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 efforts, the impacts of COVID-19 on our business, 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 18, 2021 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, 2020 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. Company Overview Our strategy and primary business objective is to be a profitable intellectual property-rich fabless semiconductor company offering integrated circuits, or ICs, and related software, firmware and intellectual property, or 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 through at least 2021, and we expect these products to continue to generate significant revenue thereafter. 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. We are developing our Virtual Accelerator Engine, or VAE, product line consisting of software, firmware and IP available for license. This 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 incurred net losses of approximately $1.4 million for the three months ended March 31, 2021 and $3.8 million and $2.6 million for the years ended December 31, 2020 and 2019, respectively, and had an accumulated deficit of approximately $244.0 million as of March 31, 2021. 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. 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. 16 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 effective through the first quarter of 2021. We have been complying with the Order and have minimized business activities at our San Jose headquarters facility (our only facility) since March 2020. 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 2020, as certain of our vendors in the San Francisco Bay Area closed in accordance with the Order. In April 2020, 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 still generally restricted from visiting our customer and vendor sites, and we are unable 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 continue to have a negative impact on our revenues for the remainder of 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 the quarter ended March 31, 2021, we were able to raise additional capital and make full repayment of our convertible notes payable (see discussion below under Liquidity and in Notes 8 and 9 to the condensed consolidated financial statements included in Part I, Item I of this Form 10-Q), however, if we need to raise additional capital to support operations in the future, we may be unable to access the capital markets and additional capital may only be available to us on terms that could be significantly detrimental to our existing stockholders and to our business. For additional information on risks that could impact our future results, please refer to “Risk Factors” in Part II, Item 1A. of this quarterly report on Form 10-Q. Sources of Revenue Product. Product revenue is generally recognized at the time of shipment to our customers. An estimated allowance may be recorded, 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 their currently shipping commercial products. We estimate royalty revenue in the period in which the licensee uses the licensed technology. Payments are received in the following period. 17 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 GAAP. The preparation of these condensed consolidated financial statements requires us to make certain estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis we make these estimates based on our historical experience and on assumptions that we consider reasonable under the circumstances. Actual results may differ from these estimates and reported results could differ under different assumptions or conditions. Our significant accounting policies and estimates are disclosed in Note 1 of the “Notes to Consolidated Financial Statements” in our annual report on Form 10-K for the year ended December 31, 2020. As of March 31, 2021, there have been no material changes to our significant accounting policies and estimates. Results of Operations Net Revenue March 31, Change 2021 2020 2020 to 2021 (dollar amounts in thousands) Product -three months ended $ 1,178 $ 1,068 $ 110 10 % Percentage of total net revenue 88 % 85 % Product revenue increased for the three months ended March 31, 2021 compared with the same period of 2020 primarily due to higher sales of our Bandwidth Engine 2 products, partially offset by decreases in our LineSpeed product sales. March 31, Change 2021 2020 2020 to 2021 (dollar amounts in thousands) Royalty and other -three months ended $ 160 $ 192 $ (32 ) (17 )% Percentage of total net revenue 12 % 15 % Royalty and other includes license, royalty and related revenues generated from licensing agreements. The decrease in royalty and other revenue for the three months ended March 31, 2021 compared with the same period of 2020 was primarily due to a decrease in royalty revenue for one licensee. Cost of Net Revenue and Gross Profit March 31, Change 2021 2020 2020 to 2021 (dollar amounts in thousands) Cost of net revenue -three months ended $ 495 $ 530 $ (35 ) (7 )% Percentage of total net revenue 37 % 42 % March 31, Change 2021 2020 2020 to 2021 (dollar amounts in thousands) Gross profit -three months ended $ 843 $ 730 $ 113 15 % Percentage of total net revenue 63 % 58 % Cost of net revenue is primarily comprised of direct and indirect costs related to the sale of our IC products. Cost of net revenue decreased for the three months ended March 31, 2021 when compared with the same period in 2020, primarily due to decreased shipment volumes of our LineSpeed product which was only partially offset by the increase of our Bandwidth Engine products that have lower production costs. Gross profit increased for the three months ended March 31, 2021 compared with the same period of 2020 due to the increase in gross profit attributable to the increases in product revenues. As a percentage of net revenue, gross profit 18 in creased due to higher gross margins on our product sales and higher royalty and other revenue , which generally has no associated cost. Research and Development March 31, Change 2021 2020 2020 to 2021 (dollar amounts in thousands) Research and development -three months ended $ 1,159 $ 961 $ 198 21 % Percentage of total net revenue 87 % 76 % Our research and development expenses include costs related to the development of our IC and VAE IP products. We expense research and development costs as they are incurred. The increase for the three months ended March 31, 2021 compared with the same period of 2020 was primarily due to increases in personnel costs due to new hires and increases in consulting costs for development of our VAE products. We expect that total research and development expenses will increase in 2021 compared with 2020 as we incur increased development costs for our VAE products. Selling, General and Administrative March 31, Change 2021 2020 2020 to 2021 (dollar amounts in thousands) SG&A -three months ended $ 1,071 $ 1,135 $ (64 ) (6 )% Percentage of total net revenue 80 % 90 % 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. The decrease for the three months ended March 31, 2021 compared with the same period of 2020 was primarily due to decreases in professional services and facilities and travel costs, partially offset by increased legal and personnel costs. We expect total SG&A expenses to remain relatively consistent for the remainder of 2021. Interest expense March 31, Change 2021 2020 2020 to 2021 (dollar amounts in thousands) Interest expense - three months ended $ 30 $ 54 $ (24 ) (44 )% Percentage of total net revenue 2 % 4 % Interest expense consisted of interest expense on our senior secured convertible notes (the Notes). As of March 31, 2021, we had repaid the full remaining principal amount of the Notes and accrued interest. We do not expect to incur interest expense during the remainder of 2021. See Note 9 to the condensed consolidated financial statements for additional disclosure. Liquidity and Capital Resources; Changes in Financial Condition Cash Flows As of March 31, 2021, we had cash, cash equivalents and short-term investments of $11.1 million and working capital of $10.9 million. We believe that cash generated from our liquidity sources will be sufficient to meet both our short-term and long-term working capital and capital expenditure needs for the foreseeable future. 19 Net cash used in operating activities was $ 1. 0 million for the first three months of 20 2 1 , which primarily resulted from our net loss of $ 1.4 million , which was partially offset by $0. 3 million i n net changes in assets and liabilities and non-cash charges of $0. 1 million . 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 used in operating activities was $0.7 million for the first three months of 2020, which primarily resulted from our net loss of $1.4 million, which was partially offset by $0.5 million in net changes in assets and liabilities and non-cash charges of $0.1 million of stock-based compensation, depreciation and amortization expenses and $0.1 million of accrued interest. The changes in assets and liabilities primarily related to the timing of customer collections, and inventory and other vendor payables and prepayments. Net cash used in investing activities of $1.6 million for the three months ended March 31, 2021 represented purchases of short-term investments. Net cash provided by investing activities for the three months ended March 31, 2020 was mainly due to the proceeds from the maturities of short-term investments of $0.3 million. Net cash provided by financing activities of $6.3 million for the three months ended March 31, 2021 primarily consisted of $6.8 million in net proceeds received from the registered direct offering of our common stock completed in February 2021 and $2.5 million of proceeds from the exercise of warrants to purchase shares of common stock at a price of $2.40 per share. We used approximately $3 million of these proceeds to repay in full the outstanding balance of our senior secured convertible notes. There were minimal cash flows used in financing activities during the three months ended March 31, 2020. 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, especially for our VAE products; • inventory levels, timing of product shipments and length of billing and collection cycles; • variations in manufacturing yields, material lead time and costs and other manufacturing risks; • profitability of our business; • costs of acquiring other businesses and integrating the acquired operations; and • whether the PPP Note is substantially forgiven. 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 our revenues will not be sufficient to offset our working capital requirements. During the three months ended March 31, 2021, we received proceeds of $2.5 million from the exercise of common stock warrants, and we used $1.5 million of these proceeds to repay a portion of the principal balance of our senior secured convertible notes. In February 2021, we completed a registered direct offering of securities that generated net proceeds of approximately $6.8 million. In May 2020, we entered into a Promissory Note with Wells Fargo Bank, N.A. in an aggregate principal amount of approximately $0.6 million (the PPP Note), pursuant to the Paycheck Protection Program (the PPP) under the CARES Act. In March 2021 we applied for forgiveness of the PPP Note under the terms of the PPP. No assurance is provided that we will obtain forgiveness of the PPP Note in whole or in part, but we believe we have used the proceeds in accordance with the PPP. In the event that additional financing is required through sales of our equity securities, our stockholders would suffer dilution of their equity ownership, and we may be required to accept other terms that could be significantly detrimental to our existing stockholders and to our business. 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 be significantly detrimental 20 to 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.