What changed in this filing

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Item 1. Financial Statements

2022-12-01 compared with 2022-09-01 · 218 added, 132 removed, 548 unchanged (39% of the section changed)

3 unchanged sentences

(unaudited, in thousands, except per share amounts)

July 30, 2022 April 30, 2022

October 29, 2022 April 30, 2022

Current Assets:

Cash and cash equivalents $ 190,542 $ 259,322

Short-term investments 50,000 —

Accounts receivable 51,768 29,524

21 unchanged sentences

1,000,000 shares authorized;

145,344 shares issued and outstanding at July 30, 2022;

146,486 shares issued and outstanding at October 29, 2022;

and 1,000,000 shares authorized;

9 unchanged sentences

(unaudited, in thousands, except per share amounts)

Three Months Ended

July 30, 2022 July 31, 2021

Three Months Ended Six Months Ended

October 29, 2022 October 31, 2021 October 29, 2022 October 31, 2021

Product sales $ 44,349 $ 18,454 $ 79,612 $ 25,717

17 unchanged sentences

Loss before income taxes ( 2,431 ) ( 3,499 ) ( 2,869 ) ( 15,174 )

Provision (benefit) for income taxes ( 365 ) 902

Provision for income taxes 929 601 564 1,503

Net loss $ ( 3,360 ) $ ( 4,100 ) $ ( 3,433 ) $ ( 16,677 )

7 unchanged sentences

(unaudited, in thousands)

Three Months Ended

July 30, 2022 July 31, 2021

Three Months Ended Six Months Ended

October 29, 2022 October 31, 2021 October 29, 2022 October 31, 2021

Net loss $ ( 3,360 ) $ ( 4,100 ) $ ( 3,433 ) $ ( 16,677 )

Other comprehensive loss:

Foreign currency translation loss ( 96 ) ( 5 )

Other comprehensive gain (loss):

Foreign currency translation gain (loss) ( 320 ) 32 ( 416 ) 27

Total comprehensive loss $ ( 3,680 ) $ ( 4,068 ) $ ( 3,849 ) $ ( 16,650 )

6 unchanged sentences

Balances at April 30, 2022 — — 144,755 $ 7 $ 424,562 $ 23 $ ( 90,429 ) $ 334,163

Issuance of Series D+ convertible preferred shares, net of issuance costs 1,251 7,245 — — — — — —

Ordinary shares issued under equity incentive plans

1 unchanged sentence

Share-based compensation

— — — — 5,546 — — 5,546

Warrant contra revenue — — — — 388 — — 388

Total comprehensive loss — — — — — ( 96 ) ( 73 ) ( 169 )

Balances at July 30, 2022 — $ — 145,344 $ 7 $ 432,473 $ ( 73 ) $ ( 90,502 ) $ 341,905

Balances at April 30, 2022 — — 144,755 7 424,562 23 ( 90,429 ) 334,163

Ordinary shares issued under equity incentive plans

4 unchanged sentences

Total comprehensive loss — — — — — ( 320 ) ( 3,360 ) ( 3,680 )

Balances at October 29, 2022 — $ — 146,486 $ 7 $ 438,352 $ ( 393 ) $ ( 93,862 ) $ 344,104

Balances at April 30, 2021 50,809 $ 197,965 68,282 $ 3 $ 12,592 $ 227 $ ( 68,253 ) $ ( 55,431 )

Issuance of Series D+ convertible preferred shares, net of issuance costs 1,251 7,245 — — — — — —

Ordinary shares issued under equity incentive plans

— — 554 — 461 — — 461

Share-based compensation — — — — 1,075 — — 1,075

Total comprehensive loss — — — — — ( 5 ) ( 12,577 ) ( 12,582 )

Balances at July 31, 2021 52,060 $ 205,210 68,836 $ 3 $ 14,128 $ 222 $ ( 80,830 ) $ ( 66,477 )

Ordinary shares issued under equity incentive plans

— — 667 — 587 — — 587

Share-based compensation

— — — — 1,307 — — 1,307

Total comprehensive loss — — — — — 32 ( 4,100 ) ( 4,068 )

Balances at October 31, 2021 52,060 205,210 69,503 $ 3 $ 16,022 $ 254 $ ( 84,930 ) $ ( 68,651 )

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

2 unchanged sentences

(unaudited, in thousands)

Three months ended

July 30, 2022 July 31, 2021

Six Months Ended

October 29, 2022 October 31, 2021

Cash flows from operating activities:

17 unchanged sentences

Purchases of property and equipment ( 10,925 ) ( 4,985 )

Purchases of short-term investments ( 50,000 ) —

Net cash used in investing activities ( 60,925 ) ( 4,985 )

34 unchanged sentences

Our fiscal year ending April 29, 2023 (“fiscal year 2023”) is a 52-week fiscal year.

The first quarter of our fiscal year 2023 ended on July 30, 2022, the second quarter ends on October 29, 2022 and the third quarter ends on January 28, 2023.

The first quarter of our fiscal year 2023 ended on July 30, 2022, the second quarter ended on October 29, 2022 and the third quarter ends on January 28, 2023.

Significant Accounting Policies

The Company believes that other than the adoption of new accounting pronouncements and the accounting policies as described below, there have been no significant changes during the three months ended July 30, 2022 to the items disclosed in Note 2, “Significant Accounting Policies,” included in the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2022.

The Company believes that other than the adoption of new accounting pronouncements and the accounting policies as described below, there have been no significant changes during the three and six months ended October 29, 2022 to the items disclosed in Note 2, “Significant Accounting Policies,” included in the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2022.

Use of Estimates

1 unchanged sentence

The Company bases its estimates and judgments on historical experience, knowledge of current conditions and beliefs of what could occur in the future, given the available information.

Estimates are used for, but not limited to, write-down for excess and obsolete inventories, the standalone selling price for each distinct performance obligation included in customer contracts with multiple performance obligations, variable consideration from revenue contracts, determination of the fair value of share-based awards and customer warrant, valuation of ordinary shares prior to the completion of initial public offering (“IPO”), the realization of tax assets and estimates of tax reserves, and incremental borrowing rate used in the Company’s operating lease calculations.

Estimates are used for, but not limited to, write-down for excess and obsolete inventories, the standalone selling price for each distinct performance obligation included in customer contracts with multiple performance obligations, variable consideration from revenue contracts, determination of the fair value of share-based awards, ordinary shares and a customer warrant, realization of tax assets and estimates of tax reserves, and incremental borrowing rate used in the Company’s operating lease calculations.

Actual results may differ from those estimates and such differences may be material to the financial statements.

6 unchanged sentences

None of these reclassifications had an impact on reported net income or cash flows for any of the periods presented.

Cash, Cash Equivalents and Short-term Investments

Cash and cash equivalents are highly liquid investments with insignificant interest rate risk and maturities of three months or less at the time of acquisition.

Cash and cash equivalents consist primarily of cash balances in the Company’s bank checking and savings accounts, and government and institutional money market funds.

Investments not considered cash equivalents, and with maturities of one year or less from the consolidated balance sheet date, are classified as short-term investments.

Short-term investments consist of a certificate of deposit with original maturity date between three and twelve months.

The classification of our investments in marketable debt securities is determined at the time of purchase, and such determination is reevaluated at each balance sheet date.

Marketable debt securities are classified as available-for-sale.

These investments are considered impaired when a decline in fair value is judged to be other-than-temporary.

We consult with our investment managers and consider available quantitative and qualitative evidence in evaluating potential impairment of our investments on a quarterly basis.

If the cost of an individual investment exceeds its fair value, we evaluate, among other factors, general market conditions, the duration and extent to which the fair value is less than cost, and our intent and ability to hold the investment.

Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis in the investment is established.

Accounting Pronouncement Recently Adopted

11 unchanged sentences

Concentrations

Financial instruments that subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, and accounts receivable.

Financial instruments that subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, short term investments and accounts receivable.

Cash is placed in major financial institutions around the world.

The Company’s cash deposits exceed insured limits.

Short-term investments are subject to counterparty risk up to the amount presented on the balance sheet.

Historically, a relatively small number of customers have accounted for a significant portion of the Company’s revenue.

1 unchanged sentence

These variations are expected to continue in the foreseeable future.

Credo Technology Group Holding Ltd

Notes to Unaudited Condensed Consolidated Financial Statements

The following table summarizes the significant customers’ accounts receivable and revenue as a percentage of total accounts receivable and total revenue, respectively:

Accounts Receivable July 30, 2022 April 30, 2022

Accounts Receivable October 29, 2022 April 30, 2022

Customer A 44 % *

2 unchanged sentences

Customer D 11 % 14 %

Three months ended

Revenue July 30, 2022 July 31, 2021

Three months ended Six months ended

Revenue October 29, 2022 October 31, 2021 October 29, 2022 October 31, 2021

Customer A 44 % * 43 % *

Customer B * 22 % * 15 %

Customer C 16 % 33 % 11 % 24 %

2 unchanged sentences

* Less than 10% of total accounts receivable or total revenue.

Credo Technology Group Holding Ltd

Notes to Unaudited Condensed Consolidated Financial Statements

Revenue Recognition

The following table summarizes revenue disaggregated by primary geographical market based on destination of shipment and location of contracting entity, which may differ from the customer’s principal offices (in thousands):

Three months ended

July 30, 2022 July 31, 2021

Three Months Ended Six Months Ended

October 29, 2022 October 31, 2021 October 29, 2022 October 31, 2021

Mainland China $ 31,423 $ 9,255 $ 54,179 $ 9,336

3 unchanged sentences

Taiwan 2,934 94 3,001 1,725

Singapore 1,079 4,941 4,150 4,962

Rest of World 4,619 368 6,830 1,192

1 unchanged sentence

Contract Balances

The contract assets are primarily related to the Company’s fixed fee IP licensing arrangements and rights to consideration for performance obligations delivered but not billed as of July 30, 2022 and April 30, 2022.

During the three months ended July 30, 2022, the Company recognized $ 0.7 million of revenue that was included in the deferred revenue balance as of April 30, 2022.

During the three months ended July 31, 2021, the Company recognized $ 2.0 million of revenue that was included in the deferred revenue balance as of April 30, 2021.

During three months ended July 30, 2022, the decrease in contract assets of $ 4.0 million and the increase in deferred revenue of $ 1.8 million was primarily due to IP licensing and engineering services arrangements where certain billing milestones had been reached.

During the three months ended October 29, 2022, the Company recognized $ 1.8 million of revenue that was included in the deferred revenue balance as of July 30, 2022.

During the three months ended October 31, 2021, the Company recognized $ 2.1 million of revenue that was included in the deferred revenue balance as of July 31, 2021.

During the six months ended October 29, 2022, the Company recognized $ 1.0 million of revenue that was included in the deferred revenue balance as of April 30, 2022.

During the six months ended October 31, 2021, the Company recognized $ 3.9 million of revenue that was included in the deferred revenue balance as of April 30, 2021.

During six months ended October 29, 2022, the decrease in contract assets of $ 3.6 million was primarily due to IP licensing and engineering services arrangements where certain billing milestones had been reached.

During six months ended October 29, 2022, the change to deferred revenue balance was not material.

Remaining Performance Obligations

Credo Technology Group Holding Ltd

Notes to Unaudited Condensed Consolidated Financial Statements

Revenue allocated to remaining performance obligations represents the transaction price allocated to the performance obligations that are unsatisfied, or partially unsatisfied, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods.

The contracted but unsatisfied performance obligation was approximately $ 22.5 million and the satisfied but unrecognized performance obligations was approximately $ 20.2 million as of July 30, 2022, which the Company expects to recognize over the next two years .

