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PERASO INC.
FORM 10-Q
March 31, 2023
TABLE OF CONTENTS
i
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
PERASO INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
March 31, | December 31, | |||||||
2023 | 2022 | |||||||
(unaudited) | ||||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | $ | ||||||
Short-term investments | ||||||||
Accounts receivable, net | ||||||||
Inventories | ||||||||
Deferred cost of net revenue | ||||||||
Prepaid expenses and other | ||||||||
Total current assets | ||||||||
Property and equipment, net | ||||||||
Intangible assets, net | ||||||||
Right-of-use lease asset, net | ||||||||
Other | ||||||||
Total assets | $ | $ | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities | ||||||||
Accounts payable | $ | $ | ||||||
Accrued expenses and other | ||||||||
Deferred revenue | ||||||||
Short-term lease liabilities | ||||||||
Total current liabilities | ||||||||
Long-term lease liabilities | ||||||||
Warrant liability | ||||||||
Total liabilities | ||||||||
Commitments and contingencies (Note 4) | ||||||||
Stockholders’ equity | ||||||||
Preferred stock, $ | ||||||||
Series A, special voting preferred stock, $ | ||||||||
Common stock, $ | ||||||||
Exchangeable shares, | ||||||||
Additional paid-in capital | ||||||||
Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
Accumulated deficit | ( | ) | ( | ) | ||||
Total stockholders’ equity | ||||||||
Total liabilities and stockholders’ equity | $ | $ |
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
PERASO INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
(In thousands, except per share data)
Three Months Ended | ||||||||
March 31, | ||||||||
2023 | 2022 | |||||||
Net revenue | ||||||||
Product | $ | $ | ||||||
Royalty and other | ||||||||
Total net revenue | ||||||||
Cost of net revenue | ||||||||
Gross profit | ||||||||
Operating expenses | ||||||||
Research and development | ||||||||
Selling, general and administrative | ||||||||
Gain on license and asset sale | ( | ) | ||||||
Total operating expenses | ||||||||
Loss from operations | ( | ) | ( | ) | ||||
Change in fair value of warrant liability | ||||||||
Other expense, net | ( | ) | ( | ) | ||||
Net loss | $ | ( | ) | $ | ( | ) | ||
Other comprehensive loss, net of tax: | ||||||||
Net unrealized gain (loss) on available-for-sale securities | ( | ) | ||||||
Comprehensive loss | $ | ( | ) | $ | ( | ) | ||
Net loss per share | ||||||||
$ | ( | ) | $ | ( | ) | |||
Shares used in computing net loss per share | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
PERASO INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
(In thousands)
Series A Special | Accumulated | |||||||||||||||||||||||||||||||||||||||
Voting | Exchangeable | Additional | Other | |||||||||||||||||||||||||||||||||||||
Preferred Stock | Common Stock | Shares | Paid-In | Comprehensive | Accumulated | |||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Capital | Loss | Deficit | Total | |||||||||||||||||||||||||||||||
Balance as of December 31, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||||||
Exchange of exchangeable shares | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | |||||||||||||||||||||||||||||||||||||
Unrealized gain on available-for-sale securities | — | — | — | |||||||||||||||||||||||||||||||||||||
Net loss | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
Balance as of March 31, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ |
Series A Special | Accumulated | |||||||||||||||||||||||||||||||||||||||
Voting | Exchangeable | Additional | Other | |||||||||||||||||||||||||||||||||||||
Preferred Stock | Common Stock | Shares | Paid-In | Comprehensive | Accumulated | |||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Capital | Loss | Deficit | Total | |||||||||||||||||||||||||||||||
Balance as of December 31, 2021 | $ | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||||
Issuance of common stock under stock plan, net | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | |||||||||||||||||||||||||||||||||||||
Unrealized loss on available-for-sale securities | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
Net loss | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
Balance as of March 31, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ |
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
PERASO INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended | ||||||||
March 31, | ||||||||
2023 | 2022 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | ( | ) | $ | ( | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation and amortization | ||||||||
Stock-based compensation | ||||||||
Change in fair value of warrant liability | ( | ) | ||||||
Allowance for bad debt | ( | ) | ||||||
Accrued interest | ( | ) | ||||||
Other | ||||||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | ||||||||
Inventories | ( | ) | ||||||
Prepaid expenses and other assets | ( | ) | ||||||
Accounts payable | ( | ) | ||||||
Right-of-use assets | ||||||||
Lease liabilities - operating | ( | ) | ( | ) | ||||
Deferred revenue and other liabilities | ( | ) | ( | ) | ||||
Net cash used in operating activities | ( | ) | ( | ) | ||||
Cash flows from investing activities: | ||||||||
Purchases of property and equipment | ( | ) | ( | ) | ||||
Purchases of intangible assets | ( | ) | ||||||
Proceeds from maturities of marketable securities | ||||||||
Purchases of marketable securities | ( | ) | ||||||
Net cash provided by investing activities | ||||||||
Cash flows from financing activities: | ||||||||
Taxes paid to net share settle equity awards | ( | ) | ||||||
Repayment of financing lease | ( | ) | ||||||
Net cash used in financing activities | ( | ) | ( | ) | ||||
Net decrease in cash and cash equivalents | ( | ) | ( | ) | ||||
Cash and cash equivalents at beginning of period | ||||||||
Cash and cash equivalents at end of period | $ | $ | ||||||
Supplemental disclosure: | ||||||||
Recognition of right-of-use asset and lease liability | $ | $ | ||||||
Unrealized gain/(loss) on securities | $ | $ | ( | ) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
PERASO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. The Company and Summary of Significant Accounting Policies
Peraso Inc. (the Company), formerly known as MoSys, Inc. (MoSys), was incorporated in California in 1991 and reincorporated in 2000 in Delaware. The Company is a fabless semiconductor company specializing in the development of millimeter wave (mmWave), which is generally described as the frequency band from 24 Gigahertz (GHz) to 300GHz, wireless technology. The Company also manufactures and sells high-performance memory semiconductor devices for a wide range of markets and receives royalties from licensees of its memory technology. The Company derives revenue from selling its semiconductor devices and antenna modules, performance of non-recurring engineering services and licensing of its technologies.
On
September 14, 2021, the Company and its subsidiaries,
The accompanying condensed consolidated financial statements of the Company have been prepared without audit. The condensed consolidated balance sheet as of December 31, 2022 has been derived from the audited consolidated financial statements at that date. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) have been condensed or omitted in accordance with the rules and regulations of the Securities and Exchange Commission (SEC). The information in this report should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in its most recent annual report on Form 10-K filed with the SEC.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary to summarize fairly the Company’s financial position, results of operations and cash flows for the interim periods presented. The operating results for the three months ended March 31, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023 or for any other future period.
Liquidity and Going Concern
The Company incurred
net losses of approximately $
The Company expects to continue to incur operating losses for the foreseeable future as it secures additional customers and continues to invest in the commercialization of its products. The Company will need to increase revenues substantially beyond levels that it has attained in the past in order to generate sustainable operating profit and sufficient cash flows to continue doing business without raising additional capital from time to time. As a result of the Company’s expected operating losses and cash burn for the foreseeable future, as well as recurring losses from operations, if the Company is unable to raise sufficient capital through additional debt or equity arrangements, there will be uncertainty regarding the Company’s ability to maintain liquidity sufficient to operate its business effectively, which raises substantial doubt as to the Company’s ability to continue as a going concern within one year from the date of issuance of these condensed consolidated financial statements. These condensed consolidated financial statements do not include any adjustments that might result from this uncertainty. There can be no assurance that such additional capital, whether in the form of debt or equity financing, will be sufficient or available and, if available, that such capital will be offered on terms and conditions acceptable to the Company. The Company’s primary focus is producing and selling its products. If the Company is unsuccessful in these efforts, it will need to implement additional cost reduction strategies, which could further affect its near- and long-term business plan. These efforts may include, but are not limited to, reducing headcount and curtailing business activities.
5
Basis of Presentation
The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. The Company’s fiscal year ends on December 31 of each calendar year. Certain prior year amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations or cash flows.
Risks and Uncertainties
The Company is subject to risks from, among other things, competition associated with the industry in general, other risks associated with financing, liquidity requirements, rapidly changing customer requirements, limited operating history and the volatility of public markets.
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. Since March 2020, from time to time, 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 the Company’s operational and financial performance will depend on future developments, including the duration and spread of the pandemic and related actions taken by U.S. and foreign government agencies to prevent disease spread, all of which are uncertain, out of the Company’s control, and cannot be predicted.
Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses recognized during the reported period. Material estimates may include assumptions made in determining reserves for uncollectible receivables, inventory write-downs, impairment of long-term assets, purchase price allocations, valuation allowance on deferred tax assets, accruals for potential liabilities and assumptions made in valuing equity instruments. Actual results could differ from those estimates.
Cash Equivalents and Investments
The Company has invested its excess cash in money market accounts, certificates of deposit, corporate debt, government-sponsored enterprise bonds and municipal bonds and considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Investments with original maturities greater than three months and remaining maturities less than one year are classified as short-term investments. Investments with remaining maturities greater than one year are classified as long-term investments. Management generally determines the appropriate classification of securities at the time of purchase. All securities are classified as available-for-sale. The Company’s available-for-sale short-term and long-term investments are carried at fair value, with the unrealized holding gains and losses reported in accumulated other comprehensive income (loss). Realized gains and losses and declines in the value judged to be other-than-temporary are included in the other income, net line item in the condensed consolidated statements of operations. The cost of securities sold is based on the specific identification method.
Fair Value Measurements
The Company measures 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:
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.
6
Level 2—Pricing is provided by third party sources of market information obtained through the Company’s investment advisors, rather than models. The Company does not adjust for, or apply, any additional assumptions or estimates to the pricing information it receives from advisors. The Company’s Level 2 securities include cash equivalents and available-for-sale securities, which consisted primarily of certificates of deposit, corporate debt, and government agency and municipal debt securities from issuers with high-quality credit ratings. The Company’s 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 are not actively traded and have fewer observable transactions. The Company considers this the most reliable information available for the valuation of the securities.
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.
The carrying amounts of financial assets and liabilities, such as cash and cash equivalents, accounts receivable, accounts payable, notes payable and other payables, approximate their fair values because of the short maturity of these instruments. The carrying values of lease obligations and long-term financing obligations approximate their fair values because interest rates on these obligations are based on prevailing market interest rates. The Company measures the fair value of its warrant liability using Level 3 inputs.
Derivatives and Liability-Classified Instruments
The Company accounts for common stock warrants as either equity-classified or liability-classified instruments based on an assessment of the specific terms of the warrants and the guidance provided by the Financial Accounting Standards Board (FASB) in ASC 480, Distinguishing Liabilities from Equity (ASC 480) and ASC 815, Derivatives and Hedging (ASC 815). The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own stock and whether the holders of the warrants could potentially require net cash settlement in a circumstance outside of the Company’s control, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding.
Allowance for Doubtful Accounts
The
Company establishes an allowance for doubtful accounts to ensure that its trade receivables balances are not overstated due to uncollectibility.
The Company performs ongoing customer credit evaluations within the context of the industry in which it operates and generally does not
require collateral from its customers. A specific allowance of up to
Inventories
The
Company values its inventories at the lower of cost, which approximates actual cost on a first-in, first-out basis, or net realizable
value. Costs of inventories primarily consisted of material and third party assembly costs. The Company records inventory reserves for
estimated obsolescence or unmarketable inventories based upon assumptions about future demand and market conditions. Once a reserve is
established, it is maintained until the product to which it relates is sold or otherwise disposed of. If actual market conditions are
less favorable than those expected by management, additional adjustment to inventory valuation may be required. Charges for obsolete
and slow-moving inventories are recorded based upon an analysis of specific identification of obsolete inventory items and quantification
of slow moving inventory items. The Company recorded write-downs of inventory of approximately $
Tax Credits
The Company is registered for the Canadian federal and provincial goods and services taxes. As such, the Company is obligated to collect from third parties and is entitled to claim sales taxes paid on its expenses and capital expenditures incurred in Canada.
The Company participates
in the Canadian government’s Scientific Research and Experimental Development (SRED) Program, which uses tax incentives to encourage
Canadian businesses to conduct research and development (R&D) in Canada. As a part of the program, the Company may be eligible for
a tax credit of
7
Intangible and Long-lived Assets
Intangible assets
are recorded at cost and amortized on a straight-line method over their estimated useful lives of
The Company regularly reviews the carrying value and estimated lives of its long-lived assets and finite-lived intangible assets to determine whether indicators of impairment may exist which warrant adjustments to carrying values or estimated useful lives. The determinants used for this evaluation include management’s estimate of the asset’s ability to generate positive income from operations and positive cash flow in future periods as well as the strategic significance of the assets to the Company’s business objective. Should an impairment exist, the impairment loss would be measured based on the excess of the carrying amount of the long-lived asset group over the asset’s fair value.
Purchased Intangible Assets
Intangible assets acquired in business combinations are accounted for based on the fair value of assets purchased and are amortized over the period in which economic benefit is estimated to be received. Intangible assets subject to amortization, including those acquired in business combinations were as follows (amounts in thousands):
March 31, 2023 | ||||||||||||
Gross | Net | |||||||||||
Carrying | Accumulated | Carrying | ||||||||||
Amount | Amortization | Amount | ||||||||||
Developed technology | $ | $ | ( | ) | $ | |||||||
Customer relationships | ( | ) | ||||||||||
Other | ( | ) | ||||||||||
Total | $ | $ | ( | ) | $ |
December 31, 2022 | ||||||||||||
Gross | Net | |||||||||||
Carrying | Accumulated | Carrying | ||||||||||
Amount | Amortization | Amount | ||||||||||
Developed technology | $ | $ | ( | ) | $ | |||||||
Customer relationships | ( | ) | ||||||||||
Other | ( | ) | ||||||||||
Total | $ | $ | ( | ) | $ |
Developed
technology primarily consisted of MoSys’ products that have reached technological feasibility and primarily relate to its memory
semiconductor products and technology. The value of the developed technology was determined by discounting estimated net future cash
flows of these products. The Company is amortizing the developed technology on a straight-line basis over
Customer relationships
relate to the Company’s ability to sell existing and future versions of products to MoSys’ customers existing at the time
of the arrangement. The fair value of the customer relationships was determined by discounting estimated net future cash flows from the
customer relationships. The Company is amortizing customer relationships on a straight-line basis over an estimated life of
Other amortization
expense was approximately $
8
As of March 31, 2023, estimated future amortization expense related to intangible assets was as follows (in thousands):
Year ending December 31, | ||||
2023 | $ | |||
2024 | ||||
2025 | ||||
2026 | ||||
2027 | ||||
Thereafter | ||||
$ |
Revenue Recognition
The Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers and its amendments (ASC 606). As described below, the analysis of contracts under ASC 606 supports the recognition of revenue at a point in time, resulting in revenue recognition timing that is materially consistent with the Company’s historical practice of recognizing product revenue when title and risk of loss pass to the customer.
