Navitas Semiconductor Corp 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Unless the context otherwise requires, all references in this section to the “Company,” “we,” “us, or “our” refer to the business of Navitas and its subsidiaries. Throughout this section, unless otherwise noted, “Navitas” refers to Navitas Semiconductor Corporation and its consolidated subsidiaries. You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes appearing elsewhere in this quarterly report on Form 10-Q. This discussion contains forward-looking statements that reflect our plans, estimates, and beliefs that involve risks and uncertainties. As a result of many factors, such as those set forth under the “Summary of Risk Factors” and “Cautionary Statement About Forward-Looking Statements” sections and elsewhere in this quarterly report, our actual results may differ materially from those anticipated in these forward-looking statements. 25 Overview Founded in 2013, Navitas is a U.S. based, developer of gallium nitride power integrated circuits that provide superior efficiency, performance, size and sustainability relative to existing silicon technology. Our solutions offer faster charging, higher power density and greater energy savings compared to silicon-based power systems with the same output power. By unlocking this speed and efficiency, we believe we are leading a revolution in high-frequency, high-efficiency and high-density power electronics to electrify our world for a cleaner tomorrow. We maintain operations around the world, including the United States, Ireland, Germany, Italy, China, Taiwan and the Philippines, with principal executive offices in El Segundo, California. We design, develop and market gallium nitride (“GaN”) power integrated circuits (“ICs”) used in power conversion and charging. Power supplies incorporating our products may be used in a wide variety of electronics products including mobile phones, consumer electronics, data centers, solar inverters and electric vehicles. We utilize a fabless business model, working with third parties to manufacture, assemble and test our designs. Our fabless model allows us to run the business today with minimal capital expenditures. Our go-to-market strategy is based on partnering with leading manufacturers and suppliers through focused product development, addressing both mainstream and emerging applications. We consider ourselves to be a pioneer in the GaN market with a proprietary, proven GaN power IC platform that is shipping in mass production to tier-1 companies including Samsung, Dell, Lenovo, LG, Xiaomi, OPPO, Amazon, vivo and Motorola. Most of the products we ship today are used primarily as components in mobile device chargers. The majority of charger manufacturers we ship to today are in China, supporting major international mobile brands. Other emerging applications will be addressed in China, other parts of Asia, and worldwide. In support of our technology leadership, we have formed relationships with numerous Tier 1 manufacturers and suppliers over the past eight years, gaining significant traction in mobile and consumer charging applications. Navitas GaN is now in mass production with 9 of the top 10 mobile OEMs across smartphone and laptops, and is in development with 10 out of 10. In addition, our supply chain partners have committed manufacturing capacity in excess of what we consider to be necessary to support our continued growth and expansion. The core strength of our business lies in our industry leading IP position in GaN Power ICs. Navitas invented the first commercial GaN Power ICs and along the way we patented many fundamental circuit elements which are needed in most power systems from 10 W to 100 kW. Today, we have over 151 patents that are issued or pending. In addition to our comprehensive patent portfolio, our biggest proprietary advantage is our process design kit (PDK), the ‘how-to’ guide for Navitas designers to create new GaN based device and circuits. Our GaN power IC inventions and intellectual property translate across all of our target markets from mobile, consumer, EV, enterprise, and renewables. We evaluate various complementary technologies and look to improve our PDK, in order to keep introducing newer generations of GaN technology. In 2021 and the three months ended March 31, 2022, we spent approximate ly 117% and 143%, respectively o f our revenue on research and development. Navitas’ research and development activities are located primarily in the US and China. As of March 31, 2022, we had approximatel y 103 full-time personnel in our research & development team, with approximately 59% w ith advanced degrees (PhD and MS). Business Combination and Reverse Recapitalization On May 6, 2021, Navitas Semiconductor Limited (“Navitas Ireland”), a private company limited by shares organized under the Laws of Ireland and domesticated in the State of Delaware as Navitas Semiconductor Ireland, LLC, (“Navitas Delaware”, and together with Navitas Ireland, “Legacy Navitas”) a Delaware limited liability company, entered into a business combination agreement and plan of reorganization (the “Business Combination Agreement” or “BCA”) with Live Oak Acquisition Corp. II, (“Live Oak”). Pursuant to the BCA, through a series of transactions, Navitas Ireland merged with and into Live Oak effective October 19, 2021 (the “Closing Date”), with Navitas Ireland’s newly formed parent, Navitas Semiconductor Corporation (“Navitas Corp” or after the Business Combination, the “Company”, formerly named Live Oak Acquisition Corp. II), surviving the transaction. The Business Combination was