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, 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, 2024 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, 2023 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 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.” 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, 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 to complete shipments of our memory products by June 30, 2025. However, the timing of EOL shipments will be dependent on the potential receipt of additional purchase orders from customers, deliveries from our suppliers, and the delivery schedules requested by our customers. 26 We incurred net losses of approximately $6.5 million for the six months ended June 30, 2024 and $16.8 million for the year ended December 31, 2023, and we had an accumulated deficit of approximately $173 million as of June 30, 2024. 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. 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. Risks and Uncertainties We are 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, pandemics, wars and acts of terrorism and the volatility of public markets. 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 of operations, 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 Condensed Consolidated Financial Statements” included in Part I, Item 1 of this report and Note 1 of the “Notes to Consolidated Financial Statements” in our annual report on Form 10-K for the year ended December 31, 2023. As of June 30, 2024, there have been no material changes to our significant accounting policies and estimates. 27 Results of Operations Net Revenue June 30, Change 2024 2023 2023 to 2024 (dollar amounts in thousands) Product - three months ended $ 4,109 $ 2,235 $ 1,874 84 % Percentage of total net revenue 97 % 93 % Product - six months ended $ 6,785 $ 7,123 $ (338 ) (5 )% Percentage of total net revenue 96 % 96 % The following table details revenue by product category for the three and six months ended June 30, 2024 and 2023: Three months Ended June 30, Six Months Ended June 30, Product category 2024 2023 2024 2023 Memory ICs $ 3,428 $ 1,616 $ 5,811 $ 3,831 mmWave ICs 127 559 204 2,004 mmWave modules 553 60 757 1,284 mmWave other products 1 — 13 4 $ 4,109 $ 2,235 $ 6,785 $ 7,123 Product revenue increased for the three months ended June 30, 2024 compared with the same period of 2023 primarily due to increases in EOL shipments of our memory IC products. Product revenue decreased for the six months ended June 30, 2024 compared with the same period of 2023 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 June 30, 2024, we had not realized any material increase in revenue as a result of those price increases. Taiwan Semiconductor Manufacturing Corporation (TSMC) is the sole foundry that manufactures the wafers used to produce our memory IC products. TSMC has informed us that TSMC is discontinuing the foundry process used to produce wafers, in turn, necessary to manufacture our memory ICs. As a result, in May 2023, we informed our customers that we would be initiating an end-of-life (EOL) of our memory IC products. As of June 30, 2024, we had a non-cancelable purchase order backlog for our memory IC products of $9.1 million. We expect to fulfill this backlog and complete final shipments of our memory IC products by March 31, 2025. We expect revenues to increase in 2024 as compared with 2023, as we anticipate increased sales of our memory IC products, based on EOL purchase orders received from customers. 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. June 30, Change 2024 2023 2023 to 2024 (dollar amounts in thousands) Royalty and other - three months ended $ 129 $ 168 $ (39 ) -23 % Percentage of total net revenue 3 % 7 % Royalty and other - six months ended $ 269 $ 313 $ (44 ) -14 % Percentage of total net revenue 4 % 4 % 28 Royalty and other includes royalty, non-recurring engineering services and license revenues. The decrease in royalty and other revenue for the three and six months ended June 30, 2024 compared with the same periods of 2023 was primarily due to a decrease in royalty revenues from licensees of our memory technology due to reduced shipments by these licensees, as partially offset by an increase in non-recurring engineering services revenue related to our mmWave technology. Cost of Net Revenue and Gross Profit June 30, Change 2024 2023 2023 to 2024 (dollar amounts in thousands) Cost of net revenue -three months ended $ 1,887 $ 1,795 $ 92 5 % Percentage of total net revenue 45 % 75 % Cost of net revenue -six months ended $ 3,397 $ 4,901 $ (1,504 ) -31 % Percentage of total net revenue 48 % 66 % 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 slightly for the three months ended June 30, 2024 when compared with the same period in 2023, primarily due to the combined effect of i) an increase in shipments of our memory IC products and ii) increased amortization of developed technology of approximately $0.2 million. Cost of net revenue decreased for the six months ended June 30, 2024 when compared with the same period in 2023, primarily due to the combined effect of i) a decrease in sales of our mmWave IC and module products, partially offset by an increase in shipments of our memory IC products in 2024, and ii) increased amortization of developed technology of approximately $0.3 million. June 30, Change 2024 2023 2023 to 2024 (dollar amounts in thousands) Gross profit -three months ended $ 2,351 $ 608 $ 1,743 287 % Percentage of total net revenue 55 % 25 % Gross profit -six months ended $ 3,657 $ 2,535 $ 1,122 44 % Percentage of total net revenue 52 % 34 % Gross profit increased for the three and six months ended June 30, 2024 compared with the same periods of 2023 primarily due to the increase in shipment volumes of our memory IC products. The increase in our gross profit margin percentage for the three and six months ended June 30, 2024 compared with the prior year period was primarily attributable to the increase in shipments of our memory products, which carry higher gross margins than our mmWave products. During the three months ended June 30, 2024, we sold inventory with a value of $81,000 that had been written down in 2023. Research and Development June 30, Change 2024 2023 2023 to 2024 (dollar amounts in thousands) Research and development -three months ended $ 2,644 $ 3,668 $ (1,024 ) (28 )% Percentage of total net revenue 62 % 153 % Research and development -six months ended $ 5,457 $ 7,555 $ (2,098 ) (28 )% Percentage of total net revenue 77 % 102 % 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. The decrease for the three and six months ended June 30, 2024 compared with the same periods of 2023 was primarily due to reduced salary and consulting costs, as we implemented reductions in force in February and November 2023 and terminated consultant contracts. 29 We expect that total R&D expenses will decrease during 2024 compared with 2023, as a result of our cost reduction initiatives initiated during 2023 . Selling, General and Administrative June 30, Change 2024 2023 2023 to 2024 (dollar amounts in thousands) SG&A -three months ended $ 2,141 $ 1,977 $ 164 8 % Percentage of total net revenue 51 % 82 % SG&A -six months ended $ 4,243 $ 4,219 $ 24 1 % Percentage of total net revenue 60 % 57 % 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 increase for the three and six months ended June 30, 2024 compared with the same periods of 2023 was primarily attributable to increased consulting and professional services costs and increased amortization of purchased intangible assets for customer relationships, as we reduced the estimated life of these intangibles during 2023 due to the EOL of our memory IC products. These increases were partially offset by the impact of headcount reductions initiated in 2023, including the elimination of certain employee and consulting positions and reductions of other discretionary operating expenses during 2023. We expect that total SG&A expense will remain flat or slightly decrease for the remainder of 2024 compared with 2023 due to our continued cost reduction initiatives. Severance and Software License Obligations June 30, Change 2024 2023 2023 to 2024 (dollar amounts in thousands) Severance and software license obligations -three months ended $ 2,041 $ — $ 2,041 — Percentage of total net revenue 48 % — Severance and software license obligations -six months ended $ 2,063 $ — $ 2,063 — Percentage of total net revenue 29 % — On November 7, 2023, we implemented an employee lay-off and terminated certain consulting positions (the “Reductions”) to reduce operating expenses and cash burn, as we prioritized business activities and projects that we believe will have a higher return on investment. As part of the Reductions, we implemented a temporary lay-off that impacted 16 employees (the “Employees”) of Peraso Tech. The employment of one Employee was terminated during the three months ended March 31, 2024. During the three months ended June 30, 2024, we determined that we would not recall any of the 10 Employees that remained on our payroll and commenced notifying the remaining Employees that their employment would be terminated. As a result, we recorded severance charges of approximately $424,000 and $446,000 for the three and six months ended June 30, 2024, respectively. As a result of the decision to not recall the Employees, we determined that it was probable that a number of our non-cancelable licenses for computer-aided design software would not be utilized during the remaining license terms. During the three months ended June 30, 2024, we expensed the value of the remaining contractual liabilities and certain prepaid amounts totaling approximately $1,617,000 and recorded liabilities totaling approximately $1,533,000, which are expected to be paid through September 30, 2025. As of June 30, 2024, the current portion of the remaining contractual liabilities of $257,000 and $1,015,000 are included in accounts payable and accrued expenses and other, respectively (see Note 3), and the non-current portion of $261,000 is included in other long-term liabilities. Liquidity and Capital Resources; Changes in Financial Condition Cash Flows As of June 30, 2024, we had cash and cash equivalents of $1.9 million and working capital of $1.1 million. Net cash used in operating activities was $3.2 million for the first six months of 2024, which primarily resulted from our net loss of $6.5 million, as adjusted for a $1.6 million non-cash gain on the change in fair value of warrant liability, as partially offset by non-cash charges of $2.0 million of depreciation and amortization, $2.4 million of stock based compensation and $0.5 million in net changes in assets and liabilities. The changes in assets and liabilities primarily related to the timing of accounts receivable collections, accruals for software license obligations, accrued severance benefits and other vendor payables and prepayments. 30 Net cash used in operating activities was $3.6 million for the first six months of 2023, which primarily resulted from our net loss of $7.2 million, as adjusted for a $1.6 million non-cash gain on the change in fair value of warrant liability and $0.2 million of other non-cash changes, as partially offset by non-cash charges of $1.7 million of depreciation and amortization, $2.6 million of stock based compensation, and $1.1 million in net changes in assets and liabilities. The changes in assets and liabilities primarily related to the timing of accounts receivable collections, purchases of inventory and other vendor payables and prepayments. Net cash provided by investing activities of $0.4 million for the six months ended June 30, 2023 represented $0.5 million in proceeds from maturities of short-term investments, partially offset by $0.1 million of purchases of property and equipment. For the six months ended June 30, 2024, no cash was provided by or used in investing activities. Net cash provided by financing activities of $3.5 million for the six months ended June 30, 2024 primarily comprised $3.4 million in net proceeds from a public offering of our common stock and common stock purchase warrants completed in February 2024 and a $0.1 million sale of unregistered stock to a member of our board of directors. Net cash provided by financing activities for the six months ended June 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 June 2023, partially offset by taxes paid to net share settle equity awards and repayment of finance lease liabilities. 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 during the COVID-19 pandemic 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 Our primary purchase obligations include non-cancelable purchase orders for inventory. At June 30, 2024, we had outstanding non-cancelable purchase orders for inventory, primarily wafers and substrates, and related expenditures of approximately $2.9 million. As disclosed above and in Note 4 to the condensed consolidated financial statements, we recorded liabilities of approximately $1.6 million for non-cancelable license commitments for computer-aided design software. We expect to pay these license fees through September 30, 2025. Going Concern - Working Capital We incurred net losses of approximately $6.5 million for the six months ended June 30, 2024 and $16.8 million for the year ended December 31, 2023, and we had an accumulated deficit of approximately $173 million as of June 30, 2024. 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. 31 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 we are unsuccessful in these efforts, we will need to implement additional cost reduction strategies, which could further affect our near- and long-term business plan. These efforts may include, but are not limited to, reducing headcount and curtailing business activities. In 2023, we implemented cost-reduction initiatives, including headcount reductions, to reduce operating expenses. As discussed in Note 8 of the “Notes to Condensed Consolidated Financial Statements” included in Part I, Item 1 of this report, in February 2024, we completed a public offering of common stock and common stock purchase warrants for net proceeds to us of approximately $3.4 million. If we were to raise additional capital through the exercise of the common stock purchase warrants issued in February 2024 or other 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 any of 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 June 30, 2024, plus expected receipts associated with forecasted product sales, will provide us with liquidity to fund our planned operating needs into the fourth quarter of 2024. Variability in our operating forecast, driven primarily by (i) product sales and collections, (ii) potential customer licensing and non-recurring engineering (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. 32 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 2024. 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. 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 consolidated financial statements for the three and six months ended June 30, 2024. Recent Accounting Pronouncements See Note 1 to the condensed consolidated financial statements for a discussion of recently-issued accounting pronouncements.