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, 2022 .
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 15 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 16 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 Ended March 31, 2023 2022 Adjusted EBITDA reconciliation: Net income $ 761 $ 1,935 Depreciation and amortization 333 258 Stock-based compensation expense 1,160 824 Interest expense 63 75 Adjusted EBITDA $ 2,317 $ 3,092
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. Overall, our business remained operational in the midst of the COVID-19 pandemic. Recently, the United States Government declared that it was no longer treating COVID-19 as a pandemic. Since our business is dependent on a global supply chain, we expect to continue to navigate the impact of COVID-19, particularly in some Asian countries. 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 predicted, See "Risk Factors" in Part II, Item 1A of this report for additional risks we face due to the existence of COVID-19. 17 Table of Contents Results of Operations The following table sets forth our results of operations for the periods indicated: Three Months Ended March 31, 2023 2022 2023 2022 (In thousands) (As a percentage of revenue) Product sales$ 13,777 $ 12,671 93 % 88 % Licensing, royalty, patent, and other revenue 1,069 1,676 7 12 Total revenue 14,846 14,347 100 100 Cost of product sales 6,123 5,752 41 40 Cost of licensing, royalty, patent, and other revenue 293 272 2 2 Total cost of sales 6,416 6,024 43 42 Gross profit 8,430 8,323 57 58 Operating expenses: Research and development 3,199 2,436 22 17 General and administrative 3,220 2,729 22 19 Sales and marketing 1,315 1,134 9 8 Total operating expenses 7,734 6,299 52 44 Income from operations 696 2,024 5 14 Interest expense (63) (75) - (1) Other income (expense), net 128 (14) 1 -
Net income and comprehensive income$ 761 $ 1,935 5 % 13 %
Comparison of the three months ended
Revenue
We generated 87% and 75% 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 March 31, 2023 2022 APAC$ 7,591 $ 9,234 North America 2,925 3,105 EMEA 4,330 2,008 Total revenue$ 14,846 $ 14,347 Three Months Ended March 31, Change 2023 2022 Amount % (Dollars in thousands) Product sales$ 13,777 $ 12,671 $ 1,106 8.7 % Licensing, royalty, patent, and other revenue 1,069 1,676 (607) (36.2) % Total revenue$ 14,846 $ 14,347 $ 499 3.5 %
Total revenue increased by$0.5 million , or 3.5%, from$14.3 million during the three months endedMarch 31, 2022 to$14.8 million during the three months endedMarch 31, 2023 . The increase was primarily due to an increase of 18
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product sales by
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$0.6 million , or 36.2%, from$1.7 million during the three months endedMarch 31, 2022 to$1.1 million during the three months endedMarch 31, 2023 . The decrease was driven by a decrease of$0.6 million of other revenue related to foundry services.
Cost of Sales and Gross Margin
Three Months Ended March 31, Change 2023 2022 Amount % (Dollars in thousands) Cost of product sales$ 6,123 $ 5,752 $ 371 6.4 % Cost of licensing, royalty, patent, and other revenue 293 272 21 7.7 % Total cost of sales$ 6,416 $ 6,024 $ 392 6.5 % Gross margin 56.8 % 58.0 %
Cost of product sales increased by$0.4 million , or 6.4%, from$5.8 million during the three months endedMarch 31, 2022 , to$6.1 million during the three months endedMarch 31, 2023 . The increase was due to an increase in product sales and price increases from suppliers, partially offset by increased yields on toggle products. Cost of licensing, royalty, patent, and other revenue increased by$21,000 , or 7.7% from$272,000 during the three months endedMarch 31, 2022 , to$293,000 during the three months endedMarch 31, 2023 . The increase was due to an increase in licensing costs. Gross margin decreased from 58.0% during the three months endedMarch 31, 2022 , to 56.8% during the three months endedMarch 31, 2023 . Our gross margin decreased due to price increases from suppliers and lower licensing, royalty, patent, and other revenue. Operating Expenses Our operating expenses consist of research and development, general and administrative and sales and marketing expenses. Personnel-related expenses, including salaries, benefits, bonuses and stock-based compensation, are among the most significant component of each of our operating expense categories.
