 %
Cost of product sales increased by$0.1 million , or 1.3%, from$6.0 million during the three months endedSeptember 30, 2021 , to$6.1 million during the three months endedSeptember 30, 2022 . The increase was due to an increase in product sales and price increases from suppliers, offset by increased yields on toggle products. Cost of licensing, royalty, patent, and other revenue decreased by$0.1 million , or 49% from$0.3 million during the three months endedSeptember 30, 2021 , to$0.2 million during the three months endedSeptember 30, 2022 . The decrease was due to a decline in licensing costs. Gross margin decreased from 60.7% during the three months endedSeptember 30, 2021 , to 58.8% during the three months endedSeptember 30, 2022 . The decrease in gross margin was primarily due to price increases from suppliers and lower licensing, royalty, patent, and other revenue.
Operating Expenses
Our operating expenses consist of research and development, general and administrative and sales and marketing expenses. Personnel-related expenses, including salaries, benefits, bonuses and stock-based compensation, are among the most significant component of each of our operating expense categories.
Three Months Ended September 30, Change 2022 2021 Amount % (Dollars in thousands) Research and development$ 2,879 $ 3,105 $ (226) (7.3) % Research and development as a % of revenue 19 % 21 %
Research and Development Expenses. Research and development expenses decreased
by
22
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September 30, 2022 . The decrease is primarily due to reduced development expenses related to the new 28nm product, that has started producing samples in 2022. Three Months Ended September 30, Change 2022 2021 Amount % (Dollars in thousands)
General and administrative$ 2,971 $ 2,996 $ (25) (0.8) % General and administrative as a % of revenue 19 % 20 %
General and Administrative Expenses. General and administrative expenses
remained relatively consistent at
Three Months Ended September 30, Change 2022 2021 Amount % (Dollars in thousands) Sales and marketing$ 1,203 $ 1,272 $ (69) (5.4) % Sales and marketing as a % of revenue 8 % 9 % Sales and Marketing Expenses. Sales and marketing expenses decreased by$0.1 million , or 5.4%, from$1.3 million during the three months endedSeptember 30, 2021 , to$1.2 million during the three months endedSeptember 30, 2022 . The decrease was primarily due to a decrease in variable compensation. Interest Expense Three Months Ended September 30, Change 2022 2021 Amount % (Dollars in thousands) Interest expense$ 73 $ 165 $ (92) (55.8) % Interest expense decreased by$92,000 , or 55.8%, from$165,000 during the three months endedSeptember 30, 2021 , to$73,000 during the three months endedSeptember 30, 2022 . The decrease was due to lower outstanding balances under the credit facility during the three months endedSeptember 30, 2022 , resulting
in less interest incurred. Other Income (Expense), Net Three Months Ended September 30, Change 2022 2021 Amount % (Dollars in thousands) Other income (expense), net$ 69 $ (8) $ 77 962.5 % Other income (expense), net changed from a$8,000 expense to income of$69,000 from the three months endedSeptember 30, 2021 to the three months endedSeptember 30, 2022 . The increase was primarily due to interest income earned on the money market cash account.
Comparison of the nine months ended
Revenue
We generated 85% and 67% of our revenue from products sold through distributors
for the nine months ended
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Our revenue by region and by type for the periods indicated were as follows (in thousands):
Nine Months Ended September 30, 2022 2021 APAC$ 27,634 $ 23,474 North America 9,865 8,623 EMEA 6,796 4,826 Total revenue$ 44,295 $ 36,923 Nine Months Ended September 30, Change 2022 2021 Amount % (Dollars in thousands) Product sales$ 40,465 $ 31,292 $ 9,173 29.3 % Licensing, royalty, patent, and other revenue 3,830 5,631 (1,801) (32.0) % Total revenue$ 44,295 $ 36,923 $ 7,372 20.0 % Total revenue increased by$7.4 million , or 20.0%, from$36.9 million during the nine months endedSeptember 30, 2021 to$44.3 million during the nine months endedSeptember 30, 2022 . The increase was primarily due to an increase of product sales by$9.2 million , or 29.3%, from$31.3 million to$40.5 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 decreased by$1.8 million , or 32.0%, from$5.6 million during the nine months endedSeptember 30, 2021 to$3.8 million during the nine months endedSeptember 30, 2022 . The decrease was driven by higher licensing revenues during the nine months endedSeptember 30, 2021 , 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, along with a patent sale in the third quarter of 2021 resulting in approximately$1.3 million in revenue. There were no patent sales in the nine months endedSeptember 30, 2022 .
Cost of Sales and Gross Margin
Nine Months Ended September 30, Change 2022 2021 Amount % (Dollars in thousands) Cost of product sales$ 17,667 $ 14,629 $ 3,038 20.8 % Cost of licensing, royalty, patent, and other revenue 750 665 85 12.8 % Total cost of sales$ 18,417 $ 15,294 $ 3,123 20.4 % Gross margin 58.4 % 58.6 % Cost of product sales increased by$3.0 million , or 20.8%, from$14.6 million during the nine months endedSeptember 30, 2021 , to$17.6 million during the nine months endedSeptember 30, 2022 . The increase was due to an increase in product sales, along with price increases from suppliers.
