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. 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. 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 10 world-wide 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 have 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 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 the three months ended March 31, 2023 and 2022 , we spent approximately 130% and 198%, respectively, of our revenue on research and development. Navitas’ research and development activities are located primarily in the US and China. 31 Table of Contents Buyout of Elevation Semiconductor On January 19, 2023, the Company announced an agreement to acquire the remaining minority interest in its silicon control IC joint venture as well as rights to certain intellectual property from Halo Microelectronics for a total purchase price of $22.4 million in Navitas stock. As Navitas was already the majority shareholder, financial results from the joint venture have already been reflected in Navitas’ historical financial statements. The transaction was completed on February 13, 2023. In connection with the purchase of intellectual property, the Company recognized an intangible asset at its estimated fair value of $4.4 million related to acquired intellectual property 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, $97.1 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, Virginia. The future earn-out payments were fair valued at $0.6 million, for a total merger consideration of $244.0 million. GeneSiC’s net assets and operating results since the merger date are included in the Company’s Condensed Consolidated Balance Sheet and Condensed Consolidated Statements of Operations as of and for the three months ended March 31, 2023. 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 Condensed Consolidated Balance Sheet and Condensed Consolidated Statement of Operations for the three months ended March 31, 2023. 32 Table of Contents 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 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 revenues 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. 33 Table of Contents Interest Income Interest income primarily consists of interest earned from our cash on hand.. Interest Expense Interest expense primarily consists of interest under our term loan facility, held during the fiscal year 2022. Income Taxes Legacy Navitas is a dual domesticated corporation for Ireland and U.S. federal income tax purposes. Refer to Note 14, 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, 2023 and 2022 (in thousands): Three Months Ended March 31, Change $ Change % (dollars in thousands) 2023 2022 Net revenues (including $0 and $613 of related party revenues) $ 13,358 $ 6,740 $ 6,618 98 % Cost of revenues (exclusive of amortization of intangible assets included below) 7,873 3,777 4,096 108 % Operating expenses: Research and development 17,394 13,325 4,069 31 % Selling, general and administrative 19,058 24,544 (5,486) (22) % Amortization of intangible assets 4,499 88 4,411 5013 % Total operating expenses 40,951 37,957 2,994 8 % Loss from operations (35,466) (34,994) (472) 1 % Other income (expense), net: — — — % Interest income (expense), net 903 (24) 927 (3863) % Gain from change in fair value of warrants — 51,763 (51,763) — % Gain (loss) from change in fair value of earnout liabilities (27,752) 63,406 (91,158) — % Other income (expense) 11 (356) 367 — % Total other income (expense), net (26,838) 114,789 (141,627) (123) % Income (loss) before income taxes (62,304) 79,795 (142,099) (178) % Income tax provision 61 3 58 1933 % Net income (loss) (62,365) 79,792 (142,157) (178) % Less: Net loss attributable to noncontrolling interests (518) — (518) — % Net income (loss) attributable to controlling interests $ (61,847) $ 79,792 (141,639) (178) % Three Months Ended March 31, 2023 Compared to the Three Months Ended March 31, 2022 Revenue 34 Table of Contents Reve nue for the three months ended March 31, 2023 was $13.4 million compared to $6.7 million for the three months ended March 31, 2022, an increase of $6.6 million, or 98%. The increase reflects a combination of the Company’s customer growth trajectory, evolving from aftermarket customers to higher volume customers, and the accretive revenue impact from the acquisition of GeneSiC. Total sales volumes increased 19%, from 7.5 million to 8.9 million units shipped, while the average selling price increased 78% to $1.46 per unit. Cost of Revenues Cost of revenues for the three months ended March 31, 2023 was $7.9 million compared to $3.8 million for the three months ended March 31, 2022, an increase of $4.1 million or 108%. The increase was primarily driven by significant revenue growth, acquisition of GeneSiC, in addition to TSMC’s 20% wafer price increase which created a higher cost of revenues. Research and Development Expense Research and development expense for the three months ended March 31, 2023 of $17.4 million increased by $4.1 million, or 31%, when compared to the three months ended March 31, 2022, driven by increases of $3.0 million compensation costs related to growth in headcount as the Company develops products in Solar, Enterprise and EV and $1.3 million toward the expansion of new products, slightly offset by a decrease of $0.3 million in stock based compensation. 