Item 7. Management’s Discussion and Analysis
Item 7. 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 consolidated financial statements and notes included in
this Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Report, including information
with respect to our plans and strategy for our business, include forward-looking statements that involve risks and uncertainties. You
should review “Risk Factors” for a discussion of important factors that could cause our actual results to differ materially
from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
We were formerly known as
MoSys, Inc. (“MoSys”), and we 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.”
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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
IC 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. We also produce and sell complete mmWave antenna modules. The primary advantage provided by
our antenna modules is that our proprietary mmWave ICs and the antenna are integrated into a single device. A differentiating characteristic
of mmWave technology is that the RF amplifiers must be as close as possible to the antenna to minimize loss. With our module, we can guarantee
the performance of the amplifier/antenna interface and simplify customers’ radio frequency (“RF”) engineering, facilitating
more opportunities for customer prospects that have not provided RF-type systems, as well as shortening the time to market for new products.
We also acquired a memory
product line comprising our Bandwidth Engine IC products. These products 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 has 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, in May 2023, we initiated an end-of-life, or EOL, of our memory IC products. We
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.
We incurred net losses of
approximately $16.8 million and $32.4 million for the years ended December 31, 2023 and 2022, respectively, and we had an accumulated
deficit of approximately $166.4 million as of December 31, 2023. These and prior year losses have resulted in significant negative cash
flows and historically have required us to raise substantial amounts of additional capital. As discussed below, this raises significant
doubt about our ability to continue as a going concern. We will need to increase revenues substantially beyond levels that we have attained
in the past in order to generate sustainable operating profit and sufficient cash flows to continue doing business without raising additional
capital from time to time.
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Recent Developments
Cost Reductions
In November 2023, we implemented
a reduction in our workforce and eliminated three full-time equivalent positions, which included one employee and two consultants. In
addition, we initiated a temporary lay-off in Canada of 16 positions, all intended to preserve cash while keeping capital expenditures
to minimum levels in order to reduce operating costs and our short-term cash needs.
Reverse Stock Split
On December 15, 2023, at our
annual meeting of stockholders, our stockholders approved a certificate of amendment to our Second Amended and Restated Certificate of
Incorporation (the “Charter Amendment”) to effect a reverse stock split of our outstanding shares of common stock at a ratio
to be determined by our board of directors. On December 15, 2023, we filed the Charter Amendment with the Secretary of State of Delaware
which effected a 1-for-40 reverse stock split of our outstanding shares of common stock as of 4:01 p.m. Eastern Time on January 2, 2024.
As a result of the reverse stock split, every forty shares of common stock were combined into one issued and outstanding share of common
stock, with no change in the $0.001 par value per share. Holders of fractional shares received, in lieu of any fractional share, the number
of shares rounded up to the next whole number. All equity awards outstanding and common stock reserved for issuance under our equity incentive
plans and warrants outstanding immediately prior to the reverse stock split were appropriately adjusted by dividing the number of affected
shares of common stock by 40 and, as applicable, multiplying the exercise price by 40, as a result of the reverse stock split. Exchangeable
shares, which can be converted to common stock at any time by their respective holders, were also adjusted to reflect the reverse stock
split.
Compliance with Nasdaq Minimum Bid Price Requirement
On January 18, 2024, we received
a notification letter from the Listing Qualifications Department of the Nasdaq Stock Market notifying us that we had regained compliance
with the minimum bid price requirement set forth under Nasdaq Listing Rule 5550(a)(2).
Termination of Advisory Agreement Related to
Strategic Alternative Exploration
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. In January 2024, we terminated such
advisory agreement. We currently have no commitments or agreements and are not negotiating with any parties relating to a merger, sale
of assets or other similar transaction with us.
Public Offering
On
February 6, 2024, we entered into an underwriting agreement (the “Underwriting Agreement”) with Ladenburg Thalmann & Co.
Inc., as the sole underwriter (the “Underwriter”), relating to the issuance and sale in a public offering (the “Offering”)
of: (i) 480,000 shares of our common stock, (ii) pre-funded warrants to purchase up to 1,424,760 shares of our common stock, (iii) Series
A warrants to purchase up to 3,809,520 shares of our common stock, (iv) Series B warrants to purchase up to 3,809,520 shares of our common
stock, and (v) up to 285,714 additional shares of our common stock, Series A warrants to purchase up to 571,428 shares of our common stock
and Series B warrants to purchase up to 571,428 shares of our common stock, which may be purchased pursuant to a 45-day option to purchase
additional securities granted to the Underwriter by the Company. The Underwriter partially exercised this option on February 7, 2024 for
82,500 shares of common stock, Series A warrants to purchase up to 165,000 shares of common stock and Series B warrants to purchase up
to 165,000 shares of common stock. The combined public offering price of each share of common stock, together with the accompanying Series
A warrants and Series B warrants, was $2.10, less underwriting discounts and commissions. The combined public offering price of each pre-funded
warrant, together with the accompanying Series A warrants and Series B warrants, was $2.099, less underwriting discounts and commissions.
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The
Offering, including the additional shares of common stock, Series A warrants and Series B warrants sold pursuant to the partial exercise
of the Underwriter’s option, closed on February 8, 2024.
The
net proceeds from the Offering, including the additional shares of common stock, Series A warrants and Series B warrants sold pursuant
to the partial exercise of the Underwriter’s option, after deducting underwriting discounts and commissions and other estimated
Offering expenses payable by us and excluding any net proceeds from the exercise of the Series A warrants, Series B warrants and pre-funded
warrants, were approximately $3.4 million.
The
Series A warrants and Series B warrants each have an exercise price of $2.25 per share and are immediately exercisable upon issuance.
The Series A warrants expire on the five-year anniversary of the date of issuance and the Series B warrants expire on the six-month anniversary
of the date of issuance. The pre-funded warrants have an exercise price of $0.001 per share, are exercisable immediately and may be exercised
at any time until all of the pre-funded warrants are exercised in full. Subsequent to the closing of the Offering, as of March 18, 2024,
the holders exercised pre-funded warrants for 1,001,110 shares of common stock.
On February 8, 2024, pursuant
to the Underwriting Agreement, we issued warrants to the Underwriter to purchase up to 139,108 shares of our common stock at an exercise
price of $2.625, subject to adjustments, which are exercisable at any time and from time to time, in whole or in part, until February
8, 2029, and have substantially similar terms to the Series A warrants.
All securities issued in the
Offering (including the shares of common stock issuable from time to time upon exercise of the warrants) were offered pursuant to our
registration statement on Form S-1, as amended (File No. 333-276247), which became effective on February 6, 2024, including a prospectus
contained therein.
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, at times, the U.S. Federal Reserve has addressed elevated inflation by increasing interest
rates. Market conditions may prevent us from accessing 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.
Critical Accounting Policies and Estimates
The discussion and analysis
of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States (GAAP). The preparation of these 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”
as of and for the years ended December 31, 2023 and 2022 included elsewhere in this Report. As of December 31, 2023, there have been no
material changes to our significant accounting policies and estimates.
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Business Combination
We allocate the fair value
of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated
fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities
is recorded as goodwill to reporting units based on the expected benefit from the business combination. Allocation of purchase consideration
to identifiable assets and liabilities affects the amortization expense, as acquired finite-lived intangible assets are amortized over
the useful life, whereas any indefinite-lived intangible assets, including goodwill, are not amortized. During the measurement period,
which is not to exceed one year from the acquisition date, our records adjustments to the assets acquired and liabilities assumed, with
the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.
Acquisition-related expenses are recognized separately from business combinations and are expensed as incurred.
Acquired Intangibles
Acquired intangible assets
consist of developed technology and customer relationships that are measured at fair value at date of acquisition. In valuing acquired
intangible assets, we make assumptions and estimates based in part on projected financial information, which makes assumptions and estimates
inherently uncertain, particularly for early-stage technology companies. The significant estimates and assumptions used by us in the determination
of the fair value of acquired intangible technology assets include the revenue growth rate, the royalty rate and the discount rate. The
significant estimates and assumptions used by us in the determination of the fair value of acquired customer contract intangible assets
include the revenue growth rate and the discount rate.
As a result of the judgments
that need to be made, we obtain the assistance of independent valuation firms. We complete these assessments as soon as practical after
the closing dates. Any excess of the purchase price over the estimated fair values of the identifiable net assets acquired is recorded
as goodwill.
Revenue Recognition
We recognize revenue in accordance
with FASB ASC Topic 606, Revenue from Contracts with Customers, and its amendments (ASC 606). As described below, the analysis
of contracts under ASC 606 supports the recognition of revenue at a point in time, resulting in revenue recognition timing that is materially
consistent with our historical practice of recognizing product revenue when title and risk of loss pass to the customer.
We generate revenue primarily
from sales of integrated circuits and module products, performance of engineering services and licensing of its intellectual property.
Revenues are recognized when control is transferred to customers in amounts that reflect the consideration we expect to be entitled to
receive in exchange for those goods. Revenue recognition is evaluated through the following five steps: (i) identification of the contract,
or contracts, with a customer; (ii) identification of the performance obligations in the contract; (iii) determination of the transaction
price; (iv) allocation of the transaction price to the performance obligations in the contract; and (v) recognition of revenue when or
as a performance obligation is satisfied.
Product revenue
Revenue is recognized when
performance obligations under the terms of a contract with a customer are satisfied. The majority of our contracts have a single performance
obligation to transfer products. Accordingly, we recognize revenue when title and risk of loss have been transferred to the customer,
generally at the time of shipment of products. Revenue is measured as the amount of consideration we expect to receive in exchange for
transferring products and is generally based upon a negotiated, formula, list or fixed price. We sell our products both directly to customers
and through distributors generally under agreements with payment terms typically 60 days or less.
We may record an estimated
allowance, at the time of shipment, for future returns and other charges against revenue consistent with the terms of sale.
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Royalty and other
Our licensing contracts typically
provide for royalties based on the licensee’s use of our memory technology in its currently shipping commercial products. We estimate
its royalty revenue in the calendar quarter in which the licensee uses the licensed technology. Payments are received in the subsequent
quarter. We also generate revenue from licensing its technology. We recognize License fee as revenue at the point of time when the control
of the license has been transferred and we have no continuing performance obligations to the customer.
Engineering services revenue
Engineering and development
contracts with customers generally contain a single performance obligation that is delivered over time. Revenue is recognized using an
output method that is consistent with the satisfaction of the performance obligation as a measure of progress.
Deferred cost of net revenue
During the year ended 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 consolidated balance sheets as of December 31, 2022. During the three months ended March 31, 2023, the Company
recognized the associated revenue and cost of net revenue.
Contract liabilities - deferred revenue
Our contract liabilities consist
of advance customer payments and deferred revenue. We classify advance customer payments and deferred revenue as current or non-current
based on the timing of when we expect to recognize revenue. As of December 31, 2023 and 2022, contract liabilities were in a current position
and included in deferred revenue.
Fair Value Measurements of Financial Instruments
We measure 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, as follows:
● 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 from investment advisors rather than models. We do not adjust
for or apply any additional assumptions or estimates to the pricing information we receive from advisors. Our Level 2 securities include
cash equivalents and available-for-sale securities, which consisted primarily of corporate debt, and government agency and municipal
debt securities from issuers with high quality credit ratings. Our 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 we hold are not actively traded and have fewer observable transactions. We consider 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, notes 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. We
measure the fair value of our warrant liabilities using Level 3 inputs.
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Valuation of long-lived assets
We evaluate our long-lived
assets for impairment at least annually, or more frequently when a triggering event is deemed to have occurred. This assessment is subjective
in nature and requires significant management judgment to forecast future operating results, projected cash flows and current period market
capitalization levels. If our estimates and assumptions change in the future, it could result in a material write-down of long-lived assets.
We amortize our finite-lived intangible assets, such as developed technology and patent license, on a straight-line basis over their estimated
useful lives of three to seven years. We recognize an impairment charge as the difference between the net book value of such assets and
the fair value of the assets on the measurement date.
Deferred tax valuation allowance
When we prepare our consolidated
financial statements, we estimate our income tax liability for each of the various jurisdictions where we conduct business. This requires
us to estimate our actual current tax exposure and to assess temporary differences that result from differing treatment of certain items
for tax and accounting purposes. These differences result in deferred tax assets, which we show on our consolidated balance sheet under
the category of other assets. The net deferred tax assets are reduced by a valuation allowance if, based upon weighted available evidence,
it is more likely than not that some or all of the deferred tax assets will not be realized. We must make significant judgments to determine
our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance to be recorded against our net deferred
tax asset. We believe that utilization of our net operating loss and tax credit carryforwards, which comprise the majority of our deferred
tax assets, may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue
Code and similar state provisions. See Note 4 to the consolidated financial statements in Item 15 of this report for an additional
description of these limitations.
Derivatives and liability-classified instruments
We account 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 FASB 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 our stock and whether the holders of the warrants could potentially require net cash settlement in a circumstance outside
of our 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.
Stock-based compensation
We recognize stock-based compensation
for equity awards on a straight-line basis over the requisite service period, usually the vesting period, based on the grant-date fair
value. We estimate the value of employee stock options on the date of grant using the Black-Scholes option pricing model. The determination
of fair value of share-based payment awards on the date of grant using an option pricing model is affected by our stock price, as well
as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the expected
stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. The expected term
of options granted is derived from historical data on employee exercises and post-vesting employment termination behavior. The expected
volatility is based on the historical volatility of our stock price.
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Results of Operations
Net Revenue
Years Ended December 31,
Year-Over-Year Change
2023
2022
2022 to 2023
(dollar amounts in thousands)
Product
$ 12,853
$ 14,199
$ (1,346 )
(9 )%
Percentage of total net revenue
93 %
96 %
The following table details revenue by product
category:
(amounts in thousands)
Years Ended December 31,
Year-Over-Year
Product category
2023
2022
change
Memory ICs
$ 8,446
$ 7,722
724
mmWave ICs
2,726
3,289
(563 )
mmWave modules
1,677
3,170
(1,493 )
mmWave other products
4
18
(14 )
$ 12,853
$ 14,199
$ (1,346 )
Product revenue decreased
for the year ended December 31, 2023 compared with the same period of 2022 primarily due to the decrease in shipments of our mmWave ICs
and antenna modules, which was partially offset by increases in EOL shipments of our memory IC products. We initiated price increases
on certain of our antenna module products in 2022, however, through December 31, 2023, we had not realized any material increase in revenue
as a result of those price increases.
We expect revenues to increase
in 2024, as we anticipate increased sales of our memory IC products, based on EOL purchase orders received from customers to date. In
addition, we expect sales of our mmWave products to increase from a volume and revenue perspective over the next 12 months, as we expect
new customers to commence production during 2024.
Years Ended December 31,
Year-Over-Year Change
2023
2022
2022 to 2023
(dollar amounts in thousands)
Royalty and other
$ 896
$ 669
$ 227
34 %
Percentage of total net revenue
7 %
4 %
Royalty and other includes
royalty, non-recurring engineering services and license revenues. The increase in royalty and other revenue for the year ended December
31, 2023 compared with the same period of 2022 was due to an increase in non-recurring engineering services revenue related to our mmWave
technology combined with a modest increase in royalties from licensees of our memory technology.
Cost of Net Revenue and Gross Profit
Years Ended December 31,
Year-Over-Year Change
2023
2022
2022 to 2023
(dollar amounts in thousands)
Cost of net revenue
$ 11,877
$ 8,915
$ 2,962
33 %
Percentage of total net revenue
86 %
60 %
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.
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Cost of net revenue increased
for the year ended December 31, 2023 when compared with the same period in 2022, due to the increase in sales of our memory IC products
and inventory write-down charges, as partially offset by a decrease in sales of our mmWave IC and module products. The inventory write-down
charges recorded during 2023 totaled approximately $3.5 million and comprised approximately $0.5 million related to memory IC product
inventory and $3.0 million related to mmWave product inventory. The write-downs were primarily attributable to inventory identified as
excess and obsolete based on inventory expiration and customer purchase orders received to date and current customer forecasts. 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.
Years Ended December 31,
Year-Over-Year Change
2023
2022
2022 to 2023
(dollar amounts in thousands)
Gross profit
$ 1,872
$ 5,953
$ (4,081 )
(69 )%
Percentage of total net revenue
14 %
40 %
Gross profit decreased for
the year ended December 31, 2023 compared with the same period in 2022 due to inventory write-down charges and decreased mmWave product
shipments, partially offset by increases in memory IC product shipments. The decrease in our gross profit margin for the year ended December
31, 2023 compared with the prior year periods was primarily attributable to the inventory write-down charges incurred during 2023.
Research and Development (R&D)
Years Ended December 31,
Year-Over-Year Change
2023
2022
2022 to 2023
(dollar amounts in thousands)
Research and development
$ 14,398
$ 19,768
$ (5,370 )
(27 )%
Percentage of total net revenue
105 %
133 %
Our R&D expenses include
costs related to the development of our products. We expense R&D costs as they are incurred.
The decrease for the year
ended December 31, 2023 compared with the same period of 2022 was primarily due to reduced salary and consulting costs. During
the quarter ended December 31, 2022, we began implementing cost reductions, 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 $1.2 million for the year ended December 31, 2023. In addition,
during the year ended December 31, 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.
In November 2023, we implemented
a reduction in our workforce and eliminated three full-time equivalent positions, which included one employee and two consultants. In
addition, we initiated a temporary lay-off in Canada of 16 positions, all intended to preserve cash while keeping capital expenditures
to minimum levels in order to reduce operating costs and our short-term cash needs. We expect that
total R&D expenses will decrease during 2024 compared with 2023, as a result of our cost reduction initiatives initiated during 2022
and 2023.
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Selling, General and Administrative (SG&A)
Years Ended December 31,
Year-Over-Year Change
2023
2022
2022 to 2023
(dollar amounts in thousands)
SG&A
$ 8,505
$ 11,108
$ (2,603 )
(23 )%
Percentage of total net revenue
62 %
75 %
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 year ended December 31, 2023
compared with the same period of 2022 was primarily related to cost reductions, which we initiated during the three months ended December
31, 2022. 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 headcount reductions.
Liquidity and Capital Resources; Changes in Financial Condition
At December 31, 2023, we had
cash and cash equivalents totaling $1.6 million compared with cash, cash equivalents and investments of $2.9 million as of December 31,
2022.
In 2023, we used $4.7 million
in cash from operating activities, which primarily resulted from our net loss of $16.8 million and changes to operating assets and liabilities
of approximately $2.8 million, adjusted for non-cash charges and gains, including stock-based compensation expenses of $5.2 million, and
depreciation and amortization expenses of $3.8 million, $3.6 million in inventory write-downs and $0.3 million of asset impairment charges,
partially offset by a $3.5 million non-cash gain on the change in fair value of warrant liability and $0.1 million of other changes. The
changes in assets and liabilities primarily related to the timing of the collection of receivables from customers, payments to vendors
and increases in inventory balances.
In 2022, we used $16.0 million
in cash from operating activities, which primarily resulted from the net loss of $32.4 million and changes to operating assets and liabilities
of approximately $2.4 million, adjusted for non-cash charges and gains, including stock-based compensation expenses of $5.7 million, depreciation
and amortization expenses of $3.1 million, a $9.9 million goodwill impairment charge and $0.1 million of other changes. The changes in
assets and liabilities primarily related to the timing of the collection of receivables from customers, payments to vendors and increases
in inventory balances.
In 2023, net cash provided
from investing activities of $1.0 million represented $1.1 million of proceeds from maturities and sales of short-term investments, partially
offset by $0.1 million of purchases of fixed assets.
In 2022, net cash provided
from investing activities of $10.0 million represented $11.5 million of proceeds from maturities and sales of short-term investments,
partially offset by $0.5 million purchases of short and long-term investments and $1.0 million of purchases of fixed assets and intangible
assets.
In 2023, net cash provided
by financing activities was $3.4 million and consisted of $3.6 million in net proceeds from a registered direct offering of our common
stock and common stock purchase warrants completed in June 2023, partially offset by taxes paid to net share settle equity awards and
repayment of finance lease liabilities.
In 2022, net cash provided
by financing activities was $1.9 million and consisted of $2.1 million in net proceeds from a registered direct offering of our common
stock and common stock purchase warrants completed in November 2022, partially offset by $0.1 million of taxes paid to net share settle
equity awards and $0.1 million of repayment of finance lease.
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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.
Purchase Obligations
The Company’s primary
purchase obligations include non-cancelable purchase orders for inventory and computer-aided-design (CAD) software. At December 31, 2023,
the Company 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 over 24 months.
Going Concern - Working Capital
We incurred net losses of
approximately $16.8 million and $32.4 million for the years ended December 31, 2023 and 2022, respectively, and we had an accumulated
deficit of approximately $166.4 million as of December 31, 2023. These and prior year losses have resulted in significant negative cash
flows and have required us to raise substantial amounts of additional capital. To date, we have primarily financed our operations through
loans, offerings of common stock and warrants and issuances of convertible notes.
We expect to continue to incur
operating losses during 2024, as we continue to secure new customers for and continue to invest in the development of our products. Further,
we expect our cash expenditures to continue to exceed receipts for at least the next 12 months, as our revenues will not be sufficient
to offset our operating expenses.
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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 debt or equity 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 consolidated financial statements. The consolidated
financial statements presented in Item 8 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 debt or equity 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 we are unsuccessful in these efforts, we 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. As further discussed in Note 13 to the consolidated financial statements, in February 2024, we completed a public
offering of our common stock and warrants for net proceeds of approximately $3.3 million. Further, in November 2023, we implemented a
reduction in our workforce and eliminated three full-time equivalent positions, which included one employee and two consultants. In addition,
we initiated a temporary lay-off in Canada of 16 positions. The initial cost reduction benefits from the November 2023 actions began to
be realized during the three months ended December 31, 2023, and we expect annualized savings of up to approximately $2.2 million dollars,
if we do not recall the impacted employees. These cost reduction actions are intended to preserve cash while keeping capital expenditures
to minimum levels in order to reduce operating costs and our short-term cash needs.
If we were to raise additional
capital through sales of our equity securities, our stockholders would suffer dilution of their equity ownership. If we engage in debt
financing, we may be required to accept terms that restrict our ability to incur additional indebtedness, prohibit us from paying dividends,
repurchasing our stock or making investments, and force us to maintain specified liquidity or other ratios, any of which could harm our
business, operating results and financial condition. If we need additional capital and cannot raise it on acceptable terms, we may not
be able to, among other things:
● develop
or enhance our products;
● continue
to expand our product development and sales and marketing organizations;
● acquire
complementary technologies, products or businesses;
● expand
operations, in the United States or internationally;
● hire,
train and retain employees; or
● respond
to competitive pressures or unanticipated working capital requirements.
Our failure to do any of these
things could seriously harm our ability to execute our business strategy and may force us to curtail our existing operations.
Off-Balance Sheet Arrangements
We do not maintain any off-balance sheet arrangements
or obligations that are reasonably likely to have a material current or future effect on our financial condition, results of operations,
liquidity or capital resources.
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 consolidated financial statements for the years
ended December 31, 2023 or 2022.
Recent Accounting Pronouncements
See Note 1 to the consolidated
financial statements in Item 15 of this Report for a description of recent accounting pronouncements.
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