TRANSPHORM, INC. Management report and analysis of the financial situation and operating results. (Form 10-K)
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our historical financial statements and the related notes thereto contained in this Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the sections titled "Note Regarding Forward-Looking Statements" and "Risk Factors" for a discussion of forward-looking statements and important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
We are a pioneer, and a market and technology leader, in the wide-bandgap
GaNpower electronics field for high voltage power conversion applications. We deliver high quality and reliable GaNdevices with high performance, while providing application design support to a growing customer base. Our GaNdevices allow customers to design smaller, lighter and cooler power systems that create increased functional value in end products including smartphone power adapters, smartphone chargers, power supplies for datacenter servers and automotive electric vehicles, among other applications. We deploy our unique vertically integrated innovation model that leverages one of the industry's most experienced GaNengineering teams (with over 300 years of combined experience) at every development stage: device design, materials growth, device fabrication, packaging, circuits and application support. This approach, backed by one of the GaNpower industry's largest IP portfolios with access to over 1,000 world-wide patents, has yielded the industry's first automotive-grade AEC-Q101 and JEDEC qualified high voltage GaN FETs. Our innovations are designed to move power electronics beyond the limitations of silicon and provide our customers with the potential to achieve higher efficiency (e.g., titanium-class performance in power supplies), higher power density and, in some designs, an overall lower system cost. We received our first product order "in volume" (e.g., greater than ten thousand units) for our Gen-2-based TO247 products in January 2018. We introduced our Gen-3 products in June 2018. Also in 2018, we were awarded a contract from the U.S. Navyto become a supplier for GaNepiwafer products for use by the U.S. Department of Defense. In the year ended December 31, 2020, we recognized $5.0 millionof perpetual licensing revenue from Nexperia related to Gen-4 technology development. In the year ended March 31, 2022, we recognized $8.0 millionof perpetual licensing revenue from Nexperia related to Gen-5 and 900V technology development. Since our inception we have devoted substantial resources to the research and development of GaNpower devices and the protection and enhancement of our intellectual property and have incurred significant operating losses. Our net loss was $10.2 millionfor the year ended March 31, 2022, $6.6 millionfor the three months ended March 31, 2021and $17.9 millionfor the year ended December 31, 2020. As of March 31, 2022, our accumulated deficit was $178.6 million. Substantially all of our operating losses have resulted from expenses incurred in connection with research and development activities and from general and administrative costs associated with our operations. 45 -------------------------------------------------------------------------------- Our revenue for the year ended March 31, 2022was $24.1 million, of which $11.6 millionwas from related parties. Our revenue for the three months ended March 31, 2021was $2.4 million, of which $673 thousandwas from related parties. Our revenue for the year ended December 31, 2020was $11.4 million, of which $7.1 millionwas from related parties and $505 thousandwas retroactive application since inception due to new government authorized rates. For the year ended March 31, 2022, Nexperia, the U.S.government and one other overseas customer each accounted for more than ten percent of our revenues and together accounted for 78.1% of our revenues. For the three months ended March 31, 2021and the year ended December 31, 2020, Nexperia and the U.S.government each accounted for more than ten percent of our revenues. For the three months ended March 31, 2021and the year ended December 31, 2020, such customers together accounted for 58.5% and 88.8% of our revenues, respectively. We expect to continue to incur significant expenses and operating losses for the foreseeable future. We expect our expenses will increase in connection with our ongoing activities as we:
• add field sales and application personnel and incur related expenses to support operational growth;
•increase the activity directly related to the promotion of our products to increase revenues;
•acquire additional MOCVD reactor capacity; and
• add financial and management accounting systems, select staff, and incur additional legal and accounting costs because we operate as a public company.
February 12, 2020, our wholly-owned subsidiary, Peninsula Acquisition Sub, Inc., a corporation formed in the State of Delaware("Acquisition Sub"), merged with and into Transphorm Technology (formerly known as Transphorm, Inc.), the corporate existence of Acquisition Sub ceased, and Transphorm Technology became our wholly-owned subsidiary (such transaction, the "Merger"). As a result of the Merger, we acquired the business of Transphorm Technology. The Merger was effective as of February 12, 2020, upon the filing of a certificate of merger with the Secretary of State of the State of Delaware. Immediately after completion of the Merger, we adopted Transphorm Technology's former company name, " Transphorm, Inc.", as our company name.
