Item 7. Management’s Discussion and Analysis
Item 7. 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 annual report on Form 10-K. 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 “Risk Factors” and “Cautionary Statement About Forward-Looking Statements” sections and elsewhere in this annual report, our actual results may differ materially from those anticipated in these forward-looking statements.
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, Belgium, China, Taiwan, Thailand, and the Philippines, with principal executive offices in Torrance, California.
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We design, develop and market next-generation power semiconductors including gallium nitride (“GaN”) power integrated circuits (“ICs”), silicon carbide (“SiC”) and associated high-speed silicon system controllers, and digital isolators 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. Charger manufacturers we ship to today are worldwide, supporting major international mobile brands. Other emerging applications will also be addressed across the world.
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 world-wide 10 mobile OEMs across smartphone and laptops 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.
A core strength of our business lies in our industry leading IP position in GaN Power ICs. Navitas invented the first commercial GaN Power ICs. Today, we ha ve over 185 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 f rom 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 2022, we spent approximate ly 103% and 141%, respectively, o f our revenue on research and development. Navitas’ research and development activities are located primarily in the US and China.
Acquisition of GeneSiC
On August 15, 2022, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) to acquire 100% of the outstanding shares of GeneSiC Semiconductor Inc. (“GeneSiC”) for $146.3 million of equity, $99.3 million of cash consideration, and potential future earn-out payments of up to an aggregate of $25.0 million in cash. GeneSiC is a silicon carbide (SiC) pioneer with deep expertise in SiC power device design and process, based in Dulles, Virgnia. The future earn-out payments were fair valued at $0.6 million, for a total merger consideration of $246.2 million. GeneSiC’s net assets and operating results since the merger date are included in the Company’s Consolidated Balance Sheet and Consolidated Statements of Operations as of and for the year ended December 31, 2022.
Acquisition of VDDTech
On June 10, 2022, the Company’s wholly owned subsidiary, Navitas Semiconductor Limited, acquired all of the stock of VDDTECH srl, a private Belgian company (“VDDTech”), for approximately $1.9 million in cash and stock. Based in Mont-saint-Guibert, Belgium, VDDTech creates advanced digital-isolators for next-generation power conversion. VDDTech’s net assets and operating results since the acquisition date are included in the Company’s Consolidated Balance Sheet and Consolidated Statement of Operations for the year ended December 31, 2022.
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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, Live Oak acquired all of the capital stock of Navitas Ireland by means of a tender offer, and a wholly owned subsidiary of Live Oak merged with and into Navitas, Delaware, with Navitas Delaware surviving the merger. As a result, Legacy Navitas became a wholly owned subsidiary of Live Oak effective October 19, 2021. At the closing of the Business Combination, Live Oak changed its name to Navitas Semiconductor Corporation.
The Business Combination was accounted for as a reverse recapitalization in accordance with US GAAP. Under the guidance in Accounting Standards Codification (“ASC”) 805, “ Business Combinations” , Live Oak was treated as the “acquired” company for financial reporting purposes. We were deemed the accounting predecessor and the post-combination company is the successor SEC registrant, meaning that our financial statements for previous periods were disclosed in our annual report Form 10-K filed with the SEC 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 includes $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 $25 million. 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, SiC MOSFETs and Schottky MPS diodes that deliver best-in-class performance, ruggedness, and quality. 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
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and does not represent a separate performance obligation. Our product revenue is well diversified across the United States, Europe, and Asia.
Cost of Revenues
Cost of revenues 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, inventory impairments, 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.
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 Income
Interest income primarily consists of interest income earned from our cash on hand due to the increase of interest rates.
Interest Expense
Interest expense primarily consists of interest under our term loan facility held during the year.
Income Taxes
Legacy N avitas is a dual domesticated corporation for Ireland and U.S. federal income tax purposes. Refer to Note 14, Provision for I ncome Taxes, in our accompanying consolidated financial statements elsewhere in this annual report.
