Notes to Consolidated Financial Statements
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-subsidiary, 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 non-controlling 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.
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 December 31, 2020, there was $15.0 million of principal and $486 thousand of accrued and unpaid interest outstanding on the convertible promissory note.
All per share and share amounts for the year ended December 31, 2019 have been retroactively adjusted to reflect the effect of the Merger.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As included in the accompanying 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 and $13.6 million from the sales of common stock in February 2020 and December 2020, respectively, as described in Note 13 - 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 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.
Note 2 - Summary of Significant Accounting Policies
Principles of Consolidation
The 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 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 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 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 consolidated balance sheets as of December 31, 2020 and 2019 include restricted 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 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 consolidated statements of operations. As of December 31, 2020 and 2019, the Company had foreign cash and cash equivalents of $42 thousand and $55 thousand, respectively, which represented 0.3 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 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. Provision for doubtful accounts amounted to $110 thousand and $0 for the years ended December 31, 2020 and 2019, respectively.
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 consolidated statements of operations. For the years ended December 31, 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 years ended December 31, 2020 and 2019, no impairment charges were recorded related to intangible assets.
Revenue Recognition
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 Arrangement (Note 3 - 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. For the year ended December 31, 2020, the Company recognized $5.0 million of licensing revenue. For the year ended December 31, 2019, the Company received the remaining $6.0 million and recognized a total of $9.0 million, including $3.0 million received in 2018, as licensing revenue upon satisfaction of contractual milestones and delivery of the perpetual license and transferred technology without any remaining performance obligations.
In December 2020, we entered into a cooperation and development agreement with Yaskawa, pursuant to which Yaskawa agreed to provide $4.0 million over approximately three years to fund development activities related to industrial power conversion applications, with an initial focus on servo motor drive applications. Yaskawa provided $1.0 million of this $4.0 million commitment in December 2020. The Company evaluated and concluded that the deliverables are the same and nature of the services to be provided to Yaskawa will be consistent over the period of approximately three years. Accordingly, the Company recognized $333 thousand as revenue during the year ended December 31, 2020. As of December 31, 2020, $667 thousand is included in deferred revenue on the consolidated balance sheet.
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 $426 thousand and $0 was recorded as an offset to research and development expense for the years ended December 31, 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 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 year ended December 31, 2020, there were 3,285,058 shares, consisting of 2,320,318 stock options, 805,325 restricted stock units and 159,415 stock warrants, that were not included in the computation of diluted loss per share because their effect would be anti-dilutive. For the year ended December 31, 2019, there were 26,422,608 shares, consisting of 23,933,949 convertible preferred stocks, 2,473,198 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.
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 year ended December 31, 2020, total revenue was $11.4 million, of which $10.7 million was from U.S. operations and $713 thousand was from Japan operations. For the year ended December 31, 2019, total revenue was $11.9 million, of which $11.9 million was from U.S. operations and $28 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 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 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 consolidated financial statements and the adoption is not expected to have a significant impact on the 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 consolidated financial statements and the adoption is not expected to have a significant impact on the 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 consolidated financial statements and the adoption is not expected to have a significant impact on the consolidated financial statements.
Note 3 - 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 June 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 9 - Debts.
On March 1, 2021, Amendment No. 5 to the LSA was executed to extend the maturity of the Tranche B loans of $10 million and the Tranche C Loan of $10 million to June 30, 2021 and May 18, 2021, respectively. All other terms set forth under the original LSA remained unchanged following the amendments.
Note 4 - Fair Value Measurements
FASB ASC 820, Fair Value Measurements and Disclosures, establishes a three-tier fair value hierarchy for disclosure of fair value measurements as follows:
Level 1 - Unadjusted quoted prices in active markets for identical assets and liabilities.
Level 2 - Inputs (other than quoted prices included within Level 1) that are observable, unadjusted quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data of substantially the full term of the related assets or liabilities.
Level 3 - Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Inputs are unobservable for the asset or liability. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The following table summarizes the Company’s liabilities measured at fair value as of December 31, 2020 and 2019, by level within the fair value hierarchy (in thousands):
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Level 1
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Level 2
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Level 3
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December 31, 2020
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Promissory note
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$
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—
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$
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$
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15,392
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December 31, 2019
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Promissory note
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$
|
—
|
|
|
$
|
—
|
|
|
$
|
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
|
|
2019
|
Fair value at January 1,
|
$
|
16,169
|
|
|
$
|
15,852
|
|
Interest expense accrued
|
150
|
|
|
150
|
|
(Decrease) increase in fair value
|
(927)
|
|
|
167
|
|
Fair value at December 31,
|
$
|
15,392
|
|
|
$
|
16,169
|
|
The Company recorded interest expense of $150 thousand for each of the years ended December 31, 2020 and 2019. Fair value of promissory note decreased $927 thousand and increased $167 thousand for the years ended December 31, 2020 and 2019, respectively.
There were no changes to our valuation techniques used to measure assets and liability fair values during the years ended December 31, 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. There were no transfers in or out of level 3 fair value instruments.
