UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended September 30, 2023
For the transition period from __________ to __________
Commission file number: 001-41295
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||
| (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 | Trading Symbol(s) | Name of Each Exchange on Which Registered | ||||||||||||
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,”
1
“accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | 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 2, 2023, 62,002,968 shares of the registrant’s common stock were outstanding.
2
Transphorm, Inc.
FORM 10-Q
Table of Contents
| PART I - FINANCIAL INFORMATION | |||||
| PART II - OTHER INFORMATION | |||||
3
Glossary of Terms and Abbreviations
The following is a glossary of technical terms used in this Quarterly Report on Form 10-Q (this “Report”):
AC – alternating current
AEC-Q101 – Automotive Electronic Council’s electronic components stress qualification standard
AFSW – Aizu Fujitsu Semiconductor Wafer Solution Limited, the wafer fabrication facility located in Aizu Wakamatsu, Japan that is owned by GaNovation, our joint venture company
DC – direct current
Epi/Epiwafer/Epimaterials – GaN device layers grown on a substrate, from which active GaN-based devices are subsequently manufactured in a wafer fabrication facility
FET – field effect transistor, a type of switching transistor
GaN – gallium nitride
JEDEC – Joint Electron Device Engineering Council, an independent semiconductor engineering trade organization and standardization body that represents all areas of the electronics industry
MOCVD – metal organic chemical vapor deposition, a technique for layering GaN layers onto substrates such as a silicon substrate and making the starting GaN semiconductor material (i.e., an epiwafer)
Power converters / Inverters – electronic systems used to convert electricity from AC to DC (such as a charger), DC-AC (such as an inverter) or in some cases AC-AC or DC-DC within the systems converting from one voltage level to another
4
Risk Factor Summary
Our business is subject to significant risks and uncertainties that make an investment in us speculative and risky. Below we summarize what we believe are the principal risk factors but these risks are not the only ones we face, and you should carefully review and consider the full discussion of our risk factors in the section titled “Risk Factors,” together with the other information in this Report. If any of the following risks actually occurs (or if any of those listed elsewhere in this Report occur), our business, reputation, financial condition, results of operations, revenue, and future prospects could be seriously harmed. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business.
•We have a history of losses, anticipate increasing our operating expenses and capital expenditures in the future, and may not be able to achieve or maintain profitability.
•If we do not successfully complete the asset-based debt financing initiatives we are pursuing or raise other capital, we believe that our existing cash and cash equivalents and forecasted revenue will be sufficient to fund our operations into the first half of January 2024.
•Our strategic review process may not result in us entering into or completing a transaction, and may not lead to increased stockholder value.
•Our recurring operating losses and our current operating plans raise substantial doubt about our ability to continue as a going concern. We need to raise capital to support our business, and this capital may be unavailable on attractive terms, if at all, and could dilute your investment.
•Our joint venture arrangement involves numerous risks, including risks relating to the lack of full control of the joint venture, potential disagreements with our joint venture partner about how to manage the joint venture, conflicting interests of the joint venture, requirements to fund the joint venture and its business not being profitable.
•Our quarterly results of operations are likely to vary from period to period, which could cause the market price of our common stock to fluctuate or decline.
•We are exposed to foreign currency exchange rate fluctuations. Although we hedge certain currency risks, our hedging strategies may not be successful in mitigating our risks and changes in foreign currency exchange rates may adversely affect our financial condition, cash flows and results of operations.
•We may not be able to develop new technologies and products to satisfy changes in customer demand or industry standards, and our competitors could develop products that decrease the demand for our products.
•Our sales cycles can be long and unpredictable, and our sales efforts require considerable time and expense.
•We must commit resources to development, design and production prior to receipt of purchase commitments and could lose some or all of the associated investment.
•Unfavorable worldwide economic conditions (including inflation), may negatively affect our business, financial condition and results of operations.
•We compete in highly competitive markets, and competitive pressures from existing and new companies may adversely impact our business and operating results.
•We rely on third-party channel partners to sell our products. If our partners fail to perform, our ability to sell our products and services could be limited, and if we fail to optimize our channel partner model going forward, our operating results could be harmed.
•We rely on limited sources of wafer fabrication, packaged products fabrication and product testing, the loss of which could delay and limit our product shipments.
5
•We rely on third parties for supply of raw materials and parts, assembly and test services, and transportation, among other things, and we generally cannot control their availability or conditions of supply or services.
•Because we depend on third-party manufacturers to build portions of our products, we are susceptible to manufacturing delays and pricing fluctuations that could prevent us from shipping customer orders on time, if at all, or on a cost-effective basis, which may result in the loss of sales, income and customers.
•Our business could be adversely affected by health epidemics or pandemics.
•An earthquake, terrorist attack or other man-made natural disaster could negatively impact our business and operating results.
•The loss of one or more key employees or our inability to attract and retain qualified personnel could harm our business.
•If we fail to effectively manage our growth, our business, financial condition and results of operations would be harmed.
•We are subject to a number of risks associated with international sales and operations.
•Investments in us may be subject to U.S. foreign investment regulations which may impose conditions on or limit certain investors’ ability to purchase or hold our common stock, potentially limiting our ability to enter into or maintain strategic relationships and making our common stock less attractive to investors.
•We are subject to government regulation, including import, export and economic sanctions laws and regulations that may expose us to liability and increase our costs.
•Our sales to government customers subject us to uncertainties regarding fiscal funding approvals, renegotiations or terminations at the discretion of the government, as well as audits and investigations, which could result in litigation, penalties and sanctions including early termination, suspension and debarment.
•Any failure by us to protect our proprietary technologies or maintain the right to use certain technologies may negatively affect our ability to compete.
•If we fail to comply with our obligations under any license, collaboration or other agreements, we may be required to pay damages and could lose certain intellectual property rights.
•Any failure to maintain effective internal controls over our financial reporting could materially and adversely affect us.
•We have identified a material weakness in our internal control over financial reporting that, if not properly remediated, could result in material misstatements in our consolidated financial statements in future periods.
•Sales of substantial amounts of our common stock in the public markets, or the perception that such sales might occur, could cause the market price of our common stock to decline significantly, even if our business is doing well.
•We could be subject to certain liquidated damages pursuant to the registration rights agreements we entered into with certain holders of our securities.
•Our principal stockholders and management have substantial control over us and could delay or prevent a change in corporate control.
•Anti-takeover provisions in our charter documents could make an acquisition of us more difficult and may prevent attempts by our stockholders to replace or remove our management.
6
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Transphorm, Inc.
