What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-12 compared with 2021-08-12 · 71 added, 31 removed, 126 unchanged (45% of the section changed)

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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.

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, risks inherent in our ability to consummate the proposed business combination with Peraso Technologies, Inc., 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.

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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.

We are developing our Virtual Accelerator Engine, or VAE, IP solutions which consist of software, firmware and other 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.

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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 $2.6 million for the six months ended June 30, 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 $245.2 million as of June 30, 2021.

We incurred net losses of approximately $4.3 million for the nine months ended September 30, 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 $246.9 million as of September 30, 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.

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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.

Recent Developments – Proposed Arrangement with Peraso Technologies Inc.

On September 14, 2021, we and our newly formed subsidiaries, 2864552 Ontario Inc.

(Callco) and 2864555 Ontario Inc.

(Canco), both corporations existing under the laws of the province of Ontario, entered into an Arrangement Agreement (the Agreement) with Peraso Technologies Inc., a corporation existing under the laws of the province of Ontario (Peraso).

Under the Agreement, we, indirectly through Canco, are to acquire all of the issued and outstanding common shares of Peraso (Peraso Shares), including those Peraso Shares to be issued in connection with the conversion or exchange of secured convertible debentures of Peraso and common share purchase warrants of Peraso, as applicable, by way of a statutory plan of arrangement (the Arrangement) under the Business Corporations Act (Ontario) (the OBCA), on and subject to the terms and conditions of the Agreement

The Agreement provides that the Peraso stockholders may elect to receive either shares of our common stock or shares of the capital stock of Canco (the Exchangeable Shares) in exchange for such holder’s Peraso Shares, in each case based on an exchange ratio (the Exchange Ratio) to be determined based on the number of Peraso Shares and shares of our common stock outstanding as of immediately prior to the effective time of the Arrangement (the Effective Time).

Pursuant to the terms of the Agreement, at the Effective Time, we shall hold an aggregate of 1,815,445 Exchangeable Shares and Common Stock (collectively, the Earnout Shares).

Such Earnout Shares shall be escrowed pursuant to the terms of an escrow agreement on a pro rata basis from the aggregate consideration to be received by the Peraso stockholders, subject to the offset by us for any losses in accordance with the Agreement.

Such Earnout Shares shall be released, subject to any offset claim, upon the satisfaction of the earlier of:

(a) any date following the first anniversary of the Effective Time and prior to the third anniversary of the Effective Time where the volume weighted average price of our common stock for any 20 trading days within a period of 30 consecutive trading days is at least $8.57 per share, subject to adjustment for stock splits or other similar transaction;

(b) the date of any sale of all or substantially all of the assets or shares of us;

or (c) the date of any bankruptcy, insolvency, restructuring, receivership, administration, wind-up, liquidation, dissolution, or similar event involving us.

Following the Effective Time, each Exchangeable Share will be exchangeable by the holder for one share of common stock (subject to customary adjustments for stock splits or other reorganizations).

In addition, we may require all outstanding Exchangeable Shares to be exchanged upon the occurrence of certain events and at any time following the seventh anniversary of the closing of the Arrangement.

While outstanding, holders of Exchangeable Shares will be entitled to cast votes on matters for which holders of our common stock are entitled to vote and will be entitled to receive dividends economically equivalent to the dividends declared by us with respect to our common stock.

Eligibility to receive Exchangeable Shares will be subject to certain Canadian residency restrictions and tax statuses.

The Agreement also provides that Peraso stock options, which are exercisable for Peraso Shares, will be replaced with an option to acquire common stock to be issued by us in consideration for cancellation of the Peraso options and exercisable for shares of our common stock after the Effective Time, in each case with adjustments based on the Exchange Ratio.

The exact number of shares of common stock that will be issued pursuant to the Arrangement will be determined at the Effective Time in accordance with the Exchange Ratio.

Immediately following the Effective Time, based on the Exchange Ratio, the former stockholders of Peraso are anticipated to own approximately 61% of the economic and voting interest of the combined company with our current stockholders holding the remaining 39% economic and voting interest, as calculated on a fully-diluted basis and including the Earnout Shares.

The consummation of the Arrangement is subject to certain closing conditions precedent, including both our and Peraso’s stockholders approval of the Agreement and transactions contemplated therein;

the order of the Ontario Superior Court of Justice (Commercial List) granted pursuant to Section 182(5) of the Business Corporations Act (Ontario);

all regulatory approvals;

the continuing listing of our common stock on the Nasdaq Capital Market;

and other customary closing conditions.

The transaction is expected to close in the fourth calendar quarter of 2021 and to be implemented by way of an arrangement under the OBCA.

The Agreement provides for customary representations, warranties and covenants, including covenants of each party to (i) subject to certain exceptions, carry on its business in the ordinary course of business consistent with past practice during the period between the execution of the Agreement and the Effective Time and (ii) not solicit any alternate transactions or, subject to certain exceptions, to engage in any discussions or negotiations with respect thereto.

Subject to certain terms and conditions, the Agreement may be terminated if the

Effective Time does not occur on or before November 30, 2021, subject to certain automatic extensions.

The Agreement may also be terminated by either party, if the respective stockholders’ approval is not obtained, in the event of material adverse effect, or a superior proposal in connection with an alternative acquisition.

The Agreement subjects the parties to certain termination payment obligations.

If the Agreement is terminated because of the failure to obtain stockholders’ approval, the party that failed to obtain such approval will be obligated to pay a fee of $750,000 to the other party.

If the Agreement is terminated by either party as a result of obtaining a superior proposal from a third party, breach of non-solicitation covenants of the Agreement, or because either party’s board of directors fails to unanimously recommend to proceed with the Arrangement or withdraws its recommendation, the breaching party will be required to pay a termination fee of $3,500,000.

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.

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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.

We remain diligent in continuing to identify and manage risks to our business given the changing uncertainties related to COVID-19.

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The continued spread of COVID-19 has also led to disruption and volatility in the global capital markets.

During the six months ended June 30, 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.

During the nine months ended September 30, 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.

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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 June 30, 2021, there have been no material changes to our significant accounting policies and estimates.

As of September 30, 2021, there have been no material changes to our significant accounting policies and estimates.

Results of Operations

September 30,

(dollar amounts in thousands)

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Percentage of total net revenue

Product -six months ended

Product -nine months ended

Percentage of total net revenue

Product revenue decreased for the three and months ended June 30, 2021 compared with the same period of 2020 primarily due to lower sales of our Bandwidth Engine 2 and LineSpeed IC products.

Product revenue decreased for the three and nine months ended September 30, 2021 compared with the same period of 2020 primarily due to lower sales of our Bandwidth Engine 2 and LineSpeed IC products.

September 30,

(dollar amounts in thousands)

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Percentage of total net revenue

Royalty and other -six months ended

Royalty and other -nine months ended

Percentage of total net revenue

Royalty and other includes license, royalty and related revenues generated from licensing agreements.

The decrease in royalty and other revenue for the three and six months ended June 30, 2021 compared with the same period of 2020 was due to a decrease in royalty revenues and $0.1 million of non-recurring license revenues recognized during the three months ended June 30, 2020.

The decrease in royalty and other revenue for the three months ended September 30, 2021 compared with the same period of 2020 was due to a decrease in legacy royalty revenues.

The decrease in royalty and other revenue for the nine months ended September 30, 2021 compared with the same period of 2020 was due to a decrease in royalty revenues and $0.1 million of non-recurring license revenues recognized during the three months ended June 30, 2020.

Cost of Net Revenue and Gross Profit

September 30,

(dollar amounts in thousands)

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Percentage of total net revenue

Cost of net revenue -six months ended

Cost of net revenue -nine months ended

Percentage of total net revenue

September 30,

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Percentage of total net revenue

Gross profit -six months ended

Gross profit -nine months ended

Percentage of total net revenue

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 and six months ended June 30 , 20 21 when compared with the same period s in 2020, primarily due to decreased shipment volumes of our LineSpeed and Bandwidth Engine IC products .

Gross profit decreased for the three and six months ended June 30, 2021 compared with the same period of 2020 due to the decrease in gross profit attributable to the decreases in revenues.

Cost of net revenue decreased for the three and nine months ended September 30, 2021 when compared with the same periods in 2020, primarily due to decreased shipment volumes of our LineSpeed and Bandwidth Engine IC products.

Gross profit decreased for the three and nine months ended September 30, 2021 compared with the same period of 2020 due to the decrease in gross profit attributable to the decreases in revenues.

Research and Development

September 30,

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Percentage of total net revenue

Research and development -six months ended

Research and development -nine months ended

Percentage of total net revenue

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We expense research and development costs as they are incurred.

The increase for the three and six months ended June 30, 2021 compared with the same period of 2020 was primarily due to increases in personnel costs due to headcount increases and increases in consulting costs for development of our VAE-IP.

The increase for the three and nine months ended September 30, 2021 compared with the same period of 2020 was primarily due to increases in personnel costs due to headcount increases and increases in consulting costs for development of our VAE IP.

We expect that total research and development expenses will increase in 2021 compared with 2020 as we incur increased development costs for our VAE IP.

Selling, General and Administrative

September 30,

(dollar amounts in thousands)

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Percentage of total net revenue

SG&A -six months ended

SG&A -nine months ended

Percentage of total net revenue

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 increase for the three and six months ended June 30, 2021 compared with the same period of 2020 was primarily due to increases in legal, consulting and professional services fees.

The increase for the three and nine months ended September 30, 2021 compared with the same period of 2020 was primarily due to increases in transaction costs related to the Arrangement with Peraso.

Transaction costs incurred in connection with the Arrangement were $0.3 million and $0.7 million for the three and nine months ended September 30, 2021, respectively.

We expect total SG&A expenses to remain relatively consistent for the remainder of 2021.

Interest expense

September 30,

(dollar amounts in thousands)

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Percentage of total net revenue

Interest expense - six months ended

Interest expense - nine months ended

Percentage of total net revenue

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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.

See Note 10 to the condensed consolidated financial statements included in this report for additional disclosure.

Liquidity and Capital Resources;

Changes in Financial Condition

As of June 30, 2021, we had cash, cash equivalents and investments of $23.1 million and working capital of $19.9 million.

As of September 30, 2021, we had cash, cash equivalents and investments of $21.2 million and working capital of $18.6 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.

Net cash used in operating activities was $2.8 million for the first six months of 2021, which primarily resulted from our net loss of $2.6 million, adjusted for a $0.6 million of gains for debt extinguishment, which was partially offset by $0.2 million in net changes in assets and liabilities and non-cash charges of $0.2 million.

Net cash used in operating activities was $4.6 million for the first nine months of 2021, which primarily resulted from our net loss of $4.3 million, adjusted for a $0.6 million of gains for debt extinguishment and $0.1 million in net changes in assets and liabilities, which was partially offset by non-cash charges of $0.4 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 $1.2 million for the first six months of 2020, which primarily resulted from our net loss of $2.0 million, which was partially offset by $0.5 million in net changes in assets and liabilities and non-cash charges of $0.2 million of stock-based compensation, depreciation and amortization expenses and $0.1 million of accrued interest.

Net cash used in operating activities was $1.6 million for the first nine months of 2020, which primarily resulted from our net loss of $2.8 million, which was partially offset by $0.7 million in net changes in assets and liabilities and non-cash charges of $0.2 million of stock-based compensation, depreciation and amortization expenses and $0.2 million of accrued interest.

The changes in assets and liabilities primarily related to the timing of accounts receivable collections, and inventory and other vendor payables and prepayments.

Net cash used in investing activities of $9.6 million for the six months ended June 30, 2021 represented purchases of investments.

Net cash provided by investing activities for the six months ended June 30, 2020 was mainly due to the proceeds from maturities of short-term investments of $0.3 million.

Net cash provided by financing activities of $20.0 million for the six months ended June 30, 2021 primarily consisted of $6.8 million and $12.0 million in net proceeds received from the registered direct offerings of our common stock completed in February 2021 and June 2021, respectively, and $4.2 million of proceeds from the exercise of warrants to purchase shares of common stock at a price of $2.40 per share.

Net cash used in investing activities of $11.4 million for the nine months ended September 30, 2021 represented $12.7 million in purchases of short and long-term investments, partially offset by $1.3 million in proceeds from maturities of short-term investments.

Net cash provided by investing activities for the nine months ended September 30, 2020 was mainly due to the proceeds from maturities of short-term investments of $0.3 million.

Net cash provided by financing activities of $19.9 million for the nine months ended September 30, 2021 primarily consisted of $6.8 million and $12.0 million in net proceeds received from the registered direct offerings of our common stock completed in February 2021 and June 2021, respectively, and $4.2 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 the Notes.

Net cash provided by financing activities of $2.2 million for the six months ended June 30, 2020 primarily consisted of $1.6 million in net proceeds received from the sale of common stock in a registered direct offering of securities completed in April 2020 and $0.6 million of proceeds from an unsecured loan under the Paycheck Protection Program.

Net cash provided by financing activities of $2.2 million for the nine months ended September 30, 2020 primarily consisted of $1.6 million in net proceeds received from the sale of common stock in a registered direct offering of securities completed in April 2020 and $0.6 million of proceeds from an unsecured loan under the Paycheck Protection Program.

Our future liquidity and capital requirements are expected to vary from quarter-to-quarter, depending on numerous factors, including:

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profitability of our business;

impacts of our proposed Arrangement with Peraso;

costs of acquiring other businesses and integrating the acquired operations.

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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 six months ended June 30, 2021, we completed two registered direct offerings of our common stock that generated net proceeds of approximately $18.8 million.

During the nine months ended September 30, 2021, we completed two registered direct offerings of our common stock that generated net proceeds of approximately $18.8 million.

Also, during 2021, we received proceeds of $4.2 million from the exercise of common stock warrants.

During the three months ended June 30,2021, we repaid in full the outstanding principal balance of our Notes.

During the three months ended March 31, 2021, we repaid in full the outstanding principal balance of our Notes.

In May 2020, we entered into a Promissory Note with Wells Fargo Bank, N.A.

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In March 2021, we applied for forgiveness of the PPP Note under the terms of the PPP, and, in May 2021, we obtained forgiveness of the full amount of the PPP Note from the Lender.

As a result of these activities, at June 30, 2021, we had approximately $23.1 million in cash and investments and no debt.

As a result of these activities, at September 30, 2021, we had approximately $21.2 million in cash and investments and no debt.

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.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis