Peraso Inc. 10-Q

Item 1. Financial Statements PERASO INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except par value) June 30, December 31, 2023 2022 (unaudited) ASSETS Current assets Cash and cash equivalents $ 2,146 $ 1,828 Short-term investments 594 1,078 Accounts receivable, net 1,497 3,244 Inventories 5,160 5,348 Deferred cost of net revenue — 600 Prepaid expenses and other 729 615 Total current assets 10,126 12,713 Property and equipment, net 1,850 2,225 Intangible assets, net 5,031 6,278 Right-of-use lease assets, net 820 1,147 Other 123 123 Total assets $ 17,950 $ 22,486 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities Accounts payable $ 1,142 $ 1,844 Accrued expenses and other 1,161 1,817 Deferred revenue 175 332 Short-term lease liabilities 464 687 Total current liabilities 2,942 4,680 Long-term lease liabilities 349 470 Warrant liabilities 3,618 2,079 Total liabilities 6,909 7,229 Commitments and contingencies (Note 4) Stockholders’ equity Preferred stock, $ 0.01 par value; 20,000 shares authorized; none issued and outstanding — — Series A, special voting preferred stock, $ 0.01 par value; one share authorized; and one share issued and outstanding at June 30, 2023 and December 31, 2022, respectively — — Common stock, $ 0.001 par value; 120,000 shares authorized; 22,170 shares and 14,270 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively 22 14 Exchangeable shares, no par value; unlimited shares authorized; 5,731 shares and 9,107 shares outstanding at June 30, 2023 and December 31, 2022, respectively — — Additional paid-in capital 167,854 164,865 Accumulated other comprehensive loss ( 4 ) ( 25 ) Accumulated deficit ( 156,831 ) ( 149,597 ) Total stockholders’ equity 11,041 15,257 Total liabilities and stockholders’ equity $ 17,950 $ 22,486 The accompanying notes are an integral part of these condensed consolidated financial statements. 1 PERASO INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (Unaudited) (In thousands, except per share data) Three Months Ended Six Months Ended June 30, June 30, 2023 2022 2023 2022 Net revenue Product $ 2,235 $ 4,120 $ 7,123 $ 7,324 Royalty and other 168 164 313 363 Total net revenue 2,403 4,284 7,436 7,687 Cost of net revenue 1,795 2,799 4,901 4,747 Gross profit 608 1,485 2,535 2,940 Operating expenses Research and development 3,668 5,643 7,555 11,127 Selling, general and administrative 1,977 2,878 4,219 5,585 Gain on license and asset sale — — ( 406 ) — Total operating expenses 5,645 8,521 11,368 16,712 Loss from operations ( 5,037 ) ( 7,036 ) ( 8,833 ) ( 13,772 ) Change in fair value of warrant liabilities 966 — 1,624 — Other expense, net ( 15 ) ( 7 ) ( 25 ) ( 25 ) Net loss $ ( 4,086 ) $ ( 7,043 ) $ ( 7,234 ) $ ( 13,797 ) Other comprehensive loss, net of tax: Net unrealized gain (loss) on available-for-sale securities 7 ( 4 ) 21 ( 41 ) Comprehensive loss $ ( 4,079 ) $ ( 7,047 ) $ ( 7,213 ) $ ( 13,838 ) Net loss per share Basic and diluted $ ( 0.17 ) $ ( 0.33 ) $ ( 0.32 ) $ ( 0.64 ) Shares used in computing net loss per share Basic and diluted 24,338 21,636 22,442 21,610 The accompanying notes are an integral part of these condensed consolidated financial statements. 2 PERASO INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited) (In thousands) Series A Special Voting Additional Accumulated Other Preferred Stock Common Stock Exchangeable Shares Paid-In Comprehensive Accumulated Shares Amount Shares Amount Shares Amount Capital Loss Deficit Total Balance as of December 31, 2022 — $ — 14,270 $ 14 9,107 $ — $ 164,865 $ ( 25 ) $ ( 149,597 ) $ 15,257 Exchange of exchangeable shares 310 1 ( 310 ) ( 1 ) — Stock-based compensation — — — — — — 1,307 — — 1,307 Unrealized gain on available-for-sale securities — — — — — — — 14 — 14 Net loss — — — — — — — — ( 3,148 ) ( 3,148 ) Balance as of March 31, 2023 — — 14,580 15 8,797 — 166,171 ( 11 ) ( 152,745 ) 13,430 Exchange of exchangeable shares — — 3,066 3 ( 3,066 ) — ( 3 ) — — — Issuance of common stock under stock plan, net — — 157 — — — ( 36 ) — — ( 36 ) Sale of common stock and warrants — — 2,250 2 — — 3,546 — — 3,548 Issuance of common stock upon exercise of warrants — — 2,117 2 — — 19 — — 21 Initial recognition of fair value of warrant liability — — — — — — ( 3,162 ) — — ( 3,162 ) Stock-based compensation — — — — — — 1,319 — — 1,319 Unrealized gain on available-for-sale securities — — — — — — — 7 — 7 Net loss — — — — — — — — ( 4,086 ) ( 4,086 ) Balance as of June 30, 2023 — $ — 22,170 $ 22 5,731 $ — $ 167,854 $ ( 4 ) $ ( 156,831 ) $ 11,041 Series A Special Voting Additional Accumulated Other Preferred Stock Common Stock Exchangeable Shares Paid-In Comprehensive Accumulated Shares Amount Shares Amount Shares Amount Capital Loss Deficit Total Balance as of December 31, 2021 — $ — 12,284 $ 12 9,295 $ — $ 159,256 $ — $ ( 117,199 ) $ 42,069 Issuance of common stock under stock plan, net — — 9 — — — ( 9 ) — — ( 9 ) Stock-based compensation — — — — — — 1,171 — — 1,171 Unrealized loss on available-for-sale securities — — — — — — — ( 37 ) — ( 37 ) Net loss — — — — — — — — ( 6,754 ) ( 6,754 ) Balance as of March 31, 2022 — — 12,293 12 9,295 — 160,418 ( 37 ) ( 123,953 ) 36,440 Issuance of common stock under stock plan, net — — 244 — — — ( 50 ) — — ( 50 ) Stock-based compensation — — — — — — 1,738 — — 1,738 Unrealized loss on available-for-sale securities — — — — — — — ( 4 ) — ( 4 ) Net loss — — — — — — — — ( 7,043 ) ( 7,043 ) Balance as of June 30, 2022 — $ — 12,537 $ 12 9,295 $ — $ 162,106 $ ( 41 ) $ ( 130,996 ) $ 31,081 The accompanying notes are an integral part of these condensed consolidated financial statements. 3 PERASO INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) Six Months Ended June 30, 2023 2022 Cash flows from operating activities: Net loss $ ( 7,234 ) $ ( 13,797 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,713 1,540 Stock-based compensation 2,626 2,909 Change in fair value of warrant liabilities ( 1,624 ) — Allowance for bad debt ( 154 ) — Accrued interest ( 12 ) 13 Other 5 154 Changes in assets and liabilities: Accounts receivable 1,900 ( 791 ) Inventories 189 ( 561 ) Prepaid expenses and other assets 485 ( 331 ) Accounts payable ( 702 ) 474 Right-of-use assets 332 256 Lease liabilities - operating ( 285 ) ( 242 ) Deferred revenue and other liabilities ( 813 ) ( 1,186 ) Net cash used in operating activities ( 3,574 ) ( 11,562 ) Cash flows from investing activities: Purchases of property and equipment ( 91 ) ( 342 ) Purchases of intangible assets — ( 21 ) Proceeds from maturities of marketable securities 500 9,434 Purchases of marketable securities — ( 497 ) Net cash provided by investing activities 409 8,574 Cash flows from financing activities: Proceeds from sale of common stock, net 3,570 — Taxes paid to net share settle equity awards ( 36 ) ( 59 ) Repayment of financing leases ( 51 ) ( 26 ) Net cash provided by (used in) financing activities 3,483 ( 85 ) Net increase (decrease) in cash and cash equivalents 318 ( 3,073 ) Cash and cash equivalents at beginning of period 1,828 5,893 Cash and cash equivalents at end of period $ 2,146 $ 2,820 Supplemental disclosure: Initial recognition of warrant liability $ 3,162 $ — Recognition of right-of-use asset and lease liability $ — $ 995 Unrealized gain on securities $ 21 $ 41 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 PERASO INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1. The Company and Summary of Significant Accounting Policies Peraso Inc. (the Company), formerly known as MoSys, Inc. (MoSys), was incorporated in California in 1991 and reincorporated in 2000 in Delaware. The Company is a fabless semiconductor company and derives revenue from selling its semiconductor devices and antenna modules, performance of non-recurring engineering services and licensing of its technologies. The Company specializes in the development of millimeter wave (mmWave), which is generally described as the frequency band from 24 Gigahertz (GHz) to 300GHz, wireless technology. In addition, the Company also manufactures and sells high-performance memory semiconductor devices for a wide range of markets and receives royalties from licensees of its memory technology (see Note 10). On September 14, 2021, the Company and its subsidiaries, 2864552 Ontario Inc. (Callco) and 2864555 Ontario Inc. (Canco), 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 , the Company changed its name to “Peraso Inc.” and began trading on the Nasdaq Stock Market (the Nasdaq) under the symbol “PRSO.” For accounting purposes, Peraso Tech, the legal subsidiary, was treated as the accounting acquirer and the Company, the legal parent, was treated as the accounting acquiree. The transaction was accounted for as a reverse acquisition in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 805, Business Combinations . The accompanying condensed consolidated financial statements of the Company have been prepared without audit. The condensed consolidated balance sheet as of December 31, 2022 has been derived from the audited consolidated financial statements at that date. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) have been condensed or omitted in accordance with the rules and regulations of the Securities and Exchange Commission (SEC). The information in this report should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in its most recent annual report on Form 10-K filed with the SEC. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary to summarize fairly the Company’s financial position, results of operations and cash flows for the interim periods presented. The operating results for the three and six months ended June 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023 or for any other future period. Liquidity and Going Concern The Company incurred net losses of approximately $ 7.2 million for the six months ended June 30, 2023 and $ 32.4 million for the year ended December 31, 2022 and had an accumulated deficit of approximately $ 156.8 million as of June 30, 2023. These and prior year losses have resulted in significant negative cash flows and have required the Company to raise substantial amounts of additional capital. To date, the Company has primarily financed its operations through multiple offerings of common stock and issuance of convertible notes and loans to investors and affiliates. 5 The Company expects to continue to incur operating losses for the foreseeable future as it secures additional customers and continues to invest in the commercialization of its products. The Company will need to increase revenues substantially beyond levels that it has 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 the Company’s expected operating losses and cash burn for the foreseeable future, as well as recurring losses from operations, if the Company is unable to raise sufficient capital through additional debt or equity arrangements, there will be uncertainty regarding the Company’s ability to maintain liquidity sufficient to operate its business effectively, which raises substantial doubt as to the Company’s ability to continue as a going concern within one year from the date of issuance of these condensed consolidated financial statements. These condensed consolidated financial statements do not include any adjustments that might result from this uncertainty. There can be no assurance that such additional capital, whether in the form of debt or equity financing, will be sufficient or available and, if available, that such capital will be offered on terms and conditions acceptable to the Company. The Company’s primary focus is producing and selling its products. 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. Basis of Presentation The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. The Company’s fiscal year ends on December 31 of each calendar year. Certain prior year amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations or cash flows. Risks and Uncertainties The Company is subject to risks from, among other things, competition associated with the industry in general, other risks associated with financing, liquidity requirements, rapidly changing customer requirements, limited operating history and the volatility of public markets. COVID-19 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 the Company’s operational and financial performance will depend on future developments, including the duration and spread of the pandemic and related actions taken by U.S. and foreign government agencies to prevent disease spread, all of which are uncertain, out of the Company’s control, and cannot be predicted. Use of Estimates The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses recognized during the reported period. Material estimates may include assumptions made in determining reserves for uncollectible receivables, inventory write-downs, impairment of long-term assets, purchase price allocations, valuation allowance on deferred tax assets, accruals for potential liabilities and assumptions made in valuing equity instruments. Actual results could differ from those estimates. 6 Cash Equivalents and Investments The Company has invested its excess cash in money market accounts, certificates of deposit, corporate debt, government-sponsored enterprise bonds and municipal bonds and considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Investments with original maturities greater than three months and remaining maturities less than one year are classified as short-term investments. Investments with remaining maturities greater than one year are classified as long-term investments. Management generally determines the appropriate classification of securities at the time of purchase. All securities are classified as available-for-sale. The Company’s available-for-sale investments are carried at fair value, with the unrealized holding gains and losses reported in accumulated other comprehensive income (loss). Realized gains and losses and declines in the value judged to be other-than-temporary are included in the other income, net line item in the condensed consolidated statements of operations. The cost of securities sold is based on the specific identification method. Fair Value Measurements The Company measures the fair value of financial instruments using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels: Level 1—Inputs used to measure fair value are unadjusted quoted prices that are available in active markets for the identical assets or liabilities as of the reporting date. Level 2—Pricing is provided by third party sources of market information obtained through the Company’s investment advisors, rather than models. The Company does not adjust for, or apply, any additional assumptions or estimates to the pricing information it receives from advisors. The Company’s Level 2 securities include cash equivalents and available-for-sale securities, which consisted primarily of certificates of deposit, corporate debt, and government agency and municipal debt securities from issuers with high-quality credit ratings. The Company’s investment advisors obtain pricing data from independent sources, such as Standard & Poor’s, Bloomberg and Interactive Data Corporation, and rely on comparable pricing of other securities because the Level 2 securities are not actively traded and have fewer observable transactions. The Company considers this the most reliable information available for the valuation of the securities. Level 3—Unobservable inputs that are supported by little or no market activity and reflect the use of significant management judgment are used to measure fair value. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions. The determination of fair value for Level 3 investments and other financial instruments involves the most management judgment and subjectivity. The carrying amounts of financial assets and liabilities, such as cash and cash equivalents, accounts receivable, accounts payable, and other payables, approximate their fair values because of the short maturity of these instruments. The carrying values of lease obligations and long-term financing obligations approximate their fair values because interest rates on these obligations are based on prevailing market interest rates. The Company measures the fair value of its warrant liabilities using Level 3 inputs. Derivatives and Liability-Classified Instruments The Company accounts for common stock warrants as either equity-classified or liability-classified instruments based on an assessment of the specific terms of the warrants and the guidance provided by the Financial Accounting Standards Board (FASB) in ASC 480 , Distinguishing Liabilities from Equity (ASC 480) and ASC 815, Derivatives and Hedging (ASC 815) . The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own stock and whether the holders of the warrants could potentially require net cash settlement in a circumstance outside of the Company’s control, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding. 7 Allowance for Doubtful Accounts The Company establishes an allowance for doubtful accounts to ensure that its trade receivables balances are not overstated due to uncollectibility. The Company performs ongoing customer credit evaluations within the context of the industry in which it operates and generally does not require collateral from its customers. A specific allowance of up to 100 % of the invoice value is provided for any problematic customer balances. Delinquent account balances are written off after management has determined that the likelihood of collection is remote. The Company grants credit only to customers deemed creditworthy in the judgment of management. The allowance for doubtful accounts receivable was approximately $ 30,000 as of June 30, 2023 and approximately $ 183,000 as of December 31, 2022. Inventories The Company values its inventories at the lower of cost, which approximates actual cost on a first-in, first-out basis, or net realizable value. Costs of inventories primarily consisted of material and third party assembly costs. The Company records inventory reserves for estimated obsolescence or unmarketable inventories based upon assumptions about future demand and market conditions. Once a reserve is established, it is maintained until the product to which it relates is sold or otherwise disposed of. If actual market conditions are less favorable than those expected by management, additional adjustment to inventory valuation may be required. Charges for obsolete and slow-moving inventories are recorded based upon an analysis of specific identification of obsolete inventory items and quantification of slow moving inventory items. The Company determined that it had excess and obsolete inventory, primarily related to its mmWave products, and recorded write-downs of inventory of approximately $ 629,000 and $ 160,000 during the six months ended June 30, 2023 and 2022, respectively. If the Company’s recognition of excess or obsolete inventory is, or if its estimates of inventory’s potential utility become, less favorable than currently expected, additional inventory write-downs may be required. Intangible and Long-lived Assets Intangible assets are recorded at cost and amortized on a straight-line method over their estimated useful lives of three to ten years . Amortization of developed technology and other intangibles directly related to the Company’s products is included in cost of net revenue, while amortization of customer relationships and other intangibles not associated with the Company’s products is included in SG&A in the condensed consolidated statements of operations. The Company regularly reviews the carrying value and estimated lives of its long-lived assets and finite-lived intangible assets to determine whether indicators of impairment may exist which warrant adjustments to carrying values or estimated useful lives. The determinants used for this evaluation include management’s estimate of the asset’s ability to generate positive income from operations and positive cash flow in future periods as well as the strategic significance of the assets to the Company’s business objective. Should an impairment exist, the impairment loss would be measured based on the excess of the carrying amount of the long-lived asset group over the asset’s fair value. Purchased Intangible Assets Intangible assets acquired in business combinations are accounted for based on the fair value of assets purchased and are amortized over the period in which economic benefit is estimated to be received. Intangible assets subject to amortization, including those acquired in business combinations were as follows (amounts in thousands): June 30, 2023 Gross Net Carrying Accumulated Carrying Amount Amortization Amount Developed technology $ 5,726 $ ( 2,344 ) $ 3,382 Customer relationships 2,556 ( 1,046 ) 1,510 Other 186 ( 47 ) 139 Total $ 8,468 $ ( 3,437 ) $ 5,031 December 31, 2022 Gross Net Carrying Accumulated Carrying Amount Amortization Amount Developed technology $ 5,726 $ ( 1,491 ) $ 4,235 Customer relationships 2,556 ( 666 ) 1,890 Other 186 ( 33 ) 153 Total $ 8,468 $ ( 2,190 ) $ 6,278 8 Developed technology primarily consisted of MoSys’ products that have reached technological feasibility and primarily relate to its memory semiconductor products and technology. The value of the developed technology was determined by discounting estimated net future cash flows of these products. The Company has revised the remaining estimated life to 18 months as a result of the end of life for our memory products (see Note 11). Amortization related to developed technology of $ 0.4 million and $ 0.9 million for the three and six months ended June 30, 2023, respectively, has been included in cost of net revenue in the condensed consolidated statements of operations and comprehensive loss. Customer relationships relate to the Company’s ability to sell existing and future versions of products to MoSys’ customers existing at the time of the arrangement. The fair value of the customer relationships was determined by discounting estimated net future cash flows from the customer relationships. The Company has revised the remaining estimated life to 18 months as a result of the end of life announcement on May 1, 2023 (see Note 11). Amortization related to customer relationships of $ 0.2 million and $ 0.4 million for the three and six months ended June 30, 2023, respectively, has been included in selling, general and administrative expense in the condensed consolidated statements of operations and comprehensive loss. Other amortization expense was approximately $ 7,000 and $ 14,000 for the three and six months ended June 30, 2023, respectively. As of June 30, 2023, estimated future amortization expense related to intangible assets was as follows (in thousands): Year ending December 31, 2023 $ 1,645 2024 3,289 2025 28 2026 28 2027 10 Thereafter 31 $ 5,031 Revenue Recognition The Company recognizes revenue in accordance with 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 the Company’s historical practice of recognizing product revenue when title and risk of loss pass to the customer. The Company generates 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 the Company expects 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 the Company’s contracts have a single performance obligation to transfer products. Accordingly, the Company recognizes 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 the Company expects to receive in exchange for transferring products and is generally based upon a negotiated, formula, list or fixed price. The Company sells its products both directly to customers and through distributors generally under agreements with payment terms typically 60 days or less. The Company may record an estimated allowance, at the time of shipment, for future returns and other charges against revenue consistent with the terms of sale. 9 Royalty and other The Company’s licensing contracts typically provide for royalties based on the licensee’s use of the Company’s memory technology in its currently shipping commercial products. The Company estimates its royalty revenue in the calendar quarter in which the licensee uses the licensed technology. Payments are received in the subsequent quarter. The Company also generates revenue from licensing its technology. The Company recognizes license fees as revenue at the point of time when the control of the license has been transferred and the Company has 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 As of December 31, 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 six months ended June 30, 2023, the Company recognized the associated revenue and cost of net revenue. Contract liabilities – deferred revenue The Company’s contract liabilities consist of advance customer payments and deferred revenue. The Company classifies advance customer payments and deferred revenue as current or non-current based on the timing of when the Company expects to recognize revenue. As of June 30, 2023 and December 31, 2022, contract liabilities were in a current position and included in deferred revenue. During the six months ended June 30, 2023, the Company recognized approximately $ 157,000 of revenue that had been included in deferred revenue as of December 31, 2022. See Note 5 for disaggregation of revenue by geography. The Company does not have significant financing components, as payments from customers are typically due within 60 days of invoicing, and the Company has elected the practical expedient to not value financing components that are less than one year. Shipping and handling costs are generally incurred by the customer, and, therefore, are not recorded as revenue. Cost of Net Revenue Cost of net revenue consists primarily of direct and indirect costs of product sales, including amortization of intangible assets and depreciation of production-related fixed assets. Stock-Based Compensation The Company periodically issues stock options and restricted stock units to employees and non-employees. The Company accounts for such awards based on ASC 505 and ASC 718, whereby the value of the award is measured on the date of award and recognized as compensation expense on a straight-line basis over the vesting period. The fair value of the Company’s stock options is estimated using the Black-Scholes-Merton Option Pricing (Black Scholes) model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the options, and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes model. The assumptions used in the Black-Scholes model could materially affect compensation expense recorded in future periods. 10 Foreign Currency Transactions The functional currency of the Company is the U.S dollar. All foreign currency transactions are initially measured and recorded in an entity’s functional currency using the exchange rate on the date of the transaction. All monetary assets and liabilities are remeasured at the end of each reporting period using the exchange rate at that date. All non-monetary assets and related expense, depreciation or amortization are not subsequently remeasured and are measured using the historical exchange rate. An average exchange rate may be used to recognize income and expense items earned or incurred evenly over a period. Foreign exchange gains and losses resulting from the settlement of such transactions are recognized in the statement of operations, except for the gains and losses arising from the conversion of the carrying amount of the foreign currency denominated convertible preferred shares into the functional currency that are presented as adjustment to the net loss to arrive at net loss attributable to common stockholders. Per-Share Amounts Basic net loss per share is computed by dividing net loss for the period by the weighted-average number of exchangeable shares and shares of common stock outstanding during the period. In addition, the Company includes the number of shares of common stock issuable under pre-funded warrants as outstanding. Diluted net loss per share gives effect to all potentially dilutive exchangeable and common shares outstanding during the period. Potentially dilutive common shares consist of incremental exchangeable shares and shares of common stock issuable upon the achievement of escrow terms, exercise of stock options, vesting of stock awards and exercise of warrants. The following table sets forth securities outstanding that were excluded from the computation of diluted net loss per share as their inclusion would be anti-dilutive (in thousands): June 30, 2023 2022 Escrow shares - exchangeable shares 1,313 1,313 Escrow shares - common stock 502 502 Options to purchase common stock 1,473 1,537 Unvested restricted common stock units 942 1,303 Common stock warrants 9,490 134 Total 13,720 4,789 Recently Issued Accounting Pronouncements In June 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments—Credit Losses . This ASU added a new impairment model (known as the current expected credit loss (CECL) model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes an allowance for its estimate of expected credit losses and applies to most debt instruments, trade receivables, lease receivables, financial guarantee contracts, and other loan commitments. The CECL model does not have a minimum threshold for recognition of impairment losses and entities will need to measure expected credit losses on assets that have a low risk of loss. This update is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years for smaller reporting companies. The Company adopted ASU No. 2016-13 effective January 1, 2023, and the adoption did not have a significant impact on the Company’s condensed consolidated financial statement presentation or disclosures. Management does not believe that any other recently issued, but not yet effective, authoritative guidance, if currently adopted, would have a material impact on the Company’s financial statement presentation or disclosures. 11 Note 2: Fair Value of Financial Instruments The following table represents the Company’s assets and liabilities measured at fair value on a recurring basis and the basis for that measurement (in thousands): June 30, 2023 Fair Value Level 1 Level 2 Level 3 Assets: Money market funds (1) $ 82 $ — $ — $ — Corporate notes and commercial paper $ 594 $ — $ 594 $ — Liabilities: Warrant $ 3,618 $ — $ — $ 3,618 December 31, 2022 Fair Value Level 1 Level 2 Level 3 Assets: Money market funds (1) $ 73 $ — $ — $ — Corporate notes and commercial paper $ 1,078 $ — $ 1,078 $ — Liabilities: Warrants $ 2,079 $ — $ — $ 2,079 (1) Amounts are included in cash and cash equivalents on the condensed consolidated balance sheets. The following tables represents the Company’s determination of fair value for its financial assets (cash equivalents and investments) (in thousands): June 30, 2023 Unrealized Unrealized Fair Cost Gains Losses Value Cash and cash equivalents $ 2,146 $ — $ — $ 2,146 Short-term investments 580 14 — 594 $ 2,726 $ 14 $ — $ 2,740 December 31, 2022 Unrealized Unrealized Fair Cost Gains Losses Value Cash and cash equivalents $ 1,828 $ — $ — $ 1,828 Short-term investments 1,103 — ( 25 ) 1,078 $ 2,931 $ — $ ( 25 ) $ 2,906 Note 3. Balance Sheet Detail Inventories June 30, December 31, 2023 2022 (in thousands) Inventories: Raw materials $ 617 $ 1,279 Work-in-process 2,448 2,595 Finished goods 2,095 1,474 $ 5,160 $ 5,348 12 Note 4. Commitments and Contingencies Leases The Company has facility leases that it accounts for under ASC 842, including the operating leases for its corporate headquarters facility in San Jose, California, and facilities in Toronto and Markham Ontario, Canada. The San Jose and Toronto leases expire in January 2024 and December 2023, respectively. In May 2022, the Company entered into a new lease for the facility in Markham with a 60-month term, which commenced June 21, 2022. The Markham landlord also provided a lease incentive of approximately $ 220,000 (the Incentive), which will be payable to the Company as follows: one-half of the Incentive payable subsequent to the completion of the improvements to the leased space and the second half-ratably on an annual basis commencing with the second year of the lease. The initial right-of-use assets and corresponding liabilities of approximately $ 1.0 million for the San Jose and Markham facility leases were measured at the present value of the future minimum lease payments. The discount rate used to measure the lease assets and liabilities was 8 %. On March 1, 2022, the Company entered into a 36-month finance lease agreement for the lease of equipment resulting in the recognition of a right-of-use asset and lease liability of approximately $ 274,000 . On November 1, 2022, the Company entered into a 36-month finance lease agreement for the lease of equipment resulting in the recognition of a right-of-use asset of approximately $ 124,000 and lease liability of approximately $ 117,000 . The following table provides the details of right-of-use assets and lease liabilities as of June 30, 2023 (in thousands): June 30, 2023 Right-of-use assets: Operating leases $ 562 Finance lease 258 Total right-of-use assets $ 820 Lease liabilities: Operating leases $ 554 Finance lease 259 Total lease liabilities $ 813 Future minimum payments under the leases at June 30, 2023 are listed in the table below (in thousands): Operating Year ending December 31, leases 2023 $ 283 2024 265 2025 166 2026 110 2027 83 Total future lease payments 907 Less: imputed interest ( 94 ) Present value of lease liabilities $ 813 The following table provides the details of supplemental cash flow information (in thousands): Six Months Ended June 30, 2023 2022 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows for leases $ 403 $ 283 Rent expense was approximately $ 0.2 million for each of the three-month periods ended June 30, 2023 and 2022. Rent expense was approximately $ 0.4 million for each of the six-month periods ended June 30, 2023 and 2022. In addition to the minimum lease payments, the Company is responsible for property taxes, insurance and certain other operating costs related to the leased facilities and equipment. 13 Indemnification In the ordinary course of business, the Company enters into contractual arrangements under which it may agree to indemnify the counterparties from any losses incurred relating to breach of representations and warranties, failure to perform certain covenants, or claims and losses arising from certain events as outlined within the particular 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. The Company has also entered into indemnification agreements with its officers and directors. No material amounts were reflected in the Company’s condensed consolidated financial statements for the six months ended June 30, 2023 and 2022 related to these indemnifications. The Company has not estimated the maximum potential amount of indemnification liability under these agreements due to the limited history of prior claims and the unique facts and circumstances applicable to each particular agreement. To date, the Company has not made any payments related to these indemnification agreements. Product Warranties The Company warrants certain of its products to be free of defects generally for a period of three years. The Company estimates its warranty costs based on historical warranty claim experience and includes such costs in cost of net revenues. Warranty costs were not material for the six months ended June 30, 2023 and 2022. Legal Matters The Company is not a party to any legal proceeding that the Company believes is likely to have a material adverse effect on its condensed consolidated financial position or results of operations. From time to time the Company may be subject to legal proceedings and claims in the ordinary course of business. These claims, even if not meritorious, could result in the expenditure of significant financial resources and diversion of management efforts. Purchase Obligations The Company’s primary purchase obligations include non-cancelable purchase orders for inventory and computer-aided-design (CAD) software. At June 30, 2023, the Company had outstanding non-cancelable purchase orders for inventory, primarily wafers and substrates, and related expenditures of approximately $ 2.2 million and non-cancelable purchase orders for CAD software of $ 2.9 million. Note 5. Business Segments, Concentration of Credit Risk and Significant Customers The Company determined its reporting units in accordance with ASC 280, Segment Reporting (ASC 280). Management evaluates a reporting unit by first identifying its operating segments under ASC 280. The Company then evaluates each operating segment to determine if it includes one or more components that constitute a business. If there are components within an operating segment that meet the definition of a business, the Company evaluates those components to determine if they must be aggregated into one or more reporting units. If applicable, when determining if it is appropriate to aggregate different operating segments, the Company determines if the segments are economically similar and, if so, the operating segments are aggregated. Management has determined that the Company has one consolidated operating segment. The Company’s reporting segment reflects the manner in which its chief operating decision maker reviews results and allocates resources. The Company’s reporting segment meets the definition of an operating segment and does not include the aggregation of multiple operating segments. 14 The Company recognized revenue from shipments of product, licensing of its technologies and performance of services to customers by geographical location as follows (in thousands): Three Months Ended Six Months Ended June 30, June 30, 2023 2022 2023 2022 United States $ 1,421 $ 3,127 $ 4,510 $ 5,503 Taiwan 562 204 1,991 515 China 147 587 293 879 Japan 2 245 14 537 Rest of world 271 121 628 253 Total net revenue $ 2,403 $ 4,284 $ 7,436 $ 7,687 The following is a breakdown of product revenue by category (in thousands): (amounts in thousands) Three Months Ended June 30, Six Months Ended June 30, Product category 2023 2022 2023 2022 Memory ICs $ 1,616 $ 1,872 $ 3,798 $ 3,781 mmWave ICs 559 678 2,038 1,165 mmWave antenna modules 60 1,552 1,283 2,360 mmWave other products - 18 4 18 $ 2,235 $ 4,120 $ 7,123 $ 7,324 Customers who accounted for at least 10 % of total net revenue were: Three Months Ended Six Months Ended June 30, June 30, 2023 2022 2023 2022 Customer A 46 % * 27 % * Customer D 23 % * 26 % * Customer B * 36 % 15 % 31 % Customer C * 14 % * 11 % Customer E * * 12 % * * Represents less than 10 % As of June 30, 2023, one customer accounted for 74 % of accounts receivable. Four customers accounted for 79 % of accounts receivable as of December 31, 2022. Note 6. Stock-Based Compensation Common Stock Equity Plans In 2010, the Company adopted the 2010 Equity Incentive Plan and later amended it in 2014, 2017 and 2018 (the Amended 2010 Plan). The Amended 2010 Plan was terminated in August 2019 and remains in effect as to outstanding equity awards granted prior to the date of expiration. No new awards may be made under the Amended 2010 Plan. In August 2019, the Company’s stockholders approved the 2019 Stock Incentive Plan (the 2019 Plan) to replace the Amended 2010 Plan. The 2019 Plan authorizes the board of directors or the compensation committee of the board of directors to grant a broad range of awards including stock options, stock appreciation rights, restricted stock, performance-based awards, and restricted stock units. Under the 2019 Plan, 182,500 shares were initially reserved for issuance. In November 2021, in connection with the approval of the Arrangement, the Company’s stockholders approved an amendment increasing the number of shares reserved for issuance under the 2019 Plan by 3,106,937 shares. 15 Under the 2019 Plan, the term of all incentive stock options granted to a person who, at the time of grant, owns stock representing more than 10 % of the voting power of all classes of the Company’s stock may not exceed five years . The exercise price of stock options granted under the 2019 Plan must be at least equal to the fair market value of the shares on the date of grant. Generally, awards under the 2019 Plan will vest over a three to four-year period, and options will have a term of 10 years from the date of grant. In addition, the 2019 Plan provides for automatic acceleration of vesting for options granted to non-employee directors upon a change of control of the Company. In connection with the Arrangement, the Company assumed the Peraso Technologies Inc. 2009 Share Option Plan (the 2009 Plan) and all outstanding options granted pursuant to the terms of the 2009 Plan. Each outstanding, unexercised and unexpired option under the 2009 Plan, whether vested or unvested, was assumed by the Company and converted into options to purchase shares of the Company’s common stock No further awards will be made under the 2009 Plan. The 2009 Plan, the Amended 2010 Plan and the 2019 Plan are referred to collectively as the “Plans.” Stock-Based Compensation Expense The Company reflected compensation costs of $ 2.1 million and $ 2.2 million related to the vesting of stock options during each of the six-month periods ended June 30, 2023 and 2022, respectively. At June 30, 2023, the unamortized compensation cost was approximately $ 5.6 million related to stock options and is expected to be recognized as expense over a weighted average period of approximately 1.4 years. The Company reflected compensation costs of $ 0.5 million and $ 0.7 million related to the vesting of restricted stock during the six months ended June 30, 2023 and 2022, respectively. The unamortized compensation cost at June 30, 2023 was $ 1.6 million related to restricted stock units and is expected to be recognized as expense over a weighted average period of approximately 1.6 years. There were no stock options granted or exercised during the six months ended June 30, 2023 and 2022. Common Stock Options and Restricted Stock The term of all incentive stock options granted to a person who, at the time of grant, owns stock representing more than 10 % of the voting power of all classes of the Company’s stock may not exceed five years. The exercise price of stock options granted under the 2019 Plan must be at least equal to the fair market value of the shares on the date of grant. Generally, options granted under the 2019 Plan will vest over a three to four-year period and have a term of 10 years from the date of grant. In addition, the 2019 Plan provides for automatic acceleration of vesting for options granted to non-employee directors upon a change of control (as defined in the 2019 Plan) of the Company. The following table summarizes the activity in the shares available for grant under the Plans during the six months ended June 30, 2023 (in thousands, except exercise price): Options Outstanding Weighted Shares Average Available Number of Exercise for Grant Shares Prices Balance as of December 31, 2022 1,556 1,499 $ 3.32 RSUs granted ( 80 ) — $ — RSUs cancelled and returned to the Plans 51 — $ — Options cancelled — ( 17 ) $ 6.76 Balance as of March 31, 2023 1,527 1,482 $ 3.28 RSUs granted ( 69 ) — $ — RSUs cancelled and returned to the Plans 3 — $ — Options cancelled — ( 9 ) $ 2.92 Balance as of June 30, 2023 1,461 1,473 $ 3.22 16 A summary of RSU activity under the Plans is presented below (in thousands, except for fair value): Weighted Average Number of Grant-Date Shares Fair Value Non-vested shares as of December 31, 2022 1,057 $ 2.06 Granted 80 $ 0.99 Vested ( 51 ) $ 2.07 Non-vested shares as of March 31, 2023 1,086 $ 1.98 Granted 69 $ 0.52 Vested ( 210 ) $ 2.16 Cancels ( 3 ) $ 2.15 Non-vested shares as of June 30, 2023 942 $ 1.84 The following table summarizes significant ranges of outstanding and exercisable options as of June 30, 2023 (in thousands, except contractual life and exercise price): Options Outstanding Options Exercisable Weighted Average Remaining Weighted Weighted Contractual Average Average Aggregate Number Life Exercise Number Exercise Intrinsic Range of Exercise Price Outstanding (in Years) Price Exercisable Price value $ 1.57 - $ 14.99 1,464 7.18 $ 2.64 987 $ 2.59 $ — $ 15.00 - $ 25.59 4 0.24 $ 15.00 4 $ 15.00 $ — $ 25.60 - $ 143.99 1 1.18 $ 50.00 1 $ 50.00 $ — $ 144.00 - $ 409.99 3 2.89 $ 144.00 3 $ 144.00 $ — $ 410.00 - $ 924.00 1 1.20 $ 410.00 1 $ 410.00 $ — $ 1.57 - $ 924.00 1,473 7.14 $ 3.22 996 $ 3.45 $ — Note 7. Equity Exchangeable Shares and Preferred Stock As discussed in Note 1, on December 17, 2021, following the satisfaction of the closing conditions set forth in the Arrangement Agreement, the Arrangement was completed. Pursuant to the completion of the Arrangement, each Peraso Share that was issued and outstanding immediately prior to December 17, 2021 was converted into either newly issued shares of common stock of the Company or shares of Canco, which are exchangeable for shares of the Company’s common stock (Exchangeable Shares), at the election of each former Peraso Tech stockholder. Of the shares issued to the holders of Peraso Tech Shares, pursuant to the terms of the Agreement, the Company held in escrow an aggregate of 1,312,878 Exchangeable Shares and 502,567 shares of common stock (collectively, the Escrow Shares). The Escrow Shares are escrowed pursuant to the terms of an escrow agreement on a pro rata basis from the aggregate consideration received by the holders of Peraso Shares, subject to the offset by the Company for any losses in accordance with the Agreement. Such Escrow Shares shall be released, subject to any offset claim, upon the satisfaction of the earlier of: (a) any date following the first anniversary of December 17, 2021 and prior to December 17, 2024 where the volume weighted average price of the common stock for any 20 trading days within a period of 30 consecutive trading days is at least $ 8.57 per share, subject to adjustment for stock splits or other similar transactions; (b) the date of any sale of all or substantially all of the assets or shares of the Company; or (c) the date of any bankruptcy, insolvency, restructuring, receivership, administration, wind-up, liquidation, dissolution, or similar event involving the Company. All and any voting rights and other stockholder rights, other than with respect to dividends and distributions, with respect to the Escrow Shares are suspended until the Escrow Shares are released from escrow. The Exchangeable Share structure is commonly used for cross-border transactions of this nature so as to provide non-tax-exempt Canadian shareholders with the same economic rights and benefits as holders of the Company’s shares into which the Exchangeable Shares are exchangeable, while allowing those Canadian shareholders to benefit from the tax-rollover available on the issuance of the Exchangeable Shares. In general terms, by choosing to acquire Exchangeable Shares from Canco, such a former Peraso Tech shareholder was able to rely on a rollover rule in the Income Tax Act (Canada) in order to defer any capital gain that he/she/it would have otherwise realized. 17 Callco was incorporated to exercise the call rights, while Canco was incorporated to acquire the shares of Peraso Tech from Canadian shareholders that wished to receive Exchangeable Shares as consideration, so it was a tax deferred transaction for such Canadian shareholders. The use of a separate entity, Callco, helps maximize cross border paid-up capital, which represents the amount that can generally be distributed free of Canadian withholding tax. The call rights also allow Callco to “purchase” the Exchangeable Shares rather than having them redeemed by Canco on a redemption or retraction or in connection with a liquidity event, thus avoiding the adverse deemed dividend tax consequences to shareholders that may arise from a redemption or retraction of Exchangeable Shares. Holders of Exchangeable Shares have the right at any time (the Retraction Right) to retract or redeem any or all of the Exchangeable Shares owned by them for an amount per share equal to the market price of a share of the Company’s common stock plus the full amount of all declared and unpaid dividends on such Exchangeable Share (the Exchangeable Share Purchase Price). The Exchangeable Share Purchase Price is payable only by the Company delivering or causing to be delivered to the relevant holder one share of the Company’s common stock for each Exchangeable Share purchased plus a cash amount equal to the amount of any accrued and unpaid dividends on such Exchangeable Share. The Company and Callco each have an overriding right, in the event that a holder of Exchangeable Shares exercises its Retraction Right, to redeem from such holder all, but not less than all, of the Exchangeable Shares tendered for redemption. The Exchangeable Shares are subject to redemption by the Company, Callco and Canco at the Exchangeable Share Purchase Price, on the “Redemption Date,” which date shall be no earlier than the seventh anniversary of the date on which Exchangeable Shares are first issued, unless: (a) less than 10 % of the aggregate number of Exchangeable Shares issued remain outstanding; (b) there is a change in control of the Company (defined generally as (i) any merger, amalgamation, arrangement, takeover bid or tender offer, material sale of shares or rights or interests that results in the holders of outstanding voting securities of the Company directly or indirectly owning, or exercising control or direction over, voting securities representing less than 50 % of the total voting power of all of the voting securities of the surviving entity; or (ii) any sale or disposition of all or substantially of the Company’s assets), and (c) upon the occurrence of certain other events. The Exchangeable Share Purchase Price is payable only by the Company delivering or causing to be delivered to the relevant holder one share of the Company’s common stock for each Exchangeable Share purchased plus a cash amount equal to the amount of any accrued and unpaid dividends on such Exchangeable Share. In the event of the liquidation, dissolution or winding-up of Canco, holders of Exchangeable Shares have the right to receive in respect of each Exchangeable Share held by such holder, an amount per share equal to the Exchangeable Share Purchase Price, which shall be satisfied in full by Canco by delivering to such holder one Company Share, plus an amount equal to the Dividend Amount. The Company and Callco each have an overriding right to purchase from all holders all but not less than all of the Exchangeable Shares upon the occurrence of such events. In addition, the Company and Callco have the right to purchase all outstanding Exchangeable Shares at the Exchangeable Share Purchase Price if there is a change of law that permits holders of Exchangeable Shares to exchange their Exchangeable Shares for shares of common stock on a basis that will not require holders to recognize any gain or loss or any actual or deemed dividend for Canadian tax purposes. The holders of Exchangeable Shares have an “automatic exchange right” in the event of any insolvency, liquidation, dissolution or winding-up or in general, related proceedings, of the Company for an amount per share equal to the Exchangeable Share Purchase Price. It is expected that Callco will exercise its call rights, as that is more beneficial to the holders of the Exchangeable Shares. Once Callco acquires the Exchangeable Shares from a holder, it (Callco and the Company) is obligated to deliver the Company shares to the holder. Callco discharges this obligation by arranging for the Company to issue and deliver those shares to the holders on behalf of Callco. As consideration for satisfying the delivery obligation, Callco would issue its own shares to the Company. There are no cash redemption features, as all redemption and exchange scenarios are payable in a share of the Company’s common stock. Neither Canco, Callco, or the Company assume any tax liabilities of a former Peraso Tech shareholder who acquired Exchangeable Shares under the plan of arrangement. The purchase price computed upon the exercise of rights pertaining to retraction, redemption, or liquidation, or otherwise giving rise to a purchase or cancellation of an Exchangeable Share, will, in all cases, consist of a 1:1 exchange involving the Company’s common stock, regardless of the market price of a share of the Company’s common stock. 18 In connection with the Arrangement, on December 15, 2021, the Company filed the Certificate of Designation of Series A Special Voting Preferred Stock (the Certificate) with the Secretary of State of the State of Delaware to designate Series A Special Voting Preferred Stock (the Special Voting Share) in accordance with the terms of the Arrangement Agreement in order to enable the holders of Exchangeable Shares to exercise their voting rights. The Special Voting Share was issued to a third-party administrative agent (the Agent) solely to facilitate the exercise of rights by holders of Exchangeable Shares. The rights of the Agent, as holder of the Special Voting Share, are limited to effecting the rights of the holders of the Exchangeable Shares; the Special Voting Share does not confer any independent rights to the Agent. Under the Certificate, when all of the Exchangeable shares have been converted into shares of the Company’s common stock, the Special Voting Share shall be automatically cancelled and shall not be reissued. Each Exchangeable Share is exchangeable for one share of common stock of the Company and while outstanding, the Special Voting Share enables holders of Exchangeable Shares to cast votes on matters for which holders of the common stock are entitled to vote, and by virtue of the share terms relating to the Exchangeable Shares, enable the Exchangeable Shares to receive dividends that are economically equivalent to any dividends declared with respect to the shares of common stock. As the Special Voting Share does not participate in dividends (only the Exchangeable Shares participate in dividends) and is not entitled to participate in the residual interest of the Company, it is not classified as an equity instrument in the Company’s financial statements. The Exchangeable Shares, which can be converted into common stock at the option of the holder and have the same voting and dividend rights as common stock, are similar in substance to shares of common stock. Further, Canco and Callco are non-substantive entities, which are looked through with the Exchangeable Shares being, in substance, common stock of the Company. Therefore, the Exchangeable Shares have been included in the determination of outstanding common stock. The Special Voting Share was issued to a third-party administrative agent (the Agent) solely to facilitate the exercise of rights by holders of Exchangeable Shares, The rights of the Agent, as holder of the Special Voting Share, are limited to effecting the rights of the holders of the Exchangeable Shares; the Special Voting Share does not confer any independent rights to the Agent. Under the Certificate, when all of the Exchangeable shares have been converted into shares of the Company’s common stock, the Special Voting Share shall be automatically cancelled and shall not be reissued. June 2023 Registered Direct Offering On May 31, 2023, the Company entered into a securities purchase agreement (the SPA) with an institutional investor (the Investor), pursuant to which the Company sold to the Investor, in a registered direct offering that closed on June 2, 2023, an aggregate of 2,250,000 shares of common stock at a purchase price of $ 0.70 per share. The Company also offered and sold to the Investor pre-funded warrants to purchase up to 3,464,286 shares of common stock (the 2023 PF Warrants). Each pre-funded warrant is exercisable for one share of common stock. The purchase price of each pre-funded warrant was $ 0.69 , and the exercise price of each pre-funded warrant is $ 0.01 per share. The 2023 PF Warrants were immediately exercisable and may be exercised at any time until all of such pre-funded warrants are exercised in full. In June 2023, the Investor exercised a portion of the 2023 PF Warrants and purchased 967,286 shares of common stock. Net proceeds to the Company from the registered direct offering, after offering costs, were approximately $ 3.6 million. In connection with the execution of the SPA, the Company and the Investor entered into an amendment (the Amendment) to the 2022 Purchase Warrant. Pursuant to the terms of the Amendment, the 2022 Purchase Warrant was amended to reduce the exercise price per share from $ 1.36 to $ 1.00 , effective as of June 2, 2023. In a concurrent private placement that closed on June 2, 2023, the Company also sold to the Investor a warrant to purchase up to 5,714,286 shares of common stock (the 2023 Purchase Warrant). The 2023 Purchase Warrant was immediately exercisable at an exercise price of $ 0.70 per share and has a five-year term. As discussed in Note 8, the 2023 Purchase Warrant is accounted for as a liability. Fair value of the warrants at the date of issuance was determined to be $ 3,162,401 and was accounted for as a cost of the offering. November 2022 Registered Direct Offering On November 28, 2022, the Company entered into a securities purchase agreement with the Investor, pursuant to which the Company sold to the Investor, in a registered direct offering that closed on November 30, 2022, an aggregate of 1,300,000 shares of common stock at a negotiated purchase price of $ 1.00 per share. The Company also offered and sold to the investor pre-funded warrants to purchase up to 1,150,000 shares of common stock. Each pre-funded warrant was exercisable for one share of common stock. The purchase price of each pre-funded warrant was $ 0.99 , and the exercise price of each pre-funded warrant is $ 0.01 per share. The pre-funded warrants were exercised in full by the Investor in April 2023. Net proceeds to the Company from the registered direct offering, after offering costs, were approximately $ 2.1 million. 