If an emerging growth company, indicate by check
mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act. ☐
If securities are registered pursuant to Section 12(b)
of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of
an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error
corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s
executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐
No ☒
The aggregate market value of the voting and
non-voting common equity held by non-affiliates of the Registrant, based on the closing price of the shares of common stock on the Nasdaq
Stock Market on June 30, 2022 was $22,138,865.
The number of outstanding shares of the Registrant’s
exchangeable shares, no par value, was 9,106,876 as of March 23, 2023.
The number of shares of the Registrant’s
common stock outstanding, par value $0.001 per share, as of March 23, 2023, was 14,269,590.
Special Note Regarding Forward-Looking Statements and Other Information
Contained in this Report
Unless expressly indicated or the context requires
otherwise, the terms “Peraso,” the “Company,” “we,” “us” or “our” in this
Report refer to Peraso Inc., a Delaware corporation, and, where appropriate, its subsidiaries.
Part I
Item 1. Business
Overview
Peraso Inc., together with its subsidiaries (“Peraso,”
the “Company,” “we,” “our” or “us”), is a fabless semiconductor company focused on
the development and sale of: i) semiconductor devices and millimeter wavelength wireless
technology, or mmWave antenna modules based on its proprietary semiconductor devices and ii) performance of non-recurring engineering,
or NRE, services and licensing of intellectual property, or IP. Our primary focus is the development of mmWave, which is generally
described as the frequency band from 24 Gigahertz, or GHz, to 300GHz. Our mmWave products enable a range of applications,
including i) multi-gigabit point-to-point, or PtP, wireless links with a range of up to 25 kilometers and operating in the 60Ghz frequency
band, ii) multi-gigabit point-to-multi-point, or PtMP, links in the 60GHz frequency band used to provide fixed wireless access, or FWA,
services, iii) FWA in the 5G operating bands from 24GHz to 43GHz to provide multi-gigabit capability and low latency connections, and
iv) consumer applications, such as wireless video streaming and untethered augmented reality and virtual reality, or AR/VR. We
also have a line of memory-denominated integrated circuits, or ICs, for high-speed cloud networking, communications, security appliance,
video, monitor and test, data center and computing markets that deliver time-to-market, performance, power, area and economic benefits
for system original equipment manufacturers, or OEMs.
Business Combination
We were formerly
known as MoSys, Inc., or MoSys. On September 14, 2021, we and our subsidiaries, 2864552 Ontario Inc. and 2864555 Ontario Inc., entered
into an Arrangement Agreement, or the Arrangement Agreement, with Peraso Technologies Inc., or Peraso Tech, a privately-held corporation
existing under the laws of the province of Ontario, to acquire all of the issued and outstanding common shares of Peraso Tech, or 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, or 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 from MoSys to “Peraso Inc.” and began trading on The Nasdaq Stock Market, or the Nasdaq, under the symbol “PRSO.”
Certain previous shareholders of Peraso Tech elected to convert their Peraso Tech common stock into exchangeable shares in 2864555 Ontario
Inc., one of our wholly-owned subsidiaries. These exchangeable shares, which can be converted into our common stock at the option of the
holder, are similar in substance to our common stock.
Industry Trends and Market Opportunities
mmWave
The demand for wireless services is increasing
exponentially, and, as a result, the current low frequency spectrum (under 7GHz) is running out of capacity. While service providers have
maximized the capacity of the available spectrum, demand continues to outpace supply. We believe that mmWave spectrum will need to be
utilized.
MmWave has been standardized for use in both licensed
and unlicensed applications. In the licensed market, the 3rd Generation Partnership Project, or 3GPP, standards organizations have included
mmWave frequencies in the 5G specification, utilizing the frequency band from 24GHz to 43GHz. The Institute of Electrical and Electronics
Engineers, or IEEE, has standardized mmWave in the unlicensed band from 57GHz to 71GHz. We believe mmWave will soon be licensed on the
45GHz band in China.
A primary opportunity for the unlicensed product
line is the FWA market. This market is primarily driven by wireless Internet service providers, or WISPs, in contrast to the licensed
market, which is primarily serviced by large telecommunications carriers such as AT&T, Verizon and T-Mobile. Pursuant to the 2022
Fixed Wireless Access and Infrastructure and Devices report issued in September 2022 by
Mobile Experts Inc., the WISP market has been estimated to be 3.2M subscribers in 2023. The market is primarily served today
by traditional WiFi technology using the 2.4GHz and 5GHz bands. From an equipment perspective, this worldwide market is historically serviced
by FWA original equipment manufacturers, or OEMs, such as Ubiquiti Inc., Cambium Networks, Ltd. and SIA MikroTik. WISPs are addressing
a segment of the broadband market not served by the traditional carriers, or, in some cases, underserved by the carriers.
This market
has been helped in recent years with the advent of government incentives aimed at closing the so-called ‘digital divide’ between
urban and rural broadband access. In the United States, such incentive programs include the Regional Digital Opportunity Fund, or RDOF,
the Broadband Equity, Access and Deployment, or BEAD, Program, and the Affordable Connectivity Program. However, in addition to rural
markets, WISPs have begun offering services in large urban markets in the United States, such as Las Vegas, Los Angeles and Phoenix. The
basic business premise is that the 60GHz spectrum is free, and WISPs can pass this cost savings on the customer and compete with more
traditional Internet access services, such as cable broadband or digital subscriber line, or DSL.
There are several other market opportunities
for 60GHz mmWave technology. Such market opportunities include transportation safety, factory automation, military, and railway communications.
Our 60GHz products can also be applied to consumer
applications, as our technology can provide key advantages to this market. For example, the data rates of our Versatus antenna module
product is 3Gbps, which is a good fit for high performance, 4K video for VR applications. Additionally, VR requires very low latency;
under 5ms. Another benefit of 60GHz in the VR market, and in the streaming video market, is low interference. A primary characteristic
of mmWave technology is the use of beamforming, which focuses the radio frequency, or RF, energy into a narrow beam. Not only does this
provide improved range, it also provides physical isolation from other transmitters, and leads to reduced interference versus traditional
wireless technology. Other high performance video applications include streaming, docking, surveillance, and AR.
Considering the licensed 5G market, there are
several primary applications for mmWave. Our initial target is the FWA segment. In this market segment, carriers provide their customers
with a fixed wireless link to a base station or small cell, thus providing the customer with high-speed access to the Internet. mmWave
can provide download speeds of over 1 Gbps and upload speeds of several hundred megabits per second. In addition, mmWave is a much cheaper
alternative to installing fiber and allows carriers an additional advantage and competitive advantage against other access technologies,
such as cable broadband. Additionally, our mmWave antenna modules can be utilized in consumer-premise applications, including hotspots,
laptops and tablets. 5G mmWave has support from major industry players. Apple has incorporated mmWave wireless into substantially all
versions of the iPhone for sale in the US market. The basic premise is the ever-increasing demand for bandwidth. Verizon is the leading
carrier in the US at deploying mmWave for both mobile and fixed wireless access. The initial use case for cellular service providers is
to provide their customer base (primarily smart-phone customers) with continuity of network access in highly congested environments, such
as sporting events, public beaches, music festivals or generally any large gathering where thousands of users are attempting to access
the network simultaneously. We believe that mmWave will gain universal acceptance, as users will demand full continuity in terms of network
access, and we are well positioned to address the mobile opportunity for mmWave, which is expected to present an order of magnitude increase
in the total available market.
mmWave is not without challenges, as mmWave signals
do not typically travel as far as traditional wireless signals and are more attenuated by solid objects. Mitigation strategies must be
deployed, particularly with regard to the management of signal propagation. Whereas traditional wireless devices utilize a broad, omni-antenna
pattern, mmWave systems rely on phased array technology, which focusses the radio signal into a narrow beam to improve propagation characteristics.
Peraso is a global leader in implementing these sophisticated radio systems and is one of the few companies in the market that is successfully
shipping phased array devices in mass production.
Memory
Our memory solutions deliver time-to-market,
performance, power, area and economic benefits for system original equipment manufacturers, or OEMs. Our primary product line is marketed
under the Accelerator Engine name and comprises our Bandwidth Engine and quad-partition rate SRAM memory ICs, 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. Further performance benefits can be achieved to offload statistical, search or
other custom functions using our optional integrated logic and processor elements.
As data rates and the amount of high-speed processing
increase, critical memory access bottlenecks occur. Our Accelerator Engine ICs dramatically increase memory accesses per second, removing
these bottlenecks. In addition, the serial interface and high-memory capacity reduce the board footprint, number of pins and complexity,
while using less power.
Our Products
Our primary focus is the development, marketing
and sale of our mmWave products. Currently, there are two industry standards that incorporate mmWave technology for wireless communications:
(i) IEEE 802.11ad/ay and (ii) 3GPP Release 15-17 (commonly referred to as 5G). We have developed and continue to develop products that
conform to these standards. To date, we have not sold any 5G products.
mmWave ICs
Our first mmWave product
line operates in the 60 GHz band and conforms to the IEEE 802.11ad standard. This product line includes a baseband IC, several variations
of mmWave radio frequency, or RF, ICs, as well as associated antenna technology. The second product line addresses the 5G mmWave
opportunity. Given our extensive experience in the development of mmWave technology, 5G mmWave, is a logical adjacent and larger
market.
Our initial target market was the 60GHz IEEE 802.11ad
market. Our 60GHz IEEE802.11ad products had two very important advantages over traditional 2.4GHz / 5GHz Wi-Fi products: very high
data rates (up to 4.5 Gigabits per second, or Gb/s) and low latency, i.e., less than 5 milliseconds, or ms. The first application that
had traction was outdoor broadband, including applications such as point-to-point, or PtP, backhaul links or FWA using point-to-multipoint,
or PtMP, links. As the spectrum is unlicensed (free), wireless carriers can provide services without having to spend significantly on
wireless spectrum licenses. These services are offered by WISPs. The WISP market has seen significant growth over the last six years.
In the United States, the number of subscribers that WISP providers serve has grown from 4 million in 2016 to 6.7 million in 2022 and
could grow to 12.7 million subscribers in 2025, based on The 2021 Fixed-Wireless and Hybrid ISP Industry Report prepared by the
Carmel Group.
We are a leading supplier
of semiconductors in the PtP and PtMP markets. We are currently shipping to leading equipment suppliers in this space, as well as directly
to service providers that are building their own equipment. We believe we bring certain advantages to the market. First, our products
support the spectrum from 66 GHz to 71GHz. These are often referred to as channels 5 and 6 in the 802.11ad/ay specifications. The key
advantage in supporting these channels is that the signals are able to propagate much further than channels 1 through 4; this
is a result of significantly lower oxygen absorption at frequencies above 66GHz. To date, our FWA customers have achieved links in the
range of 25 kilometers, which is substantially longer than any past 60 GHz links.
In the indoor area, the 802.11ad
technology is ideal for high-speed, low-latency video applications. In indoor applications, our products can support 3Gb/s links with
under 5ms of latency. Example applications include:
| ● | AR/VR links between the headset and
the video console; |
| ● | USB video cameras for corporate video conferencing; |
| ● | wireless security cameras; and |
| ● | smart factory safety and
surveillance. |
We are a leader in the production of
mmWave devices and 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 to address the operational challenge of delivering mmWave products into high-volume markets.
mmWave Antenna Modules
In the second half of 2021, we augmented
our business model to produce and sell complete mmWave antenna modules. The primary advantage provided by our antenna modules is that
our proprietary mmWave ICs and the antenna are integrated into a single device. A differentiating characteristic of mmWave technology is
that the RF amplifiers must be as close as possible to the antenna to minimize loss. By providing a module, we can
guarantee the performance of the amplifier/antenna interface and simplify our customer’s RF design engineering,
facilitating more opportunities for new companies that have not provided RF-type systems, as well as shortening the time to market
for new products. It is possible for third parties to provide competitive module products, but, because we utilize our mmWave ICs
and incorporate our proprietary mmWave antenna IP, we can provide a highly-competitive solution based on our internally-owned and developed
module components.
During 2022, we launched our PERSPECTUS family
of mmWave antenna modules to enable WISPs to offer high-capacity FWA networks in the unlicensed 60-GHz spectrum. The PERSPECTUS product
family includes a new generation of integrated 60-GHz mmWave antenna modules and enhanced software for PtMP FWA applications. Our PERSPECTUS
products allow rapid development of low-cost network equipment utilizing over 14 GHz of spectrum to provide multi-gigabit access services.
Leveraging our integrated phased-array antennas and operating in the upper channels of the band, link ranges from 1.5 kilometers up to
extended ranges of 30 kilometers can be achieved using a parabolic reflector.
Memory
Accelerator Engines
Our memory products comprise
our Accelerator Engine ICs, which include our Bandwidth Engine and quad-partition rate SRAM memory ICs.
Bandwidth Engine
The Bandwidth Engine is a
memory-dominated IC that was designed to be a high-performance companion IC to packet processors and is targeted for high-performance
applications where throughput is critical. While the Bandwidth Engine primarily functions as a memory device with a high-performance and
high-efficiency interface, it also can accelerate certain processing operations by serving as a co-processor element. Our Bandwidth Engine
ICs combine: (1) our proprietary high-density, high-speed, low latency embedded memory, (2) our high-speed serial interface
technology, or SerDes, (3) an open-standard interface protocol and (4) intelligent access technology. We believe an IC combining
our 1T-SRAM memory and serial interface with logic and other intelligence functions provides a system-level solution and significantly
improves overall system performance at lower cost, size and power consumption. Our Bandwidth Engine ICs can provide up to and over 6.5 billion
memory accesses per second externally and 12 billion memory accesses per second internally, which we believe is more than three times
the performance of current memory-based solutions. They also can enable system designers to significantly narrow the gap between processor
and memory IC performance. Our customers that design Bandwidth Engine ICs onto the line cards in their systems will re-architect their
systems at the line-card level and use our product to replace traditional memory IC solutions, such as dynamic random access, or DRAM,
and static random access memory, or SRAM, ICs. When compared with existing commercially available DRAM and SRAM IC solutions, our Bandwidth
Engine ICs may:
| ● | provide up to four times the
performance; |
| ● | reduce power consumption by
approximately 50%; |
| ● | reduce cost by greater than
50%; and |
| ● | result in a dramatic reduction
in IC pin counts on the line card. |
Our Bandwidth Engine 2 IC
products contain 576 megabits, or Mb, of memory and use a SerDes interface with up to 16 lanes operating at up to 12.5 Gbps per lane.
We have been shipping our Bandwidth Engine 2 IC products since 2013.
Our Bandwidth Engine 3 IC
products contain 1152 Mb of memory and use a SerDes interface with up to 16 lanes operating at up to 25 Gbps per lane. Our Bandwidth Engine
3 ICs target support for packet-processing applications with up to five billion memory single word accesses per second, as well as burst
mode to enable full duplex buffering up to 400 Gbps for ingress, egress and oversubscription applications. The devices provide benefits
of size, power, pin count, and cost savings to our customers.
QPR
Our quad partition rate, or
QPR, family of low cost, ultra-high speed SRAM memory devices are optimized for FPGA-based systems. Our QPR memory technology features
an architecture that allows for parallel accesses to multiple partitions of the memory simultaneously and allows access of up to 576 bits
per read or write cycle. The QPR device includes four independent partitions per input/output and each partition functions as a stand-alone
random-access SRAM. The high-performance interface, larger density and the multiple partitions work together to support multiple independent
functional blocks within an FPGA with one QPR device. Our MSQ220 and MSQ230 QPR devices are ideally suited for random-access applications.
Research and Development
Our ability to compete in the future depends
on successfully improving our technology to meet the increasing demand for higher performance and lower cost solutions. Development of
new IC products requires specialized chip design and product engineers, expensive computer-aided design software licenses, and significant
fabrication and testing costs, including mask costs.
We have over 14 years of technical know-how in the design and manufacturing
of mmWave technology. The most important aspect of this knowledge is knowing how mmWave circuits will perform in a real-world environment.
Traditionally, semiconductor design utilizes sophisticated computer-aided design software to simulate the performance of a device that
is manufactured at a specific semiconductor manufacturing plant. However, mmWave is extremely difficult to model precisely. Therefore,
the only path to understand how well a device will perform is to produce the device and test it in a real-world application. Over the
last decade, many companies have attempted to develop mmWave semiconductor devices, however, given that the devices had inconsistent or
weak performance, a number of the companies were unsuccessful and abandoned their design and product development efforts. As an example
of our leadership and expertise in the development of mmWave technology, we were an active participant in the development of the IEEE
802.11ay wireless specification and, to date, have been granted nine essential claims patents with respect to this standard.
At a system level, there are additional technical
challenges presented by mmWave technology that we have overcome and form a key part of our internal know-how. For example, a key technology
of mmWave is the concept of beamforming and beam steering using a phased array antenna. This technology is utilized to concentrate the
RF energy into a narrow beam to improve the range and coverage of mmWave devices. We have developed effective beamforming and beam steering
technology for phased array circuits and antennas. While there are many academic examples of successful phased array implementations,
there is a vast barrier between a “laboratory” version of phased array technology and a version that is deployed for commercial
use. One such aspect is the implementation of the beamforming procedure, which seeks to maximize throughput and do so while not impacting
latency. While the details of achieving this are complex, it is important-intellectual property that we have gained through real-world
experience.
With regard to our memory products, we do not
have internal resources to develop new, memory IC products, and do not intend to expend any development efforts or funds to develop new
memory products. That said, we believe our Accelerator Engine IC products will provide us with meaningful revenue and gross margin contributions
through at least the end of 2024. We intend to continue to devote substantially all of our research and development efforts toward further
expanding our mmWave technology portfolio and expanding our product offerings.
Sales and Marketing
In addition to our direct sales personnel, we
sell through sales representatives and distributors in the United States, Asia and Europe. Our distributors have a global presence with
offices and technical selling and applications engineering capabilities, which we believe will enable us to reach new potential customers
for our products.
We also have applications engineers who support
our customer engagements and engage with the customers’ system architects and designers to propose and implement our products and
solutions to address system design challenges and improve performance.
In the markets we serve, the time from a design
win to production volume shipments of our IC products can range from 12 to 36 months. Networking, wireless and wired communication and
security appliance systems can have a product life from a few years to over 10 years once a product like ours has been designed into the
system. Historically, our revenue has been highly concentrated, with a few customers accounting for a significant percentage of our total
revenue.
During the year ended December 31, 2022, four
customers accounted for 10% or more of our net revenues, including Nokia Corporation at 26%, WeLink Communications LLC, or WeLink, at
21%, CEAC International Limited, or CEAC, a distributer selling to Ubiquiti Inc., at 16%, and F5, Inc. at 11%. During the year ended December
31, 2021, three customers accounted for 10% or more of our net revenues, including CEAC at 48%, WeLink at 19% and Alltek Technology Corp.,
a distributer selling to Ubiquiti Inc., at 11%.
Intellectual Property
We regard our patents, copyrights, trademarks,
trade secrets and similar intellectual property as critical to our success and rely on a combination of patent, trademark, copyright,
and trade secret laws to protect our proprietary rights.
As of December 31, 2022, we held 95 United States
patents and 59 foreign patents on various aspects of our mmWave, antenna, memory and other technology, with expiration dates ranging from
2025 to 2041. We also held 15 pending patent applications in the United States and abroad. There can be no assurance that others will
not independently develop or patent similar or competing technology or design around any patents that may be issued to us, or that we
will be able to successfully enforce our patents against infringement by others.
We were also an active participant in the development
of the IEEE 802.11ay wireless specification and, to date, have been granted nine essential claims patents with respect to this standard.
Essential claims patents are of particular value as a specification cannot be implemented without obtaining a license to the patents from
us.
The semiconductor industry is characterized by
frequent litigation regarding patent and other intellectual property rights. Our IC customers, licensees or we might, from time to time,
receive notice of claims that we have infringed patents or other intellectual property rights owned by others. Our successful protection
of our patents and other intellectual property rights and our ability to make, use, import, offer to sell, and sell products free from
the intellectual property rights of others are subject to a number of factors, particularly those described in Part I, Item 1A, “Risk
Factors.”
Competition
mmWave
mmWave circuit and system design is a highly
specialized engineering skill, as mmWave is a challenging technology to ship in mass production. At frequencies above 24GHz, circuits
are extremely vulnerable to small variances in the semiconductor manufacturing process. Designing circuits that minimize susceptibility
to these variances takes years of development, and we believe we are one of the few companies in the world that is skilled in mmWave design.
Further, we have shipped mmWave devices in volume, and ensuring all devices sold adhere to strict performance standards is a core competency
we have developed. In addition, we have developed our own mmWave phased array antenna technology, which allows us to be highly competitive
in terms of overall system cost. Our customers do not need to engage with third-party antenna suppliers, thus eliminating the additional
cost for a third-party antenna.
Unlicensed IEEE 802.11ad/ay Market:
Our primary competitor in the IEEE802.11ad/ay
market is Qualcomm. The primary benefit that we provide to the market is the support of the higher frequency bands from 66GHz to 71GHz.
The advantage at these frequencies is that oxygen attenuation is significantly reduced, and signals can travel much further.
We also have key points of differentiation compared
to Qualcomm for wireless video devices. We are well positioned in this market, as we have USB 3.0 built into our devices, so our products
generally support USB architectures. A prime example is the replacement of the USB cable with a wireless version using our technology.
There are many applications where this can be of use, including USB web cams, wireless displays, and AR/VR headsets. We have invested
significant software resources into providing the market with wireless USB solutions, and we believe there is no other mmWave vendor in
the world that can offer multi-gigabit solutions as a replacement for wired USB.
Licensed 5G Market:
With 5G, our efforts are focused on the mmWave
RF front-end phased array component of the system. The 5G product instantiation is an RF module utilizing our proprietary intellectual
property. Key elements of our mmWave intellectual property include:
| ● | phased-array antenna; and |
| ● | in-system circuit calibration, beam forming, real-time system
monitoring. |
From a competitive perspective, we believe we
are currently the only pure-play, 5G vendor to offer a dual-band (28/39GHz) RF solution for the FWA market. Qualcomm does offer a 5G RF
solution for the FWA market, however its solution is based on aggregating its mobile RF solution, which requires several compromises in
terms of cost, performance, and power consumption. With an initial focus on fixed wireless access, we can derive advantages by optimizing
our silicon for that specific market. Furthermore, we have achieved traction in the unlicensed, 60GHz, FWA market, and we believe we will
be able to transfer all of our knowledge gained from the 60GHz market to the 5G market. However, this market opportunity is more competitive,
and potential competitors, in addition to Qualcomm, include MediaTek Inc. and Samsung Electronics Co., Ltd., or Samsung.
Memory
The markets for our memory products are highly
competitive. We believe that the principal competitive factors are:
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processing speed and performance; |
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density and cost; |
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power consumption; |
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reliability; |
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interface requirements; |
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ease with which technology can be customized for and incorporated into customers’ products; and |
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level of technical support provided. |
We believe that our products compete favorably
with respect to each of these criteria. Our proprietary 1T-SRAM embedded memory and high-speed serial interface IP can provide our Accelerator
Engine ICs with a competitive advantage over alternative devices. Our Accelerator Engine ICs compete with embedded memory solutions, stand-alone
memory ICs, including both DRAM and SRAM ICs, application-specific, or ASICs, designed by customers in-house to meet their system requirements,
and network processing units, or NPUs, that use significant internal memory and customer-designed software to implement tasks. Competitive
DRAM solutions primarily include RLDRAM from Micron Technology, Inc., or Micron, LLDRAM from Renesas, DDR from Samsung, Micron and
others, and high-bandwidth memory, or HBM, which is stacked DRAM memory from Samsung and SK Hynix. SRAM solutions can meet high-speed
performance requirements, but often lack adequate memory size. Competitive SRAM solutions primarily include QDR or similar SRAM products
from Infineon Technologies AG and GSI Technology, Inc. Most of the currently available SRAM and DRAM solutions use a parallel, rather
than a serial interface. To offset these drawbacks, system designers generally must use more discrete memory ICs, resulting in higher
power consumption and greater utilization of space. Our competitors include established semiconductor companies with significantly
longer operating histories, greater name recognition and reputation, large customer bases, dedicated manufacturing facilities and greater
financial, technical, sales and marketing resources. This may allow them to respond more quickly than us to new or emerging technologies
or changes in customer requirements. Generally, customers prefer suppliers with greater financial resources than we have currently. Many
of our competitors also have significant influence in the semiconductor industry. They may be able to introduce new technologies or devote
greater resources to the development, marketing and sales of their products than we can. Furthermore, in the event of a manufacturing
capacity shortage, these competitors may be able to manufacture products when we are unable to do so.
Manufacturing
We depend on third-party vendors to manufacture,
package, assemble and test our IC and module products, as we do not own or operate a semiconductor fabrication, packaging or production
testing facility. By outsourcing manufacturing, we can avoid the high cost associated with owning and operating our own facilities, allowing
us to focus our efforts on the design and marketing of our products.
We perform an ongoing review of our product manufacturing
and testing processes. Our IC products are subjected to extensive testing to assess whether their performance meets design specifications.
Our test vendors provide us with immediate test data and the ability to generate characterization reports that are made available to our
customers.
Employees
As of December 31, 2022, we had 73 employees, including 17 located
in the United States and 56 located in Canada. Our headcount consisted of 54 in research and development and manufacturing operations
and 19 in sales, marketing and general and administrative functions. In February 2023, we implemented a reduction in our workforce and
eliminated five positions. We believe our current headcount is adequate to conduct our business.
Available Information
We were founded in 1991 and reincorporated in
Delaware in 2000. Our website address is www.perasoinc.com. The information in our website is not incorporated by reference into this
report. Through a link on the Investor section of our website, we make available our annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act, as soon as reasonably practicable after they are filed with, or furnished to, the Securities and Exchange Commission, or
SEC. You can also read any materials submitted electronically by us to the SEC on its website (www.sec.gov), which contains reports, proxy
and information statements, and other information regarding issuers that file electronically with the SEC, including us.
Item 1A. Risk Factors
The following risks could materially and adversely
affect our business, financial condition, cash flows, and results of operations, and the trading price of our common stock could decline.
These risk factors do not identify all of the risks that we face. Our operations could also be affected by factors that are not presently
known to us or that we currently consider to be immaterial to our operations. Due to risks and uncertainties, known and unknown, our past
financial results may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results
or trends in future periods. Refer also to the other information set forth in this Annual Report on Form 10-K, including in Part II, Item
7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as our Consolidated
Financial Statements and the related notes in Part II, Item 15.
We might not be able to continue as a going concern.
Our consolidated financial
statements as of December 31, 2022 have been prepared under the assumption that we will continue as a going concern for the next twelve
months. As of December 31, 2022, we had cash, cash equivalents and investments of $2.9 million and an accumulated deficit of $149.6 million.
We do not believe that our cash, cash equivalents and investments are sufficient to fund our operations for the next 12 months. 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. As a result of our
expected operating losses and cash burn for the foreseeable future and recurring losses from operations, if we are unable to raise sufficient
capital through additional debt or equity 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. If we cannot continue
as a viable entity, our stockholders would likely lose most or all of their investment in us.
If we are unable to generate sustainable operating
profit and sufficient cash flows, then our future success will depend on our ability to raise capital. We are seeking additional financing
and evaluating financing alternatives in order to meet our cash requirements for the next 12 months. We cannot be certain that raising
additional capital, whether through selling additional debt or equity securities or obtaining a line of credit or other loan, will be
available to us or, if available, will be on terms acceptable to us. If we issue additional securities to raise funds, these securities
may have rights, preferences, or privileges senior to those of our common stock, and our current stockholders may experience dilution.
If we are unable to obtain funds when needed or on acceptable terms, we may be required to curtail our current product development programs,
cut operating costs, forego future development and other opportunities or even terminate our operations.
We have a history of losses, and we will need to raise additional
capital.
We recorded net losses of approximately $32.4
million and $10.9 million for the years ended December 31, 2022 and December 31, 2021, and we ended the period with an accumulated deficit
of approximately $149.6 million. These and prior-year losses have resulted in significant negative cash flows. To remain competitive and
expand our product offerings to customers, 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. Given our history of fluctuating revenues and operating losses, and the challenges we face in securing customers
for our products, we cannot be certain that we will be able to achieve and maintain profitability on either a quarterly or annual basis
in the future. As a result, we may need to raise additional capital in the future, which may or may not be available to us at all or only
on unfavorable terms.
Our failure to generate the significant capital necessary or
raise additional capital to expand our operations and invest in new products could reduce our ability to compete and could harm our business.
We intend to continue spending to grow our business.
If we do not achieve and maintain profitability, we will need additional financing to pursue our business strategy, develop new products,
respond to competition and market opportunities and acquire complementary businesses or technologies. 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 us.
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 successfully market our products could seriously
harm our ability to execute our business strategy and may force us to curtail our research and development plans or existing operations.
Our success depends upon the acceptance by our
target markets of our products and technologies by original equipment manufacturers or OEMs and service providers. Our prospective customers
may be unwilling to adopt and design-in our products due to the uncertainties and risks surrounding designing a new IC or module and/or
incorporating new IP into their systems and relying on a small, sole-sourced supplier. Thus, currently, we do not know whether we will
be able to generate adequate profit from making and selling our products and licensing our technologies.
An important part of our strategy to gain market
acceptance is to penetrate new markets by targeting market leaders to accept our technology solutions. This strategy is designed to encourage
other participants in those markets to follow these leaders in adopting our solutions. If a high-profile industry participant adopts our
products for one or more of its products but fails to achieve success with those products, or is unable to successfully implement our
products, other industry participants’ perception of our solutions could be harmed. Any such event could reduce the amount of future
sales of our products.
Future revenue growth depends on our winning designs with existing
and new customers, retaining current customers, and having those customers design our solutions into their product offerings and successfully
selling and marketing such products. If we do not continue to win designs in the short term, our product revenue in the following years
will not grow.
We sell our ICs to customers that include our
ICs and modules in their products. Our technology is generally incorporated into products at the design stage, which we refer to as a
design win, and which we define as the point at which a customer has made a commitment to build a board against a fixed schematic for
its system, and this board will utilize our products. As a result, our future revenue depends on our OEM customers designing our products
into their products, and on those products being produced in volume and successfully commercialized. If we fail to retain our current
customers or convince our current or prospective customers to include our products in their products and fail to achieve a consistent
number of design wins, our results of operations and business will be harmed. In addition, if a current or prospective customer designs
a competitor’s offering into its product, it becomes significantly more difficult for us to sell our products to that customer because
changing suppliers involves significant cost, time, effort and risk for the OEM. Even if a customer designs one of our ICs or modules
into its product, we cannot be assured that the OEM’s product will be commercially successful over time, or at all, or that we will
receive or continue to receive any revenue from that customer. Furthermore, the customer product for which we obtain a design win may
be canceled before the product enters production or before or after it is introduced into the market. Because of our extended sales cycle,
our revenue in future years is highly dependent on design wins we are awarded today. Our lack of capital and uncertainty about our future
technology roadmap also may limit our success in achieving additional design wins, as discussed under “We may experience difficulties
in transitioning to new wafer fabrication process technologies or in achieving higher levels of design integration, which may result in
reduced manufacturing yields, delays in product deliveries and increased costs.”
The design win process for our products is generally lengthy,
expensive and competitive, with no guarantee of revenue, and, if we fail to generate sufficient revenue to offset our expenses, our business
and operating results would suffer.
Achieving a design win for one of our products
is typically a lengthy, expensive and competitive process because our customers generally take a considerable amount of time to evaluate
our products. In the markets we serve, the time from initial customer engagement to design win to production volume shipments can range
from one to three years, though it may take longer for new customers or markets we intend to address. In order to win designs, we are
required to both incur design and development costs and dedicate substantial engineering resources in pursuit of a single customer opportunity.
Even though we incur these costs we may not prevail in the competitive selection process, and, even if we do achieve a design win, we
may never generate sufficient, or any, revenue to offset our development expenditures. Our customers have the option to decide whether
or not to put our solutions into production after initially designing our products in the specification. The customer can make changes
to its product after a design win has been awarded to us, which can have the effect of canceling a previous design win. The delays inherent
in our protracted sales cycle increase the risk that a customer will decide to cancel, curtail, reduce or delay its product plans, causing
us to lose anticipated revenue. In addition, any change, delay or cancellation of a customer’s plans could harm our financial results,
as we may have incurred significant expense while generating no revenue.
If our foundries do not achieve satisfactory yields or quality,
our cost of net revenue will increase, our operating margins will decline and our reputation and customer relationships could be harmed.
We depend not only on sufficient foundry manufacturing
capacity and wafer prices, but also on good production yields (the number of good die per wafer) and timely wafer delivery to meet customer
demand and maintain profit margins. The fabrication of our products is a complex and technically demanding process. Minor deviations in
the manufacturing process can cause substantial decreases in yields and, in some cases, cause production to be suspended. From time to
time, our foundries experience manufacturing defects and reduced manufacturing yields. Changes in manufacturing processes or the inadvertent
use of defective or contaminated materials by our foundries could result in lower than anticipated manufacturing yields, which would harm
our revenue or increase our costs. For example, in the past, one of our foundries produced ICs and met its process specification range
but did not meet our customer’s specifications causing us to write off a portion of our production lot. Many of these problems are
difficult to detect at an early stage of the manufacturing process and may be time consuming and expensive to correct. Poor yields from
our foundry, or defects, integration issues or other performance problems in our ICs, could cause us significant customer relations and
business reputation problems, harm our operating results and give rise to financial or other damages to our customers. Our customers might
consequently seek damages from us for their losses. A product liability claim brought against us, even if unsuccessful, would likely be
time consuming and costly to defend.
We may experience difficulties in transitioning to new wafer
fabrication process technologies or in achieving higher levels of design integration, which may result in reduced manufacturing yields,
delays in product deliveries and increased costs.
We aim to use the most advanced manufacturing
process technology appropriate for our solutions that is available from our foundries. As a result, we periodically evaluate the benefits
of migrating our solutions to other technologies in order to improve performance and reduce costs. These ongoing efforts require us from
time to time to modify the manufacturing processes for our products and to redesign some products, which in turn may result in delays
in product deliveries. We are dependent on our foundries to support the production of wafers for future versions of our IC. Such production
may require changes to the foundry’s existing process technology. If the foundry elects to not alter their process technology to
support future versions of our ICs, we would need to identify a new foundry.
For example, our 1T-SRAM technology used in our
Accelerator Engine products is not available at process nodes below 40 nanometers. To date, we have not developed any memory products
below the 40-nanometer process node and have no plans to continue the product roadmap for our Accelerator Engine products. We do not consider
this to adversely affect our current product offerings, but our inability to continue our product roadmap can adversely affect, and has
in the past affected, our efforts to win new customers for these products, secure additional design wins and grow our future revenues.
If Taiwan Semiconductor Manufacturing, or TSMC,
which is the sole foundry for producing our memory ICs were to discontinue the foundry process used to produce our Accelerator Engine
products, we would not be in a position to transition production of these products to a new foundry and continue to manufacture our products.
This would require us to discontinue production of these products and would negatively impact our future revenues, results of operations
and cash flows.
To date, we have not achieved the anticipated benefits of a fabless
semiconductor company.
Our primary goal has been to increase our total
available market by creating high-performance ICs and modules for mmWave applications using our proprietary technology and design expertise.
Historically, this development effort required that we add headcount and design resources, such as expensive software tools, which increased
our losses from, and cash used in, operations. Our efforts to increase our revenue and expand our markets have been subject to various
risks and uncertainties, including, but not limited to:
| ● | a lack of working capital; |
| ● | difficulties and delays in our product development, manufacturing,
testing and marketing activities; |
| ● | timeliness of new product introductions; |
| ● | the anticipated costs and technological risks of developing
and bringing our products to market; |
| ● | the willingness of our manufacturing partners to assist successfully
with fabrication; |
| ● | our ability to qualify our products for mass production and
achieve wafer yield levels and the final test results necessary to be price competitive; |
| ● | the availability of quantities of our products supplied by
our manufacturing partners at a competitive cost; |
| ● | our ability to generate the desired gross margin percentages
and return on our product development investment; |
| ● | competition from established competitors; |
| ● | the adequacy of our IP protection for our proprietary IC designs
and technologies; |
| ● | customer concerns over our financial condition and viability
to be a long-term profitable supplier; and |
| ● | the vigor and growth of markets served by our current and
prospective customers. |
If we experience significant delays in bringing
our products to market, if customer adoption of our products is delayed or if our customers’ products that include our products
are not successful, this could have a material adverse effect on our anticipated revenues in upcoming years due to the potential loss
of design wins and future revenues.
Our main objective is the development and sale of our technologies
to service providers, cloud networking, security, test and video system providers and their subsystem and component vendors and, if demand
for these products does not grow, we may not achieve revenue growth and our strategic objectives.
We market and sell our products and technology
to mmWave, cloud networking, communications, data center and other equipment providers and their subsystem and component vendors. We believe
our future business and financial success depends on market acceptance and increasing sales of these products. To meet our growth and
strategic objectives, networking infrastructure OEMs must incorporate our products into their systems and the demand for their systems
must grow as well. We cannot provide assurance that sales of our products to these OEMs will increase substantially in the future or that
the demand for our customers’ systems will increase. Our future revenues from these products may not increase in accordance with
our growth and strategic objectives if, instead, our OEM customers modify their product designs, select products sold by our competitors
or develop their own proprietary technologies. Moreover, demand for their products that incorporate our technologies may not grow or result
in significant sales of such products due to factors affecting the customers and their business such as industry downturns, declines in
capital spending in the enterprise and carrier markets or unfavorable macroeconomic conditions. Thus, the future success of our business
depends in large part on factors outside our control, and sales of our products may not meet our revenue growth and strategic objectives.
Our failure to continue to develop new products and enhance our
products on a timely basis could diminish our ability to attract and retain customers.
The existing and potential markets for our products
are characterized by ever-increasing performance requirements, evolving industry standards, rapid technological change and product obsolescence.
These characteristics lead to periodic changes in customer requirements, shorter product life cycles and changes in industry demands and
mandate new product introductions and enhancements to maintain customer engagements and design wins. In order to attain and maintain a
significant position in the market, we will need to continue to enhance and evolve our products and the underlying proprietary technologies
in anticipation of these market trends although we do not have a large engineering staff.
Our future performance depends on a number of
factors, including our ability to:
| ● | identify target markets and relevant emerging technological
trends; |
| ● | develop and maintain competitive technology by improving performance
and adding innovative features that differentiate our products from alternative technologies; |
| ● | enable the incorporation of our products into customers’
products on a timely basis and at competitive prices; and |
| ● | respond effectively to new technological developments or new
product introductions by others. |
Our failure to enhance our existing products and
develop future products that achieve broad market acceptance will harm our competitive position and impede our future growth.
Our products have a lengthy sales cycle, which makes it difficult
to predict success in this market and the timing of future revenue.
Our products have a lengthy sales cycle, ranging
from six to 24 months from the date of our initial proposal to a prospective customer until the date on which the customer confirms that
it has designed our product into its system. An even lengthier period could ensue before we would know the volume of products that such
customer will, or is likely to, order. A number of factors can contribute to the length of the sales cycle including technical evaluations
of our products by the customers, the design process required to integrate our products into the customers’ products and the timing
of the customers’ new product announcements. In anticipation of product orders, we may incur substantial costs before the sales
cycle is complete and before we receive any customer payments. As a result, in the event that a sale is not completed or is cancelled
or delayed, we may have incurred substantial expenses, making it more difficult for us to become profitable or otherwise negatively impacting
our financial results. Furthermore, because of this lengthy sales cycle, the recording of revenues from our selling efforts may be substantially
delayed, our ability to forecast our future revenue may be more limited and our revenue may fluctuate significantly from quarter to quarter.
We cannot provide any assurances that our efforts to build a strong and profitable business based on the sale of ICs will succeed. If
these efforts are not successful, in light of the substantial resources that we have invested, our future operating results and cash flows
could be materially and adversely affected.
The semiconductor industry is cyclical in nature and subject
to periodic downturns, which can negatively affect our revenue.
The semiconductor industry is cyclical and has
experienced pronounced downturns for sustained periods of up to several years. To respond to any downturn, many semiconductor manufacturers
and their customers will slow their research and development activities, cancel or delay new product developments, reduce their workforces
and inventories and take a cautious approach to acquiring new equipment and technologies. As a result, our business has been in the past
and could be adversely affected in the future by an industry downturn which could negatively impact our future revenue and profitability.
Also, the cyclical nature of the semiconductor industry may cause our operating results to fluctuate significantly from year-to-year.
Our revenue has been highly concentrated among a small number
of customers, and our results of operations could be harmed if we lose a key revenue source and fail to replace it.
Our overall revenue has been highly concentrated,
with a few customers accounting for a significant percentage of our total revenue. For the year ended December 31, 2022, our three largest
customers represented approximately 74% of total revenue. We expect that a relatively small number of customers will continue to account
for a substantial portion of our revenue for the foreseeable future.
As a result of this revenue concentration, our
results of operations could be adversely affected by the decision of a single key customer to cease using our technology or products or
by a decline in the number of products that incorporate our technology that are sold by a single licensee or customer or by a small group
of licensees or customers.
Our revenue concentration may also pose credit risks which could
negatively affect our cash flow and financial condition.
We might also face credit risks associated with
the concentration of our revenue among a small number of licensees and customers. At December 31, 2022, four customers represented approximately
79% of total trade receivables. Our failure to collect receivables from any customer that represents a large percentage of receivables
on a timely basis, or at all, could adversely affect our cash flow or results of operations.
Our products must meet exact specifications and defects and failures
may occur, which may cause customers to return or stop buying our products.
Our customers generally establish demanding specifications
for quality, performance and reliability that our products must meet. However, our products are highly complex and may contain defects
and failures when they are first introduced or as new versions are released. If defects and failures occur in our products during the
design phase or after, we could experience lost revenues, increased costs, including warranty and customer support expenses and penalties
for non-performance stipulated in customer purchase agreements, delays in or cancellations or rescheduling of orders or shipments, product
returns or discounts, diversion of management resources or damage to our reputation and brand equity, and in some cases consequential
damages, any of which would harm our operating results. In addition, delays in our ability to fill product orders as a result of quality
control issues may negatively impact our relationship with our customers. We cannot assure you that we will have sufficient resources
to satisfy any asserted claims. Furthermore, any such defects, failures or delays may be particularly damaging to us as we attempt to
establish our reputation as a reliable provider of IC and module products.
Because we sell our products on a purchase order basis and rely
on estimated forecasts of our customers’ needs, inaccurate forecasts could adversely affect our business.
We sell our products pursuant to individual purchase
orders rather than long-term purchase commitments. Therefore, we will rely on estimated demand forecasts, based upon input from our customers,
to determine how much product to manufacture. Because our sales are based primarily on purchase orders, our customers may cancel, delay
or otherwise modify their purchase commitments with little or no notice to us. For these reasons, we will generally have limited visibility
regarding our customers’ product needs. In addition, the product design cycle for our customers can be lengthy and it may be difficult
for us to accurately anticipate when they will commence commercial shipments of products that include our ICs or modules.
