NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. The Company and Summary
of Significant Accounting Policies
Peraso
Inc. (the Company), formerly known as MoSys, Inc. (MoSys), was incorporated in California in 1991
and reincorporated in 2000 in Delaware. The Company is a fabless semiconductor company specializing in the development of millimeter
wave (mmWave), which is generally described as the frequency band from 24 Gigahertz (GHz) to 300GHz, wireless technology. The Company
also manufactures and sells high-performance memory semiconductor devices for a wide range of markets and receives royalties from licensees
of its memory technology. The Company derives revenue from selling its semiconductor devices and antenna modules, performance of non-recurring
engineering services and licensing of its technologies.
On
September 14, 2021, the Company and its subsidiaries, 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).
The accompanying
condensed consolidated financial statements of the Company have been prepared without audit. The condensed consolidated balance sheet
as of December 31, 2022 has been derived from the audited consolidated financial statements at that date. Certain information and disclosures
normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP)
have been condensed or omitted in accordance with the rules and regulations of the Securities and Exchange Commission (SEC). The
information in this report should be read in conjunction with the Company’s consolidated financial statements and notes thereto
included in its most recent annual report on Form 10-K filed with the SEC.
In the opinion
of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal
recurring adjustments) necessary to summarize fairly the Company’s financial position, results of operations and cash flows for
the interim periods presented. The operating results for the three months ended March 31, 2023 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2023 or for any other future period.
Liquidity and Going Concern
The Company incurred
net losses of approximately $3.1 million for the three months ended March 31, 2023 and $32.4 million for the year ended December 31,
2022 and had an accumulated deficit of approximately $152.7 million as of March 31, 2023. These and prior year losses have resulted in
significant negative cash flows and have required 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
condensed consolidated financial statements. These condensed consolidated financial statements do not include any adjustments that might
result from this uncertainty. There can be no assurance that such additional capital, whether in the form of debt or equity financing,
will be sufficient or available and, if available, that such capital will be offered on terms and conditions acceptable to the Company.
The Company’s primary focus is producing and selling its products. If the Company is unsuccessful in these efforts, it will need
to implement additional cost reduction strategies, which could further affect its near- and long-term business plan. These efforts may
include, but are not limited to, reducing headcount and curtailing business activities.
Basis of Presentation
The
condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation. The Company’s fiscal year ends on December 31 of each calendar
year. Certain prior year amounts have been reclassified for consistency with the current period presentation. These reclassifications
had no effect on the reported results of operations or cash flows.
Risks and Uncertainties
The
Company is subject to risks from, among other things, competition associated with the industry in general, other risks associated with
financing, liquidity requirements, rapidly changing customer requirements, limited operating history and the volatility of public markets.
COVID-19
The
global outbreak of the coronavirus disease 2019 (COVID-19) was declared a pandemic by the World Health Organization and a national emergency
by the U.S. government in March 2020. Since March 2020, from time to time, this has negatively affected the U.S. and global
economy, disrupted global supply chains, significantly restricted travel and transportation, resulted in mandated closures and orders
to “shelter-in-place” and created significant disruption of the financial markets. The full extent of the COVID-19 impact
on the Company’s operational and financial performance will depend on future developments, including the duration and spread of
the pandemic and related actions taken by U.S. and foreign government agencies to prevent disease spread, all of which are uncertain,
out of the Company’s control, and cannot be predicted.
Use of Estimates
The
preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses recognized during the reported period. Material estimates may include assumptions made in determining
reserves for uncollectible receivables, inventory write-downs, impairment of long-term assets, purchase price allocations, valuation
allowance on deferred tax assets, accruals for potential liabilities and assumptions made in valuing equity instruments. Actual results
could differ from those estimates.
Cash Equivalents and Investments
The
Company has invested its excess cash in money market accounts, certificates of deposit, corporate debt, government-sponsored enterprise
bonds and municipal bonds and considers all highly liquid debt instruments purchased with an original maturity of three months or less
to be cash equivalents. Investments with original maturities greater than three months and remaining maturities less than one year are
classified as short-term investments. Investments with remaining maturities greater than one year are classified as long-term investments.
Management generally determines the appropriate classification of securities at the time of purchase. All securities are classified as
available-for-sale. The Company’s available-for-sale short-term and long-term investments are carried at fair value, with the unrealized
holding gains and losses reported in accumulated other comprehensive income (loss). Realized gains and losses and declines in the value
judged to be other-than-temporary are included in the other income, net line item in the condensed consolidated statements of operations.
The cost of securities sold is based on the specific identification method.
Fair Value Measurements
The
Company measures the fair value of financial instruments using a fair value hierarchy that prioritizes the inputs to valuation techniques
used to measure fair value into three broad levels:
Level 1—Inputs
used to measure fair value are unadjusted quoted prices that are available in active markets for the identical assets or liabilities
as of the reporting date.
Level 2—Pricing
is provided by third party sources of market information obtained through the Company’s investment advisors, rather than models.
The Company does not adjust for, or apply, any additional assumptions or estimates to the pricing information it receives from advisors.
The Company’s Level 2 securities include cash equivalents and available-for-sale securities, which consisted primarily of
certificates of deposit, corporate debt, and government agency and municipal debt securities from issuers with high-quality credit ratings.
The Company’s investment advisors obtain pricing data from independent sources, such as Standard & Poor’s, Bloomberg
and Interactive Data Corporation, and rely on comparable pricing of other securities because the Level 2 securities are not actively
traded and have fewer observable transactions. The Company considers this the most reliable information available for the valuation of
the securities.
Level 3—Unobservable
inputs that are supported by little or no market activity and reflect the use of significant management judgment are used to measure
fair value. These values are generally determined using pricing models for which the assumptions utilize management’s estimates
of market participant assumptions. The determination of fair value for Level 3 investments and other financial instruments involves
the most management judgment and subjectivity.
The carrying amounts of financial
assets and liabilities, such as cash and cash equivalents, accounts receivable, accounts payable, notes payable and other payables, approximate
their fair values because of the short maturity of these instruments. The carrying values of lease obligations and long-term financing
obligations approximate their fair values because interest rates on these obligations are based on prevailing market interest rates.
The Company measures the fair value of its warrant liability using Level 3 inputs.
Derivatives
and Liability-Classified Instruments
The
Company accounts for common stock warrants as either equity-classified or liability-classified instruments based on an assessment of
the specific terms of the warrants and the guidance provided by the Financial Accounting Standards Board (FASB) in ASC 480, Distinguishing
Liabilities from Equity (ASC 480) and ASC 815, Derivatives and Hedging (ASC 815). The assessment considers whether the warrants
are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and meet all of the
requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own stock and
whether the holders of the warrants could potentially require net cash settlement in a circumstance outside of the Company’s control,
among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the
time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding.
Allowance for Doubtful Accounts
The
Company establishes an allowance for doubtful accounts to ensure that its trade receivables balances are not overstated due to uncollectibility.
The Company performs ongoing customer credit evaluations within the context of the industry in which it operates and generally does not
require collateral from its customers. A specific allowance of up to 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 zero as of March 31, 2023 and approximately $183,000 as of December 31, 2022.
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 $361,000 and $114,000 during the three
months ended March 31, 2023 and 2022, respectively.
Tax Credits
The
Company is registered for the Canadian federal and provincial goods and services taxes. As such, the Company is obligated to collect
from third parties and is entitled to claim sales taxes paid on its expenses and capital expenditures incurred in Canada.
The Company participates
in the Canadian government’s Scientific Research and Experimental Development (SRED) Program, which uses tax incentives to encourage
Canadian businesses to conduct research and development (R&D) in Canada. As a part of the program, the Company may be eligible for
a tax credit of 15% on qualified SRED expenditures. Unused SRED tax credits can be carried back three years or forward for 20 years.
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 SG&A
in the condensed consolidated statements of operations.
