indie Semiconductor, Inc. (INDI) FY 2023 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF INDIE
Unless the context otherwise requires, all references in this section to the “Company,” “we,” “us, or “our” refer to the business of indie and its subsidiaries prior to the consummation of the Transaction. Throughout this section, unless otherwise noted, “indie” refers to indie Semiconductor, Inc. and its consolidated subsidiaries.
The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of our consolidated results of operations and financial condition. You should read this discussion and analysis in conjunction with the accompanying audited consolidated financial statements and notes thereto included elsewhere in this Form 10-K. Certain amounts may not foot due to rounding. This discussion and analysis contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described under the sections entitled “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” included elsewhere in this Form 10-K. We assume no obligation to update any of these forward-looking statements except as required by law. Actual results may differ materially from those contained in any forward-looking statements.
OUR COMPANY
indie offers highly innovative automotive semiconductors and software solutions for Advanced Driver Assistance Systems (“ADAS”), autonomous vehicle, connected car, user experience and electrification applications. We focus on edge sensors across multiple modalities spanning LiDAR, radar, ultrasound and computer vision. These functions represent the core underpinnings of both electric and autonomous vehicles, while the advanced user interfaces are transforming the in-cabin experience to mirror and seamlessly connect to the mobile platforms we rely on every day. We are an approved vendor to Tier 1 automotive suppliers and our platforms can be found in marquee automotive manufacturers around the world. Headquartered in Aliso Viejo, California, indie has design centers and sales offices in Austin, Texas; Boston, Massachusetts; Detroit, Michigan; San Francisco and San Jose, California; Cordoba, Argentina; Budapest, Hungary; Dresden, Frankfurt an der Oder, Munich and Nuremberg, Germany; Edinburgh, Scotland; Schlieren, Switzerland; Rabat, Morocco; Haifa, Israel; Quebec City and Toronto, Canada; Seoul, South Korea; Tokyo, Japan and several locations throughout China.
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We maintain design centers for our semiconductor engineers and designers in the United States, Argentina, Canada, Hungary, Germany, Scotland, Morocco, Israel, Switzerland and China. We engage subcontractors to manufacture our products. These subcontractors, as well as the majority of our customers’ locations, are primarily in Asia. For the years ended December 31, 2023, 2022 and 2021 approximately 63%, 54% and 62%, respectively, of our product revenues were recognized for shipments to customer locations in Asia.
Execution of At-The-Market Agreement
On August 26, 2022, we entered into an At Market Issuance Agreement (“ATM Agreement”) with B. Riley Securities, Inc., Craig-Hallum Capital Group LLC and Roth Capital Partners, LLC (collectively as “Sales Agents”) relating to shares of our Class A common stock, par value $0.0001 per share (the “Class A common stock”). In accordance with the terms of the ATM Agreement, we may offer and sell shares of our Class A common stock having an aggregate offering price of up to $150.0 million from time to time through the Sales Agents, acting as our agent or principal. We implemented this program for the flexibility that it provides to the capital markets and to best time our equity capital needs. As of December 31, 2023, we had raised gross proceeds of $70.3 million and issued 7,351,259 shares of Class A common stock at an average per-share sales price of $9.57 through this program. For the years ended December 31, 2023 and December 31, 2022, we incurred total issuance costs of $1.1 million and $0.4 million, respectively, in connection with the ATM Agreement.
Warrant Exchange
On September 22, 2023, indie announced the commencement of an exchange offer (the “Offer”) and consent solicitation (the “Consent Solicitation”) relating to our outstanding (i) Public Warrants to purchase shares of Class A common stock and (ii) Private Warrants to purchase shares of Class A common stock (together with the Public Warrants, the “Warrants”).
The Offer and the Consent Solicitation expired at 11:59 p.m., Eastern Time on October 20, 2023. Upon expiration of the Offer and the Consent Solicitation, 24,658,461 Warrants, or approximately 90.0% of the outstanding Warrants, were tendered. Subsequently, we issued 7,027,517 shares of Class A common stock, or an exchange ratio of 0.285, for the Warrants tendered in the Offer on October 25, 2023. Additionally, we received the approval of approximately 89.8% of the outstanding Warrants to amend the warrant agreement governing the Warrants (the “Amendment No. 2”), which exceeded the majority of the outstanding warrants required to effect the Amendment No. 2. This amendment permitted us to require that each Warrant that remained outstanding upon settlement of the Exchange Offer to be converted into 0.2565 shares of Class A common stock, which was a ratio 10.0% less than the exchange ratio applicable to the Exchange Offer.
We completed the exchange of the remaining 2,741,426 untendered Warrants on November 9, 2023 through issuance of 703,175 shares of Class A common stock. As a result of the completion of the Exchange Offer and the exchange for the remaining untendered Warrants, the Warrants were suspended from trading on the Nasdaq Capital Market as of the close of business on November 8, 2023, and delisted.
Recent Acquisitions
Kinetic Technologies
On January 25, 2024 (the “Deal Closing Date”), indie and ADK LLC completed an Asset Purchase Agreement (the “APA”), carving out certain assets, including R&D personnel and intellectual properties (“IP”) from Kinetic Technologies (“Kinetic”), in support of a custom product development for a North American electric vehicle OEM. The closing consideration consisted of (i) $4.5 million in cash as the initial cash consideration, subject to adjustments for an adjustment holdback amount of $0.5 million and an indemnity holdback amount of $0.8 million, payable after the 18-month anniversary of the Deal Closing Date in shares of Class A common stock, par value $0.0001 (the “Class A common stock”), (ii) $3.0 million of total contingent considerations, payable in cash or Class A common stock, subject to achievement of certain production based milestones 24 months after the Deal Closing Date, and (iii) $2.5 million of contingent considerations, payable in cash or Class A common stock, subject to achievement of a revenue based milestone 12 months after the Deal Closing Date. The purchase price is subject to working capital and other adjustments as provided the APA.