The contracted but unsatisfied performance obligation was approximately $ 11.4 million and the satisfied but unrecognized performance obligations was approximately $ 20.2 million as of October 29, 2022, which the Company expects to recognize over the next year.

The amounts stated above include amounts relating to an IP licensing and development contract we entered into with a customer in September 2021, for total cash consideration of $ 43.5 million, which is receivable over an estimated period of three years upon meeting certain contractual milestones.

As of July 30, 2022, we had billed $ 22.2 million and recognized revenue amounting to $ 20.6 million upon delivery of certain milestones of the contract.

We have applied constraints on certain remaining milestones due to significant uncertainty relating to the delivery of those milestones as of July 30, 2022 associated with dependency on actions by the customer.

As of October 29, 2022, we had billed $ 22.2 million and recognized revenue amounting to $ 21.8 million upon delivery of certain milestones of the contract.

We have applied constraints on certain remaining milestones due to significant uncertainty relating to the delivery of those milestones as of October 29, 2022 associated with dependency on actions by the customer.

The constraints will be re-evaluated at each future reporting period.

3 unchanged sentences

Upon issuance of the Warrant, 40,000 of the shares issuable upon exercise of the Warrant vested immediately and the remainder of the shares issuable will vest in tranches over the contract term based on the amount of global payments by Holder and its affiliates to us, up to $ 201 million in aggregate payments.

No other tranches were vested as of July 30, 2022.

No other tranches were vested as of October 29, 2022.

The grant date fair value of the Warrant share was determined at $ 4.65 per share using the Black-Scholes option pricing model.

The grant date fair value of the Warrant share was estimated using the following assumptions:

Credo Technology Group Holding Ltd

Notes to Unaudited Condensed Consolidated Financial Statements

At Grant Date

4 unchanged sentences

Fair value per ordinary share $ 10.74

During the three months ended July 30, 2022, the Company recognized $ 0.4 million as contra revenue within the product sales revenue on the consolidated statements of operations.

During the three and six months ended October 29, 2022, the Company recognized $ 0.2 million and $ 0.6 million, respectively, as contra revenue within the product sales revenue on the condensed consolidated statements of operations.

Fair Value Measurements

6 unchanged sentences

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The carrying amount of the Company’s financial instruments, including cash equivalents, accounts receivable, and accounts payable, approximate their respective fair values because of their short maturities.

The Company measures the fair value of money market funds using Level 1 inputs.

The Company’s certificates of deposit are classified as a held-to-maturity security as the Company intends to hold until their maturity dates.

The certificates of deposit are valued using Level 2 inputs.

Pricing sources may include industry standard data providers, security master files from large financial institutions, and other third -party sources used to determine a daily market value.

Credo Technology Group Holding Ltd

Notes to Unaudited Condensed Consolidated Financial Statements

The following table present the fair value of the financial instruments measured on a recurring basis as of October 29, 2022 (in thousands).

October 29, 2022

Level 1 Level 2 Level 3 Total

Cash equivalents:

Certificates of deposit $ — $ 9,226 $ — $ 9,226

Money market funds 150,000 — — 150,000

Short-term investments:

Certificate of deposit — 50,000 — 50,000

Total cash equivalents and short-term investments $ 150,000 $ 59,226 $ — $ 209,226

The carrying amount of the Company’s financial instruments, including cash equivalents, short-term investments, accounts receivable, and accounts payable, approximate their respective fair values because of their short maturities.

As of October 29, 2022, there were no unrealized loss or gains associated with the Company’s financial instruments.

Supplemental Financial Information

Inventories consisted of the following (in thousands):

July 30, 2022 April 30, 2022

October 29, 2022 April 30, 2022

Raw materials $ 20,739 $ 11,610

4 unchanged sentences

Property and equipment consisted of the following (in thousands):

July 30, 2022 April 30, 2022

October 29, 2022 April 30, 2022

Computer equipment and software $ 13,832 $ 1,736

7 unchanged sentences

$ 40,664 $ 21,844

Credo Technology Group Holding Ltd

Notes to Unaudited Condensed Consolidated Financial Statements

Depreciation and amortization expense for the three months ended July 30, 2022 and July 31, 2021 was $ 1.6 million and $ 0.9 million, respectively.

Depreciation and amortization expense for the three months ended October 29, 2022 and October 31, 2021 was $ 2.6 million and $ 1.1 million, respectively.

Depreciation and amortization expense for the six months ended October 29, 2022 and October 31, 2021 was $ 4.3 million and $ 2.0 million, respectively.

Computer equipment and software primarily includes electronic design automation software relating to the Company’s R&D design of future products and intellectual properties.

Construction in progress and production equipment primarily includes mask set costs capitalized relating to the Company’s new products already introduced or to be introduced.

Credo Technology Group Holding Ltd

Notes to Unaudited Condensed Consolidated Financial Statements

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following (in thousands):

July 30, 2022 April 30, 2022

October 29, 2022 April 30, 2022

Accrued expenses $ 12,098 $ 8,372

5 unchanged sentences

Other non-current liabilities consisted of the following (in thousands):

July 30, 2022 April 30, 2022

October 29, 2022 April 30, 2022

Non-current payables relating to purchases of property and equipment $ 6,017 $ —

3 unchanged sentences

Non-cancelable Purchase Obligations

The Company depends upon third-party subcontractors to manufacture wafers and other inventory parts.

The Company’s subcontractor relationships typically allow for the cancellation of outstanding purchase orders, but require payment of all expenses incurred through the date of cancellation.

As of July 30, 2022, the total value of open purchase orders payable within the next one year, that were committed with the Company’s third party subcontractors was approximately $ 18.3 million.

Total future non-cancelable purchase obligations as of October 29, 2022 are as follows (in thousands):

Fiscal Year Purchase Commitments to Manufacturing Vendors Technology License Fees

Remainder of 2023 $ 6,200 $ 2,202

2024 4,039 5,177

2025 6,763 5,432

2026 8,131 350

2027 9,282 350

Thereafter 7,319 700

Total unconditional purchase commitments $ 41,734 $ 14,211

Technology license fees include the liabilities under agreements for technology licenses between the Company and various vendors.

Under the Company’s manufacturing relationships with its foundry partners, cancellation of outstanding purchase orders is allowed but requires payment of all costs and expenses incurred through the date of cancellation.

As of October 29, 2022, the total value of non-cancelable purchase orders payable within the next one year, that were committed with the Company’s third party subcontractors was approximately $ 6.2 million.

Such purchase commitments are included in the preceding table.

The Company entered into a manufacturing supply capacity reservation agreement with an assembly subcontractor during the current fiscal year due to the current global supply shortage environment.

Under this arrangement, the Company agreed to pay refundable deposits to the supplier in exchange for reserved manufacturing production capacity over the term of the agreement, which approximates five years.

In addition, the Company committed to certain purchase levels that were in line with the capacity reserved.

If the Company does not meet the purchase level commitment, the agreement requires the Company to pay a fee equal to the difference between the actual purchase and the purchase commitment, up to the value of refundable deposits made.

The Company currently estimates that it has made purchase level commitments of at least $ 35.5 million for the remainder of fiscal 2023 through fiscal 2028 under the capacity reservation agreement.

Such purchase commitments are included in the preceding table.

In addition, refundable deposits payable under this arrangement are $ 5.4 million during the remainder of fiscal 2023 and $ 3.4 million in fiscal 2024.

Credo Technology Group Holding Ltd

Notes to Unaudited Condensed Consolidated Financial Statements

Warranty Obligations

5 unchanged sentences

The Company has not incurred material costs to defend lawsuits or settle claims related to these indemnifications.

Accordingly, the Company has no liabilities recorded for these agreements as of July 30, 2022 and April 30, 2022.

Accordingly, the Company has no liabilities recorded for these agreements as of October 29, 2022 and April 30, 2022.

Legal Proceedings

3 unchanged sentences

Accrual estimates are recorded when and if it is determined that such a liability for litigation and contingencies are both probable and reasonably estimable.

As of the date of issuance of the unaudited condensed consolidated financial statements, the Company was not

Credo Technology Group Holding Ltd

Notes to Unaudited Condensed Consolidated Financial Statements

subject to any litigation.

As of the date of issuance of the unaudited condensed consolidated financial statements, the Company was not subject to any litigation.

No accruals for loss contingencies or recognition of actual losses have been recorded in any of the periods presented.

13 unchanged sentences

The conversion price per share for each series of preferred share shall initially be equal to the original issue price of such series, which means $ 1.00 per share for Series A, $ 2.10 per share for Series B, $ 4.29 per share for Series C, $ 4.99 per share for Series D and $ 5.81 per share for Series D+.

The conversion price shall be subject to adjustment in order to adjust the number of ordinary shares into which the preferred shares are convertible.

Credo Technology Group Holding Ltd

Notes to Unaudited Condensed Consolidated Financial Statements

conversion price shall be subject to adjustment in order to adjust the number of ordinary shares into which the preferred shares are convertible.

Each share of Series A, B, C, D and D+ convertible preferred share automatically converted into the number of ordinary shares at the conversion rate at the time in effect upon the closing of a public offering of ordinary shares which results in at least $ 25.0 million of proceeds to the Company at a per share price not less than $ 9.99 or with the vote or written consent of the holders of a majority of the then outstanding preferred shares, voting as a separate class, to convert their preferred shares at the then effective Conversion Price.

4 unchanged sentences

Liquidation Rights - In the event of any sale, lease, conveyance or other disposition of all or substantially all of the assets of the Company or the exclusive license of all or substantially all of the Company’s intellectual property used in generating all or substantially all of the Company’s revenues, reorganization, consolidation, acquisition, merger, liquidation, dissolution or winding up of the Company, either voluntary or involuntary, the holders of preferred shares shall be entitled to receive in preference to the holders of ordinary shares, an amount per share equal to the liquidation preference, plus any declared but unpaid dividends.

After payment of the liquidation preference to holders

Credo Technology Group Holding Ltd

Notes to Unaudited Condensed Consolidated Financial Statements

of preferred shares, the remaining assets of the Company were available for distribution on a pro rata basis to the holders of ordinary shares.

After payment of the liquidation preference to holders of preferred shares, the remaining assets of the Company were available for distribution on a pro rata basis to the holders of ordinary shares.

Voting Rights - The holders of the convertible preferred shares were entitled to the number of votes equal to the number of ordinary shares into which such convertible preferred shares could be converted on the record date.

4 unchanged sentences

Lease expense and supplemental cash flow information are as follows (in thousands):

Three Months Ended

July 30, 2022 July 31, 2021

Three Months Ended Six Months Ended

October 29, 2022 October 31, 2021 October 29, 2022 October 31, 2021

Operating lease expenses $ 891 $ 676 $ 1,780 $ 1,355

1 unchanged sentence

Right-of-use assets obtained in exchange for lease obligation $ 649 $ — $ 649 $ 259

The aggregate future lease payments for operating leases as of July 30, 2022 are as follows (in thousands):

Credo Technology Group Holding Ltd

Notes to Unaudited Condensed Consolidated Financial Statements

The aggregate future lease payments for operating leases as of October 29, 2022 are as follows (in thousands):

Fiscal Year Operating leases

4 unchanged sentences

Present value of lease liabilities $ 16,623

As of July 30, 2022, the weighted average remaining lease term for the Company's operating leases is 7.43 years and the weighted average discount rate used to determine the present value of the Company's operating leases is 6 %.

As of October 29, 2022, the weighted average remaining lease term for the Company's operating leases is 7.15 years and the weighted average discount rate used to determine the present value of the Company's operating leases is 5.81 %.

Share Incentive Plan

3 unchanged sentences

In regard to the ordinary shares purchased, but not vested, the Company has the right to repurchase shares at the original issue price in the event of termination of services.

As of July 30, 2022, 248,478 shares from share option early exercises remained subject to the Company’s repurchase rights.

As of October 29, 2022, 168,390 shares from share option early exercises remained subject to the Company’s repurchase rights.

As of April 30, 2022, 442,787 such ordinary shares, consisting of 16,667 shares from RSAs and 426,120 from share option early exercises, remained subject to the Company’s repurchase rights.

1 unchanged sentence

Restricted Stock Unit (“RSU”) Awards

Credo Technology Group Holding Ltd

Notes to Unaudited Condensed Consolidated Financial Statements

A summary of information related to RSU activity during the three months ended July 30, 2022 is as follows:

A summary of information related to RSU activity during the six months ended October 29, 2022 is as follows:

RSUs Outstanding

4 unchanged sentences

Canceled/ forfeited ( 260,938 ) $ 10.47

Balances and expected to vest as of July 30, 2022 4,208,688 $ 10.32 1.43 $ 67,549

Balances and expected to vest as of October 29, 2022 3,873,038 $ 10.92 1.53 $ 53,138

Share Option Awards

A summary of information related to share option activity during the three months ended July 30, 2022 is as follows:

A summary of information related to share option activity during the six months ended October 29, 2022 is as follows:

Credo Technology Group Holding Ltd

Notes to Unaudited Condensed Consolidated Financial Statements

Options Outstanding

3 unchanged sentences

Options canceled/ forfeited ( 168,586 ) $ 3.03

Balance and expected to vest as of July 30, 2022 10,800,951 $ 1.94 6.86 $ 152,427

Exercisable as of July 30, 2022 10,552,473 $ 1.94 6.86 $ 148,907

Balance and expected to vest as of October 29, 2022 10,348,238 $ 1.95 6.66 $ 121,814

Exercisable as of October 29, 2022 10,179,848 $ 1.95 6.66 $ 119,833

Employee Stock Purchase Plan (“ESPP”)

During the three months ended July 30, 2022, 154,053 shares were issued under the ESPP.

During the six months ended October 29, 2022, 154,053 shares were issued under the ESPP.

No shares were issued during the three months ended October 29, 2022 under the ESPP.

Summary of Share-Based Compensation Expense

The following table summarizes share-based compensation expense included in the unaudited condensed consolidated statements of operations (in thousands):

Three Months Ended

July 30, 2022 July 31, 2021

Three Months Ended Six Months Ended

October 29, 2022 October 31, 2021 October 29, 2022 October 31, 2021

Cost of revenue $ 149 $ 47 $ 452 $ 134

5 unchanged sentences

The Company’s quarterly tax provision, and estimate of its annual effective tax rate, is subject to variation due to several factors, including variability in accurately predicting our pre-tax income or loss and the mix of jurisdictions to which they relate, intercompany transactions, changes in tax laws, the applicability of special tax regimes, changes in how we do business, and discrete items.

Provisions for income taxes for the three and six months ended October 29, 2022 and October 31, 2021 were as follows (in thousands except percentages):

Three Months Ended Six Months Ended

October 29, 2022 October 31, 2021 % Change October 29, 2022 October 31, 2021 % Change

Provision for income taxes $ 929 $ 601 54.6 % $ 564 $ 1,503 ( 62.5 ) %

Effective tax rate ( 38 ) % ( 17 ) % ( 20 ) % ( 10 ) %

Our effective tax rate for the three months ended October 29, 2022 differs from the same period in the prior year primarily due to an increase in estimated annual tax provision based on the estimated annual effective tax rate, offset by an increase in stock based compensation deductions.

Our effective tax rate for the six months ended October 29, 2022 differs from the same period in the prior year primarily due to an increase in stock based compensation deductions.

During the three and six months ended October 29, 2022, there were no material changes to the total amount of unrecognized tax benefits and we do not expect any significant changes in the next 12 months.

Credo Technology Group Holding Ltd

Notes to Unaudited Condensed Consolidated Financial Statements

Provisions for income taxes for the three months ended July 30, 2022 and July 31, 2021 were as follows (in thousands except percentages):

Three Months Ended July 30, 2022 Effective Tax Rate Three Months Ended July 31, 2021 Effective Tax Rate

Provision (benefit) for income taxes $ ( 365 ) 138.96 % $ 902 ( 7.72 ) %

Our effective tax rate for the three months ended July 30, 2022 differs from the same period in the prior year primarily due to the decrease in the company loss before tax, a partial release of the US valuation allowance on research and development credits and a reduction in foreign withholding taxes.

During the three months ended July 30, 2022, there were no material changes to the total amount of unrecognized tax benefits and we do not expect any significant changes in the next 12 months.

Net Loss Per Share

1 unchanged sentence

Net loss per share was determined as follows (in thousands, except per share amounts):

Three months ended

July 30, 2022 July 31, 2021

Three months ended Six Months Ended

October 29, 2022 October 31, 2021 October 29, 2022 October 31, 2021

Net loss $ ( 3,360 ) $ ( 4,100 ) $ ( 3,433 ) $ ( 16,677 )

1 unchanged sentence

Basic and diluted net loss per share $ ( 0.02 ) $ ( 0.06 ) $ ( 0.02 ) $ ( 0.24 )

The following potentially dilutive securities outstanding (in thousands) have been excluded from the computations of diluted weighted average shares outstanding for the three months ended July 30, 2022 and July 31, 2021 because such securities have an anti-dilutive impact due to losses reported:

Three months ended

July 30, 2022 July 31, 2021

The following potentially dilutive securities outstanding (in thousands) have been excluded from the computations of diluted weighted average shares outstanding for the three and six months ended October 29, 2022 and October 31, 2021 because such securities have an anti-dilutive impact due to losses reported:

Three Months Ended Six Months Ended

October 29, 2022 October 31, 2021 October 29, 2022 October 31, 2021

Options and RSAs 10,492 9,828 10,675 8,696

RSUs 3,753 — 3,981 —

ESPP 76 — 76 —

Customer warrants 4,080 — 4,080 —

33 unchanged sentences

Once developed, these tailored solutions can generally be broadly leveraged across our portfolio and we are able to sell the product or license the IP into the broader market.

