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 and silicon carbide power semiconductor devices 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, South Korea 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 10 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 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 devices 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 and six months ended June 30, 2024, we spent approximately 93% and 90%, respectively, of our revenue on research and development. In the three and six months ended June 30, 2023, we spent approximately 93% and 109%, respectively, of our revenue on research and development. Navitas’ research and development activities are located primarily in the US and China. 26 TABLE OF CONTENTS May 2023 Public Offering On May 26, 2023, the Company completed an underwritten public offering (the “May 2023 Public Offering”) of 10,000.000 shares of its Class A Common Stock at a public offering price of $8.00 per share, before deducting underwriting discounts and commissions. In connection with the May 2023 Public Offering, the Company granted the underwriters of the offering a 30-day option to purchase up to an additional 1,500,000 shares of the Company’s Class A Common Stock (the “Option Shares”) from the Company at the same public offering price. On June 1, 2023, the underwriters exercised in full their option to purchase the Option Shares. The sale of the Option Shares closed on June 5, 2023. After deducting underwriting discounts and commissions and before deducting offering expenses payable by the Company, the Company received net proceeds of $75.6 million and $11.3 million from the May 2023 Public Offering and sale of the Option Shares, respectively. The total net proceeds received by the Company after deducting offering expenses was $86.5 million. The Company intends to use the net proceeds for working capital and other general corporate purposes, including potential acquisitions or strategic manufacturing investments. 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. 27 TABLE OF CONTENTS Results of Operations Revenue 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. 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 less estimated returns. We provide a non-conformity warranty which is not sold separately and does not represent a separate performance obligation. 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. Interest Income (Expense), net Interest income (expense), net primarily consists of interest earned from our cash on hand. 28 TABLE OF CONTENTS Income Taxes Legacy Navitas is a dual domesticated corporation for Ireland and U.S. federal income tax purposes. Refer to Note 12, Provision for Income Taxes, in our accompanying condensed consolidated financial statements elsewhere in this quarterly report. Results of Operations The tables and discussion below present our results for the three months ended June 30, 2024 and 2023 (in thousands): Three Months Ended June 30, Change $ Change % 2024 2023 Net revenues $ 20,468 $ 18,062 $ 2,406 13 % Cost of revenues (exclusive of amortization of intangible assets included below) 12,478 10,572 1,906 18 % Operating expenses: Research and development 18,971 16,791 2,180 13 % Selling, general and administrative 15,382 13,151 2,231 17 % Amortization of intangible assets 4,774 4,773 1 — % Total operating expenses 39,127 34,715 4,412 13 % Loss from operations (31,137) (27,225) (3,912) 14 % Other income (expense), net: Interest income (expense), net (72) 347 (419) (121) % Dividend income 1,361 459 902 197 % Gain (loss) from change in fair value of earnout liabilities 7,550 (32,224) 39,774 (123) % Other income 31 20 11 55 % Total other income (expense), net 8,870 (31,398) 40,268 (128) % Loss before income taxes (22,267) (58,623) 36,356 (62) % Income tax provision (benefit) 61 (96) 157 (164) % Net loss (22,328) (58,527) 36,199 (62) % Less: Net loss attributable to noncontrolling interests — — — — % Net loss attributable to controlling interests $ (22,328) $ (58,527) 36,199 (62) % 29 TABLE OF CONTENTS Six Months Ended June 30, Change $ Change % (dollars in thousands) 2024 2023 Net revenues $ 43,643 $ 31,420 $ 12,223 39 % Cost of revenues (exclusive of amortization of intangible assets included below) 26,138 18,445 7,693 42 % Operating expenses: Research and development 39,200 34,186 5,014 15 % Selling, general and administrative 31,469 32,209 (740) (2) % Amortization of intangible assets 9,548 9,272 276 3 % Total operating expenses 80,217 75,667 4,550 6 % Loss from operations (62,712) (62,692) (20) — % Other income (expense), net: Interest income (expense), net (70) 1,250 (1,320) (106) % Dividend income 3,041 459 2,582 563 % Gain (loss) from change in fair value of earnout liabilities 33,749 (59,976) 93,725 (156) % Other income 114 31 83 268 % Total other income (expense), net 36,834 (58,236) 95,070 (163) % Loss before income taxes (25,878) (120,928) 