The Company regularly
reviews the carrying value and estimated lives of its long-lived assets and finite-lived intangible assets to determine whether indicators
of impairment may exist which warrant adjustments to carrying values or estimated useful lives. The determinants used for this evaluation
include management’s estimate of the asset’s ability to generate positive income from operations and positive cash flow in
future periods as well as the strategic significance of the assets to the Company’s business objective. Should an impairment exist,
the impairment loss would be measured based on the excess of the carrying amount of the long-lived asset group over the asset’s
fair value.
Purchased Intangible Assets
Intangible
assets acquired in business combinations are accounted for based on the fair value of assets purchased and are amortized over the period
in which economic benefit is estimated to be received. Intangible assets subject to amortization, including those acquired in business
combinations were as follows (amounts in thousands):
| | |
March
31, 2023 | |
| | |
Gross | | |
| | |
Net | |
| | |
Carrying | | |
Accumulated | | |
Carrying | |
| | |
Amount | | |
Amortization | | |
Amount | |
| Developed technology | |
$ | 5,726 | | |
$ | (1,849 | ) | |
$ | 3,877 | |
| Customer relationships | |
| 2,556 | | |
| (825 | ) | |
| 1,731 | |
| Other | |
| 186 | | |
| (40 | ) | |
| 146 | |
| Total | |
$ | 8,468 | | |
$ | (2,714 | ) | |
$ | 5,754 | |
| | |
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 | |
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 $0.4 million for the three months ended March 31, 2023 has been included in cost of net revenue in the condensed
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 4 years.
Amortization related to customer relationships of $0.2 million for the three months ended March 31, 2023 has been included in selling,
general and administrative expense in the condensed consolidated statements of operations and comprehensive loss.
Other amortization
expense was approximately $7,000 for the three months ended March 31, 2023.
As of March 31,
2023, estimated future amortization expense related to intangible assets was as follows (in thousands):
| Year ending December 31, | |
| |
| 2023 | |
$ | 1,575 | |
| 2024 | |
| 2,099 | |
| 2025 | |
| 2,011 | |
| 2026 | |
| 28 | |
| 2027 | |
| 10 | |
| Thereafter | |
| 31 | |
| | |
$ | 5,754 | |
Revenue Recognition
The Company recognizes
revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers and its amendments (ASC 606). As described below,
the analysis of contracts under ASC 606 supports the recognition of revenue at a point in time, resulting in revenue recognition timing
that is materially consistent with the Company’s historical practice of recognizing product revenue when title and risk of loss
pass to the customer.
The Company generates
revenue primarily from sales of integrated circuits and antenna module products, performance of engineering services and licensing of
its intellectual property. Revenues are recognized when control is transferred to customers in amounts that reflect the consideration
the Company expects to be entitled to receive in exchange for those goods. Revenue recognition is evaluated through the following five
steps: (i) identification of the contract, or contracts, with a customer; (ii) identification of the performance obligations in the contract;
(iii) determination of the transaction price; (iv) allocation of the transaction price to the performance obligations in the contract;
and (v) recognition of revenue when or as a performance obligation is satisfied.
Product revenue
Revenue is recognized
when performance obligations under the terms of a contract with a customer are satisfied. The majority of the Company’s contracts have
a single performance obligation to transfer products. Accordingly, the Company recognizes revenue when title and risk of loss have been
transferred to the customer, generally at the time of shipment of products. Revenue is measured as the amount of consideration the Company
expects to receive in exchange for transferring products and is generally based upon a negotiated, formula, list or fixed price. The
Company 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 three
months ended September 30, 2022, the Company had $1.1 million of product shipments for which the revenue recognition criteria under ASC
606 had not been met. Accordingly, the Company deferred the cost of net revenue associated with these shipments, and the amount deferred
was presented as deferred cost of net revenue in the condensed consolidated balance sheets. During the three months ended March 31, 2023,
the Company recognized the associated revenue and cost of net revenue.
Contract liabilities
– deferred revenue
The Company’s
contract liabilities consist of advance customer payments and deferred revenue. The Company classifies advance customer payments and
deferred revenue as current or non-current based on the timing of when the Company expects to recognize revenue. As of March 31, 2023
and December 31, 2022, contract liabilities were in a current position and included in deferred revenue.
During the three
months ended March 31, 2023, the Company recognized approximately $88,000 of revenue that had been included in deferred revenue as of
December 31, 2022.
See Note 5 for
disaggregation of revenue by geography.
The Company does
not have significant financing components, as payments from customers are typically due within 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.
Stock-Based Compensation
The Company periodically
issues stock options and restricted stock units to employees and non-employees. The Company accounts for such awards based on ASC 718,
whereby the value of the award is measured on the date of award and recognized as compensation expense on a straight-line basis over
the vesting period. The fair value of the Company’s stock options is estimated using the Black-Scholes-Merton Option Pricing (Black
Scholes) model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the options,
and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes model. The assumptions used
in the Black-Scholes model could materially affect compensation expense recorded in future periods.
Foreign Currency Transactions
The functional
currency of the Company is the U.S dollar. All foreign currency transactions are initially measured and recorded in an entity’s
functional currency using the exchange rate on the date of the transaction. All monetary assets and liabilities are remeasured at the
end of each reporting period using the exchange rate at that date. All non-monetary assets and related expense, depreciation or amortization
are not subsequently remeasured and are measured using the historical exchange rate. An average exchange rate may be used to recognize
income and expense items earned or incurred evenly over a period. Foreign exchange gains and losses resulting from the settlement of
such transactions are recognized in the statement of operations, except for the gains and losses arising from the conversion of the carrying
amount of the foreign currency denominated convertible preferred shares into the functional currency that are presented as adjustment
to the net loss to arrive at net loss attributable to common stockholders.
Per-Share Amounts
Basic net loss
per share is computed by dividing net loss for the period by the weighted-average number of exchangeable shares and shares of common
stock outstanding during the period. Diluted net loss per share gives effect to all potentially dilutive exchangeable and common shares
outstanding during the period. Potentially dilutive common shares consist of incremental exchangeable shares and shares of common stock
issuable upon the achievement of escrow terms, exercise of stock options, vesting of stock awards and exercise of warrants.
The following table
sets forth securities outstanding that were excluded from the computation of diluted net loss per share as their inclusion would be anti-dilutive
(in thousands):
| | |
March 31, | |
| | |
2023 | | |
2022 | |
| Escrow shares - exchangeable shares | |
| 1,313 | | |
| 1,313 | |
| Escrow shares - common stock | |
| 502 | | |
| 502 | |
| Options to purchase common stock | |
| 1,482 | | |
| 1,545 | |
| Unvested restricted common stock units | |
| 1,086 | | |
| 75 | |
| Common stock warrants | |
| 4,926 | | |
| 134 | |
| Total | |
| 9,309 | | |
| 3,569 | |
Recently
Issued Accounting Pronouncements
In
June 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments—Credit Losses. This ASU
added a new impairment model (known as the current expected credit loss (CECL) model) that is based on expected losses rather than incurred
losses. Under the new guidance, an entity recognizes an allowance for its estimate of expected credit losses and applies to most debt
instruments, trade receivables, lease receivables, financial guarantee contracts, and other loan commitments. The CECL model does not
have a minimum threshold for recognition of impairment losses and entities will need to measure expected credit losses on assets that
have a low risk of loss. This update is effective for fiscal years beginning after December 15, 2022, including interim periods within
those fiscal years for smaller reporting companies. The adoption of ASU 2016-13 did not have a significant impact on the Company’s
condensed consolidated financial statement presentation or disclosures.
Management
does not believe that any other recently issued, but not yet effective, authoritative guidance, if currently adopted, would have a material
impact on the Company’s financial statement presentation or disclosures.
Note 2: Fair Value of Financial
Instruments
The
following table represents the Company’s assets and liabilities measured at fair value on a recurring basis and the basis for that
measurement (in thousands):
| | |
March 31,
2023 | |
| | |
Fair
Value | | |
Level
1 | | |
Level
2 | | |
Level
3 | |
| Assets: | |
| | |
| | |
| | |
| |
| Money market funds (1) | |
$ | 81 | | |
$ | — | | |
$ | — | | |
$ | — | |
| Corporate notes and commercial paper | |
$ | 587 | | |
$ | — | | |
$ | 587 | | |
$ | — | |
| | |
| | | |
| | | |
| | | |
| | |
| Liabilities: | |
| | | |
| | | |
| | | |
| | |
| Warrant | |
$ | 1,421 | | |
$ | — | | |
$ | — | | |
$ | 1,421 | |
| | |
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 | |
$ | 2,079 | | |
$ | — | | |
$ | — | | |
$ | 2,079 | |
| (1) |
Amounts
are included in cash and cash equivalents on the condensed consolidated balance sheets.
|
The
following tables represents the Company’s determination of fair value for its financial assets (cash equivalents and investments)
(in thousands):
| | |
March 31,
2023 | |
| | |
| | |
Unrealized | | |
Unrealized | | |
Fair | |
| | |
Cost | | |
Gains | | |
Losses | | |
Value | |
| Cash and cash equivalents | |
$ | 805 | | |
$ | — | | |
$ | — | | |
$ | 805 | |
| Short-term investments | |
| 573 | | |
| 14 | | |
| — | | |
| 587 | |
| | |
$ | 1,378 | | |
$ | 14 | | |
$ | — | | |
$ | 1,392 | |
| | |
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 | |
Warrant Classified as Liability
A
warrant to purchase shares of our common stock at an exercise price of $1.00 per share (the Purchase Warrant) was issued on November
30, 2022 in conjunction with a registered direct offering to an institutional investor. The stock
purchase agreement 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 (as defined in the stock purchase agreement). 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 holder 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 condensed consolidated balance sheets. 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 condensed consolidated statements of operations and comprehensive loss.
The
fair value of the Purchase Warrant at March 31, 2023 was determined using the Black Scholes model with the following assumptions: (i)
expected term based on the contractual term of 5.4 years, (ii) risk-free interest rate of 4.00%, which was based on a comparable US Treasury
5-year bond, (iii) expected volatility of 114% and (iv) an expected dividend of zero.
As
of March 31, 2023, the Company had the following liability-classified warrant outstanding (amounts in thousands):
| | |
Number of
warrants on | | |
| |
| | |
common shares | | |
Amount | |
| Balance as of December 31, 2021 | |
| — | | |
$ | — | |
| Recognition of warrant liability | |
| 3,675 | | |
| 3,674 | |
| Change in fair value of warrant | |
| — | | |
| (1,595 | ) |
| Balance as of December 31, 2022 | |
| 3,675 | | |
| 2,079 | |
| Change in fair value of warrant | |
| — | | |
| (658 | ) |
| Balance as of March 31, 2023 | |
| 3,675 | | |
$ | 1,421 | |
Note 3. Balance Sheet Detail
Inventories
| | |
March 31, | | |
December 31, | |
| | |
2023 | | |
2022 | |
| | |
(in thousands) | |
| Inventories: | |
| | |
| |
| Raw materials | |
$ | 1,568 | | |
$ | 1,279 | |
| Work-in-process | |
| 1,228 | | |
| 2,595 | |
| Finished goods | |
| 2,057 | | |
| 1,474 | |
| | |
$ | 4,853 | | |
$ | 5,348 | |
Note 4. Commitments and Contingencies
Leases
The
Company has facility leases that it accounts for under ASC 842, including the operating leases for its corporate headquarters facility
in San Jose, California, and facilities in Toronto and Markham Ontario, Canada. The San Jose and Toronto leases expire in January 2024
and December 2023, respectively. In May 2022, the Company entered into a new lease for the facility in Markham with a 60-month term,
which commenced June 21, 2022. The Markham landlord also provided a lease incentive of approximately $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
was 8%.