During the three months ended July 30, 2022 and July 31, 2021, we generated $46.5 million and $10.7 million in total revenue, respectively.

Product sales and product engineering services revenue comprised 78% and 80% of our total revenue in the three months ended July 30, 2022 and July 31, 2021, respectively, and IP license and IP license engineering services revenue represented 22% and 20% of our total revenue in the three months ended July 30, 2022 and July 31, 2021, respectively.

During the three months ended July 30, 2022 and July 31, 2021, we generated $0.1 million and $12.6 million in net loss, respectively.

During the three months ended October 29, 2022 and October 31, 2021, we generated $51.4 million and $26.4 million in total revenue, respectively.

Product sales and product engineering services revenue comprised 94% and 75% of our total revenue in the three months ended October 29, 2022 and October 31, 2021, respectively, and IP license and IP license engineering services revenue represented 6% and 25% of our total revenue in the three months ended October 29, 2022 and October 31, 2021, respectively.

During the three months ended October 29, 2022 and October 31, 2021, we generated $3.4 million and $4.1 million in net loss, respectively.

We derive the substantial majority of our revenue from a limited number of customers, and we anticipate we will continue to derive a significant portion of our revenue from a limited number of customers for the foreseeable future.

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By providing tailored engineering services to our customers, we believe we strengthen our customer relationships, enable additional sales and establish ourselves for potential long-term revenue opportunities from associated product sales or IP license revenue.

A summary of our revenue and associated gross margin by these revenue sources for the three months ended July 30, 2022 and July 31, 2021, respectively, is presented below (in thousands, except percentages):

Three months ended

July 30, 2022 July 31, 2021

A summary of our revenue and associated gross margin by these revenue sources for the three and six months ended October 29, 2022 and October 31, 2021, respectively, is presented below (in thousands, except percentages):

Three Months Ended Six Months Ended

October 29, 2022 October 31, 2021 October 29, 2022 October 31, 2021

Product sales $ 44,349 $ 18,454 $ 79,612 $ 25,717

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Total IP license and IP license engineering services

3,270 6,618 13,650 8,760

Total revenue $ 51,369 $ 26,427 $ 97,836 $ 37,151

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Results of Operations

Three Months Ended July 30, 2022 and July 31, 2021

Three and Six Months Ended October 29, 2022 and October 31, 2021

The following table sets forth information derived from our unaudited consolidated statements of operations expressed as a percentage of total revenue:

Three months ended

July 30, 2022 July 31, 2021

Three Months Ended Six Months Ended

October 29, 2022 October 31, 2021 October 29, 2022 October 31, 2021

Product sales 86.3 % 69.8 % 81.4 % 69.2 %

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Loss before income taxes (4.7) % (13.2) % (2.9) % (40.8) %

Provision (benefit) for income taxes (0.8) % 8.4 %

Provision for income taxes 1.8 % 2.3 % 0.6 % 4.0 %

Net loss (6.5) % (15.5) % (3.5) % (44.9) %

Comparison of Three Months Ended July 30, 2022 and July 31, 2021

Comparison of Three and Six Months Ended October 29, 2022 and October 31, 2021

Three Months Ended

July 30, 2022 July 31, 2021 % Change

Six Months Ended

October 29, 2022 October 31, 2021 % Change October 29, 2022 October 31, 2021 % Change

(in thousands, except percentages)

4 unchanged sentences

Total revenue $ 51,369 $ 26,427 94.4 % $ 97,836 $ 37,151 163.3 %

Total revenue for the three months ended July 30, 2022 increased by $35.7 million primarily due to increases in product sales revenue of $28.0 million, and IP license revenue by $9.4 million.

Total revenue for the three months ended October 29, 2022 increased by $24.9 million, compared to the same period in fiscal 2022, primarily due to an increase in product sales revenue of $25.9 million.

Total revenue for the six months ended October 29, 2022 increased by $60.7 million, compared to the same period in fiscal 2022, primarily due to increases in product sales revenue of $53.9 million and IP license revenue of $5.3 million.

The increase in product sales was primarily due to an increase in the unit shipments of AEC cables that were introduced in fiscal 2021.

The increase in IP license revenue was driven by a high-dollar IP license delivered to a customer that resulted in revenue recognition of $9.0 million during the three months ended July 30, 2022.

The increase in six months ended October 29, 2022 IP license revenue was driven by a high-

dollar IP license delivered to a customer that resulted in revenue recognition of $9.0 million during the six months ended October 29, 2022.

Cost of Revenue

Three Months Ended

July 30, 2022 July 31, 2021 % Change

Six Months Ended

October 29, 2022 October 31, 2021 % Change October 29, 2022 October 31, 2021 % Change

(in thousands, except percentages)

1 unchanged sentence

Cost of product engineering services revenue 418 532 (21.4) % 518 1,397 (62.9) %

Cost of IP license revenue 1,179 — N/A

Cost of IP license revenue — — N/A 1,179 — N/A

Cost of IP license engineering services revenue 334 92 263.0 % 334 414 (19.3) %

Total cost of revenue $ 23,410 $ 10,473 123.5 % $ 42,214 $ 16,017 163.6 %

Cost of product sales revenue increased by $13.2 million in the three months ended July 30, 2022, compared to the same period in fiscal 2022, primarily due to increased product sales during the same period as discussed above.

Cost of IP license revenue in the three months ended July 30, 2022 related to costs incurred for delivery of a milestone during the quarter on an IP licensing and development contract entered into with a customer in September 2021 (refer to note 4 of our unaudited condensed consolidated financial statements for details).

Cost of product sales revenue increased by $12.8 million in the three months ended October 29, 2022 and $26.0 million in the six months ended October 29, 2022, compared to the same periods in fiscal 2022, primarily due to increased product sales during the same period as discussed above.

