UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended December 31, 2022
For the transition period from __________ to __________
Commission file number: 000-55832
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||
| (Address of principal executive offices) | (Zip Code) | ||||||||||
(805 ) 456-1300
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”
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“accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | ||||||||
| ☒ | Smaller reporting company | ||||||||||
| Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of February 16, 2023, 57,016,858 shares of the registrant’s common stock were outstanding.
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Transphorm, Inc.
FORM 10-Q
Table of Contents
| PART I - FINANCIAL INFORMATION | |||||
Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended December 31, 2022 and 2021 | |||||
Unaudited Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended December 31, 2022 and 2021 | |||||
Notes to Unaudited Condensed Consolidated Financial Statements | |||||
| PART II - OTHER INFORMATION | |||||
Item 1. Legal Proceedings | |||||
Item 3. Defaults Upon Senior Securities | |||||
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Glossary of Terms and Abbreviations
The following is a glossary of technical terms used in this Quarterly Report on Form 10-Q (this “Report”):
AC – alternating current
AEC-Q101 – Automotive Electronic Council’s electronic components stress qualification standard
AFSW – Aizu Fujitsu Semiconductor Wafer Solution Limited, the wafer fabrication facility located in Aizu Wakamatsu, Japan that is owned by GaNovation, our joint venture company
DC – direct current
Epi/Epiwafer/Epimaterials – GaN device layers grown on a substrate, from which active GaN-based devices are subsequently manufactured in a wafer fabrication facility
FET – field effect transistor, a type of switching transistor
GaN – gallium nitride
JEDEC – Joint Electron Device Engineering Council, an independent semiconductor engineering trade organization and standardization body that represents all areas of the electronics industry
MOCVD – metal organic chemical vapor deposition, a technique for layering GaN layers onto substrates such as a silicon substrate and making the starting GaN semiconductor material (i.e., an epiwafer)
Power converters / Inverters – electronic systems used to convert electricity from AC to DC (such as a charger), DC-AC (such as an inverter) or in some cases AC-AC or DC-DC within the systems converting from one voltage level to another
TO – transistor outline leaded packages commonly used in power semiconductors (such as TO220, TO247)
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Risk Factor Summary
Our business is subject to significant risks and uncertainties that make an investment in us speculative and risky. Below we summarize what we believe are the principal risk factors but these risks are not the only ones we face, and you should carefully review and consider the full discussion of our risk factors in the section titled “Risk Factors,” together with the other information in this Report. If any of the following risks actually occurs (or if any of those listed elsewhere in this Report occur), our business, reputation, financial condition, results of operations, revenue, and future prospects could be seriously harmed. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business.
•We have a history of losses, anticipate increasing our operating expenses and capital expenditures in the future, and may not be able to achieve or maintain profitability.
•Our recurring operating losses and our current operating plans raise substantial doubt about our ability to continue as a going concern for the next twelve months. We need to raise capital to support our business, and this capital may be unavailable on attractive terms, if at all, and could dilute your investment.
•Our quarterly results of operations are likely to vary from period to period, which could cause the market price of our common stock to fluctuate or decline.
•We are exposed to foreign currency exchange rate fluctuations. Although we hedge certain currency risks, our hedging strategies may not be successful in mitigating our risks and changes in foreign currency exchange rates may adversely affect our financial condition, cash flows and results of operations.
•We may not be able to develop new technologies and products to satisfy changes in customer demand or industry standards, and our competitors could develop products that decrease the demand for our products.
•Our sales cycles can be long and unpredictable, and our sales efforts require considerable time and expense.
•We must commit resources to development, design and production prior to receipt of purchase commitments and could lose some or all of the associated investment.
•Unfavorable worldwide economic conditions (including inflation and supply chain disruptions), may negatively affect our business, financial condition and results of operations
•We compete in highly competitive markets, and competitive pressures from existing and new companies may adversely impact our business and operating results.
•We rely on third-party channel partners to sell our products. If our partners fail to perform, our ability to sell our products and services could be limited, and if we fail to optimize our channel partner model going forward, our operating results could be harmed.
•We rely on limited sources of wafer fabrication, packaged products fabrication and product testing, the loss of which could delay and limit our product shipments.
•Because we depend on third-party manufacturers to build portions of our products, we are susceptible to manufacturing delays and pricing fluctuations that could prevent us from shipping customer orders on time, if at all, or on a cost-effective basis, which may result in the loss of sales, income and customers.
•Our business could be adversely affected by the effects of health epidemics or pandemics.
•An earthquake, terrorist attack or other man-made or natural disaster could negatively impact our business and operating results.
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•The loss of one or more key employees or our inability to attract and retain qualified personnel could harm our business.
•If we fail to effectively manage our growth, our business, financial condition and results of operations would be harmed.
•We are subject to a number of risks associated with international sales and operations.
•Investments in us may be subject to U.S. foreign investment regulations which may impose conditions on or limit certain investors’ ability to purchase or hold our common stock, potentially limiting our ability to enter into or maintain strategic relationships and making our common stock less attractive to investors.
•We are subject to government regulation, including import, export and economic sanctions laws and regulations that may expose us to liability and increase our costs.
•Our sales to government customers subject us to uncertainties regarding fiscal funding approvals, renegotiations or terminations at the discretion of the government, as well as audits and investigations, which could result in litigation, penalties and sanctions including early termination, suspension and debarment.
•Any failure by us to protect our proprietary technologies or maintain the right to use certain technologies may negatively affect our ability to compete.
•If we fail to comply with our obligations under any license, collaboration or other agreements, we may be required to pay damages and could lose certain intellectual property rights.
•Any failure to maintain effective internal controls over our financial reporting could materially and adversely affect us.
•We have identified a material weakness in our internal control over financial reporting that, if not properly remediated, could result in material misstatements in our consolidated financial statements in future periods.
•Sales of substantial amounts of our common stock in the public markets, or the perception that such sales might occur, could cause the market price of our common stock to decline significantly, even if our business is doing well.
•We could be subject to certain liquidated damages pursuant to the registration rights agreements we entered into with certain holders of our securities.
•Our principal stockholders and management have substantial control over us and could delay or prevent a change in corporate control.
