Transphorm, Inc. - SEC Filing

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none-20200930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ___________

Commission file number: 000-55832

Transphorm, Inc.

(Exact name of registrant as specified in its charter)


Delaware		82-1858829
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
75 Castilian Drive
Goleta,	California	93117
(Address of principal executive offices)		(Zip Code)

(805) 456-1300

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Trade Symbol(s)

Name of Each Exchange on Which Registered

N/A

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐ Accelerated filer ☐

Non-accelerated filer ☒ Smaller reporting company ☒

Emerging growth company ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of November 5, 2020, there were 35,266,496 shares of the registrant’s common stock, par value $0.0001 per share, outstanding.

Transphorm, Inc.

Quarterly Report on Form 10-Q

Table of Contents


Note Regarding Forward-Looking Statements			4

Part I - Financial Information			6
Item 1. Financial Statements			6
Condensed Consolidated Balance Sheets as of September 30, 2020 (unaudited) and December 31, 2019			6
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2020 and 2019 (unaudited)			8
Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2020 and 2019 (unaudited)			9
Condensed Consolidated Statements of Changes in Stockholders’ Deficit for the Three and Nine Months Ended September 30, 2020 and 2019 (unaudited)			10
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019 (unaudited)			12
Notes to Unaudited Condensed Consolidated Financial Statements for the Three and Nine Months Ended September 30, 2020 and 2019			14
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			36
Item 3. Quantitative and Qualitative Disclosures About Market Risk			46
Item 4. Controls and Procedures			46

Part II - Other Information			48
Item 1. Legal Proceedings			48
Item 1A. Risk Factors			48
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			67
Item 3. Defaults Upon Senior Securities			67
Item 4. Mine Safety Disclosures			67
Item 5. Other Information			67
Item 6. Exhibits			67

Signatures			69

Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q (this “Report”), including the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains express or implied forward-looking statements that are based on our management’s belief and assumptions and on information currently available to our management. All statements other than statements of historical fact contained in this Report are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “could,” “will,” “would,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “intend,” “predict,” “seek,” “contemplate,” “project,” “continue,” “potential,” “ongoing” or the negative of these terms or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:

•the implementation of our business model and strategic plans for our business, technologies and products;

•our ability to raise additional funds to continue to operate our business, including our joint venture wafer fabrication facility located in Aizu Wakamatsu, Japan, and to satisfy our obligations under our agreements with our lenders;

•our costs in meeting our contractual obligations, including the cash flow impact of purchasing the remaining interest in our joint venture wafer fabrication facility and operating such facility, and our ability to maintain our contracts for their expected durations;

•the impact of the ongoing COVID-19 pandemic on our industry and our business, operations and financial condition, as well as on the global economy;

•the rate and degree of market acceptance of any of our products or GaN technology in general, including changes due to the impact of (i) new GaN fabrication sources, (ii) the performance of GaN technology, whether perceived or actual, relative to competing semiconductor materials, and (iii) the performance of our products, whether perceived or actual, compared to competing GaN-based, silicon-based and other products;

•the timing and success of product releases by us and our customers;

•our ability to develop new products and technologies;

•our future financial performance, including our expectations regarding our revenue, expenses, ongoing losses, and capital requirements;

•our needs for additional financing, ability to obtain additional funds for our operations and our intended use of any such funds;

•our receipt and timing of any royalties, milestone payments or payments for products, under any current or future collaboration, license or other agreements or arrangements, including the credit risks of our customers;

•our ability to obtain, maintain, enforce, defend and enhance our intellectual property rights;

•the strength and marketability of our intellectual property portfolio;

•our dependence on current and future collaborators for developing, manufacturing or otherwise bringing our products to market;

•the ability of our third party supply and manufacturing partners to meet our current and future business needs;

•the throughput of our fabrication facilities and third party foundries, as well as the ability of such facilities and foundries to ramp up production;

•our expectations regarding our classification as a “smaller reporting company,” as defined under the Securities Exchange Act of 1934 (the “Exchange Act”) and an “emerging growth company” under the JOBS Act in future periods;

•the total addressable market and growth rates of the markets in which we compete;

•the competitive landscape of our industry;

•the impact of “controlled company” exemptions that may be available to us in the future under Nasdaq or NYSE listing standards and our use of the applicable phase-in periods; and

•the impact of government regulation and developments relating to us, our competitors or our industry.

We caution you that the foregoing list may not contain all of the forward-looking statements made in this Report.

You should not rely upon forward-looking statements as predictions of future events. We have based the

forward-looking statements contained in this Report primarily on our current expectations and projections about

future events and trends that we believe may affect our business, financial condition, results of operations, and

prospects. The outcome of the events described in these forward-looking statements is subject to significant risks,

uncertainties, and other factors, including those described in the section titled “Risk Factors” and elsewhere in this

report. Moreover, we operate in a very competitive and rapidly changing environment. New risks and

uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could

have an impact on the forward-looking statements contained in this Report. We cannot assure you that the

results, events, and circumstances reflected in the forward-looking statements will be achieved or occur, and actual

results, events, or circumstances could differ materially from those described in the forward-looking statements.

Neither we nor any other person assumes responsibility for the accuracy and completeness of any of these

forward-looking statements. Moreover, the forward-looking statements made in this Report relate only to events

as of the date on which the statements are made. We undertake no obligation to update any forward-looking

statements made in this Report to reflect events or circumstances after the date of this Report or to reflect

new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve

the plans, intentions, or expectations disclosed in our forward-looking statements and you should not place undue

reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of

any future acquisitions, mergers, dispositions, joint ventures, or investments we may make.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the

relevant subject. These statements are based upon information available to us as of the date of this Report, and

while we believe such information forms a reasonable basis for such statements, such information may be limited or

incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or

review of, all potentially available relevant information. These statements are inherently uncertain and investors are

cautioned not to unduly rely upon these statements.

Part I - Financial Information

Item 1. Financial Statements

Transphorm, Inc.

Condensed Consolidated Balance Sheets

(in thousands except share and per share data)


	September 30, 2020 (Unaudited)		December 31, 2019
Assets
Current assets:
Cash and cash equivalents	$	4,369	$	2,875
Accounts receivable, net, including related parties	1,125		709
Inventory	1,372		990
Prepaid expenses and other current assets	1,743		783
Total current assets	8,609		5,357
Property and equipment, net	1,432		1,770
Goodwill	1,362		1,325
Intangible assets, net	1,062		1,313
Other assets	401		497
Total assets	$	12,866	$	10,262

Liabilities, convertible preferred stock and stockholders’ deficit
Current liabilities:
Accounts payable and accrued expenses	$	2,687	$	2,383
Deferred revenue	178		—
Development loan	10,000		5,000
Revolving credit facility, including accrued interest	10,153		10,458
Unfunded commitment to joint venture	1,684		1,688
Accrued payroll and benefits	1,325		1,159
Total current liabilities	26,027		20,688
Development loans, net of current portion	—		10,000
Promissory note	16,327		16,169
Total liabilities	42,354		46,857
Commitments and contingencies (Note 8)
Convertible preferred stock (Notes 1 and 9):
Series 1, $0.0001 par value; no shares authorized, issued and outstanding as of September 30, 2020; 12,438,704 shares authorized and 12,433,953 shares issued and outstanding as of December 31, 2019	—		39,658
Series 2, $0.0001 par value; no shares authorized, issued and outstanding as of September 30, 2020; 7,507,699 shares authorized and 7,499,996 shares issued and outstanding as of December 31, 2019	—		30,000
Series 3, $0.0001 par value; no shares authorized, issued and outstanding as of September 30, 2020; 4,000,000 shares authorized, issued and outstanding as of December 31, 2019	—		16,000
Total convertible preferred stock	—		85,658



Stockholders’ deficit:
Common stock, $0.0001 par value; 750,000,000 shares authorized and 35,266,496 shares issued and outstanding as of September 30, 2020; 29,012,034 shares authorized and 4,220,998 shares issued and outstanding as of December 31, 2019	4		—
Additional paid-in capital	128,385		22,404
Accumulated deficit	(157,112)		(143,915)
Accumulated other comprehensive loss	(765)		(742)
Total stockholders’ deficit	(29,488)		(122,253)
Total liabilities, convertible preferred stock and stockholders’ deficit	$	12,866	$	10,262

See accompanying notes to unaudited condensed consolidated financial statements

Transphorm, Inc.

Condensed Consolidated Statements of Operations (unaudited)

(in thousands except share and per share data)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Revenue, net, including related parties (Note 11)	$	1,929	$	994	$	9,358	$	2,011
Operating expenses:
Cost of goods sold	2,043		1,625		4,746		4,211
Research and development	1,071		2,041		4,131		6,245
Sales and marketing	547		572		1,593		2,098
General and administrative	2,688		1,270		7,838		4,015
Total operating expenses	6,349		5,508		18,308		16,569
Income (loss) from operations	(4,420)		(4,514)		(8,950)		(14,558)
Interest expense	191		191		569		567
Loss in joint venture	1,943		777		5,218		3,004
Changes in fair value of promissory note	709		17		46		101
Other income, net	(523)		(53)		(1,586)		(513)
Loss before tax expense	(6,740)		(5,446)		(13,197)		(17,717)
Tax expense	—		—		—		—
Net loss	$	(6,740)	$	(5,446)	$	(13,197)	$	(17,717)

Net loss per share - basic and diluted	$	(0.19)	$	(0.19)	$	(0.39)	$	(0.63)
Weighted average common shares outstanding - basic and diluted	35,156,918		28,153,555		34,072,176		28,153,555

See accompanying notes to unaudited condensed consolidated financial statements

Transphorm, Inc.

Condensed Consolidated Statements of Comprehensive Loss (unaudited)

(in thousands)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Net loss	$	(6,740)	$	(5,446)	$	(13,197)	$	(17,717)
Other comprehensive loss, net of tax:
Foreign currency translation adjustments	6		5		(23)		7
Other comprehensive (loss) income, net of tax	6		5		(23)		7
Comprehensive loss	$	(6,734)	$	(5,441)	$	(13,220)	$	(17,710)

See accompanying notes to unaudited condensed consolidated financial statements

Transphorm, Inc.

Condensed Consolidated Statements of Changes in Stockholders’ Deficit (unaudited)

For the Three Months Ended September 30,

(in thousands except share data)


	Common Stock			Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Loss		Stockholders’ Deficit
	Number of Shares	Amount
Balance at July 1, 2019	4,219,606	$	—	$	22,109	$	(140,903)	$	(738)	$	(119,532)
Stock-based compensation	—	—		159		—		—		159
Other comprehensive income	—	—		—		—		5		5
Net loss	—	—		—		(5,446)		—		(5,446)
Balance at September 30, 2019	4,219,606	$	—	$	22,268	$	(146,349)	$	(733)	$	(124,814)

Balance at July 1, 2020	35,135,520	$	4	$	127,787	$	(150,372)	$	(771)	$	(23,352)
Stock options exercised	3,475	—		14		—		—		$	14
Restricted stock issued	127,501	—		—		—		—		—
Stock-based compensation	—	—		584		—		—		584
Other comprehensive loss	—	—		—		—		6		6
Net loss	—	—		—		(6,740)		—		(6,740)
Balance at September 30, 2020	35,266,496	$	4	$	128,385	$	(157,112)	$	(765)	$	(29,488)

See accompanying notes to unaudited condensed consolidated financial statements

Transphorm, Inc.

Condensed Consolidated Statements of Changes in Stockholders’ Deficit (unaudited)

For the Nine Months Ended September 30,

(in thousands except share data)


	Common Stock			Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Loss		Stockholders’ Deficit
	Number of Shares	Amount
Balance at January 1, 2019	4,219,606	$	—	$	21,833	$	(128,632)	$	(740)	$	(107,539)
Stock-based compensation	—	—		435		—		—		435
Other comprehensive income	—	—		—		—		7		7
Net loss	—	—		—		(17,717)		—		(17,717)
Balance at September 30, 2019	4,219,606	$	—	$	22,268	$	(146,349)	$	(733)	$	(124,814)

Balance at January 1, 2020	4,220,998	$	—	$	22,404	$	(143,915)	$	(742)	$	(122,253)
Stock options exercised	6,821	—		27		—		—		27
Restricted stock issued	127,501	—		—		—		—		—
Stock-based compensation	—	—		820		—		—		820
Conversion of shares in connection with the Reverse Merger	23,933,949	3		85,655		—		—		85,658
Shares redeemed	(52,773)	—		(211)		—		—		(211)
Shares issued in connection with the Reverse Merger	1,650,000	—		(50)		—		—		(50)
Issuance of common stock, net	5,380,000	1		19,740		—		—		19,741
Other comprehensive loss	—	—		—		—		(23)		(23)
Net loss	—	—		—		(13,197)		—		(13,197)
Balance at September 30, 2020	35,266,496	$	4	$	128,385	$	(157,112)	$	(765)	$	(29,488)

See accompanying notes to unaudited condensed consolidated financial statements

Transphorm, Inc.

Condensed Consolidated Statements of Cash Flows (unaudited)

(in thousands)


	Nine Months Ended September 30,
	2020		2019
Cash flows from operating activities:
Net loss	$	(13,197)	$	(17,717)
Adjustments to reconcile net loss to net cash used in operating activities:
Inventory write-off	274		—
Depreciation and amortization	632		920
Bad debt expense	146
Licensing revenue from a related party	(5,000)
Stock-based compensation	820		435
Interest cost	(193)		455
Loss in joint venture	5,218		3,004
Changes in fair value of promissory note	46		101
Changes in operating assets and liabilities:
Accounts receivable	(562)		(45)
Inventory	(656)		(288)
Prepaid expenses and other current assets	(965)		(236)
Other assets	96		(51)
Accounts payable and accrued expenses	304		(766)
Deferred revenue	178		3,000
Accrued payroll and benefits	166		(136)
Net cash used in operating activities	(12,693)		(11,324)
Cash flows from investing activities:
Purchases of property and equipment	(46)		(155)
Investment in joint venture	(5,327)		(1,696)
Net cash used in investing activities	(5,373)		(1,851)
Cash flows from financing activities:
Proceeds from development loans	—		13,000
Proceeds from stock option exercise	32		—
Payment for repurchase of common stock	(211)		—
Loan repayment	(50)		—
Proceeds from issuance of common stock, net of offering cost	19,741		—
Net cash provided by financing activities	19,512		13,000
Effect of foreign exchange rate changes on cash and cash equivalents	48		17
Net increase (decrease) in cash and cash equivalents	1,494		(158)
Cash and cash equivalents at beginning of period	2,875		3,069
Cash and cash equivalents at end of period	$	4,369	$	2,911

Supplemental disclosures of cash flow information:
Interest expense paid	$	762	$	496
Supplemental non-cash financing activity:
Development loan reduction related to licensing revenue	$	5,000	$	—

See accompanying notes to unaudited condensed consolidated financial statements

Transphorm, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

for the Three and Nine Months Ended September 30, 2020 and 2019

Note 1 - Business and Basis of Presentation

Transphorm, Inc. (“Parent”) develops gallium nitride (“GaN”) semiconductor components used in power conversion and is headquartered in Goleta, California. Parent’s wholly owned-subsdiary, Transphorm Technology, Inc., was incorporated in the State of Delaware on February 22, 2007. Throughout these notes, “the Company,” “Transphorm,” “we,” “us” and “our” refer to Parent and its direct and indirect wholly-owned subsidiaries. Transphorm Technology and its subsidiaries hold all material assets and conduct all business activities and operations of the Company. Transphorm Technology’s activities to date have been primarily performing research and development, establishing manufacturing infrastructure, market sampling, product launch, hiring personnel, and raising capital to support and expand these activities. Transphorm Japan, Inc. was established in Japan in February 2014 to secure Transphorm’s production capacity and establish a direct presence in Asian markets. Transphorm Aizu, Inc. was established in Japan to manage the financial transactions around Aizu Fujitsu Semiconductor Wafer Solution Limited, Transphorm’s joint venture wafer fabrication facility located in Aizu Wakamatsu, Japan (“Aizu”). Transphorm Japan Epi, Inc. was established in Japan in 2019 to enable the operational capacity of the reactors held in Aizu.

In management’s opinion, the accompanying unaudited condensed consolidated financial statements of Transphorm reflect all adjustments of a normal and recurring nature that are necessary for a fair presentation of the results for the interim period ended September 30, 2020, but are not necessarily indicative of the results that will be reported for the entire year or any other interim period. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with Accounting Principles Generally Accepted in the United States of America (“GAAP”) have been condensed or omitted. The aforementioned unaudited condensed consolidated financial statements are prepared in conformity with GAAP and in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission. The interim information should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Amendment No. 2 to Form 8-K filed on March 31, 2020. The consolidated balance sheet as of December 31, 2019 is derived from those audited financial statements.

The preparation of interim unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Material estimates subject to change include, among other items, the determination of allowance for loan and lease losses and allowance for off-balance sheet items, other-than-temporary impairment, securities valuations, the fair value of other assets and liabilities acquired in a business combination and income taxes. Actual results could differ from those estimates.

Reverse Merger

On February 12, 2020, our wholly-owned subsidiary, Peninsula Acquisition Sub, Inc., a corporation formed in the State of Delaware (“Acquisition Sub”), merged with and into Transphorm Technology (formerly known as Transphorm, Inc.), the corporate existence of Acquisition Sub ceased, and Transphorm Technology became our wholly-owned subsidiary (such transaction, the “Merger”). As a result of the Merger, we acquired the business of Transphorm Technology. The Merger was effective as of February 12, 2020, upon the filing of a certificate of merger with the Secretary of State of the State of Delaware. Immediately after completion of the Merger, we adopted Transphorm Technology’s former company name, “Transphorm, Inc.”, as our company name.

The Merger was treated as a recapitalization and reverse acquisition for financial reporting purposes, and Transphorm Technology is considered the acquirer for accounting purposes.

As a result of the Merger and the change in our business and operations, a discussion of the past financial results of our predecessor, Peninsula Acquisition Corporation, is not pertinent, and under applicable accounting principles, the historical financial results of Transphorm Technology, the accounting acquirer, prior to the Merger are considered our historical financial results.

At the effective time of the Merger, (i) each share of Transphorm Technology’s common stock issued and outstanding immediately prior to the closing of the Merger was converted into the right to receive (a) 0.08289152527 shares of our common stock (in the case of shares held by accredited investors) or (b) $4.00 multiplied by 0.08289152527 (in the case of shares held by unaccredited investors), with the actual number of shares of our common stock issued to the former holders of Transphorm Technology’s common stock equal to 4,171,571, (ii) 51,680,254 shares of Transphorm Technology’s Series 1 preferred stock issued and outstanding immediately prior to the closing of the Merger were converted into 12,433,953 shares of our common stock, (iii) 38,760,190 shares of Transphorm Technology’s Series 2 preferred stock issued and outstanding immediately prior to the closing of the Merger were converted into 7,499,996 shares of our common stock, and (iv) 31,850,304 shares of Transphorm Technology’s Series 3 preferred stock issued and outstanding immediately prior to the closing of the Merger were converted into 4,000,000 shares of our common stock. As a result, 28,105,520 shares of our common stock were issued to the former holders of Transphorm Technology’s issued and outstanding capital stock after adjustments due to rounding for fractional shares. Immediately prior to the effective time of the Merger, an aggregate of 682,699 shares of our common stock, owned by the stockholders of Peninsula Acquisition Corporation prior to the Merger, were forfeited and cancelled.

In addition, pursuant to the Merger Agreement, (i) options to purchase 29,703,285 shares of Transphorm Technology’s common stock issued and outstanding immediately prior to the closing of the Merger under Transphorm Technology’s 2007 Stock Plan (the “2007 Plan”) and 2015 Equity Incentive Plan (the “2015 Plan”) were assumed and converted into options to purchase 2,461,923 shares of our common stock, (ii) warrants to purchase 186,535 shares of Transphorm Technology’s common stock issued and outstanding immediately prior to the closing of the Merger were assumed, amended and converted into warrants to purchase 15,461 shares of our common stock, and (iii) Transphorm Technology’s outstanding convertible promissory note was amended to be convertible at the option of the holder, into shares of our common stock at a conversion price of $5.12 per share, with 3,076,171 being the maximum number of shares of our common stock issuable upon conversion of the convertible promissory note. As of September 30, 2020, there was $15.0 million of principal and $448 thousand of accrued and unpaid interest outstanding on the convertible promissory note.

All per share and share amounts for the three and nine months ended September 30, 2019 have been retroactively adjusted to reflect the effect of the Merger.

Going Concern

The accompanying unaudited condensed consolidated condensed financial statements have been prepared assuming that the Company will continue as a going concern. As included in the accompanying unaudited condensed consolidated financial statements, the Company has generated recurring losses from operations, sustained negative cash flows from operating activities, and has an accumulated deficit and has a working capital deficiency. These factors raise substantial doubt about the Company’s ability to continue as a going concern for the next twelve months from the issuance of these financial statements.

Management plans to raise additional working capital to fund operations through the issuance of stock to investors, license of intellectual property and/or issuance of notes payable. The Company raised $19.7 million from the sale of common stock in February 2020 as described in Note 9 - Stockholders’ Equity. However, there is no assurance that the Company will be successful in raising additional capital.

The ability of the Company to continue as a going concern is dependent on its ability to raise significant additional capital to fund operating losses until it is able to generate liquidity from its business operations. To the extent sufficient financing is not available, the Company may not be able to, or may be delayed in, developing its offerings and meeting its obligations. The Company will continue to evaluate its projected expenditures relative to

its available cash and to evaluate financing alternatives in order to satisfy its working capital and other cash requirements. The accompanying unaudited condensed consolidated financial statements do not reflect any adjustments that might result from the outcome of these uncertainties.

Impact of COVID-19 on Our Business

The COVID-19 pandemic has adversely disrupted and will further disrupt the operations at certain of our customers, partners, suppliers and other third-party providers for an uncertain period of time, including as a result of travel restrictions, adverse effects on budget planning processes, business deterioration, and/or business shutdowns, all of which has impacted our business and results of operations. Some of our customers have experienced delays in their internal development programs and design cycles with our GaN products due to the effects of COVID-19, which have led to postponements of their orders of our products and postponements of determinations that our products will be used in their designs for new products under development with corresponding delays in their market introduction and our revenues. The future impact of COVID-19 cannot be predicted with certainty and may make it more difficult or preclude us from raising additional capital, increase our costs of capital and otherwise adversely affect our business, results of operations, financial condition and liquidity.

Significant Accounting Policies

Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of the Parent and its wholly-owned subsidiaries, Transphorm Technology, Transphorm Japan, Inc., Transphorm Japan Epi, Inc. and Transphorm Aizu, Inc. Upon consolidation, all significant intercompany accounts and transactions have been eliminated.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Management bases its estimates and assumptions on historical experience, knowledge of current conditions, and its belief of what could occur in the future, given available information. Actual results could differ from those estimates, and such differences could be material to the condensed consolidated financial statements. Estimates are used for, but not limited to, the determinations of fair value of stock awards and promissory notes, accrual of liabilities, revenue recognition, inventory reserve, and useful lives for property and equipment.

Reclassification of Prior Year Presentation

Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported condensed consolidated financial statements.

Cash and Cash Equivalents

The Company considers all highly-liquid investments with original maturities of 90 days or less at the date of purchase to be cash equivalents. Cash and cash equivalents consist principally of bank deposits and money market funds. Other assets in the condensed consolidated balance sheets as of September 30, 2020 and December 31, 2019 include cash of $75 thousand.

Foreign Currency Risk

The Company is exposed to foreign currency risk due to its operations in Japan. Assets and liabilities of the operations are re-measured into U.S. currency at exchange rates in effect at the balance sheet dates through the condensed consolidated statements of comprehensive income. Gains or losses resulting from foreign currency

transactions are re-measured using the rates on the dates on which those elements are recognized during the period and are included in other income or expense in the unaudited condensed consolidated statements of operations. As of September 30, 2020 and December 31, 2019, the Company had foreign cash and cash equivalents of $41 thousand and $55 thousand, respectively, which represented 0.9 percent and 1.9 percent, respectively, of total cash and cash equivalents.

Concentrations of Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents. The Company is exposed to credit risk in the event of default by the financial institution holding its cash. The Company’s investment policy restricts investments to high-quality investments and limits the amounts invested with any one issuer, industry or geographic area. Risks associated with cash holdings in excess of insured limits are mitigated by banking with high-quality institutions. To date, the Company has not experienced any significant losses on its cash and cash equivalents. The Company periodically evaluates the relative credit standing of these financial institutions.

The Company is subject to risks common in the power conversion components industry, including, but not limited to, technological obsolescence, dependence on key personnel, market acceptance of its products, the successful protection of its proprietary technologies, compliance with government regulations, and the possibility of not being able to obtain additional financing when needed.

Comprehensive Loss

Comprehensive loss is comprised of net loss and other comprehensive income (loss). Other comprehensive income (loss) includes the impact of foreign currency translation adjustments.

Accounts Receivable

Accounts receivable are analyzed and allowances for uncollectible accounts are recorded, as required. Provisions for uncollectible accounts, if any, are recorded as bad debt expense and included in general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations. The process for determining the appropriate level of allowances for doubtful accounts involves judgment, and the Company considers such factors as the age of the underlying receivables, historical and projected collection trends, the composition of outstanding receivables, current economic conditions and regulatory changes. An account is fully reserved when reasonable collection efforts have been unsuccessful and it is probable that the receivable will not be recovered. No significant losses on accounts receivable have been recorded as of September 30, 2020 and December 31, 2019.

Inventory

Inventory is stated at the lower of cost (first-in, first-out method) or net realizable value. The Company periodically reviews the value of items in inventory and records write-downs or write-offs based on its assessment of slow moving or obsolete inventory. The Company maintains an inventory reserve for obsolete inventory and generally makes inventory value adjustments against the inventory reserve.

Property and Equipment

Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation is determined using the straight-line method over the estimated useful lives of the respective assets, generally ranging from three to seven years. Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or the related lease term. Depreciation for equipment commences once it is placed in service, and depreciation for buildings and leasehold improvements commences once they are ready for their intended use. The Company expenses maintenance and repair costs that do not extend the life of the asset as they are incurred.

The Company evaluates the carrying amount of its property and equipment whenever events or changes in circumstances indicate that the assets may not be recoverable. An impairment loss would be recognized when estimated future cash flows expected to result from the use of an asset or asset group and its eventual disposition are less than the carrying amount of the asset or asset group. To date, there have been no such impairment losses.

Goodwill

Goodwill arose for the acquisition of a business in February 2014 based in Japan and was accounted for as the purchase of a business. Goodwill generated from business combinations and deemed to have indefinite lives are not subject to amortization and instead are tested for impairment at least annually in December unless certain events occur or circumstances change. Goodwill represents the excess of the purchase price over the fair value of the net assets and other identifiable intangible assets acquired. We test for goodwill impairment annually or earlier if events or changes in circumstances indicate goodwill might possibly be impaired. Impairment exists when the carrying value of the goodwill exceeds its implied fair value. An impairment loss would be recognized in an amount equal to that excess as a charge to operations in the unaudited condensed consolidated statements of operations. For the three and nine months ended September 30, 2020 and 2019, no impairment charge was recorded related to goodwill.

Intangible Assets

Intangible assets that are not considered to have an indefinite useful life are amortized over their estimated useful lives, which generally range from three to ten years. Each reporting period, the Company evaluates the estimated remaining useful lives of intangible assets and whether events or changes in circumstances warrant a revision to the remaining periods of amortization.

If it is determined that the carrying values might not be recoverable based upon the existence of one or more indicators of impairment, the Company performs a test for recoverability using various methodologies, such as the income approach or cost approach, to determine the fair value of intangible assets depending upon the nature of the assets. If assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds their respective fair values. For the three and nine months ended September 30, 2020 and 2019, no impairment charges were recorded related to intangible assets.

Revenue Recognition

Revenue Recognition Policy

The Company derives its revenues from sales of high-powered GaN-based products manufactured utilizing the Company’s proprietary and patented epiwafer technology and wafer fabrication and other assembly processes, sales of GaN epiwafers for the radio frequency (“RF”) and power markets, and sales of licenses to use such patented proprietary technology, as well as enabling EPI wafer growth services and products to our strategic partners. Revenues are recognized when control of these products or licenses are transferred to the Company’s customers in an amount that reflects the consideration it expects to be entitled to in exchange for those products and licenses. Sales and other taxes the Company collects concurrent with revenue-producing activities are excluded from revenue. Incidental items that are immaterial in the context of the contract are recognized as expense. The Company does not have any significant financing components associated with its revenue contracts, as payment is received at or shortly after the point of sale.

Disaggregation of Revenue from Contracts with Customers

Revenue consists of licensing revenue, government contract revenue from our contract with the U.S. Navy and product sales, with applicable performance obligations satisfied at a point in time. Products are sold to distributors and end-users in various sectors such as, but not limited to, the automotive, gaming, industrial, IT, and consumer products industries.

As part of the Collaboration Arrangement (Note 2 - Nexperia Arrangement) executed with Nexperia on April 4, 2018, the Company agreed to grant Nexperia the perpetual exclusive right to use the Company’s existing Gen-3 manufacturing process technology. License fees are received upon satisfaction of contractual milestones and recognized upon delivery of the perpetual license or transferred technology without any remaining performance obligations. The Company recognized $0 and $5.0 million of licensing revenue for the three and nine months ended September 30, 2020, respectively, and no licensing revenue for each of the three and nine months ended September 30, 2019. Additionally, pursuant to agreements entered into in October 2019, during the three and nine months ended September 30, 2020 and 2019, the Company recognized $280,000 and $0 of revenue from the sale of EPI Gen 4 wafer growths.

Government contract revenues are principally generated under research and development contracts. Contract revenues are derived primarily from research contracts with agencies of the U.S. government. We believe credit risk related to accounts receivable arising from such contracts is minimal. These contracts may include cost-plus fixed fee and fixed price terms. All payments to us for work performed on contracts with agencies of the U.S. government are subject to adjustment upon audit by the Defense Contract Audit Agency. The Company received new government authorized rates for billing purposes which allowed for retroactive application since inception. The cumulative impact of this rate change was $505 thousand in the third quarter of 2020. The Company will use the new approved rates on go-forward basis.

Performance Obligations

For performance obligations related to the sale of products, control transfers to the customer at a point in time. The Company’s principal terms of sale are free on board shipping or destination and the Company transfers control and records revenue for product sales upon shipment or delivery to the customer, respectively. For performance obligations related to the licensing of patented technology in perpetuity, control also transfers to the customer at a point in time. The Company transfers control and records revenue for licensing fees once the Company has (i) provided or otherwise makes available the patented technology to the customer and (ii) the customer is able to use and benefit from the patented technology.

Variable Consideration

The nature of the Company’s arrangement with Nexperia gives rise to variable consideration in the form of milestone and royalty payments. The royalties qualify for the sales and usage-based royalty exception, as the license of intellectual property is the predominant item to which the royalty relates and are recognized upon the subsequent sale occurring. The variable amounts are received upon satisfaction of contractually agreed upon development targets and sales volume.

Research and Development

The Company is a party to research grant contracts with the U.S. government for which the Company is reimbursed for specified costs incurred for its research projects. These projects include energy saving initiatives for which the U.S. government offers reimbursement funds. Such reimbursements are recorded as an offset to research and development expenses when the related qualified research and development expenses are incurred. Reimbursable costs are recognized in the same period the costs are incurred up to the limit of approved funding amounts on qualified expenses. Grant reimbursement of $81 thousand and $0 was recorded as an offset to research and development expense for the three months ended September 30, 2020 and 2019, respectively. Grant reimbursement of $380 thousand and $0 was recorded as an offset to research and development expense for the nine months ended September 30, 2020 and 2019, respectively.

Stock-Based Compensation

All share-based payments, including grants of stock options, restricted stock awards (“RSAs”) and restricted stock units (“RSUs”), are measured at the fair value of the share-based awards on the grant date and recognized over their respective vesting periods, which is generally one to four years. The estimated fair value of

stock options at the grant date is determined using the Black-Scholes-Merton pricing model. The RSAs and RSUs are measured using the estimated fair value of the stock price, which, due to limited trading history, is based on recent equity sales. The Company recognizes the fair value of share-based payments as compensation expense for all expected-to-vest stock-based awards over the vesting period of the award using the straight-line attribution or graded vesting method provided that the amount of compensation cost recognized at any date is no less than the portion of the grant-date fair value of the award that is vested at that date.

The Black-Scholes-Merton option pricing model requires inputs such as the fair value of common stock on date of grant, expected term, expected volatility, dividend yield, and risk-free interest rate. Further, the forfeiture rate also affects the amount of aggregate compensation expense. These inputs are subjective and generally require significant analysis and judgment to develop. Volatility data is obtained from a study of publicly traded industry peer companies. The forfeiture rate is derived primarily from the Company’s historical data, and the risk-free interest rate is based on the yield available on U.S. Treasury zero-coupon issues commensurate with the expected term. Management generally uses the simplified method to calculate the expected term for employee grants as the Company has limited historical exercise data or alternative information to reasonably estimate an expected term assumption. The simplified method assumes that all options will be exercised midway between the weighted average vesting date and the contractual term of the option.

Stock-based compensation expense recognized in the Company’s condensed consolidated financial statements is based on awards that are expected to vest. These expense amounts have been reduced by using an estimated forfeiture rate. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company evaluates the assumptions used to estimate forfeitures annually in connection with the recognition of stock-based compensation expense.

Loss Per Share

Basic loss per share is calculated by dividing net loss applicable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted loss per share is calculated by dividing the net loss attributable to common stockholders by the sum of the weighted average number of common shares outstanding plus potential dilutive common shares outstanding during the period. Potential dilutive securities, comprised of stock warrants, restricted stock units and stock options, are not reflected in diluted loss per share because such shares are anti–dilutive. Dilutive impact of potential common shares resulting from common stock equivalents is determined by applying the treasury stock method.

For the three and nine months ended September 30, 2020, there were 3,155,064 shares, consisting of 2,327,423 stock options, 812,180 restricted stock units and 15,461 stock warrants, that were not included in the computation of diluted loss per share because their effect would be anti-dilutive. For the three and nine months ended September 30, 2019, there were 2,469,273 shares, consisting of 2,453,812 stock options and 15,461 stock warrants, that were not included in the computation of diluted loss per share because their effect would be anti-dilutive.

Fair Value Measurement

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The carrying values of the Company’s financial instruments such as cash equivalents, accounts receivable, revolving credit facility, accounts payable and accrued liabilities approximate fair values due to the short-term nature of these items. The Company has elected the fair value option for its promissory notes. See Note 3 - Fair Value Measurements.

Income Taxes

The Company accounts for income taxes in accordance with Accounting Standards Codification (“ASC”) 740, Income Taxes (“ASC 740”). ASC 740 prescribes the use of the liability method. Deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amounts and the tax basis

of assets and liabilities and are measured using the enacted statutory tax rates in effect at the balance sheet date. The Company records a valuation allowance to reduce its deferred tax assets when uncertainty regarding their realizability exists.

Equity Method Investments

The Company uses the equity method to account for investments in entities that it does not control, but in which it has the ability to exercise significant influence over operating and financial policies. The Company's proportionate share of the net income or loss of these companies is included in consolidated net loss. Judgments regarding the level of influence over each equity method investment include consideration of key factors such as the Company's ownership interest, representation on the board of directors or other management body and participation in policy-making decisions.

Segment Reporting

The Company’s operations and its financial performance is evaluated on a consolidated basis by the chief operating decision maker. Accordingly, the Company considers all of its operations to be aggregated in one reportable operating segment. For the three months ended September 30, 2020, total revenue was $1.9 million, of which $1.6 million was from U.S. operations and $289 thousand was from Japan operations. For the three months ended September 30, 2019, total revenue was $994 thousand, of which $988 thousand was from U.S. operations and $6 thousand was from Japan operations. For the nine months ended September 30, 2020, total revenue was $9.4 million, of which $9.0 million was from U.S. operations and $321 thousand was from Japan operations. For the nine months ended September 30, 2019, total revenue was $2.0 million, of which $2.0 million was from U.S. operations and $25 thousand was from Japan operations.

Recently Issued Accounting Standards Adopted

Fair Value - In August 2018, the Financial Accounting Standard Boards (“FASB”) issued Accounting Standards Update (“ASU”) 2018-13, Fair Value Measurement (ASC 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 removes certain disclosures, modifies certain disclosures and adds additional disclosures. ASU 2018-13 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2019. The Company adopted this standard effective January 1, 2020. The adoption of ASU 2018-13 did not have a material effect on the condensed consolidated financial statements.

Statement of Cash Flows - In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). This guidance addresses eight specific cash flow issues with the objective of reducing existing diversity in practice. ASU 2016-15 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2019. The Company adopted this standard effective January 1, 2020, using the modified retrospective approach. The adoption of ASU 2016-15 did not have a material effect on the condensed consolidated financial statements.

Recently Issued Accounting Standards under Evaluation

Leases - In June 2020, the FASB issued ASU 2020-05, which amends the effective dates of the FASB’s standards on leasing (ASC 842) to give immediate relief to certain entities as a result of the widespread adverse economic effects and business disruptions caused by the COVID-19 pandemic. In February 2016, the FASB issued ASU 2016-02, Leases, which, for operating leases, requires the lessee to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, on its balance sheet. The guidance also requires a lessee to recognize single lease costs, calculated so that the cost of the lease is allocated over the lease term, on a generally straight-line basis. The leasing standard’s effective dates were the fiscal year beginning after December 15, 2019 as originally issued (ASU 2016-02) and the fiscal year beginning after December 15, 2020 as amended by ASU 2019-10. As amended by ASU 2020-05, the leasing standard’s effective date is now the fiscal year

beginning after December 15, 2021. The Company is currently evaluating the impact of this new standard on its condensed consolidated financial statements.

Financial Instruments - FASB ASU 2020-03, Codification Improvements to Financial Instruments, makes clear the determination of the contractual life of a net investment in leases in estimating expected credit losses under ASC 326, Financial Instruments – Credit Losses. In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). The standard changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. ASU 2016-13 is effective for the Company’s 2021 fiscal year. Early adoption is permitted. The Company is currently evaluating the impact of this new standard on its condensed consolidated financial statements.

Income Tax - In December 2019, the FASB issued ASU 2019-12, which modifies ASC 740 to simplify the accounting for income taxes. The ASU’s amendments are based on changes that were suggested by stakeholders as part of the FASB’s simplification initiative (i.e., the FASB’s effort to reduce the complexity of accounting standards while maintaining or enhancing the helpfulness of information provided to financial statement users). ASU 2019-12 is effective for the Company’s 2021 fiscal year. The Company is currently evaluating the impact of this new standard on its condensed consolidated financial statements.

Note 2 - Nexperia Arrangement

Nexperia Transaction

On April 4, 2018, the Company entered into a multi-element commercial arrangement with Nexperia B.V. (“Nexperia”) to obtain financing in exchange for the sale of equity instruments and performing certain technology and product development activities for Nexperia (collectively, the “Collaboration Arrangement”). Nexperia specializes in designing, manufacturing and selling a broad range of small discrete semiconductor devices that utilize components such as those manufactured by the Company. Financing under the Collaboration Arrangement is comprised of the following elements:

•$16 million Series 3 preferred stock issuance

•$9 million license fee for transfer of the Gen-3 manufacturing process

•$5 million development loan, originally maturing March 31, 2020 and subsequently extended to June 30, 2020 intended to pre-fund the Gen-4 (Tranche A) technology development (the “Tranche A Loan”)

•$10 million development loan maturing March 31, 2021 intended to pre-fund the Gen-5 and 1200V technology development (the “Tranche B Loan”)

•$10 million revolving loan (the “Tranche C Loan”)

The Company has to use the funds to operate the business in a manner consistent with or reasonably related to those business activities as carried out on or prior to April 4, 2018, the effective date of Collaboration Arrangement. In addition to the multiple elements outlined above, the Company and Nexperia entered into a Supply Agreement requiring that the Company be Nexperia’s primary supplier of specified components until September 30, 2020 on a best efforts basis. By entering into this Collaboration Arrangement, Nexperia will gain access to technology that allows for production of high power semiconductors for use in electric vehicles.

Further, Nexperia will obtain an exclusive license and market access to automotive customers outside of Japan and a sole license (non-exclusive of the Company), as well as market access to customers in other parts of the power market. Nexperia has a lien on certain of the Company’s U.S. patents not relating to metal organic chemical vapor deposition (“MOCVD”) or epiwafer technology, per the agreement.

On March 31, 2019, the Company executed Amendment No. 1 to the Loan and Security Agreement (the ”LSA”), pursuant to which the Tranche B Loan was bifurcated into the following two separate sub-tranches:

•$8 million development loan intended to pre-fund the Gen-5 (Tranche B) technology development (the “Tranche B Loan”)

•$2 million development loan intended to pre-fund the 1200V technology development (the “Tranche B-1 Loan” and, together with the Tranche B Loan, the “Tranche B Loans”)

On February 7, 2020, Amendment No. 2 to the LSA was executed to acknowledge the then-pending Merger, reaffirm the terms of the loans and confirm the waiver for the late delivery of the Company’s 2018 audited financial statements. On April 8, 2020, Amendment No. 3 to the LSA was executed to extend the maturity of the Tranche A Loan to April 30, 2020. On April 28, 2020, Amendment No. 4 to the LSA was executed to further extend the maturity of the Tranche A Loan to June 30, 2020. All other terms set forth under the original LSA remained unchanged following the amendments.

The Tranche A and Tranche B Loans represent pre-funding for Gen-4 (Tranche A), Gen-5 (Tranche B), and 1200V (Tranche B-1) technology development for Nexperia. The specific development activities and associated performance milestones are contained within a Statement of Work (“SoW”) between the Company and Nexperia. The SoW may be modified from time to time based upon mutual business interests. This promise to perform the technology development is a good/service provided to a customer in exchange for consideration in the form of the technology development license fees that offset the Tranche A and Tranche B Loans outstanding. The Development Loans are recognized as a liability equal to the cash proceeds received.

In relation to the license fee for the transfer of the Company’s Gen-3 manufacturing process to Nexperia, the Company received $3 million (the first of three tranches) in October 2018, $3 million (the second of three tranches) in April 2019, and $3 million (the third of three tranches) in October 2019. The Company recognized $9.0 million as licensing revenue during 2019 upon the completion of the transfer of the Company’s Gen-3 manufacturing process technology and mutual sign off between Nexperia and the Company.

In January 2019, the Company received the $5 million Tranche A Loan. In June 2020, Nexperia agreed that the $5 million Tranche A Loan was permanently satisfied in full in connection with the Company transferring its Gen-4 technology development to Nexperia, at which point the Company recognized $5 million as licensing revenue. In June and July 2019, the Company received the $8 million Tranche B Loan. In December 2019, the Company received the $2 million Tranche B-1 Loan.

The Company received the full $10 million Tranche C Loan under the credit facility during the year ended December 31, 2018. See Note 6 - Debts.

Note 3 - Fair Value Measurements

FASB ASC 820, Fair Value Measurements and Disclosures, establishes a three-tier fair value hierarchy for disclosure of fair value measurements as follows:

Level 1 - Unadjusted quoted prices in active markets for identical assets and liabilities.

Level 2 - Inputs (other than quoted prices included within Level 1) that are observable, unadjusted quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data of substantially the full term of the related assets or liabilities.

Level 3 - Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Inputs are unobservable for the asset or liability. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The following table summarizes the Company’s liabilities measured at fair value as of September 30, 2020 and December 31, 2019, by level within the fair value hierarchy (in thousands):


	Level 1		Level 2		Level 3
September 30, 2020
Promissory note	$	—	$	—	$	16,327

December 31, 2019
Promissory note	$	—	$	—	$	16,169

The following table includes the changes in fair value of the promissory note which are Level 3 on the fair value hierarchy (in thousands):


	2020
Fair value at January 1,	$	16,169
Interest expense accrued	112
Increase in fair value	46
Fair value at September 30,	$	16,327

	2019
Fair value at January 1,	$	15,852
Interest expense accrued	150
Increase in fair value	167
Fair value at December 31,	$	16,169

The Company recorded interest expense of $38 thousand for each of the three months ended September 30, 2020 and 2019, and interest expense of $112 thousand for each of the nine months ended September 30, 2020 and 2019. Fair value of promissory note increased $709 thousand and $17 thousand for the three months ended September 30, 2020 and 2019, respectively, and fair value of promissory note increased $46 thousand and $101 thousand for the nine months ended September 30, 2020 and 2019, respectively.

There were no changes to our valuation techniques used to measure assets and liability fair values during the nine months ended September 30, 2020 and 2019. The valuation techniques for the items in the table above are as follows:

Level 3 borrowings, which consist of a promissory note, are measured and reported at fair value using a Monte Carlo simulation valuation model. The models can include assumptions related to the value of the notes that are based on the estimated timing and amounts of future rounds of financing, including the estimated timing of a change in control of the Company, and estimated market interest rates, which represent significant unobservable inputs. Assumptions used are (1) the Company is worth today what it can generate in future cash to the Company, (2) cash received today is more than an equal amount of cash received in the future, and (3) future cash flows can be reasonably estimated.

Note 4 - Concentration of Credit Risk and Significant Customers

The Company manages its credit risk associated with exposure to distributors and direct customers on outstanding accounts receivable through the application of credit approvals and other monitoring procedures. Credit sales, which are mainly on credit terms of 30 to 60 days, are only made to customers who meet the Company's credit standards, while sales to new customers or customers with low credit ratings are usually made on an advance payment basis. The Company closely monitors the aging of accounts receivable from its distributors and direct customers, and regularly reviews their financial positions, where available.

Significant customers are those that represent 10% or more of revenue or accounts receivable and are set forth in the following table:


	Revenue for the Nine Months Ended September 30,		Accounts Receivable As of
	2020	2019	September 30, 2020	December 31, 2019
Customer A	67.3%	14.6%	44.0%	60.0%
Customer B	26.0%	51.1%	36.1%	20.4%

Customer A is a related party and Customer B is a government agency. See Note 11 - Related Party Transactions.

Note 5 - Inventory

Inventory consists of the following as of September 30, 2020 and December 31, 2019 (in thousands):


	As of
	September 30, 2020		December 31, 2019
Raw materials	$	546	$	412
Work in process	396		258
Finished goods	430		320
Total	$	1,372	$	990

An inventory write-off of $112 thousand and $274 thousand was recorded for the three and nine months ended September 30, 2020, respectively. For the three and nine months ended September 30, 2019, no inventory write-off was recorded.

Note 6 - Debts

Development Loans

On April 4, 2018, the Company entered into a Loan and Security Agreement (“LSA”) and Development and License Agreement (“DLA”) with Nexperia. The LSA provided for term loans in an aggregate principal amount of up to $15.0 million, which term loans were available in tranches (Tranche A, Tranche B and Tranche B-1) and subject to the satisfaction of specified conditions. The Tranche A Loan of $5.0 million initially was scheduled to mature on the earlier of the date a specified report is required to be delivered under the DLA or March 31, 2020. On April 8, 2020, the maturity of the Tranche A loan was extended to April 30, 2020 and, on April 28, 2020, the maturity of the Tranche A Loan was further extended to June 30, 2020. On June 29, 2020, the Tranche A Loan of $5.0 million was satisfied in full when the Company transferred its Gen-4 technology development to Nexperia. The Tranche B Loan of $8.0 million and Tranche B-1 Loan of $2.0 million mature on the earlier of the date a specified

report is required to be delivered under the DLA or March 31, 2021, subject to extension as provided in the LSA. See Note 2 - Nexperia Arrangement.

As of September 30, 2020 and December 31, 2019, $10.0 million aggregate principal amount of term loans were outstanding under the LSA.

Revolving Credit Facility

The LSA also provided a $10.0 million revolving loan (Tranche C Loan) maturing at the earlier of (i) April 3, 2021, and (ii) the date a Change of Control (as defined in the LSA) of the Company occurs. Interest payable by the Company accrues on the outstanding principal amount of the loans during such period at a rate of 6% per annum. The credit facility is secured against certain of our U.S. patents not relating to MOCVD or epiwafer technology. See Note 2 - Nexperia Arrangement.

The Tranche C Loan is recorded based on principal in the amount of $10.0 million and accrued interest (6% interest per annum). The Company recorded interest expense of $153 thousand for each of the three months ended September 30, 2020 and 2019, and interest expense of $457 thousand and $455 thousand for the nine months ended September 30, 2020 and 2019, respectively. The Company paid interest expense of $762 thousand during the three months ended September 30, 2020. As of September 30, 2020 and December 31, 2019, the total balance of the revolving credit facility was $10.2 million and $10.5 million, respectively.

Promissory Note

The Company’s promissory note obligation at September 30, 2020 and December 31, 2019 consists of the following (in thousands):


			Stated Value at
	Interest Rate	Due Date	September 30, 2020		December 31, 2019
Yaskawa Note	1.00%	September 2022	$	15,448	$	15,336

Pursuant to ASC 825-10-15-4, the Company elected to apply the fair value option for the promissory note. As of September 30, 2020 and December 31, 2019, the Company determined the fair value for the note, as compared to the face value, including accrued interest, as follows (in thousands):


	Fair Value at
	September 30, 2020		December 31, 2019
Yaskawa Note	$	16,327	$	16,169

Fair value of promissory note increased $46 thousand for the nine months ended September 30, 2020 and increased $167 thousand for the year ended December 31, 2019.

In October 2017, the Company issued an unsecured subordinated convertible promissory note to Yaskawa Electric Corporation (the “Yaskawa Note”) for $15.0 million. The stated interest rate of the Yaskawa Note is 1.0%, and principal plus interest is due on the earlier of September 30, 2022, or the date of the occurrence of an Event of Default, Change of Control or an Initial Public Offering (all terms as defined in the Yaskawa Note). In connection with the Merger, the Yaskawa Note was amended to be convertible at the option of the holder into a maximum of 3,076,171 shares of our common stock at a conversion price of $5.12 per share.

In connection with its promissory note obligation, the Company recorded interest expense of $38 thousand for each of the three months ended September 30, 2020 and 2019, and interest expense of $112 thousand for each of

the nine months ended September 30, 2020 and 2019. In accordance with the terms of the promissory note, interest is added to the principal balance and is reflected in the carrying value on the condensed consolidated balance sheet. As of September 30, 2020 and December 31, 2019, accrued interest on the promissory note was $448 thousand and $336 thousand, respectively.

In February 2020, the Company entered into a letter of intent (“LOI”) with Yaskawa that will form the basis for a mutually beneficial cooperation agreement between the Company and Yaskawa, which is expected to be finalized by the end of 2020. Under the LOI, Yaskawa intends to enter into a long-term cooperation and development agreement with the Company to use the Company’s GaN power device products for a variety of industrial power conversion applications, which will initially focus on servo motor drive applications. Yaskawa also intends to provide at least $4.0 million to fund the Company’s development activities from which amount Yaskawa intends to provide $1.0 million in 2020 in connection with the ongoing development activities.

As of September 30, 2020, the scheduled maturity on the development loans, revolving credit facility and promissory note was as follows (in thousands):


Year Ending December 31,	Amount
2020	$	10,153
2021	10,000
2022	15,748
Total	$	35,901

Note 7 - Investment in Aizu Fujitsu Semiconductor Wafer Solution Limited (“AFSW”)

The Company has a 49% interest in AFSW and is a party to a joint venture agreement (the “JVA”) with Fujitsu Semiconductor Limited (“FSL”), the 51% owner of AFSW. AFSW manufactures semiconductor products exclusively for its owners under manufacturing agreements at prices estimated to cover the cost of production. AFSW was determined to be a variable interest entity (“VIE”) as the equity at risk was not believed to be sufficient. AFSW depends on its owners for any additional cash. The Company extended $5.3 million and $2.7 million to AFSW to fund AFSW’s operations for the nine months ended September 30, 2020 and the year ended December 31, 2019, respectively. The Company’s known maximum exposure to loss approximated the carrying value of its investment balance, which included the financing. Potential future losses could be higher than the carrying amount of the Company’s investment, as we are liable, along with the other owner, for other future operating costs or obligations of AFSW. In addition, because Transphorm is currently committed to purchasing GaN wafers and production-related services from AFSW at pre-agreed pricing based upon the Company’s second generation products, the Company may be required to purchase products at a higher cost for its newer generation products. Unfunded commitment to AFSW was $1.7 million as of September 30, 2020 and December 31, 2019.

On April 1, 2020, FSL exercised its put option under the JVA and notified us that FSL intended to exit the joint venture by selling its 51% interest in AFSW to us. Under the terms of the JVA, the aggregate purchase price for FSL’s interest in AFSW is expected to be one Japanese Yen. While the agreement provides that completion of the transaction was to take place as soon as 60 days from the date of the exercise notice, such transaction will be subject to regulatory and other approvals in Japan, which we believe will take an additional three to six months from the date of issuance of these financial statements to obtain, assuming such approval is received at all. For at least one year following the date on which we take over full ownership of AFSW, we have agreed to use our best efforts to maintain and continue the operations of AFSW, which is also synergistic with our own business for securing wafers for our products.

The Company’s investment activities in AFSW for the nine months ended September 30, 2020 and the year ended December 31, 2019 are summarized below (in thousands):


	For the Nine Months Ended September 30, 2020		For the Year Ended December 31, 2019
Beginning balance	$	(1,688)	$	(659)
Investment	5,327		2,698
Loss	(5,218)		(3,703)
Effect of exchange rate change	(105)		(24)
Ending balance	$	(1,684)	$	(1,688)

Summarized financial information (unaudited) of AFSW for the periods indicated, as provided by the controlling owner, are as follows (in thousands):


					As of
					September 30, 2020		December 31, 2019
Current assets					$	1,138	$	3,733
Long-term assets					$	5,412	$	5,101
Other current liabilities					$	2,557	$	931
Due to controlling owner					$	19,633	$	17,913
Due to Transphorm					$	10,910	$	5,349
Net deficit					$	(26,550)	$	(15,359)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Sales	$	492	$	2,613	$	2,278	$	8,864
Gross loss	$	(3,170)	$	(835)	$	(8,515)	$	(4,002)
Net loss	$	(3,965)	$	(1,585)	$	(10,649)	$	(6,130)

Note 8 - Commitments and Contingencies

Commitment with a Government Agency

In connection with a contract with a government agency, the Company entered into a commitment to acquire equipment and services from vendors totaling $6.7 million, all of which is reimbursable. For the three and nine months ended September 30, 2020, the Company received reimbursements of $1.4 million and $5.3 million, respectively, from the government agency. As of September 30, 2020, the remaining commitment under the contract was approximately $1.4 million. For the three and nine months ended September 30, 2020, the Company paid $616 thousand and $4.1 million, respectively, for equipment purchases. As of September 30, 2020, the remaining accounts payable to the vendors was approximately $798 thousand.

Operating Leases

The Company leases office and fabrication space in Goleta, California, and office spaces in San Jose, California and in Japan under noncancelable operating lease agreements. The terms of certain leases provide for escalating rental payments through the term of the lease. The Company recognizes rent expense on a straight-line basis over the lease term and accrues for rent expense incurred but not paid.

As of September 30, 2020, future minimum operating lease commitments were as follows (in thousands):


Year Ending December 31,	Amount
2020	$	180
2021	571
2022	163
Total	$	914

The Company recorded rent expense, net of rental income, which includes common area maintenance fees in addition to the base rent, of $228 thousand and $233 thousand for the three months ended September 30, 2020 and 2019, respectively, and $655 thousand and $672 thousand for the nine months ended September 30, 2020 and 2019, respectively. Rental income from a noncancelable sublease was $45 thousand for each of the three months ended September 30, 2020 and 2019, and $136 thousand for each of the nine months ended September 30, 2020 and 2019. As of September 30, 2020, the future minimum rental payments to be received under the noncancelable sublease are $78 thousand through February 2021.

Contingencies

During the ordinary course of business, the Company may become a party to legal proceedings incidental to its business. The Company accrues contingent liabilities when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. Legal cost is expensed as incurred. The Company is not aware of any material legal claims or assessments. Although the results of litigation and claims are inherently unpredictable, management believes there was not at least a reasonable possibility that the Company had incurred a material loss with respect to any loss contingencies as of September 30, 2020 and through the issuance of these financial statements.

Indemnification

The Company from time to time enters into types of contracts that contingently require the Company to indemnify parties against third-party claims. These contracts primarily relate to: (1) real estate leases, under which the Company may be required to indemnify property owners for environmental and other liabilities and for other claims arising from the Company’s use of the applicable premises; (2) agreements with the Company’s officers, directors, and employees, under which the Company may be required to indemnify such persons from liabilities arising out of their relationship; (3) indemnifying customers in the event of product failure; and (4) agreements with outside parties that use the Company’s intellectual property, under which the Company may indemnify for copyright or patent infringement related specifically to the use of such intellectual property.

Historically, the Company has not been required to make payments under these obligations, and no liabilities have been recorded for these obligations in the Company’s condensed consolidated financial statements.

Note 9 - Stockholders’ Equity

On February 12, 2020, in connection with the Merger, shares of Transphorm Technology’s convertible preferred stock and common stock issued and outstanding immediately prior to the closing of the Merger were converted into shares of the Company’s common stock as follows:

•Series 1 convertible preferred stock: 51,680,254 shares issued and outstanding were converted into 12,433,953 shares issued and outstanding;

•Series 2 convertible preferred stock: 38,760,190 shares issued and outstanding were converted into 7,499,996 shares issued and outstanding;

•Series 3 convertible preferred stock: 31,850,304 issued and outstanding were converted into 4,000,000 shares issued and outstanding; and

•Common stock: 50,325,662 shares issued and outstanding were converted into 4,171,571 shares issued and outstanding.

In addition, on February 12, 2020, the Company issued 1,650,000 shares in connection with the Merger with Peninsula Acquisition Corporation and redeemed 52,773 shares from unaccredited investors.

All per share and share amounts for all periods presented have been retroactively adjusted to reflect the effect of the Merger.

In December 2019, the Company amended its certificate of incorporation to authorize two classes of stock, to be designated, respectively, common stock and preferred stock. The total number of shares of stock that the Company shall have authority to issue is 755,000,000 shares, of which 750,000,000 shares are common stock, $0.0001 par value per share, and 5,000,000 shares are preferred stock, $0.0001 par value per share.

As of September 30, 2020, 750,000,000 shares of common stock are authorized, of which 35,266,496 shares of common stock were issued and outstanding, and 5,000,000 shares of preferred stock are authorized, none of which were issued and outstanding. The Company’s Board of Directors has the ability to designate the rights, preferences and privileges for the preferred stock.

Private Placement

On February 12, 2020 and February 27, 2020, we sold an aggregate of 5,380,000 shares of common stock pursuant to closings of a private placement offering (the “Private Placement”) at a purchase price of $4.00 per share. We granted to the investors in the Private Placement registration rights requiring us to register those shares of common stock for public resale. The then existing stockholders of Transphorm Technology also became entitled to such registration rights. The aggregate gross proceeds from the closings of the Private Placement were $21.5 million (before deducting placement agent fees and expenses of such closings, which were an aggregate of $1.8 million).

The issuance of common stock in the Private Placement was not registered under the Securities Act, in

reliance upon the exemption from registration provided by Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated by the SEC. The common stock issued in the Private Placement was sold to “accredited investors,” as defined in Regulation D, and was conducted on a “reasonable best efforts” basis.

Common Stock

Common stockholders are entitled to dividends, as and when declared by the Company’s Board of Directors, subject to the priority dividend rights of the holders of other classes of stock. There have been no dividends declared to date. The holder of each share of common stock is entitled to one vote.

At September 30, 2020, the Company has reserved shares of common stock for future issuance as follows:


Equity incentive plans			5,042,525
Common stock warrants			15,461
Total			5,057,986

Common Stock Warrants

At September 30, 2020, the following warrants to purchase common stock were outstanding:


Number of Shares	Exercise Price	Expiration Date
6,046	$34.74	November 2020
6,046	$34.74	5 years after an initial public offering of the Company
3,369	$54.41	5 years after an initial public offering of the Company
15,461

Note 10 - Stock Based Compensation

The 2020 Equity Incentive Plan (the “2020 Plan”) was approved by Transphorm Technology’s board of directors on February 10, 2020 and Transphorm Technology’s stockholders on February 12, 2020, and became effective on the business day immediately prior to the closing of the Merger. Our stockholders approved the 2020 Plan on February 11, 2020. We assumed the 2020 Plan in connection with the Merger. As of September 30, 2020, there were 1,902,922 shares available for grant and 816,180 restricted stock units outstanding under the 2020 Plan. The 2020 Plan provides for the grant of incentive stock options, within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), to our employees and our parent and subsidiary corporations’ employees, and for the grant of nonstatutory stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”), performance units, and performance shares to our employees, directors, and consultants and our parent and subsidiary corporations’ employees and consultants.

Subject to the adjustment provisions of the 2020 Plan, and the automatic increase described in the 2020 Plan, the maximum aggregate number of shares of our common stock that may be issued under the 2020 Plan is 5,050,000 shares of our common stock, which includes (i) 2,588,077 shares initially reserved for issuance, plus (ii) any shares of our common stock subject to issued and outstanding awards under the 2007 Plan or 2015 Plan that were assumed in the Merger and that, on or after the closing of the Merger, expire or otherwise terminate without having been exercised or issued in full, are tendered to or withheld by us for payment of an exercise price or for tax withholding obligations, or are forfeited to or repurchased by us due to failure to vest, with the maximum number of shares to be added to the 2020 Plan pursuant to this clause (ii) equal to 2,461,923 shares. Subject to the adjustment provisions of the 2020 Plan, the number of shares of common stock available for issuance under the 2020 Plan will also include an annual increase on the first day of each fiscal year beginning with our 2022 fiscal year and ending on (and including) our 2030 fiscal year, in an amount equal to the least of: 5,000,000 shares of our common stock; five percent (5%) of the outstanding shares of our common stock on the last day of the immediately preceding fiscal year; or such number of shares of our common stock as the administrator of the 2020 Plan may determine.

Stock Options

The following table summarizes stock option activity and related information for the three months ended September 30, 2020 and 2019:


	Number of Options Outstanding	Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term (in Years)	Aggregate Intrinsic Value (1) (in thousands)
Balance at July 1, 2020	2,454,687	$	4.74	6.33	$	—
Options exercised	(3,475)	$	3.80
Options canceled	(123,789)	$	5.91
Balance at September 30, 2020	2,327,423	$	4.68	6.16