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Results of Operations
The table and discussion below summarizes operating data for our consolidated operations (in thousands):
Year Ended
December 31, Change
$ Change
%
(dollars in thousands) 2022 2021
Net revenues (including $1,528 and $435 of related party revenues) $ 37,943 $ 23,736 $ 14,207 60 %
Cost of revenues (exclusive of amortization of intangibles included below) 25,996 13,050 12,946 99 %
Operating expenses:
Research and development 50,318 27,475 22,843 83 %
Selling, general and administrative 78,353 51,374 26,979 53 %
Amortization of intangible assets 6,913 345 6,568 1904 %
Total operating expenses 135,584 79,194 56,390
Loss from operations (123,637) (68,508)
Other income (expense), net:
Interest income (expense), net 1,387 (257) 1,644 (640) %
Gain (loss) from change in fair value of warrants 51,763 (45,625) 97,388 (213) %
Gain (loss) from change in fair value of earnout liabilities 121,709 (38,105) 159,814 (419) %
Other income (expense) (1,147) (143) (1,004) 702 %
Total other income (expense), net 173,712 (84,130)
Income (loss) before income taxes 50,075 (152,638)
Income tax (benefit) provision (22,812) 47 (22,859) (48636) %
Net income (loss) $ 72,887 $ (152,685) $ 225,572 (148) %
LESS: net income (loss) attributable to noncontrolling interests (1,026) — $ (1,026)
Net income (loss) attributable to controlling interests $ 73,913 $ (152,685) $ 226,598 (148) %
Comparison of the Years ended December 31, 2022 and 2021
Net Revenues
Net revenues for the twelve months ended December 31, 2022 were $37.9 million compared to $23.7 million for the twelve months ended December 31, 2021, an increase of $14.2 million, or 60%. The significant increase was driven by revenues derived from the GeneSiC acquisition and increased unit sales in the home appliance market, partially offset by declines in the China mobile market.
Cost of Revenues
Cost of revenues for the twelve months ended December 31, 2022 was $26.0 million, an increase of $12.9 million or 99% compared to the twelve months ended December 31, 2021. The increase was primarily driven by significant revenue growth, including the acquisition of GeneSiC, inventory charges of $2.8 million and higher wafer prices from TSMC.
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Research and Development Expense
Research and development expense for the twelve months ended December 31, 2022 of $50.3 million increased by $22.8 million, or 83%, when compared to the twelve months ended December 31, 2021, primarily driven by increases in stock based compensation of $13.2 million and $8.2 million in higher compensation costs related to growth in headcount as the Company developed products in the home appliances, solar, data center, industrial, and EV markets. We expect research and development expense to continue to increase as we grow our headcount to continue our diversification into new applications.
Sellin g, General and Administrative Expense
Selling, general and administrative expense for the twelve months ended December 31, 2022 of $78.4 million increased by $27.0 million, or 53%, when compared to the twelve months ended December 31, 2021. The increase is primarily due to a $8.8 million increase in stock-based compensation, along with an increase of $3.0 million in compensation costs related to growth in headcount. In addition, the Company incurred $5.9 million of transaction expenses related to the acquisition of GeneSiC and a $3.7 million increase in costs associated with the operating of a public company. We expect selling, general and administrative costs to increase to support our revenue growth.
Amortization of Definite-Lived Intangible Assets
Amortization of definite-lived intangible assets for the twelve months ended December 31, 2022 of $6.9 million increased by $6.6 million, or 1,810%, when compared to the twelve months ended December 31, 2021. The increase is primarily due to business acquisitions that occurred during the fiscal year ended December 31, 2022.
Other Income (Expense), net
Net interest income for the twelve months ended December 31, 2022 o f $1.4 million compared to expense of $0.3 million for the twelve mo nths ended December 31, 2021, primarily due to higher interest earned on cash equivalents.
During the twelve months ended December 31, 2022, we recognized a $51.8 million gain from the change in fair value of our warrant liabilities, a $121.7 million decrease in fair value of our earn out liabilities and a $1.1 million loss from equity method investment, 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 $121.7 million was primarily a result of the decrease of the closing price of our Class A common stock listed on the Nasdaq, resulting in the decline in the estimated fair value of the earnout shares from $16.09 as of December 31, 2021 to $1.47 as of December 31, 2022 .
iii) Other expense primarily reflects our minority interest in the net loss of a joint venture through August 18, 2022.