Three Months Ended March 31, Change 2023 2022 Amount % (Dollars in thousands) Research and development$ 3,199 $ 2,436 $ 763 31.3 % Research and development as a % of revenue 22 % 17 % Research and Development Expenses. Research and development expenses increased by$0.8 million , or 31.3%, from$2.4 million during the three months endedMarch 31, 2022 , to$3.2 million during the three months endedMarch 31, 2023 . The increase is primarily due to development expenses related to our new xSPI family of STT-MRAM products. Three Months Ended March 31, Change 2023 2022 Amount % (Dollars in thousands)
General and administrative$ 3,220 $ 2,729 $ 491 18.0 % General and administrative as a % of revenue 22 % 19 % 19 Table of Contents General and Administrative Expenses. General and administrative expenses increased by$0.5 million , or 18.0%, from$2.7 million during the three months endedMarch 31, 2022 to$3.2 million during the three months endedMarch 31, 2023 . The increase is primarily due to increases related to profit sharing
and professional service costs. Three Months Ended March 31, Change 2023 2022 Amount % (Dollars in thousands) Sales and marketing$ 1,315 $ 1,134 $ 181 16.0 % Sales and marketing as a % of revenue 9 % 8 % Sales and Marketing Expenses. Sales and marketing expenses increased by$0.2 million , or 16.0%, from$1.1 million during the three months endedMarch 31, 2022 , to$1.3 million during the three months endedMarch 31, 2023 . The increase was primarily due to an increase in variable compensation costs. Interest Expense Three Months Ended March 31, Change 2023 2022 Amount % (Dollars in thousands) Interest expense$ 63 $ 75 $ (12) (16.0) % Interest expense decreased by$12,000 , or 16.0%, from$75,000 during the three months endedMarch 31, 2022 , to$63,000 during the three months endedMarch 31, 2023 . The decrease was due to lower outstanding balances under the credit facility that we paid off in full during the three months endedMarch 31, 2023 , resulting in less interest incurred. Other Income (Expense), Net Three Months Ended March 31, Change 2023 2022 Amount % (Dollars in thousands) Other income (expense), net$ 128 $ (14) $ 142 1,014.3 % Other income (expense), net changed from a$14,000 expense to income of$128,000 from the three months endedMarch 31, 2022 to the three months endedMarch 31, 2023 . The change was primarily due to interest income earned on the money market cash account, offset by a loss on prepayment and termination of our 2019 Credit Facility.
Liquidity and Capital Resources
As ofMarch 31, 2023 , we had$24.2 million of cash and cash equivalents, compared to$26.8 million as ofDecember 31, 2022 . As ofMarch 31, 2023 , we have no outstanding debt as we paid off our 2019 Credit Facility in full inMarch 2023 . We believe our cash and cash equivalents are sufficient to meet our anticipated capital requirements in the next 12 months. 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.
Cash Flows
The following table summarizes our cash flows for the periods indicated (in thousands): Three Months EndedMarch 31, 2023 2022 (In thousands)
Cash provided by (used in) operating activities
(1,011) (22) Cash used in financing activities (2,777) (531) 20 Table of Contents
Cash Flows From Operating Activities
During the three months endedMarch 31, 2023 , cash provided by operating activities was$1.2 million , which consisted of net income of$0.8 million , cash provided by non-cash charges of$1.7 million and changes of net operating assets and liabilities of$1.3 million . The non-cash charges primarily consisted of stock-based compensation of$1.2 million , depreciation and amortization of$0.3 million , and a loss on prepayment and termination of our 2019 credit facility of$0.2 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$0.5 million due to timing of cash receipts for outstanding balances and a decrease in accrued liabilities of$1.5 million primarily due to timing of variable compensation costs. These uses were partially offset by a decrease in inventory of$0.4 million , a decrease in prepaid and other current assets of$0.1 million , an increase in deferred revenue of$0.1 million , and an increase in accounts payable of$0.1 million . 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 and 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 .
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 the three months endedMarch 31, 2023 , was$2.8 million , consisting mainly of$2.8 million of payments to pay off our 2019 Credit Facility. Cash used in financing activities during the three months endedMarch 31, 2022 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.
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, 2022 , filed with theSEC onMarch 2, 2023 , that have had a material impact on our condensed financial statements and related notes.
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