COMMITMENTS AND CONTINGENCIES |
3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
COMMITMENTS AND CONTINGENCIES [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
COMMITMENTS AND CONTINGENCIES |
Lease Arrangements
On December 9, 2013, the Company entered into a Lease Agreement, as amended on December 23, 2013,
April 15, 2014, and January 29, 2021 (the “Lease Agreement”), for its corporate headquarters, which occupies approximately 36,350
square feet of office, storage and light manufacturing space and is classified as an operating lease for financial reporting purposes. The expiration date of the base term of the Lease Agreement in effect as of September 30, 2021 is October 31,
2026 and the terms of the Lease Agreement contain no early termination provisions. Provided there is no outstanding uncured event of default under the Lease Agreement, the Company has an option to extend the lease term for a period of five years. The Company’s option to extend the term of the Lease Agreement must be exercised in writing on or before 270 days prior to expiration of the then-current term. If the options are exercised, the monthly minimum rent for each of the extended terms will be
adjusted to the then prevailing fair market rate.
The Company took possession of the leased property on May 23, 2014, once certain improvements to the
leased space were completed and did not have access to the property before this date. Upon execution of the third amendment to the Lease Agreement (the “Lease Amendment”) on January 29, 2021, the Lease Amendment included a rent abatement in the
amount of approximately $214,000, which is reflected in the rent payments used in the calculation of the right-of-use (“ROU”) asset and
lease liability once remeasured upon the execution of the Lease Amendment to extend the lease term. The Lease Amendment also included an allowance for leasehold improvements offered by the landlord in an amount not to exceed approximately $545,000. Once such costs have been incurred, the Company will be reimbursed for qualified costs by the landlord and the Company will reduce the
remaining ROU asset and lease liability by the amount of the reimbursement. Such reductions of the ROU asset and lease liability will be recognized prospectively by the Company over the remaining term of the lease.
The Company has no other material operating leases and is not party to leases that would qualify for
classification as a finance lease, variable lease, or short-term lease.
As of September 30, 2021, the Company’s balance sheet classifications of its leases are as follows:
The Company’s total operating lease cost for the three months ended September 30, 2021 and 2020 was
approximately $202,000 and $131,000,
respectively.
As of September 30, 2021, the Company’s estimated incremental borrowing rate used and assumed
discount rate with respect to operating leases was 2.81% and the remaining operating lease term was 5.08 years.
As of September 30, 2021, the Company’s remaining future payments under operating leases for each
fiscal year ending June 30 are as follows:
The Company makes cash payments for amounts included in the measurement of its lease liabilities.
During the three months ended September 30, 2021 and 2020, cash paid for operating leases was approximately $162,000 and $170,000, respectively. Upon the execution of the Lease Amendment, the Company recorded additional ROU assets in the amount of approximately $3.9 million obtained in exchange for the additional operating lease liability during the fiscal year ended June 30, 2021.
Purchase Commitments
On December 12, 2014, the Company entered into an exclusive supply agreement (the “Supply Agreement”)
with Cree, Inc., now known as Wolfspeed, Inc. (“Wolfspeed”). Under the Supply Agreement, subject to certain terms and conditions, the Company agreed to exclusively purchase from Wolfspeed, and Wolfspeed agreed to exclusively supply, 100% of the Company’s required SiC materials in quarterly installments that must equal or exceed a set minimum order quantity. The initial term of the
Supply Agreement was scheduled to expire on June 24, 2018, unless extended by the parties.
Effective June 22, 2018, the Supply Agreement was amended to extend the expiration date to June 25,
2023. The Supply Agreement was also amended to (i) provide the Company with one option, subject to certain conditions, to unilaterally
extend the term of the Supply Agreement for an additional two-year period following expiration of the initial term; (ii) establish a
process by which Wolfspeed may begin producing alternate SiC material based on the Company’s specifications that will give the Company the flexibility to use the materials in a broader variety of its products; and (iii) permit the Company to
purchase certain amounts of SiC materials from third parties under limited conditions.
Effective June 30, 2020, the Supply Agreement was further amended to extend the expiration date to
June 29, 2025, which may be extended again by mutual agreement of the parties. The Supply Agreement was also amended to, among other things, (i) spread the Company’s total purchase commitment under the Supply Agreement in the amount of
approximately $52.95 million over the term of the Supply Agreement, as amended; (ii) establish a process by which Wolfspeed has agreed
to accept purchase orders in excess of the agreed-upon minimum purchase commitment, subject to certain conditions; and (iii) permit the Company to purchase revised amounts of SiC materials from third parties under limited conditions.
The Company’s total purchase commitment under the Supply Agreement, as amended, until June 2025 is
approximately $52.95 million, of which approximately $31.35 million remains to be purchased as of September 30, 2021. Over the life of the Supply Agreement, as amended, the Company’s future minimum annual purchase commitments of SiC crystals
range from approximately $4.00 million to $10.00
million each year.
During the three months ended September 30, 2021, the Company purchased approximately $1.50 million of SiC crystals from Wolfspeed pursuant to the terms of the Supply Agreement, as amended. During the three months ended September 30,
2020, the Company did not purchase SiC crystals from Wolfspeed pursuant to the terms of the Supply Agreement, as amended.
COVID-19 Update
The COVID-19 pandemic continues to present unprecedented business challenges in the
Company’s fiscal year ending June 30, 2022 (“Fiscal 2022”). The Company’s management has taken measures to protect the health and safety of the Company’s employees, work with its customers and suppliers to minimize disruptions, reduce its
expenses, and support its community in addressing the challenges posed by the ongoing COVID-19 pandemic.
The Company has experienced impacts on its business related to the COVID-19
pandemic, primarily in increased coronavirus-related costs, including using accelerated payments in some cases to the Company’s suppliers that are due by their terms in future periods and the Company expects to continue accelerating payments to
certain suppliers through at least a portion of Fiscal 2022. The Company is also seeing a sharp increase in international freight costs, with limited availability and long delays causing disruption in the global supply chain. Accordingly, the
Company’s management is taking steps where possible to mitigate such potential delays in supplier deliveries by accelerating orders and increasing order quantities.
Following the government mandated shut down during the early days of the pandemic,
work in the Company’s production and distribution facilities has continued throughout the remainder of the pandemic, consistent with guidance from federal, state, and local officials to minimize the spread of COVID-19. The Company’s management
continues to take actions to equip its employees with personal protective equipment, establish minimum staffing and social distancing policies, sanitize workspaces more frequently, adopt alternate work schedules, and institute other measures
aimed to sustain production and related services while minimizing the transmission of COVID-19, including measures to facilitate the provision of vaccines to the Company’s employees in line with state and local guidelines. In addition, the
Company has maintained a flexible teleworking policy for its employees who can meet customer commitments remotely, and a portion of the Company’s workforce continues teleworking.
Although
the COVID-19 pandemic did not have a significant adverse impact on the Company’s
financial results in the quarter ended September 30, 2021, the ultimate impact of COVID-19 on the Company’s operations and financial performance in future periods, including management’s ability to execute its strategic initiatives in the
expected timeframes, remains uncertain and will depend on future pandemic related developments, including the duration of the pandemic, any potential subsequent waves of COVID-19 and its variant viral infections, the effectiveness, distribution
and acceptance of COVID-19 vaccines, and related government actions to prevent and manage disease spread, all of which are uncertain and cannot be predicted. The Company cannot at this time predict the full impact of the COVID-19 pandemic, but
the Company’s management believes there is a risk that the COVID-19 pandemic could adversely impact the Company’s business, financial condition, results of operations and/or cash flows in Fiscal 2022.
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