Navitas Semiconductor Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are with the three months ended March 31, 2021 unless noted. Amounts are in U.S. dollars; financial-statement amounts below are in millions unless stated otherwise.
Business context
Navitas develops gallium nitride (GaN) power integrated circuits using a fabless model, outsourcing wafer fabrication, assembly and testing. Products are used primarily in mobile-device chargers, with expansion efforts targeting consumer electronics, data centers, solar and electric vehicles. The October 2021 Business Combination was accounted for as a reverse recapitalization; the 2021 comparative period reflects Legacy Navitas.
Financial results and liquidity
- Revenue: $6.74 million, up 27% from $5.32 million. Units shipped increased 32% to 7.5 million, while average selling price declined 15% to $0.82 per unit.
- Gross profit and margin: Gross profit was $2.96 million, up 26%; gross margin was approximately 44.0%, compared with 44.3%.
- Operating expenses and profit: Research and development was $13.41 million, up 215%; selling, general and administrative expense was $24.54 million, up 357%. Operating loss widened to $34.99 million from $7.27 million.
- Net income: Reported net income was $79.79 million, versus a $7.35 million net loss. The 2022 result included $51.76 million of warrant fair-value gains and $63.41 million of earnout-liability fair-value gains. Excluding those gains, the quarter would have shown a substantial loss; reported net income is therefore not a measure of operating profitability.
- Cash flow: Operating cash use was $10.60 million, compared with $5.81 million. Investing cash use was $2.99 million, including $2.70 million invested in a joint venture. Financing cash use was $0.86 million. Cash declined $14.46 million during the quarter.
- Liquidity and debt: Cash and cash equivalents were $253.80 million at March 31, 2022, versus $268.25 million at year-end 2021. Debt principal was $6.13 million, including $3.20 million current; the term loan bears 4% interest and matures January 2024. Current assets were $279.54 million and current liabilities $12.88 million.
- Other metrics: Stock-based compensation expense was $25.33 million, compared with $1.84 million. Total assets were $286.90 million and stockholders’ equity $199.74 million. No dividends were planned.
Material changes and notable items
- Revenue growth reflected customer growth and higher shipment volume, partly offset by a lower average selling price. The company cited lower costs on third-generation products as partly offsetting higher cost of revenues.
- Operating expenses increased sharply, primarily due to stock-based compensation, higher headcount and investment in new applications and next-generation product development.
- The company redeemed its warrants in March 2022. Warrants were exercised or redeemed, and none remained outstanding at quarter-end. The related fair-value gain was noncash.
- The earnout liability fell to $70.77 million from $134.17 million at December 31, 2021, producing a noncash gain; management attributed the decrease primarily to the stock-price decline from $17.01 to $10.28.
- Three distributors each accounted for at least 10% of quarterly revenue; together they represented 83%. China accounted for 58% of end-customer revenue, down from 86%; the United States rose to 33% from 4%.
- Navitas adopted lease accounting standard ASC 842 on January 1, 2022, recognizing operating lease assets and liabilities.
Outlook, risks and controls
- Management expects operating losses and negative operating cash flows to continue, with research and development, selling and administrative costs, and capital expenditures expected to increase as the business expands. It stated that cash from the Business Combination was sufficient to fund operations, working capital and capital expenditures for the foreseeable future; no specific revenue or earnings guidance was provided.
- Key risks include dependence on a single wafer foundry and a limited supplier base, concentration in distributors and end customers, lack of long-term customer purchase commitments, China exposure, and execution risk in expanding beyond mobile charging.
- Management concluded disclosure controls were not effective as of May 16, 2022 because of material weaknesses in internal control over financial reporting, including insufficient technical accounting expertise and accounting resources for segregation of duties. Remediation was in progress; the weaknesses were not yet considered remediated.
- The company reported no material pending legal proceedings, no material changes to the risk factors in its 2021 Form 10-K, and no material subsequent events through May 16, 2022.
Important facts for investors to verify
- Whether shipment growth and design wins can offset continued average-selling-price pressure and customer concentration.
- How much of reported earnings reflects recurring operations versus noncash warrant and earnout remeasurement gains; monitor cash burn and stock-based compensation.
- Whether the company can diversify suppliers and customers, and maintain production capacity amid foundry, materials and geopolitical risks.
- Progress in remediating the disclosed internal-control material weaknesses and the potential effect of rising public-company and expansion costs.
- Potential dilution from equity awards, including 6.5 million performance-based LTIP options, 7.25 million outstanding RSUs at quarter-end and earnout shares subject to milestones.