Note 5 - 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 Year Ended December 31,
|
|
Accounts Receivable As of December 31,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Customer A
|
59.6%
|
|
79.6%
|
|
49.3%
|
|
60.0%
|
Customer B
|
29.2%
|
|
13.3%
|
|
31.9%
|
|
20.4%
|
Customer A is a related party and Customer B is a government agency. See Note 17 - Related Party Transactions.
Note 6 - Inventory
Inventory consists of the following as of December 31, 2020 and December 31, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2020
|
|
2019
|
Raw materials
|
$
|
633
|
|
|
$
|
412
|
|
Work in process
|
350
|
|
|
258
|
|
Finished goods
|
644
|
|
|
320
|
|
Total
|
$
|
1,627
|
|
|
$
|
990
|
|
An inventory write-off of $435 thousand and $155 thousand was recorded for the years ended December 31, 2020 and 2019, respectively.
Note 7 - Property and Equipment
Property and equipment as of December 31, 2020 and 2019 consists of the following (in thousands except years):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
Estimated Useful Life (in years)
|
|
2020
|
|
2019
|
|
Machinery and equipment
|
$
|
14,924
|
|
|
$
|
14,892
|
|
|
5
|
Computer equipment and software
|
828
|
|
|
876
|
|
|
3
|
Furniture and fixtures
|
189
|
|
|
186
|
|
|
7
|
Leasehold improvements (1)
|
4,970
|
|
|
4,954
|
|
|
7
|
Construction in progress
|
13
|
|
|
6
|
|
|
|
Property and equipment, gross
|
20,924
|
|
|
20,914
|
|
|
|
Less: accumulated depreciation and amortization
|
(19,600)
|
|
|
(19,144)
|
|
|
|
Property and equipment, net
|
$
|
1,324
|
|
|
$
|
1,770
|
|
|
|
(1) Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or the related remaining lease term.
The Company recorded depreciation and amortization expense related to property and equipment of $509 thousand and $563 thousand for the years ended December 31, 2020 and 2019, respectively.
Note 8 - Intangible Assets
The carrying values of intangible assets as of December 31, 2020 and 2019, respectively, consists of the following (in thousands except years):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
Gross
|
|
Accumulated Amortization
|
|
Foreign Exchange Rate Changes
|
|
Net
|
|
Estimated Useful Life (in years)
|
Patents
|
$
|
2,963
|
|
|
$
|
(1,975)
|
|
|
$
|
—
|
|
|
$
|
988
|
|
|
10
|
Developed technology - 150V
|
560
|
|
|
(555)
|
|
|
(5)
|
|
|
—
|
|
|
6
|
Developed technology - 600V
|
1,701
|
|
|
(1,684)
|
|
|
(17)
|
|
|
—
|
|
|
6
|
Total
|
$
|
5,224
|
|
|
$
|
(4,214)
|
|
|
$
|
(22)
|
|
|
$
|
988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Gross
|
|
Accumulated Amortization
|
|
Foreign Exchange Rate Changes
|
|
Net
|
|
Estimated Useful Life (in years)
|
Patents
|
$
|
2,963
|
|
|
$
|
(1,679)
|
|
|
$
|
—
|
|
|
$
|
1,284
|
|
|
10
|
Developed technology - 150V
|
560
|
|
|
(519)
|
|
|
(34)
|
|
|
7
|
|
|
6
|
Developed technology - 600V
|
1,701
|
|
|
(1,575)
|
|
|
(104)
|
|
|
22
|
|
|
6
|
Total
|
$
|
5,224
|
|
|
$
|
(3,773)
|
|
|
$
|
(138)
|
|
|
$
|
1,313
|
|
|
|
The Company recorded amortization expenses related to intangible assets of $326 thousand and $653 thousand for the years ended December 31, 2020 and 2019, respectively.
Estimated future amortization expenses related to intangible assets at December 31, 2020 are as follows (in thousands):
|
|
|
|
|
|
Year Ending December 31,
|
Amount
|
2021
|
$
|
296
|
|
2022
|
296
|
|
2023
|
296
|
|
2024
|
100
|
|
Thereafter
|
—
|
|
Total
|
$
|
988
|
|
Note 9 - 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 3 - Nexperia Arrangement.
As of December 31, 2020 and 2019, aggregate principal amount of term loans outstanding under the LSA were $10.0 million and $15 million, respectively.
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 3 - 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 $610 thousand and $608 thousand for the years ended December 31, 2020 and 2019, respectively. The Company paid interest expense of $915 thousand and $496 thousand for the years ended December 31, 2020 and 2019. As of December 31, 2020 and 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 December 31, 2020 and 2019 consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stated Value at December 31,
|
|
Interest Rate
|
|
Due Date
|
|
2020
|
|
2019
|
Yaskawa Note
|
1.00%
|
|
September 2022
|
|
$
|
15,486
|
|
|
$
|
15,336
|
|
Pursuant to ASC 825-10-15-4, the Company elected to apply the fair value option for the promissory note. As of December 31, 2020 and 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 December 31,
|
|
2020
|
|
2019
|
Yaskawa Note
|
$
|
15,392
|
|
|
$
|
16,169
|
|
Fair value of promissory note decreased $927 thousand and increased $167 thousand for the years ended December 31, 2020 and 2019, respectively.