accounted for as a reverse recapitalization in accordance with US GAAP. Under the guidance in ASC 805, Live Oak was treated as the “acquired” company for financial reporting purposes. We were deemed 26 the accounting predecessor and the post-combination company is the successor SEC registrant, meaning that our financial statements for previous periods will be disclosed in our annual report Form 10-K filed with the SEC filed on March 31, 2022. The Business Combination had a significant impact on our reported financial position and results as a consequence of the reverse recapitalization. The most significant change in our reported financial position and results of operations was net cash proceeds of $298,054 from the merger transaction, which included $173,000 in gross proceeds from the PIPE financing that was consummated in conjunction with the Business Combination. The increase in cash was offset by transaction costs incurred in connection with the Business Combination of approximately $24,967. Navitas expects to incur additional annual expenses as a public company for, among other things, directors’ and officers’ liability insurance, director fees and additional internal and external accounting and legal and administrative resources, including increased audit and legal fees. Results of Operations Revenue We design, develop and manufacture GaN ICs. Our revenue represents the sale of semiconductors through specialized distributors to original equipment manufacturers (“OEMs”), their suppliers and other end customers. Our revenues fluctuate in response to a combination of factors, including the following: • our overall product mix and sales volumes; • gains and losses in market share and design win traction; • pace at which technology is adopted in our end markets; • the stage of our products in their respective life cycles; • the effects of competition and competitive pricing strategies; • availability of specialized field application engineering resources supporting demand creation and end customer adoption of new products; • achieving acceptable yields and obtaining adequate production capacity from our wafer foundries and assembly and test subcontractors; • market acceptance of our end customers’ products; governmental regulations influencing our markets; and • the global and regional economic cycles. Our product revenue is recognized when the customer obtains control of the product and the timing of recognition is based on the contractual shipping terms of a contract. We provide a non-conformity warranty which is not sold separately and does not represent a separate performance obligation. The vast majority of our product revenue originates from sales shipped to customer locations in Asia. Cost of Goods Sold Cost of goods sold consists primarily of the cost of semiconductors purchased from subcontractors, including wafer fabrication, assembly, testing and packaging, manufacturing support costs, including labor and overhead (which includes depreciation and amortization) associated with such purchases, final test and wafer level yield fallout, consumables, system and shipping costs. Cost of goods sold also includes compensation related to personnel associated with manufacturing. Research and Development Expense Costs related to research, design, and development of our products are expensed as incurred. Research and development expense consists primarily of pre-production costs related to the design and development of our products and technologies, including costs related to cash and share-based employee compensation, benefits and related costs of sustaining our engineering teams, project material costs, third party fees paid to consultants, prototype development expenses, and other costs incurred in the product design and development process. 27 Selling, General and Administrative Expense Selling, general and administrative costs include employee compensation, including cash and share-based compensation and benefits for executive, finance, business operations, sales, field application engineers and other administrative personnel. In addition, it includes marketing and advertising, IT, outside legal, tax and accounting services, insurance, and occupancy costs and related overhead based on headcount. Selling, general and administrative costs are expensed as incurred. Interest Expense Interest expense primarily consists of interest under our term loan facility. Income Taxes Legacy Navitas a dual domesticated corporation for Ireland and U.S. federal income tax purposes. Refer to Note 13, Provision for Income Taxes, in our accompanying condensed consolidated financial statements elsewhere in this quarterly report. Results of Operations The table and discussion below present our results for the three months ended March 31, 2022 and 2021: Three Months Ended March 31, Change $ Change % ($ in thousands) 2022 2021 Revenue $ 6,740 $ 5,317 $ 1,423 27 % Cost of goods sold 3,777 2,959 818 28 % Gross profit 2,963 2,358 605 26 % Operating expenses: Research and development 13,413 4,254 9,159 215 % Selling, general and administrative 24,544 5,369 19,175 357 % Total operating expenses 37,957 9,623 28,334 294 % Loss from operations (34,994) (7,265) (27,729) 382 % Other income (expense), net: Interest expense, net (24) (61) 37 (61) % Gain from change in fair value of warrants 51,763 — 51,763 — % Gain from change in fair value of earnout liabilities 63,406 — 63,406 — % Other expense (356) — (356) — % Total other income (expense), net 114,789 (61) 114,850 — % Income (loss) before income taxes 79,795 (7,326) 87,121 — % Income tax expense 3 19 (16) (84) % Net income (loss) $ 79,792 $ (7,345) $ 87,135 (1186) % 28 Comparison of the Quarters ended March 31, 2022 and 2021 Revenue Revenue for the three months ended March 31, 2022 was $6.7 million compared to $5.3 million for the three months ended March 31, 2021, an increase of $1.4 million, or 27%. The significant increase primarily reflected the Company’s customer growth trajectory, evolving from aftermarket customers to the top mobile companies and total sales volumes increasing 32%, from 5.7 million to 7.5 million units shipped, while the average selling price declined 15% to $0.82 per unit. Cost of Goods Sold Cost of goods sold for the three months ended March 31, 2022 was $3.8 million compared to $3.0 million for the three months ended March 31, 2021, an increase of $0.8 million or 28%. The increase was primarily driven by significant revenue growth, partially offset by lower costs on third generation (“Gen 3”) products launched in the second half of 2021. Research and Development Expense Research and development expense for the three months ended March 31, 2022 of $13.4 million increased by $9.2 million, or 215%, when compared to the three months ended March 31, 2021, primarily driven by increases in stock based compensation, resulting in $7.3 million higher compensation costs, along with an increase of $1.9 milli on in non-compensation costs related to new applications and reliability expenses devoted to next generation product development. We expect research and development expense to continue to increase as we grow our headcount to support our expansion into new applications. Selling, General and Administrative Expense Selling, general and administrative expense for the three months ended March 31, 2022 of $24.5 million increased by $19.2 million, or 357%, when compared to the three months ended March 31, 2021. The increase is primarily due to an $16.3 million increase in stock-based compensation, a $1.6 million increase in compensation costs related to growth in headcount and a $1.3 million increase in other costs of growing the business. We expect selling, general and administrative costs to increase to support our growth and as a result of the increased costs for infrastructure required as a public company. Other Income (Expense), net Net interest expense, net for the three months ended March 31, 2022 of $24 thousand decreased by (61%), when compared to the three months ended March 31, 2021, primarily due to lower outstanding debt and interest income on cash equivalents. During the three months ended March 31, 2022, we recognized gain from the change in fair value of our warrant liabilities, earn out liabilities and an equity method investment of $51.8 million, $63.4 million and ($0.4) million, respectively, as follows: i) Warrants: The change in fair value of our warrant liability is due to the Company issuing a notice of redemption on February 4, 2022 and the Company revaluing the liability just before the exercise and redemptions which resulted in a valuation change of $51.8 million. ii) Earnout liability: Subsequent to the recognition of the earnout liability upon the consummation of the Business Combination on October 19, 2021, we remeasure the fair value of this liability at each reporting date. The decrease in fair value of our earn-out liability of $63.4 million was primarily a result of the decrease of the closing price of our Class A common stock listed on the Nasdaq from $17.01 per share on December 31, 2021 to $10.28 per share on March 31, 2022. iii) Other expense reflects our minority interest in the net loss of a joint venture. 29 Income Tax Expense Income tax expenses for the three months March 31, 2022 decreased by ($16) thousand when compared to the three March 31, 2021. We expect our tax rate to remain close to zero in the near term due to full valuation allowances against deferred tax assets. Liquidity and Capital Resources Our primary use of cash is to fund operating expenses, which consist primarily of research and development expenditures, working capital requirements related to inventory, accounts payable and accounts receivable, and selling, general and administrative expenditures. In addition, we use cash to fund our debt service obligations, and purchases of capital and software assets. We expect to continue to incur net operating losses and negative cash flows from operations and we expect our research and development expenses, general and administrative expenses and capital expenditures will continue to increase. We expect our expenses and capital requirements to increase in connection with our ongoing initiatives to expand our operations, product offerings and end customer base. Prior to the Business Combination, we derived our liquidity and capital resources primarily from the issuance and sale of convertible preferred stock. The term loan principal balance is payable in monthly installments beginning in September 2021. As March 31, 2022, we had cash and cash equivalents of $253.8 million. We currently use cash to fund operations, meet working capital requirements, for capital expenditures and strategic investments. Post-Business Combination, the Company has additional access to capital resources through public market transactions and the historical focus on near-term working capital and liquidity has shifted to more strategic and forward-looking capital optimization plans. We believe that the influx of capital from the Business Combination is sufficient to finance our operations, working capital requirements and capital expenditures for the foreseeable future. We expect our operating and capital expenditures to