Furthermore, if we experience substantial warranty
claims, our customers may cancel existing orders or cease to place future orders. Any cancellation, delay or other modification in our
customers’ orders could significantly reduce our revenue, cause our operating results to fluctuate from period to period and make
it more difficult for us to predict our revenue. In the event of a cancellation or reduction of an order, we may not have enough time
to reduce operating expenses to mitigate the effect of the lost revenue on our business.
If we overestimate customer demand for our products,
we may purchase products from our manufacturers that we cannot sell. Conversely, if we underestimate customer demand or if sufficient
manufacturing and testing capacity are unavailable, we would forego revenue opportunities and could lose market share in the markets served
by our products and could incur penalty payments under our customer purchase agreements. In addition, our inability to meet customer requirements
for our products could lead to delays in product shipments, force customers to identify alternative sources and otherwise adversely affect
our ongoing relationships with our customers.
We depend on contract manufacturers for a significant portion
of our revenue from the sale of our products.
Many of our current and prospective OEM customers
use third party contract manufacturers to manufacture their systems and these contract manufacturers purchase our products directly from
us on behalf of the OEMs. Although we expect to work with our OEM customers in the design and development phases of their systems, these
OEMs often give contract manufacturers some authority in product purchasing decisions. If we cannot compete effectively for the business
of these contract manufacturers, or if any of the contract manufacturers that work with our OEM customers experience financial or other
difficulties in their businesses, our revenue and our business could be adversely affected. For example, if a contract manufacturer becomes
subject to bankruptcy proceedings, we may not be able to obtain our products held by the contract manufacturer or recover payments owed
to us by the contract manufacturer for products already delivered to the contract manufacturer. If we are unable to persuade contract
manufacturers to purchase our products, or if the contract manufacturers are unable to deliver systems with our products to OEMs on a
timely basis, our business would be adversely affected.
We rely on independent foundries and contractors for the manufacture,
assembly, testing and packaging of our integrated circuits and modules, and the failure of any of these third parties to deliver products
or otherwise perform as requested could damage our relationships with our customers and harm our sales and financial results.
As a fabless semiconductor company, we rely on
third parties for substantially all of our manufacturing operations. We depend on these parties to supply us with material in a timely
manner that meets our standards for yield, cost and quality. We do not have long-term supply contracts with any of our suppliers or manufacturing
service providers, and therefore they are not obligated to manufacture products for us for any specific period, in any specific quantity
or at any specified price except as may be provided in a particular purchase order. Any problems with our manufacturing supply chain,
including disruptions due to the COVID-19 global pandemic, could adversely impact our ability to ship our products to our customers on
time and in the quantity required which in turn could damage our customer relationships and impede market acceptance of our IC products.
Our third-party wafer foundry and testing and assembly vendors
are located in regions at high risk for earthquakes and other natural disasters and adverse consequences related to the outbreak
of contagious diseases such as COVID-19. Any disruption to the operations of these foundries and vendors resulting from earthquakes or
other natural disasters could cause significant delays in the development, production, shipment and sales of our IC products.
Certain vendors that we utilize to manufacture
our products are located in Asia, as are other foundries we may use in the future. Our vendors that provide substrates and wafer sorting
and handle the testing of our products are headquartered in either Asia or the San Francisco Bay Area of California. The risk of an earthquake
in the Pacific Rim region is significant due to the proximity of major earthquake fault lines. The occurrence of earthquakes or other
natural disasters could result in the disruption of the wafer foundry or assembly and test capacity of the third parties that supply these
services to us and may impede our research and development efforts as well as our ability to market and sell our products. We may not
be able to obtain alternate capacity on favorable terms, if at all.
The COVID-19 global pandemic, along with outbreaks
of new contagious diseases or the resurgence of existing diseases that significantly affect the Asia-Pacific region could disrupt the
operations of our key suppliers and manufacturing partners.
Disruptions in our supply chain due to shortages in the global
semiconductor supply chain could cause delays for customers and impact revenue.
We have and may continue to experience disruptions
in our global semiconductor supply chain, with suppliers increasing lead times or placing products on allocation, including procuring
necessary components, wafers, substrates and assembly services in a timely fashion. As a result of these supply chain disruptions, we
have had to increase customer order lead times, and we may be required some products on allocation. We may be unable to satisfy all of
the demand for our products, which may adversely affect customer relationships and impact revenue.
Price increases from our supply chain can adversely impact revenue
or reduce margins.
Our suppliers can increase the price of products
and services provided to us. Finding and qualifying alternate or additional suppliers in response to increased pricing from suppliers
can be a lengthy process and can lead to production delays or additional costs, and such alternatives are sometimes not available. If
we are unable to increase the price of our products to our customers in response to increased costs, we would face reduced margins.
Any claim that our products or technology infringe third party
IP rights could increase our costs of operation and distract management and could result in expensive settlement costs or the discontinuance
of our technology licensing or product offerings. In addition, we may incur substantial litigation expense which would adversely affect
our profitability.
The semiconductor industry is characterized by
vigorous protection and pursuit of IP rights or positions which has resulted in often protracted and expensive litigation. We are not
aware of any third party IP that our products or technology would infringe. However, like many companies of our size with limited resources,
we have not searched for all potentially applicable IP in the public databases. It is possible that a third party now has, or may in the
future obtain, patents or other intellectual property rights that our products or technology may now, or in the future, infringe. Our
licensees and IC customers, or we, might, from time to time, receive notice of claims that we have infringed patents or other IP rights
of others. Litigation against us can result in significant expense and divert the efforts of our technical and management personnel whether
or not the litigation has merit or results in a determination adverse to us.
The discovery of defects in our technology and products could
expose us to liability for damages.
The discovery of a defect in our technologies
and products could lead our customers to seek damages from us. Many of our agreements with customers include provisions waiving implied
warranties regarding our technology and products and limiting our liability to our customers. We cannot be certain, however, that the
waivers or limitations of liability contained in our agreements with customers will be enforceable.
We might not be able to protect and enforce our IP rights which
could impair our ability to compete and reduce the value of our technology.
Our technology is complex and is intended for
use in complex systems. For example, our licensees’ products utilize our embedded memory and/or interface technology and a large
number of companies manufacture and market these products. Because of these factors, policing the unauthorized use of our IP is difficult
and expensive. We cannot be certain that we will be able to detect unauthorized use of our technology or prevent other parties from designing
and marketing unauthorized products based on our technology. In the event we identify any past or present infringement of our patents,
copyrights or trademarks, or any violation of our trade secrets, confidentiality procedures or licensing agreements, we cannot assure
you that the steps taken by us to protect our proprietary information will be adequate to prevent misappropriation of our technology.
Our inability to adequately protect our IP would reduce significantly the barriers of entry for directly competing technologies and could
reduce the value of our technology. Furthermore, we might initiate claims or litigation against third parties for infringement of our
proprietary rights or to establish the validity of our proprietary rights. Litigation by us could result in significant expense and divert
the efforts of our technical and management personnel whether or not such litigation results in a determination favorable to us.
Our existing patents might not provide us with sufficient protection
of our IP, and our patent applications might not result in the issuance of patents, either of which could reduce the value of our core
technology and harm our business.
We rely on a combination of patents, trademarks,
trade secret laws and confidentiality procedures to protect our IP rights. We cannot be sure that any patents will be issued from any
of our pending applications or that any claims allowed from pending applications will be of sufficient scope or strength, or issued in
all countries where our products can be sold, to provide meaningful protection or any commercial advantage to us. Failure of our patents
or patent applications to provide meaningful protection might allow others to utilize our technology without any compensation to us.
If our intangible assets become impaired,
we would be required to record a charge to earnings.
We review our intangible
assets for impairment when events or changes in circumstances, such as a decline in our stock price and/or market capitalization, indicate
the carrying value may not be recoverable. If our intangible assets are deemed to be impaired, an impairment loss equal to the amount
by which the carrying amount exceeds the fair value of the assets would be recognized. We would be required to record an impairment charge
in our financial statements during the period in which any impairment of our intangible assets is determined, which would negatively affect
our results of operations.
If we fail to retain key personnel, our business and growth could
be negatively affected.
Our business has been dependent to a significant
degree upon the services of a small number of executive officers and technical employees. The loss of key personnel could negatively impact
our technology development efforts, our ability to deliver products under our existing agreements, maintain strategic relationships with
our partners and obtain new customers. We generally have not entered into employment or non-competition agreements with any of our employees
and do not maintain key-man life insurance on the lives of any of our key personnel.
Our ability to utilize our net operating loss carryforwards is
limited as a result of an “ownership change,” as defined in Section 382 of the Internal Revenue Code of 1986, as amended.
As of December 31, 2022, we had over $238 million
of net operating loss, or NOL, carryforwards for U.S. federal tax purposes. Under U.S. federal income tax law, we generally can use our
NOL carryforwards (and certain related tax credits) to offset ordinary taxable income, thereby reducing our U.S. federal income tax liability,
for up to 20 years from the year in which the losses were generated, after which time they will expire. Our California NOL carryforwards
(and certain related tax credits) generally may be used to offset future state taxable income for 20 years from the year in which the
losses are generated, depending on the state, after which time they will expire. The rate at which we can utilize our NOL carryforwards
is limited (which could result in NOL carryforwards expiring prior to their use) each time we experience an “ownership change,”
as determined under Section 382 of the Internal Revenue Code. A Section 382 ownership change generally occurs if a shareholder or a group
of shareholders who are deemed to own at least 5% of our common stock increase their ownership by more than 50 percentage points over
their lowest ownership percentage within a rolling three-year period. If an ownership change occurs, Section 382 generally would impose
an annual limit on the amount of post-ownership change taxable income that may be offset with pre-ownership change NOL carryforwards equal
to the product of the total value of our outstanding equity immediately prior to the ownership change (reduced by certain items specified
in Section 382) and the U.S. federal long-term tax-exempt interest rate in effect at the time of the ownership change. A number of special
and complex rules apply in calculating this Section 382 limitation. While the complexity of Section 382 makes it difficult to determine
whether and when an ownership change has occurred, and a formal study has not been performed, we believe that a Section 382 ownership
change occurred as a result of our business combination with Peraso Technologies Inc. in 2021. The Company believes this Section 382 limitation
will result in substantially all of our federal and state NOLs federal tax credit carryforwards incurred prior to December 2021 expiring
before they can be utilized. In addition, our ability to use our NOL carryforwards will be limited to the extent we fail to generate enough
taxable income in the future before they expire. Existing and future Section 382 limitations and our inability to generate enough taxable
income in the future could result in a substantial portion of our NOL carryforwards expiring before they are used. We have recorded a
full valuation allowance for our deferred tax assets.
Acquisitions or other business combinations that we pursue in
the future, whether or not consummated, could result in other operating and financial difficulties.
In the future we may seek to acquire additional
product lines, technologies or businesses in an effort to increase our growth, enhance our ability to compete, complement our product
offerings, enter new and adjacent markets, obtain access to additional technical resources, enhance our IP rights or pursue other competitive
opportunities. If we seek acquisitions or other business combinations, we may not be able to identify suitable candidates at prices we
consider appropriate. We cannot readily predict the timing or size of our future acquisitions or combinations, or the success of any such
transactions.
To the extent that we consummate acquisitions,
combinations or investments, we may face financial risks as a result, including increased costs associated with merged or acquired operations,
increased indebtedness, economic dilution to gross and operating profit and earnings per share, or unanticipated costs and liabilities.
Acquisitions may involve additional risks, including:
| ● | the acquired product lines, technologies or businesses may
not improve our financial and strategic position as planned; |
| ● | we may determine we have overpaid for the product lines, technologies
or businesses, or that the economic conditions underlying our acquisition have changed; |
| ● | we may have difficulty integrating the operations and personnel
of the acquired company; |
| ● | we may have difficulty retaining the employees with the technical
skills needed to enhance and provide services with respect to the acquired product lines or technologies; |
| ● | the acquisition may be viewed negatively by customers, employees,
suppliers, financial markets or investors; |
| ● | we may have difficulty incorporating the acquired product
lines or technologies with our existing technologies; |
| ● | we may encounter a competitive response, including price competition
or IP litigation; |
| ● | we may become a party to product liability or IP infringement
claims as a result of our sale of the acquired company’s products; |
| ● | we may incur one-time charges, such as for acquired in-process
research and development costs, and restructuring charges; |
| ● | we may acquire goodwill and other intangible assets that are
subject to impairment tests, which could result in future impairment charges; |
| ● | our ongoing business and management’s attention may
be disrupted or diverted by transition or integration issues and the complexity of managing geographically or culturally diverse enterprises;
and |
| ● | our due diligence process may fail to identify significant
existing issues with the target business. |
From time to time, we may enter into negotiations
for acquisitions or investments that are not ultimately consummated. These negotiations could result in significant diversion of management
time, as well as substantial out-of-pocket costs, any of which could have a material adverse effect on our business, operating results
and financial condition.
Provisions of our certificate of incorporation and bylaws or
Delaware law might delay or prevent a change-of-control transaction and depress the market price of our stock.
Various provisions of our certificate of incorporation
and bylaws might have the effect of making it more difficult for a third party to acquire, or discouraging a third party from attempting
to acquire, control of our company. These provisions could limit the price that certain investors might be willing to pay in the future
for shares of our common stock. Certain of these provisions eliminate cumulative voting in the election of directors, limit the right
of stockholders to call special meetings and establish specific procedures for director nominations by stockholders and the submission
of other proposals for consideration at stockholder meetings.
We are also subject to provisions of Delaware
law that could delay or make more difficult a merger, tender offer or proxy contest involving our company. In particular, Section 203
of the Delaware General Corporation Law prohibits a Delaware corporation from engaging in any business combination with any interested
stockholder for a period of three years unless specific conditions are met. Any of these provisions could have the effect of delaying,
deferring or preventing a change in control, including without limitation, discouraging a proxy contest or making more difficult the acquisition
of a substantial block of our common stock.
Under our certificate of incorporation, our board
of directors may issue up to 20,000,000 shares of preferred stock, potentially without stockholder approval on such terms as the board
might determine. The rights of the holders of common stock will be subject to, and might be adversely affected by, the rights of the holders
of any preferred stock that might be issued in the future.
Potential volatility of the price of our common stock could negatively
affect your investment.
We cannot assure you that there will continue
to be an active trading market for our common stock. Historically, the stock market, as well as our common stock, has experienced significant
price and volume fluctuations. Market prices of securities of technology companies have been highly volatile and frequently reach levels
that bear no relationship to the operating performance of such companies. These market prices generally are not sustainable and are subject
to wide variations. If our common stock trades to unsustainably high levels, it is likely that the market price of our common stock will
thereafter experience a material decline.
In the past, securities class action litigation
has often been brought against a company following periods of volatility in the market price of its securities. We could be the target
of similar litigation in the future. Securities litigation could cause us to incur substantial costs, divert management’s attention
and resources, harm our reputation in the industry and the securities markets and negatively impact our operating results.
Certain of our
common stock warrants are accounted for as a warrant liability and recorded at fair value with changes in fair value each period reported
in earnings, which may have an adverse effect on the market price of our common stock.
In accordance with generally
accepted accounting principles in the United States (“GAAP”), we are required to evaluate our common stock warrants to determine
whether they should be accounted for as a warrant liability or as equity. At each reporting period (1) the warrants will be reevaluated
for proper accounting treatment as a liability or equity and (2) the fair value of the liability of the warrants will be re-measured.
The change in the fair value of the liability will be recorded as other income (expense) in our statement of operations and comprehensive
loss. This accounting treatment may adversely affect the market price of our securities, as we may incur additional expense. In addition,
changes in the inputs and assumptions for the valuation model we use to determine the fair value of such liability may have a material
impact on the estimated fair value of the warrant liability. As a result, our financial statements and results of operations will fluctuate
quarterly, based on various factors, many of which are outside of our control, including the share price of our common stock. We expect
that we will recognize non-cash gains or losses on our warrants or any other similar derivative instruments in each reporting period and
that the amount of such gains or losses could be material. The impact of changes in fair value on earnings may have an adverse effect
on the market price of our common stock.
If we are unable to satisfy the continued listing requirements
of The Nasdaq Stock Market, our common stock could be delisted and the price and liquidity of our common stock may be adversely affected.
Our common stock may lose value and our common
stock could be delisted from Nasdaq due to several factors or a combination of such factors. While our common stock is currently listed
on Nasdaq, there can be no assurance that we will be able to maintain such listing. To maintain the listing of our common stock on Nasdaq,
we are required to meet certain listing requirements, including, among others, a requirement to maintain a minimum closing bid price of
$1.00 per share. If our common stock trades below the $1.00 minimum closing bid price requirement for 30 consecutive business days or
if we do not meet other listing requirements, we may be notified by Nasdaq of non-compliance. On February 1, 2023, we received a notice
from Nasdaq, indicating that, based upon the closing bid price of our common stock for the previous 30 business days, we no longer meet
the requirement to maintain a minimum bid price of $1 per share, as set forth in Nasdaq Listing Rule 5550(a)(2) (the “Notice”).
In accordance with Nasdaq Listing Rule 5810(c)(3)(A),
we have been provided a period of 180 calendar days, or until July 31, 2023, in which to regain compliance. In order to regain compliance
with the minimum bid price requirement, the closing bid price of our common Stock must be at least $1 per share for a minimum of ten consecutive
business days during this 180-day period. In the event that we do not regain compliance within this 180-day period, we may be eligible
to seek an additional compliance period of 180 calendar days if we meet the continued listing requirement for market value of publicly
held shares and all other initial listing standards for the Nasdaq Capital Market, with the exception of the bid price requirement, and
provide written notice to Nasdaq of our intent to cure the deficiency during this second compliance period, by effecting a reverse stock
split, if necessary. However, if it appears to the Nasdaq Staff that we will not be able to cure the deficiency, or if we are otherwise
not eligible, Nasdaq will provide notice to us that our common stock will be subject to delisting.
The above mentioned notice does not result in the
immediate delisting of our common stock from the Nasdaq Capital Market. We intend to monitor the closing bid price of our common stock
and consider our available options in the event that the closing bid price of our common stock remains below $1 per share. There can be
no assurance that we will be able to regain compliance with the minimum bid price requirement or maintain compliance with the other listing
requirements. As of the date of this Report, we have not regained compliance. There can be no assurance that we would pursue a reverse
stock split or be able to obtain the approvals necessary to effect a reverse stock split. In addition, there can be no assurance that,
following any reverse stock split, the per share trading price of our common stock would remain above $1.00 per share or that we would
be able to continue to meet other listing requirements. If we were to be delisted, we would expect our common stock to be traded in the
over-the-counter market which could adversely affect the liquidity of our common stock. Additionally, we could face significant material
adverse consequences, including:
| |
● |
a limited availability of market quotations for our common stock; |
| |
● |
a reduced amount of analyst coverage; |
| |
● |
a decreased ability to issue additional securities or obtain additional financing in the future; |
| |
● |
reduced liquidity for our stockholders; |
| |
● |
potential loss of confidence by customers, collaboration partners and employees; and |
| |
● |
loss of institutional investor interest. |
Holders of exchangeable shares are expected to experience a delay
in receiving shares of our common stock from the date they request an exchange, which may affect the value of the shares the holder receives
in an exchange.
Holders of exchangeable shares who request to
receive shares of our common stock in exchange for their exchangeable shares will not receive shares of our common stock until several
business days after the applicable request is received. During this period, the market price of our common stock may increase or decrease.
Any such increase or decrease would affect the value of the consideration to be received by such holder of exchangeable shares upon a
subsequent sale of the common stock received in the exchange
We are a “smaller reporting company” and, as a result
of the reduced disclosure and governance requirements applicable to smaller reporting companies, our common stock may be less attractive
to investors.
We are a “smaller reporting company,”
and are subject to lesser disclosure obligations in our SEC filings compared to other issuers. Specifically, “smaller reporting
companies” are able to provide simplified executive compensation disclosures in their filings, are exempt from the provisions of
Section 404(b) of the Sarbanes-Oxley Act requiring that independent registered public accounting firms provide an attestation report on
the effectiveness of internal control over financial reporting and have certain other decreased disclosure obligations in their SEC filings,
including, among other things, only being required to provide two years of audited financial statements in annual reports. Decreased disclosures
in our SEC filings due to our status as a “smaller reporting company” may make it harder for investors to analyze our operating
results and financial prospects.
The invasion of Ukraine by Russia could
negatively impact our business.
Russia’s military invasion of Ukraine in
2022 has led to, and may lead to, additional sanctions being levied by the United States, European Union and other countries against Russia.
Russia’s military invasion and the resulting sanctions have had an adverse effect on global markets. We cannot predict the progress
or outcome of the situation in Ukraine, as the conflict and governmental reactions are rapidly developing and beyond our control. Prolonged
unrest, intensified military activities, or more extensive sanctions impacting the region could have a material adverse effect on the
global economy, and such effect could in turn have a material adverse effect on the operations, results of operations, financial condition,
liquidity and business outlook of our business.
Sustained inflation could have a material
adverse effect on our business, financial condition, results of operations and liquidity.
Inflation rates in the markets in which we operate
have increased and may continue to rise. Inflation over the last several months has led us to experience higher costs, including, among
others, labor, wafer and transportation. Our suppliers have raised their prices and may continue to raise prices, and, although we have
made minimal price increases thus far, in the competitive markets in which we operate, we may not be able to make corresponding price
increases to preserve our gross margins and profitability. In addition, inflationary pressures could cause customers to delay or reduce
purchases of our products or delay payments to us. If inflation rates continue to rise or remain elevated for a sustained period of time,
they could have a material adverse effect on our business, financial condition, results of operations and liquidity.
The full effects of COVID-19 and other potential future public
health crises, epidemics, pandemics or similar events are uncertain and could have a material and adverse effect on our business, financial
condition, operating results and cash flows.
The global outbreak of the coronavirus disease
2019, or 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 world economy, disrupted global supply chains, significantly restricted travel and transportation, resulted
in mandated closures and orders to “shelter-in-place” from time to time and created significant disruption of the financial
markets. The extent of the impact on our operational and financial performance will depend on future developments, including the duration
and spread of the pandemic and related actions U.S. and foreign government agencies continue to take to prevent disease spread, all of
which are uncertain, out of our control and cannot be predicted.
As required,
we have complied with state and county orders, and we have implemented a teleworking policy for our employees and contractors when such
orders were in place. However, a facility closure, work slowdowns or temporary stoppage at one of our suppliers could occur, which could
have a longer-term impact and could delay our prototype production and ability to conduct business.
If our workforce is unable to work effectively,
including because of illness, quarantines, absenteeism, government actions, facility closures, travel restrictions or other restrictions
in connection with the COVID-19 pandemic, our operations will be negatively impacted. We may be unable to produce and sell our IC products,
and our costs may increase as a result of the COVID-19 outbreak. The impacts could worsen if there is an extended duration of any COVID-19
outbreak or a resurgence of COVID-19 infection in affected regions after they have begun to experience improvement.
The continued spread of COVID-19 has also led to occasional disruption
and volatility in the global capital markets. While we were able to access the capital markets in November 2022, 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.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We currently maintain leased facilities in San
Jose, California and Toronto and Markham, Ontario, Canada. Our administrative, sales, marketing, support and research and development
functions are located in these leased facilities. We occupy approximately 10,000 square feet of space in the San Jose facility, and the
lease extends until January 2024. We occupy approximately 12,700 square feet of space in the Toronto, Ontario facility, and the lease
extends until December 2023. We also occupy approximately 9,500 square feet of space in the Markham facility for research and development
functions, and the lease extends until September 2027. We believe that our existing facilities
are adequate to meet our current needs.
Item 3. Legal Proceedings
The information set forth under the “Legal
Matters” subheading in Note 5 (Commitments and Contingencies) of the Notes to Consolidated Financial Statements in Part II, Item
15, of this Annual Report on Form 10-K is incorporated herein by reference.
Item 4. Mine Safety Disclosures
Not applicable.
Part
III
Item
10. Directors, Executive Officers and Corporate Governance
The
names of our directors and certain information about each of them are set forth below.
| Name |
|
Age |
|
Position(s) with the Company |
| Ronald
Glibbery |
|
61 |
|
Chief
Executive Officer and Director |
| Daniel
Lewis |
|
73 |
|
Director |
| Ian McWalter(1)(2) |
|
71 |
|
Director |
| Andreas
Melder(1)(2) |
|
64 |
|
Director |
| Robert
Y. Newell(1)(2) |
|
74 |
|
Director |
| (1) |
Member of Audit Committee |
| (2) |
Member of Compensation Committee |
The
principal occupations and positions for at least the past five years of our directors are described below. There are no family relationships
among any of our directors or executive officers.
Ronald
Glibbery. Mr. Glibbery was appointed as our chief executive officer and to our board of directors in December 2021. He founded Peraso
Technologies Inc. (Peraso Tech) in 2008 and served as its chief executive officer. In June 2020, Peraso Tech applied for and obtained
an order under the Companies’ Creditors Arrangement Act (the CCAA), providing certain relief. Pursuant to the Initial Order issued
by the Ontario Superior Court of Justice (Commercial List) (the Court), Ernst & Young Inc. was appointed as the Monitor of Peraso
Tech. In addition, the Monitor, in its capacity as Foreign Representative, filed a voluntary petition in the United States under Chapter
15 of the U.S. Bankruptcy Code, seeking recognition of the CCAA proceeding. In October 2020, the Court granted an order authorizing the
termination of Peraso Tech’s CCAA proceedings upon the completion of certain defined steps. In December 2020, the United States
Bankruptcy Court for the Southern District of New York issued an Order that: (i) recognized and gave full force and effect in the United
States to the Court’s order approving the Settlement Agreement; and (ii) terminated the Chapter 15 Proceedings. Mr. Glibbery has
over 25 years of experience in the semiconductor industry. Prior to co-founding Peraso Tech, Mr. Glibbery held executive positions at
Kleer Semiconductor, a fabless semiconductor company focused on wireless audio technology and Intellon, a pioneer and leader in the development
of semiconductor devices used for powerline communications. He has held other executive roles at Cogency Semiconductor, LSI Logic Canada,
Inc. and LSI Logic Corporation. Mr. Glibbery holds a B.E.Sc. in Electrical and Electronics Engineering from the University of Western
Ontario.
We
believe that Mr. Glibbery’s qualifications to serve on the board of directors include his service as an officer of ours and his
extensive general management and technical expertise in the semiconductor industry, as well as his experience as a chief executive officer.
Daniel
Lewis. Mr. Lewis has served as a member of the board of directors since September 2017. He served as our Vice President, General
Manager of Memory Products from April 2022 until his retirement effective December 16, 2022. Mr. Lewis previously served as our President
from August 2018 until April 2022 and chief executive officer from August 2018 until the business combination with Peraso Tech in December
2021. Before joining MoSys, Mr. Lewis served as the managing member and an owner of GMS Manufacturing Solution LLC, a firm focused on
providing engineering services to manufacturing companies. He previously held various executive and leadership roles at View Box Group,
Xicor, Integrated Device Technology, Accelerant Networks, Intel Corporation, Zilog and Digital Equipment Corporation. Mr. Lewis holds
a B.S. in Electrical Engineering from the University of Michigan. We believe that Mr. Lewis’s qualifications to serve on the board
of directors include his service as an officer of ours and his extensive business experience, having held senior management positions
at several companies in the semiconductor, computer and networking industries. He brings strategic and operational insight to the board
of directors.
Ian
McWalter. Dr. McWalter was appointed to our board of directors in December 2021. He currently serves as a member of the board
of directors for Evertz Technologies, a publicly traded manufacturer of video and audio infrastructure solutions for television, telecom
and new-media industries. Dr. McWalter served as the president and chief executive officer of CMC Microsystems from 2007 until 2018.
Prior to this role, Dr. McWalter was chief executive officer of Toumaz Technology. Before joining Toumaz, Dr. McWalter spent 15 years
at Gennum Corporation, including five years as president and chief executive officer from 2000 to 2005. Previously, he held management
and technical positions at Bell Northern Research Ltd., the research and development arm of Northern Telecom and Bell Canada, and Plessey
Semiconductors. Dr. McWalter was awarded a B.Sc. in physics and a Ph.D. in Electrical Engineering from the Imperial College of Science
and Technology in London, England. We believe that Dr. McWalter’s qualifications to serve on the board of directors include his
extensive general management and technical expertise in the semiconductor industry, as well as his experience as a chief executive officer
and his experience serving as a director on public-company boards of directors.
Andreas
Melder. Mr. Melder was appointed to our board of directors in December 2021. He is a veteran technology executive in the semiconductor,
communications and consumer electronics industries and previously served as vice president of business development at Gigle Networks,
which was acquired in 2011 by Broadcom, where he continued to serve in executive marketing roles. Prior to Broadcom, Mr. Melder served
as senior vice president of sales, marketing and business development for Intellon, which was acquired by Atheros/Qualcom. Previously,
he was founder and vice president of marketing and business development for Microtune, a designer of RF integrated circuits and subsystem
modules, which was acquired by Zoran Semiconductor, and vice president of sales & marketing for Tripath, an audio controller company
acquired by Etelos. Additionally, Mr. Melder was a senior executive for companies that were acquired by Broadcom, Cirrus Logic and RFMD.
Mr. Melder earned a B.S. in Electrical Engineering/Business from Carnegie-Mellon University and a M.S. in Electrical Engineering and
Operations Research from Southern Methodist University. We believe that Mr. Melder’s qualifications to serve on the board of directors
include his extensive business experience, having held senior management positions at several companies in the semiconductor, computer
and networking industries. Additionally, he brings additional operational, and fund-raising expertise, and business development and mergers
and acquisitions experience. public markets, participated in investor roadshows and positioned additional companies for M&A exits
through proper strategic industry positioning.
Robert
Y. Newell. Mr. Newell has served as a member of our board of directors since October 2018 and is currently a consultant and advisor
to emerging technology and healthcare companies. He has held financial management positions for companies in Silicon Valley for over
25 years. From 2003 to 2018, Mr. Newell was chief financial officer of Dextera Surgical, Inc. (Dextera) a developer of advanced surgical
stapling and medical devices. In December 2017, after entering into an agreement to sell substantially all of its assets, Dextera filed
a voluntary petition for reorganization under Chapter 11 of Title 11 of the United States Code in the United States Bankruptcy Court
for the District of Delaware. He served on the board of directors of ARI Network Services, a leading publicly traded supplier of SaaS
and data as a service solutions. Previously, Mr. Newell served as chief financial officer of Omnicell, an automated medication and hospital
supply management company, and prior to 2000, he held executive positions with the Beta Group and Cardiometrics. Prior to his business
career, he was a pilot in the United States Air Force. Mr. Newell holds a B.A. in mathematics from the College of William & Mary
and an MBA from Harvard Business School. We believe that Mr. Newell’s qualifications to serve on the board of directors include
his substantial financial and public-company experience, as he has served as chief financial officer at multiple medical device and other
technology companies. He also has previous experience serving as a director on public-company boards of directors.
The
names of our executive officers and certain information about them are set forth either above or below, as the case may be:
| Name |
|
Age |
|
Position(s) with the Company |
| Ronald
Glibbery |
|
61 |
|
Chief
Executive Officer and Director |
| James
W. Sullivan |
|
54 |
|
Chief
Financial Officer |
| Bradley
Lynch |
|
50 |
|
Chief
Operating Officer |
| Alexander
Tomkins |
|
39 |
|
Chief
Technology Officer |
| Mark
Lunsford |
|
65 |
|
Chief
Revenue Officer |
James
Sullivan. Mr. Sullivan has served as our chief financial officer since January 2008. From July 2006 until January 2008, Mr. Sullivan
served as Vice President of Finance and Chief Financial Officer at Apptera, Inc., a venture-backed company providing software for mobile
advertising, search and commerce. From July 2002 until June 2006, Mr. Sullivan was the chief financial officer at 8x8, Inc., a publicly-traded
SAAS provider of VoIP and unified communication solutions. Mr. Sullivan’s prior experience includes various positions at 8x8, Inc.
and PricewaterhouseCoopers LLP. He received a Bachelor of Science degree in Accounting from New York University and is a certified public
accountant.
Bradley
Lynch. Mr. Lynch has served as chief operating officer since December 2021. He co-founded Peraso Tech in 2009 and served as executive
vice president of engineering and operations. In June 2020, Peraso Tech applied for and obtained an order under the Companies’
Creditors Arrangement Act (the CCAA), providing certain relief. Pursuant to the Initial Order issued by the Ontario Superior Court of
Justice (Commercial List) (the Court), Ernst & Young Inc. was appointed as the Monitor of Peraso Tech. In addition, the Monitor,
in its capacity as Foreign Representative, filed a voluntary petition in the United States under Chapter 15 of the U.S. Bankruptcy Code,
seeking recognition of the CCAA proceeding. In October 2020, the Court granted an order authorizing the termination of Peraso Tech’s
CCAA proceedings upon the completion of certain defined steps. In December 2020, the United States Bankruptcy Court for the Southern
District of New York issued an Order that: (i) recognized and gave full force and effect in the United States to the Court’s order
approving the Settlement Agreement; and (ii) terminated the Chapter 15 Proceedings. Prior to founding Peraso Tech, Mr. Lynch worked as
a system architect at Kleer Semiconductor, a fabless company focused on wireless audio technology. Before Kleer, he was director of software
engineering at Intellon Corporation, a pioneer and leader in the development of semiconductor devices used for powerline communications.
Previously, Mr. Lynch held various technical roles at Cogency Semiconductor and Power Trunk. Mr. Lynch holds a B.A.Sc in Computer Engineering
from the University of Waterloo.
Alexander
Tomkins. Mr. Tomkins has served as our chief technology officer since December 2021. He co-founded Peraso Tech in 2009 and served
as its chief technology officer. In June 2020, Peraso Tech applied for and obtained an order under the Companies’ Creditors Arrangement
Act (the CCAA), providing certain relief. Pursuant to the Initial Order issued by the Ontario Superior Court of Justice (Commercial List),
Ernst & Young Inc. was appointed as the Monitor of Peraso Tech. In addition, the Monitor, in its capacity as Foreign Representative,
filed a voluntary petition in the United States under Chapter 15 of the U.S. Bankruptcy Code, seeking recognition of the CCAA proceeding.
In October 2020, the Court granted an order authorizing the termination of Peraso Tech’s CCAA proceedings upon the completion of
certain defined steps. In December 2020, the United States Bankruptcy Court for the Southern District of New York issued an Order that:
(i) recognized and gave full force and effect in the United States to the Court’s order approving the Settlement Agreement; and
(ii) terminated the Chapter 15 Proceedings. Mr. Tomkins holds a Masters of Applied Science from the University of Toronto and a B.S.
in Engineering Physics from Carleton University. He also attended the University of Toronto as a doctoral candidate in Applied Science.
Mark
Lunsford. Mr. Lunsford was appointed as our chief revenue officer in October 2022. Prior to joining Peraso, Mr. Lunsford held numerous
positions of responsibility with companies in the semiconductor industry. From 1988 to 1999, he worked for Asia Pacific at Monolithic
Memories, where he served in multiple roles, including vice president of sales for the Americas and director of marketing. From 1999
to 2001, Mr. Lunsford was the vice president of worldwide sales and director of business development at Pivotal Technologies. In 2001,
and for a period of eight years, he served as vice president of worldwide sales at Micrel Semiconductor. From 2009 to 2013, he worked
at NXP, where he served as vice president of sales and marketing for the Americas. In 2013, and for a period of six years, he served
as the executive vice president of worldwide sales at SiTime Inc., a provider of MEMS-based timing devices. From January 2019 until April
2020, he provided consulting services for a range of high-technology businesses. Finally, he served as the vice president of global sales
at Chasm Advanced Materials, a provider of carbon nano tube based product solutions, from November 2020 until April 2022. Mr. Lunsford
holds a degree in Mechanical Engineering from the University of California at Davis.
Code
of Ethics
We
have adopted a code of ethics that applies to all of our employees. The code of ethics is designed to deter wrongdoing and to promote,
among other things, honest and ethical conduct, full, fair, accurate, timely, and understandable disclosures in reports and documents
submitted to the SEC and other public communications, compliance with applicable governmental laws, rules and regulations, the prompt
internal reporting of violations of the code to an appropriate person or persons identified in the code and accountability for adherence
to such code.
The
code of ethics is available on our website, www.perasoinc.com. If we make any substantive amendments to the code of ethics or
grant any waiver, including any implicit waiver, from a provision of the code to our chief executive officer or chief financial officer,
or persons performing similar functions, where such amendment or waiver is required to be disclosed under applicable SEC rules, we intend
to disclose the nature of such amendment or waiver on our website.
Audit
Committee
Our
board of directors established the Audit Committee for the purpose of overseeing the accounting and financial reporting processes and
audits of our financial statements. The Audit Committee also is charged with reviewing reports regarding violations of our code of ethics
and complaints with respect thereto, and internal control violations under our whistleblower policy are directed to the members of the
Audit Committee. The responsibilities of our Audit Committee are described in the Audit Committee Charter adopted by our board of directors,
a current copy of which can be found on the investors section of our website, www.perasoinc.com.
Robert
Y. Newell, Ian McWalter and Andreas Melder are the current members of the Audit Committee. All are independent, as determined in accordance
with Rule 5605(a)(2) of the Nasdaq listing rules and Rule 10A-3 of the Exchange Act. Mr. Newell serves as the chairman and has been designated
by the board of directors as the “audit committee financial expert,” as defined by Item 407(d)(5) of Regulation S-K under
the Securities Act and the Exchange Act. That status does not impose duties, liabilities or obligations that are greater than the duties,
liabilities or obligations otherwise imposed on him as a member of the Audit Committee and the board of directors, however. The Audit
Committee has delegated authority to Mr. Newell for review and pre-approval of services proposed to be provided by our independent registered
public accounting firm.
Compensation
Committee
Ian
McWalter, Andreas Melder and Robert Y. Newell are the current members of the Compensation Committee, and Dr. McWalter serves as the chairman.
The Compensation Committee is responsible for reviewing, recommending and approving our compensation policies and benefits, including
the compensation of all of our executive officers and directors. Our Compensation Committee also has the principal responsibility for
the administration of our equity incentive and stock purchase plans. The responsibilities of our Compensation Committee are described
in the Compensation Committee Charter adopted by our board of directors, a current copy of which can be found on the investors section
of our website, www.perasoinc.com.
Nominations
Process
We
do not have a nominating committee, as we are a small company and currently only have five directors. Instead of having such a committee,
our board of directors historically has appointed all of the independent directors on our board to search for and evaluate qualified
individuals to become nominees for director and board committee members. The independent directors recommend candidates for nomination
for election or reelection at each annual meeting of stockholders and, as necessary, to fill vacancies and newly created directorships,
and evaluate candidates for appointment to and removal from committees. The independent directors operate in this capacity under authority
granted by resolution of the board of directors, rather than by charter.
When
new candidates for our board of directors are sought, the independent directors evaluate each candidate for nomination as a director
within the context of the needs and the composition of the board of directors as a whole. The independent directors conduct any appropriate
and necessary inquiries into the backgrounds and qualifications of candidates. When evaluating director nominees, our board of directors
generally seeks to identify individuals with diverse, yet complementary business backgrounds. Although we have no formal policy regarding
diversity, our directors consider both the personal characteristics and experience of director nominees, including each nominee’s
independence, diversity, age, skills, expertise, time availability and industry background in the context of the needs of the board of
directors and the Company. The board of directors believes that director nominees should exhibit proven leadership capabilities and experience
at a high level of responsibility within their chosen fields and must have the experience and ability to analyze the complex business
issues facing us, and specifically, the issues inherent in the semiconductor industry. In addition to business expertise, the board of
directors requires that director nominees have the highest personal and professional ethics, integrity and values and, above all, are
committed to representing the long-term interests of our stockholders and other stakeholders. To date, we have not paid any fee to a
third party to assist in the process of identifying or evaluating director candidates. Our independent directors will consider candidates
for nomination as director who are recommended by a stockholder and will not evaluate any candidate for nomination for director differently
because the candidate was recommended by a stockholder. To date, we have not received or rejected any suggestions for a director candidate
recommended by any stockholder or group of stockholders owning more than 5% of our common stock. The recommendation must include the
information specified in our bylaws for stockholder nominees to be considered at an annual meeting, including the following:
| ● | The
stockholder’s name and address and the beneficial owner, if any, on whose behalf the
nomination is proposed; |
| ● | The
stockholder’s reason for making the nomination at the annual meeting, and the signed
consent of the nominee to serve if elected; |
| ● | The
number of shares owned by, and any material interest of, the record owner and the beneficial
owner, if any, on whose behalf the record owner is proposing the nominee; |
| ● | A
description of any arrangements or understandings between the stockholder, the nominee and
any other person regarding the nomination; and |
| ● | Information
regarding the nominee that would be required to be included in our proxy statement by the
rules of the SEC, including the nominee’s age, business experience for the past five
years and any other directorships held by the nominee. |
The
information listed above is not a complete list of the information required by our bylaws. The secretary will forward any timely recommendations
containing the required information to our independent directors for consideration.
Item
11. Executive Compensation
Compensation
Committee
Ian
McWalter, Andreas Melder and Robert Y. Newell are the current members of our Compensation Committee, with Dr. McWalter serving as the
chairman. The Compensation Committee is responsible for reviewing, recommending and approving our compensation policies and benefits,
including the compensation of all of our executive officers and directors. Our Compensation Committee also has the principal responsibility
for the administration of our equity incentive and stock purchase plans and the approval of equity awards to the named executive officers.
The responsibilities of our Compensation Committee are described in the Compensation Committee Charter adopted by our board of directors,
a current copy of which can be found on the investors section of our website, www.perasoinc.com.
Overview
of Compensation Program
The
Compensation Committee of the board of directors has responsibility for establishing, implementing and monitoring adherence to our compensation
philosophy. The board of directors has delegated to the Compensation Committee the responsibility for determining our compensation policies
and procedures for senior management, including the named executive officers, periodically reviewing these policies and procedures, and
making recommendations concerning executive compensation to be considered by the full board of directors, when such approval is required
under any of our plans or policies or by applicable laws.
The
compensation received by our named executive officers in fiscal year 2022 is set forth in the Summary Compensation Table, below. For
2022, the named executive officers included Ronald Glibbery, our chief executive officer, Daniel Lewis, our former vice president and
president, and James Sullivan, our chief financial officer.
Compensation
Philosophy
In
general, our executive compensation policies are designed to recruit, retain and motivate qualified executives by providing them with
a competitive total compensation package based in large part on the executive’s contribution to our financial and operational success,
the executive’s personal performance and increases in stockholder value, as measured by the price of our common stock. We believe
that the total compensation paid to our executives should be fair, reasonable and competitive.
We
seek to have a balanced approach to executive compensation with each primary element of compensation (base salary, variable compensation
and equity incentives) designed to play a specific role. Overall, we design our compensation programs to allow for the recruitment, retention
and motivation of the key executives and high-level talent required in order for us to:
| ● | supply
high-value and high-quality integrated circuit solutions to our customer base; |
| ● | achieve
or exceed our annual financial plan and be profitable; |
| ● | make
continuous progression towards achieving our long-term strategic objectives to be a high-growth
company with growing profitability; and |
| ● | increase
our share price to provide greater value to our stockholders. |
Role
of Executive Officers in Compensation Decisions
The
chief executive officer (CEO) makes recommendations for equity and non-equity compensation for executives to be approved by the Compensation
Committee. The Compensation Committee reviews these guidelines annually. The CEO annually reviews the performance of our executives (other
than himself) and presents his recommendations for proposed salary adjustments, bonuses and equity awards to the Compensation Committee
once a year. In its discretion, the Compensation Committee may accept, modify or reject the CEO’s recommendations. The Compensation
Committee evaluates the compensation of the CEO on its own without the participation or involvement of the CEO. Only the Compensation
Committee and the board of directors are authorized to approve the compensation for any named executive officer. Compensation of new
executives is based on hiring negotiations between the individuals and our CEO and/or Compensation Committee.
Elements
of Compensation
Consistent
with our compensation philosophy and objectives, we offer executive compensation packages consisting of the following three components:
| ● | annual
incentive compensation; and |
In
each fiscal year, the Compensation Committee determines the amount and relative weighting of each component for all executives, including
the named executive officers. Base salaries are paid in fixed amounts and thus do not encourage risk taking. Our widespread use of long-term
compensation consisting of restricted stock units (RSUs) focuses recipients on the achievement of our longer-term goals and conserves
cash for other operating expenses. Historically, the RSUs granted to our executives have vested in increments over three years. The Compensation
Committee does not believe that these awards encourage unnecessary or excessive risk taking because the ultimate value of the awards
is tied to our stock price, and the use of multi-year vesting schedules helps to align our employees’ interests even more closely
with those of our long-term investors.
Base
Salary
Because
our compensation philosophy stresses performance-based awards, base salary is intended to be a smaller portion of total executive compensation
relative to long-term equity. The Compensation Committee takes into account the executive’s scope of responsibility and significance
to the execution of our long-term strategy, past accomplishments, experience and personal performance and compares each executive’s
base salary with those of the other members of senior management. The Compensation Committee may give different weighting to each of
these factors for each executive, as it deems appropriate. The Compensation Committee did not retain a compensation consultant or determine
a compensation peer group for 2022.
In February 2022, the Compensation Committee approved increases to
the annual base salaries of certain of our executive officers, effective retroactively as of December 17, 2021. The annual base salary
for our chief financial officer, James Sullivan, was increased from $260,000 to $305,000. The annual base salary for our chief operating
officer, Brad Lynch, was increased from CAD$200,000 to $275,000. The annual base salary for our chief technology officer, Alex Tomkins,
was increased from CAD$252,000 to $250,000.
In
April 2022, the Compensation Committee approved an increase to the annual base salary for our then president, Daniel Lewis, from $250,000
to $275,000, effective retroactively as of December 17, 2021.
Annual
Incentive Compensation
In
February 2022, the Compensation Committee authorized incentive compensation targets for the named executive officers. Mr. Sullivan, under
the terms of his 2022 annual performance-based bonus, will be eligible to receive a target amount of up to 60% of his base salary, payable
in the form of cash, the Company’s stock or a combination of both. Similarly, Mr. Lynch, under the terms of his 2022 annual performance-based
bonus, will be eligible to receive a target amount of up to 50% of his base salary, also payable in the form of cash, the Company’s
stock or a combination of both.
In
April 2022, the Compensation Committee authorized incentive compensation targets for Mr. Lewis. Mr.
Lewis, under the terms of his 2022 annual performance-based bonus, will be eligible to receive (i) a target amount of up to 50%
of his base salary based upon the achievement of certain goals and performance criteria determined by our CEO and the Compensation Committee
and (ii) a cash bonus equal to 3% of (a) the cash proceeds received by the Company (the “VAE Bonus”) in the event the Company
sells all or any part of the Company’s Virtual Accelerator Engine intellectual property (the “VAE Sale”) or (b) the
royalties paid to the Company during the 24 month period following the VAE Sale (the “VAE Royalty Payments” and, together
with the VAE Bonus, the “VAE Incentive Payments”); provided, however, that in no event will the aggregate VAE Incentive Payments
exceed $300,000. In January 2023, upon receipt of the final proceeds from the VAE Sale, we paid Mr. Lewis $105,000 for the VAE Bonus.
Equity
Awards
Although
we do not have a mandated policy regarding the ownership of shares of common stock by officers and directors, we believe that granting
equity awards to executives and other key employees on an ongoing basis gives them a strong incentive to maximize stockholder value and
aligns their interests with those of our other stockholders on a long-term basis. Our Amended and Restated Peraso Inc. 2019 Stock Incentive
Plan (the “Peraso Stock Incentive Plan”), which was approved by our stockholders and became effective in August 2019, enables
us to grant equity awards, as well as other types of stock-based compensation, to our executive officers and other employees. The Compensation
Committee reviews and approves all equity awards granted under the Peraso Stock Incentive Plan to the named executive officers. We grant
equity awards to achieve retention and motivation:
| |
● |
upon the hiring of key executives and other personnel; |
| |
|
|
| |
● |
annually, when we review progress against corporate
and personal goals; and |
| |
|
|
| |
● |
when we believe that competitive forces or economic
conditions threaten to cause our key executives to lose their motivation and/or where retention of these key executives is in jeopardy. |
With
the Compensation Committee’s approval, we grant equity awards to acquire shares of common stock when we initially hire executives
and other employees, as a long-term performance incentive. The Compensation Committee has determined the size of the initial equity awards
to newly hired executives with reference to equity awards held by existing executives, the percentage that such award represents of our
total shares outstanding and hiring negotiations with the individual. In addition, the Compensation Committee would consider other relevant
information regarding the size and type of compensation package considered necessary to enable us to recruit, retain and motivate the
executive.
Typically,
when we hire an executive, the equity awards vest on over a three-year period. The options granted to executives in connection with annual
performance reviews typically vest monthly over a three-to-four year period, and RSUs granted typically vest annually over a period of
from one-to-three years, as the Compensation Committee may decide. As matters of policy and practice, we grant stock options with an
exercise price equal to fair market value, although the 2019 Plan allows us to use a different exercise price. In determining fair market
value, we use the closing price of the common stock on the Nasdaq on the grant date.
Historically,
no employee has been eligible for an annual performance grant until the employee has been employed for at least six months. Annual performance
reviews are generally conducted in the first half of each fiscal year. Our CEO conducts the performance review of all other executives
and makes his recommendations to the Compensation Committee. The Compensation Committee also reviews the CEO’s annual performance
and determines whether he should receive additional equity awards. Aside from equity award grants in connection with annual performance
reviews, we do not have a policy of granting additional awards to executives during the year. The board of directors and Compensation
Committee have not adopted a policy with respect to setting the dates of award grants relative to the timing of the release of material
non-public information. Our policy with respect to prohibiting insider trading restricts sales of shares during specified black-out periods,
including at all times that our insiders are considered to possess material non-public information.
In
determining the size of equity awards in connection with the annual performance reviews of our executives, the Compensation Committee
takes into account the executive’s current position with and responsibilities to us, and current and past equity awards to the
executive.
In
April 2022, our Compensation Committee authorized the following awards of restricted stock units to the named executive officers:
| |
● |
Mr. Glibbery – 200,000; |
| |
● |
Mr. Lewis – 75,000; and |
| |
● |
Mr. Sullivan – 100,000. |
The
awards vest over semiannually over the 36-month period commencing December 17, 2021.
Going
forward, we intend to continue to evaluate and consider equity grants to our executives on an annual basis. We expect to consider potential
equity awards for executives at the same time as we annually review our employees’ performance and determine whether to award grants
for all employees.
Accounting
and Tax Considerations
Our
Compensation Committee has reviewed the impact of tax and accounting treatment on the various components of our executive compensation
program. Section 162(m) of the Internal Revenue Code, as amended (the “Code”), generally disallows a tax deduction to publicly-held
companies for compensation paid to “covered” executive officers, to the extent that compensation paid to such an officer
exceeds $1 million during the taxable year. The Tax Cuts and Jobs Act repealed the performance-based exception to the deduction limit
for remuneration that is deductible in tax years commencing after December 31, 2017. However, certain remuneration is specifically exempt
from the deduction limit under a transition rule to the extent that it is “performance-based,” as defined in Section 162(m)
of the Code, and subject to a “written binding contract” in effect as of November 2, 2017 that is not later modified in any
material respect. We endeavor to award compensation that will be deductible for income tax purposes, though other factors will also be
considered. None of the compensation paid to our covered executive officers for the year ended December 31, 2022 that would be taken
into account for purposes of Section 162(m) exceeded the $1 million limitation for 2021. Because of ambiguities and uncertainties as
to the application and interpretation of Section 162(m) of the Code and the regulations issued thereunder, including the uncertain scope
of the transition relief under the Tax Cuts and Jobs Act, no assurance can be given that compensation intended to satisfy the requirements
for exemption from Section 162(m) of the Code in fact will satisfy such requirements. Our Compensation Committee may authorize compensation
payments that do not comply with the exemptions to Section 162(m) when we believe that such payments are appropriate to attract and retain
executive talent.
Say-on-Pay
In
2020, we gave our stockholders an opportunity to provide feedback on our executive compensation through an advisory vote at our annual
stockholder meeting. Stockholders were asked to approve, on an advisory basis, the compensation paid to our named executive officers.
A majority of stockholders indicated approval of the compensation of the named executive officers, with approximately 90% of the shares
that voted on such matter voting in favor of the proposal. Additionally, in 2017, stockholders were asked to approve, on an advisory
basis, in favor of having a stockholder vote to approve the compensation of our named executive officers every three years. A majority
of stockholders indicated approval of having a stockholder vote to approve the compensation of our named executive officers every three
years, with approximately 60% of the shares that voted on such matter voting in favor of the proposal. Based on these results and consistent
with the previous recommendation and determination of its board of directors, we will hold non-binding advisory votes on executive compensation
every three years until the next vote on the frequency of the stockholder advisory vote on executive compensation.
In
light of the results of the advisory vote, the Compensation Committee continued to apply principles that were substantially similar to
those applied historically in determining compensation policies and decisions and did not make any significant changes to executive compensation
decisions and policies with respect to 2022 executive compensation.
SUMMARY
COMPENSATION TABLE
The
following table sets forth compensation information for fiscal years 2022 and 2021 for each of our named executive officers. Compensation
paid by Peraso Tech prior to the closing of the Arrangement is not reflected in the Summary Compensation Table.
| Name
and principal position | |
Year | |
Salary
($) | | |
Stock Option
Awards
($)(1) | | |
Restricted Stock
Awards
($)(1) | | |
Non-Equity
Incentive Plan
Compensation
($) | | |
Total
($) | |
Ronald Glibbery
| |
2022 | |
| 400,000 | | |
| — | | |
| 430,000 | | |
| — | | |
| 830,000 | |
Ronald Glibbery
| |
2021 | |
| 16,667 | | |
| — | | |
| — | | |
| — | | |
| 16,667 | |
| Chief
Executive Officer (2) | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Daniel Lewis
| |
2022 | |
| 279,316 | | |
| — | | |
| 161,250 | | |
| — | | |
| 440,566 | |
| Vice
President, General Manager of Memory Products and Director (3) | |
2021 | |
| 266,667 | | |
| — | | |
| 32,500 | | |
| 500,000 | | |
| 799,167 | |
| James Sullivan | |
2022 | |
| 306,719 | | |
| — | | |
| 215,000 | | |
| — | | |
| 521,719 | |
| Chief
Financial Officer | |
2021 | |
| 256,668 | | |
| — | | |
| — | | |
| 200,000 | | |
| 456,668 | |
| (1) | Award
amounts reflect the aggregate grant date fair value with respect to awards granted during
the years indicated, as determined pursuant to FASB ASC Topic 718. The assumptions used
to calculate the aggregate grant date fair value of option and stock awards are set forth
in the notes to the consolidated financial statements included in item 15 of this Report.
These amounts do not reflect actual compensation earned or to be earned by our named executive
officers. |
| (3) | Mr.
Lewis resigned as our Vice President, General Manager of Memory Products in December 2022. |
GRANTS
OF PLAN-BASED AWARDS
| Name | |
Grant
Date | |
All
Other
Stock Awards:
Number of Shares of Stock or
Units (#)(1) | | |
Grant
Date
Fair Value
of Stock
Awards ($) | |
Ronald Glibbery
| |
4/15/2022 | |
| 200,000 | | |
| 430,000 | |
| Daniel
Lewis (2) | |
4/15/2022 | |
| 75,000 | | |
| 161,250 | |
| James Sullivan | |
4/15/2022 | |
| 100,000 | | |
| 215,000 | |
| (1) | Represents
restricted stock units granted pursuant to the Equity Plan. |
| (2) | Mr.
Lewis resigned as our Vice President, General Manager of Memory Products in December 2022. |
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END
The
following table sets forth information regarding the outstanding equity awards held by our named executive officers as of December 31,
2022.
| | |
Option
Awards | |
Stock
Awards |
|
| Name | |
Number
of
Securities
Underlying
Unexercised
Options (#)
Exercisable |
| | |
Number
of
Securities
Underlying
Unexercised
Options (#)
Unexercisable | | |
Equity
Incentive
Plan Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#) | | |
Option
Exercise
Price($) | | |
Option
Expiration
Date(1) | |
Number of
Units That
Have Not
Vested (#) |
| | |
Market
Value of
Units That
Have Not
Vested ($) |
|
| Ron Glibbery | |
| 22,619 |
| (2) | |
| — | | |
| — | | |
| 1.73 | | |
11/17/2024 | |
| — |
| | |
| — |
|
| | |
| 18,095 |
| (2) | |
| — | | |
| — | | |
| 2.59 | | |
12/29/2025 | |
| — |
| | |
| — |
|
| | |
| 278,891 |
| (2) | |
| — | | |
| — | | |
| 2.59 | | |
9/17/2030 | |
| — |
| | |
| — |
|
| | |
| 109,599 |
| (2) | |
| — | | |
| — | | |
| 2.59 | | |
12/16/2031 | |
| — |
| | |
| — |
|
| | |
| |
| | |
| | | |
| | | |
| | | |
| |
| 133,333 |
| (11) | |
| 97,333 |
(12) |
| | |
| |
| | |
| | | |
| | | |
| | | |
| |
| |
| | |
| |
|
| Daniel Lewis | |
| 4,000 |
| (3) | |
| — | | |
| — | | |
| 15.00 | | |
10/19/2023 | |
| — |
| | |
| — |
|
| | |
| 1,000 |
| (4) | |
| — | | |
| — | | |
| 25.60 | | |
1/4/2024 | |
| — |
| | |
| — |
|
| | |
| 15,000 |
| (5) | |
| — | | |
| — | | |
| 3.92 | | |
2/6/2029 | |
| — |
| | |
| — |
|
| | |
| 60,000 |
| (6) | |
| — | | |
| — | | |
| 1.57 | | |
11/20/2029 | |
| — |
| | |
| — |
|
| | |
| |
| | |
| | | |
| | | |
| | | |
| |
| 50,000 |
| (11) | |
| 36,500 |
(12) |
| | |
| |
| | |
| | | |
| | | |
| | | |
| |
| |
| | |
| |
|
| James Sullivan | |
| 300 |
| (7) | |
| — | | |
| — | | |
| 410.00 | | |
3/30/2025 | |
| — |
| | |
| — |
|
| | |
| 787 |
| (8) | |
| — | | |
| — | | |
| 144.00 | | |
8/23/2026 | |
| — |
| | |
| — |
|
| | |
| 5,500 |
| (9) | |
| — | | |
| — | | |
| 3.92 | | |
2/6/2029 | |
| — |
| | |
| — |
|
| | |
| 20,000 |
| (10) | |
| — | | |
| — | | |
| 1.57 | | |
11/20/2029 | |
| — |
| | |
| — |
|
| | |
| |
| | |
| | | |
| | | |
| | | |
| |
| 66,667 |
| (11) | |
| 48,667 |
(12) |
| (1) |
The standard option term is
generally ten years, but all of the options expire automatically unless exercised within 90 days after the cessation of service as
an employee, director or consultant. |
| (2) |
The stock options were acquired
on December 17, 2021 as consideration for the person’s securities of Peraso Technologies Inc., which we acquired by way of
reverse takeover pursuant to the Arrangement. |
| (3) |
The stock option was granted
on October 19, 2017 for service as a non-employee director, and the shares subject to this option vest annually over three years
beginning September 26, 2017 subject to continued employment (or service as a director or consultant). |
| (4) |
The stock option was granted
on January 4, 2018 for service as a non-employee director, and the shares subject to this option vest annually over three years beginning
September 26, 2017 subject to continued service as an employee, director or consultant. |
| (5) |
The stock option was granted
on February 6, 2019, and the shares subject to this option vest monthly over three years subject to continued service as an employee,
director or consultant. The shares were fully vested on December 17, 2021 per the Arrangement Agreement. |
| (6) |
The stock option was granted
on November 20, 2019, and the shares subject to this option vested monthly over three years subject to continued service as an employee,
director or consultant. The shares were fully vested on December 17, 2021 per the Arrangement Agreement. |
| (7) |
The stock option was granted
on March 30, 2015, and the shares subject to this option vested monthly over 48 months subject to continued employment (or service
as a director or consultant). |
| (8) |
In August 2016, officers tendered
their eligible options and received new options at a rate of 1 replacement option share for each 1.75 option shares tendered. The
stock option was granted on August 23, 2016, and the shares subject to this option vested monthly over 48 months subject to continued
employment (or service as a director or consultant). |
| (9) |
The stock option was granted
on February 6, 2019, and the shares subject to this option vest monthly over three years subject to continued service as an employee,
director or consultant). |
| (10) |
The stock option was granted
on November 20, 2019, and the shares subject to this option vested monthly over three years subject to continued service as an employee,
director or consultant. |
| (11) |
The shares subject to each
restricted stock unit grant vest on each semi-annual anniversary over a three-year period commencing on December 17, 2021 subject
to continued employment (or service as a director or consultant). |
| (12) |
The amount is calculated using
the Company’s closing price on the Nasdaq of $0.73 per share of common stock on December 30, 2022. |
OPTION
EXERCISES AND STOCK VESTED
The
following table sets forth the number of shares acquired and aggregate dollar amount realized pursuant to the vesting of stock awards
by our named executive officers during 2022.
| | |
Option
Awards | | |
Stock
Awards | |
| Name | |
Number
of
Shares
Acquired on
Exercise(#) | | |
Value
Realized on
Exercise($) | | |
Number
of
Shares
Acquired on
Vesting(#) | | |
Value
Realized on
Vesting($)(1) | |
| Ronald Glibbery | |
| — | | |
| — | | |
| 66,667 | | |
| 92,333 | |
| Daniel Lewis | |
| — | | |
| — | | |
| 25,000 | | |
| 34,625 | |
| James Sullivan | |
| — | | |
| — | | |
| 34,708 | | |
| 49,714 | |
| (1) |
The aggregate dollar value
realized upon vesting represents the closing price of a share of common stock on the Nasdaq at the date of vesting, multiplied by
the total number of shares vested. |
Employment
and Change-in-Control Arrangements and Agreements
Our
Executive Change-in-Control and Severance Policy (the “Policy”) provides benefits that are intended to encourage the continued
dedication of our executive officers and to mitigate potential disincentives to the consideration of a transaction that would result
in a change in control, particularly where the services of our named executive officers may not be required by a potential acquirer.
