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 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. 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 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 by December 22, 2023, and we commenced initial EOL shipments during the quarter ended September 30, 2023. We have requested customers to pay a deposit upon purchase order placement to reserve supply and provide funding for our required inventory purchases. In addition, we have requested customers to accelerate payments to improve our cash flows. Under our EOL plan, we expect shipments of our memory products to continue until at least December 31, 2024. However, the timing of EOL shipments will be dependent on receipt of purchase orders from customers, deliveries from our suppliers, and the delivery schedules requested by our customers. 24 We incurred net losses of approximately $7.9 million for the nine months ended September 30, 2023 and $32.4 million for the year ended December 31, 2022, and we had an accumulated deficit of approximately $157.5 million as of September 30, 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. Exploring Strategic Alternatives In August 2023, we engaged an investment bank to assist with the exploration of strategic alternatives, including a merger, sale of assets or other similar transaction, with the intention to maximize stockholder value and further our business operations. There can be no assurance that the exploration process will result in any strategic alternative, or as to its outcome or timing. We have neither set a timetable for completion of this process, nor have we made any decisions related to strategic alternatives at this time. If a strategic process is unsuccessful and we are unable to raise additional capital, we may be unable to continue our operations at planned levels and be forced to further reduce or terminate our operations. These factors raise substantial doubt about our ability to continue as a going concern, as discussed below. COVID-19 and World Unrest 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. This 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. While the U.S. national emergency expired in May 2023 and substantially all closures and “shelter-in-place” orders have ended, there can be no assurance that the COVID-19 pandemic will not impact our operational and financial performance in the future, as the duration and spread of the pandemic and related actions taken by U.S. and foreign government agencies to prevent disease spread are uncertain, out of our control, and cannot be predicted. World unrest due to wars and terrorist attacks have 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. 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 September 30, 2023, there have been no material changes to our significant accounting policies and estimates. 25 Results of Operations Net Revenue September 30, Change 2023 2022 2022 to 2023 (dollar amounts in thousands) Product -three months ended $ 4,262 $ 3,060 $ 1,202 39 % Percentage of total net revenue 95 % 93 % Product -nine months ended $ 11,385 $ 10,384 $ 1,001 10 % Percentage of total net revenue 96 % 95 % The following table details revenue by product category for the three and nine months ended September 30, 2023 and 2022: (amounts in thousands) Three Months Ended September 30, Nine Months Ended September 30, Product category 2023 2022 change 2023 2022 change Memory ICs $ 3,384 $ 1,748 $ 1,636 $ 7,181 $ 5,528 $ 1,653 mmWave ICs 576 533 43 2,614 1,699 915 mmWave antenna modules 302 779 (477 ) 1,586 3,139 (1,553 ) mmWave other products - - - 4 18 (14 ) $ 4,262 $ 3,060 $ 1,202 $ 11,385 $ 10,384 $ 1,001 Product revenue increased for the three months ended September 30, 2023 compared with the same period of 2022 primarily due to increases in shipments related to our end-of-life announcement of our memory IC products, partially offset by a reduction in shipments of our antenna modules. Product revenue increased for the nine months ended September 30, 2023 compared with the same period of 2022 due to increases in shipments related to our end-of-life announcement of our memory IC products combined with year-over year increases in shipments of our mmWave ICs, partially offset by a reduction in shipments of our antenna modules. We initiated price increases on certain of our antenna module products in 2022, however, through September 30, 2023, we had not realized any material increase in revenue as a result of those price increases. September 30, Change 2023 2022 2022 to 2023 (dollar amounts in thousands) Royalty and other -three months ended $ 219 $ 234 $ (15 ) (6 )% Percentage of total net revenue 5 % 7 % Royalty and other -nine months ended $ 531 $ 597 $ (66 ) (11 )% Percentage of total net revenue 4 % 5 % Royalty and other includes royalty, non-recurring engineering, or NRE, services and license revenues. The decrease in royalty and other revenue for the three months ended September 30, 2023 compared with the same period of 2022 was primarily due to a decrease in royalty revenues from licensees of our memory technology due to reduced shipments by these licensees. The decrease in royalty and other revenue for the nine months ended September 30, 2023 compared with the same period of 2022 was primarily due to a decrease in NRE services revenue related to our mmWave technology and a decrease in royalty revenues from licensees of our memory technology due to reduced shipments by these licensees. 26 Cost of Net Revenue and Gross Profit September 30, Change 2023 2022 2022 to 2023 (dollar amounts in thousands) Cost of net revenue -three months ended $ 2,445 $ 2,000 $ 445 22 % Percentage of total net revenue 55 % 61 % Cost of net revenue -nine months ended $ 7,346 $ 6,747 $ 599 9 % Percentage of total net revenue 62 % 61 % 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. Cost of net revenue increased for the three months ended September 30, 2023 when compared with the same period in 2022, primarily due to the combined effect of i) increased shipment volumes of our memory products in 2023, partially offset by decrease in sales of our mmWave product, and ii) increased amortization of developed technology of approximately $0.2 million. The revised remaining estimated life to 18 months of the intangible asset was a result of the end-of-life announcement on May 1, 2023 (see Note 11). Cost of net revenue increased for the nine months ended September 30, 2023 when compared with the same period in 2022, due to the increase in sales of our IC products, partially offset by decrease in sales of our mmWave product. In addition, we incurred increased inventory write-down charges of $0.4 million primarily for mmWave product inventory, as we identified excess and obsolete inventory. If our utilization of inventory is, or if our estimates of our inventory’s potential utility become, less favorable than currently expected, additional inventory write-downs may be required. Cost of net revenue represents a higher percentage of revenue for our mmWave products, as compared to our memory products. September 30, Change 2023 2022 2022 to 2023 (dollar amounts in thousands) Gross profit -three months ended $ 2,036 $ 1,294 $ 742 57 % Percentage of total net revenue 45 % 39 % Gross profit -nine months ended $ 4,570 $ 4,234 $ 336 8 % Percentage of total net revenue 38 % 39 % Gross profit increased for the three months ended September 30, 2023 compared with the same period of 2022 primarily due to the increase in shipment volumes of our memory products. The increase in our gross profit margin percentage for the three months ended September 30, 2023 compared with the prior year period was primarily attributable to the increased volume shipments of our memory products, which carry higher gross margins than our mmWave products. Gross profit increased for the nine months ended September 30, 2023 compared with the same period of 2022 due to the increased shipments of our memory and mmWave IC products partially offset by a decrease in shipments of our mmWave antenna modules combined with the increase in cost of net revenues. Research and Development September 30, Change 2023 2022 2022 to 2023 (dollar amounts in thousands) R&D -three months ended $ 3,484 $ 4,509 $ (1,025 ) (23 )% Percentage of total net revenue 78 % 137 % Research and development -nine months ended $ 11,038 $ 15,636 $ (4,598 ) (29 )% Percentage of total net revenue 93 % 142 % Our research and development, or R&D, expenses include costs related to the development of our products. We expense R&D costs as they are incurred. 27 The decrease for the three and nine months ended September 30, 2023 compared with the same periods of 2022 was primarily due to reduced salary and consulting costs. During the quarter ended December 31, 2022, we began implementing cost reductions, which included a reduction of consulting positions and the elimination of certain employee positions in February 2023, 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 $0.6 million and $1.2 million for the three and nine months ended September 30, 2023, respectively. In addition, during the nine months ended September 30, 2022, we incurred mask fabrication (i.e., tape-out) expenses of $0.7 million for one of our mmWave ICs, and we incurred no mask fabrication costs in 2023. We expect that total R&D expenses will decrease for the remainder of 2023 compared with 2022, as a result of our cost reduction initiatives. Selling, General and Administrative September 30, Change 2023 2022 2022 to 2023 (dollar amounts in thousands) SG&A -three months ended $ 2,112 $ 3,353 $ (1,241 ) (37 )% Percentage of total net revenue 47 % 102 % SG&A -nine months ended $ 6,331 $ 8,938 $ (2,607 ) (29 )% Percentage of total net revenue 53 % 81 % Selling, general and administrative, or SG&A, expenses consist primarily of personnel and related overhead costs for sales, marketing, finance, human resources and general management and amortization of certain intangible assets. The decrease for the three and nine months ended September 30, 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 . The reductions in SG&A expense in 2023 primarily resulted from lower headcount, including the elimination of certain employee and consulting positions and reductions of other discretionary operating expenses. We expect that total SG&A expense will decrease for the remainder of 2023 compared with 2022 due to our continued cost reduction initiatives, including lower headcount. Liquidity and Capital Resources; Changes in Financial Condition Cash Flows As of September 30, 2023, we had cash, cash equivalents and investments of $0.7 million and working capital of $6.5 million. Net cash used in operating activities was $5.6 million for the first nine months of 2023, which primarily resulted from our net loss of $7.9 million, as adjusted for a $4.2 million non-cash gain on the change in fair value of warrant liability and $0.2 million in other non-cash changes, and was partially offset by non-cash charges of $2.8 million of depreciation and amortization and $3.9 million of stock based compensation. Net cash used in operating activities was $13.4 million for the first nine months of 2022, which primarily resulted from our net loss of $17.8 million and $3.1 million in net changes in assets and liabilities, partially offset by non-cash charges of $2.3 million of depreciation and amortization, $4.4 million of stock based compensation, $0.7 million of allowance for doubtful accounts and $0.1 million for other non-cash items. 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 $1.0 million for the nine months ended September 30, 2023 represented $1.1 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 $10.4 million for the nine months ended September 30, 2022 represented $11.5 million in proceeds from maturities of short-term investments, partially offset by $0.5 million purchases of short and long-term investments and $0.6 million of purchases of property and equipment. 28 Net cash provided by financing activities for the nine months ended September 30, 2023 consisted of $3.5 million, primarily comprised $3.6 million in net proceeds from a registered direct offering of our common stock and common stock purchase warrants completed in September 2023, partially offset by taxes paid to net share settle equity awards and repayment of finance lease liabilities. Net cash used financing activities for the nine months ended September 30, 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. Subsequent to September 30, 2023, we collected approximately $3.7 million of EOL proceeds, including $2.2 million included in accounts receivable at September 30, 2023, $0.4 million related to October shipments and approximately $1.1 million of customer deposits to fund inventory purchases of our memory IC products. 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. Purchase Obligations Our primary purchase obligations include non-cancelable purchase orders for inventory and computer-aided-design (CAD) software. At September 30, 2023, we had outstanding non-cancelable purchase orders for inventory, primarily wafers and substrates, and related expenditures of approximately $2.3 million and non-cancelable purchase orders for CAD software of $3.1 million, which extend through approximately September 2025. Going Concern - Working Capital We incurred net losses of approximately $7.9 million for the nine months ended September 30, 2023 and $32.4 million for the year ended December 31, 2022, and we had an accumulated deficit of approximately $157.5 million as of September 30, 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. 29 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 February 2023, we announced that we had implemented cost-reduction initiatives to reduce operating expenses by approximately $5 million on an annualized basis. Most recently, in November 2023, we initiated a temporary lay-off in Canada of 16 positions, and eliminated three full-time equivalent positions in the U.S. and Canada. We have the ability to recall the employees subject to temporary lay-off, however such recalls would be dependent on improvements in business conditions and our financial condition, which we are unable to predict. If we do not recall any of the affected employees in Canada, we would achieve annual total savings of approximately $2.8 million from these reductions, excluding the impacts of any severance and related termination payments. In June 2023, we completed a registered direct offering of common stock and warrants for net proceeds to us of approximately $3.6 million. 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. Discontinuing the above-mentioned activities could seriously harm our ability to execute our business strategy and may force us to curtail our existing operations. We believe that our existing cash and cash equivalents as of September 30, 2023, plus expected receipts associated with product sales, will provide us with liquidity to fund our planned operating needs into the first quarter of 2024. Variability in our operating forecast, driven primarily by (i) product sales and collections, (ii) potential customer licensing and NRE transactions, (iii) timing of operating expenditures, and (iv) unanticipated changes in net working capital, will impact our cash runway. Likewise, we may decide to revise our financial priorities and operating plans, depending on the level of customer shipments, licensing and NRE arrangements and timing of related collections. This could impact our ability to enter into strategic arrangements and to access additional capital. We will need additional funding to continue our operating activities beyond those activities currently included in our operating forecast and related cash projection. Therefore, we will need to secure additional capital or financing and/or significantly delay, defer or reduce our cash expenditures before the end of 2023. There can be no assurance that we will be able to obtain additional capital or financing on terms acceptable to us, on a timely basis or at all. 30 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. 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 nine months ended September 30, 2023. Recent Accounting Pronouncements See Note 1 to the condensed consolidated financial statements for a discussion of recently-issued accounting pronouncements.