Condensed Consolidated Balance Sheets (unaudited)
(in thousands, except share and per share data)
| September 30, 2023 | March 31, 2023 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash | |||||||||||
Accounts receivable, net of allowance for doubtful accounts of $ | |||||||||||
| Inventory | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Property and equipment, net | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Goodwill | |||||||||||
| Intangible assets, net | |||||||||||
| Investment in joint venture | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and stockholders’ equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable and accrued expenses, including related parties (Note 11) | $ | $ | |||||||||
| Accrued interest | |||||||||||
| Unfunded commitment in joint venture | |||||||||||
| Accrued payroll and benefits | |||||||||||
| Operating lease liabilities | |||||||||||
| Revolving credit facility | |||||||||||
| Total current liabilities | |||||||||||
| Operating lease liabilities, net of current portion | |||||||||||
| Other liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies (Note 7) | |||||||||||
| Stockholders’ equity: | |||||||||||
Preferred stock, $ | |||||||||||
7
Common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated deficit | ( | ( | |||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
8
Transphorm, Inc.
Condensed Consolidated Statements of Operations (unaudited)
(in thousands, except share and per share data)
| Three Months Ended September 30, | Six Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Revenue, net, including related parties (Note 11) | $ | $ | $ | $ | |||||||||||||||||||
| Cost of goods sold | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| Sales and marketing | |||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| Loss from operations | ( | ( | ( | ( | |||||||||||||||||||
| Interest expense | |||||||||||||||||||||||
| Loss in joint venture | |||||||||||||||||||||||
| Other income, net | ( | ( | ( | ( | |||||||||||||||||||
| Loss before tax expense | ( | ( | ( | ( | |||||||||||||||||||
| Tax expense | |||||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Deemed dividend related to warrant modification and issuance of Inducement Warrants (Note 8) | |||||||||||||||||||||||
| Net loss attributable to common stockholders | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Net loss per share - basic and diluted | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Weighted average common shares outstanding - basic and diluted | |||||||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
9
Transphorm, Inc.
Condensed Consolidated Statements of Comprehensive Loss (unaudited)
(in thousands)
| Three Months Ended September 30, | Six Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Other comprehensive loss, net of tax: | |||||||||||||||||||||||
| Foreign currency translation adjustments | ( | ( | ( | ( | |||||||||||||||||||
| Other comprehensive loss, net of tax | ( | ( | ( | ( | |||||||||||||||||||
| Comprehensive loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
10
Transphorm, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity (unaudited)
For the Three Months Ended September 30, 2023 and 2022
(in thousands, except share data)
| Preferred Stock | Common Stock | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||||
| Number of Shares | Amount | Number of Shares | Amount | Additional Paid-in Capital | Accumulated Deficit | ||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2023 | — | $ | — | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||
| Restricted stock units vested | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Restricted stock units surrendered due to net share settlement to satisfy employee tax liability | — | — | ( | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock, net of issuance costs (Note 8) | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2023 | — | $ | — | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2022 | — | $ | — | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||
| Stock options exercised | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Restricted stock units vested | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Restricted stock units surrendered due to net share settlement to satisfy employee tax liability | — | — | ( | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2022 | — | $ | — | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
11
Transphorm, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity (unaudited)
For the Six Months Ended September 30, 2023 and 2022
(in thousands, except share data)
| Preferred Stock | Common Stock | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||||
| Number of Shares | Amount | Number of Shares | Amount | Additional Paid-in Capital | Accumulated Deficit | ||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2023 | — | $ | — | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||
| Restricted stock units vested | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Restricted stock units surrendered due to net share settlement to satisfy employee tax liability | — | — | ( | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Stock warrant exercise and deemed dividend related to warrant modification, net of issuance costs (Note 8) | — | — | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||
| Deemed dividend related to issuance of Inducement Warrants (Note 8) | — | — | — | — | ( | — | |||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock, net of issuance costs (Note 8) | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2023 | — | $ | — | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | — | $ | — | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||
| Stock options exercised | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Restricted stock units vested | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Restricted stock units surrendered due to net share settlement to satisfy employee tax liability | — | — | ( | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock, net of issuance costs | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2022 | — | $ | — | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
12
Transphorm, Inc.
Condensed Consolidated Statements of Cash Flows (unaudited)
(in thousands)
| Six Months Ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
| Provision for inventory | |||||||||||
| Depreciation and amortization | |||||||||||
| Amortization of operating lease right-of-use assets | |||||||||||
| Provision for doubtful accounts | |||||||||||
| Stock-based compensation | |||||||||||
| Interest cost | |||||||||||
| Gain on sale of equipment | ( | ( | |||||||||
| Loss in joint venture | |||||||||||
| Changes in fair value of derivative instruments | |||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | ( | ||||||||||
| Inventory | ( | ( | |||||||||
| Prepaid expenses and other current assets | ( | ||||||||||
| Other assets | ( | ||||||||||
| Accounts payable, accrued expenses, and other liabilities | ( | ||||||||||
| Deferred revenue | ( | ||||||||||
| Accrued payroll and benefits | |||||||||||
| Operating lease liabilities | ( | ( | |||||||||
| Net cash used in operating activities | ( | ( | |||||||||
| Cash flows from investing activities: | |||||||||||
| Purchases of property and equipment | ( | ( | |||||||||
| Proceeds from sale of equipment | |||||||||||
| Investment in joint venture | ( | ( | |||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from stock option exercise | |||||||||||
| Proceeds from issuance of common stock | |||||||||||
| Cost associated with issuance of common stock and warrants | ( | ( | |||||||||
| Payment for taxes related to net share settlement of restricted stock units | ( | ( | |||||||||
| Proceeds from exercise of stock warrants | |||||||||||
| Loan repayment | ( | ||||||||||
| Net cash provided by financing activities | |||||||||||
| Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash | ( | ( | |||||||||
| Net (decrease) increase in cash, cash equivalents and restricted cash | ( | ||||||||||
| Cash, cash equivalents and restricted cash at beginning of period | |||||||||||
| Cash and cash equivalents at end of period | |||||||||||
13
| Restricted cash at end of period | |||||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | $ | |||||||||
| Supplemental disclosures of cash flow information: | |||||||||||
| Interest expense paid | $ | $ | |||||||||
| Supplemental non-cash investing activity: | |||||||||||
| Property and equipment in accounts payable and accrued expenses | $ | $ | |||||||||
| Supplemental non-cash financing activity: | |||||||||||
| Stock warrant exercise and deemed dividend related to warrant modification | $ | $ | |||||||||
| Deemed dividend related to issuance of Inducement Warrants | |||||||||||
| Rights offering costs in accounts payable and accrued liabilities | |||||||||||
| Operating lease right-of-use asset obtained in exchange for operating lease liabilities | |||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
14
Transphorm, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1 - Business and Basis of Presentation
Transphorm Technology, Inc. (“Transphorm Technology”), a wholly owned subsidiary of Transphorm, Inc., was founded in 2007 to develop GaN semiconductor components used in power conversion.