The Company generates revenue primarily from sales of integrated circuits and antenna module products, performance of engineering services and licensing of its intellectual property. Revenues are recognized when control is transferred to customers in amounts that reflect the consideration the Company expects 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.
Product revenue
Revenue is recognized
when performance obligations under the terms of a contract with a customer are satisfied. The majority of the Company’s contracts have
a single performance obligation to transfer products. Accordingly, the Company recognizes 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 the Company
expects to receive in exchange for transferring products and is generally based upon a negotiated, formula, list or fixed price.
The Company 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
The Company’s licensing contracts typically provide for royalties based on the licensee’s use of the Company’s memory technology in its currently shipping commercial products. The Company estimates its royalty revenue in the calendar quarter in which the licensee uses the licensed technology. Payments are received in the subsequent quarter. The Company also generates revenue from licensing its technology. The Company recognizes license fees as revenue at the point of time when the control of the license has been transferred and the Company has 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.
Deferred cost of net revenue
During the three
months ended September 30, 2022, the Company had $
9
Contract liabilities – deferred revenue
The Company’s contract liabilities consist of advance customer payments and deferred revenue. The Company classifies advance customer payments and deferred revenue as current or non-current based on the timing of when the Company expects to recognize revenue. As of March 31, 2023 and December 31, 2022, contract liabilities were in a current position and included in deferred revenue.
During the three
months ended March 31, 2023, the Company recognized approximately $
See Note 5 for disaggregation of revenue by geography.
The Company does
not have significant financing components, as payments from customers are typically due within
Cost of Net Revenue
Cost of net revenue consists primarily of direct and indirect costs of product sales, including amortization of intangible assets and depreciation of production-related fixed assets.
Stock-Based Compensation
The Company periodically issues stock options and restricted stock units to employees and non-employees. The Company accounts for such awards based on ASC 718, whereby the value of the award is measured on the date of award and recognized as compensation expense on a straight-line basis over the vesting period. The fair value of the Company’s stock options is estimated using the Black-Scholes-Merton Option Pricing (Black Scholes) model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the options, and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes model. The assumptions used in the Black-Scholes model could materially affect compensation expense recorded in future periods.
Foreign Currency Transactions
The functional currency of the Company is the U.S dollar. All foreign currency transactions are initially measured and recorded in an entity’s functional currency using the exchange rate on the date of the transaction. All monetary assets and liabilities are remeasured at the end of each reporting period using the exchange rate at that date. All non-monetary assets and related expense, depreciation or amortization are not subsequently remeasured and are measured using the historical exchange rate. An average exchange rate may be used to recognize income and expense items earned or incurred evenly over a period. Foreign exchange gains and losses resulting from the settlement of such transactions are recognized in the statement of operations, except for the gains and losses arising from the conversion of the carrying amount of the foreign currency denominated convertible preferred shares into the functional currency that are presented as adjustment to the net loss to arrive at net loss attributable to common stockholders.
10
Per-Share Amounts
Basic net loss per share is computed by dividing net loss for the period by the weighted-average number of exchangeable shares and shares of common stock outstanding during the period. Diluted net loss per share gives effect to all potentially dilutive exchangeable and common shares outstanding during the period. Potentially dilutive common shares consist of incremental exchangeable shares and shares of common stock issuable upon the achievement of escrow terms, exercise of stock options, vesting of stock awards and exercise of warrants.
The following table sets forth securities outstanding that were excluded from the computation of diluted net loss per share as their inclusion would be anti-dilutive (in thousands):
March 31, | ||||||||
2023 | 2022 | |||||||
Escrow shares - exchangeable shares | ||||||||
Escrow shares - common stock | ||||||||
Options to purchase common stock | ||||||||
Unvested restricted common stock units | ||||||||
Common stock warrants | ||||||||
Total |
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments—Credit Losses. This ASU added a new impairment model (known as the current expected credit loss (CECL) model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes an allowance for its estimate of expected credit losses and applies to most debt instruments, trade receivables, lease receivables, financial guarantee contracts, and other loan commitments. The CECL model does not have a minimum threshold for recognition of impairment losses and entities will need to measure expected credit losses on assets that have a low risk of loss. This update is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years for smaller reporting companies. The adoption of ASU 2016-13 did not have a significant impact on the Company’s condensed consolidated financial statement presentation or disclosures.
Management does not believe that any other recently issued, but not yet effective, authoritative guidance, if currently adopted, would have a material impact on the Company’s financial statement presentation or disclosures.
Note 2: Fair Value of Financial Instruments
The following table represents the Company’s assets and liabilities measured at fair value on a recurring basis and the basis for that measurement (in thousands):
March 31, 2023 | ||||||||||||||||
Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||
Assets: | ||||||||||||||||
Money market funds (1) | $ | $ | $ | $ | ||||||||||||
Corporate notes and commercial paper | $ | $ | $ | $ | ||||||||||||
Liabilities: | ||||||||||||||||
Warrant | $ | $ | $ | $ |
11
December 31, 2022 | ||||||||||||||||
Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||
Assets: | ||||||||||||||||
Money market funds (1) | $ | $ | $ | $ | ||||||||||||
Corporate notes and commercial paper | $ | $ | $ | $ | ||||||||||||
Liabilities: | ||||||||||||||||
Warrant | $ | $ | $ | $ |
(1) | Amounts are included in cash and cash equivalents on the condensed consolidated balance sheets. |
The following tables represents the Company’s determination of fair value for its financial assets (cash equivalents and investments) (in thousands):
March 31, 2023 | ||||||||||||||||
Unrealized | Unrealized | Fair | ||||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
Cash and cash equivalents | $ | $ | $ | $ | ||||||||||||
Short-term investments | ||||||||||||||||
$ | $ | $ | $ |
December 31, 2022 | ||||||||||||||||
Unrealized | Unrealized | Fair | ||||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
Cash and cash equivalents | $ | $ | $ | $ | ||||||||||||
Short-term investments | ( | ) | ||||||||||||||
$ | $ | $ | ( | ) | $ |
Warrant Classified as Liability
A
warrant to purchase shares of our common stock at an exercise price of $
The
fair value of the Purchase Warrant at March 31, 2023 was determined using the Black Scholes model with the following assumptions: (i)
expected term based on the contractual term of
12
As of March 31, 2023, the Company had the following liability-classified warrant outstanding (amounts in thousands):
Number of warrants on | ||||||||
common shares | Amount | |||||||
Balance as of December 31, 2021 | $ | |||||||
Recognition of warrant liability | ||||||||
Change in fair value of warrant | ( | ) | ||||||
Balance as of December 31, 2022 | ||||||||
Change in fair value of warrant | ( | ) | ||||||
Balance as of March 31, 2023 | $ |
Note 3. Balance Sheet Detail
Inventories
March 31, | December 31, | |||||||
2023 | 2022 | |||||||
(in thousands) | ||||||||
Inventories: | ||||||||
Raw materials | $ | $ | ||||||
Work-in-process | ||||||||
Finished goods | ||||||||
$ | $ |
Note 4. Commitments and Contingencies
Leases
The
Company has facility leases that it accounts for under ASC 842, including the operating leases for its corporate headquarters facility
in San Jose, California, and facilities in Toronto and Markham Ontario, Canada. The San Jose and Toronto leases expire in January 2024
and December 2023, respectively. In May 2022, the Company entered into a new lease for the facility in Markham with a 60-month term,
which commenced June 21, 2022. The Markham landlord also provided a lease incentive of approximately $
The
initial right-of-use assets and corresponding liabilities of approximately $
On
March 1, 2022, the Company entered into a 36-month finance lease agreement for the lease of equipment resulting in the recognition of
a right-of-use asset and lease liability of approximately $
On
November 1, 2022, the Company entered into a 36-month finance lease agreement for the lease of equipment resulting in the recognition
of a right-of-use asset of approximately $
13
The following table provides the details of right-of-use assets and lease liabilities as of March 31, 2023 (in thousands):
Three Months Ended | ||||
March
31, 2023 | ||||
Right-of-use assets: | ||||
Operating leases | $ | | ||
Finance lease | ||||
Total right-of-use assets | $ | |||
Lease liabilities: | ||||
Operating leases | $ | |||
Finance lease | ||||
Total lease liabilities | $ |
Future minimum payments under the leases at March 31, 2023 are listed in the table below (in thousands):
Year ending December 31, | Operating leases | |||
2023 | $ | |||
2024 | ||||
2025 | ||||
2026 | ||||
2027 | ||||
Total future lease payments | ||||
Less: imputed interest | ( | ) | ||
Present value of lease liabilities | $ |
The following table provides the details of supplemental cash flow information (in thousands):
Three Months Ended | ||||||||
March 31, | ||||||||
2023 | 2022 | |||||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
Operating cash flows for leases | $ | $ |
Rent expense was
approximately $
Indemnification
In the ordinary course of business, the Company enters into contractual arrangements under which it may agree to indemnify the counterparties from any losses incurred relating to breach of representations and warranties, failure to perform certain covenants, or claims and losses arising from certain events as outlined within the particular 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. The Company has also entered into indemnification agreements with its officers and directors. No material amounts were reflected in the Company’s condensed consolidated financial statements for the three months ended March 31, 2023 and 2022 related to these indemnifications.
The Company has not estimated the maximum potential amount of indemnification liability under these agreements due to the limited history of prior claims and the unique facts and circumstances applicable to each particular agreement. To date, the Company has not made any payments related to these indemnification agreements.
14
Product Warranties
The Company warrants certain of its products to be free of defects generally for a period of three years. The Company estimates its warranty costs based on historical warranty claim experience and includes such costs in cost of net revenues. Warranty costs were not material for the three months ended March 31, 2023 and 2022.
Legal Matters
The Company is not a party to any legal proceeding that the Company believes is likely to have a material adverse effect on its condensed consolidated financial position or results of operations. From time to time the Company may be subject to legal proceedings and claims in the ordinary course of business. These claims, even if not meritorious, could result in the expenditure of significant financial resources and diversion of management efforts.
Note 5. Business Segments, Concentration of Credit Risk and Significant Customers
The Company determined its reporting units in accordance with ASC 280, Segment Reporting (ASC 280). Management evaluates a reporting unit by first identifying its operating segments under ASC 280. The Company then evaluates each operating segment to determine if it includes one or more components that constitute a business. If there are components within an operating segment that meet the definition of a business, the Company evaluates those components to determine if they must be aggregated into one or more reporting units. If applicable, when determining if it is appropriate to aggregate different operating segments, the Company determines if the segments are economically similar and, if so, the operating segments are aggregated.
Management has determined that the Company has one consolidated operating segment. The Company’s reporting segment reflects the manner in which its chief operating decision maker reviews results and allocates resources. The Company’s reporting segment meets the definition of an operating segment and does not include the aggregation of multiple operating segments.
The Company recognized revenue from shipments of product, licensing of its technologies and performance of services to customers by geographical location as follows (in thousands):
Three Months Ended | ||||||||
March 31, | ||||||||
2023 | 2022 | |||||||
United States | $ | $ | ||||||
Taiwan | ||||||||
China | ||||||||
Japan | ||||||||
Rest of world | ||||||||
Total net revenue | $ | $ |
The following is a breakdown of product revenue by category (in thousands):
(amounts in thousands) | Three Months Ended March 31, | |||||||||||
Product category | 2023 | 2022 | change | |||||||||
Memory ICs | $ | $ | ||||||||||
mmWave ICs | ||||||||||||
mmWave antenna modules | ||||||||||||
mmWave other products | ||||||||||||
$ | $ | $ |
15
Customers who accounted
for at least
Three Months Ended | ||||||||
March 31, | ||||||||
2023 | 2022 | |||||||
Customer A | % | |||||||
Customer B | % | % | ||||||
Customer C | % | % | ||||||
Customer D | % |
* |
As of March 31,
2023, three customers accounted for
Note 6. Stock-Based Compensation
Common Stock Equity Plans
In 2010, the Company adopted the 2010 Equity Incentive Plan and later amended it in 2014, 2017 and 2018 (the Amended 2010 Plan). The Amended 2010 Plan was terminated in August 2019 and remains in effect as to outstanding equity awards granted prior to the date of expiration. No new awards may be made under the Amended 2010 Plan.
In August 2019,
the Company’s stockholders approved the 2019 Stock Incentive Plan (the 2019 Plan) to replace the Amended 2010 Plan. The 2019 Plan
authorizes the board of directors or the compensation committee of the board of directors to grant a broad range of awards including
stock options, stock appreciation rights, restricted stock, performance-based awards, and restricted stock units. Under the 2019 Plan,
Under the 2019
Plan, the term of all incentive stock options granted to a person who, at the time of grant, owns stock representing more than
In connection with the Arrangement, the Company assumed the Peraso Technologies Inc. 2009 Share Option Plan (the 2009 Plan) and all outstanding options granted pursuant to the terms of the 2009 Plan. Each outstanding, unexercised and unexpired option under the 2009 Plan, whether vested or unvested, was assumed by the Company and converted into options to purchase shares of the Company’s common stock No further awards will be made under the 2009 Plan.
The 2009 Plan, the Amended 2010 Plan and the 2019 Plan are referred to collectively as the “Plans.”
Stock-Based Compensation Expense
The Company reflected
compensation costs of $
16
Common Stock Options and Restricted Stock
The term of all
incentive stock options granted to a person who, at the time of grant, owns stock representing more than
The following table summarizes the activity in the shares available for grant under the Plans during the three months ended March 31, 2023 (in thousands, except exercise price):
Options Outstanding | ||||||||||||
Weighted | ||||||||||||
Shares | Average | |||||||||||
Available | Number of | Exercise | ||||||||||
for Grant | Shares | Prices | ||||||||||
Balance as of December 31, 2022 | $ | |||||||||||
RSUs granted | ( | ) | $ | |||||||||
RSUs cancelled and returned to the Plans | $ | |||||||||||
Options cancelled | ( | ) | $ | |||||||||
Balance as of March 31, 2023 | $ |
A summary of RSU activity under the Plans is presented below (in thousands, except for fair value):
Weighted | ||||||||
Average | ||||||||
Number of | Grant-Date | |||||||
Shares | Fair Value | |||||||
Non-vested shares as of December 31, 2022 | $ | |||||||
Granted | $ | |||||||
Vested | ( | ) | $ | |||||
Non-vested shares as of March 31, 2023 | $ |
The following table summarizes significant ranges of outstanding and exercisable options as of March 31, 2023 (in thousands, except contractual life and exercise price):
Options Outstanding | Options Exercisable | |||||||||||||||||||||||
Weighted | ||||||||||||||||||||||||
Average | ||||||||||||||||||||||||
Remaining | Weighted | Weighted | ||||||||||||||||||||||
Contractual | Average | Average | Aggregate | |||||||||||||||||||||
Number | Life | Exercise | Number | Exercise | Intrinsic | |||||||||||||||||||
Range of Exercise Price | Outstanding | (in Years) | Price | Exercisable | Price | value | ||||||||||||||||||
$ | $ | $ | $ | |||||||||||||||||||||
$ | $ | $ | $ | |||||||||||||||||||||
$ | $ | $ | $ | |||||||||||||||||||||
$ | $ | $ | $ | |||||||||||||||||||||
$ | $ | $ | $ | |||||||||||||||||||||
$ | $ | $ | $ |
17
Note 7. Equity
Exchangeable Shares and Preferred Stock
As
discussed in Note 1, on December 17, 2021, following the satisfaction of the closing conditions set forth in the Arrangement Agreement,
the Arrangement was completed. Pursuant to the completion of the Arrangement, each Peraso Share that was issued and outstanding immediately
prior to December 17, 2021 was converted into either newly issued shares of common stock of the Company or shares of Canco, which are
exchangeable for shares of the Company’s common stock (Exchangeable Shares), at the election of each former Peraso Tech stockholder.
Of the shares issued to the holders of Peraso Tech Shares, pursuant to the terms of the Agreement, the Company held in escrow an aggregate
of
The Exchangeable Share structure is commonly used for cross-border transactions of this nature so as to provide non-tax-exempt Canadian shareholders with the same economic rights and benefits as holders of the Company’s shares into which the Exchangeable Shares are exchangeable, while allowing those Canadian shareholders to benefit from the tax-rollover available on the issuance of the Exchangeable Shares. In general terms, by choosing to acquire Exchangeable Shares from Canco, such a former Peraso Tech shareholder was able to rely on a rollover rule in the Income Tax Act (Canada) in order to defer any capital gain that he/she/it would have otherwise realized.
Callco was incorporated to exercise the call rights, while Canco was incorporated to acquire the shares of Peraso Tech from Canadian shareholders that wished to receive Exchangeable Shares as consideration, so it was a tax deferred transaction for such Canadian shareholders. The use of a separate entity, Callco, helps maximize cross border paid-up capital, which represents the amount that can generally be distributed free of Canadian withholding tax. The call rights also allow Callco to “purchase” the Exchangeable Shares rather than having them redeemed by Canco on a redemption or retraction or in connection with a liquidity event, thus avoiding the adverse deemed dividend tax consequences to shareholders that may arise from a redemption or retraction of Exchangeable Shares.
Holders of Exchangeable Shares have the right at any time (the Retraction Right) to retract or redeem any or all of the Exchangeable Shares owned by them for an amount per share equal to the market price of a share of the Company’s common stock plus the full amount of all declared and unpaid dividends on such Exchangeable Share (the Exchangeable Share Purchase Price). The Exchangeable Share Purchase Price is payable only by the Company delivering or causing to be delivered to the relevant holder one share of the Company’s common stock for each Exchangeable Share purchased plus a cash amount equal to the amount of any accrued and unpaid dividends on such Exchangeable Share. The Company and Callco each have an overriding right, in the event that a holder of Exchangeable Shares exercises its Retraction Right, to redeem from such holder all, but not less than all, of the Exchangeable Shares tendered for redemption.
The
Exchangeable Shares are subject to redemption by the Company, Callco and Canco at the Exchangeable Share Purchase Price, on the “Redemption
Date,” which date shall be no earlier than the seventh anniversary of the date on which Exchangeable Shares are first issued, unless:
(a) less than
In the event of the liquidation, dissolution or winding-up of Canco, holders of Exchangeable Shares have the right to receive in respect of each Exchangeable Share held by such holder, an amount per share equal to the Exchangeable Share Purchase Price, which shall be satisfied in full by Canco by delivering to such holder one Company Share, plus an amount equal to the Dividend Amount. The Company and Callco each have an overriding right to purchase from all holders all but not less than all of the Exchangeable Shares upon the occurrence of such events.
18
In addition, the Company and Callco have the right to purchase all outstanding Exchangeable Shares at the Exchangeable Share Purchase Price if there is a change of law that permits holders of Exchangeable Shares to exchange their Exchangeable Shares for shares of common stock on a basis that will not require holders to recognize any gain or loss or any actual or deemed dividend for Canadian tax purposes.
The holders of Exchangeable Shares have an “automatic exchange right” in the event of any insolvency, liquidation, dissolution or winding-up or in general, related proceedings, of the Company for an amount per share equal to the Exchangeable Share Purchase Price.
It is expected that Callco will exercise its call rights, as that is more beneficial to the holders of the Exchangeable Shares. Once Callco acquires the Exchangeable Shares from a holder, it (Callco and the Company) is obligated to deliver the Company shares to the holder. Callco discharges this obligation by arranging for the Company to issue and deliver those shares to the holders on behalf of Callco. As consideration for satisfying the delivery obligation, Callco would issue its own shares to the Company.
There are no cash redemption features, as all redemption and exchange scenarios are payable in a share of the Company’s common stock. Neither Canco, Callco, or the Company assume any tax liabilities of a former Peraso Tech shareholder who acquired Exchangeable Shares under the plan of arrangement. The purchase price computed upon the exercise of rights pertaining to retraction, redemption, or liquidation, or otherwise giving rise to a purchase or cancellation of an Exchangeable Share, will, in all cases, consist of a 1:1 exchange involving the Company’s common stock, regardless of the market price of a share of the Company’s common stock.
In connection with the Arrangement, on December 15, 2021, the Company filed the Certificate of Designation of Series A Special Voting Preferred Stock (the Certificate) with the Secretary of State of the State of Delaware to designate Series A Special Voting Preferred Stock (the Special Voting Share) in accordance with the terms of the Arrangement Agreement in order to enable the holders of Exchangeable Shares to exercise their voting rights. The Special Voting Share was issued to a third-party administrative agent (the Agent) solely to facilitate the exercise of rights by holders of Exchangeable Shares. The rights of the Agent, as holder of the Special Voting Share, are limited to effecting the rights of the holders of the Exchangeable Shares; the Special Voting Share does not confer any independent rights to the Agent. Under the Certificate, when all of the Exchangeable shares have been converted into shares of the Company’s common stock, the Special Voting Share shall be automatically cancelled and shall not be reissued. Each Exchangeable Share is exchangeable for one share of common stock of the Company and while outstanding, the Special Voting Share enables holders of Exchangeable Shares to cast votes on matters for which holders of the common stock are entitled to vote, and by virtue of the share terms relating to the Exchangeable Shares, enable the Exchangeable Shares to receive dividends that are economically equivalent to any dividends declared with respect to the shares of common stock. As the Special Voting Share does not participate in dividends (only the Exchangeable Shares participate in dividends) and is not entitled to participate in the residual interest of the Company, it is not classified as an equity instrument in the Company’s financial statements.
The Exchangeable Shares, which can be converted into common stock at the option of the holder and have the same voting and dividend rights as common stock, are similar in substance to shares of common stock. Further, Canco and Callco are non-substantive entities, which are looked through with the Exchangeable Shares being, in substance, common stock of the Company. Therefore, the Exchangeable Shares have been included in the determination of outstanding common stock. The Special Voting Share was issued to a third-party administrative agent (the Agent) solely to facilitate the exercise of rights by holders of Exchangeable Shares, The rights of the Agent, as holder of the Special Voting Share, are limited to effecting the rights of the holders of the Exchangeable Shares; the Special Voting Share does not confer any independent rights to the Agent. Under the Certificate, when all of the Exchangeable shares have been converted into shares of the Company’s common stock, the Special Voting Share shall be automatically cancelled and shall not be reissued.
Warrants
As of March 31, 2023, the Company had the following equity-classified warrants outstanding (share amounts in thousands):
Warrant Type | Number
of Shares | Exercise Price | Expiration | |||||||||
Common stock | $ | |||||||||||
Common stock | $ |
19
As of December 31, 2022, the Company had the following equity-classified warrants outstanding (share amounts in thousands):
Warrant Type | Number
of Shares | Exercise Price | Expiration | |||||||||
Common stock | $ | | ||||||||||
Common stock | $ | | ||||||||||
Common stock | $ |
During the three
months ended March 31, 2023, approximately
Note 8. Related Party Transactions
A family member
of one of the Company’s executive officers served as a consultant to the Company during 2022. During the three months ended March
31, 2022, the Company incurred consulting expenses of approximately $
Note 9. License and Asset Sale Transaction
On August 5, 2022, the Company entered into a Technology License and Patent Assignment Agreement (the Intel Agreement) with Intel Corporation (Intel), pursuant to which Intel: (i) licensed from the Company, on an exclusive basis, certain software and technology assets related to the Company’s Stellar packet classification intellectual property, including its graph memory engine technology, and any roadmap variant, in the form existing as of the date of the Agreement (the Licensed Technology); (ii) acquired from the Company certain patent applications and patents owned by the Company; and (iii) assumed a professional services agreement, dated March 24, 2020, between Fabulous Inventions AB (Fabulous) and the Company (the Fabulous Agreement), pursuant to which, among other things, the Company licensed from Fabulous certain technology incorporated into the Licensed Technology.
As consideration
for the Company to enter into the Agreement, Intel agreed to pay the Company $
The Company determined
that the license and asset sale did not qualify as a sale of a business, but as a sale of a non-financial asset, with the resultant gain
recorded as income from operations in accordance with ASC 610-20, Other Income - Gains and Losses from the Derecognition of Nonfinancial
Assets. During the year ended December 31, 2022, the Company recognized a $
Note 10. Subsequent Events
Warrant Exercise
In April 2023,
a warrant holder exercised its warrant and purchased
Memory IC Product End-of-Life
Taiwan Semiconductor Manufacturing Corporation, or TSMC, is the sole foundry that manufactures the wafers used to produce the Company’s memory IC products. TSMC has informed the Company that TSMC would be discontinuing the foundry process used to produce wafers, in turn, necessary to manufacture the Company’s memory ICs. As a result, effective May 1, 2023, the Company began informing its memory IC customers that the Company would be initiating an end-of-life, or EOL, of its memory IC products. The Company has notified its customers to provide purchase orders during 2023 that the Company expects to fulfill during 2024. However, the timing of EOL shipments will be dependent on deliveries from the Company’s suppliers, as well as the delivery schedules requested by customers.
20
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, the effects of the Russia/Ukraine conflict, and inflation, which could cause customers to delay or reduce purchases of our products or delay payments to us, which would adversely affect our financial results, including cash flows, and other aspects of our business identified in our most recent annual report on Form 10-K filed with the Securities and Exchange Commission on March 29, 2023 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, 2022 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 2000 in Delaware. On September 14, 2021, we and our subsidiaries, 2864552 Ontario Inc. and 2864555 Ontario Inc., entered into an Arrangement Agreement (the Arrangement Agreement) with Peraso Technologies Inc. (Peraso Tech), a corporation existing under the laws of the province of Ontario, to acquire all of the issued and outstanding common shares of Peraso Tech (the Peraso Shares), including those Peraso Shares to be issued in connection with the conversion or exchange of secured convertible debentures and common share purchase warrants of Peraso Tech, as applicable, by way of a statutory plan of arrangement (the Arrangement) under the Business Corporations Act (Ontario). On December 17, 2021, following the satisfaction of the closing conditions set forth in the Arrangement Agreement, the Arrangement was completed and we changed our name to “Peraso Inc.” and began trading on the Nasdaq Stock Market (the Nasdaq) under the symbol “PRSO.”
Our strategy and primary business objective is to be a profitable, IP-rich fabless semiconductor company offering integrated circuits, or ICs, antenna modules and related non-recurring engineering services. We specialize in the development of mmWave semiconductors, primarily in the unlicensed 60 GHz spectrum band for 802.11ad/ay compliant devices and in the 28/39 GHz spectrum bands for 5G-compliant devices. We derive our revenue from selling semiconductor devices, as well as antenna modules based on using those mmWave semiconductor devices. We have pioneered a high-volume mmWave 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. The primary advantage provided by an antenna 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. This memory product line comprises our Bandwidth Engine and Quad Partition Rate 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.
We incurred net losses of approximately $3.1 million for the three months ended March 31, 2023 and $32.4 million for the year ended December 31, 2022, and we had an accumulated deficit of approximately $152.7 million as of March 31, 2023. These and prior year losses have resulted in significant negative cash flows and historically have required us to raise substantial amounts of additional capital. As discussed below, this raises significant doubt about our ability to continue as a going concern. We will need to increase revenues substantially beyond levels that we have attained in the past in order to generate sustainable operating profit and sufficient cash flows to continue doing business without raising additional capital from time to time.
21
Memory IC Product End-of-Life
Taiwan Semiconductor Manufacturing Corporation, or TSMC, is the sole foundry that manufactures the wafers used to produce our memory IC products. TSMC recently informed us that it would be discontinuing the foundry process used to produce wafers, in turn, necessary to manufacture our memory ICs. As a result, we have informed our memory IC customers that we are initiating an end-of-life, or EOL, of our memory IC products. We have notified our customers to provide purchase orders during 2023 that we expect to fulfill during 2024. We are requiring customers to pay a deposit upon purchase order placement to reserve supply and provide funding for our required inventory purchases. Under our EOL plan, we intend to complete all shipments of our memory products during 2024, and, as a result, we do not anticipate any shipments of our memory products after December 31, 2024. However, the timing of EOL shipments will be dependent on deliveries from our suppliers, as well as the delivery schedules requested by our customers.
COVID-19 and Russian Invasion of Ukraine
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. Since March 2020, from time to time, 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.
The continued spread of COVID-19 has also led to disruption and volatility in the global capital markets. The Russian invasion of Ukraine in February 2022 has led to further economic disruptions. Mounting inflationary cost pressures and recessionary fears have negatively impacted the global economy. Since mid-2022, the U.S. Federal Reserve has addressed elevated inflation by increasing interest rates, as inflation remains elevated. Given current market conditions, 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.
Revenue Recognition
We recognize revenue in accordance with FASB ASC Topic 606, Revenue from Contracts with Customers, and its amendments (ASC 606). As described below, the analysis of contracts under ASC 606 supports the recognition of revenue at a point in time, resulting in revenue recognition timing that is materially consistent with our historical practice of recognizing product revenue when title and risk of loss pass to the customer.
We generate revenue primarily from sales of integrated circuits and antenna module products, performance of engineering services and licensing of its 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.
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.
22
Royalty and other
Our licensing contracts typically provide for royalties based on the licensee’s use of our memory technology in the licensee’s commercial products. We estimate 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 our technology. We recognize license fees as revenue at the point of time when the control of the license has been transferred and we have 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.
Deferred cost of net revenue
During the three months ended September 30, 2022, the Company had $1.1 million of product shipments for which the revenue recognition criteria under ASC 606 had not been met. Accordingly, the Company deferred the cost of net revenue associated with these shipments, and the amount deferred was presented as deferred cost of net revenue in the condensed consolidated balance sheets. During the three months ended March 31, 2023, the Company recognized the associated revenue and cost of net revenue.
Contract liabilities - deferred revenue
Our contract liabilities generally consist of advance customer payments and deferred revenue. We classify advance customer payments and deferred revenue as current or non-current based on the timing of when we expect to recognize revenue. As of March 31, 2023, contract liabilities were in a current position and included in deferred revenue.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). The preparation of these condensed consolidated financial statements requires us to make certain estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis we make these estimates based on our historical experience and on assumptions that we consider reasonable under the circumstances. Actual results may differ from these estimates and reported results could differ under different assumptions or conditions. Our significant accounting policies and estimates are disclosed in Note 1 of the “Notes to Consolidated Financial Statements” in our annual report on Form 10-K for the year ended December 31, 2022. As of March 31, 2023, there have been no material changes to our significant accounting policies and estimates.
Results of Operations
Net Revenue
March 31, | Change | |||||||||||||||
2023 | 2022 | 2022 to 2023 | ||||||||||||||
(dollar amounts in thousands) | ||||||||||||||||
Product -three months ended | $ | 4,888 | $ | 3,204 | $ | 1,684 | 53 | % | ||||||||
Percentage of total net revenue | 97 | % | 94 | % |
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The following table details revenue by product category for the three months ended March 31, 2023 and 2022:
(amounts in thousands) | Three Months Ended March 31, | |||||||||||
Product category | 2023 | 2022 | change | |||||||||
Memory ICs | $ | 2,181 | $ | 1,908 | 273 | |||||||
mmWave ICs | 1,479 | 488 | 991 | |||||||||
mmWave antenna modules | 1,224 | 808 | 416 | |||||||||
mmWave other products | 4 | - | 4 | |||||||||
$ | 4,888 | $ | 3,204 | $ | 1,684 |
Product revenue increased for the three months ended March 31, 2023 compared with the same period of 2022 primarily due to recognition of revenue of approximately $1.1 million for shipments during the three months ended September 30, 2022 upon payment by the customer and satisfaction of the revenue recognition criteria. We initiated price increases on certain of our antenna module products in 2022, however, through March 31, 2023, we had not realized any material increase in revenue as a result of those price increases. The increase in memory IC sales was mainly due to larger shipments to one customer. In late 2022, we implemented modest price increases on our memory products, and, during the three months ended March 31, 2023, contributed $0.1 million to the revenue increase.
We expect sales of our mmWave products to increase from a volume and revenue perspective over the remainder of 2023, as compared with 2022, as our primary sales focus is on obtaining new mmWave customers. We expect sales of our memory products to decrease from a volume and revenue perspective during the remainder of 2023, as compared with 2022, based on current customer forecasts. Given the planned EOL discussed above, we do not expect revenue from these products beyond 2024.
March 31, | Change | |||||||||||||||
2023 | 2022 | 2022 to 2023 | ||||||||||||||
(dollar amounts in thousands) | ||||||||||||||||
Royalty and other -three months ended | $ | 145 | $ | 199 | $ | (54 | ) | (27 | )% | |||||||
Percentage of total net revenue | 3 | % | 6 | % |
Royalty and other includes royalty, non-recurring engineering, services and licenses revenues. The decrease in royalty and other revenue for the three months ended March 31, 2023 compared with the same period of 2022 was primarily due to a decrease in non-recurring engineering services revenue related to our mmWave technology, partially offset by royalty revenues from licensees of our memory technology.
Cost of Net Revenue and Gross Profit
March 31, | Change | |||||||||||||||
2023 | 2022 | 2022 to 2023 | ||||||||||||||
(dollar amounts in thousands) | ||||||||||||||||
Cost of net revenue -three months ended | $ | 3,106 | $ | 1,948 | $ | 1,158 | 59 | % | ||||||||
Percentage of total net revenue | 62 | % | 57 | % |
Cost of net revenue is primarily comprised of direct and indirect costs related to the sale of our products, including amortization of intangible assets and depreciation of production-related fixed assets.
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Cost of net revenue increased for the three months ended March 31, 2023 when compared with the same period in 2022, primarily due to increased shipment volumes of our memory and mmWave products.
March 31, | Change | |||||||||||||||
2023 | 2022 | 2022 to 2023 | ||||||||||||||
(dollar amounts in thousands) | ||||||||||||||||
Gross profit -three months ended | $ | 1,927 | $ | 1,455 | $ | 472 | 32 | % | ||||||||
Percentage of total net revenue | 38 | % | 43 | % |
Gross profit increased for the three months ended March 31, 2023 compared with the same period of 2022 due to the increased product shipments. The decrease in our gross profit margin percentage for the three months ended March 31, 2023 compared with the prior year period was primarily attributable to the increased volume shipments of our mmWave products, which carry lower gross margins than our memory products.
Research and Development
March 31, | Change | |||||||||||||||
2023 | 2022 | 2022 to 2023 | ||||||||||||||
(dollar amounts in thousands) | ||||||||||||||||
R&D -three months ended | $ | 3,887 | $ | 5,486 | $ | (1,599 | ) | (29 | )% | |||||||
Percentage of total net revenue | 77 | % | 161 | % |
Our R&D expenses include costs related to the development of our products. We expense R&D costs as they are incurred.
The decrease for the three months ended March 31, 2023 compared with the same period of 2022 was primarily due to reduced salary and consulting costs. During the quarter ended December 31, 2022, we began implementing cost reductions including a reduction of employees and full-time-equivalent consulting positions, as well as targeted reductions in certain longer-term research and development projects. In August 2022, we entered into a Technology License and Patent Assignment Agreement, or the Agreement, with Intel Corporation, or Intel, and as a result we transferred certain employees and consultants to Intel. As a result of the Agreement and other cost reductions, our memory-related R&D expenses declined by approximately $1.0 million. In addition, during the three months ended March 31, 2022, we incurred a tape-out expense of $0.7 million for one of our mmWave ICs.
We expect that total R&D expenses will decrease in 2023 compared with 2022, as we began implementing cost reductions during the three months ended December 31, 2022. The reductions in R&D expense in 2023 will primarily result from our cost reduction initiatives.
Selling, General and Administrative
March 31, | Change | |||||||||||||||
2023 | 2022 | 2022 to 2023 | ||||||||||||||
(dollar amounts in thousands) | ||||||||||||||||
SG&A -three months ended | $ | 2,242 | $ | 2,705 | $ | (463 | ) | (17 | )% | |||||||
Percentage of total net revenue | 45 | % | 79 | % |
SG&A expenses consist primarily of personnel and related overhead costs for sales, marketing, finance, human resources and general management and amortization of intangible assets.
The decrease for the three months ended March 31, 2023 compared with the same period of 2022 was primarily related to cost reductions, which we initiated during the three months ended December 31, 2022. We expect that total SG&A expense will decrease for the remainder of 2023 compared with 2022 due to our cost reductions. The reductions in SG&A expense in 2023 will primarily result from lower headcount, including a reduction of employees and reductions of other discretionary operating expenses.
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Liquidity and Capital Resources; Changes in Financial Condition
Cash Flows
As of March 31, 2023, we had cash, cash equivalents and investments of $1.4 million and working capital of $6.3 million.
Net cash used in operating activities was $1.4 million for the first three months of 2023, which primarily resulted from our net loss of $3.1 million, as adjusted for a $0.7 million non-cash gain on the change in fair value of warrant liability and $0.2 million of other non-cash changes, and partially offset by non-cash charges of $0.8 million of depreciation and amortization, $1.3 million of stock based compensation, and $0.5 million in net changes in assets and liabilities. The changes in assets and liabilities primarily related to the timing of accounts receivable collections, purchases of inventory and other vendor payables and prepayments.
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 $1.1 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 $0.2 million other non-cash changes. The changes in assets and liabilities primarily related to the timing of accounts receivable collections, purchases of inventory and other vendor payables and prepayments.
Net cash provided by investing activities of $0.4 million for the three months ended March 31, 2023 represented $0.5 million in proceeds from maturities of short-term investments, partially offset by $0.1 million of purchases of property and equipment.
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 of purchases of short and long-term investments and $0.1 million of purchases of property and equipment.
Net cash used in financing activities for the three months ended March 31, 2023 consisted of repayment of financing lease liabilities.
Net cash provided by financing activities for the three months ended March 31, 2022 consisted of taxes paid to net share settle equity awards.
Our future liquidity and capital requirements are expected to vary from quarter-to-quarter, depending on numerous factors, including:
● | level of revenue; |
● | cost, timing and success of technology development efforts; |
● | inventory levels, as supply chain disruption has required us to maintain higher inventory levels and place purchase orders with our suppliers longer into the future, which exposes us to additional inventory risk; |
● | timing of product shipments, which may be impacted by supply chain disruptions; |
● | length of billing and collection cycles, which may be impacted in the event of a global recession or economic downturn; |
● | fabrication costs, including mask costs, of our ICs, currently under development; |
● | variations in manufacturing yields, material lead time and costs and other manufacturing risks; |
● | costs of acquiring other businesses and integrating the acquired operations; and |
● | profitability of our business. |
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During the three months ended March 31, 2023, we collected approximately $2.0 million of amounts past due from a large customer of our mmWave products. The amounts collected included approximately $0.9 million of accounts receivable outstanding at September 30, 2022, for which we had established a $0.2 million allowance for doubtful accounts, and $1.1 million for shipments in September 2022 for which we had deferred revenue recognition.
Going Concern - Working Capital
We incurred net losses of approximately $3.1 million for the three months ended March 31, 2023 and $32.4 million for the year ended December 31, 2022, and we had an accumulated deficit of approximately $152.7 million as of March 31, 2023. These and prior year losses have resulted in significant negative cash flows and have required us to raise substantial amounts of additional capital. To date, we have primarily financed our operations through offerings of equity and equity-linked securities, issuance of convertible notes and loans.
We expect to continue to incur operating losses for the foreseeable future as we continue to secure new customers for and continue to invest in the development of our products, and we expect our cash expenditures to continue to exceed receipts for the foreseeable future, as our revenues will not be sufficient to offset our operating expenses.
We will need to increase revenues beyond the levels that we have attained in the past in order to generate sustainable operating profit and sufficient cash flows to continue doing business without raising additional capital from time to time. As a result of our expected operating losses and cash burn and recurring losses from operations, if we are unable to raise sufficient capital through additional equity or debt arrangements, there will be uncertainty regarding our ability to maintain liquidity sufficient to operate our business effectively, which raises substantial doubt as to our ability to continue as a going concern within one year from the date of issuance of these condensed consolidated financial statements. The condensed consolidated financial statements presented in Part I, Item 1 of this Report have been prepared assuming that we will continue as a going concern, and do not include any adjustments that might result from the outcome of this uncertainty. There can be no assurance that such additional capital, whether in the form of equity or debt financing, will be sufficient or available and, if available, that such capital will be offered on terms and conditions acceptable to us. We are currently seeking additional financing in order to meet our cash requirements for the foreseeable future. If the Company is unsuccessful in these efforts, it will need to implement additional cost reduction strategies, which could further affect its near- and long-term business plan. These efforts may include, but are not limited to, reducing headcount and curtailing business activities. In August 2022, we entered into an exclusive technology license and patent assignment agreement with Intel Corporation, under which we collected $3.1 million in August 2022 and $0.4 million in January 2023. We expect this transaction to result in a reduction of operating expenses of approximately $2.7 million on annual basis. In November 2022, we completed a registered direct offering of common stock and warrants for net proceeds to us of approximately $2.1 million. Further, in February 2023, we announced that we had implemented cost-reduction initiatives to reduce operating expenses by approximately $5 million on an annualized basis.
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; |
● | continue to expand our product development and sales and marketing organizations; |
● | acquire complementary technologies, products or businesses; |
● | expand operations, in the United States or internationally; |
● | hire, train and retain employees; or |
● | respond to competitive pressures or unanticipated working capital requirements. |
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.
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.
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Indemnifications
In the ordinary course of business, we enter into contractual arrangements under which we may agree to indemnify the counter-party from losses relating to a breach of representations and warranties, a failure to perform certain covenants, or claims and losses arising from certain external events as outlined within the contract, which may include, for example, losses arising from litigation or claims relating to past performance. Such indemnification clauses may not be subject to maximum loss clauses. We have also entered into indemnification agreements with our officers and directors. No material amounts related to these indemnifications are reflected in our condensed financial statements for the three months ended March 31, 2023.
Recent Accounting Pronouncements
See Note 1 to the condensed consolidated financial statements for a discussion of recently-issued accounting pronouncements.
ITEM 4. Controls and Procedures
Disclosure Controls and Procedures. Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Based on this evaluation, our management concluded that, as of March 31, 2023, our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting. During the three months ended March 31, 2023, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II—OTHER INFORMATION
ITEM 1. Legal Proceedings
The discussion of legal matters in Note 6 of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this report under the heading “Legal Matters” is incorporated by reference in response to this Part II, Item 1.
ITEM 1A. Risk Factors
We face many significant risks in our business, some of which are unknown to us and not presently foreseen. These risks could have a material adverse impact on our business, financial condition and results of operations in the future. Other than as set forth below, there have been no material changes with respect to the risk factors disclosed under Item 1A of our annual report on Form 10-K for the year ended December 31, 2022, which we filed with the SEC on March 29, 2022.
We intend to discontinue the production of our memory products
Taiwan Semiconductor Manufacturing Corporation, or TSMC, is the sole foundry that manufactures the wafers used to produce our memory IC products. TSMC has informed us that it will be discontinuing the foundry process used to produce the wafers necessary to produce our memory ICs. We are not in a position to transition wafer production to a new foundry and continue to manufacture these products. As a result, we have informed our customers that we are initiating an end-of-life, or EOL, of our memory IC products. We expect to fulfill product EOL orders during 2024, and we do not expect to ship any memory products after December 31, 2024. Our memory IC products represented over 50% of our revenues for the year ended December 31, 2022 and over 40% of our revenues for the three months ended March 31, 2023. The discontinuation of the production and sale of our memory IC products will negatively impact our future revenues, results of operations and cash flows.
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ITEM 6. Exhibits
(a) Exhibits
31.1* | Rule 13a-14 certification |
31.2* | Rule 13a-14 certification |
32.1** | Section 1350 certifications |
101* | The following financial information from Peraso Inc.’s quarterly report on Form 10-Q for the period ended March 31, 2023, filed with the SEC on May 15, 2023, formatted in Inline Extensible Business Reporting Language (Inline XBRL): (i) the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three months ended March 31, 2023 and 2022, (ii) the Condensed Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022, (iii) the Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2023 and 2022, (iv) the Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2023 and 2022, and (v) Notes to Condensed Consolidated Financial Statements. |
104* | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
* | Filed herewith. |
** | Furnished herewith. |
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: May 15, 2023 | PERASO INC. | |
By: | /s/ Ronald Glibbery | |
Ronald Glibbery | ||
Chief Executive Officer (Principal Executive Officer) | ||
By: | /s/ James Sullivan | |
James Sullivan | ||
Chief Financial Officer | ||
(Principal Financial and Accounting Officer) |
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