The Policy provides for benefits for our named executive officers in the event of a “Change-in-Control,” which is generally
defined as:
|
● |
an acquisition of 45% or more of our common stock or
voting securities by any “person” as defined under the Exchange Act; or |
| |
|
|
|
● |
consummation of a complete liquidation or dissolution
of the Company or a merger, consolidation, reorganization or sale of all or substantially all of our assets (collectively, a “Business
Combination”) other than a Business Combination in which (A) our stockholders receive 50% or more of the stock of the corporation
resulting from the Business Combination and (B) at least a majority of the board of directors of such resulting corporation were
our incumbent directors immediately prior to the consummation of the Business Combination, and (C) after which no individual, entity
or group (excluding any corporation or other entity resulting from the Business Combination or any employee benefit plan of such
corporation or of ours) who did not own 45% or more of the stock of the resulting corporation or other entity immediately before
the Business Combination owns 45% or more of the stock of such resulting corporation or other entity. |
Under
the Policy, the following compensation and benefits are to be provided to our chief executive officer upon the occurrence of a Change-in-Control,
and in the case of our other named executive officers, upon a Change-in-Control combined with a termination of the named executive officer’s
employment without cause, or due to disability or resignation for good reason (as defined in the Policy) in connection with the Change-in-Control
or within 24 months after it:
| |
● |
any base salary earned but not yet paid through the
date of termination; |
| |
|
|
| |
● |
any annual or discretionary
bonus earned but not yet paid to him for any calendar year prior to the year in which his termination occurs; |
| |
|
|
| |
● |
any compensation under
any deferred compensation plan of ours or deferred compensation agreement with us then in effect; |
| |
|
|
| |
● |
a single lump sum payment
equal to the sum of (a) one year of his or her then-current base salary plus (b) the average of his or her annual bonus payments
in the preceding three years or such shorter time as he or she has been employed by us (with prorated weighting assigned to any bonus
earned for a partial year of employment), which payment will be made within 60 days following the Change-in-Control (in the case
of the chief executive officer), or 60 days following the date of employment termination (in the case of all other named executive
officers). |
| |
|
|
| |
● |
vesting in 100% of all
outstanding equity awards as of the date of the Change-in-Control for the chief executive officer, or as of the date of termination
of employment for all other named executive officers; |
| |
|
|
| |
● |
reimbursement of any business
expenses incurred by him through the date of termination but not yet paid; |
| |
|
|
| |
● |
reimbursement of the cost
of continuation of medical benefits for a period of 12 months; and |
| |
|
|
| |
● |
outstanding equity awards that are structured as stock
options, stock appreciation rights or similar awards shall be amended effective as of the date of termination to provide that such
awards will remain outstanding and exercisable until the earlier of (a) 12 months following the date of the Change-in-Control for
the chief executive officer, or the termination of employment for the other named executive officers, and (b) the expiration of the
award’s initial term. |
Under
the Policy, “cause” means the executive’s:
| |
● |
willful failure to attend to the executive’s
duties that is not cured by the executive within 30 days of receiving written notice from the CEO (or, in the case of the CEO, from
the board of directors) specifying such failure; |
| |
|
|
| |
● |
material breach of the executive’s then-current
employment agreement (if any) that is not cured by the executive within 30 days of receiving written notice from the CEO (or, in
the case of the CEO, from the board of directors) specifying such breach; |
| |
|
|
| |
● |
conviction of (or plea of guilty or nolo contendere
to) any felony or any misdemeanor involving theft or embezzlement; or |
| |
|
|
| |
● |
misconduct resulting in material harm to our business
or reputation, including fraud, embezzlement, misappropriation of funds or a material violation of the executive’s Employment,
Confidential Information, Invention Assignment and Arbitration Agreement; and |
Under
the Policy, “good reason” means the occurrence of any of the following conditions without the executive’s consent,
but only if such condition is reported by the executive within 90 days of the executive’s knowledge of such condition and remains
uncured 30 days after written notice from the executive to the board of directors of said condition:
| |
● |
a material reduction in the executive’s then-current base salary or annual target bonus (expressed as a percentage of Executive’s then-current base salary), except for a reduction proportionate to reductions concurrently imposed on all other members of the Company’s executive management; |
| |
|
|
| |
● |
a material reduction in the executive’s then-current employee benefits package, taken as a whole, except for a reduction proportionate to reductions concurrently imposed on all other members of executive management; |
| |
|
|
| |
● |
a material reduction in the executive’s responsibilities with respect to our overall operations, such that continuity of responsibilities with respect to business operations existing prior to a corporate transaction will serve as a material reduction in responsibilities if such business operations represent only a subsidiary or business unit of the larger enterprise after the corporate transaction; |
| |
|
|
| |
● |
a material reduction in the responsibilities of the executive’s direct reports, including a requirement for the chief executive officer to report to another officer as opposed to our board of directors or a requirement for any other executive to report to any officer other than our chief executive officer; |
| |
|
|
| |
● |
a material breach by us of any material provision of the executive’s then-current employment agreement (if any); |
| |
|
|
| |
● |
a requirement that the executive relocate to a location more than 35 miles from the executive’s then-current office location, unless such office relocation results in the distance between the new office and Executive’s home being closer or equal to the distance between the prior office and the executive’s home; |
| |
|
|
| |
● |
a failure of a successor or transferee to assume our obligations under this Policy; or |
| |
|
|
| |
● |
a failure to nominate the executive for election as a Board director, if, at the proper time for nomination, the executive is a member of the board of directors. |
Notwithstanding
the above, in lieu of the payments and benefits payable under the Policy to Mr. Glibbery as the Company’s chief executive officer,
Mr. Glibbery will receive change-in control payments and benefits in accordance with the terms and conditions of his employment agreement.
The table below summarizes the payments Mr. Glibbery would be entitled to depending on the respective type of termination of his employment.
| Termination
Type |
|
Payments
and Benefits |
| |
|
|
| Termination
for Cause or Voluntary Resignation |
|
(i) |
|
accrued and unpaid base
salary and any other payments required by law, including those in connection with accrued vacation; and |
| |
(ii) |
|
reimbursement for business
expenses. |
| |
|
|
| Termination
Without Cause, for Good Reason, upon Change of Control, Death or Disability |
|
(i) |
|
accrued and unpaid base
salary and any other payments required by law including those in connection with accrued vacation; |
| |
(ii) |
|
reimbursement for business
expenses; |
| |
(iii) |
|
the payment of the greater
of (A) the sum of: (x) pay in lieu of notice of termination, in the amount required pursuant to the ESA (as defined in Mr. Glibbery’s
employment agreement), and (y) statutory severance pay (if applicable) in the amount required to be provided pursuant to the ESA;
or (B) twenty-four (24) months of base salary in lieu of notice, calculated solely by reference to the base salary except and only
to the extent as otherwise minimally required by the ESA, to be paid in the form of a lump sum; |
| |
(iv) |
|
any bonus awarded but
not yet paid in respect of the fiscal year preceding the termination date; |
| |
|
(v) |
|
bonus for the year in
which the employment terminates, prorated pursuant to the employment agreement; |
| |
|
(vi) |
|
all benefits (as existed
on the date notice of termination is provided) for the duration of the Severance Period (as defined in the employment agreement); |
| |
|
(vii) |
|
any unvested equity
and equity-related compensation that has been issued pursuant to the Plan will be immediately accelerated and vested as of the termination
date; |
| |
|
(viii) |
|
any vested equity and
equity-related compensation that has been issued under the Plan will remain exercisable until 24 months following such termination;
and |
| |
|
(ix) |
|
any other benefits and/or
perquisites shall continue until the end of the ESA Notice Period (as defined in the employment agreement). |
The
information below describes the severance benefits payable to (i) Mr. Glibbery under his employment agreement and (ii) Mr. Sullivan under
the Policy, as if such arrangements had been in effect and a Change-in-Control occurred on December 31, 2022, and the employment of each
of our named executive officers was terminated without cause immediately following the Change-in-Control:
| Name | |
Base Salary
($)(1) | | |
Incentive Plans
($)(2) | | |
Continuation
of Benefits
($)(3) | | |
Stock
Option
Vesting
($)(4) | | |
Stock
Award
Vesting
($)(5) | | |
Total
($) | |
| Ronald Glibbery | |
| 800,000 | | |
| 300,000 | | |
| 13,766 | | |
| — | | |
| 97,333 | | |
| 1,211,099 | |
| James Sullivan | |
| 305,000 | | |
| 183,000 | | |
| 24,506 | | |
| — | | |
| 48,667 | | |
| 561,173 | |
| (1) |
Represents cash severance
payments based on the executive’s salary at December 31, 2022, in an amount equal to two years of base salary for Mr. Glibbery
and one year of base salary for Mr. Sullivan. |
| (2) |
For
Mr. Glibbery, the amount represents payment of his annual target bonus amount. For Mr. Sullivan, the amount represents the average of
his annual performance incentive payments in the preceding three years. |
| (3) |
Represents
the aggregate amount of all premiums payable for the continuation of the executive’s health benefits for one or two years, as applicable,
based on the amounts of such premiums at December 31, 2022. |
| (4) |
The
value is calculated as the intrinsic value per share, multiplied by the number of shares that would become fully vested upon the Change-in-Control.
The intrinsic value per share would be calculated as the excess of the closing price of the common stock on the Nasdaq of $0.73 on December
30, 2022 over the exercise price of the option. If the value is less than zero, it is deemed to be zero for the purposes of these calculations. |
| (5) |
The
value is calculated as the intrinsic value per share, multiplied by the number of shares that would become fully vested upon the Change-in-Control.
The intrinsic value per share is considered as the closing price of our common stock on the Nasdaq of $0.73 on December 30, 2022. |
If
a Change-in-Control occurred on December 31, 2022, under the Policy, the following numbers of option and award shares would have vested
immediately as a result of acceleration on December 31, 2022:
| Name | |
Number of
Accelerated
Option and
Award
Shares | |
| Ronald Glibbery | |
| 215,532 | |
| James Sullivan | |
| 66,667 | |
Employment
Agreements
In
addition to the agreements containing the Change-in-Control provisions summarized above, we have entered into our standard form of employment,
confidential information, invention assignment and arbitration agreement with each of the named executive officers.
We
also have entered into agreements to indemnify our current and former directors and certain executive officers, in addition to the indemnification
provided for in our certificate of incorporation and bylaws. These agreements, among other things, provide for indemnification of our
directors and certain executive officers for many expenses, including attorneys’ fees, judgments, fines and settlement amounts
incurred by any such person in any action or proceeding, including any action by or in the right of the Company, arising out of such
person’s services as a director or executive officer of the Company, any subsidiary of the Company or any other company or enterprise
to which the person provided services at our request.
Director
Compensation
The
following table summarizes the compensation we paid to our non-employee directors in 2022:
| Name | |
Fee
Compensation
($) | | |
Restricted Stock
Awards
($)(1) | | |
Option
Awards
($)(2) | | |
All Other
Compensation | | |
Total
($) | |
| Robert Y. Newell | |
| 42,175 | | |
| — | | |
| — | | |
| — | | |
| 42,175 | |
| Ian McWalter | |
| 34,793 | | |
| — | | |
| — | | |
| — | | |
| 34,793 | |
| Andreas Melder | |
| 31,630 | | |
| — | | |
| — | | |
| — | | |
| 31,630 | |
| (1) |
As
of December 31, 2022, restricted stock unit awards held on December 31, 2022 consist of: awards granted to Messrs. Newell, McWalter and
Melder on December 22, 2021 for 20,000 shares each. |
| (2) |
As
of December 31, 2022, Messrs. McWalter and Melder each held 19,724 outstanding options to purchase of shares of our common stock. Mr.
Newell held 24,724 outstanding options to purchase of shares of our common stock. |
Director
Fee Compensation
The
challenges our business has faced have made it challenging for us to attract new non-employee directors. Nasdaq and SEC regulations require
that a majority of the directors on our board of directors and its committees be independent, non-employee directors, as defined by each
entity. In December 2021, we amended our director compensation structure and adopted our Outside Director Compensation Plan (the Director
Plan). Under the Director Plan, we pay the following annual cash retainer fees, payable in quarterly installments, to our non-employee
directors for their service on our board of directors and, as applicable, for service on committees of our board of directors:
| |
● |
$35,000 for service on the board of directors; |
| |
|
|
| |
● |
$8,000 for service as chairperson of the Audit Committee; and |
| |
|
|
| |
● |
$6,000 for service as chairperson of the Compensation Committee. |
Director
Equity Compensation
Under
the Director Plan, upon initial appointment to our board of directors, each non-employee director will receive a stock option with
a value of $100,000, calculated by dividing the $100,000 by the closing trading price of our common stock on the date of grant. The initial
stock option will have an exercise price equal to the closing price of our common stock on the date of grant and will vest as to one-third
of the shares on the first annual anniversary of the grant and the remaining shares quarterly over the subsequent two years, provided
the non-employee director continues to serve on the board of directors. In the event of a merger, sale of substantially all of our assets
or similar transaction, vesting of all director options would accelerate as to 100% of the unvested shares subject to the award.
Non-employee
directors will also receive an annual equity award of restricted stock units of common stock equal to $50,000 of value per non-employee
director. The restricted stock unit award will be made upon initial appointment to our board of directors and then subsequently at the
first scheduled meeting of the board of directors following our annual meeting of stockholders. The number of restricted stock units
will be calculated by dividing $50,000 by the closing trading price of our common stock on the date of the award. The restricted stock
unit award will vest in full on the earlier to occur of the next annual meeting of stockholders or the one-year anniversary of the award.
All equity awards granted under the Director Plan will be made from the 2019 Plan.
Item
12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The
following table sets forth certain information as of March 1, 2023 concerning the ownership of our common stock by:
| |
● |
each stockholder known by us to be the beneficial owner of more than 5% of the outstanding shares of our common stock (currently our only class of voting securities); |
| |
|
|
| |
● |
each of our directors; |
| |
|
|
| |
● |
each of our executive officers; and |
| |
|
|
| |
● |
all directors and executive officers as a group. |
Beneficial
ownership is determined in accordance with Rule 13d-3 of the Exchange Act and includes all shares over which the beneficial owner exercises
voting or investment power. Shares that are issuable upon the exercise of options, warrants and other rights to acquire common stock
that are presently exercisable or exercisable within 60 days of March 1,2023 are reflected in a separate column in the table below. These
shares are taken into account in the calculation of the total number of shares beneficially owned by a particular holder and the total
number of shares outstanding for the purpose of calculating percentage ownership of the particular holder. We have relied on information
supplied by our officers, directors and certain stockholders and on information contained in filings with the SEC. Except as otherwise
indicated, and subject to community property laws where applicable, we believe, based on information provided by these persons, that
the persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially
owned by them. The percentage of beneficial ownership is based on 23,376,466 shares of our common stock and exchangeable shares outstanding
as of March 1, 2023.
Unless
otherwise stated, the business address of each of our directors and executive officers listed in the table is 2309 Bering Drive, San
Jose, California 95131.
| | |
Amount and Nature of Beneficial
Ownership | | |
| |
| Name and Principal Position | |
Number of
Shares
Beneficially
Owned
(Excluding
Outstanding
Options)
(1) |
| | |
Number of
Shares
Issuable on
Exercise of
Outstanding
Options
or Convertible
Securities
(2) | | |
Percent of
Class | |
| Entities affiliated with Roadmap Capital General Partner Ltd. | |
| 8,562,520 |
(3 | ) | |
| — | | |
| 36.63 | % |
| Armistice Capital, LLC | |
| 1,438,834 |
(4 | ) | |
| — | | |
| 6.16 | % |
| | |
| |
| | |
| | | |
| | |
| Directors and Officers: | |
| |
| | |
| | | |
| | |
| Ronald Glibbery | |
| 110,344 |
| | |
| 347,007 | | |
| 1.9 | % |
| Daniel Lewis | |
| 61,677 |
| | |
| 80,000 | | |
| * | |
| Robert Y. Newell | |
| 97,862 |
| | |
| 11,575 | | |
| * | |
| Ian McWalter | |
| 39,880 |
| | |
| 6,575 | | |
| * | |
| Andreas Melder | |
| 14,012 |
| | |
| 6,575 | | |
| * | |
| James Sullivan | |
| 34,351 |
| | |
| 26,587 | | |
| * | |
| Bradley Lynch | |
| 39,694 |
| | |
| 123,685 | | |
| * | |
| Alexander Tomkins | |
| 28,093 |
| | |
| 137,328 | | |
| * | |
| All current directors and executive officers as a group
(8 persons) | |
| 425,913 |
| | |
| 739,332 | | |
| 4.8 | % |
| * |
Represents holdings of less than one percent. |
| (1) |
Excludes
shares subject to outstanding options, warrants, convertible securities or other rights to acquire common stock that are exercisable
within 60 days of March 1, 2023. |
| (2) |
Represents
the number of shares subject to outstanding options, restricted stock units, convertible securities or other rights to acquire common
stock that are exercisable within 60 days of March 1, 2023. |
| (3) |
Based
on information reported by Roadmap Capital General Partner Ltd. (“Roadmap GP”) on Schedule 13D filed with the SEC on December
27, 2021, Roadmap GP reported that it has shared dispositive power with respect to 8,562,520 shares, and shared voting power with respect
to 8,562,520 shares. Roadmap GP is the general partner of Roadmap Innovation I, Roadmap Innovation II, Roadmap Peraso, Roadmap Peraso
(U.S. and Offshore), Roadmap Peraso II, Roadmap Peraso II (U.S. and Offshore), Roadmap Peraso III and Roadmap Peraso III (U.S. and Offshore)
(collectively, the “Roadmap Funds”), which own these shares. Roadmap Capital Inc. is the sole shareholder of Roadmap GP.
Because of the relationship between Roadmap GP and each of the Roadmap Funds, Roadmap GP may be deemed to beneficially own securities
beneficially owned by each of the Roadmap Funds. Because of the relationship between Roadmap Capital and Roadmap GP, Roadmap Capital
may be deemed to beneficially own the securities beneficially owned by Roadmap GP. Roadmap GP listed its address as 130 Bloor Street
West, Suite 603, Toronto, Ontario, Canada M5S 1N5. |
| (4) |
Based
on information reported by Armistice Capital, LLC on Schedule 13G filed with the SEC on February 14, 2023. |
Securities
Authorized for Issuance under Equity Compensation Plans
The
following table provides information as of December 31, 2022 regarding equity compensation plans approved by our security holders. As
of December 31, 2022, we had no awards outstanding under equity compensation plans that have not been approved by our security holders.
| Plan Category | |
Number of
Securities
to be Issued
Upon Exercise of
Outstanding Options,
Warrants and Rights | |
| |
Weighted Average
Exercise Price of
Outstanding Options,
Warrants and Rights | | |
Number of Securities
Remaining Available for
Future Issuance under
Equity Compensation
Plans (excluding
Securities reflected
in Column (a))(1) | |
| | |
(a) | |
| |
(b) | | |
(c) | |
| Equity compensation plans approved by security holders | |
| 2,556,063 | (2) |
| |
$ | 3.38 | | |
| 1,551,074 | |
| (1) |
Consists of shares of common stock available for future
issuance under the 2019 Plan. |
| (2) |
Consists
of 61,787 shares of common stock subject to outstanding equity awards under the 2010 Plan, 1,195,954 shares of common stock subject to
outstanding equity awards under the 2019 Plan and 1,298,322 of common stock subject to outstanding options assumed by us in connection
with the business combination with Peraso Technologies Inc. that was completed in December 2021. |
Item
13. Certain Relationships and Related Transactions and Director Independence
Related
Party Transactions
A
family member of one of our executive officers serves as a consultant to us. During the year ended December 31, 2022 and 2021, we paid
approximately $162,000 and $208,000, respectively, to the consultant. Additionally, a family member of one of our executive officers
is an employee of the Company. During the year ended December 31, 2022, we paid approximately $101,000 to the employed family member,
which includes the aggregate grant date fair value, as determined pursuant to FASB ASC Topic 718, of an RSU awarded in April 2022. During
the year ended December 31, 2021, we paid approximately $94,000 to the employed family member.
Director
Independence
Our
board of directors has determined that each of the current directors, with the exception of Daniel Lewis and Ronald Glibbery, is “independent,”
as defined by the listing rules of the NASDAQ Stock Market, or Nasdaq, and the rules and regulations of the SEC. Our board of directors
has standing Audit and Compensation Committees, each of which is comprised solely of independent directors in accordance with the Nasdaq
listing rules. No director qualifies as independent unless the board of directors affirmatively determines that he has no direct or indirect
relationship with us that would impair his independence. We independently review the relationship of the Company to any entity employing
a director or on whose board of directors he is serving currently.
Item
14. Principal Accountant Fees and Services
Weinberg
& Co., P.A. (“Weinberg”) was our independent registered public accounting firm for the years ended December 31, 2022
and 2021.
The
following table shows the fees billed (in thousands of dollars) to us by Weinberg for the financial statement audits and other services
provided for fiscal 2022 and 2021.
| | |
2022 | | |
2021 | |
| Audit Fees(1) | |
$ | 223 | | |
$ | 121 | |
| Audit-Related Fees(2) | |
| 13 | | |
| 13 | |
| Total(3) | |
$ | 236 | | |
$ | 134 | |
| (1) |
Audit fees consisted of fees for professional
services rendered for the audit of our annual consolidated financial statements, review of our quarterly financial statements and
services normally provided in connection with statutory and regulatory filings. |
| (2) |
Audit-related fees consisted of fees related to the
issuance of SEC registration statements. |
| (3) |
Weinberg
did not provide any non-audit or other services other than those reported under “Audit Fees” and “Audit-Related Fees.” |
The
Audit Committee meets with our independent registered public accounting firm at least four times a year. At such times, the Audit Committee
reviews both audit and non-audit services performed by the independent registered public accounting firm, as well as the fees charged
for such services. The Audit Committee is responsible for pre-approving all auditing services and non-auditing services (other than non-audit
services falling within the de minimis exception set forth in Section 10A(i)(1)(B) of the Exchange Act and non-audit services
that independent auditors are prohibited from providing to us) in accordance with the following guidelines: (1) pre-approval policies
and procedures must be detailed as to the particular services provided; (2) the Audit Committee must be informed about each service;
and (3) the Audit Committee may delegate pre-approval authority to one or more of its members, who shall report to the full committee,
but shall not delegate its pre-approval authority to management. Among other things, the Audit Committee examines the effect that performance
of non-audit services may have upon the independence of the auditors.
The accompanying notes are an integral part of
these consolidated financial statements.
The accompanying notes are an integral part of
these consolidated financial statements.
The accompanying notes are an integral part of
these consolidated financial statements.
The accompanying notes are an integral part of
these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. The Company and Summary of Significant Accounting Policies
Peraso Inc.,
formerly known as MoSys, Inc. (the Company), 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 derives revenue from selling its semiconductor
devices and modules and performance of non-recurring engineering services. 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.
On September
14, 2021, the Company and its subsidiaries, 2864552 Ontario Inc. (Callco) and 2864555 Ontario Inc. (Canco), 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 (the Nasdaq) under the symbol “PRSO.”
For accounting
purposes, Peraso Tech, the legal subsidiary, was treated as the accounting acquirer and the Company, the legal parent, was treated as
the accounting acquiree. The transaction was accounted for as a reverse acquisition in accordance with Financial Accounting Standards
Board (FASB) Accounting Standards Codification (ASC) 805, Business Combinations (ASC 805). Accordingly, these consolidated financial
statements are a continuation of Peraso Tech’s consolidated financial statements prior to December 17, 2021 and exclude the statements
of operations and comprehensive loss, statement of stockholders’ equity and statements of cash flows of the Company prior to December
17, 2021. See Note 2 for additional disclosure.