Throughout these notes, “the Company,” “Transphorm,” “we,” “us” and “our” refer to Transphorm, Inc. 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. (“TPJ”) was established in Japan in February 2014 to secure the Company’s production capacity and establish a direct presence in Asian markets. Transphorm Aizu, Inc. (“Transphorm Aizu”) was established in Japan to manage the financial transactions around Aizu Fujitsu Semiconductor Wafer Solution Limited (“AFSW”), the wafer fabrication facility located in Aizu Wakamatsu, Japan that is owned by GaNovation, the joint venture company in which the Company has a non-controlling interest. Transphorm Japan Epi, Inc. (“TJE”) was established in Japan in 2019 to enable the operational capacity of the MOCVD reactors held in Aizu.
Going Concern
The accompanying unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. However, considering the Company’s working capital of $13.6 million as of September 30, 2023, historical losses (during the year ended March 31, 2023 and six months ended September 30, 2023, the Company’s net loss was $30.6 million and $14.6 million, respectively), and future expected losses, there is 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.
In response to the factors noted above, management intends to raise additional working capital to fund operations through the issuance of stock to investors, debt financing, and/or license of intellectual property. However, there is no assurance that the Company will be successful in raising additional capital. If the Company is unable to secure additional funding, the Company believes that its existing cash and cash equivalents and forecasted revenue will be sufficient to fund its operations into the first half of January 2024. If the Company does not obtain any other financing, the Company would need to cease operations, liquidate its assets, and may seek the protection of applicable bankruptcy laws.
The Company’s ability to sustain operations is dependent on its ability to successfully market and sell its products and its ability to raise capital through additional financings until it is able to achieve profitability with positive cash flows. 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 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.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements 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, 2023, but are not necessarily indicative of the results that will be reported for the entire fiscal year or any other interim period. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with U.S. Generally Accepted Accounting Principles (“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
15
Significant Accounting Policies
Descriptions of the Company’s significant accounting policies are included in Note 2 - Summary of Significant Accounting Policies in the notes to consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2023.
Accounting Standard Adopted
Financial Instruments - In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). The standard changed 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 fiscal year ending March 31, 2024. The Company adopted this standard effective April 1, 2023 and the adoption did not have a material effect on the condensed consolidated financial statements.
Recently Issued Accounting Standards under Evaluation
Debt - In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40), Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, to address the complexity in accounting for certain financial instruments with characteristics of liabilities and equity. Among other provisions, the amendments in this ASU significantly change the guidance on the issuer’s accounting for convertible instruments and the guidance on the derivative scope exception for contracts in an entity’s own equity such that fewer conversion features will require separate recognition, and fewer freestanding instruments, like warrants, will require liability treatment. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, excluding entities eligible to be smaller reporting companies as defined by the SEC. As the Company is a smaller reporting company, the ASU is effective for fiscal years beginning after December 15, 2023. The Company is currently evaluating the impact of this new standard on its consolidated financial statements and the adoption is not expected to have a significant impact on the consolidated financial statements.
| Three Months Ended September 30, | Six Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Net loss available to common shareholders | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Deemed dividend related to warrant modification (Note 8) | ( | ||||||||||||||||||||||
| Deemed dividend related to Inducement Warrants (Note 8) | ( | ||||||||||||||||||||||
| Net loss attributable to common stockholders | ( | ( | ( | ( | |||||||||||||||||||
| Weighted average common shares outstanding - basic and diluted | |||||||||||||||||||||||
| Net loss per share | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
16
Note 2 - Revenue Recognition
Revenue, net including related parties, disaggregated by contract type is as follows (in thousands):
| Three Months Ended September 30, | Six Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Commercial product and service | $ | $ | |||||||||||||||||||||
| Government | |||||||||||||||||||||||
| Revenue, net | $ | $ | $ | $ | |||||||||||||||||||
Revenue from related parties is as follows and included in Commercial product and service revenue (in thousands):
| Three Months Ended September 30, | Six Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Commercial product and service | $ | $ | $ | $ | |||||||||||||||||||
Note 3 - 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.
17
Total revenues, by percentage, from individual customers representing 10% or more of total revenues in the respective periods were as follows:
| Three Months Ended September 30, | Six Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Customer A | * | ||||||||||||||||||||||
| Customer B | * | * | |||||||||||||||||||||
| Customer C | |||||||||||||||||||||||
| Customer D | * | * | |||||||||||||||||||||
| Customer E | * | * | * | * | |||||||||||||||||||
| Customer F | * | * | |||||||||||||||||||||
* Less than 10% of total
Accounts receivable, by percentage, from individual customers representing 10% or more of accounts receivable are set forth in the following table:
| September 30, 2023 | March 31, 2023 | ||||||||||
| Customer A | |||||||||||
| Customer B | * | * | |||||||||
| Customer C | |||||||||||
| Customer D | * | ||||||||||
| Customer E | * | ||||||||||
| Customer F | * | ||||||||||
* Less than 10% of total
Note 4 - Balance Sheet Components
Inventory
Inventory consists of the following as of the dates presented (in thousands):
| September 30, 2023 | March 31, 2023 | ||||||||||
| Raw materials | $ | $ | |||||||||
| Work in process | |||||||||||
| Sub-assembly | |||||||||||
| Finished goods | |||||||||||
| Total | $ | $ | |||||||||
Property and equipment
18
| September 30, 2023 | March 31, 2023 | ||||||||||
| Machinery and equipment | $ | $ | |||||||||
| Computer equipment and software | |||||||||||
| Furniture and fixtures | |||||||||||
| Leasehold improvements | |||||||||||
| Construction in progress | |||||||||||
| Property and equipment, gross | |||||||||||
| Less: accumulated depreciation | ( | ( | |||||||||
| Property and equipment, net | $ | $ | |||||||||
The Company recorded depreciation and amortization expense related to property and equipment, net of $0.3 million and $0.2 million for the three months ended September 30, 2023 and 2022, respectively. The Company recorded depreciation and amortization expense related to property and equipment, net of $0.5 million and $0.3 million for the six months ended September 30, 2023 and 2022, respectively.
Intangible assets
The carrying values of intangible assets as of the dates presented, respectively, consist of the following (in thousands, except years):
| September 30, 2023 | |||||||||||||||||||||||||||||
| Gross | Accumulated Amortization | Foreign Exchange Rate Changes | Net | Estimated Useful Life (in years) | |||||||||||||||||||||||||
| Patents | $ | $ | ( | $ | $ | ||||||||||||||||||||||||
| Developed Technology - 150 V | ( | ( | |||||||||||||||||||||||||||
| Developed Technology - 600 V | ( | ( | |||||||||||||||||||||||||||
| Total | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||
| March 31, 2023 | |||||||||||||||||||||||||||||
| Gross | Accumulated Amortization | Foreign Exchange Rate Changes | Net | Estimated Useful Life (in years) | |||||||||||||||||||||||||
| Patents | $ | $ | ( | $ | $ | ||||||||||||||||||||||||
| Developed Technology - 150 V | ( | ( | |||||||||||||||||||||||||||
| Developed Technology - 600 V | ( | ( | |||||||||||||||||||||||||||
| Total | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||
The Company recorded amortization expenses related to intangible assets of $0.1
Estimated future amortization expenses related to intangible assets as of September 30, 2023 were as follows (in thousands):
| Year Ending March 31, | |||||
| 2024 | $ | ||||
| 2025 | |||||
| Total | $ | ||||
19
Goodwill
Changes in the carrying amount of goodwill were as follows (in thousands):
| Balance as of March 31, 2022 | $ | ||||
| Foreign currency translation adjustments | ( | ||||
| Balance as of March 31, 2023 | $ | ||||
| Foreign currency translation adjustments | ( | ||||
| Balance as of September 30, 2023 | $ | ||||
There have been no impairment losses recorded to date.
Accounts payable and accrued expenses
Accounts payable and accrued expenses consist of the following as of the dates presented (in thousands):
| September 30, 2023 | March 31, 2023 | ||||||||||
| Accounts payable | $ | $ | |||||||||
| Manufacturing production costs | |||||||||||
| Legal fees | |||||||||||
| Audit fees | |||||||||||
| Consulting fees | |||||||||||
| Insurance | |||||||||||
| Deposit liability | |||||||||||
| Other | |||||||||||
| Accrued expenses | $ | $ | |||||||||
| Total Accounts payable and accrued expenses | $ | $ | |||||||||
Note 5 - Investment in Joint Venture
20
The Company’s investment activities in GaNovation for the periods presented are summarized below (in thousands):
| Three Months Ended September 30, | Six Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Beginning Balance | $ | $ | $ | $ | |||||||||||||||||||
| Investment | |||||||||||||||||||||||
| Loss | ( | ( | ( | ( | |||||||||||||||||||
| Ending Balance | $ | ( | $ | $ | ( | $ | |||||||||||||||||
Summarized financial information of GaNovation for the periods indicated are as follows (in thousands):
| Three Months Ended September 30, | Six Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Sales | $ | $ | $ | $ | |||||||||||||||||||
| Gross loss | ( | ( | ( | ( | |||||||||||||||||||
| Net loss | ( | ( | ( | ( | |||||||||||||||||||
Note 6 - Debts
Revolving Credit Facility
The Company entered into a Loan and Security Agreement (“LSA”) with Nexperia on April 4, 2018 which provided a $10.0 million revolving loan (Tranche C Loan) that was scheduled to mature 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 was secured against certain of the Company’s U.S. patents not relating to MOCVD or epiwafer technology. On March 1, 2021, the maturity of the Tranche C Loan of $10.0 million was extended to May 18, 2021. On May 18, 2021, the maturity of the Tranche C Loan was extended to the earlier of April 4, 2023 or the occurrence of specified change of control events, and the $2.0 million Tranche B-1 Loan was converted into a Tranche C-1 Loan (the “Tranche C Loans” together with the Tranche C Loan) with the same terms and conditions as the existing Tranche C Loan.
Note 7 - Commitments and Contingencies
Cooperation Agreement
On December 30, 2022, and effective as of December 18, 2022, the Company entered into a cooperation agreement (the “Cooperation Agreement”) with GaNext (Zhuhai) Technology Co., Ltd (“GaNext”). Among other things, the Cooperation Agreement calls for certain royalties including a royalty due to the Company in the event that GaNext utilizes epiwafers not provided by the Company (such royalties are based on time and volume with a minimum floor), and a royalty payable by the Company in the event the Company utilizes certain future platform that may be developed independently by GaNext (such royalties are based on time and volume, and half the amount per wafer of the royalties GaNext would pay the Company when utilizing epiwafers not provided by the Company). As of
21
September 30, 2023, no amounts have been earned by or due to either party and, thus, no amounts have been recorded in the condensed consolidated financial statements.
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.
On April 5, 2022, Joel Newman, an alleged holder of the Company’s common stock, filed a complaint in the Delaware Court of Chancery derivatively against the Company’s directors and KKR Phorm Investors L.P. (“Phorm”). On July 11, 2022, the plaintiff filed an amended complaint. Among other things, the complaint alleged that the directors and Phorm (as an alleged controlling stockholder) breached their fiduciary duties, and that Phorm was unjustly enriched, because the terms of the November 5, 2021 private placement in which Phorm participated were allegedly unfairly favorable to Phorm. Defendants moved to dismiss the complaint and, on August 31, 2023, the Court granted defendants’ motion to dismiss.
The Company is not aware of any material legal claims or assessments other than disclosed above. Although the results of litigation and claims are inherently unpredictable, management believes (in consultation with legal counsel) 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, 2023 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 8 - Stockholders’ Equity
As of September 30, 2023, 750,000,000 shares of common stock are authorized, of which 61,981,134 5,000,000 shares of preferred stock are authorized, none
Common Stock
22
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 any then-outstanding preferred stock. There have been no dividends declared to date. The holder of each share of common stock is entitled to one vote.
The Company has reserved shares of common stock for future issuance as of the date presented as follows:
| September 30, 2023 | |||||
| Equity incentive plans | |||||
| Common stock warrants | |||||
| Total | |||||
Warrant Repricing and Issuance
On April 3, 2023, the Company entered into warrant exercise inducement offer letters with certain holders of outstanding warrants to purchase shares of the Company’s common stock (such holders, the “Exercising Holders,” and such warrants, the “Existing Warrants”), pursuant to which the Exercising Holders agreed to exercise, for cash, Existing Warrants to purchase, in the aggregate, 1,815,848 shares of the Company’s common stock, in exchange for the Company’s agreement to (i) lower the exercise price of the Existing Warrants to $4.00 per share and (ii) issue new warrants (the “Inducement Warrants”) to the Exercising Holders to purchase, in the aggregate, up to 2,269,810 shares of the Company’s common stock.
The Inducement Warrants have an exercise price of $5.00 per share, provide for a cashless exercise feature, and are exercisable until April 3, 2026. Certain Exercising Holders have contractually agreed to restrict their ability to exercise the Inducement Warrants issued to them if the holder (together with such holder’s affiliates, and any persons acting as a group together with such holder or any of such holder’s affiliates) would beneficially own a number of shares in excess of 9.99 % of the shares of the Company’s common stock then outstanding. At the holder’s option, upon notice to the Company, the holder may increase or decrease this beneficial ownership limitation not to exceed 19.99 % of the shares of common stock then outstanding, with any such increase becoming effective upon 61 days’ prior notice to the Company.
The Company determined that the modification was not executed in contemplation of an imminent equity offering, financing transaction nor represented compensation for goods and services and is not within the scope of another ASC Topic. As such, the Company concluded that the $0.8 million incremental fair value of the modified warrants and the $4.9 million fair value of the Inducement Warrants should be treated as deemed dividends to the warrant holder in accordance with ASC Subtopic 815-40 – Derivatives and Hedging – Contracts in Entity’s Own Equity.
Private Placement of Common Stock and Warrants
On April 3, 2023, the Company entered into securities purchase agreements with two accredited investors that are affiliated with each other (the “Purchasers”) pursuant to which the Company agreed to sell to the Purchasers in a private placement (the “Private Placement”) for an aggregate purchase price of $2.0 million (i) an aggregate of 500,000 shares (the “Shares”) of the Company’s common stock at a purchase price of $4.00 per share and (ii) warrants to purchase an aggregate of 250,001 shares of the Company’s common stock (the “Warrants”). The Warrants have an exercise price of $5.00 per share, provide for a cashless exercise feature, and are exercisable until April 3, 2026.
On April 3, 2023, the Company entered into a registration rights agreement (the “Registration Rights Agreement”) with the Purchasers, pursuant to which the Company agreed to register the Shares and the shares of Common Stock issuable upon exercise of the Warrants (collectively, the “Registrable Securities”) for resale. Under the terms of the Registration Rights Agreement, the Company is obligated, subject to certain exceptions, to (i) no later than 30 days after the closing of the Private Placement, file a registration statement with the Securities and Exchange Commission (the “SEC”) covering the resale or other disposition of the Registrable Securities, (ii) use its commercially
23
reasonable efforts to cause such registration statement to become effective no later than 60 days after such registration statement is first filed with the SEC, and (iii) use its commercially reasonable efforts to keep such registration statement effective for up to three years after the date on which such registration statement is declared effective by the SEC. The registration statement was filed and declared effective within the time period required by the Registration Rights Agreement.
The Company received $7.3 million from the exercise of the Existing Warrants by the Exercising Holders and $2.0 million from the Purchasers in the Private Placement, for total aggregate gross proceeds of approximately $9.3 million (before deducting legal costs of $0.1 million).
The following warrants to purchase common stock were outstanding as of September 30, 2023:
| Number of Warrant Shares | Exercise Price | Expiration Date | ||||||||||||
| $ | October 4, 2024 | |||||||||||||
| November 5, 2024 | ||||||||||||||
| December 7, 2024 | ||||||||||||||
| December 10, 2024 | ||||||||||||||
| December 10, 2025 | ||||||||||||||
| December 23, 2025 | ||||||||||||||
| April 3, 2026 | ||||||||||||||
| April 3, 2026 | ||||||||||||||
The following table summarizes stock warrant activity for the periods presented:
| Number of Warrant Shares | |||||
| Outstanding at March 31, 2023 | |||||
| Stock warrants issued | |||||
| Stock warrants exercised | ( | ||||
| Outstanding and exercisable at September 30, 2023 | |||||
Rights Offering
On July 5, 2023, the Company distributed to all holders of record of its common stock as of 5:00 p.m., Eastern Daylight Time, on June 26, 2023, for each share of common stock held as of June 26, 2023, one non-transferable subscription right. Each subscription right carried with it (i) a basic subscription right, which entitled the holder to purchase 0.07655623 of a share of common stock and (ii) an over-subscription privilege, which entitled a holder that had exercised its basic subscription right in full to subscribe for additional shares of common stock that were offered in the rights offering, to the extent other holders did not exercise their basic subscription rights in full. The subscription price was $3.30 per whole share of common stock.
24
Note 9 - Stock-Based Compensation
Out-of-Period Adjustment
For the six months ended September 30, 2023, the Company recorded a $0.4
Option Modification
Note 10 - 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.
25
Foreign Currency Forward and Option Contracts
In December 2022, the Company entered into four quarterly tiered collar contracts consisting of foreign currency forward and option contracts to manage the foreign exchange risk associated with certain foreign currency-denominated assets and liabilities, specifically those associated with its Japanese operations. The contracts have quarterly maturities ending January 2024.
As a result of foreign currency fluctuations, the U.S. dollar equivalent values of the Company’s foreign currency-denominated assets and liabilities change. The Company has not elected to account for these contracts as hedge instruments and as such, gains and losses on these contracts are included in other income (expense), net in the Company's condensed consolidated statements of operations, along with foreign currency gains and losses of the related foreign currency-denominated assets and liabilities associated with these foreign currency forward and option contracts. During the three and six months ended September 30, 2023, the Company recognized net losses of $39,000 and $0.2 million, respectively, associated with these contracts.
As the forward contract and option model employs market observable inputs such as spot currency rates and forward points, the Company has determined that the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy.
The following table presents the fair value of derivative instruments recognized in the Company's condensed consolidated balance sheets as of September 30, 2023 (in thousands):
| Derivative Not Designated as Hedging Instruments | Gross Amounts of Recognized Assets and Liabilities | Gross Amounts Offset in the Balance Sheet | Net Amounts of Assets and Liabilities Presented in the Balance Sheet | ||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
| Net | $ | $ | $ | $ | |||||||||||||||||||
Note 11 - Related Party Transactions
26
| Three Months Ended September 30, | Six Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Joint Venture-GaNovation: | |||||||||||||||||||||||
| Product sale | $ | $ | $ | $ | |||||||||||||||||||
| Service fees | |||||||||||||||||||||||
| Inventory purchase | |||||||||||||||||||||||
| Fixed asset purchase | |||||||||||||||||||||||
| Cost of goods sold | |||||||||||||||||||||||
| Research and development expense | |||||||||||||||||||||||
| Consumption tax | |||||||||||||||||||||||
| Employee and related benefits | |||||||||||||||||||||||
| Yaskawa: | |||||||||||||||||||||||
| Revenue per a cooperation and development agreement | |||||||||||||||||||||||
| Nexperia: | |||||||||||||||||||||||
| Product sale | |||||||||||||||||||||||
| License and service fee income | |||||||||||||||||||||||
| Reimbursements in license maintenance fee | |||||||||||||||||||||||
| Interest expense | |||||||||||||||||||||||
As of September 30, 2023, total due to and from related parties were as follows (in thousands):
| September 30, 2023 | March 31, 2023 | ||||||||||
| Due from (included in Accounts receivable, net): | |||||||||||
| Joint venture | $ | $ | |||||||||
| Stockholder and noteholder | |||||||||||
| Total due from related parties | $ | $ | |||||||||
| Due to (included in Accounts payable and accrued expenses): | |||||||||||
| Joint venture | $ | $ | |||||||||
| Stockholder and noteholder | |||||||||||
| Total due to related parties | $ | $ | |||||||||
Note 12 - Subsequent Events
27
Note Regarding Forward-Looking Statements
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:
•our ability to successfully complete our asset-based debt financing initiatives as expected, and whether such debt financing raises the amounts we hope for;
•our ability to initiate and successfully execute a strategic review of opportunities to enhance stockholder value, or enter into a transaction on acceptable terms, or at all;
•the implementation of our business model and strategic plans for our business, technologies and products;
•our costs in meeting our contractual obligations, including the cash flow impact of operating AFSW, and our ability to maintain our contracts for their expected durations;
•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 or other payments 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;
28
•our expectations regarding our classification in future periods as a “smaller reporting company,” as defined under the Securities Exchange Act of 1934 (the “Exchange Act”), and an “emerging growth company,” as defined under the JOBS Act;
•the total addressable market and growth rates of the markets in which we compete;
•the competitive landscape of our industry;
•our expectations regarding the performance of our products; 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.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our historical financial statements and the related notes thereto contained in this Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the sections titled “Note Regarding Forward-Looking Statements” and “Risk Factors” for a discussion of forward-looking statements and important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
29
We are a pioneer, and a market and technology leader, in the wide-bandgap GaN power electronics field for high voltage power conversion applications. We deliver high quality and reliable GaN devices with high performance, while providing application design support to a growing customer base. Our GaN devices allow customers to design smaller, lighter and cooler power systems that create increased functional value in end products including smartphone power adapters, smartphone chargers, power supplies for datacenter servers and automotive electric vehicles, among other applications. We deploy our unique vertically integrated innovation model that leverages one of the industry’s most experienced GaN engineering teams (with over 300 years of combined experience) at every development stage: device design, materials growth, device fabrication, packaging, circuits and application support. This approach, backed by one of the GaN power industry’s largest intellectual property portfolios with access to over 1,000 world-wide patents, has yielded the industry’s first automotive-grade AEC-Q101 and JEDEC qualified high voltage GaN FETs. Our innovations are designed to move power electronics beyond the limitations of silicon and provide our customers with the potential to achieve higher efficiency (e.g., titanium-class performance in power supplies), higher power density and, in some designs, an overall lower system cost.
