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.

Insight

We are a pioneer, and a market and technology leader, in the wide-bandgap GaN
power electronics field for high voltage power conversion applications. We
deliver high quality and reliable GaN devices with high performance, while
providing application design support to a growing customer base. Our GaN devices
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 GaN engineering 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
GaN power 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. Navy to become a supplier for GaN epiwafer products for use by the U.S.
Department of Defense. In the year ended December 31, 2020, we recognized
$5.0 million of perpetual licensing revenue from Nexperia related to Gen-4
technology development. In the year ended March 31, 2022, we recognized
$8.0 million of 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 GaN power devices and the protection and enhancement of our
intellectual property and have incurred significant operating losses. Our net
loss was $10.2 million for the year ended March 31, 2022, $6.6 million for the
three months ended March 31, 2021 and $17.9 million for 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.

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Our revenue for the year ended March 31, 2022 was $24.1 million, of which $11.6
million was from related parties. Our revenue for the three months ended March
31, 2021 was $2.4 million, of which $673 thousand was from related parties. Our
revenue for the year ended December 31, 2020 was $11.4 million, of which
$7.1 million was from related parties and $505 thousand was 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, 2021
and 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, 2021 and 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.

Reverse merge

On 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 Corporation is
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) $4.00
multiplied 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's Series 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's issued 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

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shares of our ordinary shares, held by shareholders of Peninsula Acquisition Company prior to the Merger, were forfeited and voided.

In addition, (i) options to purchase 29,703,285 shares of Transphorm
Technology's common 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
$5.12 per share. On October 4, 2021, the promissory note of $15.6 million,
consisting of an outstanding principal amount of $15.0 million plus accrued but
unpaid interest of $600 thousand, was further amended to reduce the conversion
price from $5.12 per share to $5.00 per 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.

Private placements

In February 2020we sold 5,380,000 common shares in a private placement at a purchase price of $4.00 per share, with total gross proceeds of $21.5 million (before deduction of placement agent fees and other offering fees, which amounted to $1.8 million).

In December 2020we sold 5,000,000 common shares in a private placement at a purchase price of $3.00 per share, with total gross proceeds of $15.0 million (before deduction of placement agent fees and other offering fees, which amounted to $1.4 million excluding the cost of the mandate of
$223,000).

In March 2021, we sold 250,000 shares of common stock in a private placement at
a purchase price of $4.00 per 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).

In August 2021we sold 1,000,000 common shares in a private placement at a purchase price of $5.00 per share, with total gross proceeds of
$5.0 million (before deduction of legal costs $22,000).

In November 2021, we sold an aggregate of 6,600,000 shares of common stock in a
private placement at a purchase price of $5.00 per 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 $5.00 per 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 $7.71 per 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:

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Overall Demand for Products and Applications Using GaN Devices. Our potential
for growth depends significantly on the adoption of GaN materials and devices in
the power markets and GaN epiwafer material products in the RF markets, the
expansion of the use of GaN devices 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 GaN products 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. Navy have 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

Revenue

Our revenue currently consists of (1) perpetual licensing revenue, (2) revenue
from our contract with the U.S. Navy and (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

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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.

Functionnary costs

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 GaN devices. 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 Europe and 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 charges

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 2021 and
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
California.

Tax Expense

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Tax expense consists primarily of income taxes in certain foreign and state jurisdictions in which we operate.

Operating results

This section of Management's Discussion and Analysis generally discusses
year-to-year comparisons between the year ended March 31, 2022 and 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, 2021
was 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, 2020 and 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 SEC on June 24, 2021.

Comparison of the years ended March 31, 2022 (audited) and March 31, 2021
(unaudited)

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          $   11,354                        89.4  %
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 million for the year
ended March 31, 2022 from $12.7 million for the same period in 2021. The
increase is due primarily to a (i) $7.5 million increase in product revenue and
(ii) $3.6 million increase in licensing and service revenue.

Cost of goods sold increased $5.5 million, or 78.6%, to $12.5 million for the
year ended March 31, 2022 from $7.0 million for 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 million for the year
ended March 31, 2022 from $5.7 million for the same period in 2021. Gross profit
margin increased 3.2% to 47.9% for the year ended March 31, 2022 from 44.7% for
the same period in 2021. The increase was due primarily to an increase in
perpetual licensing revenue.

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Operating expenses increased $3.2 million, or 17.8 percent, to $21.4 million for
the year ended March 31, 2022 from $18.2 million for the same period in 2021,
due primarily to a (i) $1.3 million increase in general and administrative
expense and (ii) $1.2 million increase in sales and marketing expense.

Research and development expense increased $757 thousand, or 12.8 percent, to
$6.7 million for the year ended March 31, 2022 from $5.9 million for the same
period in 2021, due primarily to a (i) $315 thousand increase in lab and testing
costs, (ii) $286 thousand increase in costs related to salaries and stock-based
compensation expenses and (iii) $119 thousand increase in facility expense.

Sales and marketing expense increased $1.2 million, or 52.4 percent, to $3.5
million for the year ended March 31, 2022 from $2.3 million for the same period
in 2021, due primarily to a (i) $812 thousand increase in costs related to
salaries and stock-based compensation expenses and (ii) $268 thousand increase
in consulting expense.

General and administrative expense increased $1.3 million, or 12.6 percent, to
$11.2 million for the year ended March 31, 2022 from $10.0 million for the same
period in 2021, due primarily to a (i) $1.0 million increase in costs related to
salaries and stock-based compensation expenses, (ii) $173 thousand increase in
consulting expense and (iii) $140 thousand increase in insurance cost.

Interest expense of $792 thousand for the year ended March 31, 2022 consists of
$715 thousand for our revolving credit facility with Nexperia and $77 thousand
for our note payable to Yaskawa. Interest expense of $758 thousand for the same
period in 2021 consists of $608 thousand for our revolving credit facility with
Nexperia and $150 thousand for our note payable to Yaskawa.

The loss in the joint venture was $4.0 million for the year ended March 31, 2022compared to $6.9 million for the same period in 2021 due to reduced liability for the operation of AFSW.

Changes in the fair value of the promissory note were $605,000 win and $2.1 million loss for years ended March 31, 2022 and 2021, respectively.

Other income, net of other expenses, increased $1.9 million, or 96.9 percent, to
$3.8 million for the year ended March 31, 2022 from $1.9 million for the same
period in 2021, due primarily to recognition of a (i) $1.5 million gain upon
termination of our joint venture with FSL and (ii) $1.2 million gain on
promissory note conversion, offset primarily by a $756 thousand decrease in
subleasing a portion of our research and development facility.

Net loss decreased $10.1 million, or 49.6%, to $10.2 million for the year ended
March 31, 2022 from $20.3 million for the same period in 2021. The decrease was
attributable primarily to a (i) $11.4 million increase in product revenue, (ii)
$2.9 million decrease from loss in joint venture, (iii) $2.7 million positive
change in fair value of promissory note and (iv) $1.9 million increase in other
income, offset by a (i) $5.5 million increase in cost of goods sold, (ii) $1.3
million increase in general and administrative expense and (iii) $1.2 million
increase in sales and marketing expense.

Cash and capital resources

From March 31, 2022we had cash and cash equivalents of $33.4 millionother current assets of $10.9 million and the current liabilities of $5.3 millionresulting in a working capital of $39.5 million.

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 million of cash in operations and raised
gross proceeds of $50.9 million from the sale of common stock in private
placements. We believe that our
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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 thousand and 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 million and 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.

Cash flow

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)         $    29,912


Operating Activities

Net cash used in operating activities was $19.7 million and $12.9 million for
the years ended March 31, 2022 and 2021, respectively. The increase of $6.8
million was attributable primarily to a $4.4 million decrease in loss in joint
venture, a $3.0 million decrease in non-cash perpetual licensing revenue from a
related party, a $2.7 million positive change in fair value of promissory note,
$1.2 million gain on promissory note conversion, and a $5.6 million decrease in
operating asset and liabilities, offset primarily by a $10.1 million decrease in
net loss.

Investing Activities

Net cash used in investing activities was $5.1 million and $7.0 million for the
years ended March 31, 2022 and 2021, respectively. The decrease of $1.9 million
was attributable primarily to a $2.2 million decrease in investment in joint
venture, offset by a $373 thousand increase in purchases of property and
equipment.

Financing Activities

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Net cash provided by financing activities was $49.5 million and $14.6 million
for the years ended March 31, 2022 and 2021, respectively. Net cash provided by
financing activities during the years ended March 31, 2022, and 2021 relates to
net proceeds of $49.8 million and $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

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 GaN
epiwafers 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.

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Disaggregation of revenue from contracts with customers

Revenue consists of perpetual licensing revenue, government contract revenue
from our contract with the U.S. Navy and 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 million of 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 million of 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 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 $750 thousand of this $4.0 million commitment in December 2020
and 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 million payment, the Company recognized $1.1 million as
revenue for the year ended March 31, 2022, $333 thousand as revenue for the
three months ended March 31, 2021 and $333 thousand as revenue for the year
ended December 31, 2020. The Company also recorded $375 thousand as 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, 2022 was $423 thousand, of which $(83) thousand and
$505 thousand were recorded in the three months ended March 31, 2021 and year
ended December 31, 2021, respectively. On February 1, 2022, the Company received
new government authorized rates which allowed for retroactive application of
$232 thousand for the year ended December 31, 2020. The Company will use the new
approved rates on a go-forward basis.

Performance bonds

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

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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 thousand and
$426 thousand was recorded as an offset to research and development expense for
the year ended March 31, 2022, the three month ended March 31, 2021 and the year
ended December 31, 2020, respectively.

Stock-based compensation

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. Treasury zero-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.

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