Income Tax (Benefit) Provision
Income tax benefit for the twelve months ended December 31, 2022 was $22.8 million while for the twelve months ended December 31, 2021, income tax expense was not significant. As a result of the GeneSiC Semiconductor Inc. acquisition, (see Note 18, Business Combinations), the Company released $20.5 million of its U.S. federal valuation allowance . The release was primarily attributable to the $23.1 million of net federal deferred tax liability recorded on
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GeneSiC’s opening balance sheet that is available to offset most of the U.S. federal deferred tax assets of Navitas. As of December 31, 2022, the Company continues to maintain a valuation allowance on the remaining deferred tax assets as the Company believes that it is not more likely than not that the deferred tax assets will be fully realized.
Liquidity and Capital Resources
Our primary use of cash is to fund our operating expenses, working capital requirements, and outlays for strategic investments and acquisitions. In addition, we use cash to conduct research and development, incur capital expenditures, and fund our debt service obligations.
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.
As December 31, 2022, we had cash and cash equival ents of $110.3 million. We currently expect to fund our cash requirements through the use of cash and cash equivalents on hand. We believe that our current levels of cash and cash equivalents are 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 equity or debt financing or from other sources. If we raise additional funds through the issuance of equity, the percentage ownership of our equity holders could be significantly diluted, and these newly issued securities may have rights, preferences or privileges senior to those of existing equity holders. 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 periods presented (in thousands):
Year Ended
December 31,
2022 2021
Consolidated Statements of Cash Flows Data:
Net cash used in operating activities $ (44,497) $ (41,700)
Net cash used in investing activities (107,608) (3,466)
Net cash provided by (used in) financing activities (5,810) 274,549
We derive liquidity primarily from cash on hand, debt, and equity financing activities. As of December 31, 2022, our balance of cash and cash equivalents was $110.3 million, which is a decrease of $157.9 million or 59% co mpared to December 31, 2021. As of December 31, 2022 we had no debt outstanding while we had $6.9 million of total debt outstanding at December 31, 2021.
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Operating Activities
For the year ended Dec ember 31, 2022, net cash used in operating activities was $44.5 million, which primarily reflects a net income of $72.9 million, adjusted for non-cash share-based compensation of $63.3 million, non-cash gains of $173.5 million in earnout and warrant liabilities due to changes in fair value and an aggregate cash provided by operating assets and liabilities of $2.7 million. Specifically, $1.3 million decrease in account receivable, $4.7 million increase in inventory, and $7.1 million increase in accounts payable, due to increased sales, partially offset by $1.1 million decrease in operating lease liability.
For the year ended December 31, 2021, net cash used in operating activities was $41.7 million, which primarily reflects a net loss of $152.7 million, adjusted for non-cash share-based compensation of $41.4 million and non-cash, non-operating losses of $83.7 million and includes an aggregate decrease of $15.2 million due to higher operating assets.
Investing Activities
N et cash used in investing activities for the year ended December 31, 2022 of $107.6 million was primarily due to $96.4 million in business acquisitions, $5.2 million cash funding of a joint venture and $4.6 million for purchases of fixed assets.
Net cash used in investing activities for the year ended December 31, 2021 of $3.5 million was primarily due to $0.7 million cash co nsideration paid for an asset acquisition, $0.7 million cash funding of a joint venture and $2.1 million for purchases of fixed assets.
Financing Activities
Net cash used in financing activities for the year ended December 31, 2022 of $5.8 million was primarily the result of $6.9 million repayment of debt, partially offset by $1.7 million of issuance of common stock in connection with option exercises.
Net cash provided by financing activities for the year ended December 31, 2021 of $274.5 million was primarily the result of $298.1 million in proceeds from the reverse recapitalization an d $0.9 million in net proceeds from the issuance and repayment of debt, offset by $25.0 million of stock issuance costs.
Contractual Obligations, Commitments and Contingencies
In the ordinary course of business, we enter into contractual arrangements that may require future cash payments. As of December 31, 2022, our non-cancellable contractual arrangements consisted entirely of a contract to guarantee future production capacity, of which $1.6 million remains outstanding as of year end. Refer to Note 7 - Leases for further information on our minimum future payments related to lease obligations.
Off-Balance Sheet Commitments and Arrangements
As of December 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 consolidated financial statements and the accompanying notes included elsewhere in this annual 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.
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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 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.
Our most critical accounting estimates include revenue recognition and the assumptions used in the valuation of intangible assets, determination of accounting for earnout shares, and share-based compensation.
Revenue Recognition
Revenue is recognized when a customer obtains control of products or services in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. To determine revenue recognition for arrangements within the scope of ASC 606, “Revenue from Contracts with Customers” , we perform the following five steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) we satisfy performance obligations. We recognize revenue when the control of the promised goods or services is transferred to customers in an amount that reflects the consideration we expect to receive in exchange for such goods or services.
The majority of our revenue is derived from the sale of semiconductor products. In determining the transaction price, we evaluate whether the price is subject to refund or adjustment to determine the net consideration to which we expect to be entitled.
Revenue is recognized when control of the product is transferred to the customer (i.e., when our performance obligation is satisfied), which is defined by the commercial terms of each purchase but typically occurs at shipment. In determining whether control has transferred, we consider if there is a present right to payment and legal title, and whether risks and rewards of ownership have transferred to the customer. Refer to Note 2 to our consolidated financial statements included elsewhere in this annual report for additional discussion of our revenue recognition policy.
Business Combinations
We account for business combinations using the acquisition method of accounting, in accordance with ASC 805 , “Business Combinations” . The acquisition method requires identifiable assets acquired and liabilities assumed be recognized and measured at fair value on the acquisition date, which is the date that the acquirer obtains control of the acquired business. The excess of purchase price over the fair value of assets acquired and liabilities assumed is recorded as goodwill. Determining fair value of identifiable assets, particularly intangibles, and liabilities acquired also requires management to make estimates, which are based on all available information and in some cases assumptions with respect to the timing and amount of future revenues and expenses associated with an asset. This judgment and determination affects the amount of consideration paid that is allocatable to assets and liabilities acquired in the business purchase transaction. Examples of critical estimates in valuing certain of the intangible assets and goodwill we have acquired include, but are not limited to, future expected cash inflows and outflows, expected technology life cycle, and discount rates. We estimate the useful lives of the intangible assets based on the expected period over which we anticipate generating economic benefit from the asset. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.
Share-Based Compensation
The fair value of stock option awards to employees and, prior to the Business Combination, restricted stock awards to non-employees with service based vesting conditions is estimated using the Black-Scholes option pricing model and for awards with market conditions, incorporate Monte Carlo simulations. The value of an award is recognized as expense over the requisite service period in the consolidated statements of operations. The option pricing model requires management to
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make assumptions and to apply judgment in determining fair value of the awards. The most significant assumptions and judgments include the expected volatility, risk-free interest rate, expected dividend rate and expected term of the award, in addition to the fair value of the underlying common stock. We have also granted long term performance stock options (“LTIP Options”) to certain members of senior management. These options vest in increments subject to certain market and performance conditions over the duration of the defined service period. We have utilized the services of a professional valuation firm to develop the Black-Scholes option pricing model incorporating Monte Carlo simulations for these option awards.
Prior to the Business Combination, there was no public market for our common stock and the estimated fair value of our common stock was historically determined by our board of directors, with input from management, and considering our most recently available third-party valuation of our common stock. The board of directors determined fair value at the time of grant of the option by considering a number of objective and subjective factors, including financing investment rounds, operating and financial performance, the lack of liquidity of share capital and general and industry specific economic outlook, among other factors. These third-party valuations were performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants Accounting and Valuation Guide, Valuation of Privately Held Company Equity Securities Issued as Compensation . The fair value of our common stock was derived by first determining the equity value of our company. The equity value of our company was historically determined using the market approach by reference to the closest round of equity financing, if any, preceding the date of valuation and analysis of the trading values of publicly traded companies deemed comparable to us. In allocating the equity value of our company among various classes of stock, we used an option pricing model (“OPM”). The OPM takes into account our classes of equity, dividend policy and conversion rights to determine how proceeds from a liquidity event shall be distributed among the various ownership classes at a future date. The OPM arrives at a final estimated fair value per share of the common stock before a discount for lack of marketability is applied.