19 In a concurrent private placement, the Company also sold to the Investor a warrant to purchase up to 3,675,000 shares of common stock (the 2022 Purchase Warrant). The 2022 Purchase Warrant became exercisable on May 29, 2023 at an exercise price of $ 1.36 per share and will expire on the five-year anniversary of that date. As discussed in Note 8, the 2022 Purchase Warrant is accounted for as a liability. Warrants As of June 30, 2023, the Company had the following equity-classified warrants outstanding (share amounts in thousands): Warrant Type Number of Shares Exercise Price Expiration Balance as of December 31, 2022 1,284 Warrants expired ( 33 ) $ 47.00 January 2023 Balance as of March 31, 2023 1,251 Pre-funded warrants issued 3,464 $ 0.01 — Pre-funded warrants exercised ( 2,117 ) $ 0.01 — Balance as of June 30, 2023 2,598 The unexercised 2,497,000 shares of the 2023 PF Warrant were included in the weighted average shares outstanding calculation for the three and six months ended June 30, 2023. As of December 31, 2022, the Company had the following equity-classified warrants outstanding (share amounts in thousands): Warrant Type Number of Shares Exercise Price Expiration Common stock 33 $ 47.00 January 2023 Common stock 101 $ 2.40 October 2023 Common stock 1,150 $ 0.01 — 1,284 During the six months ended June 30, 2023, approximately 33,000 warrants expired. Note 8. Warrants Classified as Liabilities The 2023 Purchase Warrant and the 2022 Purchase Warrant (collectively, the Purchase Warrants) provide for a value calculation using the Black Scholes model in the event of certain fundamental transactions, as defined in the Purchase Warrants. The fair value calculation provides for a floor on the volatility amount utilized in the value calculation at 100 % or greater. The Company has determined that this provision introduces leverage to the holder(s) of the Purchase Warrants that could result in a value that would be greater than the settlement amount of a fixed-for-fixed option on the Company’s own equity shares. Therefore, pursuant to ASC 815, the Company has classified the Purchase Warrants as liabilities in its condensed consolidated balance sheets. The classification of the Purchase Warrants, including whether the Purchase Warrants should be recorded as liabilities or as equity, is evaluated at the end of each reporting period with changes in the fair value reported in other income (expense) in the condensed consolidated statements of operations and comprehensive loss. On June 2, 2023, the 2023 Purchase Warrant was initially recorded at a fair value at $ 3,162,401 , and, as of June 30, 2023, the fair value of the warrant liability was reduced to $ 2,246,365 . As a result, the Company recorded a gain for the three months ended June 30, 2023 for the change in fair value of the 2023 Purchase Warrant. The fair value of the Purchase Warrants at June 30, 2023 was determined using the Black Scholes model with the following assumptions: (i) expected term based on the remaining contractual terms, (ii) risk-free interest rate of 4.16%, which was based on a comparable US Treasury 5-year bond, (iii) expected volatility of 118% and (iv) an expected dividend of zero. 20 As of June 30, 2023, the Company had the following liability-classified warrants outstanding (amounts in thousands): Number of warrants on common shares Amount Balance as of December 31, 2021 — $ — Recognition of warrant liability 3,675 3,674 Change in fair value of warrant — ( 1,595 ) Balance as of December 31, 2022 3,675 2,079 Change in fair value of warrant — ( 658 ) Balance as of March 31, 2023 3,675 1,421 Recognition of warrant liability 5,714 3,163 Change in fair value of warrants — ( 966 ) Balance as of June 30, 2023 9,389 $ 3,618 Note. 9 Related Party Transactions A family member of one of the Company’s executive officers served as a consultant to the Company during 2022. During the six months ended June 30, 2022, the Company incurred consulting expenses of approximately $ 92,200 for the family member. Additionally, a family member of one of the Company’s executive officers is an employee of the Company. During the six months ended June 30, 2023 and 2022, the Company recorded compensation expense of approximately $ 55,800 and $ 69,700 , respectively, for the employed family member . Note 10. License and Asset Sale Transaction On August 5, 2022, the Company entered into a Technology License and Patent Assignment Agreement (the Intel Agreement) with Intel Corporation (Intel), pursuant to which Intel: (i) licensed from the Company, on an exclusive basis, certain software and technology assets related to the Company’s Stellar packet classification intellectual property, including its graph memory engine technology, and any roadmap variant, in the form existing as of the date of the Agreement (the Licensed Technology); (ii) acquired from the Company certain patent applications and patents owned by the Company; and (iii) assumed a professional services agreement, dated March 24, 2020, between Fabulous Inventions AB (Fabulous) and the Company (the Fabulous Agreement), pursuant to which, among other things, the Company licensed from Fabulous certain technology incorporated into the Licensed Technology. As consideration for the Company to enter into the Agreement, Intel agreed to pay the Company $ 3,062,500 at the closing of the transaction (the Closing) and $ 437,500 (the Holdback) upon the satisfaction by the Company, as mutually agreed upon by the parties in good faith, of certain release criteria set forth in the Agreement relating to various due diligence activities of Intel regarding the Licensed Technology (the Release Criteria). The Company determined that the license and asset sale did not qualify as a sale of a business, but as a sale of a non-financial asset, with the resultant gain recorded as income from operations in accordance with ASC 610-20, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets . During the year ended December 31, 2022, the Company recognized a $ 2.6 million gain on this transaction, net of transaction costs. During the six months ended June 30, 2023, Intel paid the Holdback, and the Company recognized a $ 0.4 million gain, net of transaction costs, which was recorded as a reduction of operating expenses in the condensed consolidated statements of operations and comprehensive loss. Note 11. Memory IC Product End-of-Life Taiwan Semiconductor Manufacturing Corporation (TSMC), is the sole foundry that manufactures the wafers used to produce the Company’s memory IC products. TSMC has informed the Company that TSMC would be discontinuing the foundry process used to produce wafers, in turn, necessary to manufacture the Company’s memory ICs. As a result, in May 2023, the Company informed its customers that the Company would be initiating an end-of-life (EOL) of its memory IC products. The Company has notified its customers to provide purchase orders during 2023 that the Company expects to fulfill during 2024 and into 2025. However, the timing of EOL shipments will be dependent on receipt of customer purchase orders, deliveries from the Company’s suppliers and the delivery schedules requested by customers. 21