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, 2023 of $19.1 million decreased by $5.5 million, or 22%, when compared to the three months ended March 31, 2022, driven by decreases of $7.8 million in stock based compensation and $0.5 million in professional fees, slightly offset by an increase of $1.9 million in headcount costs and $1.3 million higher transaction expense. 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. Amortization of Definite-Lived Intangible Assets Amortization of definite-lived intangible assets for the three months ended March 31, 2023 of $4.5 million increased by $4.4 million, or 5,013%, when compared to the three months ended March 31, 2022. The increase is primarily due to business acquisitions that occurred during the fiscal year ended December 31, 2022. O ther Income (Expense), net Net interest income for the three months ended March 31, 2023 was $0.9 million compared to immaterial net interest expense for the three months ended March 31, 2022, primarily due to the higher interest rate received on money markets funds. During the three months ended March 31, 2023 , we recognized $27.8 million loss from the change in fair value of our earn-out liabilities. 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 increase in fair value of our earn-out liability of $27.8 million was primarily a result of the increase of the closing price of our Class A common stock listed on the Nasdaq, resulting in the increase in the estimated fair value of the earnout shares from $1.47 as of December 31, 2022 to $4.76 as of March 31, 2023. Income Tax (Benefit) Provision Income tax provision for the three months ended March 31, 2023 did not change materially when compared to the three months ended March 31, 2022. We expect our tax rate to remain close to zero in the near term due to full valuation allowances against deferred tax assets. 35 Table of Contents 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 of March 31, 2023, we had cash and cash equivalents of $100.8 million. We currently expect to fund our cash requirements through the use of cash 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 three months ended March 31, 2023 and 2022 (in thousands): March 31, 2023 March 31, 2022 Consolidated Statements of Cash Flow Data: Net cash used in operating activities $ (7,920) $ (10,601) Net cash used in investing activities $ (1,815) $ (2,992) Net cash provided by (used in) financing activities $ 221 $ (862) We derive liquidity primarily from debt and equity financing activities. As of March 31, 2023, our balance of cash and cash equivalents was $100.8 million, which is a decrease of $9.5 million or 9% compared to December 31, 2022. Operating Activities Fo r the three months ended March 31, 2023, net cash used in operating activities was $7.9 million, which primarily reflects a net loss of $62.4 million. This decrease to operating cash flows are partially offset by adjustments for non-cash share-based compensation of $17.2 million, non-cash losses of $27.8 million in earnout liabilities, amortization of intangible assets of $4.5 million, and an aggregate cash provided by operating assets and liabilities of $3.9 million. Specifically, a $3.4 million increase in accounts payable-trade, accrued compensation, and other expenses primarily due to an increase in accrued compensation expense as a result of timing, a $1.7 million decrease in account receivable and $0.2 million decrease in inventory, partially offset by a increase in other assets of $1.6 million.. Investing Activities Net cash used in investing activities for the three months ended March 31, 2023 of $1.8 million was primarily due to $1.0 million cash funding of a joint venture and $0.8 million for purchases of fixed assets. 36 Table of Contents Financing Activities Net cash provided by financing activities for the three months ended March 31, 2023 of $0.2 million was due to proceeds from stock option exercises of $0.2 million. Contractual Obligations, Commitments and Contingencies In the ordinary course of business, we enter into contractual arrangements that may require future cash payments. As of March 31, 2023, our non-cancellable contractual arrangements consisted entirely of lease obligations. Refer to Note 8 - Leases for further information. Off-Balance Sheet Commitments and Arrangements As of March 31, 2023, 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. 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 2022 annual report on Form 10-K. 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. 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.