Since our inception, we have devoted substantial resources to the research and development of GaN power devices and the protection and enhancement of our intellectual property and have incurred significant operating losses. Our net loss was $14.6 million and $11.3 million for the six months ended September 30, 2023 and 2022, respectively. As of September 30, 2023, our accumulated deficit was $229.4 million. Substantially all of our operating losses have resulted from expenses incurred in connection with research and development activities and from general and administrative costs associated with our operations.
Our revenue for the six months ended September 30, 2023 was $10.9 million, of which $3.0 million was from related parties. Our revenue for the six months ended September 30, 2022 was $8.8 million, of which $3.2 million was from related parties. For the six months ended September 30, 2023 and 2022, we had three and four customers, respectively, that each accounted for more than ten percent of our revenue. Together, these customers accounted for 71.5% and 72.1% of our revenues during the six months ended September 30, 2023 and 2022, respectively.
We expect to continue to incur significant expenses and operating losses for the foreseeable future. We expect our expenses will increase in connection with our ongoing activities as we:
•add sales and field applications personnel and incur related expenses to support operational growth;
•increase activity directly related to promoting our products to increase revenue;
•acquire additional MOCVD reactor capacity; and
•add financial accounting and management systems and select personnel and incur additional legal and accounting expense as we operate as a public company.
Recent Developments
Rights Offering
On July 5, 2023, we distributed to all holders of record of our common stock as of 5:00 p.m., Eastern Daylight Time, on June 26, 2023, for each share of common stock held as of June 26, 2023, one non-transferable subscription right. Each subscription right carried with it (i) a basic subscription right, which entitled the holder to purchase 0.07655623 of a share of common stock and (ii) an over-subscription privilege, which entitled a holder that had exercised its basic subscription right in full to subscribe for additional shares of common stock that were offered in the rights offering, to the extent other holders did not exercise their basic subscription rights in full. The subscription price was $3.30 per whole share of common stock. We completed the rights offering in August 2023 and issued 2,404,758 shares of common stock, which generated approximately $7.9 million in gross proceeds (before deducting legal costs of $0.3 million). We intend to use the net proceeds for working capital and other general corporate purposes.
30
We are also pursuing debt and equity financing that, if consummated and together with forecasted revenue, would provide us with working capital into the fiscal year ending March 31, 2025. However, there is no assurance that we will be successful in closing the debt financing or raising additional capital on terms acceptable to us or at all, or that we will achieve our revenue forecasts. If we are unable to secure any additional funding, we believe that our existing cash and cash equivalents and forecasted revenue will be sufficient to fund our operations into the first half of January 2024. If we do not obtain any other financing, we would need to cease operations, liquidate our assets, and may seek the protection of applicable bankruptcy laws. Because all of our liabilities are senior to our common stock in our capital structure, any such liquidation or bankruptcy would likely result in the complete loss of your investment in our common stock. Therefore, trading in our securities is highly speculative and poses substantial risks. All statements contained herein regarding our future strategy, operations and potential growth are contingent upon our ability to obtain additional financing through the successful execution of our debt financing initiatives, or otherwise.
As previously announced, we are engaged in a strategic review of opportunities to enhance stockholder value which may include, among other things, strategic partnerships with third parties with equity or debt investment, a sale of the Company or certain of our assets, strategic licensing or other financing alternatives. Our strategic plans are not yet finalized and are subject to market conditions and other uncertainties. There can be no assurance that any strategic review will be successful, that it will result in a transaction on terms acceptable to us or our stockholders, or at all, or will result in increased stockholder value.
Warrant Repricing and Issuance
On April 3, 2023, we entered into warrant exercise inducement offer letters with certain holders of then-outstanding warrants (the “Exercising Holders”), pursuant to which the Exercising Holders agreed to exercise, for cash, warrants to purchase, in the aggregate, 1,815,848 shares of common stock, in exchange for our agreement to (i) lower the exercise price of such warrants to $4.00 per share and (ii) issue new warrants (the “Inducement Warrants”) to the Exercising Holders to purchase, in the aggregate, up to 2,269,810 shares of common stock at an exercise price of $5.00 per share. We received aggregate gross proceeds of approximately $7.3 million from the exercise of warrants by the Exercising Holders.
The Inducement Warrants have an exercise price of $5.00 per share and are exercisable until April 3, 2026. Certain Exercising Holders have contractually agreed to restrict their ability to exercise the Inducement Warrants issued to them if the holder (together with such holder’s affiliates, and any persons acting as a group together with such holder or any of such holder’s affiliates) would beneficially own a number of shares in excess of 9.99% of the shares of the Company’s common stock then outstanding. At the holder’s option, upon notice to the Company, the holder may increase or decrease this beneficial ownership limitation not to exceed 19.99% of the shares of common stock then outstanding, with any such increase becoming effective upon 61 days’ prior notice to the Company.
Private Placement of Common Stock and Warrants
On April 3, 2023, we entered into securities purchase agreements with two accredited investors that are affiliated with each other (the “Purchasers”) pursuant to which we agreed to sell to the Purchasers in a private placement for an aggregate purchase price of $2.0 million (i) an aggregate of 500,000 shares of our common stock at a purchase price of $4.00 per share and (ii) warrants to purchase an aggregate of 250,001 shares of the our common stock (the “Private Placement Warrants”). The Private Placement Warrants have an exercise price of $5.00 per share and are exercisable until April 3, 2026.
Key Factors Affecting Our Performance
A number of industry factors affect our business, including:
Overall Demand for Products and Applications Using GaN Devices. Our potential for growth depends significantly on the adoption of GaN materials and devices in the power markets and GaN epiwafer material products in the radio frequency markets, the expansion of the use of GaN devices in infrastructure, IT, datacenter,
31
industrial, automotive and consumer applications such as fast charger/adapter and gaming power supplies, and our ability to win new designs for these applications. Demand also fluctuates based on various market cycles, fluctuations in supply chains, trade and tariff terms, and the competitive dynamics in each of the respective markets. These uncertainties make demand difficult to forecast for us and our customers.
Intense and Constantly Evolving Competitive Environment. Competition in the industries we serve is intense. Many companies have made significant investments in product development and production equipment. To remain competitive, market participants must continuously increase product performance, reduce costs and develop improved ways to serve their customers. To address these competitive pressures, we have invested in research and development activities to support new product development, lower product costs and deliver higher levels of performance to differentiate our products in the market.
Governmental Trade and Regulatory Conditions. Our potential for growth, as with most multinational companies, depends on a balanced and stable trade, political, economic and regulatory environment among the countries where we do business. Changes in trade policy such as the imposition of tariffs or export bans to specific customers or countries could reduce or limit demand for our products in certain markets.
Technological Innovation and Advancement. Innovations and advancements in materials and power technologies continue to expand the potential commercial application for our products. However, new technologies or standards could emerge or improvements could be made to existing technologies that could reduce or limit the demand for our products.
Intellectual Property Issues. We rely on patented and non-patented proprietary information relating to product development, manufacturing capabilities and other core competencies of our business. Protection of intellectual property is critical. Therefore, filing additional patent applications, entering into confidentiality and non-disclosure agreements, and other security measures are important. While we have a strong patent portfolio comprising access to over 1,000 worldwide patents (directly owned or licensed) and there is no actual or, to our knowledge, threatened litigation against us for patent-related matters, litigation or threatened litigation is a common method to effectively enforce or protect intellectual property rights. Such action may be initiated by or against us and could require significant management time and be costly.
Components of Results of Operations
Revenue
Our revenue currently consists of (1) commercial product sales and service contracts, (2) government contracts, and (3) licensing contracts. Products are sold to distributors and end-users in various sectors such as, the gaming, industrial, IT, and consumer products industries.
Cost of Goods Sold
Cost of goods sold consists of (1) direct product costs incurred for the raw materials and manufacturing services for our products, (2) fixed product costs primarily relating to production, manufacturing and personnel and (3) depreciation expenses consisting primarily of expenses related to our fixed assets. In future periods, we expect our cost of goods sold attributable to direct product costs to increase proportionately with increases in revenue, and our cost of goods sold attributable to fixed product costs to remain substantially flat or moderately increase in connection with increases in revenue.
Operating Expenses
Research and Development. Research and development expenses consist primarily of compensation and related costs for personnel, including stock-based compensation and employee benefits as well as costs associated with design, fabrication, packaging and testing of GaN devices. In addition, research and development expenses include depreciation expenses related to our fixed assets and an allocation of our information technology (IT) and facilities
32
costs. We expense research and development expenses as incurred. As we continue to invest in developing our technology for new products, we expect research and development expenses in future periods to remain flat or moderately increase in absolute dollars and decrease as a percentage of revenue.
Sales and Marketing. Sales and marketing expenses consist primarily of compensation and related costs for personnel, including stock-based compensation and employee benefits, and associated travel costs. Sales and marketing expenses also include costs associated with our support of business development efforts with distributors in Europe and Asia, and costs related to trade shows and marketing programs, and an allocation of our information technology (IT) and facilities costs. We expense sales and marketing expenses as incurred. As we increase our sales and expand our sales force and our marketing organization, we expect sales and marketing expenses in future periods to increase in absolute dollars.
General and Administrative. General and administrative expenses consist primarily of compensation and related costs for personnel, including stock-based compensation, employee benefits and travel. In addition, general and administrative expenses include third-party consulting, legal, audit, and accounting services, rent, facilities and information technology, and amortization of our intangible assets. We expect general and administrative expenses in future periods to increase in absolute dollars due to additional legal, accounting, insurance, investor relations and other costs associated with being a public company, as well as other costs associated with growing our business.
Interest Expense
Interest expense consists of interest associated with our revolving credit facility with Nexperia.
Equity Loss in Joint Venture
Equity loss in joint venture consists of expenditures to cover the losses associated with our 32.5% share ownership of GaNovation beginning April 10, 2023 and our 25% share ownership of GaNovation from August 1, 2021 to April 9, 2023. The potential magnitude of equity loss in joint venture may increase in the future based upon the level of operating expenses incurred by GaNovation, which wholly owns AFSW.
Other Income, Net
Other income, net of other expenses, consists primarily of interest income and income generated from subleasing a portion of our research and development facility located in California.
Tax Expense
Tax expense consists primarily of income taxes in certain foreign and state jurisdictions in which we conduct business.
33
Results of Operations
Comparison of the Three Months Ended September 30, 2023 and 2022
The following table sets forth our unaudited condensed consolidated statements of operations data for the periods indicated (in thousands, except percentages):
| Three Months Ended September 30, | Change | ||||||||||||||||||||||
| 2023 | 2022 | Amount | Percentage | ||||||||||||||||||||
| Revenue, net | $ | 5,010 | $ | 3,670 | $ | 1,340 | 36.5 | % | |||||||||||||||
| Cost of goods sold | 3,836 | 3,232 | 604 | 18.7 | % | ||||||||||||||||||
| Gross profit | 1,174 | 438 | 736 | 168.0 | % | ||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Research and development | 3,022 | 1,830 | 1,192 | 65.1 | % | ||||||||||||||||||
| Sales and marketing | 1,708 | 1,066 | 642 | 60.2 | % | ||||||||||||||||||
| General and administrative | 2,942 | 3,044 | (102) | (3.4) | % | ||||||||||||||||||
| Total operating expenses | 7,672 | 5,940 | 1,732 | 29.2 | % | ||||||||||||||||||
| Loss from operations | (6,498) | (5,502) | (996) | 18.1 | % | ||||||||||||||||||
| Interest expense | — | 184 | (184) | (100.0) | % | ||||||||||||||||||
| Loss in joint venture | 721 | 684 | 37 | 5.4 | % | ||||||||||||||||||
| Other income, net | (90) | (375) | 285 | (76.0) | % | ||||||||||||||||||
| Loss before tax expense | (7,129) | (5,995) | (1,134) | 18.9 | % | ||||||||||||||||||
| Tax expense | — | — | — | ||||||||||||||||||||
| Net loss | $ | (7,129) | $ | (5,995) | $ | (1,134) | 18.9 | % | |||||||||||||||
Revenue increased $1.3 million, or 36.5%, to $5.0 million for the three months ended September 30, 2023 from $3.7 million for the same period in 2022. The increase is due primarily to a $1.0 million increase in government contract revenue resulting from the NSTXL contract awarded in May 2023, combined with a $0.4 million increase in commercial product and services revenue as compared to the same period in 2022.
Cost of goods sold increased $0.6 million, or 18.7%, to $3.8 million for the three months ended September 30, 2023 from $3.2 million for the same period in 2022, due primarily to costs directly associated with increased sales.
Gross profit increased $0.7 million, or 168.0%, to $1.2 million for the three months ended September 30, 2023 from $0.4 million for the same period in 2022. Gross profit margin increased 11.5% to 23.4% for the three months ended September 30, 2023 from 11.9% for the same period in 2022. The increase is due primarily to an increase in government contract revenue associated with the NSTXL contract awarded in May 2023.
Research and development expense increased $1.2 million, or 65.1%, to $3.0 million for the three months ended September 30, 2023 from $1.8 million for the same period in 2022, due primarily to a $0.7 million increase in employee payroll costs resulting from increased research and development activities and a $0.2 million increase in stock-based compensation.
Sales and marketing expense increased $0.6 million, or 60.2%, to $1.7 million for the three months ended September 30, 2023 from $1.1 million for the same period in 2022, due primarily to an increase in costs related to payroll expense.
General and administrative expense decreased $0.1 million, or 3.4%, to $2.9 million for the three months ended September 30, 2023 from $3.0 million for the same period in 2022, due primarily to a reduction in legal and payroll costs, partially offset by an increase in bad debt expense.
34
There was no interest expense recorded for the three months ended September 30, 2023, as we repaid the outstanding amount of the revolving credit facility with Nexperia in full on April 4, 2023. Interest expense was $0.2 million for the revolving credit facility for the same period in 2022.
Loss in joint venture was $0.7 million for each of the three months ended September 30, 2023 and 2022.
Other income, net was $0.1 million for the three months ended September 30, 2023 compared to $0.4 million for the same period in 2022, due primarily to a decrease in sublease income as a result of the amendment of our subleasing contract during the current quarter.
Comparison of the Six Months Ended September 30, 2023 and 2022
The following table sets forth our unaudited condensed consolidated statements of operations data for the periods indicated (in thousands, except percentages):
| Six Months Ended September 30, | Change | ||||||||||||||||||||||
| 2023 | 2022 | Amount | Percentage | ||||||||||||||||||||
| Revenue, net | $ | 10,893 | $ | 8,826 | $ | 2,067 | 23.4 | % | |||||||||||||||
| Cost of goods sold | 7,631 | 7,282 | 349 | 4.8 | % | ||||||||||||||||||
| Gross profit | 3,262 | 1,544 | 1,718 | 111.3 | % | ||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Research and development | 5,891 | 3,570 | 2,321 | 65.0 | % | ||||||||||||||||||
| Sales and marketing | 3,190 | 2,149 | 1,041 | 48.4 | % | ||||||||||||||||||
| General and administrative | 7,458 | 6,361 | 1,097 | 17.2 | % | ||||||||||||||||||
| Total operating expenses | 16,539 | 12,080 | 4,459 | 36.9 | % | ||||||||||||||||||
| Loss from operations | (13,277) | (10,536) | (2,741) | 26.0 | % | ||||||||||||||||||
| Interest expense | 8 | 366 | (358) | (97.8) | % | ||||||||||||||||||
| Loss in joint venture | 1,581 | 1,266 | 315 | 24.9 | % | ||||||||||||||||||
| Other income, net | (290) | (820) | 530 | (64.6) | % | ||||||||||||||||||
| Loss before tax expense | (14,576) | (11,348) | (3,228) | 28.4 | % | ||||||||||||||||||
| Tax expense | — | — | — | ||||||||||||||||||||
| Net loss | $ | (14,576) | $ | (11,348) | $ | (3,228) | 28.4 | % | |||||||||||||||
Revenue increased $2.1 million, or 23.4%, to $10.9 million for the six months ended September 30, 2023 from $8.8 million for the same period in 2022. The increase is due primarily to a $3.1 million increase in government contract revenue resulting from the NSTXL contract awarded in May 2023, offset by a $1.0 million decrease in commercial product and services revenue, due primarily to a reduction in sales volume of commercial products.
Cost of goods sold increased $0.3 million, or 4.8%, to $7.6 million for the six months ended September 30, 2023 from $7.3 million for the same period in 2022, due primarily to a larger reduction in service revenue which carries a higher margin in comparison to commercial product revenue.
Gross profit increased $1.7 million, or 111.3%, to $3.3 million for the six months ended September 30, 2023 from $1.5 million for the same period in 2022. Gross profit margin increased 12.5% to 29.9% for the six months ended September 30, 2023 from 17.5% for the same period in 2022, due primarily to the increase in government contract revenue associated with the NSTXL contract awarded in May 2023.
Research and development expense increased $2.3 million, or 65.0%, to $5.9 million for the six months ended September 30, 2023 from $3.6 million for the same period in 2022, due primarily to a $1.6 million increase in
35
employee payroll costs resulting from increased research and development activities and a $0.5 million increase in stock-based compensation expense primarily resulting from an out-of-period adjustment.
Sales and marketing expense increased $1.0 million, or 48.4%, to $3.2 million for the six months ended September 30, 2023 from $2.1 million for the same period in 2022, due primarily to an increase in costs related to payroll and stock-based compensation expense.
General and administrative expense increased $1.1 million, or 17.2%, to $7.5 million for the six months ended September 30, 2023 from $6.4 million for the same period in 2022, due primarily to a $1.0 million increase in stock-based compensation expense resulting from an out-of-period adjustment and option modification, and a $0.3 million increase in bad debt expense, partially offset by a reduction in payroll and legal expenses.
Interest expense was $8,000 for our revolving credit facility with Nexperia for the six months ended September 30, 2023, as we repaid the outstanding amount in full on April 4, 2023. Interest expense was $0.4 million for the revolving credit facility for the same period in 2022.
Loss in joint venture was $1.6 million for the six months ended September 30, 2023, compared with $1.3 million for the same period in 2022 due to an increase in our percentage ownership of the joint venture that owns AFSW.
Other income, net was $0.