Cost of licensing, royalty, patent, and other revenue increased by
Gross margin decreased from 58.6% during the nine months endedSeptember 30, 2021 , to 58.4% during the nine months endedSeptember 30, 2022 . The decrease in gross margin was primarily due to price increases from suppliers and lower licensing, royalty, patent, and other revenue. 24 Table of Contents Operating Expenses Our operating expenses consist of research and development, general and administrative and sales and marketing expenses. Personnel-related expenses, including salaries, benefits, bonuses and stock-based compensation, are among the most significant component of each of our operating expense categories.
Nine Months Ended September 30, Change 2022 2021 Amount % (Dollars in thousands) Research and development$ 8,014 $ 8,901 $ (887) (10.0) % Research and development as a % of revenue 18 % 24 % Research and Development Expenses. Research and development expenses decreased by$0.9 million , or 10.0%, from$8.9 million during the nine months endedSeptember 30, 2021 to$8.0 million during the nine months endedSeptember 30, 2022 . The decrease is primarily due to reduced development expenses related to the new 28nm product that has started producing samples in 2022. Nine Months Ended September 30, Change 2022 2021 Amount % (Dollars in thousands) General and administrative$ 8,560 $ 8,177 $ 383 4.7 % General and administrative as a % of revenue 19 % 22 % General and Administrative Expenses. General and administrative expenses increased by$0.4 million , or 4.7%, from$8.2 million during the nine months endedSeptember 30, 2021 , to$8.6 million during the nine months endedSeptember 30, 2022 . The increase is primarily due to increased stock-based compensation expense offset by a gain on the sale of property and equipment. Nine Months Ended September 30, Change 2022 2021 Amount % (Dollars in thousands) Sales and marketing$ 3,629 $ 3,304 $ 325 9.8 % Sales and marketing as a % of revenue 8 % 9 % Sales and Marketing Expenses. Sales and marketing expenses increased by$0.3 million , or 9.8%, from$3.3 million during the nine months endedSeptember 30, 2021 , to$3.6 million during the nine months endedSeptember 30, 2022 . The increase was primarily due to an increase in variable compensation. Interest Expense Nine Months Ended September 30, Change 2022 2021 Amount % (Dollars in thousands) Interest expense$ 218 $ 461 $ (243) (52.7) %
Interest expense decreased by$243,000 , or 52.7%, from$461,000 during the nine months endedSeptember 30, 2021 , to$218,000 during the nine months endedSeptember 30, 2022 . The decrease was due to lower outstanding balances under the credit facility during the nine months endedSeptember 30, 2022 , resulting
in less interest incurred. 25 Table of Contents Other Income (Expense), Net Nine Months Ended September 30, Change 2022 2021 Amount % (Dollars in thousands) Other income (expense), net$ 56 $ (35) $ 91 (260.0) %
Other income (expense) changed from$35,000 in expense to$56,000 in income from the nine months endedSeptember 30, 2021 to the nine months endedSeptember 30, 2022 . The increase was primarily due to interest income earned on the money market cash account.
Liquidity and Capital Resources
As ofSeptember 30, 2022 , we had$23.4 million of cash and cash equivalents, compared to$21.4 million as ofDecember 31, 2021 . We believe our cash and cash equivalents are sufficient to meet our anticipated capital requirements. 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): Nine Months EndedSeptember 30, 2022 2021 (In thousands)
Cash provided by operating activities
Cash Flows From Operating Activities
During the nine months endedSeptember 30, 2022 , cash provided by operating activities was$4.3 million , which consisted of net income of$5.5 million , cash provided by non-cash charges of$3.9 million and changes of net operating assets and liabilities of$5.2 million . The non-cash charges primarily consisted of stock-based compensation of$3.3 million , and depreciation and amortization of$0.7 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$4.4 million due to timing of cash receipts for outstanding balances, an increase in inventory of$1.5 million , and a decrease in accrued liabilities of$1.1 million primarily due to timing of variable compensation costs. These uses were partially offset by a decrease in prepaid and other current assets of$0.5 million and an increase in accounts payable of$1.2 million . During the nine months endedSeptember 30, 2021 , cash provided by operating activities was$2.9 million , which consisted of net income of$0.7 million , cash provided by non-cash charges of$3.9 million and changes of net operating assets and liabilities of$1.6 million . The non-cash charges primarily consisted of stock-based compensation of$2.5 million , depreciation and amortization of$1.1 million , and interest expense related to the amortization of debt issuance costs 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$3.0 million due to timing of cash receipts for outstanding balances, an increase of$0.9 million in inventory due to increased inventory levels, and an increase of$0.1 million in prepaid expenses and other current assets. These uses were partially offset by an increase in deferred revenue of$1.4 million , an increase of$0.7 million in accrued liabilities due to the timing of payments, and an increase in accounts payable of$0.7 million . 26
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Cash Flows From Investing Activities
Cash used in investing activities during the nine months endedSeptember 30, 2022 , was$1.1 million , reflecting$1.3 million for the purchase of manufacturing equipment partially offset by$0.2 million in proceeds received on the sale of property and equipment.
Cash used in investing activities during the nine months ended
Cash Flows From Financing Activities
Cash used in financing activities during the nine months endedSeptember 30, 2022 , was$1.1 million , consisting mainly of$1.8 million of payments of term loan installments partially offset by$0.7 million in proceeds from the exercise of employee stock options. Cash used in financing activities during the nine months endedSeptember 30, 2021 was$2.4 million , consisting of$2.8 million of payments of term loan installments, partially offset by$0.4 million in proceeds from stock option exercises.
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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