Beginning with the common stock valuation as of February 2021 and for all subsequent valuations prior to the Business Combination, the equity value of our company was determined using the probability weighted expected return method (“PWERM”) approach, which assigns a probability or weighting to valuations determined under distinct scenarios. The February 12, 2021 valuation incorporated two scenarios under the PWERM method. The first scenario is a stay-private scenario in which the estimated current enterprise value was allocated to the various securities using an OPM, reflecting the rights and preferences for each security (i.e., convertible notes, preferred equity, common equity, options and warrants). The second scenario was a form of PWERM in which a single future exit event, a near-term IPO, was assumed. Under this scenario the future total enterprise value at the near-term IPO date was allocated to various equity and equity-linked securities using a common stock equivalent method reflecting as-converted common stock equivalents for each security class, since, upon an IPO, these outstanding equity-linked securities will convert into common stock. The future value of each security is then discounted to the valuation date.
In addition to considering the results of these third-party valuations, we considered various objective and subjective factors to determine the fair value of our common stock as of each grant date. The assumptions underlying these valuations represented management’s best estimates, which involved inherent uncertainties and the application of management’s judgment, including the probability and timing of liquidity events. As a result, if we had used significantly different assumptions or estimates, the fair value of our common stock and our stock-based compensation expense could be materially different. The fair value of the Company’s common stock ranged from $1.16 per share in the second half of 2020 to $1 0.53 pe r share as of August 25, 2021, the date of the most recent contemporaneous valuation report prior to the Business Combination.
Earnout Shares
Certain of the Company’s stockholders are entitled to receive up to 10,000,000 Earnout Shares of the Company’s Class A common stock if the Earnout Milestones are met. The Earnout Milestones represents three independent criteria, which each entitles the eligible stockholders to 3,333,333 earn-out shares per milestone met. Each Earnout Milestone is
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considered met if at anytime 150 days following the Business Combination and prior to October 19, 2026, the volume weighted average price of the Company’s Class A common stock is greater than or equal to $12.50, $17.00 or $20.00 for any twenty trading days within any thirty trading day period, respectively
These earnout shares have been categorized into two components: (i) the “Vested Shares” - those associated with stockholders with vested equity at the closing of the Business Combination that will be earned upon achievement of the Earnout Milestones and (ii) the “Unvested Shares” - those associated with stockholders with unvested equity at the closing of the Business Combination that will be earned over the remaining service period with the Company on their unvested equity shares and upon achievement of the Earnout Milestones. The Vested Shares are classified as liabilities in the consolidated balance sheet and the Unvested Shares are equity-classified share-based compensation to be recognized over time (see Note 7 - Share-based Compensation). The earnout liability was initially measured at fair value at the closing of the Business Combination and subsequently remeasured at the end of each reporting period. The change in fair value of the earn-out liability is recorded as part of Other income (expense), net in the consolidated statement of operations.
The estimated fair value of the earnout liability was determined using a Monte Carlo analysis of 20,000 simulations of the future path of the Company’s stock price over the earnout period. The assumptions utilized in the calculation are based on the achievement of certain stock price milestones including projected stock price, volatility, and risk-free rate.
Recent Developments
We are pursuing key strategic initiatives, including bringing to market multiple generations of GaN technology that enhance our margin profile and continually evaluating acquisition opportunities that are complementary to our existing portfolio and increase power semiconductor content in our targeted applications. See “ Information about Navitas — Company Strategy .”
Recently Issued and Adopted Accounting Standards
See Not e 2 to our consolidated financial statements included elsewhere in this annual report for a discussion of accounting pronouncements recently adopted and recently issued accounting pronouncements not yet adopted and their potential impact to our financial statements.
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 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.
Item 7A. 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.
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