increase as we increase headcount, expand our operations and grow our end customer base. If additional funds are required to support our working capital requirements, acquisitions or other purposes, we may seek to raise funds through additional debt financing or from other sources. If we raise additional funds through the issuance of equity, the percentage ownership of our equityholders could be significantly diluted, and these newly issued securities may have rights, preferences or privileges senior to those of existing equityholders. If we raise additional funds by obtaining loans from third parties, the terms of those financing arrangements may include negative covenants or other restrictions on our business that could impair our operating flexibility and would also require us to incur interest expense. We can provide no assurance that additional financing will be available at all or, if available, that we would be able to obtain additional financing on terms favorable to us. Cash Flows The following table summarizes our consolidated cash flows for the three months ended March 31, 2022 and 2021: March 31, 2022 March 31, 2021 ($ in thousands) Consolidated Statements of Cash Flow Data: Net cash used in operating activities $ (10,601) $ (5,812) Net cash used in investing activities $ (2,992) $ (990) Net cash provided (used in) by financing activities $ (862) $ 222 We derive liquidity primarily from debt and equity financing activities. As of March 31, 2022, our balance of cash and cash equivalents was $253.8 million, which is an decrease of $14.5 million or 5% compared to December 31, 2021. Our total outstanding debt principal balance as of March 31, 2022 was $6.1 million, which is a decrease of $0.8 million from the $6.9 million of total debt outstanding at December 31, 2021. 30 Operating Activities For the three months ended March 31, 2022, net cash used in operating activities was $10.6 million, which primarily reflects a net income of $79.8 million, adjusted for non-cash share-based compensation of $25.3 million, non-cash, gains of $115.2 million in earnout and warrant liabilities and an aggregate change of $0.3 million in higher operating assets. For the three months ended March 31, 2021, net cash used in operating activities was $5.8 million, which reflects a net loss of $7.3 million, adjusted for non-cash share-based compensation of $1.8 million and includes an aggregate $.9 million decrease due to higher operating assets, offset by a decrease in cash of $0.6 million due to lower accounts payable. Investing Activities Net cash used in investing activities for the three months ended March 31, 2022 of $3.0 million was primarily due to $2.7 million cash funding of a joint venture and $0.3 million for purchases of fixed assets. Net cash used in investing activities of $990 thousand for the three months ended March 31, 2021, was primarily related to the purchase of an asset acquisition and property and equipment. Financing Activities Net cash used in financing activities for the three months ended March 31, 2022 of $0.9 million was primarily the result of $0.8 million net uses from the issuance and repayment of debt. Net cash provided by financing activities for the three months ended March 31, 2021 of $222 thousand was primarily the result net proceeds from the issuance and repayment of debt. Contractual Obligations, Commitments and Contingencies There have been no significant changes to our contractual obligations as described in our annual report on Form 10-K for the year ended December 31, 2021. Off-Balance Sheet Commitments and Arrangements As of March 31, 2022, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K. Critical Accounting Policies and Estimates The preparation of our financial statements and related disclosures in accordance with U.S. GAAP requires our management to make judgments, assumptions and estimates that affect the amounts reported in our accompanying condensed consolidated financial statements and the accompanying notes included elsewhere in this quarterly report. Our management bases its estimates and judgments on historical experience, current economic and industry conditions and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. The methods, estimates, and judgments that we use in applying our accounting policies have a significant impact on the results that we report in our condensed consolidated financial statements. Some of our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain. 31 There have been no material changes to our critical accounting policies and estimates from the information in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, included in our 2021 annual report on Form 10-K. 32 JOBS Act Accounting Election We are an emerging growth company, as defined in the JOBS Act. The JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards applicable to public companies, allowing them to delay the adoption of those standards until those standards would otherwise apply to private companies. We have elected to use this extended transition period under the JOBS Act. As a result, following the Business Combination, our condensed consolidated financial statements may not be comparable to the financial statements of companies that are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies, which may make common stock less attractive to investors. 33 Item 3. Quantitative and Qualitative Disclosures About Market Risk We are a smaller reporting company, as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, for this reporting period and are not required to provide the information required under this item.