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 $150 thousand for each of the years ended December 31, 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 consolidated balance sheet. As of December 31, 2020 and 2019, accrued interest on the promissory note was $486 thousand and $336 thousand, respectively.
In December 2020, we entered into a cooperation and development agreement with Yaskawa, pursuant to which Yaskawa agreed to provide $4.0 million over approximately three years to fund development activities related to industrial power conversion applications, with an initial focus on servo motor drive applications. Yaskawa provided $1.0 million of this $4.0 million commitment in December 2020. The Company evaluated and concluded that the deliverables are the same and nature of the services to be provided to Yaskawa will be consistent over the period of approximately three years. Accordingly, the Company recognized $333 thousand as revenue during the year ended December 31, 2020. As of December 31, 2020, $667 thousand is included in deferred revenue on the consolidated balance sheet.
As of December 31, 2020, the scheduled maturity on the development loans, revolving credit facility and promissory note was as follows (in thousands):
|
|
|
|
|
|
Year Ending December 31,
|
Amount
|
2021
|
$
|
20,153
|
|
2022
|
15,748
|
|
Thereafter
|
—
|
|
Total
|
$
|
35,901
|
|
Note 10 - 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 $7.3 million and $2.7 million to AFSW to fund AFSW’s operations for the years ended December 31, 2020 and 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 $1.5 million and $1.7 million as of December 31, 2020 and 2019, respectively.
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 up to the second quarter of 2021 to obtain, assuming such approval is received at all. In December 2020, we created a joint venture company in Singapore with a third party (controlling party with 75% ownership) to become a partner in AFSW, subject to regulatory and other approvals in Japan that we believe will take up to the second quarter of 2021 to obtain, assuming such approval is received at all. In addition, for at least one year following the date on which we (alone or with a third party) 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 years ended December 31, 2020, and 2019 are summarized below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Beginning balance at January 1,
|
$
|
(1,688)
|
|
|
$
|
(659)
|
|
Investment
|
7,348
|
|
|
2,698
|
|
Loss
|
(6,836)
|
|
|
(3,703)
|
|
Effect of exchange rate change
|
(290)
|
|
|
(24)
|
|
Ending balance at December 31,
|
$
|
(1,466)
|
|
|
$
|
(1,688)
|
|
Summarized financial information of AFSW for the periods indicated, as provided by the controlling owner, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2020
|
|
2019
|
Current assets
|
$
|
1,503
|
|
|
$
|
3,733
|
|
Long-term assets
|
$
|
5,572
|
|
|
$
|
5,101
|
|
Other current liabilities
|
$
|
2,521
|
|
|
$
|
931
|
|
Due to controlling owner
|
$
|
22,136
|
|
|
$
|
17,913
|
|
Due to Transphorm
|
$
|
12,967
|
|
|
$
|
5,349
|
|
Net deficit
|
$
|
(30,549)
|
|
|
$
|
(15,359)
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
Sales
|
$
|
2,976
|
|
|
$
|
11,599
|
|
Gross loss
|
$
|
(11,411)
|
|
|
$
|
(4,849)
|
|
Net loss
|
$
|
(13,952)
|
|
|
$
|
(7,557)
|
|
Note 11 - 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 $7.4 million, all of which is reimbursable. The Company has made total purchases of $6.7 million cumulatively as of December 31, 2020, all of which were reimbursed by the government agency as of December 31, 2020. During the year ended December 31, 2020, the Company made purchases of $6.2 million, of which $1.0 million was in accounts payable as of December 31, 2020 and was subsequently paid as of the date of this report.
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 December 31, 2020, future minimum operating lease commitments were as follows (in thousands):
|
|
|
|
|
|
Year Ending December 31,
|
Amount
|
2021
|
$
|
751
|
|
2022
|
404
|
|
2023
|
241
|
|
2024
|
120
|
|
Thereafter
|
—
|
|
Total
|
$
|
1,516
|
|
The Company recorded rent expense, net of rental income, which includes common area maintenance fees in addition to the base rent, of $892 thousand and $897 thousand for the years ended December 31, 2020 and 2019, respectively. Rental income from a noncancelable sublease was $182 thousand for each of the years ended December 31, 2020 and 2019. As of December 31, 2020, the future minimum rental payments to be received under the noncancelable sublease are $31 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 December 31, 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 consolidated financial statements.