Cost of IP license revenue in the six months ended October 29, 2022 related to costs incurred for delivery of a milestone during the quarter on an IP licensing and development contract entered into with a customer in September 2021 (refer to note 4 of our unaudited condensed consolidated financial statements for details).

Gross Profit and Gross Margin

Three Months Ended

July 30, 2022 July 31, 2021 % Change

Six Months Ended

October 29, 2022 October 31, 2021 % Change October 29, 2022 October 31, 2021 % Change

(in thousands, except percentages)

1 unchanged sentence

Gross margin 54.4 % 60.4 % 56.9 % 56.9 %

Gross margin increased by 11 percentage points in the three months ended July 30, 2022, compared to the same period in fiscal 2022, primarily driven by the improvements in our operating leverage as our product sales business has gained scale compared to the same period in fiscal 2022.

In addition, during the three months ended July 30, 2022, we recognized approximately $9.4 million in additional IP license revenue, which carried a gross margin of more than 90 percent.

Gross margin decreased by 6 percentage points in the three months ended October 29, 2022, compared to the same period in fiscal 2022, primarily driven by the increase of our product sales revenue in the product mix as our product sales business has lower gross margin compared to our IP business.

Gross margin for the six months ended October 29, 2022 was consistent with the same period in fiscal 2022.

Research and Development

Three Months Ended

July 30, 2022 July 31, 2021 % Change

Six Months Ended

October 29, 2022 October 31, 2021 % Change October 29, 2022 October 31, 2021 % Change

(in thousands, except percentages)

1 unchanged sentence

% of total revenue 35.3 % 44.6 % 35.6 % 57.9 %

Research and development expense for the three months ended July 30, 2022 increased by $7.0 million compared to the same period in fiscal 2022.

The increase was due primarily to a $3.1 million increase in personnel costs as a result of new hires for product development, a $2.4 million increase in share-based compensation expense driven by increased amortization expense from new equity awards granted to employees, a $0.6 million increase in IT and facilities costs, and a $0.6 million decrease in allocation of R&D expense to costs of engineering services due to less engineering hours incurred that was associated to non-recurring engineering service revenue arrangements.

Research and development expense for the three months ended October 29, 2022 increased by $6.4 million compared to the same period in fiscal 2022.

The increase was due primarily to a $2.8 million increase in personnel costs as a result of new hires for product development, a $2.1 million increase in share-based compensation expense driven by increased amortization expense from new equity awards granted to employees, and a $1.1 million increase in depreciation expense driven by increased computer equipment and software, and laboratory equipment utilized in R&D activities.

Research and development expense for the six months ended October 29, 2022 increased by $13.3 million compared to the same period in fiscal 2022.

The increase was due primarily to a $5.9 million increase in personnel costs as a result of new hires for product development, a $4.5 million increase in share-based compensation expense

driven by increased amortization expense from new equity awards granted to employees, a $1.3 million increase in depreciation expense driven by increased computer equipment and software, and laboratory equipment utilized in R&D activities, a $0.9 million increase in IT and facilities costs, and a $0.7 million decrease in allocation of R&D expense to costs of engineering services due to less engineering hours incurred that was associated to non-recurring engineering service revenue arrangements.

Selling, General and Administrative

Three Months Ended

July 30, 2022 July 31, 2021 % Change

Six Months Ended

October 29, 2022 October 31, 2021 % Change October 29, 2022 October 31, 2021 % Change

(in thousands, except percentages)

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% of total revenue 22.5 % 29.2 % 23.2 % 39.9 %

Selling, general and administrative expense for the three months ended July 30, 2022 increased by $4.1 million compared to the same period in fiscal 2022.

and a $1.9 million increase in share-based compensation expense driven by increased amortization expense from new equity awards granted to employees.

Provision (benefit) for Income Taxes

Selling, general and administrative expense for the three months ended October 29, 2022 increased by $3.8 million compared to the same period in fiscal 2022.

The increase was due primarily to a $0.9 million increase in personnel costs as a result of higher selling, general and administrative headcount, a $0.5 million increase in professional services spending, a $0.7 million increase in director and officer insurance cost as a result of being a public company, and a $1.4 million increase in share-based compensation expense driven by increased amortization expense from new equity awards granted to employees.

Selling, general and administrative expense for the six months ended October 29, 2022 increased by $7.9 million compared to the same period in fiscal 2022.

The increase was due primarily to a $1.8 million increase in personnel costs as a result of higher selling, general and administrative headcount, a $1.2 million increase in professional services spending, a $1.3 million increase in director and officer insurance cost as a result of being a public company, and a $3.3 million increase in share-based compensation expense driven by increased amortization expense from new equity awards granted to employees.

Provision for Income Taxes

Three Months Ended

July 30, 2022 July 31, 2021 % Change

Six Months Ended

October 29, 2022 October 31, 2021 % Change October 29, 2022 October 31, 2021 % Change

(in thousands, except percentages)

Provision (benefit) for income taxes $ (365) $ 902 (140.5) %

Provision for income taxes $ 929 $ 601 54.6 % $ 564 $ 1,503 (62.5) %

% of total revenue 1.8 % 2.3 % 0.6 % 4.0 %

Provision for income taxes for the three months ended July 30, 2022 decreased by $1.3 million compared to the same period in fiscal 2022, resulting in a benefit for income taxes for the three months ended July 30, 2022.

The fluctuation was primarily due to an decrease in the company loss before tax, a partial release of the US valuation allowance on research and development credits and a reduction in foreign withholding taxes.

Provision for income taxes for the three months ended October 29, 2022 increased by $0.3 million compared to the same period in fiscal 2022.

The fluctuation was primarily due to an increase in the estimated annual tax expense based on the estimated annual effective tax rate, offset by an increase in stock based compensation deductions.

Provision for income taxes for the six months ended October 29, 2022 decreased by $0.9 million compared to the same period in fiscal 2022.

The fluctuation was primarily due to an increase in stock based compensation deductions.

Liquidity and Capital Resources

Our activities consist primarily of selling our products, licensing our IP, providing IP customization services and conducting research and development of our products and technology.

Since our inception through July 30, 2022, our operations have been financed primarily by net proceeds from our initial public offering, the sale of convertible preferred shares and ordinary shares prior to our initial public offering, and cash generated from our customers.

As of July 30, 2022 and April 30, 2022, we had $243.8 million and $259.3 million in cash and cash equivalents, respectively, and working capital of $303.4 million and $305.7 million, respectively.

Since our inception through October 29, 2022, our operations have been financed primarily by net proceeds from our initial public offering, the sale of convertible preferred shares and ordinary shares prior to our initial public offering, and cash generated from our customers.

As of October 29, 2022 and April 30, 2022, we had $190.5 million and $259.3 million in cash and cash equivalents, respectively, and working capital of $300.3 million and $305.7 million, respectively.

Our principal use of cash is to fund our operations and invest in research and development to support our growth.

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In the event that we need to borrow funds or issue additional equity, we cannot assure you that any such additional financing will be available on terms acceptable to us, if at all.

If we are unable to raise additional capital when we need it, our business, results of operations and financial condition would be adversely affected.

unable to raise additional capital when we need it, our business, results of operations and financial condition would be adversely affected.

The following table summarizes our cash flows for the periods indicated.

Three months ended

July 30, 2022 July 31, 2021

Six Months Ended

October 29, 2022 October 31, 2021

(in thousands)

3 unchanged sentences

Cash Flows Used in Operating Activities

Net cash used in operating activities was $12.2 million for the three months ended July 30, 2022.

The cash outflows from operating activities for the three months ended July 30, 2022 were primarily due to $0.1 million of net loss and $20.6 million of cash outflows for working capital purposes, partially offset by $8.5 million of non-cash items.

The cash outflows from working capital for the three months ended July 30, 2022 were primarily driven by an increase in accounts receivable and inventories, partially offset by an increase in accounts payable and deferred revenue, and a decrease in contract assets.

Net cash used in operating activities was $8.9 million for the three months ended July 31, 2021.

The cash outflows from operating activities for the three months ended July 31, 2021 were primarily due to $12.6 million of net loss, partially offset by $1.3 million of cash inflows from working capital and $2.3 million of non-cash items.

The cash inflows from working capital for the three months ended July 31, 2021 were primarily driven by a decrease in accounts receivable and an increase in accounts payable, partially offset by an increase in inventories and a decrease in deferred revenue.

Net cash used in operating activities was $10.5 million for the six months ended October 29, 2022.

The cash outflows from operating activities for the six months ended October 29, 2022 were primarily due to $3.4 million of net loss and $23.5 million of cash outflows for working capital purposes, partially offset by $16.4 million of non-cash items.

The cash outflows from working capital for the six months ended October 29, 2022 were primarily driven by an increase in accounts receivable and inventories, partially offset by an increase in accounts payable, and accrued expenses and other liabilities.

Net cash used in operating activities was $34.9 million for the six months ended October 31, 2021.

The cash outflows from operating activities for the six months ended October 31, 2021 were primarily due to $16.7 million of net loss and $23.3 million of cash outflows for working capital purposes, partially offset by $5.1 million of non-cash items.

The cash outflows from working capital for the six months ended October 31, 2021 were primarily driven by an increase in accounts receivable and inventories, partially offset by an increase in accounts payable, and accrued expenses and other liabilities.

Cash Flows Used in Investing Activities

Net cash used in investing activities of $5.3 million in the three months ended July 30, 2022 was attributable to purchases of property and equipment.

Purchases of property and equipment primarily related to mask sets purchases for new products introduced or in process of being introduced and laboratory equipment used for research and development purposes.

Net cash used in investing activities of $1.3 million in the three months ended July 31, 2021 was attributable to purchases of property and equipment.

Purchases of property and equipment primarily related to laboratory equipment used for research and development purposes.

Net cash used in investing activities of $60.9 million in the six months ended October 29, 2022 was attributable to purchases of property and equipment of $10.9 million and investment in a certificate of deposit of $50.0 million.

Purchases of property and equipment primarily related to mask sets purchases for new products introduced or in process of being introduced, and computer equipment and software used for research and development purposes.

Net cash used in investing activities of $5.0 million in the six months ended October 31, 2021 was attributable to purchases of property and equipment, including third-party licenses.

Cash Flows from Financing Activities

Net cash provided by financing activities of $2.0 million for the three months ended July 30, 2022 was solely attributable to $2.0 million in proceeds from exercises of employee share options and the issuance of shares under the ESPP.

Net cash provided by financing activities of $6.8 million for the three months ended July 31, 2021 was primarily attributable to $0.5 million in proceeds from exercises of employee share options and $7.2 million in proceeds from the issuance of convertible preferred shares, net of issuance costs.

Net cash provided by financing activities of $2.7 million for the six months ended October 29, 2022 was solely attributable to $2.7 million in proceeds from exercises of employee share options and the issuance of shares under the ESPP.

Net cash provided by financing activities of $7.2 million for the six months ended October 31, 2021 was primarily attributable to $0.9 million in proceeds from exercises of employee share options and $7.2 million in proceeds from the issuance of convertible preferred shares, net of issuance costs.

This cash inflow was partially offset by $0.9 million in payments for IPO offering cost.

Critical Accounting Estimates

There have been no material changes to our critical accounting estimates during the three months ended July 30, 2022, as compared to those disclosed under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the fiscal year ended April 30, 2022.

There have been no material changes to our critical accounting estimates during the three and six months ended October 29, 2022, as compared to those disclosed under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the fiscal year ended April 30, 2022.

In the current macroeconomic environment affected by COVID-19, our estimates could require increased judgment and carry a higher degree of variability and volatility.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements