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 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 31, 2022 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, 2021 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 were incorporated in California in 1991 and reincorporated in Delaware in 2000. 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 the Company changed its name to “Peraso Inc.” and began trading on the Nasdaq Stock Market under the symbol “PRSO.” For accounting purposes, the legal subsidiary, Peraso Tech, has been treated as the accounting acquirer and we, the legal parent, have been treated as the accounting acquiree. The transaction has been accounted for as a reverse acquisition in accordance with Accounting Standards Codification (ASC) No. 805, Business Combinations (ASC 805). Accordingly, the financial condition and results of operations discussed herein are a continuation of Peraso Tech’s financial results prior to December 17, 2021 and exclude the financial results of us prior to December 17, 2021. See Note 2 to the condensed consolidated financial statements for additional disclosure . Our strategy and primary business objective is to be a profitable, IP-rich fabless semiconductor company offering integrated circuits (ICs), modules and related non-recurring engineering services. We specialize in the development of mmWave semiconductors, primarily in the 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 modules based on using those mmWave semiconductor devices. We have pioneered a high-volume mmWave 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. During 2021, we augmented our business model and began selling complete mmWave modules. The primary advantage provided by a module is the silicon and the antenna are integrated into a single device. A differentiating characteristic of mmWave technology is that the radio frequency amplifiers must be as close as possible to the antenna to minimize loss, and, by providing a module, we can guarantee the performance of the amplifier/antenna interface. We also acquired a memory product line, marketed under the Accelerator Engine name and that 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. As we are not developing new memory 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 research and development (R&D) expenses. 22 We incurred net losses of approximately $ 6.8 million for the three months ended March 3 1 , 202 2 and $ 10.8 million for the year ended December 3 1 , 20 2 1 and had an accumulated deficit of approximately $ 124.0 million as of March 3 1 , 20 2 2 . These and prior year losses have resulted in significant negative cash flows and have required us to raise substantial amounts of additional capital during this period. We expect 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. 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. Since March 2020, certain jurisdictions in which we operate have issued ’shelter-in-place” orders. We have complied with these orders and, when such orders were in place, minimized business activities at our facilities. We have implemented a teleworking policy for our employees and contractors to reduce on-site activity. 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 have and continue to experience longer lead times for certain components used to manufacture our 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. 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 . 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 revenue Revenue is recognized when performance obligations under the terms of a contract with a customer are satisfied. The majority of our contracts have a single performance obligation to transfer products. Accordingly, we recognize revenue when title and risk of loss have been transferred to the customer, generally at the time of shipment of products. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products and is generally based upon a negotiated, formula, list or fixed price. We sell our products both directly to customers and through distributors generally under agreements with payment terms typically 60 days or less. We may record an estimated allowance, at the time of shipment, for future returns and other charges against revenue consistent with the terms of sale. License and other Our licensing contracts typically provide for royalties based on the licensee’s use of our memory technology in its currently shipping commercial products. We estimate its royalty revenue in the calendar quarter in which the licensee uses the licensed technology. Payments are received in the subsequent quarter. We also generate revenue from licensing 23 our technology. We recognize l icense fee s as revenue at the point of time when the control of the license has been transferred and we ha ve no continuing performance obligations to the customer. Engineering services revenue Engineering and development contracts with customers generally contain a single performance obligation that is delivered over time. Revenue is recognized using an output method that is consistent with the satisfaction of the performance obligation as a measure of progress. 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, 2021. As of March 31, 2022, there have been no material changes to our significant accounting policies and estimates. Results of Operations Net Revenue March 31, Change 2022 2021 2021 to 2022 (dollar amounts in thousands) Product -three months ended $ 3,204 $ 1,051 $ 2,153 205 % Percentage of total net revenue 94 % 95 % Product revenue increased for the three months ended March 31, 2022 compared with the same period of 2021 primarily due to a full quarter contribution of revenues from our memory IC products and increased shipments of our mmWave module products. We commenced selling our module products in the second quarter of 2021. We expect revenues to increase in 2022, as we expect increased sales of our mmWave products and full-year contribution of revenues from our memory products. March 31, Change 2022 2021 2021 to 2022 (dollar amounts in thousands) License and other -three months ended $ 199 $ 50 $ 149 298 % Percentage of total net revenue 6 % 5 % License and other includes royalty, non-recurring engineering (NRE), services and licenses revenues. The increase in license and other revenue for the three months ended March 31, 2022 compared with the same period of 2021 was primarily due to a full quarter contribution of royalty revenues from licensees of our memory technology. Cost of Net Revenue and Gross Profit March 31, Change 2022 2021 2021 to 2022 (dollar amounts in thousands) Cost of net revenue -three months ended $ 1,590 $ 619 $ 971 157 % Percentage of total net revenue 47 % 56 % March 31, Change 2022 2021 2021 to 2022 (dollar amounts in thousands) Gross profit -three months ended $ 1,813 $ 482 $ 1,331 276 % Percentage of total net revenue 53 % 44 % 24 Cost of net revenue is primarily comprised of direct and indirect costs related to the sale of our products. Cost of net revenue increased for the three months ended March 31, 2022 when compared with the same period in 2021, primarily due to increased shipment volumes of our LineSpeed and Bandwidth Engine IC and mmWave module products. Our module products have higher cost of goods sold per unit and generate lower gross profit margin than our IC products. Gross profit decreased for the three months ended March 31, 2022 compared with the same period of 2021 due to the increased product shipments. Research and Development March 31, Change 2022 2021 2021 to 2022 (dollar amounts in thousands) R&D -three months ended $ 6,003 $ 2,787 $ 3,216 115 % Percentage of total net revenue 176 % 253 % Our R&D expenses include costs related to the development of our products. We expense R&D costs as they are incurred. The increase for the three months ended March 31, 2022 compared with the same period of 2021 was primarily due to the inclusion of a full quarter of expenses related to the former operations of MoSys, amortization of intangible assets in the first quarter of 2022 and recognition of government wage and rent subsidies in the first quarter of 2021 that reduced operating expenses. We expect that total research and development expenses will increase in 2022 compared with 2021, as we will include the operations of MoSys and increase development of our mmWave products and technologies. In addition, we do not expect to receive any government subsidies in 2022 that would reduce our expenses. Selling, General and Administrative March 31, Change 2022 2021 2021 to 2022 (dollar amounts in thousands) SG&A -three months ended $ 2,546 $ 1,307 $ 1,239 95 % Percentage of total net revenue 75 % 119 % Selling, general and administrative (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 months ended March 31, 2022 compared with the same period of 2021 was primarily due to the inclusion of a full quarter of expenses related to the former operations of MoSys. Interest expense Interest expense incurred during the quarter ended March 31, 2021 related to our loans payable, which were repaid during 2021. Liquidity and Capital Resources; Changes in Financial Condition Cash Flows As of March 31, 2022, we had cash, cash equivalents and investments of $12.2 million and working capital of $13.7 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 at least the next twelve months. Net cash used in operating activities was $5.7 million for the first three months of 2022, which primarily resulted from our net loss of $6.8 million and $1.0 million in net changes in assets and liabilities, partially offset by non-cash charges of $0.8 million of depreciation and amortization, $1.2 million of stock based compensation and a $0.1 million 25 loss o n disposal of property and equipment . 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 $1.3 million for the first three months of 2021, which primarily resulted from our net loss of $4.2 million, which was partially offset by $0.9 million in net changes in assets and liabilities and non-cash charges of $1.2 million of stock-based compensation, $0.3 million of depreciation and amortization expenses, $0.3 million amortization of debt discount and $0.2 million of accrued interest. The changes in assets and liabilities primarily related to the timing of accounts receivable collections and other vendor payables and prepayments. Net cash provided by investing activities of $3.6 million for the three months ended March 31, 2022 represented $4.2 million in proceeds from maturities of short-term investments, partially offset by $0.5 million purchases of short and long-term investments and $0.1 million of purchases of property and equipment. Net cash used in investing activities for the three months ended March 31, 2021 represented approximately $9,000 of purchases of property and equipment. Net cash used in financing activities for the three months ended March 31, 2022 consisted of taxes paid to net share settle equity awards. Net cash provided by financing activities for the three months ended March 31, 2021 consisted of net proceeds received from an unsecured loan. 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, material lead time and costs and other manufacturing risks; • costs of acquiring other businesses and integrating the acquired operations; and • profitability of our business. 26 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 2022, as we do not expect our revenues will be sufficient to offset our working capital requirements. We incurred a net loss of approximately $6.8 million for the three months ended March 31, 2022 and had an accumulated deficit of approximately $124.0 million as of March 31, 2022. These and prior year losses have resulted in significant negative cash flows and have required us to raise substantial amounts of additional capital during this period. To date, we have primarily financed our operations through multiple equity offerings, issuances of convertible debentures, utilization of loan facilities and government subsidies and credits. However, there can be no assurance that our capital is sufficient to fund operations until such time as we begin to achieve positive cash flows. We have an effective shelf registration statement under which we could sell additional securities without advance notice. We may need 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 R&D 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. Recent Accounting Pronouncements See Note 1 to the condensed consolidated financial statements for a discussion of recent accounting policies. 27