Note 12 - Convertible Preferred Stock
As of December 31, 2019, the Company’s convertible preferred stock consisted of the following (in thousands, except share and per share data on a post conversion basis):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized Shares
|
|
Outstanding Shares
|
|
Carrying Value
|
|
Par Value per Share
|
|
Preference Value
|
Series 1
|
12,438,704
|
|
|
12,433,953
|
|
|
$
|
39,658
|
|
|
$
|
0.001
|
|
|
$
|
40,000
|
|
Series 2
|
7,507,699
|
|
|
7,499,996
|
|
|
$
|
30,000
|
|
|
$
|
0.001
|
|
|
$
|
30,000
|
|
Series 3
|
4,000,000
|
|
|
4,000,000
|
|
|
$
|
16,000
|
|
|
$
|
0.001
|
|
|
$
|
16,000
|
|
Total
|
23,946,403
|
|
|
23,933,949
|
|
|
$
|
85,658
|
|
|
|
|
$
|
86,000
|
|
Series 1 and 2 Preferred Stock
KKR Phorm Investors L.P. (Phorm) purchased 12,433,953 shares of Series 1 preferred stock, par value $0.001 per share, at a per share price of $3.217 for an aggregate purchase price of approximately $40 million. Phorm and other investors with a small percentage (~0.02%) purchased 7,499,996 shares of Series 2 preferred stock, par value $0.001 per share, at a per share price of $4.00 for an aggregate purchase price of approximately $30 million.
Series 3 Preferred Stock
On March 26, 2018, the Company entered into a stock purchase agreement and related contracts in order to effectuate the issuance of its Series 3 preferred stock to Nexperia. Pursuant to the terms of the stock purchase agreement, Nexperia purchased 4,000,000 shares of Series 3 preferred stock, par value $0.001 per share, at a per share price of $4.00, for an aggregate purchase price of approximately $16 million equating to a total ownership stake of approximately 9.9% on a fully-diluted basis. The Company has reserved shares of common stock, par value $0.001 per share, for issuance upon conversion of the Series 3 preferred stock (the conversion shares). The Series 3 preferred stock issued is substantially pari passu with the Company’s Series 1 and Series 2 preferred stock previously issued to Phorm with a small percentage (~0.02%) issued to other investors.
Each share of Series 1, Series 2 and Series 3 preferred stock are convertible at the option of the holder into such number of shares of common stock as is determined by dividing the original issue price (OIP) of the Series 1, Series 2 and Series 3 preferred stock by the conversion price in effect at the time of the conversion. The conversion price of the Series 1, Series 2 and Series 3 preferred stock is subject to adjustment for certain events. Each share of Series 1, Series 2 and Series 3 preferred stock automatically converts into common stock immediately upon the closing of an underwritten public offering of the Company’s common stock in which the aggregate net proceeds are at least $40 million and the offering price per share is not less than 1.5 times the OIP of the Series 1, Series 2 and Series 3 preferred stock (a Qualifying Public Offering).
The rights, privileges, and preferences of the Series 1, Series 2, and Series 3 convertible preferred stock are as follows:
Liquidation Rights - In the event of any liquidation, dissolution, or winding up of the Company, either voluntary or involuntary, the holders of convertible preferred stock will be entitled to receive, prior and in preference to any distribution of any assets of the Company to the holders of common stock, an amount per share equal to $3.217 per share for Series 1, $4.00 per share for Series 2 and $4.00 per share for Series 3, plus any declared but unpaid dividends. If, upon the occurrence of such an event, the assets and funds thus distributed among the holders of the convertible preferred stock are insufficient to permit the payment of the preferential amounts, the entire assets and funds legally available for distribution will be distributed ratably among the holders of convertible preferred stock in proportion to the full amount to which they would otherwise be respectively entitled. If, upon satisfaction of the convertible preferred stock preferences, there are any remaining assets and funds available for distribution, they will be ratably distributed among the holders of common stock.
Conversion - The convertible preferred stock is convertible at the option of the holder at any time into common stock on a one-for-one basis, subject to certain adjustments for anti-dilution. Each share of convertible preferred stock automatically converts into common stock in the event of an initial public offering (IPO) in which the proceeds are at least $40 million, net of the underwriting discount and commissions, and the offering price per share is not less than 1.5 times the original issue price of the convertible preferred stock unless otherwise agreed to by the shareholders.
Dividends - The holders of convertible preferred stock are entitled to receive, out of funds legally available, cash dividends at the rate of $0.25736 per annum for Series 1, $0.32 per annum for Series 2 and $0.32 per annum for Series 3 on each outstanding share. Such dividends are payable when, as, and if declared by the Board of Directors and are noncumulative. Through December 31, 2019, no such dividends have been declared.
Voting - The holders of Series 1 convertible preferred stock shall be entitled to the number of votes equal to ten times the number of shares of common stock into which such shares could be converted, and the holders of Series 2 convertible preferred stock shall be entitled to the number of votes equal to the number of shares of common stock into which such shares could be converted. Each holder of Series 3 preferred stock shall be entitled to the number of votes equal to ten times the number of shares of common stock into which the shares of Series 3 preferred stock held by such holder could be converted as of the record date.
Due to certain provisions in liquidation and conversion rights the company has presented the convertible preferred stock outside of stockholders deficit as mezzanine equity.