95,050 (79) % Income tax provision (benefit) 131 (35) 166 (474) % Net loss (26,009) (120,893) 94,884 (78) % Less: Net loss attributable to noncontrolling interests — (518) 518 — % Net loss attributable to controlling interests $ (26,009) $ (120,375) 94,366 (78) % Three Months Ended June 30, 2024 Compared to the Three Months Ended June 30, 2023 Revenue Revenue for the three months ended June 30, 2024 was $20.5 million compared to $18.1 million for the three months ended June 30, 2023, an increase of $2.4 million, or 13%. Sales have increased due to strong mobile and consumer markets. Cost of Revenues Cost of revenues for the three months ended June 30, 2024 was $12.5 million compared to $10.6 million for the three months ended June 30, 2023, an increase of $1.9 million or 18%. The increase was primarily driven by revenue slightly offset by lower gross margin mobile sales. Research and Development Expense Research and development expense for the three months ended June 30, 2024 of $19.0 million increased by $2.2 million, or 13%, when compared to the three months ended June 30, 2023. This is primarily driven by an increase in product development by approximately $1.2 million since June 30, 2023 as it relates to EV, enterprise and solar. Additionally, salaries and benefits have increased as we build out our target end markets. Selling, General and Administrative Expense Selling, general and administrative expense for the three months ended June 30, 2024 of $15.4 million increased by $2.2 million, or 17%, when compared to the three months ended June 30, 2023, primarily driven by higher stock compensation expense in selling, general and administrative compared to June 2023 by around $0.8 million reflecting increases in personnel. Additionally, salaries and benefits have increased as we build out a worldwide sales force. 30 TABLE OF CONTENTS Amortization of Intangible Assets Amortization of intangible assets remained the same as we did not acquire new intangible assets. Other Income (Expense), net Net interest (expense) income for the three months ended June 30, 2024 was $(0.1) million compared to $0.3 million net interest income (expense), net for the three months ended June 30, 2023, primarily due to the higher interest rate received on money markets funds in the prior year three months ended June 30, 2023. Dividend income consists of income earned on our money market treasury funds that are recorded as cash equivalents on our consolidated balance sheet. Increase of $0.9 million is primarily due to a full quarter of dividend income for the three months ended June 30, 2024 compared to only one month of dividend income for the three months ended June 30, 2023. During the three months ended June 30, 2024, we recognized a $7.6 million gain from the change in fair value of our earn-out liabilities. The increase in the gain of our earn-out liabilities of $39.8 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 decrease in the estimated fair value of the earnout shares from $8.58 as of June 30, 2023 to $1.53 as of June 30, 2024. Income Tax Provision (Benefit) Income tax provision for the three months ended June 30, 2024 increased $0.2 million when compared to the income tax benefit of $0.1 million for the three months ended June 30, 2023. We expect our tax rate to remain close to zero in the near term due to full valuation allowances against deferred tax assets. Six Months Ended June 30, 2024 Compared to the Six Months Ended June 30, 2023 Revenue Revenue for the six months ended June 30, 2024 was $43.6 million compared to $31.4 million for the six months ended June 30, 2023, an increase of $12.2 million, or 39%. Sales have increased due to strong mobile and consumer markets. Cost of Revenues Cost of revenues for the six months ended June 30, 2024 was $26.1 million compared to $18.4 million for the six months ended June 30, 2023, an increase of $7.7 million or 42%. The increase was primarily driven by revenue slightly offset by lower gross margin mobile sales. Research and Development Expense Research and development expense for the six months ended June 30, 2024 of $39.2 million increased by $5.0 million, or 15%, when compared to the six months ended June 30, 2023. This is primarily driven by an increase in product development by approximately $2.2 million since June 30, 2023 as it relates to EV, enterprise and solar. Additionally, salaries and benefits have increased as we build out our target end markets. Selling, General and Administrative Expense Selling, general and administrative expense for the six months ended June 30, 2024 of $31.5 million decreased by $0.7 million, or 2%, when compared to the six months ended June 30, 2023. Salaries and benefits have increased as we build out a worldwide sales force. Amortization of Intangible Assets Amortization of intangible assets remained fairly consistent as we did not acquire new intangible assets. 31 TABLE OF CONTENTS Other Income (Expense), net Net interest (expense) income for the six months ended June 30, 2024 was $(0.1) million compared to $1.3 million net interest income (expense) for the six months ended June 30, 2023, primarily due to the higher interest rate received on money markets funds in the prior year. Increase of $2.6 million in dividend income is primarily due to two quarters of dividend income for the six months ended June 30, 2024 compared to only one month of dividend income for the six months ended June 30, 2023. During the six months ended June 30, 2024, we recognized a $33.7 million gain from the change in fair value of our earn-out liabilities. The increase in the gain of our earn-out liabilities of $93.7 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 decrease in the estimated fair value of the earnout shares from $8.58 as of June 30, 2023 to $1.53 as of June 30, 2024. Income Tax Provision (Benefit) Income tax provision for the six months ended June 30, 2024 increased $0.2 million when compared to the income tax benefit of $0.0 million for the six months ended June 30, 2023. 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 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 June 30, 2024, we had cash and cash equiva lents of $112.0 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 six months ended June 30, 2024 and 2023 (in thousands): June 30, 2024 June 30, 2023 Consolidated Statements of Cash Flow Data: Net cash used in operating activities $ (34,908) $ (17,198) Net cash used in investing activities $ (8,139) $ (2,704) Net cash provided by financing activities $ 2,203 $ 87,313 We derive liquidity primarily from equity financing activities. As of June 30, 2024, our balance of cash and cash equivalents was $112.0 million, which is a decrease of $40.8 million or 27% compared to December 31, 2023. 32 TABLE OF CONTENTS Operating Activities For the six months ended June 30, 2024, net cash used in operating activities was $34.9 million, which primarily reflects a net loss of $26.0 million. This decrease to operating cash flows is partially offset by adjustments for non-cash share-based compensation of $26.6 million, depreciation of $1.4 million, non-cash gains of $33.7 million in earnout liabilities, amortization of intangible assets of $9.5 million, and an aggregate cash used in operating assets and liabilities of $14.0 million. Specifically, increases in inventories of $3.0 million due to sales increases coupled with decreases in accounts payable, accrued compensation and other expenses of $10.4 million and customer deposits and deferred revenue of $4.7 million, partially offset by an decreases in accounts receivable of $3.2 million and prepaid expenses and other current assets of $1.4 million. For the six months ended June 30, 2023, net cash used in operating activities was $17.2 million, which primarily reflects a net loss of $120.9 million. This decrease to operating cash flows are partially offset by adjustments for non-cash share-based compensation of $29.7 million, non-cash losses of $60.0 million in earnout liabilities, amortization of intangible assets of $9.3 million, and an aggregate cash provided by operating assets and liabilities of $3.2 million. Specifically, a $11.9 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, partially offset by a $6.0 million increase in account receivable and $1.6 million increase in other assets, a $0.7 million increase in prepaid expenses and other, and a decrease in operating lease liabilities of $0.5 million. Investing Activities Net cash used in investing activities for the six months ended June 30, 2024 of $8.1 million was primarily due to $2.5 million cash funding of a joint venture and $5.6 million for purchases of fixed assets. Net cash used in investing activities for the six months ended June 30, 2023 of $2.7 million was primarily due to $1.0 million cash funding of a joint venture and $1.7 million for purchases of fixed assets. Financing Activities Net cash provided by financing activities for the six months ended June 30, 2024 of $2.2 million was primarily due to proceeds from stock option exercises of $0.4 million and proceeds from our employee stock purchase plan of $1.8 million. Net cash provided by financing activities for the six months ended June 30, 2023 of $87.3 million was primarily due to proceeds from the issuance of common stock in May 2023 of $86.9 million and proceeds from stock option exercises of $0.9 million, offset by the payment of May 2023 public offering costs of $0.5 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 June 30, 2024, our non-cancellable contractual arrangements consisted entirely of lease obligations. Refer to Note 7 - Leases for further information. Off-Balance Sheet Commitments and Arrangements As of June 30, 2024, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K. 33 TABLE OF CONTENTS 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 2023 annual report on Form 10-K.