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Exalos AG
On September 18, 2023, Ay Dee Kay Ltd. (“indie UK”) completed its acquisition of all Exalos AG, a Swiss corporation (“Exalos”), pursuant to the Share Sale and Purchase Agreement by and among indie UK, indie and all of the stockholders of Exalos, whereby indie UK acquired all of the outstanding common shares of Exalos. The closing consideration consisted of (i) the issuance by indie of 6,613,786 shares of Class A common stock, with a fair value of $42.8 million; (ii) a contingent consideration with fair value of $13.2 million at closing, payable in cash, subject to Exalos’ achievement of certain revenue-based milestones through September 30, 2025; and (iii) a holdback of $2.5 million subject to final release 12 months from the acquisition date payable in shares of Class A common stock. The purchase price is subject to working capital and other adjustments as provided in the Share Purchase Agreement.
GEO Semiconductor Inc.
On February 9, 2023, we entered into an Agreement and Plan of Merger, pursuant to which Gonzaga Merger Sub Inc., a Delaware corporation and indie’s wholly-owned subsidiary, will merge with and into GEO Semiconductor Inc., a Delaware corporation (“GEO”), with GEO surviving as a wholly-owned subsidiary of indie (the “Merger”). The aggregate consideration for this transaction consisted of (i) $93.4 million in cash (including accrued cash consideration at closing and net of cash acquired); (ii) the issuance by indie of 6,868,768 shares of Class A common stock at closing, with a fair value of $75.6 million; (iii) 1,907,180 shares of Class A common stock at closing, with a fair value of $21.0 million payable in the next 24-month period after closing; and (iv) contingent considerations with fair value of $59.3 million at closing payable in cash or in Class A common stock, subject to achieving certain GEO-related revenue targets through September 30, 2024. The purchase price is subject to working capital and other adjustments as provided in the Agreement and Plan of Merger. The transaction was completed on March 3, 2023.
Silicon Radar
On February 21, 2023, Symeo GmbH (“Symeo”), one of our wholly-owned subsidiaries, completed its acquisition of all of the outstanding capital stock of Silicon Radar GmbH (“Silicon Radar”). The acquisition was consummated pursuant to a Share Purchase Agreement by and among Symeo, indie and the holders of the outstanding capital stock of Silicon Radar. The closing consideration consisted of (i) $9.2 million in cash (including debt payable at closing and net of cash acquired), (ii) the issuance by indie of 982,445 shares of Class A common stock at closing, with a fair value of $9.8 million; and (iii) a contingent consideration with fair value of $9.2 million at closing, payable in cash or in Class A common stock subject to Silicon Radar’s achievement of certain revenue-based and design-win milestones through February 21, 2025. The purchase price is subject to working capital and other adjustments as provided in the Share Purchase Agreement.
See Note 3 — Business Combinations and Note 23 — Subsequent Event for additional descriptions of these acquisitions.
Reverse Recapitalization with Thunder Bridge Acquisition II
On June 10, 2021, we completed a series of transactions (the “Transaction”) with Thunder Bridge Acquisition II, Ltd (“TB2”) pursuant to the Master Transactions Agreement dated December 14, 2020, as amended on May 3, 2021 (the “MTA”). In connection with the Transaction, Thunder Bridge II Surviving Pubco, Inc, a Delaware corporation (“Surviving Pubco”), was formed to be the successor public company to TB2, TB2 was domesticated into a Delaware corporation and merged with and into and a merger subsidiary of Surviving Pubco. Additionally, we consummated a Private Investment in Public Entity (“PIPE”) financing, pursuant to which Surviving Pubco issued 15 million Class A common shares, generating net proceeds of $150 million as a result of the Transaction. Also on June 10, 2021, Surviving Pubco changed its name to indie Semiconductor, Inc., and listed our shares of Class A common stock on The Nasdaq Stock Market LLC under the symbol “INDI.”
The most significant change in our reported financial position and results of operations in comparison to the prior year is gross cash proceeds of $399.5 million from the Transaction, which includes $150.0 million in proceeds from the PIPE financing that was consummated in conjunction with the Transaction. The increase in cash was offset by transaction costs incurred in connection with the Transaction of approximately $43.5 million plus the retirement of indie’s long-term debt of $15.6 million. Approximately $29.8 million of the transaction costs and all of indie’s long-term debt were paid as of June 30, 2021. Approximately $21.8 million of the transaction costs paid as of June 30, 2021 were paid by TB2 as part of the closing of the Transaction. The remainder of the transaction costs were paid as of September 30, 2021.
Upon consummation of the Transaction, indie-designated directors were appointed to seven of the nine seats of the combined Company’s Board of Directors; our Chief Executive Officer and President were appointed as the other two board members; our existing senior management became the senior management of the combined company; and the stockholders of indie at the time of the Transaction became the owners of approximately 26% of the outstanding shares of Class A common stock of the
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combined company. Accordingly, the Transaction is being accounted for as a reverse recapitalization, whereby indie is the acquirer for accounting and financial reporting purposes and Surviving Pubco, Inc is the legal acquirer. A reverse recapitalization does not result in a new basis of accounting, and the financial statements of the combined entity represent the continuation of the consolidated financial statements of legacy ADK LLC in many respects. The shares remaining after redemptions, and the unrestricted net cash and cash equivalents on the closing of the Transaction, are being accounted for as a capital infusion to ADK LLC.
As a consequence of the Transaction, we became an SEC-registered, Nasdaq-listed company, which has required, and will continue to require us to hire additional personnel and implement procedures and processes to address public company regulatory requirements and customary practices. We are now incurring additional annual expenses as a public company for, among other things, directors’ and officers’ liability insurance, director fees and additional internal and external accounting, legal and administrative expenses.
Additionally, we expect our capital and operating expenditures will increase significantly in connection with ongoing activities as we invest additional working capital for various research and development projects, additional investments in equipment to meet increased project needs, and additional operating expenses to hire project managers, technicians, sales, partnership and customer service personnel, data scientists, trading teams, software engineers and administrative staff.
Our historical operations and statements of assets and liabilities may not be comparable to the operations and statements of assets and liabilities of the combined company as a result of the Transaction.
Impact of Macroeconomic Conditions
Current and continued inflationary conditions have led, and may continue to lead to, rising prices or rising interest rates, which has had a dampening effect on overall economic activity and consumer demand for automotive products. Additionally, The recent conflict in the Middle East and the implications of these events has created global political and economic uncertainty. We are closely monitoring developments, including potential impact to our business, customers, suppliers, our employees and operations in Israel, the Middle East and elsewhere. At this time, the impact to indie is subject to change given the volatile nature of the situation.
Results of Operations
A discussion of our results of operations for the year ended December 31, 2021, including a comparison to our results of operations for the year ended December 31, 2022, is included under “Results of Operations” in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the Securities and Exchange Commission on March 28, 2023.
Revenue
We design, develop and manufacture primarily analog, digital and mixed-signal integrated circuits (“ICs”) together with software running on the embedded processors in the majority of the ICs. Our revenue represents both (i) non-recurring engineering (“NRE”) fees for the development of ICs and prototypes and (ii) product sales, the sale of semiconductors under separate commercial supply arrangements.
Our revenues fluctuate in response to a combination of factors, including the following:
•our overall product mix and sales volumes;
•gains and losses in market share and design win traction;
•semiconductor content per vehicle;
•pace at which technology is adopted in our end markets;
•fluctuations in currency exchange rates that affect our prices;
•the stage of our products in their respective life cycles;
•the effects of competition and competitive pricing strategies;
•governmental regulations influencing our markets; and
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•the global and regional economic cycles.
Product Revenue. Our product revenue is recognized when the customer obtains control of the product and is based on the contractual shipping terms of a contract. We provide an assurance-type warranty which is not sold separately and does not represent a separate performance obligation. Therefore, the estimated costs of warranty claims are generally accrued as cost of goods sold in the period the related revenue is recorded. Under limited circumstances, we may offer an extended limited warranty to customers for certain products. We accrue for known warranty and indemnification issues if a loss is probable and can be reasonably estimated. The majority of our product revenue originates from sales shipped to customer locations in Asia, and the United States.
Contract Revenue. Contract revenue is revenue earned from NRE services. Generally, our NRE contracts with our customers initially contain a single distinct performance obligation, which is to provide NRE design services for products based on the customer’s specifications. Generally, our contracts also include the optional purchase of products that may be exercised at stated prices subsequent to completion of NRE design services. We have determined that the option to purchase products is not a material right and have not allocated transaction price to this provision.
For NRE arrangements, we recognize revenue over time as services are provided based on the terms of the contract on an input basis, using costs incurred as the measure of progress. The costs incurred represent the most reliable measure of transfer of control to the customer. Revenue is deferred for amounts billed or received prior to delivery of the services.
Cost of Goods Sold
Cost of goods sold consists primarily of the cost of semiconductors purchased from subcontractors, including wafer fabrication, assembly, testing and packaging, board and device costs, manufacturing support costs, including labor and overhead associated with such purchases, final test yield fallout, inventory and warranty provisions, memory and component costs, and shipping costs. Cost of goods sold also includes compensation related to personnel associated with manufacturing and amortization of certain intangible assets acquired through the business combinations. Cost of goods sold generally does not include development costs incurred related to servicing our NRE services contracts, which are recorded to research and development and expensed as incurred.
Research and Development Expense
Costs related to research, design, and development of our products are expensed as incurred. Research and development expense consists primarily of pre-production costs related to the design and development of our products and technologies, including costs related to developing products subsidized by NRE services contracts. This includes costs with customers such as employee compensation, benefits and related costs of sustaining our engineering teams, project material costs, third-party fees paid to consultants, prototype development expenses, costs related to IP licenses, occupancy costs and related overhead based on headcount, other costs incurred in the product design and development process and amortization expenses for certain intangible assets acquired from the business combinations.
Selling, General, and Administrative Expense
Selling, general, and administrative costs include employee compensation, including compensation and benefits for executive, finance, accounting, legal, business operations and other administrative personnel. In addition, it includes marketing and advertising, outside legal, tax and accounting services, insurance, occupancy costs and related overhead based on headcount and amortization expenses for certain intangible assets acquired from the business combinations. Selling, general, and administrative costs are expensed as incurred.
Amortization for Intangible Assets Acquired from Business Combinations
As a result of the most recent business combinations, we acquired various intangible assets. The corresponding amortization expenses are included within Cost of goods sold, Research and development expenses, and Selling, general and administrative expenses based on their respective nature. Our acquired intangible assets with definite lives are amortized from the date of acquisition over periods ranging from two to seven years.
Interest Expense
Interest expense primarily consists of cash and non-cash interest under our term loan facilities, convertible notes and line of credit.
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Other Income (Expense)
Other income (expense) primarily comprises the change in the fair value of the warrants and earn-out liabilities issued as a result of the Transaction and contingent considerations and holdbacks issued as a result of the recent business combinations.
Income Taxes
We utilize the asset and liability method in accounting for income taxes. Deferred tax assets and liabilities reflect the estimated future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax expense or benefit is the result of changes in the deferred tax asset and liability. Valuation allowances are established when necessary to reduce deferred tax assets where it is more likely than not that the deferred tax assets will not be realized. We make estimates, assumptions, and judgments to determine our provision for our income taxes, deferred tax assets and liabilities, and any valuation allowance recorded against deferred tax assets. We also assess the likelihood that our deferred tax assets, if any, will be recovered from future taxable income, and to the extent we believe that recovery is not likely, we establish a valuation allowance.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. Interest and penalties related to unrecognized tax benefits which, as of the date of this report, have not been material, are recognized within provision for income taxes.
Income Tax Benefit
Income tax benefits for the year ended December 31, 2023 are primarily related to the tax effects of our acquisition structure of GEO and release of valuation allowance in China. Income tax benefits for the year ended December 31, 2022 are primarily related to our operations in Canada and Europe.
Refer to Note 18 — Income Tax, in our accompanying financial statements for additional detail.
Comparison of the Years Ended December 31, 2023 and 2022
Revenue
| Fiscal Years Ended | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | |||||||||||||||||||
| (in thousands) | $ | % of Revenue | $ | % of Revenue | $ Change | % Change | ||||||||||||||
| Revenue: | ||||||||||||||||||||
| Product revenue | $ | 195,624 | 88 | % | $ | 89,457 | 81 | % | $ | 106,167 | 119 | % | ||||||||
| Contract revenue | 27,545 | 12 | % | 21,340 | 19 | % | 6,205 | 29 | % | |||||||||||
| Total revenue | $ | 223,169 | 100 | % | $ | 110,797 | 100 | % | $ | 112,372 | 101 | % |
Revenue for the year ended December 31, 2023 was $223.2 million, compared to $110.8 million for the year ended December 31, 2022, an increase of $112.4 million or 101%, which was driven by a $106.2 million increase in product revenue and a $6.2 million increase in contract revenue. The increase in product revenue was due primarily to change in product mix as well as higher product volume (units sold) given the continued growth in demand from our customers globally as well as the recent acquisitions. Increases in average selling price (“ASP”) also contributed to the increase in product revenue year-over-year. The increase in contract revenue of $6.2 million or 29% was primarily due to a higher percentage of completion in the
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current period as we continue to make progress in the large multi-year non-recurring engineering project that commenced in early 2022.
Operating Expenses
| Fiscal Years Ended | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | |||||||||||||||||||
| (in thousands) | $ | % of Revenue | $ | % of Revenue | $ Change | % Change | ||||||||||||||
| Operating expenses: | ||||||||||||||||||||
| Cost of goods sold | $ | 133,606 | 60 | % | $ | 60,491 | 55 | % | $ | 73,115 | 121 | % | ||||||||
| Research and development | 154,507 | 69 | % | 121,197 | 109 | % | 33,310 | 27 | % | |||||||||||
| Selling, general, and administrative | 70,479 | 32 | % | 48,237 | 44 | % | 22,242 | 46 | % | |||||||||||
| Total operating expenses | $ | 358,592 | 161 | % | $ | 229,925 | 208 | % | $ | 128,667 | 56 | % |
Cost of goods sold for the year ended December 31, 2023 was $133.6 million, compared to $60.5 million for the year ended December 31, 2022. The increase of $73.1 million or 121% was primarily due to a $27.4 million increase in product shipments in connection with the increase in products sold as described above, a $21.5 million increase due to change in product mix, and a $8.2 million increase in product cost. Total cost of goods sold for the year ended December 31, 2023 also included an additional $8.7 million increase due to amortization for inventory step-up value and a $6.9 million in amortization related to acquired intangible assets, both in connection with the recent business combinations.
Research and development (“R&D”) expense for the year ended December 31, 2023 was $154.5 million, compared to $121.2 million for the year ended December 31, 2022. This increase of $33.3 million or 27% was primarily due to a $16.1 million increase in personnel costs, a $14.3 million increase in product development costs and a $2.7 million increase in professional and outside services expense, all of which were to support our continuous growth in research and development needs. The increase in R&D expense year-over-year also included a $1.9 million increase in amortization expense related to R&D project licenses and acquired intangible assets from business combinations and offset by a $2.6 million decrease in share-based compensation expense. We expect research and development expense to continue to increase as we continue to grow our headcount organically to support expanded product development activities.
Selling, general and administrative expense for the year ended December 31, 2023 was $70.5 million, compared to $48.2 million for the year ended December 31, 2022. The increase of $22.2 million or 46% was primarily due to a $8.6 million increase in personnel costs due to increase in headcount, a $4.2 million increase in share-based compensation expense, and a $3.9 million increase in professional and outside services expenses. Both the increase in personnel costs and share-based compensation expense are primarily driven by increase in headcounts. Total selling, general and administrative expense for the year ended December 31, 2023 also included a $4.6 million increase in intangible asset amortization related to acquired intangible assets from business combinations in comparison to prior year. We expect selling, general, and administrative expense to continue to increase as we grow our headcount to support our global expansion and to fulfill our obligations as a publicly traded company.
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Other income (expense), net
| Fiscal Years Ended | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | |||||||||||||
| (in thousands) | $ | $ | $ Change | % Change | ||||||||||
| Other income (expense), net: | ||||||||||||||
| Interest income | $ | 7,801 | $ | 2,567 | $ | 5,234 | 204 | % | ||||||
| Interest expense | (8,650) | (1,692) | (6,958) | 411 | % | |||||||||
| Gain (loss) from change in fair value of warrants | 7,066 | 55,069 | (48,003) | (87) | % | |||||||||
| Gain (loss) from change in fair value of contingent considerations and acquisition related holdbacks | (2,985) | 9,468 | (12,453) | (132) | % | |||||||||
| Other expense | (1,175) | (107) | (1,068) | 998 | % | |||||||||
| Total other income (expense), net | $ | 2,057 | $ | 65,305 | $ | (63,248) | (97) | % |
Interest income for the year ended December 31, 2023 was $7.8 million, compared to $2.6 million for the year ended December 31, 2022. The increase of $5.2 million from the year ended December 31, 2022 was primarily the result of higher cash balances in the 2023 period resulting from proceeds received from the 2027 Notes and increases in interest rates associated with the money market funds and marketable securities.
Interest expense for the year ended December 31, 2023 was $8.7 million, compared to $1.7 million for the year ended December 31, 2022. Interest expense relates to the routine cash and non-cash interest expenses on outstanding debt obligations. The increase was primarily driven by recognizing 12 months of interest expenses in 2023 compared to a partial year in 2022 related to the 2027 Notes.
For the years ended December 31, 2023 and 2022, we recognized gains (losses) from change from change in fair value for warrants, contingent considerations and acquisition-related holdbacks. The gains (losses) recorded represent the following:
i) Warrants: During the year ended December 31, 2023, we recognized a net gain from change in fair value of our warrants of $7.1 million, which reflected the net decrease in fair value of our warrant liability since December 31, 2022 until immediately prior to the completion of our warrant exchange to Class A common stock on November 9, 2023. The net decrease in fair value was primarily a result of the decrease of the closing price of our Class A common stock listed on the Nasdaq to $4.94 per share on November 9, 2023 from $5.83 per share on December 31, 2022. The total liability as of November 9, 2023 was reclassified to Additional Paid in Capital in our consolidated balance sheet. As of December 31, 2023, there was no liability remaining on the balance sheet. During the year ended December 31, 2022, we recognized an unrealized gain from change in fair value of our warrants of $55.1 million, which reflected the decrease in fair value of our warrant liability. The decrease in fair value of our warrant liability was primarily a result of the decrease of the closing price of our Class A common stock listed on the Nasdaq to $5.83 per share on December 31, 2022 from $11.99 per share on December 31, 2021.
ii) Contingent considerations and acquisition-related holdbacks: During the year ended December 31, 2023, we recognized a net unrealized loss from change in fair value of our contingent considerations and acquisition-related holdbacks of $3.0 million, which is primarily contributed by unrealized gains (losses) for the contingent considerations and acquisition related holdbacks of $3.2 million, $(5.7) million and $(0.4) million for Silicon Radar, GEO and Exalos, respectively. During the year ended December 31, 2022, we recognized a net gain from change in fair value of our contingent considerations of $9.5 million, which is primarily contributed by an unrealized gain of $5.8 million and a realized gain of $4.0 million for the contingent considerations related to the Symeo and OnDesign acquisition, respectively. During the year ended December 31, 2022, management determined that the product design specified in the contingent consideration arrangement from the OnDesign acquisition would be replaced with a new product design that is better aligned with customer requirements and which will not be eligible for either of the contingent considerations. Accordingly, the fair value for both the Tapeout and Design Win were reduced to zero, resulting in a gain of $4.0 million. The net gain from change in fair value relating to Symeo was driven by additional information that became available after the initial purchase price valuation.
Other expense for the year ended December 31, 2023 was $1.2 million, compared to $0.1 million for the year ended December 31, 2022. Other expense relates primarily to the realized and unrealized foreign currency gains and losses during the year. During the year ended December 31, 2023, we recognized a net loss of $0.8 million related to the change in fair value of our currency forward contracts entered during 2023.
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Income Taxes
We utilize the asset and liability method in accounting for income taxes. Deferred tax assets and liabilities reflect the estimated future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax expense or benefit is the result of changes in the deferred tax asset and liability. Valuation allowances are established when necessary to reduce deferred tax assets where it is more likely than not that the deferred tax assets will not be realized. We make estimates, assumptions, and judgments to determine our provision for our income taxes, deferred tax assets and liabilities, and any valuation allowance recorded against deferred tax assets. We also assess the likelihood that our deferred tax assets, if any, will be recovered from future taxable income, and to the extent we believe that recovery is not likely, we establish a valuation allowance.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. Interest and penalties related to unrecognized tax benefits which, as of the date of this report, have not been material, are recognized within provision for income taxes.
Income tax benefits for the year ended December 31, 2023 are primarily related to the tax effects of our acquisition of GEO and subsequent tax reorganizations. Income tax benefits for the year ended December 31, 2022 are primarily related to our operations in Canada and Europe.
JOBS Act
We previously elected to use the extended transition period to comply with new or revised accounting standards applicable to public companies under the JOBS Act available to emerging growth companies (“EGCs”).
The market value of our Class A common stock that is held by non-affiliates exceeded $700 million as of June 30, 2023, and therefore, we no longer qualify for EGC status commencing December 31, 2023. As a result, we are now subject to certain disclosure requirements that previously were not applicable to us as an EGC and no longer have the ability to take advantage of such extended transition period to comply with new or revised accounting standards.
We may choose to early adopt any new or revised accounting standards whenever such early adoption is permitted for public companies.
Liquidity and Capital Resources
Our primary use of cash is to fund operating expenses, which consist primarily of research and development expenditures, working capital requirements related to inventory, accounts payable and general and administrative expenditures. In addition, from time to time, we use cash to fund our mergers and acquisitions, purchases of various capital, intellectual property and software assets and scheduled repayments for outstanding debt obligations. Our immediate sources of liquidity are cash, cash equivalents and funds anticipated to be generated from our operations and available borrowings under our revolving credit facility. We believe these sources of liquidity will be sufficient to meet our working capital needs for at least the next 12 months. Our future capital requirements may vary from those currently planned and will depend on many factors, including our rate of sales growth, the timing and extent of spending on various business initiatives, including potential merger and acquisition activities, our international expansion, the timing of new product introductions, market acceptance of our solutions, and overall economic conditions including the potential impact of global supply imbalances, rising interest rates, inflationary pressures, the impact of the ongoing conflicts in Ukraine and the Middle East, and volatility in the global financial markets. To the extent that current and anticipated future sources of liquidity are insufficient to fund our future business activities and requirements, we may be required to seek additional equity or debt financing. We have cash deposits with large financial institutions that have stable outlooks and credit ratings as of February 29, 2024. These cash deposits may exceed the insurance provided on such deposits. As part of our cash management strategy going forward, we concentrate cash deposits with large financial institutions that are subject to regulation and maintain deposits across diverse retail banks.
Historically, we derive liquidity primarily from debt and equity financing activities as we have historically had negative cash flows from operations. On August 26, 2022, we entered into the ATM Agreement with the Sales Agents relating to shares of our Class A common stock. In accordance with the terms of the ATM Agreement, we may offer and sell shares of our Class A common stock having an aggregate offering price of up to $150.0 million from time to time through the Sales Agents, acting as our agent or principal. We implemented this program for the flexible access it provides to the capital markets. During the year
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ended December 31, 2023, we raised gross proceeds of $53.1 million and issued 5,219,500 shares of Class A common stock at an averaged per-share sales price of $10.18 through this program. For the year ended December 31, 2023, we incurred total issuance costs of $1.1 million. As of December 31, 2023, and since the inception of the program we have raised gross proceeds of $70.3 million and issued 7,351,259 shares of Class A common stock at an average per-share sales price of $9.57 and had approximately $79.7 million available for future issuances under the ATM Agreement. As of December 31, 2023, we have incurred total issuance costs of $1.5 million.
On November 21, 2022, we issued $160.0 million in aggregate principal of our 4.50% convertible senior notes which are due in May 2027 (the “2027 Notes”). The 2027 Notes will be convertible into cash, shares of common stock or a combination of cash and common stock at our election. We used the net proceeds from the 2027 Notes to fund the acquisitions of GEO and Silicon Radar as well as a stock repurchase program authorized by our Board of Directors in November 2022. The acquisition of Silicon Radar completed in February 2023 and GEO completed in March 2023, resulted in us funding the cash consideration portion of the purchase price of approximately $9.0 million and $90 million, respectively. The stock repurchase program resulted in us repurchasing 1.1 million shares of our outstanding common stock in November 2022 at an average cost of $6.65 per share, which amounted to a total cash outflow of $7.4 million in 2022.
On November 29, 2022, Wuxi executed a Capital Increase Agreement to raise CNY300.0 million (approximately $42.0 million) of capital by issuing 371,160 shares of its common stock, which represents 16% of Wuxi’s equity at the time of issuance. As a result, indie’s ownership in Wuxi has reduced from 45% to 38% in November 2022. Among other provisions, this agreement includes certain liquidation preferences for the investors of this Capital Increase Agreement as well as an ability to exchange their Wuxi shares for up to 6 million shares of indie’s Class A common stock in the event Wuxi does not successfully complete a local initial public offering (“IPO”) by December 31, 2027. The funds raised are intended to promote Wuxi’s business development and strengthen its capabilities.
In December 2023, employees in Wuxi exercised options granted to them through the Wuxi Employee Equity Incentive Plan (the “Wuxi EIP”) and contributed total capital of CNY88.0 million (approximately $12.3 million) from option proceeds in preparation for a potential IPO in China. The funds will be used by Wuxi for general corporate purposes. Wuxi does not have an obligation to repay the collected capital to its employees in the case of an unsuccessful IPO.
As of December 31, 2023, our balance of cash and cash equivalents was $151.7 million.
Acquisitions
Since the closing of the Transaction, we have completed multiple acquisitions. We continually assess and plan to selectively pursue inorganic growth opportunities that are complementary to our existing technologies and portfolio of products and/or accelerate our growth initiatives.
In connection with our acquisitions, we may from time to time be required to make future payments or issue additional shares of our common stock to satisfy our obligations under the acquisition agreements, including to satisfy certain earn-out requirements.
In January 2022 we completed the acquisition of Symeo, for which we made an initial cash payment of approximately $10.0 million, and an additional $10.0 million was paid in January 2023. We are still subject to an equity based earn out of Class A common stock based on Symeo’s future revenue growth.
In February 2023, we entered into an agreement to acquire GEO. and completed the transaction on March 3, 2023. The closing consideration consisted of (i) $93.4 million in cash (including accrued cash considerations at closing and net of cash acquired); (ii) the issuance by indie of 6,868,768 shares of Class A common stock at closing, with a fair value of $75.6 million (iii) 1,907,180 shares of Class A common stock, with a fair value of $21.0 million at closing, payable in the next 24-month period after closing; and (iv) an earn-out with a fair value of $59.3 million at closing payable in cash or in Class A common stock, subject to achieving certain GEO-related revenue targets through September 30, 2024.
Additionally, in February, 2023, we acquired Silicon Radar, for approximately (i) $9.2 million in cash (including debt payable at closing and net of cash acquired), (ii) the issuance by indie of 982,445 shares of Class A common stock at closing, with a fair value of $9.8 million; and (iii) a contingent consideration with fair value of $9.2 million at closing, payable in cash or in Class A common stock subject to Silicon Radar’s achievement of certain revenue-based and design-win milestones through February 21, 2025.
In September 2023, we acquired Exalos. The closing consideration consisted of (i) the issuance by indie of 6,613,786 shares of Class A common stock at closing, with a fair value of $42.8 million; (ii) a contingent consideration with fair value of $13.2
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million at closing, payable in cash, subject to Exalos’ achievement of certain revenue-based milestones through September 30, 2025; and (iii) a holdback of $2.5 million subject to final release 12 months from the acquisition date payable in shares of Class A common stock.
On January 25, 2024, we completed the acquisition of certain business properties from Kinetic through an asset purchase agreement. The closing consideration consisted of (i) $4.5 million in cash as the initial cash consideration, subject to adjustments for an adjustment holdback amount of $0.5 million and an indemnity holdback amount of $0.8 million, (ii) $3.0 million of total contingent considerations, payable in cash or Class A common stock, subject to achievement of certain production based milestone for the next 24 months, or through January 25, 2026, and (iii) $2.5 million of contingent considerations, payable in cash or Class A common stock, subject to achievement of certain revenue based milestones 12 months after January 25, 2024. The indemnity holdback amount is payable within five business days after the 18-month anniversary of the closing date of January 25, 2024 and is payable in shares of Class A common stock.
We expect to continue to incur net operating losses and negative cash flows from operations. We also expect our research and development expenses, general and administrative expenses and capital expenditures will increase over time as we continue to expand our operations, product offerings and customer base.
The following table summarizes our consolidated cash flows for the years ended December 31, 2023 and 2022:
| Fiscal Years Ended | ||||||
|---|---|---|---|---|---|---|
| 2023 | 2022 | |||||
| Net cash used in operating activities | $ | (104,385) | $ | (76,746) | ||
| Net cash used in investing activities | (107,742) | (16,273) | ||||
| Net cash provided by financing activities | 43,567 | 192,659 |
A discussion of our cash flows for the year ended December 31, 2021 is included under “Liquidity and Capital Resources” in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the Securities and Exchange Commission on March 28, 2023.
Operating Activities
Our primary use of cash is to fund operating expenses, which consist primarily of research and development expenditures, working capital requirements related to inventory, accounts payable and general and administrative expenditures.
For the year ended December 31, 2023, net cash used in operating activities was $104.4 million, which included net loss of $128.8 million and reflected adjustments for certain non-cash items and changes in operating assets and liabilities. Non-cash adjustments primarily consisted of (i) $43.7 million in share-based compensation expense and $31.8 million in depreciation and amortization, which are partially offset by (ii) $3.2 million of net gains resulting from a change in fair value for warrants, contingent considerations, and currency forward contracts. Changes in operating assets and liabilities from operations used $58.1 million of cash, primarily driven by an increase in accounts receivable, prepaid and other current assets and inventory.
Cash used in operating activities during the year ended December 31, 2022 was $76.7 million, which included net loss of $52.8 million and was adjusted for certain non-cash items and changes in operating assets and liabilities. Non-cash decreases primarily consisted of $64.7 million of net gains resulting from a change in fair value for warrants and contingent considerations. These non-cash decreases were partially offset by $41.9 million in share-based compensation expense and $14.8 million in depreciation and amortization. Changes in operating assets and liabilities from operations used $18.1 million of cash primarily driven by an increase in accounts receivable, prepaid and other current assets, and inventory offset by an increase in accounts payable and accrued expenses.
Investing Activities
Net cash used in investing activities for the year ended December 31, 2023 was $107.7 million. During the year ended December 31, 2023, the decrease in cash was primarily due to the acquisitions of Exalos, GEO and Silicon Radar for $95.0 million, net of cash acquired, as well as cash used of $12.8 million for the purchase of capital expenditures. We expect that we will make additional capital expenditures in the future, including licenses to various intangible assets, in order to support the future growth of our business.
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Net cash used in investing activities for the year ended December 31, 2022 was $16.3 million. During the year ended December 31, 2022, the decrease in cash was primarily due to the acquisition of Symeo for $8.7 million, net of cash acquired, as well as cash used of $7.6 million for the purchase of capital expenditures.
Financing Activities
Net cash provided by financing activities for the year ended December 31, 2023 was $43.6 million, which was primarily attributed to $52.0 million of net proceeds from the issuance of common stock through the ATM and $12.3 million of proceeds related to the Wuxi EIP capital contribution, partially offset by $12.8 million payments on debt obligations and $9.1 million of payments on financed software.
Net cash provided by financing activities for the year ended December 31, 2022 was $192.7 million, which was primarily attributed to $160.0 million of proceeds from the issuance of the 2027 Notes, $41.9 million of proceeds related to the Wuxi capital raise and $16.8 million of net proceeds from the issuance of common stock through the ATM. These increases were partially offset by $7.5 million paid to Onsemi as part of the deferred payments in relation to the acquisition of ON Design, $7.4 million paid to repurchase common stock, $5.4 million of costs incurred from the issuance of the 2027 Notes, $4.2 million of payments on financed software and a $1.0 million payment of City Semiconductor acquisition related deferred compensation.
Material Cash Obligations
Following is a summary of our material cash obligations as of December 31, 2023, other than contingent consideration payments that may be payable in connection with our previous acquisitions as described above.
| Future Estimated Cash Payments Due by Period | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Contractual Obligations | Less than 1 year | 1 - 3 years | 3-5 years | 5 years | Total | ||||||||||||||
| Debt obligations | $ | 5,142 | $ | — | $ | 160,000 | $ | — | $ | 165,142 | |||||||||
| Interest on debt obligations | 7,200 | 14,400 | 6,300 | — | 27,900 | ||||||||||||||
| Operating leases | 3,357 | 5,076 | 4,048 | 3,560 | 16,041 | ||||||||||||||
| Total contractual obligations | $ | 15,699 | $ | 19,476 | $ | 170,348 | $ | 3,560 | $ | 209,083 |
Critical Accounting Estimates
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles (“GAAP”). The preparation of these financial statements requires us to make estimates and judgments in applying our most critical accounting policies that can have a significant impact on the results we report in our financial statements. The SEC has defined critical accounting estimates as those that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on a registrant’s financial condition or results of operations. Based on this definition, our most critical accounting estimates include revenue recognition, which impacts the recording of net revenue; business combinations, which impacts the fair value of acquired assets and assumed liabilities; and contingent considerations, which impact the fair value of assumed liabilities and the recording of other income (expense). These policies and significant judgments involved are discussed further below. We have other significant accounting policies that do not generally require subjective estimates or judgments or would not have a material impact on our results of operations. Our significant accounting policies and estimates are described in Note 2 — Summary of Significant Accounting Policies to Item 8 of this Annual Report on Form 10-K.
Revenue Recognition
We enter into contracts with customers that can include various combinations of products and services. As a result, our contracts may contain multiple performance obligations. We determine whether arrangements are distinct based on whether the customer can benefit from the product or service on its own or together with other resources that are readily available and whether our commitment to transfer the product or service to the customer is separately identifiable from other obligations in the contract.
In particular, we enter into engineering services contracts with customers that generally contain only one distinct performance obligation, which is design services for ICs based on agreed-upon specifications. Engineering services contracts typically also
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include the purchase, at the customer’s option, of ICs at agreed upon prices subsequent to completion of IC design services. We have determined that the option to purchase ICs is not a material right and has not allocated transaction price to this provision.
For IC development arrangements, revenue is recognized over time as services are provided based on the terms of the contract on an input basis, using costs incurred as the measure of progress and is recorded as contract revenue in the consolidated statement of operations. The costs incurred represent the most reliable measure of transfer of control to the customer.
Business Combinations
We allocate the fair value of the purchase consideration of a business acquisition to the tangible assets, liabilities, and intangible assets acquired, including in-process research and development (“IPR&D”), based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. IPR&D is initially capitalized at fair value as an intangible asset with an indefinite life and assessed for impairment thereafter. When an IPR&D project is completed, the IPR&D is reclassified as an amortizable purchased intangible asset and amortized over the asset’s estimated useful life. Our valuation of acquired assets and assumed liabilities requires significant estimates, especially with respect to intangible assets. The valuation of intangible assets, in particular, requires that we use valuation techniques such as the market, income and cost approach. These approaches include the use of a discounted cash flow model, which includes discounted cash flow scenarios and requires the following significant estimates: future expected revenue, expenses, capital expenditures and other costs, and discount rates; or weighted average cost of capital, and any cost savings that are expected to be derived in the future from the viewpoint of a market participant. We estimate the fair value based upon assumptions we believe to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Estimates associated with the accounting for acquisitions may change as additional information becomes available regarding the assets acquired and liabilities assumed. Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred.
Contingent Considerations
Our contingent consideration obligations are arrangements resulting from acquisitions that involve potential future payment of consideration that is contingent upon the achievement of certain financial metrics. Contingent consideration is recognized at its estimated fair value at the date of acquisition based on our expected future payment, discounted using accepted valuation methodologies.
We review and re-assess the estimated fair value of contingent consideration liabilities at each reporting period and the updated fair value could differ materially from the initial estimates. We measure contingent consideration recognized in connection with acquisitions at fair value on a recurring basis using significant unobservable inputs classified as Level 3 inputs. The fair value is measured based on a Monte Carlo simulation or a scenario-based method, depending on the earnout objective and the timing of the measurement. The fair value measurement includes the following significant inputs: volatility, projected financial information and scenario probability. Significant increases or decreases to any of these inputs in isolation could result in a significantly higher or lower liability. Ultimately, the liability will be equivalent to the amount paid, and the difference between the fair value estimate on the acquisition date and each reporting period and the amount paid will be recognized in earnings within Other Income (Expense), net on the consolidated statements of operations.
Recently Issued and Adopted Accounting Standards
For information regarding new accounting pronouncements, and the impact of these pronouncements on our consolidated financial statements, if any, see Note 2 — Summary of Significant Accounting Policies in our accompanying financial statements.