The preferred stocks were converted to common stock upon the Merger. See Note 13 - Stockholders’ Deficit.
Note 13 - Stockholders’ Deficit
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, net of 52,733 redeemed shares from unaccredited investors, 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.
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 December 31, 2020, 750,000,000 shares of common stock are authorized, of which 40,278,496 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 in a private placement offering at a purchase price of $4.00 per share, with aggregate gross proceeds of $21.5 million (before deducting placement agent fees and other offering expenses, which were an aggregate of $1.8 million).
On December 23, 2020, we sold an aggregate of 5,000,000 shares of common stock in a private placement offering at a purchase price of $3.00 per share and issued warrants to placement agents to purchase 150,000 shares of common stock at a price of $3.30 per share, with aggregate gross proceeds of $15.0 million (before deducting placement agent fees, financial advisor fees and other offering expenses, which were an aggregate of $1.4 million excluding warrant cost of $223 thousand).
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 December 31, 2020, the Company has reserved shares of common stock for future issuance as follows:
|
|
|
|
|
|
Equity incentive plans
|
5,042,525
|
|
Common stock warrants
|
159,415
|
|
Total
|
5,201,940
|
|
Common Stock Warrants
On December 23, 2020, we issued warrants to placement agent to purchase 150,000 shares of common stock at an exercise price of $3.30 per share in the private placement. Our warrants are exercisable by paying cash or by cashless exercise for unregistered shares of common stock. The exercise price of the warrants is subject to standard antidilutive provision adjustment in the case of stock dividends or other distributions on shares of common stock or any other equity or equity equivalent securities payable in shares of common stock, stock splits, stock combinations, reclassifications or similar events affecting our common stock, and also, subject to limitations, upon any distribution of assets, including cash, stock or other property to our stockholders. The exercise price of the warrants is not subject to “price-based” anti-dilution adjustment. We have determined that these warrants related to issuance of common stock are subject to equity treatment because the warrant holder has no right to demand cash settlement and there are no unusual anti-dilution rights.
At December 31, 2020, the following warrants to purchase common stock were outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Exercise Price
|
|
Expiration Date
|
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
|
150,000
|
|
|
$
|
3.30
|
|
|
December 23, 2025
|
159,415
|
|
|
|
|
|
Note 14 - 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 December 31, 2020, there were 1,916,882 shares available for grant and 805,325 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 years ended December 31, 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 January 1, 2020
|
2,473,198
|
|
|
$
|
4.67
|
|
|
6.84
|
|
$
|
—
|
|
Options granted
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Options exercised
|
(6,821)
|
|
|
$
|
3.78
|
|
|
|
|
|
Options canceled
|
(146,059)
|
|
|
$
|
5.88
|
|
|
|
|
|
Balance at December 31, 2020
|
2,320,318
|
|
|
$
|
4.67
|
|
|
5.92
|
|
$
|
—
|
|
Exercisable at December 31, 2020
|
2,267,154
|
|
|
$
|
4.70
|
|
|
5.86
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2019
|
2,377,180
|
|
|
$
|
4.79
|
|
|
7.46
|
|
$
|
—
|
|
Options granted
|
209,908
|
|
|
$
|
3.14
|
|
|
|
|
|
Options exercised
|
(1,392)
|
|
|
$
|
3.86
|
|
|
|
|
|
Options canceled
|
(112,498)
|
|
|
$
|
4.34
|
|
|
|
|
|
Balance at December 31, 2019
|
2,473,198
|
|
|
$
|
4.67
|
|
|
6.84
|
|
$
|
—
|
|
Exercisable at December 31, 2019
|
2,079,809
|
|
|
$
|
4.95
|
|
|
6.65
|
|
$
|
—
|
|
(1) Intrinsic value represents the excess of the fair value on the last trading day of the period, which was $3.00 as of December 31, 2020, over the exercise price, multiplied by the number of options.
Stock-based compensation expense is determined based on the fair value of the Company’s common stock as determined by the Board of Directors and assumptions such as volatility, expected term, risk-free interest rates, and other factors. Changes in the deemed fair value of the common stock, the underlying assumptions in the calculations, the number of options granted or the terms of such options, the expected forfeiture rate, the treatment of tax benefits and other changes may result in significant differences in the amounts or timing of the compensation expense recognized. The assumptions and estimates are made as follows:
•Fair Value of Common Stock - The fair value of the shares of common stock underlying the stock options has been determined by the Board of Directors, utilizing valuation studies performed by third-party advisors. Because there has been no public market for the Company’s common stock, the Board of Directors has determined fair value of the common stock at the time of grant of the options by considering a number of objective and subjective factors, including valuations of comparable companies, sales of convertible preferred stock to unrelated third parties, operating and financial performance, the lack of liquidity of capital stock, and general and industry-specific economic outlook. The Company has not granted stock options with an exercise price that is less than the fair value of the underlying common stock as determined at the time of grant by the Board of Directors.