The merger has been treated as a recapitalization and reverse acquisition for us for financial reporting purposes, and Transphorm Technology is considered the acquirer for accounting purposes.
As a result of the Merger and the change in our business and operations, a discussion of the past financial results of
Peninsula Acquisition Corporationis not pertinent, and under applicable accounting principles, the historical financial results of Transphorm Technology, the accounting acquirer, prior to the Merger are considered our historical financial results. At the effective time of the Merger, (i) each share of Transphorm Technology's common stock issued and outstanding immediately prior to the closing of the Merger was converted into the right to receive (a) 0.08289152527 shares of our common stock (in the case of shares held by accredited investors) or (b) $4.00multiplied by 0.08289152527 (in the case of shares held by unaccredited investors), with the actual number of shares of our common stock issued to the former holders of Transphorm Technology's common stock equal to 4,171,571, (ii) 51,680,254 shares of Transphorm Technology's Series 1 preferred stock issued and outstanding immediately prior to the closing of the Merger were converted into 12,433,953 shares of our common stock, (iii) 38,760,190 shares of Transphorm Technology'sSeries 2 preferred stock issued and outstanding immediately prior to the closing of the Merger were converted into 7,499,996 shares of our common stock, and (iv) 31,850,304 shares of Transphorm Technology's Series 3 preferred stock issued and outstanding immediately prior to the closing of the Merger were converted into 4,000,000 shares of our common stock. As a result, 28,105,520 shares of our common stock were issued to the former holders of Transphorm Technology'sissued and outstanding capital stock after adjustments due to rounding for fractional shares. Immediately prior to the effective time of the Merger, an aggregate of 682,699 46 --------------------------------------------------------------------------------
shares of our ordinary shares, held by shareholders of
In addition, (i) options to purchase 29,703,285 shares of
Transphorm Technology'scommon stock issued and outstanding immediately prior to the closing of the Merger under Transphorm Technology's 2007 Stock Plan and 2015 Equity Incentive Plan were assumed and converted into options to purchase 2,461,923 shares of our common stock, (ii) warrants to purchase 186,535 shares of Transphorm Technology's common stock issued and outstanding immediately prior to the closing of the Merger were assumed, amended and converted into warrants to purchase 15,461 shares of our common stock, and (iii) Transphorm Technology's outstanding convertible promissory note was amended to be convertible, at the option of the holder, into shares of our common stock at a conversion price of $5.12per share. On October 4, 2021, the promissory note of $15.6 million, consisting of an outstanding principal amount of $15.0 millionplus accrued but unpaid interest of $600 thousand, was further amended to reduce the conversion price from $5.12per share to $5.00per share and converted into an aggregate of 3,120,000 shares of our common stock.
All per share and per share amounts for all periods presented have been retroactively adjusted to reflect the effect of the Merger.
March 2021, we sold 250,000 shares of common stock in a private placement at a purchase price of $4.00per share, with aggregate gross proceeds of $1.0 million(before deducting placement agent fees, financial advisor fees and other offering expenses, which were an aggregate of $50 thousand).
November 2021, we sold an aggregate of 6,600,000 shares of common stock in a private placement at a purchase price of $5.00per share, with aggregate gross proceeds of $33.0 million(before deducting placement agent fees and other offering expenses which were an aggregate of $840 thousand). Pursuant to the purchase agreements entered into with the investors in this offering, each investor had the right (but not the obligation), subject to the satisfaction of customary closing conditions, to purchase and acquire from us (i) additional shares of common stock at a purchase price of $5.00per share and (ii) additional warrants to purchase shares of common stock. On June 2, 2022, in connection with the investors' exercise of such purchase rights, we sold 3,199,999 shares of common stock in a private placement for aggregate gross proceeds of $16.0 million(before deducting placement agent fees and other offering expenses, which were an aggregate of $280 thousand) and issued warrants to purchase 666,668 shares of common stock. In December 2021, we sold an aggregate of 1,673,152 shares of common stock in a private placement offering at a purchase price of $7.71per share, with aggregate gross proceeds of $12.9 million(before deducting a finder's fee and other offering expenses, which were an aggregate of $286 thousand).
Key factors affecting our performance
There are a number of industry factors that affect our business, including:
47 -------------------------------------------------------------------------------- Overall Demand for Products and Applications Using GaN Devices. Our potential for growth depends significantly on the adoption of
GaNmaterials and devices in the power markets and GaNepiwafer material products in the RF markets, the expansion of the use of GaNdevices in infrastructure, IT, datacenter, industrial, automotive and consumer applications such as fast charger/adapter and gaming power supplies, and our ability to win new designs for these applications. Demand also fluctuates based on various market cycles, continuously evolving industry supply chains, trade and tariff terms, as well as evolving competitive dynamics in each of the respective markets. These uncertainties make demand difficult to forecast for us and our customers. The COVID-19 pandemic has adversely disrupted and will further disrupt the operations at certain of our customers, partners, suppliers and other third-party providers for an uncertain period of time, including as a result of travel restrictions, adverse effects on budget planning processes, business deterioration, and/or business shutdowns, all of which has impacted our business and results of operations. Some of our customers have experienced delays in their internal development programs and design cycles with our GaNproducts due to the effects of the COVID-19 pandemic, which have led to postponements of their orders of our products and postponements of determinations that our products will be used in their designs for new products under development with corresponding delays in their market introduction and potentially our revenues. Our billings under our contract with the U.S. Navyhave been lower than originally expected as a result of the pandemic. Intense and Constantly Evolving Competitive Environment. Competition in the industries we serve is intense. Many companies have made significant investments in product development and production equipment. To remain competitive, market participants must continuously increase product performance, reduce costs and develop improved ways to serve their customers. To address these competitive pressures, we have invested in research and development activities to support new product development, lower product costs and deliver higher levels of performance to differentiate our products in the market. Governmental Trade and Regulatory Conditions. Our potential for growth, as with most multinational companies, depends on a balanced and stable trade, political, economic and regulatory environment among the countries where we do business. Changes in trade policy such as the imposition of tariffs or export bans to specific customers or countries could reduce or limit demand for our products in certain markets. Technological Innovation and Advancement. Innovations and advancements in materials and power technologies continue to expand the potential commercial application for our products. However, new technologies or standards could emerge or improvements could be made in existing technologies that could reduce or limit the demand for our products in certain markets. Intellectual Property Issues. We rely on patented and non-patented proprietary information relating to product development, manufacturing capabilities and other core competencies of our business. Protection of intellectual property is critical. Therefore, steps such as additional patent applications, confidentiality and non-disclosure agreements, as well as other security measures are important. While we have a strong patent portfolio comprising access to over 1,000 worldwide patents (directly owned or licensed) and there is no actual or, to our knowledge, threatened litigation against us for patent-related matters, litigation or threatened litigation is a common method to effectively enforce or protect intellectual property rights. Such action may be initiated by or against us and would require significant management time and expenses.
Components of operating results
Our revenue currently consists of (1) perpetual licensing revenue, (2) revenue from our contract with the
U.S. Navyand (3) revenue from product sales. Products are sold to distributors and end-users in various sectors such as, but not limited to, automotive, gaming, industrial, IT, and consumer product industries. Cost of goods sold 48
-------------------------------------------------------------------------------- Cost of goods sold consists of (1) direct product costs incurred for the raw materials and manufacturing services for our products, (2) fixed product costs primarily relating to production, manufacturing and personnel and (3) depreciation and amortization expenses consisting primarily of expenses related to our fixed assets together with amortization of our intangible assets. We expect our cost of goods sold attributable to direct product costs to increase proportionately with increases in revenue, and our cost of goods sold attributable to fixed product costs to remain substantially flat or moderately increase in connection with increases in revenue.
Research and Development. Research and development expenses consist primarily of compensation and related costs for personnel, including stock-based compensation and employee benefits as well as costs associated with design, fabrication, packaging and testing of
GaNdevices. In addition, research and development expenses include depreciation expenses related to our fixed assets. We expense research and development expenses as incurred. As we continue to invest in developing our technology for new products, we expect research and development expenses to remain flat or moderately increase in absolute dollars but to decline as a percentage of revenue. Sales and Marketing. Sales and marketing expenses consist primarily of compensation and related costs for personnel, including stock-based compensation and employee benefits, and associated travel costs. Sales and marketing expenses also include costs associated with our support of business development efforts with distributors in Europeand Asia, and costs related to trade shows and marketing programs. We expense sales and marketing expenses as incurred. We expect sales and marketing expenses to increase in absolute dollars in future periods as we increase our sales and expand our sales force and our marketing organization. General and Administrative. General and administrative expenses consist primarily of compensation and related costs for personnel, including stock-based compensation, employee benefits and travel. In addition, general and administrative expenses include third-party consulting, legal, audit, accounting services, allocations of overhead costs, such as rent, facilities and information technology, and amortization of our intangible assets. We expect general and administrative expenses to increase in absolute dollars in future periods due to additional legal, accounting, insurance, investor relations and other costs associated with being a public company, as well as other costs associated with growing our business.
Interest expense consists primarily of interest and related amortization costs associated with our indebtedness to Nexperia and Yaskawa, respectively.
Loss of capital in a joint venture
Equity loss in joint venture consists of expenditures to cover the losses associated with our 25% share ownership of GaNovation starting
August 2021and former 49% share ownership of AFSW. The potential magnitude of this loss may increase or decrease in the future based upon changes in our shareholding percentage in GaNovation and the level of operating expenses incurred by GaNovation, which wholly owns AFSW.
Changes in the fair value of the promissory note
Changes in the fair value of promissory notes reflect changes in the valuation of notes held by the Company.
Other Income, Net
Other income, net of other expenses, mainly includes income generated by the subletting of part of our research and development facilities located in
Tax Expense 49 --------------------------------------------------------------------------------
Tax expense consists primarily of income taxes in certain foreign and state jurisdictions in which we operate.
This section of Management's Discussion and Analysis generally discusses year-to-year comparisons between the year ended
March 31, 2022and the comparative year ended March 31, 2021. Due to our recent change in fiscal year end from December 31st to March 31st, the comparative year ended March 31, 2021was unaudited. Discussions of comparisons between (1) the transition period for the three months ended March 31, 2021(audited) and the comparative period of the three months ended March 31, 2020(unaudited) and (2) the years ended December 31, 2020and 2019 (audited) that are not included in this Annual Report on Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of Part II of our Transition Report on Form 10-K for the transition period ended March 31, 2021, filed with the SECon June 24, 2021.
Comparison of the years ended
The following table sets forth our Consolidated Statements of Income data for the periods indicated (in thousands, except percentages):
Year Ended March 31, Change 2022 2021 (unaudited) Amount Percentage Revenue, net
$ 24,050$ 12,696 $ 11,35489.4 % Cost of goods sold 12,530 7,015 5,515 78.6 % Gross profit 11,520 5,681 5,839 102.8 % Operating expenses: Research and development 6,655 5,898 757 12.8 % Sales and marketing 3,535 2,319 1,216 52.4 % General and administrative 11,226 9,969 1,257 12.6 % Total operating expenses 21,416 18,186 3,230 17.8 % Loss from operations (9,896) (12,505) 2,609 (20.9) % Interest expense 792 758 34 4.5 % Loss in joint venture 3,971 6,885 (2,914) (42.3) % Changes in fair value of promissory note (605) 2,093 (2,698) (128.9) % Other income, net (3,819) (1,940) (1,879) 96.9 % Loss before tax expense (10,235) (20,301) 10,066 (49.6) % Tax expense - - - Net loss $ (10,235)$ (20,301) $ 10,066(49.6) % Revenue increased $11.4 million, or 89.4 percent, to $24.1 millionfor the year ended March 31, 2022from $12.7 millionfor the same period in 2021. The increase is due primarily to a (i) $7.5 millionincrease in product revenue and (ii) $3.6 millionincrease in licensing and service revenue. Cost of goods sold increased $5.5 million, or 78.6%, to $12.5 millionfor the year ended March 31, 2022from $7.0 millionfor the same period in 2021, due primarily to costs directly associated with increased sales. Gross profit increased $5.8 million, or 102.8%, to $11.5 millionfor the year ended March 31, 2022from $5.7 millionfor the same period in 2021. Gross profit margin increased 3.2% to 47.9% for the year ended March 31, 2022from 44.7% for the same period in 2021. The increase was due primarily to an increase in perpetual licensing revenue. 50 -------------------------------------------------------------------------------- Operating expenses increased $3.2 million, or 17.8 percent, to $21.4 millionfor the year ended March 31, 2022from $18.2 millionfor the same period in 2021, due primarily to a (i) $1.3 millionincrease in general and administrative expense and (ii) $1.2 millionincrease in sales and marketing expense. Research and development expense increased $757 thousand, or 12.8 percent, to $6.7 millionfor the year ended March 31, 2022from $5.9 millionfor the same period in 2021, due primarily to a (i) $315 thousandincrease in lab and testing costs, (ii) $286 thousandincrease in costs related to salaries and stock-based compensation expenses and (iii) $119 thousandincrease in facility expense. Sales and marketing expense increased $1.2 million, or 52.4 percent, to $3.5 millionfor the year ended March 31, 2022from $2.3 millionfor the same period in 2021, due primarily to a (i) $812 thousandincrease in costs related to salaries and stock-based compensation expenses and (ii) $268 thousandincrease in consulting expense. General and administrative expense increased $1.3 million, or 12.6 percent, to $11.2 millionfor the year ended March 31, 2022from $10.0 millionfor the same period in 2021, due primarily to a (i) $1.0 millionincrease in costs related to salaries and stock-based compensation expenses, (ii) $173 thousandincrease in consulting expense and (iii) $140 thousandincrease in insurance cost. Interest expense of $792 thousandfor the year ended March 31, 2022consists of $715 thousandfor our revolving credit facility with Nexperia and $77 thousandfor our note payable to Yaskawa. Interest expense of $758 thousandfor the same period in 2021 consists of $608 thousandfor our revolving credit facility with Nexperia and $150 thousandfor our note payable to Yaskawa.
The loss in the joint venture was
Changes in the fair value of the promissory note were
Other income, net of other expenses, increased
$1.9 million, or 96.9 percent, to $3.8 millionfor the year ended March 31, 2022from $1.9 millionfor the same period in 2021, due primarily to recognition of a (i) $1.5 milliongain upon termination of our joint venture with FSL and (ii) $1.2 milliongain on promissory note conversion, offset primarily by a $756 thousanddecrease in subleasing a portion of our research and development facility. Net loss decreased $10.1 million, or 49.6%, to $10.2 millionfor the year ended March 31, 2022from $20.3 millionfor the same period in 2021. The decrease was attributable primarily to a (i) $11.4 millionincrease in product revenue, (ii) $2.9 milliondecrease from loss in joint venture, (iii) $2.7 millionpositive change in fair value of promissory note and (iv) $1.9 millionincrease in other income, offset by a (i) $5.5 millionincrease in cost of goods sold, (ii) $1.3 millionincrease in general and administrative expense and (iii) $1.2 millionincrease in sales and marketing expense.
Cash and capital resources
Future funding needs
Our ability to sustain operations is dependent mainly on our ability to successfully market and sell our products and our ability to raise capital through additional financings until we are able to achieve profitability with positive cash flows. We currently incur and historically have incurred losses from operations and expect to do so in the foreseeable future. During the year ended
March 31, 2022, we used $19.7 millionof cash in operations and raised gross proceeds of $50.9 millionfrom the sale of common stock in private placements. We believe that our 51 -------------------------------------------------------------------------------- existing cash and cash equivalents will be sufficient to meet our working capital and capital expenditure requirements for a period of at least twelve months from the date of this Report. We will continue to evaluate our projected expenditures relative to our available cash and evaluate financing alternatives in order to satisfy our working capital and other cash requirements. Our material capital requirements, including commitment of capital expenditures, are primarily directed toward manufacturing equipment, lease commitments and investments in the joint venture. In 2022, we paid approximately $6.3 million, consisting of investment in the joint venture of $4.5 million, capital expenditures of $595 thousandand lease commitment of $918 thousand, and expect to incur in 2023 approximately $8.7 million, consisting of capital expenditures of $4.0 million, investment in the joint venture of $4.0 millionand lease commitment of $681 thousand. Our future capital requirements will depend on many factors including our revenue growth rate, billing frequency, the impact of the COVID-19 pandemic, the timing and extent of spending to support further sales and marketing and research and development efforts, and our obligations in connection with AFSW (through GaNovation). The future impact of the COVID-19 pandemic cannot be predicted with certainty and may make it more difficult or preclude us from raising additional capital, increase our costs of capital and otherwise adversely affect our business, results of operations, financial condition and liquidity. We may in the future enter into arrangements to acquire or invest in complementary businesses, services and technologies, including intellectual property rights. We will require additional equity or debt financing, which we may not be able to raise on terms acceptable to us or at all. If we are unable to raise additional capital when required, our business, results of operations and financial condition would be materially and adversely affected, or we may need to cease operations altogether.
The following table shows a summary of our cash flows for the periods presented (in thousands): Year Ended March 31, 2022 2021 (unaudited) Change Net cash (used in) provided by: Operating activities
$ (19,736)$ (12,897) $ (6,839)Investing activities (5,121) (6,990) 1,869 Financing activities 49,498 14,616 34,882 Increase (decrease) in cash and cash equivalents excluding effect of foreign exchange rate changes $ 24,641$ (5,271) $ 29,912Operating Activities Net cash used in operating activities was $19.7 millionand $12.9 millionfor the years ended March 31, 2022and 2021, respectively. The increase of $6.8 millionwas attributable primarily to a $4.4 milliondecrease in loss in joint venture, a $3.0 milliondecrease in non-cash perpetual licensing revenue from a related party, a $2.7 millionpositive change in fair value of promissory note, $1.2 milliongain on promissory note conversion, and a $5.6 milliondecrease in operating asset and liabilities, offset primarily by a $10.1 milliondecrease in net loss. Investing Activities Net cash used in investing activities was $5.1 millionand $7.0 millionfor the years ended March 31, 2022and 2021, respectively. The decrease of $1.9 millionwas attributable primarily to a $2.2 milliondecrease in investment in joint venture, offset by a $373 thousandincrease in purchases of property and equipment. Financing Activities 52
-------------------------------------------------------------------------------- Net cash provided by financing activities was
$49.5 millionand $14.6 millionfor the years ended March 31, 2022and 2021, respectively. Net cash provided by financing activities during the years ended March 31, 2022, and 2021 relates to net proceeds of $49.8 millionand $14.6 million, respectively, from the sale of our common stock in private placements.
Significant Accounting Policies and Estimates
The accompanying discussion and analysis of our financial condition and results of operations is based upon our audited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in
the United States. We believe certain of our accounting policies are critical to understanding our financial position and results of operations. We utilize the following critical accounting policies in the preparation of our financial statements. Use of Estimates The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Management bases its estimates and assumptions on historical experience, knowledge of current conditions, and its belief of what could occur in the future, given available information. Actual results could differ from those estimates, and such differences could be material to the consolidated financial statements. Estimates are used for, but not limited to, the determinations of fair value of stock awards and promissory notes, accrual of expenses, revenue recognition, allowance for doubtful accounts, inventory reserve, and useful lives for property and equipment.
Inventory is stated at the lower of cost (first-in, first-out method) or net realizable value. The Company periodically reviews the value of items in inventory and records write-downs or write-offs based on its assessment of slow moving or obsolete inventory. The Company maintains an inventory reserve for obsolete inventory and generally makes inventory value adjustments against the inventory reserve. Revenue Recognition The Company derives its revenues from 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 GaNepiwafers for the radio frequency ("RF") and power markets, and sales of licenses to use such patented proprietary technology, as well as enabling EPI wafer growth services and products to our strategic partners. Revenues are recognized when control of these products or licenses are transferred to the Company's customers in an amount that reflects the consideration it expects to be entitled to in exchange for those products and licenses. 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. 53 --------------------------------------------------------------------------------
Disaggregation of revenue from contracts with customers
Revenue consists of perpetual licensing revenue, government contract revenue from our contract with the
U.S. Navyand product sales, with applicable performance obligations satisfied at a point in time. Products are sold to distributors and end-users in various sectors such as, but not limited to, the automotive, gaming, industrial, IT, and consumer products industries. As part of the multi-element commercial arrangement executed with Nexperia on April 4, 2018(see Note 3 - Nexperia Arrangement), the Company agreed to grant Nexperia the perpetual exclusive right to use the Company's existing Gen-3 manufacturing process technology. License fees are received upon satisfaction of contractual milestones and recognized upon delivery of the perpetual license or transferred technology without any remaining performance obligations. The Company recognized $8.0 millionof perpetual licensing revenue for the year ended March 31, 2022. No licensing revenue was recognized for the three months ended March 31, 2021. The Company recognized $5.0 millionof perpetual licensing revenue for the year ended December 31, 2020. In December 2020, the Company entered into a cooperation and development agreement with Yaskawa Electric Corporation ("Yaskawa"), pursuant to which Yaskawa agreed to provide $4.0 millionover 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 millionand $750 thousandof this $4.0 millioncommitment in December 2020and July 2021, respectively. The Company evaluated and concluded that the deliverables are the same and nature of the services to be provided to Yaskawa will be consistent over the period of approximately three years. Accordingly, with respect to the $1.8 millionpayment, the Company recognized $1.1 millionas revenue for the year ended March 31, 2022, $333 thousandas revenue for the three months ended March 31, 2021and $333 thousandas revenue for the year ended December 31, 2020. The Company also recorded $375 thousandas revenue for services rendered but not billed for the year ended March 31, 2022. Government contract revenues are principally generated under research and development contracts. Contract revenues are derived primarily from research contracts with agencies of the U.S.government. We believe credit risk related to accounts receivable arising from such contracts is minimal. These contracts may include cost-plus fixed fee and fixed price terms. All payments to us for work performed on contracts with agencies of the U.S.government are subject to adjustment upon audit by the Defense Contract Audit Agency. The contract's expiration dates were initially March and June 2022, but such dates were subsequently extended to June and December 2022, respectively. The Company received new government authorized rates for billing purposes which allowed for retroactive application since inception. The cumulative impact of this rate change as of March 31, 2022was $423 thousand, of which $(83) thousandand $505 thousandwere recorded in the three months ended March 31, 2021and year ended December 31, 2021, respectively. On February 1, 2022, the Company received new government authorized rates which allowed for retroactive application of $232 thousandfor the year ended December 31, 2020. The Company will use the new approved rates on a go-forward basis.
For performance obligations related to the sale of products, control transfers to the customer at a point in time. The Company's principal terms of sale are free on board shipping or destination and the Company transfers control and records revenue for product sales upon shipment or delivery to the customer, respectively. For performance obligations related to the licensing of patented technology in perpetuity, control also transfers to the customer at a point in time. The Company transfers control and records revenue for licensing fees once the Company has (i) provided or otherwise makes available the patented technology to the customer and (ii) the customer is able to use and benefit from the patented technology. Variable Consideration The nature of the Company's arrangement with Nexperia gives rise to variable consideration in the form of milestone and royalty payments. 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 are recognized upon the subsequent 54 --------------------------------------------------------------------------------
sale in progress. Variable amounts are received upon satisfaction of contractually agreed development goals and sales volume.
Research and development
The Company is a party to research grant contracts with the
U.S.government for which the Company is reimbursed for specified costs incurred for its research projects. These projects include energy saving initiatives for which the U.S.government offers reimbursement funds. Such reimbursements are recorded as an offset to research and development expenses when the related qualified research and development expenses are incurred. Reimbursable costs are recognized in the same period the costs are incurred up to the limit of approved funding amounts on qualified expenses. Grant reimbursement of $345 thousand, $42 thousandand $426 thousandwas recorded as an offset to research and development expense for the year ended March 31, 2022, the three month ended March 31, 2021and the year ended December 31, 2020, respectively.
All share-based payments, including grants of stock options, restricted stock awards ("RSAs") and restricted stock units ("RSUs"), are measured at the fair value of the share-based awards on the grant date and recognized over their respective vesting periods, which is generally one to four years. The estimated fair value of stock options at the grant date is determined using the Black-Scholes-Merton pricing model, and the RSAs and RSUs are measured using the fair market value of the stock price at grant date. The Company recognizes the fair value of share-based payments as compensation expense for all expected-to-vest stock-based awards over the vesting period of the award using the straight-line attribution or graded vesting method provided that the amount of compensation cost recognized at any date is no less than the portion of the grant-date fair value of the award that is vested at that date. The Black-Scholes-Merton option pricing model requires inputs such as the fair value of common stock on date of grant, expected term, expected volatility, dividend yield, and risk-free interest rate. Further, the forfeiture rate also affects the amount of aggregate compensation expense. These inputs are subjective and generally require significant analysis and judgment to develop. Volatility data is obtained from a study of publicly traded industry peer companies. The forfeiture rate is derived primarily from the Company's historical data, and the risk-free interest rate is based on the yield available on
U.S. Treasuryzero-coupon issues commensurate with the expected term. Management generally uses the simplified method to calculate the expected term for employee grants as the Company has limited historical exercise data or alternative information to reasonably estimate an expected term assumption. The simplified method assumes that all options will be exercised midway between the weighted average vesting date and the contractual term of the option. Stock-based compensation expense recognized in the Company's consolidated financial statements is based on awards that are expected to vest. These expense amounts have been reduced by using an estimated forfeiture rate. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company evaluates the assumptions used to estimate forfeitures annually in connection with the recognition of stock-based compensation expense.
Accounting election of the JOBS law
We are an emerging growth company, as defined in the JOBS Act. The JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an emerging growth company to either early adopt or delay the adoption of some accounting standards until those standards would otherwise apply to private companies. We have elected to use the extended transition period under the JOBS Act until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates. 55
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