•Anti-takeover provisions in our charter documents could make an acquisition of us more difficult and may prevent attempts by our stockholders to replace or remove our management.
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Note Regarding Forward-Looking Statements
This Report, including the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains express or implied forward-looking statements that are based on our management’s belief and assumptions and on information currently available to our management. All statements other than statements of historical fact contained in this Report are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “could,” “will,” “would,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “intend,” “predict,” “seek,” “contemplate,” “project,” “continue,” “potential,” “ongoing” or the negative of these terms or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:
•the implementation of our business model and strategic plans for our business, technologies and products;
•our costs in meeting our contractual obligations, including the cash flow impact of operating AFSW, and our ability to maintain our contracts for their expected durations;
•the impact of the COVID-19 pandemic on our industry and our business, operations and financial condition, as well as on the global economy;
•the rate and degree of market acceptance of any of our products or GaN technology in general, including changes due to the impact of (i) new GaN fabrication sources, (ii) the performance of GaN technology, whether perceived or actual, relative to competing semiconductor materials, and (iii) the performance of our products, whether perceived or actual, compared to competing GaN-based, silicon-based and other products;
•the timing and success of product releases by us and our customers;
•our ability to develop new products and technologies;
•our future financial performance, including our expectations regarding our revenue, expenses, ongoing losses, and capital requirements;
•our needs for additional financing, ability to obtain additional funds for our operations and our intended use of any such funds;
•our receipt and timing of any royalties or other payments under any current or future collaboration, license or other agreements or arrangements, including the credit risks of our customers;
•our ability to obtain, maintain, enforce, defend and enhance our intellectual property rights;
•the strength and marketability of our intellectual property portfolio;
•our dependence on current and future collaborators for developing, manufacturing or otherwise bringing our products to market;
•the ability of our third party supply and manufacturing partners to meet our current and future business needs;
•the throughput of our fabrication facilities and third party foundries, as well as the ability of such facilities and foundries to ramp up production;
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•our expectations regarding our classification in future periods as a “smaller reporting company,” as defined under the Securities Exchange Act of 1934 (the “Exchange Act”), and an “emerging growth company,” as defined under the JOBS Act;
•the total addressable market and growth rates of the markets in which we compete;
•the competitive landscape of our industry; and
•the impact of government regulation and developments relating to us, our competitors or our industry.
We caution you that the foregoing list may not contain all of the forward-looking statements made in this Report.
You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Report primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations, and prospects. The outcome of the events described in these forward-looking statements is subject to significant risks, uncertainties, and other factors, including those described in the section titled “Risk Factors” and elsewhere in this Report. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Report. We cannot assure you that the results, events, and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements.
Neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. Moreover, the forward-looking statements made in this Report relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Report to reflect events or circumstances after the date of this Report or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments we may make.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Transphorm, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
| December 31, 2022 (unaudited) | March 31, 2022 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash | |||||||||||
| Accounts receivable, net, including related parties (Note 14) | |||||||||||
| Inventory | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Property and equipment, net | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Goodwill | |||||||||||
| Intangible assets, net | |||||||||||
| Investment in joint venture | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and stockholders’ equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable and accrued expenses | $ | $ | |||||||||
| Deferred revenue | |||||||||||
| Accrued interest | |||||||||||
| Accrued payroll and benefits | |||||||||||
| Operating lease liabilities | |||||||||||
| Revolving credit facility | |||||||||||
| Total current liabilities | |||||||||||
| Revolving credit facility, net of current portion | |||||||||||
| Operating lease liabilities, net of current portion | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies (Note 9) | |||||||||||
| Stockholders’ equity: | |||||||||||
Common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated deficit | ( | ( | |||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
See accompanying notes to unaudited condensed consolidated financial statements
9
Transphorm, Inc.
Condensed Consolidated Statements of Operations (unaudited)
(in thousands, except share and per share data)
| Three Months Ended December 31, | Nine Months Ended December 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Revenue, net, including related parties (Note 14) | $ | $ | $ | $ | |||||||||||||||||||
| Cost of goods sold | |||||||||||||||||||||||
| Gross (loss) profit | ( | ( | |||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| Sales and marketing | |||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| Loss from operations | ( | ( | ( | ( | |||||||||||||||||||
| Interest expense | |||||||||||||||||||||||
| Loss in joint venture | |||||||||||||||||||||||
| Changes in fair value of promissory note | ( | ||||||||||||||||||||||
| Other income, net | ( | ( | ( | ( | |||||||||||||||||||
| Loss before tax expense | ( | ( | ( | ( | |||||||||||||||||||
| Tax expense | |||||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Net loss per share - basic and diluted | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Weighted average common shares outstanding - basic and diluted | |||||||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements
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Transphorm, Inc.
Condensed Consolidated Statements of Comprehensive Loss (unaudited)
(in thousands)
| Three Months Ended December 31, | Nine Months Ended December 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Other comprehensive loss, net of tax: | |||||||||||||||||||||||
| Foreign currency translation adjustments | ( | ( | ( | ||||||||||||||||||||
| Other comprehensive loss, net of tax | ( | ( | ( | ||||||||||||||||||||
| Comprehensive loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements
11
Transphorm, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit) (unaudited)
(in thousands, except share data)
| Three Months Ended December 31, 2022 | |||||||||||||||||||||||||||||||||||
| Common Stock | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity (Deficit) | |||||||||||||||||||||||||||||||||
| Number of Shares | Amount | Additional Paid-in Capital | Accumulated Deficit | ||||||||||||||||||||||||||||||||
| Balance at October 1, 2022 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Stock options exercised | — | — | — | ||||||||||||||||||||||||||||||||
| Restricted stock units vested | — | — | — | — | |||||||||||||||||||||||||||||||
| Restricted stock units surrendered due to net share settlement to satisfy employee tax liability | ( | — | — | — | — | — | |||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | |||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Three Months Ended December 31, 2021 | |||||||||||||||||||||||||||||||||||
| Common Stock | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity (Deficit) | |||||||||||||||||||||||||||||||||
| Number of Shares | Amount | Additional Paid-in Capital | Accumulated Deficit | ||||||||||||||||||||||||||||||||
| Balance at October 1, 2021 | $ | $ | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||||
| Restricted stock units vested | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Issuance of common stock (Note 10) | — | — | |||||||||||||||||||||||||||||||||
| Conversion of promissory note (Note 10) | — | — | — | ||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
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| Nine Months Ended December 31, 2022 | |||||||||||||||||||||||||||||||||||
| Common Stock | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity (Deficit) | |||||||||||||||||||||||||||||||||
| Number of Shares | Amount | Additional Paid-in Capital | Accumulated Deficit | ||||||||||||||||||||||||||||||||
| Balance at April 1, 2022 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Stock options exercised | — | — | — | ||||||||||||||||||||||||||||||||
| Restricted stock units vested | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Restricted stock units surrendered due to net share settlement to satisfy employee tax liability | ( | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Issuance of common stock (Note 10) | — | — | |||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Nine Months Ended December 31, 2021 | |||||||||||||||||||||||||||||||||||
| Common Stock | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity (Deficit) | |||||||||||||||||||||||||||||||||
| Number of Shares | Amount | Additional Paid-in Capital | Accumulated Deficit | ||||||||||||||||||||||||||||||||
| Balance at April 1, 2021 | $ | $ | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||||
| Stock options exercised | — | — | — | ||||||||||||||||||||||||||||||||
| Restricted stock units vested | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Issuance of common stock (Note 10) | — | — | |||||||||||||||||||||||||||||||||
| Conversion of promissory note (Note 10) | — | — | — | ||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements
13
Transphorm, Inc.
Condensed Consolidated Statements of Cash Flows (unaudited)
(in thousands)
| Nine Months Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
| Inventory write-off | |||||||||||
| Depreciation and amortization | |||||||||||
| Amortization of operating lease right-of-use assets | |||||||||||
| Perpetual licensing revenue from a related party (Note 14) | ( | ||||||||||
| Stock-based compensation | |||||||||||
| Interest cost | |||||||||||
| Gain on promissory note conversion | ( | ||||||||||
| Gain on sale of equipment | ( | ||||||||||
| Loss in joint venture | |||||||||||
| Changes in fair value of derivative instruments | |||||||||||
| Changes in fair value of promissory note | ( | ||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | ( | ( | |||||||||
| Inventory | ( | ( | |||||||||
| Prepaid expenses and other current assets | |||||||||||
| Other assets | ( | ( | |||||||||
| Accounts payable and accrued expenses | |||||||||||
| Deferred revenue | ( | ( | |||||||||
| Accrued payroll and benefits | ( | ||||||||||
| Operating lease liabilities | ( | ||||||||||
| Net cash used in operating activities | ( | ( | |||||||||
| Cash flows from investing activities: | |||||||||||
| Advances and purchases of property and equipment | ( | ( | |||||||||
| Proceeds from sale of equipment | |||||||||||
| Investment in joint venture | ( | ( | |||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from stock option exercise | |||||||||||
| Proceeds from issuance of common stock | |||||||||||
| Cost associated with issuance of common stock | ( | ||||||||||
| Payment for taxes related to net share settlement of restricted stock units | ( | ||||||||||
| Net cash provided by financing activities | |||||||||||
| Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash | ( | ( | |||||||||
| Net (decrease) increase in cash, cash equivalents and restricted cash | ( | ||||||||||
| Cash, cash equivalents and restricted cash at beginning of period | |||||||||||
| Cash and cash equivalents at end of period | |||||||||||
14
| Restricted cash at end of period | |||||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | $ | |||||||||
| Supplemental disclosures of cash flow information: | |||||||||||
| Interest expense paid | $ | $ | |||||||||
| Supplemental non-cash investing activity: | |||||||||||
| Equipment purchases | $ | $ | |||||||||
| Supplemental non-cash financing activity: | |||||||||||
| Issuance of shares in connection with a service contract | $ | $ | |||||||||
| Operating lease right-of-use asset obtained in exchange for operating lease liabilities | $ | $ | |||||||||
| Development loan reduction related to perpetual licensing revenue | $ | $ | |||||||||
| Conversion of promissory note | $ | $ | |||||||||
See accompanying notes to unaudited condensed consolidated financial statements
15
Transphorm, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1 - Business and Basis of Presentation
The original Transphorm, Inc., now named Transphorm Technology, Inc. (“Transphorm Technology”), a wholly owned subsidiary of Parent (as defined below), was founded in 2007 to develop gallium nitride (“GaN”) semiconductor components used in power conversion.
On February 12, 2020 (the “Closing Date”), Peninsula Acquisition Corporation (“Peninsula”), a shell company, consummated the Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) dated February 12, 2020, by and among Peninsula, Peninsula Acquisition Sub, Inc., a Delaware corporation and wholly owned subsidiary of Peninsula (“Merger Sub”), and Transphorm Technology. Pursuant to the terms of the Merger Agreement, Merger Sub merged with and into Transphorm Technology, with Transphorm Technology surviving as the surviving company and as a wholly-owned subsidiary of Peninsula (the “Merger”). On the Closing Date, Peninsula changed its name to Transphorm, Inc. (“Parent”).
Throughout these notes, “the Company,” “Transphorm,” “we,” “us” and “our” refer to Parent and its direct and indirect wholly-owned subsidiaries. Transphorm Technology and its subsidiaries hold all material assets and conduct all business activities and operations of the Company. Transphorm Technology’s activities to date have been primarily performing research and development, establishing manufacturing infrastructure, market sampling, product launch, hiring personnel, and raising capital to support and expand these activities. Transphorm Japan, Inc. (“TPJ”) was established in Japan in February 2014 to secure the Company’s production capacity and establish a direct presence in Asian markets. Transphorm Aizu, Inc. (“Transphorm Aizu”) was established in Japan to manage the financial transactions around Aizu Fujitsu Semiconductor Wafer Solution Limited (“AFSW”), the wafer fabrication facility located in Aizu Wakamatsu, Japan that is owned by GaNovation, the joint venture company in which the Company has a non-controlling interest. Transphorm Japan Epi, Inc. (“TJE”) was established in Japan in 2019 to enable the operational capacity of the MOCVD reactors held in Aizu.