•Expected Volatility - The Company utilizes the historical volatility of representative public companies to determine its expected volatility, as there is no public trading of the Company’s common stock.
•Estimated Forfeitures - The Company adopted ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting and has elected to account for forfeitures as they occur and therefore, stock-based compensation expense has been calculated based on actual forfeitures in the statements of operations, rather than our previous approach which was net of estimated forfeitures. The net cumulative effect of this change was not material.
•Expected Dividend Yield - The Company has not issued any common stock dividends; therefore, a dividend yield of zero was used.
•Risk-Free Interest Rate - The Company bases the risk-free interest rate used in the Black- Scholes-Merton option pricing model on the implied yield currently available on United States Treasury zero-coupon issues with an equivalent expected term.
•Expected Term - The expected term of stock options represents the period that the Company’s stock options are expected to be outstanding. The Company generally uses the simplified method to calculate the expected term for employee grants.
The assumptions used to value options granted to employees during the year ended December 31, 2019 was as follows:
|
|
|
|
|
|
Weighted average expected life (in years)
|
5.46
|
Risk-free interest rate
|
1.34% - 1.94%
|
Expected volatility
|
39.4% - 39.8%
|
Weighted average grant date fair value
|
$1.04
|
Dividend yield
|
—%
|
Restricted Stock
Restricted Stock Awards
RSAs are grants of shares of our common stock that vest in accordance with terms and conditions established by the Company’s Board of Directors. Recipients of RSAs generally will have voting and dividend rights with respect to such shares upon grant without regard to vesting, unless the RSA agreement provides otherwise. Shares of restricted stock that do not vest are subject to forfeiture. In September 2020, we granted 123,501 RSAs outside of our 2020 Plan, 98,450 of which were fully vested on the date of grant and the remainder of which is scheduled to vest 120 days following the grant date. In December 2020, we granted 12,000 RSAs outside of our 2020 Plan, all of which were fully vested on the date of grant. The following table summarizes RSA activity and related information for the year ended December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted-Average Grant Date Fair Value Per Share
|
Balance at beginning of period
|
—
|
|
|
$
|
—
|
|
Granted
|
135,501
|
|
|
$
|
3.91
|
|
Vested
|
(98,450)
|
|
|
$
|
3.88
|
|
Balance at end of period
|
37,051
|
|
|
$
|
4.00
|
|
Restricted Stock Units
RSUs are grants of shares of our common stock that vest in accordance with terms and conditions established by the administrator of the 2020 Plan. Subject to the provisions of the 2020 Plan, the administrator determines the terms and conditions of RSUs, including the vesting criteria. We granted 816,180 RSUs during the third quarter of 2020, 4,000 of which were fully vested on the date of grant. The remainder of the RSUs are scheduled to vest as follows: one third will vest on each of January 1, 2022, January 1, 2023 and July 1, 2023, in each case subject to the RSU holders’ continued status as a service provider to the Company through each vesting date.
The following table summarizes RSU activity and related information for the year ended December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted-Average Grant Date Fair Value Per Share
|
Balance at beginning of period
|
—
|
|
|
$
|
—
|
|
Granted
|
816,180
|
|
|
$
|
4.00
|
|
Vested
|
(4,000)
|
|
|
$
|
4.00
|
|
Canceled
|
(6,855)
|
|
|
$
|
4.00
|
|
Balance at end of period
|
805,325
|
|
|
$
|
4.00
|
|
Stock-Based Compensation
The accompanying consolidated statement of operations and comprehensive loss includes stock-based compensation expense as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
Cost of revenue
|
$
|
93
|
|
|
$
|
60
|
|
Research and development
|
306
|
|
|
196
|
|
Sales and marketing
|
68
|
|
|
30
|
|
General and administrative
|
1,058
|
|
|
280
|
|
Total
|
$
|
1,525
|
|
|
$
|
566
|
|
Unrecognized Stock-Based Compensation
Unrecognized stock-based compensation expense was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020
|
|
As of December 31, 2019
|
|
Unrecognized Expense
|
|
Average Expected Recognition Period
|
|
Unrecognized Expense
|
|
Average Expected Recognition Period
|
Stock options
|
$
|
54
|
|
|
0.67 years
|
|
$
|
464
|
|
|
1.20 years
|
Restricted stock
|
2,687
|
|
|
1.87 years
|
|
—
|
|
|
—
|
Total
|
$
|
2,741
|
|
|
1.85 years
|
|
$
|
464
|
|
|
1.20 years
|
Note 15 - 401(k) Savings Plan
The Company has a 401(k) savings plan (the 401(k) plan). The 401(k) plan is a defined contribution plan intended to qualify under Section 401(k) of the Internal Revenue Code. All full-time employees of the Company are eligible to participate pursuant to the terms of the 401(k) plan. Contributions by the Company are discretionary, and the Company made no contributions during the years ended December 31, 2020 and 2019.
