Income Taxes

3 Months Ended

Mar. 31, 2021

For the three months ended March 31, 2021, the Company reported a worldwide consolidated pretax loss of $6.6 million, which consisted of a pre-tax loss from U.S. operations of approximately $4.9 million and pre-tax loss from Japan operations of approximately $1.7 million. The pre-tax loss from Japan operations primarily consists of $1.5 million from Transphorm Aizu, Inc. with nominal pre-tax book loss from Transphorm Japan, Inc. and Transphorm Japan Epi, Inc.

For the year ended December 31, 2020, the Company reported a worldwide consolidated pretax loss of $17.9 million, which consisted of a pre-tax loss from U.S. operations of approximately $10.3 million and pre-tax loss from Japan operations of approximately $7.6 million. The pre-tax loss from Japan operations consists of $800 thousand from Transphorm Japan, Inc., a $6.8 million pre-tax loss from Transphorm Aizu, Inc. and $25 thousand pre-tax income from Transphorm Japan Epi, Inc.

For the year ended December 31, 2019, the Company reported a worldwide consolidated pre-tax loss of $15.3 million, which consisted of a pre-tax loss from U.S. operations of approximately $10.6 million and pre-tax loss from Japan operations of approximately $4.7 million. The pre-tax loss from Japan operations consists of $1.0 million from Transphorm Japan, Inc., a $3.7 million pre-tax loss from Transphorm Aizu, Inc. and $1 thousand pre-tax income from Transphorm Japan Epi, Inc.

There is no U.S. federal or foreign provision for income taxes because the Company has incurred operating losses since inception and is in a full valuation allowance position. For the three month ended March 31, 2021, and the years ended December 31, 2020 and 2019, the Company has recorded a state income tax provision of $1 thousand which represents minimum taxes. Deferred income taxes reflect the net tax effects of the net operating losses and the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

Significant components of the Company’s deferred tax assets and deferred tax liabilities as of the dates presented as follows (in thousands):


			December 31,
	March 31, 2021		2020		2019
Deferred tax assets:
Net operating loss carryforwards	$	47,424	$	46,346	$	43,973
Tax credits	5,444		5,262		4,535
California capitalized research and development	72		80		343
Fixed assets	—		8		—
Others, net	581		593		602
Total deferred tax assets	53,521		52,289		49,453
Valuation allowance	(53,481)		(52,289)		(49,403)
Deferred tax asset, net of valuation allowance	40		—		50
Deferred tax liabilities:
Others, net	—		—		—
Fixed assets	(40)		—		(50)
Total deferred tax liabilities	(40)		—		(50)
Net deferred tax assets	$	—	$	—	$	—

As of March 31, 2021, December 31, 2020, and December 31, 2019, the Company had no assurance that future taxable income would be sufficient to fully utilize the net operating loss carryforwards and other deferred tax assets in the future. Consequently, the Company determined that a valuation allowance of approximately $53.5 million, $52.2 million and $49.4 million as of March 31, 2021, December 31, 2020, and December 31, 2019, respectively, was needed to offset the deferred tax assets resulting mainly from the net operating loss carryforwards.

The Company files income tax returns in the U.S. federal, California, and Oregon jurisdictions and is subject to U.S. federal, state, and local income tax examinations by tax authorities. Generally, the statute of limitations is 3 years for U.S. federal income tax and 4 years for state and local taxes. The statute of limitations may be extended for tax years where a corporation has a net operating loss carryforward or by agreement with the jurisdictional taxing authority. Accordingly, all of the Company's U.S. federal, state and local income tax years since inception remain open to examination by tax authorities. The Company is not currently under audit by any taxing authority.

The Company follows the provisions of uncertain tax positions as addressed in ASC 740-10. The Company recognized no increase or decrease in the liability for unrecognized tax benefits for any period presented. The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in

operating expenses. No such interest or penalties were recognized during the period presented. The Company had no accruals for interest and penalties at March 31, 2021, December 31, 2020 and December 31, 2019.

The utilization of the Company’s net operating loss and tax credit carryforwards is dependent on the future profitability of the Company. Further, the Internal Revenue Code imposes substantial restrictions on the utilization of such carryforwards in the event of an ownership change of more than 50%, as defined, during any three-year period (Section 382 and 383 limitations). The Company has determined that several ownership changes have occurred, which have resulted in substantial limitations on the Company’s ability to utilize its pre-ownership change net operating loss and tax credit carryforwards. These substantial limitations are expected to result in both a permanent loss of certain tax benefits related to net operating loss carryforwards and federal research and development credits, as well as an annual utilization limitation. The Company performed an analysis through the APO and anticipates no further Section 382 and 383 limitations.

As of March 31, 2021, the Company has federal net operating loss carryforwards of $250.0 million, of which $207.5 million will begin to expire in 2027 unless previously utilized, and the Company has state net operating loss carryforwards of $153.5 million which will begin to expire in 2028 unless previously utilized. The Company also has foreign net operating loss carryforwards of approximately $5.4 million which will begin to expire in 2024. The federal net operating loss generated for the fiscal year ended March 31, 2021 of $4.5 million, December 31, 2020 of $10.5 million, December 31, 2019 of $8.8 million, and December 31, 2018 of $18.5 million can be carried forward indefinitely. However, the federal deduction for net operating losses incurred in tax years beginning after January 1, 2021 is limited to 80% annual taxable income. Under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), the suspension of net operating losses generated in years 2018, 2019, and 2020 are not subject to the 80% limitation. The state net operating loss generated for the fiscal year ended March 31, 2021 of $1.0 million, December 31, 2020 of $2.6 million, and December 31, 2019 of $2.3 million can be carried forward 20 years.

As of March 31, 2021, the Company has federal research and development credit carryforwards of $4.6 million, which will begin to expire in 2032 unless previously utilized, and the Company had California research and development credit carryforwards of $4.2 million, which do not expire.

Deferred tax assets have not been established for net operating and tax credit carryforwards that are deemed to have no value due to the Section 382 and 383 limitations discussed above and, therefore, are not reflected in the table of deferred tax assets presented above. Future ownership changes, if any, may further limit the Company’s ability to utilize its remaining net operating losses and tax credit carryforwards. The Company performed an analysis as of March 31, 2021 and it was determined that no further limitations on tax attributes were required.

Reconciliation between federal statutory tax rate and the effective tax rate is shown in the following table for the periods presented:


	Three Months Ended March 31, 2021		Year Ended December 31,
			2020		2019
Federal statutory income tax rate	21.00	%	21.00	%	21.00	%
Research and development credit	2.73	%	4.06	%	4.76	%
Nondeductible expense	(2.43)	%	0.64	%	(3.18)	%
Loss in joint venture	(6.76)	%	(11.70)	%	(7.44)	%
Foreign income tax rate difference	2.45	%	4.10	%	2.99	%
Others, net	0.85	%	(2.08)	%	(0.75)	%
Valuation allowance	(17.84)	%	(16.02)	%	(17.38)	%
Effective tax rate	—	%	—	%	—	%

On March 27, 2020, the CARES Act was signed into law. The CARES Act repealed the 80% taxable income limitation for the 2018–2020 taxable years and reinstated NOL carrybacks for the 2018–2020 taxable years. In addition, the CARES Act temporarily increases the business interest deduction limitations from 30% to 50% of adjusted taxable income for the 2019 and 2020 taxable year. Lastly, a TCJA technical correction that classifies qualified improvement property as 15-year recovery period, allowing the bonus depreciation deduction to be claimed for such property retroactive as if it was included in the TCJA at the time of enactment. The Company does not anticipate a material impact to its December 31, 2019 financial statements due to the recent enactment.

On December 21, 2020, the Consolidated Appropriations Act (“CAA”) was signed into law. We do not expect any of the enactments of the CAA to have a material impact on the Company as of March 31, 2021.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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