Peraso Inc. 10-K

Item 7. Management’s Discussion and Analysis o f 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. Overview Our strategy and primary business objective is to be a profitable, IP-rich fabless semiconductor company offering ICs and related software and IP that deliver unparalleled memory bandwidth and access rate performance for high-performance data processing in cloud networking, communications, security appliances, video, test and monitoring, and data center systems. Our solutions deliver time-to-market, performance, power, area and economic benefits for system original equipment manufacturers, or OEMs. Our primary product line is marketed under the Accelerator Engine name and comprises our Bandwidth Engine and Programmable HyperSpeed Engine IC products, which integrate our proprietary, 1T-SRAM high-density embedded memory and a highly-efficient serial interface protocol resulting in a monolithic memory IC solution optimized for memory bandwidth and transaction access performance. Our second-generation Bandwidth Engine, or Bandwidth Engine 2, products are expected to be our primary revenue source for the foreseeable future. As we are not developing new IC products, from a product development perspective, we continue to leverage our current technologies and core competencies to expand our product offerings without incurring significant additional R&D expenses. In 2020, we began offering for license the first of our Virtual Accelerator Engine, or VAE, products which consist of software, firmware and related IP. This new product line will include multiple function accelerator platform products, which target specific application functions and will use a common software interface to allow performance scalability over multiple hardware environments. These function accelerator platform products are hardware agnostic and operate with or without one of our Accelerator Engine ICs. This software-defined, hardware-accelerated platform architecture utilizes an internally developed graphical memory engine architecture to provide flexible data classification and analysis capability. We believe the technology will generate new opportunities that require less up-front architectural changes by system designers and provide a scalable performance roadmap of options using our Accelerator Engine ICs. Despite our limited new IC product development efforts, we believe our current hardware and software/firmware product portfolio positions us for future growth and profitability. We continue to seek third-party funding for new product development efforts . Subsequent to December 31, 2020, we received gross proceeds of approximately $9.3 million from financing activities. In February 2021, we completed a registered direct offering and sold 1,487,601 shares of common stock at a price of $5.00 per share to institutional investors. Net proceeds of the offering, after placement agent and other fees and expenses payable by us, were approximately $6,800,000. During January and February 2021, we received a total of $2,477,657 of proceeds from the exercise of 1,032,357 warrants to purchase shares of common stock at a price of $2.40 per share. We used approximately $3 million of these proceeds to pay in full the outstanding balance of our senior secured convertible notes. We incurred net losses of approximately $3.8 million and $2.6 million for the years ended December 31, 2020 and 2019, respectively, and had an accumulated deficit of approximately $242.7 million as of December 31, 2020. These and prior year losses have resulted in significant negative cash flows for almost a decade and have necessitated that we raise substantial amounts of additional capital during this period. To date, we have primarily financed our operations through multiple offerings of common stock to investors and affiliates, as well as asset sale transactions and one offering of convertible notes. In February 2021, we completed a registered direct offering of our common stock for net proceeds of approximately $6.8 million. We may continue to incur operating losses and 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. 28 COVID-19 The global outbreak of the coronavirus disease 2019 (COVID-19) was declared a pandemic by the World Health Organization and a national emergency by the U.S. government in March 2020. This has negatively affected the U.S. and global economy, disrupted global supply chains, significantly restricted travel and transportation, resulted in mandated closures and orders to “shelter-in-place” and created significant disruption of the financial markets. The full extent of the COVID-19 impact on our operational and financial performance will depend on future developments, including the duration and spread of the pandemic and related actions taken by the U.S. and foreign government agencies to prevent disease spread, all of which are uncertain, out of our control, and cannot be predicted. In March 2020, Santa Clara County in California, where we are based, issued a ”shelter-in-place” order (the Order) that was initially effective through April 7, 2020 and has now been extended. We have been complying with the Order and have minimized business activities at our San Jose headquarters facility (our only facility). We have implemented a teleworking policy for our employees and contractors to reduce on-site activity at our facility. The Order impacted our ability to produce and ship our IC products in the second half of March, as certain of our vendors in the San Francisco Bay Area closed in accordance with the Order. In April, we resumed shipments of our IC products, as we and our vendors are supporting shipment of components for critical infrastructure, as defined by the federal government; however, our employees are generally restricted from visiting our customer and vendor sites in compliance with the Order, and, in some cases, we have limited ability to conduct certain product testing and development activities. We remain diligent in continuing to identify and manage risks to our business given the changing uncertainties related to COVID-19. The ultimate impact of the COVID-19 pandemic on our business and results of operations is uncertain and difficult to predict, and we are closely monitoring impacts, especially to customer programs and our supply chain. We expect that the impacts of the COVID-19 pandemic will have a negative impact on our revenues for 2021, although we are not in a position to quantify such impacts. In addition, we have and continue to experience longer lead times for certain components used to manufacture our IC products. While we believe that our operations personnel are currently in a position to meet expected customer demand levels in the coming quarters, we recognize that unpredictable events could create difficulties in the months ahead. We may not be able to address these difficulties in a timely manner, which could negatively impact our business, results of operations, financial condition and cash flows. The continued spread of COVID-19 has also led to disruption and volatility in the global capital markets. During 2020, we were able to raise additional capital and received a loan under the Paycheck Protection Program (see discussion below under Liquidity and in Notes 6 and 10 to the consolidated financial statements included in Item 15 of this report), however, our ability to raise additional capital to support operations in the future may be impacted, and 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. Critical Accounting Policies and Use of Estimates Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. Note 1 to the consolidated financial statements included in Item 15 of this Report describes the significant accounting policies and methods used in the preparation of our consolidated financial statements. We have identified the accounting policies below as some of the more critical to our business and the understanding of our results of operations. These policies may involve estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Although we believe our judgments and estimates are appropriate, actual future results may differ from our estimates, and if different assumptions or conditions were to prevail, the results could be materially different from our reported results. 29 Revenue Recognition We recognize revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 606, Revenue from Contracts with Customers and all its related amendments (“ASC 606”). This standard update outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. We generate revenue primarily from sales of IC products and licensing of our 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. IC products 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. 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 our royalty revenue in the calendar quarter in which the licensee uses the licensed technology. Payments are received in the subsequent quarter. 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. 30 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. 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. 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 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. 31 Results of Operations Net Revenue Years Ended December 31, Year-Over-Year Change 2020 2019 2019 to 2020 (dollar amounts in thousands) Product $ 5,933 $ 9,377 $ (3,444 ) (37 )% Percentage of total net revenue 87 % 93 % Product revenue decreased in 2020 compared with 2019 due to reduced shipments of our Bandwidth engine products. Specifically, we completed final shipments of our Bandwidth Engine 1 product in the first half of 2019 and experienced reduced shipments to certain of our Bandwidth Engine 2 IC and LineSpeed customers during 2020. The reduction in shipments was primarily due to customer transitions and inventory reductions. We expect IC revenues to increase in 2021. Years Ended December 31, Year-Over-Year Change 2020 2019 2019 to 2020 (dollar amounts in thousands) Royalty and other $ 862 $ 709 $ 153 22 % Percentage of total net revenue 13 % 7 % Royalty and other revenue primarily comprises revenue generated from licensing agreements. The increase from 2019 to 2020 was primarily due to new licensing revenue of $0.1 million in 2020 attributable to our VAE technology, combined with increased royalties from our 1T-SRAM licensees. Cost of Net Revenue and Gross Profit Years Ended December 31, Year-Over-Year Change 2020 2019 2019 to 2020 (dollar amounts in thousands) Cost of net revenue $ 2,329 $ 3,931 $ (1,602 ) (41 )% Percentage of total net revenue 34 % 39 % Years Ended December 31, Year-Over-Year Change 2020 2019 2019 to 2020 (dollar amounts in thousands) Gross profit $ 4,466 $ 6,155 $ (1,689 ) (27 )% Percentage of total net revenue 66 % 61 % In 2020 and 2019 cost of net revenue primarily consisted of direct and indirect costs related to the sale of IC products. Cost of net revenue decreased in 2020 from 2019 due to decreased product shipments. Gross profit decreased from 2020 to 2019 primarily due to the decrease in IC product shipments, which was partially offset by an increase in our royalty and other revenue, which generally has no associated costs. Research and Development Years Ended December 31, Year-Over-Year Change 2020 2019 2019 to 2020 (dollar amounts in thousands) Research and development $ 3,989 $ 4,182 $ (193 ) (5 )% Percentage of total net revenue 59 % 41 % 32 Our research and development expenses include costs related to the development of our IC and VAE products. We expense research and development costs as they are incurred. Research and development expenses decreased slightly in 2020 compared with 2019 primarily due to decreased personnel costs and decreased prototyping, testing and related material costs, partially offset by increases in consulting costs for development of our new VAE products. Research and development expenses included stock-based compensation expenses of $0.1 million for each of the years ended December 31, 2020 and 2019. We expect that total research and development expenses will remain flat in 2021. Selling, General and Administrative (SG&A) Years Ended December 31, Year-Over-Year Change 2020 2019 2019 to 2020 (dollar amounts in thousands) SG&A $ 4,028 $ 4,016 $ 12 0 % Percentage of total net revenue 59 % 40 % Selling, general and administrative expenses consist primarily of personnel and related overhead costs for sales, marketing, finance, human resources and general management. Selling, general and administrative expenses increased slightly for 2020, compared with the prior year, primarily as a result of increased consulting fees. Selling, general and administrative expenses included stock-based compensation expense of $0.2 million for each of the years ended December 31, 2020 and 2019. We expect total selling, general and administrative expenses to remain flat in 2021. Impairment of Goodwill Years Ended December 31, Year-Over-Year Change 2020 2019 2019 to 2020 (dollar amounts in thousands) Impairment of goodwill $ - $ 420 $ (420 ) (100 )% Percentage of total net revenue 0 % 4 % In 2019, we recorded goodwill impairment charges. See Note 1 of the consolidated financial statements in Item 15 of this report for additional disclosure. Interest expense Years Ended December 31, Year-Over-Year Change 2020 2019 2019 to 2020 (dollar amounts in thousands) Interest expense $ 243 $ 220 $ 23 10 % Percentage of total net revenue 4 % 2 % Interest expense is incurred on our senior secured convertible notes (the Notes). Through December 31, 2020, we have paid all accumulated interest for the Notes in-kind through the issuance of identical new senior-secured convertible notes. See Note 10 and 11 to the consolidated financial statements in Item 15 of this Report for additional disclosure. 33 Liquidity and Capital Resources At December 31, 2020, we had cash and cash equivalents totaling $5.9 million compared with cash, cash equivalents and short-term investments of $6.4 million as of December 31, 2019. In February 2021, we completed a registered direct offering of our common stock for net proceeds of approximately $6.8 million. Subsequent to December 31, 2020, we received a total of $2,476,817 of proceeds from the exercise of 1,032,007 warrants to purchase shares of common stock at a price of $2.40 per share. We believe that cash generated from our liquidity sources will be sufficient to meet our working capital and capital expenditure needs for the foreseeable future. In 2020, we used $2.6 million in cash from operating activities, which primarily resulted from the net loss of $3.8 million, adjusted for non-cash charges and gains, which included stock-based compensation expenses of $0.3 million, depreciation and amortization expenses of $0.1 million, accrued interest of $0.2 million, and changes to operating assets and liabilities of approximately $0.6 million. The changes in assets and liabilities primarily related to the timing of the collection of receivables from customers, payments to vendors and decreases in inventory balances. In 2019, we used $0.7 million in cash from operating activities, which primarily resulted from the net loss of $2.6 million, adjusted for non-cash charges and gains, which included goodwill impairment of $0.4 million, stock-based compensation expenses of $0.3 million, depreciation and amortization expenses of $0.2 million, accrued interest of $0.2 million, and changes to operating assets and liabilities of approximately $0.8 million. The changes in assets and liabilities primarily related to the timing of the collection of receivables from customers and payments to vendors, including decreases in inventory. In 2020, net cash provided from investing activities of $0.2 million represented the $0.3 million proceeds from the maturities of short-term investments partially offset by $0.1 million for purchases of fixed assets. The majority of net cash used in investing activities in 2019 was due to the purchase of short-term investments of $1.6 million, which did not affect our liquidity, partially offset by proceeds from the maturities of short-term investments of $1.3 million. The remaining investing activities in 2019 consisted of $0.1 million expended for purchases of fixed assets. In 2020, net cash provided by financing activities was $2.2 million and consisted of $1.6 million in net proceeds received from the sale of common stock in a registered direct offering of securities in April 2020 and $0.6 million of proceeds received in May 2020 from an unsecured loan under the Paycheck Protection Program. There were minimal cash flows used in financing activities during the year ended December 31, 2019. 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, timing of product shipments and length of billing and collection cycles; • fabrication costs, including mask costs, of our ICs, currently under development; • variations in manufacturing yields, materials costs and other manufacturing risks; • costs of acquiring other businesses and integrating the acquired operations; • profitability of our business; and • whether interest payments on the Notes are paid in cash or, at our election, in kind through the issuance of new Notes with identical terms for the accrued interest. 34 Working Capital Our primary need for liquidity is to fund working capital requirements of our businesses, capital expenditures and for general corporate purposes. We expect our cash expenditures to exceed receipts in 2021, as we do not expect our revenues will be sufficient to offset our working capital requirements. We incurred net losses of approximately $3.8 million and $2.6 million for the years ended December 31, 2020 and 2019, respectively, and had an accumulated deficit of approximately $242.7 million as of December 31, 2020. These and prior year losses have resulted in significant negative cash flows for more than a decade and have required us to raise substantial amounts of additional capital during this period. To date, we have primarily financed our operations through multiple offerings of common stock to investors and affiliates, as well as asset sale transactions. In March 2016, we entered into a 10% Senior Secured Convertible Note Purchase Agreement with the purchasers of $8.0 million principal amount of 10% Senior Secured Convertible Notes due August 15, 2018 (the Notes), at par, in a private placement transaction. Accrued interest was payable semi-annually in cash or in-kind through the issuance of identical new Notes, or with a combination of the two, at the Company’s option. As of December 31, 2020, the outstanding balance of the Notes approximated $3.1 million. The Notes were paid in full in March 2021 using the proceeds from exercises of warrants to purchase common stock and a registered direct offering of common stock in February 2021. We expect to raise additional capital, but there can be no assurance that such funding will be available to us on favorable terms, if at all. The failure to raise capital when needed could have a material adverse effect on our business and financial condition. We may not be able to obtain additional financing as needed on acceptable terms, or at all, which may require us to reduce our operating costs and other expenditures, including reductions of personnel, salaries and capital expenditures. Alternatively, or in addition to such potential measures, we may elect to implement additional cost reduction actions as we may determine are necessary and in our best interests. Any such actions undertaken might limit our opportunities to realize plans for revenue growth and we might not be able to reduce our costs in amounts sufficient to achieve break-even or profitable operations. 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; • expand our product development and sales and marketing organizations; • acquire complementary technologies, products or businesses; • expand operations; • 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 or research and development plans. 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, 2020 or 2019. 35 Recent Accounting Pronouncements See Note 1 to the consolidated financial statements in Item 15 of this Report for a full description of recent accounting pronouncements.