Note 16 - Income Taxes
For the year ended December 31, 2020, the Company reported a worldwide consolidated pretax loss of $17.9 million, which consisted of a pre-tax loss from U.S. operations of approximately $10.3 million and pre-tax loss from Japan operations of approximately $7.6 million. The pre-tax loss from Japan operations consists of $800 thousand from Transphorm Japan, Inc., a $6.8 million pre-tax loss from Transphorm Aizu, Inc. and $25 thousand pre-tax income from Transphorm Epi, Inc.
For the year ended December 31, 2019, the Company reported a worldwide consolidated pre-tax loss of $15.3 million, which consisted of a pre-tax loss from U.S. operations of approximately $10.6 million and pre-tax loss from Japan operations of approximately $4.7 million. The pre-tax loss from Japan operations consists of $1.0 million from Transphorm Japan, Inc., a $3.7 million pre-tax loss from Transphorm Aizu, Inc. and $1 thousand pre-tax income from Transphorm Epi, Inc.
There is no U.S. federal or foreign provision for income taxes because the Company has incurred operating losses since inception and is in a full valuation allowance position. For the year ended December 31, 2020 and 2019, the Company has recorded a state income tax provision of $1 thousand which represents minimum taxes. Deferred income taxes reflect the net tax effects of the net operating losses and the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company’s deferred tax assets and deferred tax liabilities as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2020
|
|
2019
|
Deferred tax assets:
|
|
|
|
Net operating loss carryforwards
|
$
|
46,346
|
|
|
$
|
43,973
|
|
Tax credits
|
5,262
|
|
|
4,535
|
|
California capitalized research and development
|
80
|
|
|
343
|
|
Fixed assets
|
8
|
|
|
—
|
|
Others, net
|
593
|
|
|
602
|
|
Total deferred tax assets
|
52,289
|
|
|
49,453
|
|
Valuation allowance
|
(52,289)
|
|
|
(49,403)
|
|
Deferred tax asset, net of valuation allowance
|
—
|
|
|
50
|
|
Deferred tax liabilities:
|
|
|
|
Others, net
|
—
|
|
|
—
|
|
Fixed assets
|
—
|
|
|
(50)
|
|
Total deferred tax liabilities
|
—
|
|
|
(50)
|
|
Net deferred tax assets
|
$
|
—
|
|
|
$
|
—
|
|
As of December 31, 2020, and 2019, the Company had no assurance that future taxable income would be sufficient to fully utilize the net operating loss carryforwards and other deferred tax assets in the future. Consequently, the Company determined that a valuation allowance of approximately $52.2 million and $49.4 million as of December 31, 2020, and 2019, was needed to offset the deferred tax assets resulting mainly from the net operating loss carryforwards.
The Company files income tax returns in the U.S. federal, California, and Oregon jurisdictions and is subject to U.S. federal, state, and local income tax examinations by tax authorities. Generally, the statute of limitations is 3 years for U.S. federal income tax and 4 years for state and local taxes. The statute of limitations may be extended for tax years where a corporation has a net operating loss carryforward or by agreement with the jurisdictional taxing authority. Accordingly, all of the Company's U.S. federal, state and local income tax years since inception remain open to examination by tax authorities. The Company is not currently under audit by any taxing authority.
The Company follows the provisions of uncertain tax positions as addressed in ASC 740-10. The Company recognized no increase or decrease in the liability for unrecognized tax benefits for any period presented. The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. No such interest or penalties were recognized during the period presented. The Company had no accruals for interest and penalties at December 31, 2020, and 2019.
The utilization of the Company’s net operating loss and tax credit carryforwards is dependent on the future profitability of the Company. Further, the Internal Revenue Code imposes substantial restrictions on the utilization of such carryforwards in the event of an ownership change of more than 50%, as defined, during any three-year period (Section 382 and 383 limitations). The Company has determined that several ownership changes have occurred, which have resulted in substantial limitations on the Company’s ability to utilize its pre-ownership change net operating loss and tax credit carryforwards. These substantial limitations are expected to result in both a permanent loss of certain tax benefits related to net operating loss carryforwards and federal research and development credits, as well as an annual utilization limitation. The Company performed an analysis through the APO and anticipates no further Section 382 and 383 limitations.
As of December 31, 2020, the Company has federal net operating loss carryforwards of $245.3 million, of which $207.5 million will begin to expire in 2027 unless previously utilized, and the Company has state net operating loss carryforwards of $152.4 million which will begin to expire in 2028 unless previously utilized. The cumulative federal net operating loss generated for the years 2018 to 2020 of $37.8 million can be carried forward indefinitely. However, the federal deduction for net operating losses incurred in tax years beginning after January 1, 2021 is limited to 80% annual taxable income. Under the CARES Act, the suspension of net operating losses generated in years 2019, and 2020 are not subject to the 80% limitation. The Company also has foreign net operating loss carryforwards for approximately $5.2 million which will begin to expire in 2024.
As of December 31, 2020, the Company has federal research and development credit carryforwards of $4.5 million, which will begin to expire in 2032 unless previously utilized, and the Company had California research and development credit carryforwards of $3.8 million, which do not expire.
Deferred tax assets have not been established for net operating and tax credit carryforwards that are deemed to have no value due to the Section 382 and 383 limitations discussed above and, therefore, are not reflected in the table of deferred tax assets presented above. Future ownership changes, if any, may further limit the Company’s ability to utilize its remaining net operating losses and tax credit carryforwards. The Company performed an analysis as of December 31, 2020 and determined that no further limitations on tax attributes were required.
Reconciliation between federal statutory tax rate and the effective tax rate is shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Federal statutory income tax rate
|
21.00
|
%
|
|
21.00
|
%
|
Research and development credit
|
4.06
|
%
|
|
4.76
|
%
|
Nondeductible expense
|
0.64
|
%
|
|
(3.18)
|
%
|
Loss in joint venture
|
(11.70)
|
%
|
|
(7.44)
|
%
|
Foreign income tax rate difference
|
4.10
|
%
|
|
2.99
|
%
|
Others, net
|
(2.08)
|
%
|
|
(0.75)
|
%
|
Valuation allowance
|
(16.02)
|
%
|
|
(17.38)
|
%
|
Effective tax rate
|
—
|
%
|
|
—
|
%
|
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act", H.R. 748) was signed into law. The CARES Act repealed the 80% taxable income limitation for the 2018–2020 taxable years and reinstated NOL carrybacks for the 2018–2020 taxable years. In addition, the CARES Act temporarily increases the business interest deduction limitations from 30% to 50% of adjusted taxable income for the 2019 and 2020 taxable year. Lastly, a TCJA technical correction that classifies qualified improvement property as 15-year recovery period, allowing the bonus depreciation deduction to be claimed for such property retroactive as if it was included in the TCJA at the time of enactment. The company does not anticipate a material impact to the Company’s consolidated financial statements due to the recent enactment.
On December 21, 2020, The Consolidated Appropriations Act (“CAA”) was signed into law. We do not expect any of the enactments of the CAA to have a material impact on the company as of 12/31/2020.
Note 17 - Related Party Transactions
During the year ended December 31, 2020, the Company entered into the following related party transactions:
•Recorded $241 thousand in cost of goods sold for services, recorded research and development expense of $919 thousand, of which $408 thousand was reimbursable and recorded $84 thousand in other expense for commitment for services from the AFSW joint venture;
•Sold $165 thousand of products to non-controlling stockholders of the Company and incurred $200 thousand of license maintenance fee from a non-controlling stockholder of the Company; and
•Recorded $5.2 million in license fee income, recorded $701 thousand in EPI Gen 4 wafer growth sales, recorded $150 thousand of reimbursements in license maintenance fee, recorded $610 thousand in interest expense, recorded $408 thousand reimbursement for research and development, and sold $915 thousand of products to a stockholder and noteholder of the Company. See Note 3 - Nexperia Arrangement.
As of December 31, 2020, total due from related parties was $13.9 million, consisting of $13.5 million due from the AFSW joint venture, $17 thousand accounts receivable from non-controlling stockholders of the Company, and $435 thousand accounts receivable from a stockholder and noteholder of the Company. As of December 31, 2020, total accounts payable to related parties was $512 thousand to the AFSW joint venture and $24 thousand to Nexperia, and accrued royalty was $100 thousand to Furukawa.
During the year ended December 31, 2019, the Company entered into the following related party transactions:
•Recorded $211 thousand in cost of goods sold for services, recorded research and development expense of $695 thousand, of which $195 thousand was reimbursable, recorded $444 thousand in other expense for commitment for services, and incurred $14 thousand for employees and their benefits seconded from the AFSW joint venture;
•Sold $241 thousand of products to non-controlling stockholders of the Company, incurred $200 thousand of license maintenance fee to a non-controlling stockholder, and incurred $21 thousand for employees and their related benefits seconded from a non-controlling stockholder of the Company; and
•Recorded $9.2 million in license fee revenue, recorded $195 thousand reimbursement for research and development, recorded $608 thousand in interest expense and sold $504 thousand of products to a stockholder and noteholder of the Company. See Note 3 - Nexperia Arrangement.
As of December 31, 2019, total due from related parties was $5.8 million, consisting of $5.3 million due from the AFSW joint venture, $38 thousand accounts receivable from non-controlling stockholders of the Company and $426 thousand accounts receivable from a stockholder and noteholder of the Company. As of December 31, 2019, total accounts payable due to related parties was $272 thousand to non-controlling stockholders of the Company.
Note 18 - Subsequent Events
The Company has evaluated subsequent events through the issuance of these financial statements, and determined that there have been no events that have occurred that would require adjustments to our disclosures in the consolidated financial statements except for the following:
Amendment to Loan and Security Agreement
On March 1, 2021, Amendment No. 5 to the LSA was executed to extend the maturity of the Tranche B Loans of $10 million and the Tranche C Loan of $10 million to June 30, 2021 and May 18, 2021, respectively. All other terms set forth under the original LSA remained unchanged following the amendments.