Peraso Inc. 10-Q

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the accompanying condensed consolidated financial statements and notes included in this report. This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which include, without limitation, statements about the market for our technology, our strategy, competition, expected financial performance and capital raising effort, the impacts of COVID-19 on our business, the effects of the Russia/Ukraine conflict, and inflation, which could cause customers to delay or reduce purchases of our products or delay payments to us, which would adversely affect our financial results, including cash flows, and other aspects of our business identified in our most recent annual report on Form 10-K filed with the Securities and Exchange Commission on March 29, 2023 and in other reports that we file from time to time with the Securities and Exchange Commission. Any statements about our business, financial results, financial condition and operations contained in this Form 10-Q that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “expects,” “intends,” “plans,” “projects” or similar expressions are intended to identify forward-looking statements. Our actual results could differ materially from those expressed or implied by these forward-looking statements as a result of various factors, including the risk factors described under Item 1A of our annual report on Form 10-K for the year ended December 31, 2022 and the risk factors described below under Item 1A of this Form 10-Q. We undertake no obligation to update publicly any forward-looking statements for any reason, except as required by law, even as new information becomes available or events occur in the future. Overview We were formerly known as MoSys, Inc. (MoSys) and were incorporated in California in 1991 and reincorporated in 2000 in Delaware. On September 14, 2021, we and our subsidiaries, 2864552 Ontario Inc. and 2864555 Ontario Inc., entered into an Arrangement Agreement (the Arrangement Agreement) with Peraso Technologies Inc. (Peraso Tech), a corporation existing under the laws of the province of Ontario, to acquire all of the issued and outstanding common shares of Peraso Tech (the Peraso Shares), including those Peraso Shares to be issued in connection with the conversion or exchange of secured convertible debentures and common share purchase warrants of Peraso Tech, as applicable, by way of a statutory plan of arrangement (the Arrangement) under the Business Corporations Act (Ontario). On December 17, 2021, following the satisfaction of the closing conditions set forth in the Arrangement Agreement, the Arrangement was completed and we changed our name to “Peraso Inc.” and began trading on the Nasdaq Stock Market (the Nasdaq) under the symbol “PRSO.” Our strategy and primary business objective is to be a profitable, IP-rich fabless semiconductor company offering integrated circuits, or ICs, antenna modules and related non-recurring engineering services. We specialize in the development of mmWave semiconductors, primarily in the unlicensed 60 GHz spectrum band for 802.11ad/ay compliant devices and in the 28/39 GHz spectrum bands for 5G-compliant devices. We derive our revenue from selling semiconductor devices, as well as antenna modules based on using those mmWave semiconductor devices. We have pioneered a high-volume mmWave production test methodology using standard low cost production test equipment. It has taken us several years to refine performance of this production test methodology, and we believe this places us in a leadership position in addressing operational challenges of delivering mmWave products into high-volume markets. The primary advantage provided by an antenna module is the silicon and the antenna are integrated into a single device. A differentiating characteristic of mmWave technology is that the radio frequency amplifiers must be as close as possible to the antenna to minimize loss, and by providing a module, we can guarantee the performance of the amplifier/antenna interface. We also acquired a memory product line marketed under the Accelerator Engine name. This memory product line comprises our Bandwidth Engine and Quad Partition Rate IC products, which integrate our proprietary, 1T-SRAM high-density embedded memory and a highly-efficient serial interface protocol resulting in a monolithic memory IC solution optimized for memory bandwidth and transaction access performance. We incurred net losses of approximately $3.1 million for the three months ended March 31, 2023 and $32.4 million for the year ended December 31, 2022, and we had an accumulated deficit of approximately $152.7 million as of March 31, 2023. These and prior year losses have resulted in significant negative cash flows and historically have required us to raise substantial amounts of additional capital. As discussed below, this raises significant doubt about our ability to continue as a going concern. We will need to increase revenues substantially beyond levels that we have attained in the past in order to generate sustainable operating profit and sufficient cash flows to continue doing business without raising additional capital from time to time. 21 Memory IC Product End-of-Life Taiwan Semiconductor Manufacturing Corporation, or TSMC, is the sole foundry that manufactures the wafers used to produce our memory IC products. TSMC recently informed us that it would be discontinuing the foundry process used to produce wafers, in turn, necessary to manufacture our memory ICs. As a result, we have informed our memory IC customers that we are initiating an end-of-life, or EOL, of our memory IC products. We have notified our customers to provide purchase orders during 2023 that we expect to fulfill during 2024. We are requiring customers to pay a deposit upon purchase order placement to reserve supply and provide funding for our required inventory purchases. Under our EOL plan, we intend to complete all shipments of our memory products during 2024, and, as a result, we do not anticipate any shipments of our memory products after December 31, 2024. However, the timing of EOL shipments will be dependent on deliveries from our suppliers, as well as the delivery schedules requested by our customers. COVID-19 and Russian Invasion of Ukraine The global outbreak of the coronavirus disease 2019 (COVID-19) was declared a pandemic by the World Health Organization and a national emergency by the U.S. government in March 2020. Since March 2020, from time to time, this has negatively affected the U.S. and global economy, disrupted global supply chains, significantly restricted travel and transportation, resulted in mandated closures and orders to “shelter-in-place” and created significant disruption of the financial markets. The full extent of the COVID-19 impact on our operational and financial performance will depend on future developments, including the duration and spread of the pandemic and related actions taken by the U.S. and foreign government agencies to prevent disease spread, all of which are uncertain, out of our control, and cannot be predicted. The continued spread of COVID-19 has also led to disruption and volatility in the global capital markets. The Russian invasion of Ukraine in February 2022 has led to further economic disruptions. Mounting inflationary cost pressures and recessionary fears have negatively impacted the global economy. Since mid-2022, the U.S. Federal Reserve has addressed elevated inflation by increasing interest rates, as inflation remains elevated. Given current market conditions, we may be unable to access the capital markets, and additional capital may only be available to us on terms that could be significantly detrimental to our existing stockholders and to our business. For additional information on risks that could impact our future results, please refer to “Risk Factors” in Part II, Item 1A. of this quarterly report on Form 10-Q. Revenue Recognition We recognize revenue in accordance with FASB ASC Topic 606, Revenue from Contracts with Customers, and its amendments (ASC 606). As described below, the analysis of contracts under ASC 606 supports the recognition of revenue at a point in time, resulting in revenue recognition timing that is materially consistent with our historical practice of recognizing product revenue when title and risk of loss pass to the customer. We generate revenue primarily from sales of integrated circuits and antenna module products, performance of engineering services and licensing of its intellectual property. Revenues are recognized when control is transferred to customers in amounts that reflect the consideration we expect to be entitled to receive in exchange for those goods. Revenue recognition is evaluated through the following five steps: (i) identification of the contract, or contracts, with a customer; (ii) identification of the performance obligations in the contract; (iii) determination of the transaction price; (iv) allocation of the transaction price to the performance obligations in the contract; and (v) recognition of revenue when or as a performance obligation is satisfied. Product revenue Revenue is recognized when performance obligations under the terms of a contract with a customer are satisfied. The majority of our contracts have a single performance obligation to transfer products. Accordingly, we recognize revenue when title and risk of loss have been transferred to the customer, generally at the time of shipment of products. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products and is generally based upon a negotiated, formula, list or fixed price. We sell our products both directly to customers and through distributors generally under agreements with payment terms typically 60 days or less. We may record an estimated allowance, at the time of shipment, for future returns and other charges against revenue consistent with the terms of sale. 22 Royalty and other Our licensing contracts typically provide for royalties based on the licensee’s use of our memory technology in the licensee’s commercial products. We estimate royalty revenue in the calendar quarter in which the licensee uses the licensed technology. Payments are received in the subsequent quarter. We also generate revenue from licensing our technology. We recognize license fees as revenue at the point of time when the control of the license has been transferred and we have no continuing performance obligations to the customer. Engineering services revenue Engineering and development contracts with customers generally contain a single performance obligation that is delivered over time. Revenue is recognized using an output method that is consistent with the satisfaction of the performance obligation as a measure of progress. Deferred cost of net revenue During the three months ended September 30, 2022, the Company had $1.1 million of product shipments for which the revenue recognition criteria under ASC 606 had not been met. Accordingly, the Company deferred the cost of net revenue associated with these shipments, and the amount deferred was presented as deferred cost of net revenue in the condensed consolidated balance sheets. During the three months ended March 31, 2023, the Company recognized the associated revenue and cost of net revenue. Contract liabilities - deferred revenue Our contract liabilities generally consist of advance customer payments and deferred revenue. We classify advance customer payments and deferred revenue as current or non-current based on the timing of when we expect to recognize revenue. As of March 31, 2023, contract liabilities were in a current position and included in deferred revenue. Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). The preparation of these condensed consolidated financial statements requires us to make certain estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis we make these estimates based on our historical experience and on assumptions that we consider reasonable under the circumstances. Actual results may differ from these estimates and reported results could differ under different assumptions or conditions. Our significant accounting policies and estimates are disclosed in Note 1 of the “Notes to Consolidated Financial Statements” in our annual report on Form 10-K for the year ended December 31, 2022. As of March 31, 2023, there have been no material changes to our significant accounting policies and estimates. Results of Operations Net Revenue March 31, Change 2023 2022 2022 to 2023 (dollar amounts in thousands) Product -three months ended $ 4,888 $ 3,204 $ 1,684 53 % Percentage of total net revenue 97 % 94 % 23 The following table details revenue by product category for the three months ended March 31, 2023 and 2022: (amounts in thousands) Three Months Ended March 31, Product category 2023 2022 change Memory ICs $ 2,181 $ 1,908 273 mmWave ICs 1,479 488 991 mmWave antenna modules 1,224 808 416 mmWave other products 4 - 4 $ 4,888 $ 3,204 $ 1,684 Product revenue increased for the three months ended March 31, 2023 compared with the same period of 2022 primarily due to recognition of revenue of approximately $1.1 million for shipments during the three months ended September 30, 2022 upon payment by the customer and satisfaction of the revenue recognition criteria. We initiated price increases on certain of our antenna module products in 2022, however, through March 31, 2023, we had not realized any material increase in revenue as a result of those price increases. The increase in memory IC sales was mainly due to larger shipments to one customer. In late 2022, we implemented modest price increases on our memory products, and, during the three months ended March 31, 2023, contributed $0.1 million to the revenue increase. We expect sales of our mmWave products to increase from a volume and revenue perspective over the remainder of 2023, as compared with 2022, as our primary sales focus is on obtaining new mmWave customers. We expect sales of our memory products to decrease from a volume and revenue perspective during the remainder of 2023, as compared with 2022, based on current customer forecasts. Given the planned EOL discussed above, we do not expect revenue from these products beyond 2024. March 31, Change 2023 2022 2022 to 2023 (dollar amounts in thousands) Royalty and other -three months ended $ 145 $ 199 $ (54 ) (27 )% Percentage of total net revenue 3 % 6 % Royalty and other includes royalty, non-recurring engineering, services and licenses revenues. The decrease in royalty and other revenue for the three months ended March 31, 2023 compared with the same period of 2022 was primarily due to a decrease in non-recurring engineering services revenue related to our mmWave technology, partially offset by royalty revenues from licensees of our memory technology. Cost of Net Revenue and Gross Profit March 31, Change 2023 2022 2022 to 2023 (dollar amounts in thousands) Cost of net revenue -three months ended $ 3,106 $ 1,948 $ 1,158 59 % Percentage of total net revenue 62 % 57 % Cost of net revenue is primarily comprised of direct and indirect costs related to the sale of our products, including amortization of intangible assets and depreciation of production-related fixed assets. 24 Cost of net revenue increased for the three months ended March 31, 2023 when compared with the same period in 2022, primarily due to increased shipment volumes of our memory and mmWave products. March 31, Change 2023 2022 2022 to 2023 (dollar amounts in thousands) Gross profit -three months ended $ 1,927 $ 1,455 $ 472 32 % Percentage of total net revenue 38 % 43 % Gross profit increased for the three months ended March 31, 2023 compared with the same period of 2022 due to the increased product shipments. The decrease in our gross profit margin percentage for the three months ended March 31, 2023 compared with the prior year period was primarily attributable to the increased volume shipments of our mmWave products, which carry lower gross margins than our memory products. Research and Development March 31, Change 2023 2022 2022 to 2023 (dollar amounts in thousands) R&D -three months ended $ 3,887 $ 5,486 $ (1,599 ) (29 )% Percentage of total net revenue 77 % 161 % Our R&D expenses include costs related to the development of our products. We expense R&D costs as they are incurred. The decrease for the three months ended March 31, 2023 compared with the same period of 2022 was primarily due to reduced salary and consulting costs. During the quarter ended December 31, 2022, we began implementing cost reductions including a reduction of employees and full-time-equivalent consulting positions, as well as targeted reductions in certain longer-term research and development projects. In August 2022, we entered into a Technology License and Patent Assignment Agreement, or the Agreement, with Intel Corporation, or Intel, and as a result we transferred certain employees and consultants to Intel. As a result of the Agreement and other cost reductions, our memory-related R&D expenses declined by approximately $1.0 million. In addition, during the three months ended March 31, 2022, we incurred a tape-out expense of $0.7 million for one of our mmWave ICs. We expect that total R&D expenses will decrease in 2023 compared with 2022, as we began implementing cost reductions during the three months ended December 31, 2022. The reductions in R&D expense in 2023 will primarily result from our cost reduction initiatives. Selling, General and Administrative March 31, Change 2023 2022 2022 to 2023 (dollar amounts in thousands) SG&A -three months ended $ 2,242 $ 2,705 $ (463 ) (17 )% Percentage of total net revenue 45 % 79 % SG&A expenses consist primarily of personnel and related overhead costs for sales, marketing, finance, human resources and general management and amortization of intangible assets. The decrease for the three months ended March 31, 2023 compared with the same period of 2022 was primarily related to cost reductions, which we initiated during the three months ended December 31, 2022 . We expect that total SG&A expense will decrease for the remainder of 2023 compared with 2022 due to our cost reductions. The reductions in SG&A expense in 2023 will primarily result from lower headcount, including a reduction of employees and reductions of other discretionary operating expenses. 25 Liquidity and Capital Resources; Changes in Financial Condition Cash Flows As of March 31, 2023, we had cash, cash equivalents and investments of $1.4 million and working capital of $6.3 million. Net cash used in operating activities was $1.4 million for the first three months of 2023, which primarily resulted from our net loss of $3.1 million, as adjusted for a $0.7 million non-cash gain on the change in fair value of warrant liability and $0.2 million of other non-cash changes, and partially offset by non-cash charges of $0.8 million of depreciation and amortization, $1.3 million of stock based compensation, and $0.5 million in net changes in assets and liabilities. The changes in assets and liabilities primarily related to the timing of accounts receivable collections, purchases of inventory and other vendor payables and prepayments. Net cash used in operating activities was $5.7 million for the first three months of 2022, which primarily resulted from our net loss of $6.8 million and $1.1 million in net changes in assets and liabilities, partially offset by non-cash charges of $0.8 million of depreciation and amortization, $1.2 million of stock based compensation and a $0.2 million other non-cash changes. The changes in assets and liabilities primarily related to the timing of accounts receivable collections, purchases of inventory and other vendor payables and prepayments. Net cash provided by investing activities of $0.4 million for the three months ended March 31, 2023 represented $0.5 million in proceeds from maturities of short-term investments, partially offset by $0.1 million of purchases of property and equipment. Net cash provided by investing activities of $3.6 million for the three months ended March 31, 2022 represented $4.2 million in proceeds from maturities of short-term investments, partially offset by $0.5 million of purchases of short and long-term investments and $0.1 million of purchases of property and equipment. Net cash used in financing activities for the three months ended March 31, 2023 consisted of repayment of financing lease liabilities. Net cash provided by financing activities for the three months ended March 31, 2022 consisted of taxes paid to net share settle equity awards. Our future liquidity and capital requirements are expected to vary from quarter-to-quarter, depending on numerous factors, including: ● level of revenue; ● cost, timing and success of technology development efforts; ● inventory levels, as supply chain disruption has required us to maintain higher inventory levels and place purchase orders with our suppliers longer into the future, which exposes us to additional inventory risk; ● timing of product shipments, which may be impacted by supply chain disruptions; ● length of billing and collection cycles, which may be impacted in the event of a global recession or economic downturn; ● fabrication costs, including mask costs, of our ICs, currently under development; ● variations in manufacturing yields, material lead time and costs and other manufacturing risks; ● costs of acquiring other businesses and integrating the acquired operations; and ● profitability of our business. 26 During the three months ended March 31, 2023, we collected approximately $2.0 million of amounts past due from a large customer of our mmWave products. The amounts collected included approximately $0.9 million of accounts receivable outstanding at September 30, 2022, for which we had established a $0.2 million allowance for doubtful accounts, and $1.1 million for shipments in September 2022 for which we had deferred revenue recognition. Going Concern - Working Capital We incurred net losses of approximately $3.1 million for the three months ended March 31, 2023 and $32.4 million for the year ended December 31, 2022, and we had an accumulated deficit of approximately $152.7 million as of March 31, 2023. These and prior year losses have resulted in significant negative cash flows and have required us to raise substantial amounts of additional capital. To date, we have primarily financed our operations through offerings of equity and equity-linked securities, issuance of convertible notes and loans. We expect to continue to incur operating losses for the foreseeable future as we continue to secure new customers for and continue to invest in the development of our products, and we expect our cash expenditures to continue to exceed receipts for the foreseeable future, as our revenues will not be sufficient to offset our operating expenses. We will need to increase revenues beyond the levels that we have attained in the past in order to generate sustainable operating profit and sufficient cash flows to continue doing business without raising additional capital from time to time. As a result of our expected operating losses and cash burn and recurring losses from operations, if we are unable to raise sufficient capital through additional equity or debt arrangements, there will be uncertainty regarding our ability to maintain liquidity sufficient to operate our business effectively, which raises substantial doubt as to our ability to continue as a going concern within one year from the date of issuance of these condensed consolidated financial statements. The condensed consolidated financial statements presented in Part I, Item 1 of this Report have been prepared assuming that we will continue as a going concern, and do not include any adjustments that might result from the outcome of this uncertainty. There can be no assurance that such additional capital, whether in the form of equity or debt financing, will be sufficient or available and, if available, that such capital will be offered on terms and conditions acceptable to us. We are currently seeking additional financing in order to meet our cash requirements for the foreseeable future. If the Company is unsuccessful in these efforts, it will need to implement additional cost reduction strategies, which could further affect its near- and long-term business plan. These efforts may include, but are not limited to, reducing headcount and curtailing business activities. In August 2022, we entered into an exclusive technology license and patent assignment agreement with Intel Corporation, under which we collected $3.1 million in August 2022 and $0.4 million in January 2023. We expect this transaction to result in a reduction of operating expenses of approximately $2.7 million on annual basis. In November 2022, we completed a registered direct offering of common stock and warrants for net proceeds to us of approximately $2.1 million. Further, in February 2023, we announced that we had implemented cost-reduction initiatives to reduce operating expenses by approximately $5 million on an annualized basis. If we were to raise additional capital through sales of our equity securities, our stockholders would suffer dilution of their equity ownership. If we engage in debt financing, we may be required to accept terms that restrict our ability to incur additional indebtedness, prohibit us from paying dividends, repurchasing our stock or making investments, and force us to maintain specified liquidity or other ratios, any of which could harm our business, operating results and financial condition. If we need additional capital and cannot raise it on acceptable terms, we may not be able to, among other things: ● develop or enhance our products; ● continue to expand our product development and sales and marketing organizations; ● acquire complementary technologies, products or businesses; ● expand operations, in the United States or internationally; ● hire, train and retain employees; or ● respond to competitive pressures or unanticipated working capital requirements. Our failure to do any of these things could seriously harm our ability to execute our business strategy and may force us to curtail our existing operations. Off-Balance Sheet Arrangements We do not maintain any off-balance sheet arrangements or obligations that are reasonably likely to have a material current or future effect on our financial condition, results of operations, liquidity or capital resources. 27 Indemnifications In the ordinary course of business, we enter into contractual arrangements under which we may agree to indemnify the counter-party from losses relating to a breach of representations and warranties, a failure to perform certain covenants, or claims and losses arising from certain external events as outlined within the contract, which may include, for example, losses arising from litigation or claims relating to past performance. Such indemnification clauses may not be subject to maximum loss clauses. We have also entered into indemnification agreements with our officers and directors. No material amounts related to these indemnifications are reflected in our condensed financial statements for the three months ended March 31, 2023. Recent Accounting Pronouncements See Note 1 to the condensed consolidated financial statements for a discussion of recently-issued accounting pronouncements.