Going Concern
The accompanying unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. However, considering the Company’s working capital (including restricted cash) of $18.0 million as of December 31, 2022, the Company’s historical losses from operations (during the three and nine months ended December 31, 2022, the Company used $8.8 million and $18.6 million in cash from operations), and the future expected losses, there is substantial doubt about the Company’s ability to continue as a going concern for the next twelve months from the issuance of these financial statements.
During the year ended March 31, 2022 and nine months ended December 31, 2022, the Company raised gross proceeds of $50.0 million and $16.0 million, respectively. In response to the factors noted above, management plans to raise additional working capital to fund operations through the issuance of stock to investors, license of intellectual property and/or issuance of notes payable. However, there is no assurance that the Company will be successful in raising additional capital.
The Company’s ability to sustain operations is dependent on its ability to successfully market and sell its products and its ability to raise capital through additional financings until it is able to achieve profitability with positive cash flows. To the extent sufficient financing is not available, the Company may not be able to, or may be delayed in, developing its offerings and meeting its obligations. The Company will continue to evaluate its projected expenditures relative to its available cash and to evaluate financing alternatives in order to satisfy its working capital and other cash requirements. The accompanying unaudited condensed consolidated financial statements do not reflect any adjustments that might result from the outcome of these uncertainties.
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Impact of COVID-19 on Our Business
The COVID-19 pandemic has adversely disrupted and may further disrupt the operations at certain of our customers, partners, suppliers and other third-party providers. As a result of the pandemic, some of the Company’s customers experienced delays in their internal development programs and design cycles with the Company’s GaN products, which led to postponements of their orders of the Company’s products and postponements of determinations that the Company’s products will be used in their designs for new products under development, with corresponding delays in their market introduction and potentially the Company’s revenues. While the impact of the pandemic on the Company’s business and results of operations has not been significant to date, and the Company does not expect to see any significant impact in the near term, any future impact of the pandemic cannot be predicted with certainty and may, along with the global macroeconomic environment, make it more difficult or preclude the Company from raising additional capital, increase costs of capital and otherwise adversely affect the Company’s business, results of operations, financial condition and liquidity.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements reflect all adjustments of a normal and recurring nature that are necessary for a fair presentation of the results for the interim period ended December 31, 2022, but are not necessarily indicative of the results that will be reported for the entire fiscal year or any other interim period. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) have been condensed or omitted. The aforementioned unaudited condensed consolidated financial statements are prepared in conformity with GAAP and in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission. The interim information should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2022. The consolidated balance sheet as of March 31, 2022 is derived from those audited financial statements.
Cost of goods sold, which was previously presented as a separate line item under operating expenses for the prior year comparable periods, was reclassed as a separate line item to arrive at gross (loss) profit in the condensed consolidated statement of operations.
Significant Accounting Policies
Descriptions of the Company’s significant accounting policies are included in Note 2 - Summary of Significant Accounting Policies in the notes to consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2022, except for the adoption of Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) as noted below.
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Accounting Standard Adopted
Effective April 1, 2022, the Company adopted ASU 2016-02, Leases (Topic 842), which requires lessees to recognize a right-of-use (“ROU”) asset and a lease liability on their balance sheet for all leases, including operating leases, with a term of greater than 12 months. In July 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-11, which adds a transition option permitting entities to apply the provisions of the new standard at its adoption date instead of the earliest comparative period presented in the consolidated financial statements. Under this transition option, comparative reporting would not be required, and the provisions of the standard would be applied prospectively to leases in effect at the date of adoption. The Company elected to use the optional transition method provided by ASU 2018-11. The Company also elected the package of practical expedients permitted under the transition guidance within the new standard, which allowed the Company to carry forward its ASC 840 assessment regarding definition of a lease, lease classification, and initial direct costs. The following practical expedients were applied implementing this standard.
•The Company did not reassess whether any expired or existing contracts are, or contain, leases. Additionally, the Company did not reassess for lease classifications of expired or existing leases, or initial direct costs for any existing leases.
•The Company elected the short-term lease exception, which allows the Company to account for leases with a lease term of twelve months or less similar to existing operating leases. The cost of these leases is disclosed, but is not recognized in the ROU asset and lease liability balances. Consistent with ASC 842 requirements, leases that are one month or less are not included in the disclosures.
Operating lease ROU assets represent the Company’s right to use the underlying asset during the lease term, and operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using incremental borrowing rate at the lease commencement date. The Company chose the practical expedients and reviewed the lease and non-lease components for any impairment or otherwise, subsequently determining that no cumulative-effect adjustment to equity was necessary as part of implementing the modified retrospective approach for its adoption of ASC 842. Operating lease expense, which is comprised of amortization of the ROU asset and the interest accreted on the lease liability, is recognized on a straight-line basis over the lease term and is recorded in lease expense in the condensed consolidated statements of operations.
Recently Issued Accounting Standards under Evaluation
Debt - In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40), Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, to address the complexity in accounting for certain financial instruments with characteristics of liabilities and equity. Among other provisions, the amendments in this ASU significantly change the guidance on the issuer’s accounting for convertible instruments and the guidance on the derivative scope exception for contracts in an entity’s own equity such that fewer conversion features will require separate recognition, and fewer freestanding instruments, like warrants, will require liability treatment. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, excluding entities eligible to be smaller reporting companies as defined by the SEC. As the Company is a smaller reporting company, the ASU is effective for fiscal years beginning after December 15, 2023. The Company is currently evaluating the impact of this new standard on its consolidated financial statements and the adoption is not expected to have a significant impact on the consolidated financial statements.
Financial Instruments - FASB ASU 2020-03, Codification Improvements to Financial Instruments, makes clear the determination of the contractual life of a net investment in leases in estimating expected credit losses under ASC 326, Financial Instruments – Credit Losses. In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The standard changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. ASU 2016-13 is effective for the Company in 2023. Early adoption is permitted. The Company is
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currently evaluating the impact of this new standard on its consolidated financial statements and the adoption is not expected to have a significant impact on the consolidated financial statements.
Income Tax - In December 2019, the FASB issued ASU 2019-12, which modifies ASC 740 to simplify the accounting for income taxes. The ASU’s amendments are based on changes that were suggested by stakeholders as part of the FASB’s initiative to reduce the complexity of accounting standards while maintaining or enhancing the helpfulness of information provided to financial statement users. ASU 2019-12 is effective for fiscal years beginning after December 15, 2022. The Company is currently evaluating the impact of this new standard on its consolidated financial statements and the adoption is not expected to have a significant impact on the consolidated financial statements.
Note 2 - Nexperia Arrangement
On April 4, 2018, the Company entered into a multi-element commercial arrangement with Nexperia B.V. (“Nexperia”), a related party through share ownership, including a development and license agreement, loan and security agreement and supply agreement, to obtain financing in exchange for the sale of equity instruments and performing certain technology and product development activities for Nexperia (collectively, the “Collaboration Arrangement”). Nexperia specializes in designing, manufacturing and selling a broad range of small discrete semiconductor devices that utilize components such as those manufactured by the Company. By entering into this Collaboration Arrangement, Nexperia gained access to technology that allows for the production of high power semiconductors for use in electric vehicles. Financing under the Collaboration Arrangement was comprised of the following elements:
•$16.0 million of equity financing;
•$9.0 million license fee for transfer of the Gen-3 manufacturing process;
•$15.0 million of term loans, separated into tranches for pre-funded projects; and
•$10.0 million revolving loan, secured against certain of the Company’s U.S. patents not relating to MOCVD or epiwafer technology.
Loan and Security Agreement
The LSA, entered into on April 4, 2018, originally comprised term loans in an aggregate principal amount of $15.0 million, separated into tranches for pre-funded projects, and a $10.0 million revolving loan, each of which bore 6 % annual interest. In June 2020, $5.0 million of term loans was satisfied in full upon the Company’s transfer of its Gen-4 technology development to Nexperia, at which point the Company recognized $5.0 million as licensing revenue.
On May 18, 2021, Amendment No. 6 to the LSA was executed to (1) extend the maturity date for the revolving loan to the earlier of April 4, 2023 and the occurrence of specified change of control events, (2) add Parent as a guarantor of Transphorm Technology’s obligations under the LSA, and (3) convert $2.0 million of term loans into a revolving loan with the same terms and conditions as the existing revolving loan. See Note 8 - Debts.
On June 30, 2021, Amendment No. 7 to the LSA was executed to extend the maturity of the then-outstanding $8.0 million term loan to July 16, 2021.
On July 16, 2021, Nexperia agreed that the $8.0 million term loan was satisfied in full in connection with the Company transferring its Gen-5 and 900V technology developments to Nexperia, at which point the Company recognized $8.0 million as perpetual licensing revenue.
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Amended and Restated Development and License Agreement
The amended and restated development and license agreement (the “DLA”), entered into on May 18, 2021 provides that the Company will develop and transfer to Nexperia certain manufacturing process technologies to enable Nexperia to manufacture GaN-based products at Nexperia’s facilities. These technologies to be transferred included the Company’s Gen-3, Gen-4 (Tranche A), and Gen-5 and 900V (Tranche B) process technologies, but do not include the Company’s Epi Process Technology (as defined in the DLA). Nexperia also agreed to provide funding for the development of such technologies in return for limited exclusivities in automotive and other fields. Nexperia’s rights now include sale of products in the automotive field in Japan along with Transphorm’s rights for sale of products in the automotive field in Japan which remain in place. As per the original agreement, after April 2023, Nexperia’s exclusive rights for sale of products in the automotive field outside of Japan terminate. In addition, the parties have clarified the ability of Nexperia’s customers to use products developed by Nexperia through exercise of its rights under this agreement.
Amended and Restated Supply Agreement
The amended and restated supply agreement (the “Supply Agreement”), entered into on May 18, 2021, sets forth the terms under which Nexperia may purchase epiwafers and processed wafers from the Company, and the Company may purchase processed wafers from Nexperia. The agreement specifies that Nexperia is the Company’s priority customer with respect to epiwafers manufactured by TJE and, accordingly, has preferred utilization of extra capacity, and further specifies procedures to address expansion of the Company’s epiwafer manufacturing capacity and Nexperia’s obligations with respect thereto. The term of the Supply Agreement was extended until December 31, 2025, with automatic one year renewals thereafter, and the Company may not terminate the Supply Agreement while the option agreement (described below) is in effect.
Strategic Cooperation Agreement
The strategic cooperation agreement, entered into on May 18, 2021, serves as a framework agreement that describes the numerous agreements between the parties and provides Nexperia with information rights and inspection rights with respect to the Company’s business.
Option Agreement
The option agreement, entered into on May 18, 2021, establishes the parameters pursuant to which Nexperia, in certain limited instances, is permitted to exercise an option (the “Option”) to acquire TJE, a Japanese subsidiary of the Company through which the Company is engaged in the development, manufacturing and sales of GaN-based epitaxial wafer products. In general, the Option is exercisable upon (1) certain acquisitions of securities or assets of the Company or its subsidiaries by a Competitor (as defined in the option agreement) that results in the Company, directly or indirectly, owning less than a majority of TJE, which acquisition is followed by any material breach (that is not cured within a specified time period) by the Company or a subsidiary of its obligations with respect to epiwafer supply to Nexperia under the Supply Agreement, or (2) the unilateral termination by the Company of the Supply Agreement. The option agreement also establishes the material terms, including price and timing, for the exercise of the Option by Nexperia. The Option terminates (1) if the Option is not exercised by Nexperia prior to the date on which the option agreement terminates, or (2) on the first to occur of (a) the termination of the option agreement upon written agreement of the parties, (b) the mutual termination or expiration of the Supply Agreement, or (c) the first to occur of (i) two years following the date on which the Company notifies Nexperia of epiwafer qualification of a second source and (ii) April 1, 2028.
In connection with the option agreement, the Company has also amended and restated its existing intracompany license agreement with TJE to clarify Nexperia’s rights upon exercise of the Option.
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Note 3 - Revenue Recognition
The Company derives its revenues primarily through the sale and delivery of promised goods and services to distributors and end-users in various sectors such as, but not limited to, the gaming, industrial, IT, and consumer products industries. The Company disaggregates revenue based on the following contract types:
•Commercial Product and Service contracts, including contracts for sales of high-powered GaN-based products manufactured utilizing the Company’s proprietary and patented epiwafer technology and wafer fabrication and other assembly processes, sales of GaN epiwafers for the radio frequency and power markets, and the provision of epiwafer growth services and products to the Company’s strategic partners.
•Government contracts for research and development related services and activities.
•Licensing contracts, including licenses to use the Company’s patented proprietary technology.
The Company follows a five-step approach for recognizing revenue, consisting of the following: (1) identifying the contract with a customer; (2) identifying the performance obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price to the performance obligations in the contract; and (5) recognizing revenue when, or as, the entity satisfies a performance obligation. Sales and other taxes the Company collects concurrent with revenue-producing activities are excluded from revenue. Incidental items that are immaterial in the context of the contract are recognized as expense. The Company does not have any significant financing components associated with its revenue contracts, as payment is received at or shortly after the point of sale.
Commercial Product and Service contracts
Performance obligations are satisfied, and revenue is recognized when control of a good or service promised in a contract is transferred to a customer using relative standalone selling prices. Control is obtained when a customer has the ability to direct the use of and obtain substantially all of the remaining benefits from that good or service at a point in time, and revenue is recognized in an amount that reflects the consideration the Company expects to be entitled to, in exchange for those products or services. The majority of the Company's revenue under commercial product and service contracts is derived from product sales.
Revenue is recognized over time if the customer receives the benefits as the Company performs work, if the customer controls the asset as it is being produced (continuous transfer of control), or if the product being produced for the customer has no alternative use and the Company has a contractual right to payment for performance to date. The Company recognizes revenue ratably over time under the cooperation and development agreement with Yaskawa Electric Corporation (“Yaskawa”), a related party through share ownership.
Sales of products or services typically do not include more than one performance obligation.
A portion of the Company’s products are sold through distributors. Distributors stock inventory and sell the Company’s products to their own customer base. The Company recognizes revenue upon shipment of its products to its distributors.
Master supply or distributor agreements are in place with many of the Company's customers and contain terms and conditions including, but not limited to, payment, delivery, incentives and warranty. These agreements sometimes require minimum purchase commitments. If a master supply, distributor or other similar agreement is not in place with a customer, the Company considers a purchase order, which is governed by the Company’s standard terms and conditions, to be the contract governing the relationship with that customer.
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Pricing terms are negotiated independently on a stand-alone basis. Revenue is measured based on the amount of net consideration to which the Company expects to be entitled to receive in exchange for products or services.
Government contracts
Government contract revenue is principally generated under research and development contracts with agencies of the U.S. government. Performance obligations under government contracts are satisfied over time because the customer receives the benefits as the Company performs work, the customer controls the asset as it is being produced (continuous transfer of control), and the Company has a contractual right to payment for performance to date.
Licensing contracts
From time to time, the Company may enter into licensing arrangements related to its intellectual property. Revenue from licensing arrangements is recognized when earned and estimable. The timing of revenue recognition is dependent on the terms of each license agreement. Generally, the Company will recognize non-refundable upfront licensing fees related to patent licenses immediately upon receipt of the funds if the Company has no significant future obligations to perform under the arrangement.
In the case that the arrangement gives rise to variable consideration in the form of milestone and royalty payments, the Company evaluates the royalties to determine if they qualify for the sales and usage-based royalty exception. In the case of the Company’s royalty arrangement with Nexperia, the Company determined the royalties qualify for the sales and usage-based royalty exception, as the license of intellectual property is the predominant item to which the royalty relates and revenue is recognized upon the subsequent sale occurring. The variable amounts are recognized at the net consideration the Company expects to receive upon satisfaction of contractually agreed upon development targets and sales volumes.
Disaggregation of Revenue from Contracts with Customers
Revenue disaggregated by contract type is as follows (in thousands):
| Three Months Ended December 31, | Nine Months Ended December 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Commercial product and service | $ | $ | $ | $ | |||||||||||||||||||
| Government (1) | |||||||||||||||||||||||
| Licensing | |||||||||||||||||||||||
| Revenue, net | $ | $ | $ | $ | |||||||||||||||||||
(1) Government revenue from a Government Agency was $0.5 million and $1.0 million for the three months ended December 31, 2022 and 2021, respectively, and $1.6 million and $3.0 million for the nine months ended December 31, 2022 and 2021, respectively. The contract with the Government Agency ended December 31, 2022.
The Company recognized service revenue under commercial product and service contracts of $0.3 million and $1.4 million for the three and nine months ended December 31, 2022, respectively, and $0.4 million and $1.8 million for the three and nine months ended December 31, 2021, respectively.
Note 4 - Concentration of Credit Risk and Significant Customers
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sales, which are mainly on credit terms of 30 to 60 days, are only made to customers who meet the Company's credit standards, while sales to new customers or customers with low credit ratings are usually made on an advance payment basis. The Company closely monitors the aging of accounts receivable from its distributors and direct customers, and regularly reviews their financial positions, where available.
Significant customers are those that represent 10% or more of revenue or accounts receivable.
Total revenues, by percentage, from individual customers representing 10% or more of total revenues in the respective periods were as follows:
| Three Months Ended December 31, | Nine Months Ended December 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Customer A | |||||||||||||||||||||||
| Customer B | |||||||||||||||||||||||
| Customer C | * | ||||||||||||||||||||||
| Customer D | * | * | |||||||||||||||||||||
* Less than 10% of total
Accounts receivable, by percentage, from individual customers representing 10% or more of accounts receivable are set forth in the following table:
| As of | |||||||||||
| December 31, 2022 | March 31, 2022 | ||||||||||
| Customer A | |||||||||||
| Customer B | * | ||||||||||
| Customer C | |||||||||||
| Customer D | * | ||||||||||
| Customer E | * | ||||||||||
* Less than 10% of total
Customers A and E are related parties and Customer B is a government agency. JCP Capital Management, LLC Limited is a majority stockholder of Customer C. Customer D is GaNovation. See Note 6 - Investment in Joint Venture and Note 14 - Related Party Transactions.
Note 5 - Inventory
Inventory consists of the following as of the dates presented (in thousands):
| December 31, 2022 | March 31, 2022 | ||||||||||
| Raw materials | $ | $ | |||||||||
| Work in process | |||||||||||
| Sub-assembly | |||||||||||
| Finished goods | |||||||||||
| Total | $ | $ | |||||||||
The Company recorded inventory write-off of $2.8 million and $8 thousand for the three months ended December 31, 2022 and 2021, respectively. The Company recorded inventory write-off of $2.8 million and
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Note 6 - Investment in Joint Venture
Through July 31, 2021, the Company was party to a joint venture agreement (the “JVA”), by and among Aizu Fujitsu Semiconductor Limited, Fujitsu Semiconductor Limited (“FSL”), the Company and Transphorm Aizu for the ownership and operations of AFSW. Through July 31, 2021, the Company held a 49 % interest in AFSW through Transphorm Aizu, the Company’s wholly-owned subsidiary established in Japan to manage the financial transactions around AFSW. Transphorm Aizu and FSL funded AFSW based on a mutually agreed funding schedule. Any outstanding balances were reviewed upon the conclusion of the JVA effective July 31, 2021 to assess unfunded commitment to joint venture liability. During the the nine months ended December 31, 2021, the Company recognized a $1.5 million gain, in other income, upon termination of the JVA and settlement of its obligation.
On April 1, 2020, FSL exercised its put option under the JVA and notified the Company that FSL intended to exit the joint venture by selling its 51 % interest in AFSW to the Company. In December 2020, the Company entered into a joint venture agreement with JCP Capital Management, LLC Limited (“JCP”) (controlling party with 75 % ownership) to create GaNovation, a joint venture company in Singapore, to engage in the business of distribution, development and supply of GaN products and, upon approval of the regulatory authorities in Japan, to purchase FSL’s and Transphorm’s interests in AFSW. In July 2021, regulatory authorities in Japan approved GaNovation’s purchase of 100 % of the interests in AFSW from Transphorm and FSL. On July 20, 2021, Transphorm Aizu entered into a Share Purchase Agreement (the “Purchase Agreement”) with GaNovation, pursuant to which GaNovation agreed to acquire Transphorm’s 49 % interest in AFSW from Transphorm Aizu for 1 Japanese Yen. The closing of the Purchase Agreement occurred on August 1, 2021. Following the closing of the Purchase Agreement and other concurrent transactions between GaNovation and FSL, GaNovation owns 100 % of AFSW and Transphorm holds a 25 % interest in GaNovation.
GaNovation (through AFSW) manufactures semiconductor products exclusively for its owners under manufacturing agreements at prices estimated to cover the cost of production. GaNovation was determined to be a variable interest entity as the equity at risk was not believed to be sufficient. GaNovation depends on its owners for any additional cash. The Company extended $2.6 million to GaNovation to fund operations of GaNovation for the nine months ended December 31, 2022 and $3.8 million to GaNovation and AFSW to fund operations of GaNovation and AFSW for the nine months ended December 31, 2021. The Company’s known maximum exposure to loss approximated the carrying value of its investment balance, which included the financing. Potential future losses could be higher than the carrying amount of the Company’s investment, as the Company is liable for other future operating costs or obligations of GaNovation. In addition, because Transphorm is currently committed to purchasing GaN wafers and production-related services from AFSW at pre-agreed pricing based upon the Company’s second generation products, the Company may be required to purchase products at a higher cost for its newer generation products. Investment in GaNovation was $0.6 million and $0.1 million as of December 31, 2022 and March 31, 2022, respectively.
For the period from April 1, 2022 through March 31, 2023, JCP is responsible for 75 % of the funding obligations and losses of AFSW, while Transphorm is responsible for 25 % of the funding obligations and losses of AFSW. Beginning April 1, 2023, JCP will be responsible for 67.5 % of the funding obligations and losses of AFSW, while Transphorm will be responsible for 32.5 % of the funding obligations and losses of AFSW, except that JCP’s total funding obligations or investment shall not exceed $35 million and Transphorm’s total funding obligations or investment shall not exceed $12 million for the three-year 4.6 million on its funding obligation as of December 31, 2022.
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The Company’s investment activities in GaNovation and AFSW for the periods presented are summarized below (in thousands):
| GaNovation | GaNovation | GaNovation / AFSW (1) | |||||||||||||||||||||
| Three Months Ended December 31, | Nine Months Ended December 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Beginning Balance | $ | $ | $ | $ | ( | ||||||||||||||||||
| Investment | |||||||||||||||||||||||
| Loss | ( | ( | ( | ( | |||||||||||||||||||
| Gain | |||||||||||||||||||||||
| Effect of exchange rate change | |||||||||||||||||||||||
| Ending Balance | $ | $ | $ | $ | |||||||||||||||||||
(1) Includes transactions for AFSW during the four months ended July 30, 2021.
| GaNovation | |||||||||||||||||||||||
| December 31, 2022 | March 31, 2022 | ||||||||||||||||||||||
| Current assets | $ | $ | |||||||||||||||||||||
| Long-term assets | |||||||||||||||||||||||
| Other current liabilities | |||||||||||||||||||||||
| Due to controlling owner | ( | ||||||||||||||||||||||
| Due to Transphorm | |||||||||||||||||||||||
| Net surplus | |||||||||||||||||||||||
| GaNovation | GaNovation | GaNovation / AFSW (1) | |||||||||||||||||||||
| For the Three Months Ended December 31, | For the Nine Months Ended December 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Sales | $ | $ | $ | $ | |||||||||||||||||||
| Gross loss | ( | ( | ( | ( | |||||||||||||||||||
| Net loss | ( | ( | ( | ( | |||||||||||||||||||
(1) Includes sales of $2.2 million, gross loss of $(3.2 ) million and net loss of $(4.3 ) million for AFSW during the four months ended July 30, 2021.
Note 7 - Leases
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The Company’s operating leases are real estate leases which are comprised of the Company’s headquarters and offices in the United States and internationally with remaining lease terms ranging from to eight years as of December 31, 2022. Certain lease arrangements contain extension options and, as these extension options are generally considered reasonably certain of exercise, they are included in the lease term. As most of the Company’s leases do not provide an explicit rate, the Company utilizes a 6.0 % discount rate (based on the rate provided for under the LSA with Nexperia) at the commencement date to calculate the present value of lease payments.
In determining whether a contract contains a lease, the Company assesses whether an arrangement includes a lease at contract inception. Operating lease ROU assets and liabilities are recognized at commencement date and initially measured based on the present value of lease payments over the defined lease term. The opening balances for operating lease ROU assets and lease liabilities were $3.5 million and $3.5 million, respectively, as of the adoption date of April 1, 2022. The outstanding balances of ROU assets and lease liabilities were $3.2 million and $3.2 million, respectively, as of December 31, 2022. The Company did not have any finance leases at December 31, 2022.
The following table presents the Company’s ROU assets and lease liabilities as of the date indicated (in thousands):
| December 31, 2022 | |||||
| Operating lease ROU assets | $ | ||||
| Operating lease liabilities | $ | ||||
| Operating lease liabilities, net of current portion | |||||
| Total operating lease liability | $ | ||||
Weighted average remaining lease terms for the Company’s operating leases were 5.8 years and the weighted average discount rate for the Company's operating leases was 6.0 percent as of December 31, 2022. Operating lease expense and short-term lease expense were $0.2 million and $0.1 million, respectively, for the three months ended December 31, 2022 and $0.6 million and $0.2 million, respectively, for the nine months ended December 31, 2022. Cash paid, and included in cash flows from operating activities, for amounts included in the measurement of the lease liability for the Company's operating leases was $0.2 million and $0.5 million for the three and nine months ended December 31, 2022, respectively.
The following table presents the Company's remaining lease liabilities by maturity for the periods indicated (in thousands):
| Year Ending March 31, | |||||
| 2023 | $ | ||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| Thereafter | |||||
| Lease payments | |||||
| Less: interest | ( | ||||
| Present value of lease liability | $ | ||||
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Note 8 - Debts
Development Loans
As of March 31, 2021, the Company had $10.0 million of development loans outstanding under the LSA. On May 18, 2021, $2.0 million of development loans was converted into a revolving loan with the same terms and conditions as the existing revolving loan described below, leaving $8.0 million of development loans with a maturity date of June 30, 2021. On June 30, 2021, the maturity of the development loans was extended to July 16, 2021. On July 16, 2021, the $8.0 million of development loans was satisfied in full when the Company transferred its Gen-5 and 900V technology developments to Nexperia. See Note 2 - Nexperia Arrangement.
Revolving Credit Facility
As of March 31, 2021, the Company had a $10.0 million revolving loan outstanding under the LSA. On May 18, 2021, $2.0 million of development loans was converted into a revolving loan, increasing the aggregate principal amount of revolving loans to $12.0 million. The revolving loans mature on the earlier of April 4, 2023 and the occurrence of specified change of control events. See Note 2 - Nexperia Arrangement.
The revolving loans are recorded based on principal in the amount of $12.0 million and accrued interest (6 % interest per annum). The Company recorded interest expense of $0.2 0.6 million and $0.5 million for the nine months ended December 31, 2022 and 2021, respectively.
As of December 31, 2022, the scheduled maturity, including accrued interest, of the Company’s borrowings under the revolving credit facility were as follows (in thousands):
| Year Ending March 31, | |||||
| 2023 | $ | ||||
| 2024 | |||||
| Total | $ | ||||
Promissory Note
In October 2017, the Company issued an unsecured subordinated convertible promissory note to Yaskawa (the “Yaskawa Note”) for $15.0 million. The stated interest rate of the Yaskawa Note was 1.0 %, and principal plus interest was due on the earlier of September 30, 2022, or the date of the occurrence of an Event of Default, Change of Control or an Initial Public Offering (all terms as defined in the Yaskawa Note). In February 2020, the Yaskawa Note was amended to be convertible at the option of the holder into a maximum of 3,076,171 shares of the Company’s common stock at a conversion price of $5.12 per share.
On October 4, 2021, the Company entered into a Note Amendment and Conversion Agreement with Yaskawa to (i) reduce the conversion price of the Yaskawa Note from $5.12 per share to $5.00 per share and (ii) remove the limitation on the maximum number of shares of the Company’s common stock that could be issued upon conversion of the Yaskawa Note. Yaskawa simultaneously elected to convert the outstanding principal amount (plus accrued but unpaid interest) under the Yaskawa Note, which as of the effective date of the conversion totaled $15.6 million, into an aggregate of 3,120,000 shares of common stock. The Company also issued to Yaskawa a warrant to purchase up to 650,000 shares of common stock at an exercise price of $6.00 per share, with a term of three years . On October 4, 2021, the Company recognized $1.2 million gain, in other income, upon the conversion of the Yaskawa Note.
Pursuant to ASC 825-10-15-4, the Company elected to apply the fair value option for the promissory note and fair value of promissory note increased $0.6 million for the nine months ended December 31, 2021. In
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connection with its promissory note obligation, the Company recorded interest expense of $3 thousand and $0.1 million for the three and nine months ended December 31, 2021, respectively. In accordance with the terms of the promissory note, interest is added to the principal balance and is reflected in the carrying value on the condensed consolidated balance sheet.
In December 2020, the Company entered into a cooperation and development agreement with Yaskawa, pursuant to which Yaskawa agreed to provide $4.0 million over approximately three years to fund development activities related to industrial power conversion applications, with an initial focus on servo motor drive applications. Yaskawa provided payments of $1.0 million and $0.8 million of this $4.0 million commitment in December 2020 and July 2021, respectively. With respect to the $1.8 million payment, the Company recognized $0.3 million and $0.4 million as revenue for the three months ended June 30, 2021 and September 30, 2021, respectively. The Company also recorded $0.4 million as revenue for services rendered for the three months ended June 30, 2022. The cooperation and development agreement was subsequently amended to provide for two