Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysi s of Financial Condition and Results of Operations
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 ended December 31, 2023.
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. 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 the Securities 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 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 in Chandler, 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
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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 September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
Adjusted EBITDA reconciliation:
Net (loss) income
$
2,271
$
2,438
$
(433)
$
7,084
Depreciation and amortization
402
288
1,197
905
Stock-based compensation expense
1,532
1,280
5,108
3,700
Interest expense
—
—
—
63
Income tax (benefit) expense
10
—
86
—
Adjusted EBITDA
$
4,215
$
4,006
$
5,958
$
11,752
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Results of Operations
The following tables set forth our results of operations for the periods indicated:
Three Months Ended September 30,
2024
2023
2024
2023
(In thousands)
(As a percentage of revenue)
Product sales
$
10,443
$
13,543
86
%
82
%
Licensing, royalty, patent, and other revenue
1,650
2,923
14
18
Total revenue
12,093
16,466
100
100
Cost of product sales
5,751
5,920
48
36
Cost of licensing, royalty, patent, and other revenue
390
627
3
4
Total cost of sales
6,141
6,547
51
40
Gross profit
5,952
9,919
49
60
Operating expenses:
Research and development
3,384
2,659
28
16
General and administrative
3,363
3,933
28
24
Sales and marketing
1,320
1,348
11
8
Total operating expenses
8,067
7,940
67
48
(Loss) income from operations
(2,115)
1,979
(17)
12
Other income, net
4,396
459
36
3
Net income (loss) before income taxes
2,281
2,438
19
15
Income tax expense
(10)
—
—
—
Net income (loss) and comprehensive income (loss)
$
2,271
$
2,438
19
%
15
%
Nine Months Ended September 30,
2024
2023
2024
2023
(In thousands)
(As a percentage of revenue)
Product sales
$
31,190
$
40,726
84
%
87
%
Licensing, royalty, patent, and other revenue
5,969
6,333
16
13
Total revenue
37,159
47,059
100
100
Cost of product sales
16,989
18,133
46
39
Cost of licensing, royalty, patent, and other revenue
842
1,384
2
3
Total cost of sales
17,831
19,517
48
41
Gross profit
19,328
27,542
52
59
Operating expenses:
Research and development
10,259
8,566
28
18
General and administrative
10,653
10,660
29
23
Sales and marketing
3,950
4,018
11
9
Total operating expenses
24,862
23,244
67
50
(Loss) income from operations
(5,534)
4,298
(15)
9
Interest expense
—
(63)
—
—
Other income, net
5,187
2,849
14
6
Net income (loss) before income taxes
(347)
7,084
(1)
15
Income tax expense
(86)
—
—
—
Net income (loss) and comprehensive income (loss)
$
(433)
$
7,084
(1)
%
15
%
Comparison of the three months ended September 30, 2024 and 2023
Revenue
We generated 84% and 79% of our revenue from products sold to distributors for the three months ended September 30, 2024 and 2023, respectively.
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
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regions: North America; EMEA; and 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,
2024
2023
APAC
$
7,923
$
8,663
North America
1,874
4,607
EMEA
2,296
3,196
Total revenue
$
12,093
$
16,466
Three Months Ended
September 30,
Change
2024
2023
Amount
%
(Dollars in thousands)
Product sales
$
10,443
$
13,543
$
(3,100)
(22.9)
%
Licensing, royalty, patent, and other revenue
1,650
2,923
(1,273)
(43.6)
%
Total revenue
$
12,093
$
16,466
$
(4,373)
(26.6)
%
Total revenue decreased by $4.4 million, or 26.6%, from $16.5 million during the three months ended September 30, 2023 to $12.1 million during the three months ended September 30, 2024. The decrease was primarily due to a decrease in product sales of $3.1 million due to timing of customer demand and a decrease in licensing, royalty, patent, and other revenue of $1.3 million.
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 throughout the year for royalty contracts with an annual performance period, with an annual adjustment recognized for actual sales in the first quarter of each fiscal year. Licensing, royalty, patent, and other revenue decreased by $1.3 million, or 43.6% from $2.9 million during the three months ended September 30, 2023, to $1.7 million during the three months ended September 30, 2024. The decrease was driven by licensing revenue generated from our RAD-Hard projects of $0.7 million, a decrease of $0.5 million in other revenue related to professional services and a decrease of $0.1 million in royalty revenue.
Cost of Sales and Gross Margin
Three Months Ended
September 30,
Change
2024
2023
Amount
%
(Dollars in thousands)
Cost of product sales
$
5,751
$
5,920
$
(169)
(2.9)
%
Cost of licensing, royalty, patent, and other revenue
390
627
(237)
(37.8)
%
Total cost of sales
$
6,141
$
6,547
$
(406)
(6.2)
%
Gross margin
49.2
%
60.2
%
Cost of product sales decreased by $0.2 million, or 2.9%, from $5.9 million during the three months ended September 30, 2023, to $5.8 million during the three months ended September 30, 2024. The decrease was primarily due to a reduction in product sales and increased yields on our toggle products.
Cost of licensing, royalty, patent, and other revenue decreased by $0.2 million, or 37.8% from $0.6 million during the three months ended September 30, 2023, to $0.4 million during the three months ended September 30, 2024. The decrease was primarily due to a decrease in licensing costs related to labor and materials associated with the progression of our RAD-Hard projects.
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Gross margin decreased from 60.2% during the three months ended September 30, 2023, to 49.2% during the three months ended September 30, 2024. Gross margin decreased as a result of a shift in product mix, a decrease in FAB loadings, and a decrease in licensing revenue partially offset by increased yields on our toggle products.
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 components of each of our operating expense categories.
Three Months Ended
September 30,
Change
2024
2023
Amount
%
(Dollars in thousands)
Research and development
$
3,384
$
2,659
$
725
27.3
%
Research and development as a % of revenue
28
%
16
%
Research and Development Expenses. Research and development expenses increased by $0.7 million, or 27.3%, from $2.7 million during the three months ended September 30, 2023, to $3.3 million during the three months ended September 30, 2024. The primary driver of research and development expenses relates to our new Extended Serial Peripheral Interface (xSPI) family of STT-MRAM products. Our xSPI products offer high-performance, multiple I/O, SPI-compatibility and feature a high-speed, low pin count SPI compatible interface.
Three Months Ended
September 30,
Change
2024
2023
Amount
%
(Dollars in thousands)
General and administrative
$
3,363
$
3,933
$
(570)
(14.5)
%
General and administrative as a % of revenue
28
%
24
%
General and Administrative Expenses. General and administrative expenses decreased by $0.6 million, or 14.5%, from $3.9 million during the three months ended September 30, 2023, to $3.3 million during the three months ended September 30, 2024. The decrease is primarily due to reduced professional services costs.
Three Months Ended
September 30,
Change
2024
2023
Amount
%
(Dollars in thousands)
Sales and marketing
$
1,320
$
1,348
$
(28)
(2.1)
%
Sales and marketing as a % of revenue
11
%
8
%
Sales and Marketing Expenses. Sales and marketing expenses remained consistent at $1.3 million during the three months ended September 30, 2024 and 2023, respectively. Sales and marketing expenses relate primarily to compensation costs and contract labor.
Other Income, Net
Three Months Ended
September 30,
Change
2024
2023
Amount
%
(Dollars in thousands)
Other income, net
$
4,396
$
459
$
3,937
857.7
%
Other income, net increased by $3.9 million, or 857.7%, from $0.5 million during the three months ended September 30, 2023, to $4.4 million during the three months ended September 30, 2024. The change was primarily due to $4.0 million recorded as other income on the condensed statements of operations and comprehensive (loss) income.
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Comparison of the nine months ended September 30, 2024 and 2023
Revenue
We generated 80% and 81% of our revenue from products sold to distributors for the nine months ended September 30, 2024 and 2023, respectively.
Our revenue by region and by type of revenue for the periods indicated were as follows (in thousands).
Nine Months Ended September 30,
2024
2023
APAC
$
21,163
$
24,218
North America
7,857
10,798
EMEA
8,139
12,043
Total revenue
$
37,159
$
47,059
Nine Months Ended
September 30,
Change
2024
2023
Amount
%
(Dollars in thousands)
Product sales
$
31,190
$
40,726
$
(9,536)
(23.4)
%
Licensing, royalty, patent, and other revenue
5,969
6,333
(364)
(5.7)
%
Total revenue
$
37,159
$
47,059
$
(9,900)
(21.0)
%
Total revenue decreased by $9.9 million, or 21.0%, from $47.1 million during the nine months ended September 30, 2023 to $37.2 million during the nine months ended September 30, 2024. The decrease was primarily due to a decrease in product sales of $9.5 million due to timing of customer demand and a decrease of $0.4 million in licensing, royalty, patent and other revenue.
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 term 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 $0.4 million, or 5.7%, from $6.3 million during the nine months ended September 30, 2023, to $6.0 million during the nine months ended September 30, 2024. The decrease was driven by a decrease of $0.3 million in other revenue related to professional services and a decrease of $0.1 million in royalty revenue.
Cost of Sales and Gross Margin
Nine Months Ended
September 30,
Change
2024
2023
Amount
%
(Dollars in thousands)
Cost of product sales
$
16,989
$
18,133
$
(1,144)
(6.3)
%
Cost of licensing, royalty, patent, and other revenue
842
1,384
(542)
(39.2)
%
Total cost of sales
$
17,831
$
19,517
$
(1,686)
(8.6)
%
Gross margin
52.0
%
58.5
%
Cost of product sales decreased by $1.1 million, or 6.3%, from $18.1 million during the nine months ended September 30, 2023, to $17.0 million during the nine months ended September 30, 2024. The decrease was primarily due to a reduction in product sales and increased yields on our toggle products.
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Cost of licensing, royalty, patent, and other revenue decreased by $0.5 million, or 39.2%, from $1.4 million during the nine months ended September 30, 2023, to $0.8 million during the nine months ended September 30, 2024. The decrease was due to a decrease in licensing costs related to labor and materials associated with the progression of our RAD-Hard projects.
Gross margin decreased from 58.5% during the nine months ended September 30, 2023, to 52.0% during the nine months ended September 30, 2024. Gross margin decreased as a result of a shift in product mix, a decrease in FAB loadings, and a decrease in licensing revenue partially offset by increased yields on our toggle products.
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 components of each of our operating expense categories.
Nine Months Ended September 30,
Change
2024
2023
Amount
%
(Dollars in thousands)
Research and development
$
10,259
$
8,566
$
1,693
19.8
%
Research and development as a % of revenue
28
%
18
%
Research and Development Expenses. Research and development expenses increased by $1.7 million, or 19.8%, from $8.6 million during the nine months ended September 30, 2023, to $10.2 million during the nine months ended September 30, 2024. The primary driver of research and development expenses relates to our new xSPI family of STT-MRAM products.
Nine Months Ended September 30,
Change
2024
2023
Amount
%
(Dollars in thousands)
General and administrative
$
10,653
$
10,660
$
(7)
(0.1)
%
General and administrative as a % of revenue
29
%
23
%
General and Administrative Expenses. General and administrative expenses remained consistent at $10.7 million during both the nine months ended September 30, 2023 and 2024.
Nine Months Ended September 30,
Change
2024
2023
Amount
%
(Dollars in thousands)
Sales and marketing
$
3,950
$
4,018
$
(68)
(1.7)
%
Sales and marketing as a % of revenue
11
%
9
%
Sales and Marketing Expenses. Sales and marketing expenses decreased by $0.1 million, or 1.7%, from $4.0 million during the nine months ended September 30, 2023, to $3.9 million during the nine months ended September 30, 2024. The decrease was primarily due to a decrease in variable compensation costs and contract labor.
Interest Expense
Nine Months Ended
September 30,
Change
2024
2023
Amount
%
(Dollars in thousands)
Interest expense
$
—
$
63
$
(63)
(100.0)
%
Interest expense decreased by $0.1 million, or 100.0%, from $0.1 million during the nine months ended September 30, 2023, to zero during the nine months ended September 30, 2024. The decrease was due to having no outstanding balance under our 2019 Credit Facility that we paid off in full in March 2023, resulting in no interest incurred during the nine months ended September 31, 2024.
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Other Income, Net
Nine Months Ended
September 30,
Change
2024
2023
Amount
%
(Dollars in thousands)
Other income, net
$
5,187
$
2,849
$
2,338
82.1
%
Other income, net increased by $2.3 million, or 82.1%, from $2.8 million during the nine months ended September 30, 2023, to $5.2 million during the nine months ended September 30, 2024. The increase was primarily due to $4.0 million recorded as other income on the condensed statements of operations and comprehensive (loss) income partially offset by the employee retention tax credit of $2.0 million recorded during the nine months ended September 30, 2023.
Liquidity and Capital Resources
As of September 30, 2024, we had $39.6 million of cash and cash equivalents, compared to $36.9 million as of December 31, 2023. As of September 30, 2024, we have no outstanding debt as we paid off our 2019 Credit Facility in full in March 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):
Nine Months Ended September 30,
2024
2023
(In thousands)
Cash provided by operating activities
$
3,266
$
11,086
Cash used in investing activities
(1,302)
(1,065)
Cash provided by (used in) financing activities
678
(1,882)
Cash Flows From Operating Activities
During the nine months ended September 30, 2024, cash provided by operating activities was $3.3 million , which consisted of net loss of $0.4 million , non-cash charges of $6.3 million and changes of net operating assets and liabilities of $2.6 million . The non-cash charges primarily consisted of stock-based compensation of $5.1 million, depreciation and amortization of $1.2 million . The change in our net operating assets and liabilities was primarily due to an increase in accounts payable of $0.2 million , an increase in contract obligations of $3 .0 million, an increase in prepaid and other current assets of $3.6 million, a decrease in accounts receivable of $0.1 million due to timing of cash receipts for outstanding balances, and a decrease in accrued liabilities of $2.2 million.
During the nine months ended September 30, 2023, cash provided by operating activities was $11.1 million, which consisted of net income of $7.1 million, non-cash charges of $4.8 million and changes of net operating assets and liabilities of $0.8 million. The non-cash charges primarily consisted of stock-based compensation of $3.7 million, depreciation and amortization of $0.9 million, and a loss on prepayment and termination of our 2019 Credit Facility of $0.2 million. The change in our net operating assets and liabilities was primarily due to a decrease in accounts receivable of $0.6 million due to timing of cash receipts for outstanding balances, an increase in inventory of $2.0 million to meet anticipated production volumes, a decrease in prepaid and other current assets of $0.4 million, an increase in accounts payable of $0.6 million, a decrease in accrued liabilities of $0.1 million, and a decrease in deferred revenue of $0.3 million.
Cash Flows From Investing Activities
Cash used in investing activities during the nine months ended September 30, 2024 was $1.3 million for the purchase of manufacturing equipment.
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Cash used in investing activities during the nine months ended September 30, 2023 was $1.1 million primarily for the purchase of manufacturing.
Cash Flows From Financing Activities
Cash provided by financing activities during the nine months ended September 30, 2024, was $0.7 million, consisting of proceeds from the exercise of employee stock options and purchase of shares under our employee stock purchase plan.
Cash used in financing activities during the nine months ended September 30, 2023, was $1.9 million, consisting mainly of $2.8 million of payments to pay off our 2019 Credit Facility, offset by $0.9 million in proceeds from the exercise of employee stock options and purchase of shares under our employee stock purchase plan.
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 ended December 31, 2023, filed with the SEC on February 29, 2024, that have had a material impact on our condensed financial statements and related notes.
Item 3. Quantitative and Qualitativ e Disclosures About Market Risk
Not required for a smaller reporting company.
Item 4. Controls and Procedure s
Evaluation of disclosure controls and procedures.
Our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of September 30, 2024, the end of the period covered by this Quarterly Report on Form 10-Q.
Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2024.
There have been no changes in our internal control over financial reporting that occurred during the nine months ended September 30, 2024 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent limitation on the effectiveness of internal control.
The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, any system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide reasonable, not absolute assurances. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or
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appropriate for our business, but cannot assure you that such improvements will be sufficient to provide us with effective internal control over financial reporting.
PART II—O THER INFORMATIO N
Item 1. Legal Proceedings
We are not party to any material legal proceedings at this time. From time to time, we may become involved in various legal proceedings that arise in the ordinary course of our business.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.