Liquidity and Going Concern
The Company incurred net losses of approximately
$32.4 million and $10.9 million for the years ended December 31, 2022 and December 31, 2021, respectively, and had an accumulated deficit
of approximately $149.6 million as of December 31, 2022. These and prior year losses have resulted in significant negative cash flows
and have required the Company to raise substantial amounts of additional capital. To date, the Company has primarily financed its operations
through multiple offerings of common stock and issuance of convertible notes and loans to investors and affiliates.
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 consolidated financial statements.
These 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.
Basis of Presentation
The 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. 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 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.
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 liabilities 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 100% of the invoice value is provided for any problematic customer balances. Delinquent account balances
are written off after management has determined that the likelihood of collection is remote. The Company grants credit only to customers
deemed creditworthy in the judgment of management. The allowance for doubtful accounts receivable was approximately $183,000 and $61,000
as of December 31, 2022 and December 31, 2021, respectively.
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
$420,000 during the year ended December 31, 2022. The Company recorded no inventory write-downs for the year ended December 31, 2021.
Tax Credits and Receivables
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 entitled to a receivable in the form of tax
credits or incentives. The Company records refundable tax credits as a reduction of expense and receivable when the Company can reasonably
estimate the amounts and it is more likely than not, the credit will be received.
A government refund or subsidy that is compensation
for expenses or losses already incurred, or for which there are no future related costs, is recognized in the statement of operations
in the period in which it becomes receivable.
On December 17, 2021, Peraso Tech ceased to be
a Canadian Controlled Private Corporation, as defined by the government of Canada, and the Company was no longer eligible for the expenditure
refund program. However, it is eligible for a tax credit of 15% on qualified SRED expenditures. Unused SRED tax credits can be carried
back three years or forward for 20 years.
Property and Equipment
Property and equipment are originally recorded
at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally three to six
years. Depreciation is recorded in cost of sales and operating expenses in the consolidated statements of operations and comprehensive
loss. Leasehold improvements and assets acquired through capital leases are amortized over the shorter of their estimated useful life
or the lease term, and related amortization is recorded in operating expenses in the consolidated statements of operations.
Intangible and Long-lived Assets
Intangible assets are recorded at cost and amortized
on a straight-line method over their estimated useful lives of three to ten years. Amortization of developed technology and other intangibles
directly related to the Company’s products is included in cost of net revenue, while amortization of customer relationships and
other intangibles not associated with the Company’s products is included in selling, general and administrative expenses in the
consolidated statements of operations and comprehensive loss.
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):
| | |
December 31, 2022 | |
| | |
Gross | | |
| | |
Net | |
| | |
Carrying | | |
Accumulated | | |
Carrying | |
| | |
Amount | | |
Amortization | | |
Amount | |
| Developed technology | |
$ | 5,726 | | |
$ | (1,491 | ) | |
$ | 4,235 | |
| Customer relationships | |
| 2,556 | | |
| (666 | ) | |
| 1,890 | |
| Other | |
| 186 | | |
| (33 | ) | |
| 153 | |
| Total | |
$ | 8,468 | | |
$ | (2,190 | ) | |
$ | 6,278 | |
| | |
December 31, 2021 | |
| | |
Gross | | |
| | |
Net | |
| | |
Carrying | | |
Accumulated | | |
Carrying | |
| | |
Amount | | |
Amortization | | |
Amount | |
| Developed technology | |
$ | 5,726 | | |
$ | (60 | ) | |
$ | 5,666 | |
| Customer relationships | |
| 2,556 | | |
| (27 | ) | |
| 2,529 | |
| Other | |
| 165 | | |
| (5 | ) | |
| 160 | |
| Total | |
$ | 8,447 | | |
$ | (92 | ) | |
$ | 8,355 | |
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 four years. Amortization related to developed technology of approximately $1,431,000
and $60,000 for the years ended December 31, 2022 and 2021, respectively, has been included in cost of net revenue in the consolidated
statements of operations and comprehensive loss.
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 four years. Amortization related to customer relationships
of approximately $639,000 and $27,000 for the years ended December 31, 2022 and 2021, respectively, has been included in selling, general
and administrative expenses in the consolidated statements of operations and comprehensive loss.
Other amortization expense was approximately $28,000
and $5,000 for the years ended December 31, 2022 and 2021, respectively.
As of December 31, 2022, estimated future amortization
expense related to intangible assets was (in thousands):
| Year ending December 31, | |
| |
| 2023 | |
$ | 2,099 | |
| 2024 | |
| 2,099 | |
| 2025 | |
| 2,011 | |
| 2026 | |
| 28 | |
| 2027 | |
| 10 | |
| Thereafter | |
| 31 | |
| | |
$ | 6,278 | |
Business Combinations
The Company allocates the fair value of purchase
consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair values.
The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as
goodwill to reporting units based on the expected benefit from the business combination. Allocation of purchase consideration to identifiable
assets and liabilities affects the amortization expense, as acquired finite-lived intangible assets are amortized over the useful life,
whereas any indefinite-lived intangible assets, including goodwill, are not amortized. During the measurement period, which is not to
exceed one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed, with the corresponding
offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings. Acquisition-related
expenses are recognized separately from business combinations and are expensed as incurred.
Goodwill
The Company determines the amount of a potential
goodwill impairment by comparing the fair value of the reporting unit with its carrying amount. To the extent the carrying value of a
reporting unit exceeds its fair value, a goodwill impairment charge is recognized.
The Company has determined that it has a single
reporting unit for purposes of performing its goodwill impairment test. As the Company uses the market approach to determine the step
one fair value of the reporting unit, the price of its common stock is an important component of the fair value calculation. If the Company’s
stock price experiences significant price and volume fluctuations, this will impact the fair value of the reporting unit, which can lead
to potential impairment in future periods. The Company reviews goodwill for impairment on an annual basis or whenever events or changes
in circumstances indicate the carrying value of an asset may not be recoverable. The Company first assesses qualitative factors to determine
whether it is more-likely-than-not that the fair value of the reporting unit is less than the carrying amount as a basis for determining
whether it is necessary to perform an impairment test. If the qualitative assessment warrants further analysis, the Company compares the
fair value of the reporting unit to its carrying value. The fair value of the reporting unit is determined using the market approach.
If the fair value of the reporting unit exceeds the carrying value of net assets of the reporting unit, goodwill is not impaired. If the
carrying value of the reporting unit’s goodwill exceeds its fair value, then the Company must record an impairment charge equal
to the difference.
During
the three months ended December 31, 2022, the Company concluded a triggering event had occurred due to the sustained decrease in the price
per share of its common stock and related reduced market capitalization. The Company performed a test for goodwill impairment, and, due
to the decrease in the price per share of its common stock, the test results indicated the goodwill carrying value was greater than its
implied fair value. As a result of the impairment test, the Company recorded a non-cash impairment charge totaling $9.9 million, and the
Company’s goodwill balance was reduced to zero as of December 31, 2022.
Leases
ASC 842, Leases (ASC 842), requires an entity
to recognize a right-of-use asset and a lease liability for all leases with terms longer than 12 months. The Company adopted
ASC 842 utilizing the modified retrospective transition method. The Company elected the practical expedient afforded in ASC 842 in which
the Company did not reassess whether any contracts that existed prior to adoption have or contain leases or the classification of its
existing leases.
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 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 sells its products both directly
to customers and through distributors generally under agreements with payment terms typically 60 days or less.
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 year ended December 31, 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 has been presented as deferred cost of net revenue
in the consolidated balance sheets.
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 December 31, 2022 and December 31, 2021, contract
liabilities were in a current position and included in deferred revenue.
During the year ended December 31, 2022, the Company
recognized approximately $243,000 of revenue that had been included in deferred revenue as of December 31, 2021.
See Note 7 for disaggregation of revenue by geography.
The Company does not have significant financing
components, as payments from customers are typically due within 60 days of invoicing, and the Company has elected the practical expedient
to not value financing components that are less than one year. Shipping and handling costs are generally incurred by the customer, and,
therefore, are not recorded as revenue.
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.
Advertising Costs
Advertising costs are expensed as incurred. Advertising
costs were not significant for the years ended December 31, 2022 and 2021.
Government Subsidies
A grant or subsidy that is compensation for expenses
or losses already incurred, or for which there are no future related costs, is recognized in the statement of operations in the period
in which it becomes receivable.
Starting in 2020, certain Canadian businesses,
which experienced a drop in revenue during the COVID-19 pandemic, became eligible for rent and wage subsidies from the Canadian government.
The Company’s subsidiary, Peraso Tech, was eligible for and received the Covid-program subsidies on a monthly basis beginning in
the fourth quarter of 2020 and ending in the fourth quarter of 2021.
During the year ended December 31, 2021, the Company
recognized payroll subsidies of $1,120,475 as a reduction in the associated wage costs and rent subsidies of $199,235 as a reduction of
operating expenses in the consolidated statement of operations.
Research and Development
Engineering costs are recorded as research and
development expense in the period incurred.
Stock-Based Compensation
The Company periodically issues stock options
and restricted stock awards to employees and non-employees. The Company accounts for such grants based on ASC No. 718, whereby the value
of the award is measured on the date of grant 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.
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):
| | |
December 31, | |
| | |
2022 | | |
2021 | |
| Escrow Shares - exchangeable shares | |
| 1,313 | | |
| 1,313 | |
| Escrow Shares - common stock | |
| 502 | | |
| 502 | |
| Options to purchase common stock | |
| 1,499 | | |
| 1,558 | |
| Unvested restricted common stock units | |
| 1,057 | | |
| 88 | |
| Common stock warrants | |
| 4,959 | | |
| 134 | |
| Total | |
| 9,330 | | |
| 3,595 | |
Income Taxes
The Company determines deferred tax assets and
liabilities based upon the differences between the financial statement and tax bases of the Company’s assets and liabilities using
tax rates in effect for the year in which the Company expects the differences to affect taxable income. A valuation allowance is established
for any deferred tax assets for which it is more likely than not that all or a portion of the deferred tax assets will not be realized.
The Company files U.S. federal and state and foreign
income tax returns in jurisdictions with varying statutes of limitations. The 2015 through 2020 tax years generally remain subject to
examination by U.S. federal and state tax authorities, and the 2011 through 2020 tax years generally remain subject to examination by
foreign tax authorities.
At December 31, 2022, the Company did not have
any material unrecognized tax benefits nor expect its unrecognized tax benefits to change significantly over the next 12 months. The Company
recognizes interest related to unrecognized tax benefits as income tax expense and penalties related to unrecognized tax benefits as other
income and expense. During the years ended December 31, 2022 and 2021, the Company did not recognize any interest or penalties related
to unrecognized tax benefits.
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 Company does not expect that the adoption of ASU No. 2016-13 will have
a significant impact on the Company’s consolidated financial statements.
In May 2021, the FASB
issued ASU No. 2021-04, Earnings Per Share (Topic 260), Debt — Modifications and Extinguishments (Subtopic 470-50), Compensation
— Stock Compensation (Topic 718), and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40):
Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (ASU 2021-04).
ASU 2021-04 provides guidance as to how an issuer should account for a modification of the terms or conditions or an exchange of a freestanding
equity-classified written call option (i.e., a warrant) that remains classified after modification or exchange as an exchange of the original
instrument for a new instrument. An issuer should measure the effect of a modification or exchange as the difference between the fair
value of the modified or exchanged warrant and the fair value of that warrant immediately before modification or exchange and then apply
a recognition model that comprises four categories of transactions and the corresponding accounting treatment for each category (equity
issuance, debt origination, debt modification, and modifications unrelated to equity issuance and debt origination or modification). ASU
2021-04 is effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal
years. An entity should apply the guidance provided in ASU 2021-04 prospectively to modifications or exchanges occurring on or after the
effective date. The Company adopted ASU 2021-04 effective January 1, 2022. The adoption of ASU 2021-04 did not have any impact on the
Company’s 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: Business Combination
Arrangement
As discussed in Note 1, on September
14, 2021, the Company and its newly formed subsidiaries, Callco and Canco, entered into the Arrangement Agreement with Peraso Tech. Prior
to the Arrangement, as a fabless semiconductor company, the Company’s primary focus was the manufacture and sale of high-performance
memory semiconductor devices for a wide range of markets. Peraso Tech was also a fabless semiconductor company specializing in the development
of mmWave technology, including 60GHz and 5G products, and deriving revenue from selling semiconductor devices, proprietary modules based
on its semiconductor devices and performance of non-recurring engineering services. The primary reason for the business combination was
to produce a larger fabless semiconductor company with greater size and scale with access to the public capital markets for the benefit
of the stockholders of both companies.
On December 17, 2021, following
the satisfaction of the closing conditions set forth in the Arrangement Agreement, including approvals from the stockholders of the Company
and Peraso Tech, the Arrangement was completed.
Securities Conversion
Pursuant to the completion of
the Arrangement, each Peraso Share that was issued and outstanding immediately prior to December 17, 2021 was converted into the right
to receive 0.045239122387267 (the Exchange Ratio) 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. In addition,
all of Peraso Tech’s outstanding stock options and other securities exercisable or exchangeable for, or convertible into, and any
other rights to acquire Peraso Shares were exchanged for securities exercisable or exchangeable for, or convertible into, or other rights
to acquire the Company’s common stock. Immediately following the completion of the Arrangement, the former security holders of Peraso
Tech owned approximately 61%, on a fully-diluted basis, of the Company’s common stock, and the former shareholders of Peraso Tech,
as a group, obtained control of the Company. While the Company was the legal acquirer of Peraso Tech, Peraso Tech was deemed to be the
acquirer for accounting purposes.
In addition, pursuant to the
terms of the Arrangement Agreement, (i) certain warrants to purchase Peraso Shares outstanding immediately prior to the closing of the
Arrangement were exercised in consideration for the issuance of Peraso Shares; (ii) each convertible debenture of Peraso Tech outstanding
immediately prior to the closing of the Arrangement and all principal and accrued but unpaid interest thereon was converted into Peraso
Shares at a conversion price equal to the conversion price set out in each such debenture; and (iii) each outstanding option to purchase
Peraso Shares (each, a Peraso Option) was exchanged for a replacement option to purchase such number of shares of common stock that was
equal to the product of (a) the number of Peraso Shares subject to the Peraso Options immediately before the closing of the Arrangement
and (b) the Exchange Ratio, rounded down to the nearest whole number of shares of common stock.
Upon the closing of the Arrangement,
an aggregate of 9,295,097 Exchangeable Shares and 3,558,151 shares of common stock were issued to the holders of Peraso Shares. Of such
shares, pursuant to the terms of the Agreement, the Company held in escrow an aggregate of 1,312,878 Exchangeable Shares and 502,567 shares
of common stock (collectively, the Escrow Shares). The Escrow Shares are escrowed pursuant to the terms of an escrow agreement on a pro
rata basis from the aggregate consideration received by the holders of Peraso Shares, subject to the offset by the Company for any losses
in accordance with the Agreement. Such Escrow Shares shall be released, subject to any offset claim, upon the satisfaction of the earlier
of: (a) any date following the first anniversary of December 17, 2021 and prior to December 17, 2024 where the volume weighted average
price of the common stock for any 20 trading days within a period of 30 consecutive trading days is at least $8.57 per share, subject
to adjustment for stock splits or other similar transactions; (b) the date of any sale of all or substantially all of the assets or shares
of the Company; or (c) the date of any bankruptcy, insolvency, restructuring, receivership, administration, wind-up, liquidation, dissolution,
or similar event involving the Company. All and any voting rights and other stockholder rights, other than with respect to dividends and
distributions, with respect to the Escrow Shares are suspended until the Escrow Shares are released from escrow.
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 10% of the aggregate number of Exchangeable Shares issued remain outstanding; (b) there is a change in control of the Company (defined
generally as (i) any merger, amalgamation, arrangement, takeover bid or tender offer, material sale of shares or rights or interests that
results in the holders of outstanding voting securities of the Company directly or indirectly owning, or exercising control or direction
over, voting securities representing less than 50% of the total voting power of all of the voting securities of the surviving entity;
or (ii) any sale or disposition of all or substantially of the Company’s assets), and (c) upon the occurrence of certain other events.
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.
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.
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.
Outstanding Shares of Common Stock
The following table details
the shares of the common stock that were outstanding immediately following the consummation of the Arrangement:
| | |
Number of shares | |
| MoSys common stock outstanding prior to business combination | |
| 8,715,910 | |
| Common stock issued to Peraso Tech stockholders | |
| 3,055,584 | |
| Exchangeable Shares issued to Peraso Tech stockholders | |
| 7,982,219 | |
| Escrow Shares - common stock | |
| 502,567 | |
| Escrow Shares - Exchangeable Shares | |
| 1,312,878 | |
| Total shares issued and outstanding | |
| 21,569,158 | |
Reverse Acquisition Determination
Pursuant to ASC 805, the transaction
was accounted for as a reverse acquisition because: (i) the stockholders of Peraso Tech owned the majority of the outstanding common stock
of the Company after the share exchange; (ii) Peraso Tech appointed a majority of the Company’s board of directors; and (iii) Peraso
Tech determined the officers of the Company.
Measuring the Consideration Transferred
In the reverse acquisition,
the accounting acquirer did not issue any consideration to the accounting acquiree, rather the accounting acquiree issued its equity shares
to the owners of the accounting acquirer in exchange for the accounting acquirer’s shares. The acquisition date fair value of the
consideration transferred by the accounting acquirer for its interest in the accounting acquiree was calculated by Peraso Tech, as the
fair value of the consideration effectively transferred. In accordance with ASC 805, the consideration effectively transferred between
the Company (a public company as the accounting acquiree) and Peraso Tech (a private company as the accounting acquirer), was calculated
as the fair value of the Company’s equity including the fair value of its common shares outstanding and its warrants, plus the portion
of the share-based award fair value allocated to the pre-combination service of the accounting acquiree’s awards. The fair value
of the total consideration effectively transferred is summarized in the following table (in thousands, except per-share amount):
| Company share price (i) | |
$ | 4.21 | |
| Company common shares outstanding (ii) | |
| 8,716 | |
| | |
| | |
| Fair value of the Company’s common shares outstanding | |
| 36,694 | |
| | |
| | |
| Fair value of the Company’s warrants (iii) | |
| 301 | |
| | |
| | |
| Fair value of the Company’s warrants (iii) | |
| 782 | |
| Percent related to precombination service | |
| 80.76 | % |
| Fair value of the Company’s precombination service share based awards (iii) | |
| 632 | |
| | |
| | |
| Consideration effectively transferred | |
$ | 37,627 | |
| (i) | Represents the Company's share
price as of December 16, 2021 |
| (ii) | Represents the Company's outstanding
shares as of December 16, 2021 |
| (iii) | Represents the fair value of
the Company's warrants outstanding and calculated as of December 16, 2021 |
The
following table summarizes the final allocation of the purchase price to the net assets acquired based on the respective fair value of
the acquired assets and assumed liabilities of the accounting acquiree, which is the Company.
| | |
December 31, | |
| | |
2021 | |
| Assets: | |
(in thousands) | |
| Cash, cash equivalents and investments | |
$ | 19,064 | |
| Other current assets | |
| 2,558 | |
| Other assets | |
| 833 | |
| Intangibles | |
| | |
| Developed technology | |
| 5,726 | |
| Customer relationships | |
| 2,556 | |
| | |
| 8,282 | |
| Goodwill | |
| 9,946 | |
| Liabilities: | |
| | |
| Current liabilities | |
| 3,056 | |
| | |
$ | 37,627 | |
Presentation of Consolidated Financial Statements
Post Reverse Acquisition
The consolidated financial statements reflect
all of the following:
| ● | the assets and liabilities of the legal subsidiary
(Peraso Tech, as the accounting acquirer) recognized and measured at their pre-combination carrying amounts; |
| ● | the assets and liabilities of the legal parent (the
Company, as the accounting acquiree) recognized and measured in accordance with ASC No. 805; |
| ● | the retained earnings and other equity balances
of the legal subsidiary (Peraso Tech, as the accounting acquirer) before the business combination; and |
| ● | the amount recognized as issued equity interests
in the consolidated financial statements determined by adding the issued equity interest of Peraso Tech outstanding immediately before
the business combination to the fair value of the Company. However, the equity structure (that is, the number and type of equity interests
issued) reflects the equity structure of the Company. |
All references to common stock,
stock options and warrants as well as per share amounts have been retroactively restated to reflect the number of shares of the Company
issued in the reverse acquisition. Unaudited pro forma results of operations for the year ended December 31, 2021 are included below as
if the business combination occurred on January 1, 2021. This summary of the unaudited pro forma results of operations is not necessarily
indicative of what the Company’s results of operations would have been had Peraso Tech been acquired at the beginning of 2021, nor
does it purport to represent results of operations for any future periods.
| | |
Year ended
December 31, | |
| | |
2021 | |
| Revenue | |
$ | 10,670 | |
| Net loss | |
| (19,977 | ) |
| add back: acquisition costs | |
| 1,628 | |
| Adjusted net loss | |
$ | (18,349 | ) |
Note 3: Fair Value of Financial Instruments
The following table represents the Company’s
assets and liabilities measured at fair value on a recurring basis as of December 31, 2022 and 2021 and the basis for that measurement
(in thousands):
| | |
December 31, 2022 | |
| | |
Fair Value | | |
Level 1 | | |
Level 2 | | |
Level 3 | |
| Assets: | |
| | |
| | |
| | |
| |
| Money market funds (1) | |
$ | 73 | | |
$ | — | | |
$ | — | | |
$ | — | |
| Corporate notes and commercial paper | |
$ | 1,078 | | |
$ | — | | |
$ | 1,078 | | |
$ | — | |
| | |
| | | |
| | | |
| | | |
| | |
| Liabilities: | |
| | | |
| | | |
| | | |
| | |
| Warrant liability | |
$ | 2,079 | | |
$ | — | | |
$ | — | | |
$ | 2,079 | |
| | |
December 31, 2021 | |
| | |
Fair Value | | |
Level 1 | | |
Level 2 | | |
Level 3 | |
| Money market funds (1) | |
$ | 1,159 | | |
$ | 1,159 | | |
$ | — | | |
$ | — | |
| Corporate notes and commercial paper | |
$ | 12,195 | | |
$ | — | | |
$ | 12,195 | | |
$ | — | |
| (1) | Included in cash and cash equivalents |
The following table represents the Company’s
determination of fair value for its financial assets (cash equivalents and investments) (in thousands):
| | |
December 31, 2022 | |
| | |
| | |
Unrealized | | |
Unrealized | | |
Fair | |
| | |
Cost | | |
Gains | | |
Losses | | |
Value | |
| Cash and cash equivalents | |
$ | 1,828 | | |
$ | — | | |
$ | — | | |
$ | 1,828 | |
| Short-term investments | |
| 1,103 | | |
| — | | |
| (25 | ) | |
| 1,078 | |
| | |
$ | 2,931 | | |
$ | — | | |
$ | (25 | ) | |
$ | 2,906 | |
| | |
December 31, 2021 | |
| | |
| | |
Unrealized | | |
Unrealized | | |
Fair | |
| | |
Cost | | |
Gains | | |
Losses | | |
Value | |
| Cash and cash equivalents | |
$ | 5,893 | | |
$ | — | | |
$ | — | | |
$ | 5,893 | |
| Short-term investments | |
| 9,276 | | |
| — | | |
| (9 | ) | |
| 9,267 | |
| Long-term investments | |
| 2,935 | | |
| — | | |
| (7 | ) | |
| 2,928 | |
| | |
$ | 18,104 | | |
$ | — | | |
$ | (16 | ) | |
$ | 18,088 | |
There were no transfers in or out of Level 1 and
Level 2 securities during the years ended December 31, 2022 or December 31, 2021.
Note 4. Balance Sheet Detail
| | |
December 31, | |
| | |
2022 | | |
2021 | |
| | |
(in thousands) | |
| Inventories: | |
| | |
| |
| Raw materials | |
$ | 1,279 | | |
$ | 879 | |
| Work-in-process | |
| 2,595 | | |
| 2,170 | |
| Finished goods | |
| 1,474 | | |
| 775 | |
| | |
$ | 5,348 | | |
$ | 3,824 | |
| | |
| | | |
| | |
| Prepaid expenses and other: | |
| | | |
| | |
| Prepaid inventory and production costs | |
$ | 186 | | |
$ | 671 | |
| Prepaid insurance | |
| 47 | | |
| 44 | |
| Prepaid software | |
| 173 | | |
| 277 | |
| Other | |
| 168 | | |
| 167 | |
| | |
$ | 574 | | |
$ | 1,159 | |
| | |
| | | |
| | |
| Property and equipment, net: | |
| | | |
| | |
| Machinery and equipment | |
$ | 4,630 | | |
$ | 8,944 | |
| Computer equipment and software | |
| 342 | | |
| 2,200 | |
| Furniture and fixtures | |
| 93 | | |
| 323 | |
| Leasehold improvements | |
| 555 | | |
| 354 | |
| Total property and equipment | |
| 5,620 | | |
| 11,821 | |
| Less: Accumulated depreciation and amortization | |
| (3,395 | ) | |
| (9,472 | ) |
| | |
$ | 2,225 | | |
$ | 2,349 | |
During the year ended December 31, 2022, the Company
wrote-off fully depreciated assets, or assets that were no longer in service, costing approximately $6,380,000 with corresponding accumulated
depreciation of approximately $6,227,000, or a remaining net book value of approximately $153,000. The Company recorded the remaining
book value of approximately $153,000 as a loss during the year ended December 31, 2022.
| | |
2022 | | |
2021 | |
| | |
(in thousands) | |
| Accrued Expenses & Other: | |
| | |
| |
| Accrued wages and employee benefits | |
$ | 469 | | |
$ | 506 | |
| Professional fees, legal and consulting | |
| 514 | | |
| 1,252 | |
| Insurance | |
| — | | |
| 340 | |
| Accrued taxes | |
| 14 | | |
| 190 | |
| Accrued inventory | |
| — | | |
| 233 | |
| Financing liability | |
| 330 | | |
| — | |
| Warranty accrual | |
| 39 | | |
| 29 | |
| Other | |
| 451 | | |
| 353 | |
| | |
$ | 1,817 | | |
$ | 2,903 | |
Note 5. 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 Toronto lease expires in December 2023. The Company entered into a new, direct lease for the San Jose
facility in April 2022, for an 18-month term, which commenced July 15, 2022. 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
$220,000 (the Incentive), which will be payable to the Company as follows: one-half of the Incentive payable subsequent to the completion
of the improvements to the leased space and the second half-ratably on an annual basis commencing with the second year of the lease.
The initial right-of-use assets and corresponding
liabilities of approximately $1.0 million for the San Jose and Markham facility leases were measured at the present value of the future
minimum lease payments. The discount rate used to measure the lease assets and liabilities were 8%. Lease expense is recognized on a straight-line
basis over the lease term.
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
$274,000.
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 $124,000
and lease liability of approximately $117,000.
The following table provides the details of right-of-use
assets and lease liabilities as of December 31, 2022 (in thousands):
| | |
Year Ended | |
| | |
December 31, 2022 | |
| Right-of-use assets: | |
| |
| Operating leases | |
$ | 826 | |
| Finance lease | |
| 321 | |
| Total right-of-use assets | |
$ | 1,147 | |
| Lease liabilities: | |
| | |
| Operating leases | |
$ | 834 | |
| Finance lease | |
| 323 | |
| Total lease liabilities | |
$ | 1,157 | |
Future minimum payments under the leases at December
31, 2022 are listed in the table below (in thousands):
| Year ending December 31, | |
| |
| 2023 | |
$ | 688 | |
| 2024 | |
| 263 | |
| 2025 | |
| 164 | |
| 2026 | |
| 107 | |
| 2027 | |
| 81 | |
| Total future lease payments | |
| 1,303 | |
| Less: imputed interest | |
| (146 | ) |
| Present value of lease liabilities | |
$ | 1,157 | |
The following table provides the details of supplemental
cash flow information (in thousands):
| | |
Year Ended December 31, | |
| | |
2022 | | |
2021 | |
| Cash paid for amounts included in the measurement of lease liabilities: | |
| | |
| |
| Operating cash flows for leases | |
$ | 704 | | |
$ | 248 | |
Rent expense was approximately $0.7 million and
$0.6 million for the years ended December 31, 2022 and December 31, 2021, respectively. In addition to the minimum lease payments, the
Company is responsible for property taxes, insurance and certain other operating costs related to the leased facilities and equipment.
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 consolidated financial statements for the years
ended December 31, 2022 and 2021 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.
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 years ended December 31, 2022 and
2021.
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 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 6: Retirement Savings
Plan
Effective
January 1997, the Company adopted the Peraso 401(k) Plan (the Savings Plan), which qualifies as a thrift plan under Section 401(k) of
the Internal Revenue Code. Full-time and part-time employees who are at least 21 years of age are eligible to participate in the Savings
Plan at the time of hire. Participants may contribute up to 15% of their earnings to the Savings Plan. No matching contributions were
made by the Company during the years ended December 31, 2022 and 2021.
Note 7. Business Segments, Concentration of Credit Risk and
Significant Customers
The Company determined its reporting units in
accordance with ASC No. 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):
| | |
Year Ended | |
| | |
December 31, | |
| | |
2022 | | |
2021 | |
| United States | |
$ | 8,932 | | |
$ | 1,968 | |
| Hong Kong | |
| 2,428 | | |
| 2,955 | |
| Taiwan | |
| 1,205 | | |
| 693 | |
| Rest of world | |
| 2,303 | | |
| 63 | |
| Total net revenue | |
$ | 14,868 | | |
$ | 5,679 | |
The following is a breakdown of product revenue
by category (in thousands):
| (amounts in thousands) | |
Years Ended
December 31, | |
| Product category | |
2022 | | |
2021 | |
| Memory ICs | |
$ | 7,722 | | |
$ | 150 | |
| mmWave ICs | |
| 3,289 | | |
| 3,566 | |
| mmWave modules | |
| 3,170 | | |
| 1,101 | |
| mmWave other products | |
| 18 | | |
| 89 | |
| | |
$ | 14,199 | | |
$ | 4,906 | |
Customers who accounted for at least 10% of total
net revenue were:
| | |
Year Ended | |
| | |
December 31, | |
| | |
2022 | | |
2021 | |
| Customer A | |
| 26 | % | |
| * | |
| Customer B | |
| 21 | % | |
| 19 | % |
| Customer C | |
| 16 | % | |
| 48 | % |
| Customer D | |
| 11 | % | |
| * | |
| Customer E | |
| * | | |
| 11 | % |
| * | Represents less than 10% |
As of December 31, 2022, four customers accounted
for 79% of accounts receivable, and the Company had a provision for doubtful accounts of $183,000 against one of the customer’s
receivables. Three customers accounted for 96% of accounts receivable as of December 31, 2021.
Note 8. Income Tax Provision
Deferred income taxes reflect the net tax effects
of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes.
Significant components of the Company’s
deferred tax assets and liabilities were (in thousands):
| | |
Year Ended | |
| | |
December 31, | |
| | |
2022 | | |
2021 | |
| Deferred tax assets: | |
| | |
| |
| Federal and state loss carryforwards | |
$ | 9,017 | | |
$ | 5,409 | |
| Reserves, accruals and other | |
| 344 | | |
| 198 | |
| Depreciation and amortization | |
| 611 | | |
| 917 | |
| Deferred stock-based compensation | |
| 2,682 | | |
| 2,691 | |
| Capitalized research and development costs | |
| 965 | | |
| — | |
| Research and development credit carryforwards | |
| 6,655 | | |
| 6,675 | |
| Total deferred tax assets | |
| 20,274 | | |
| 15,890 | |
| Less: Valuation allowance | |
| (20,274 | ) | |
| (15,890 | ) |
| Net deferred tax assets, net | |
$ | — | | |
$ | — | |
The $4.4 million increase in the valuation allowance during 2022 was
primarily the result of an increase to the net operating loss carryforwards for the current year. The valuation allowance increased by
$2.0 million during the year ended December 31, 2021.
Utilization of the Company’s net operating
losses (NOLs) and tax credit carryforwards is subject to a substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code (IRC) and similar state provisions. Section 382 of the IRC (Section 382) imposes limitations on a corporation’s
ability to utilize its NOL and tax credit carryforwards, if it experiences an “ownership change.” In general terms, an ownership
change may result from transactions increasing the ownership percentage of certain stockholders in the stock of the corporation by more
than 50% over a three-year period. In the event of an ownership change, utilization of the NOLs would be subject to an annual limitation
under Section 382 determined by multiplying the value of the Company’s stock at the time of the ownership change by the applicable
long-term tax-exempt rate. While a formal study has not been performed, the Company believes that Section 382 ownership changes occurred
as a result of financing transaction in 2018 and the Arrangement. The Company believes the Section 382 limitations will result in approximately
89% of the federal and state NOLs expiring before they can be utilized, and approximately 88% of the federal tax credit carryforwards
expiring before they can be utilized.
As of December 31, 2022, the Company had NOLs of approximately $228.2
million for federal income tax purposes and approximately $143.6 million for state income tax purposes. Only approximately $34.3 million
of the federal NOLs and $25.2 million of the state NOLs are expected to be available before expiration due to the Section 382 limitation.
These NOLs are available to reduce future taxable income and will expire at various times from 2025 through 2042, except federal NOLs
from 2018 to 2022 which have no expiration date. As of December 31, 2022, the Company also had federal research and development tax credit
carryforwards of approximately $8.5 million that will expire at various times through 2042, and California research and development credits
of approximately $8.4 million, which do not have an expiration date.
A reconciliation of income taxes provided at the
federal statutory rate (21%) to the actual income tax provision is as follows (in thousands):
| | |
Year Ended | |
| | |
December 31, | |
| | |
2022 | | |
2021 | |
| Income tax benefit computed at U.S. statutory rate | |
$ | (6,804 | ) | |
$ | (1,503 | ) |
| Research and development credits | |
| (38 | ) | |
| (131 | ) |
| Stock-based compensation | |
| 1,033 | | |
| — | |
| Amortization of intangible assets | |
| (60 | ) | |
| (60 | ) |
| Goodwill impairment | |
| 2,089 | | |
| — | |
| Valuation allowance changes affecting tax provision | |
| 3,774 | | |
| 1,693 | |
| Other | |
| 6 | | |
| 1 | |
| Income tax provision | |
$ | — | | |
$ | — | |
Note 9. 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, 182,500 shares were initially reserved for
issuance. In November 2021, in connection with the approval of the Arrangement, the Company’s stockholders approved an amendment
increasing the number of shares reserved for issuance under the 2019 Plan by 3,106,937 shares.
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 10% of the voting power of all classes
of the Company’s stock may not exceed five years. The exercise price of stock options granted under the 2019 Plan must be at least
equal to the fair market value of the shares on the date of grant. Generally, awards under the 2019 Plan will vest over a three to four-year
period, and options will have a term of 10 years from the date of grant. In addition, the 2019 Plan provides for automatic acceleration
of vesting for options granted to non-employee directors upon a change of control of the Company.
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 and became exercisable by the holder of such
option in accordance with its terms, with (i) the number of shares of common stock subject to each option multiplied by the Exchange Ratio
and (ii) the per share exercise price upon the exercise of each option divided by the Exchange Ratio. In connection with the Arrangement,
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 $4.3
million and $4.4 million related to the vesting of stock options during the years ended December 31, 2022 and 2021, respectively. At December
31, 2022, the unamortized compensation cost was approximately $7.7 million related to stock options and is expected to be recognized as
expense over a weighted average period of approximately two years. The Company reflected compensation costs of $1.4 million and $0.1 million
related to the vesting of restricted stock options during the years ended December 31, 2022 and 2021, respectively. The unamortized compensation
cost at December 31, 2022 was $2.1 million related to restricted stock units and is expected to be recognized as expense over a weighted
average period of approximately two years.
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 10% of the voting power of all classes of the Company’s
stock may not exceed five years. The exercise price of stock options granted under the 2019 Plan must be at least equal to the fair market
value of the shares on the date of grant. Generally, options granted under the 2019 Plan will vest over a three to four-year period and
have a term of 10 years from the date of grant. In addition, the 2019 Plan provides for automatic acceleration of vesting for options
granted to non-employee directors upon a change of control (as defined in the 2019 Plan) of the Company.
The following table summarizes the activity in the shares available
for grant under the Plans during the years ended December 31, 2021 and December 31, 2022 (in thousands, except exercise price):
| | |
| | |
Options outstanding | |
| | |
| | |
| | |
Weighted | |
| | |
Shares | | |
| | |
Average | |
| | |
Available | | |
Number of | | |
Exercise | |
| | |
for Grant | | |
Shares | | |
Prices | |
| Balance as of January 1, 2021 | |
| 356 | | |
| 1,053 | | |
$ | 2.54 | |
| Additional shares authorized under the Plans | |
| 3,107 | | |
| — | | |
| — | |
| RSUs granted | |
| (30 | ) | |
| — | | |
| — | |
| Options granted | |
| (409 | ) | |
| 409 | | |
$ | 3.00 | |
| Options exercised | |
| — | | |
| (20 | ) | |
$ | 1.72 | |
| Options cancelled and returned to the Plans | |
| — | | |
| (42 | ) | |
$ | 2.72 | |
| Effect of business combination | |
| — | | |
| 158 | | |
$ | 10.35 | |
| Balance as of December 31, 2021 | |
| 3,024 | | |
| 1,558 | | |
$ | 3.49 | |
| RSUs granted | |
| (1,732 | ) | |
| — | | |
$ | — | |
| RSUs cancelled and returned to the Plans | |
| 264 | | |
| — | | |
$ | — | |
| Options cancelled | |
| — | | |
| (59 | ) | |
$ | 6.27 | |
| Balance as of December 31, 2022 | |
| 1,556 | | |
| 1,499 | | |
$ | 3.32 | |
The following table summarizes significant ranges
of outstanding and exercisable options as of December 31, 2022 (in thousands, except contractual life and exercise price):
A summary of RSU activity under the Plans is presented
below (in thousands, except for fair value):
On November 30, 2022, the Company entered into
a securities purchase agreement (the SPA) with an institutional investor, pursuant to which the Company sold to the investor, in a registered
direct offering, an aggregate of 1,300,000 shares of common stock at a negotiated purchase price of $1.00 per share. The Company also
offered and sold to the investor pre-funded warrants to purchase up to 1,150,000 shares of common stock. Each pre-funded warrant is exercisable
for one share of common stock. The purchase price of each pre-funded warrant was $0.99, and the exercise price of each pre-funded warrant
is $0.01 per share. The pre-funded warrants were immediately exercisable and may be exercised at any time until all of the pre-funded
warrants are exercised in full. Net proceeds to the Company, after offering costs, were $2.1 million.
In a concurrent private placement, the Company
also sold to the investor a warrant to purchase up to 3,675,000 shares of common stock (the Purchase Warrant). The Purchase Warrant will
be exercisable beginning six months and one day from the date of the SPA at an exercise price of $1.36 per share and will expire on the
five-year anniversary of that date.
The SPA governing the Purchase Warrant provides
for a value calculation for the Purchase Warrant using the Black Scholes model in the event of certain fundamental transactions. The fair
value calculation provides for a floor on the volatility amount utilized in the value calculation at 100% or greater. The Company has
determined this provision introduces leverage to the holders of the Purchase Warrant that could result in a value that would be greater
than the settlement amount of a fixed-for-fixed option on the Company’s own equity shares. Therefore, pursuant to ASC 815, the
Company has classified the Purchase Warrant as a liability in its consolidated balance sheet. The classification of the Purchase Warrant,
including whether the Purchase Warrant should be recorded as liability or as equity, is evaluated at the end of each reporting period
with changes in the fair value reported in other income (expense) in the consolidated statements of operations and comprehensive loss.
The Purchase Warrant was initially recorded at a fair value at $3.7 million at the grant date and is re-valued at each reporting date.
As of December 31, 2022, the fair value of the warrant liability was reduced to $2.1 million. Upon the closing of the registered direct
offering, the fair value of the Purchase Warrant liability, up to the net amounts of the funds received of approximately $2,099,000, was
recorded as a financing cost, and the excess of $1,576,000 was recorded as a financing cost in the statement of operations. As a result
of the change in fair value the Company recorded a gain for the year ended December 31, 2022
The fair value of the Purchase Warrant at December
31, 2022 was determined using Black Scholes model with the following assumptions: expected term based on the contractual term of 5.4 years,
risk-free interest rate of 4.00%, which was based on a comparable US Treasury 5-year bond, expected volatility of 114%, and an expected
dividend of zero.
As of December 31, 2022, the Company had the following
liability-classified warrants outstanding (share amounts in thousands):
As of January 1, 2021, the Company had warrants
outstanding to purchase 375,000 shares of its common stock. During the year ended December 31, 2021, the Company issued warrants to purchase
an additional 133,000 shares of its common stock. In accordance with the Arrangement Agreement, on December 16, 2021, the warrants to
purchase the 508,000 shares of common stock were settled in exchange for a defined number of common shares. Upon settlement, the fair
value of the warrants was calculated using the intrinsic fair value of the common shares. The change in fair value of approximately $8.1
million was recognized in other income (expense) in the consolidated statements of operations.
As of December 31, 2021, the Company had the following
equity-classified warrants outstanding (share amounts in thousands):
On November 30, 2020, the Company entered into
a loan agreement (the SRED Financing) to raise funds against the Company’s present and after acquired personal property. On February
5, 2021, March 5, 2021 and September 17, 2021, the Company raised additional funds from the second, third and fourth draws under the SRED
financing of $274,715 (CDN$350,000), $274,715 (CDN$350,000) and $745,655 (CDN$950,000) respectively, totaling year to date gross proceeds
of $1,295,085 (CDN$1,650,000) net of financing fees of $32,770 (CDN$41,750). Each borrowing carried an interest rate of 1.6% per month,
compounded monthly (20.98%). The SRED financing was sanctioned against the Company’s SRED tax credit refund.
The first, second and third draws, including interest
of $136,900 (CDN$174,417), were repaid through proceeds from the Company’s tax credit refund of $1,093,230 (CDN$1,392,831) received
in August 2021, and the balance of $184,558 (CDN$ 235,132) was paid from the fourth draw. The remaining loan balance, including interest,
of $816,964 (CDN$1,044,177) was repaid on December 16, 2021.
Interest expense of approximately $3.0 million
for the year ended December 31, 2021 consisted of i) approximately $2.1 million of amortization of debt discount, ii) approximately $0.7
million of interest expense on convertible debt, which was outstanding and retired in 2021, and iii) approximately $0.2 million of interest
expense on the SRED financing.
A family member of one of the Company’s
executive officers serves as a consultant to the Company. During the years ended December 31, 2022 and 2021, the Company paid approximately
$162,000 and $208,000, respectively, to the consultant. Additionally, a family member of one of the Company’s executive officers
is an employee of the Company. During the years ended December 31, 2022, the Company paid approximately $101,000 to the employed family
member, which includes the aggregate grant date fair value, as determined pursuant to FASB ASC Topic
718, of an RSU awarded in April 2022. During the years December 31, 2021, the Company paid approximately $94,000 to the employed
family member.