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 March 31, 2023 (in thousands):
| | |
Three
Months Ended | |
| | |
March
31,
2023 | |
| Right-of-use assets: | |
| |
| Operating leases | |
$ | 696 | |
| Finance lease | |
| 290 | |
| Total right-of-use assets | |
$ | 986 | |
| Lease liabilities: | |
| | |
| Operating leases | |
$ | 692 | |
| Finance lease | |
| 291 | |
| Total lease liabilities | |
$ | 983 | |
Future minimum
payments under the leases at March 31, 2023 are listed in the table below (in thousands):
| Year ending December 31, | |
Operating
leases | |
| 2023 | |
$ | 477 | |
| 2024 | |
| 263 | |
| 2025 | |
| 164 | |
| 2026 | |
| 107 | |
| 2027 | |
| 81 | |
| Total future lease payments | |
| 1,092 | |
| Less: imputed interest | |
| (109 | ) |
| Present value of lease liabilities | |
$ | 983 | |
The following table
provides the details of supplemental cash flow information (in thousands):
| | |
Three Months Ended | |
| | |
March
31, | |
| | |
2023 | | |
2022 | |
| Cash paid for amounts included in the measurement of lease liabilities: | |
| | |
| |
| Operating cash flows for leases | |
$ | 199 | | |
$ | 129 | |
Rent expense was
approximately $0.2 million for the three-month period ended March 31, 2023. Rent expense was approximately $0.1 million for the three
months ended March 31, 2022. 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 condensed consolidated
financial statements for the three months ended March 31, 2023 and 2022 related to these indemnifications.
The Company has
not estimated the maximum potential amount of indemnification liability under these agreements due to the limited history of prior claims
and the unique facts and circumstances applicable to each particular agreement. To date, the Company has not made any payments related
to these indemnification agreements.
Product Warranties
The Company warrants
certain of its products to be free of defects generally for a period of three years. The Company estimates its warranty costs based on
historical warranty claim experience and includes such costs in cost of net revenues. Warranty costs were not material for the three
months ended March 31, 2023 and 2022.
Legal Matters
The Company is
not a party to any legal proceeding that the Company believes is likely to have a material adverse effect on its condensed consolidated
financial position or results of operations. From time to time the Company may be subject to legal proceedings and claims in the ordinary
course of business. These claims, even if not meritorious, could result in the expenditure of significant financial resources and diversion
of management efforts.
Note 5. Business Segments, Concentration
of Credit Risk and Significant Customers
The Company determined
its reporting units in accordance with ASC 280, Segment Reporting (ASC 280). Management evaluates a reporting unit by first identifying
its operating segments under ASC 280. The Company then evaluates each operating segment to determine if it includes one or more components
that constitute a business. If there are components within an operating segment that meet the definition of a business, the Company evaluates
those components to determine if they must be aggregated into one or more reporting units. If applicable, when determining if it is appropriate
to aggregate different operating segments, the Company determines if the segments are economically similar and, if so, the operating
segments are aggregated.
Management has
determined that the Company has one consolidated operating segment. The Company’s reporting segment reflects the manner in which
its chief operating decision maker reviews results and allocates resources. The Company’s reporting segment meets the definition
of an operating segment and does not include the aggregation of multiple operating segments.
The
Company recognized revenue from shipments of product, licensing of its technologies and performance of services to customers by geographical
location as follows (in thousands):
| | |
Three Months Ended | |
| | |
March 31, | |
| | |
2023 | | |
2022 | |
| United States | |
$ | 3,089 | | |
$ | 2,375 | |
| Taiwan | |
| 1,429 | | |
| 312 | |
| China | |
| 146 | | |
| 290 | |
| Japan | |
| 12 | | |
| 293 | |
| Rest of world | |
| 357 | | |
| 133 | |
| Total net revenue | |
$ | 5,033 | | |
$ | 3,403 | |
The following is
a breakdown of product revenue by category (in thousands):
| (amounts in thousands) | |
Three
Months Ended March 31, | |
| Product category | |
2023 | | |
2022 | | |
change | |
| Memory ICs | |
$ | 2,181 | | |
$ | 1,908 | | |
| 273 | |
| mmWave ICs | |
| 1,479 | | |
| 488 | | |
| 991 | |
| mmWave antenna modules | |
| 1,224 | | |
| 808 | | |
| 416 | |
| mmWave other products | |
| 4 | | |
| - | | |
| 4 | |
| | |
$ | 4,888 | | |
$ | 3,204 | | |
$ | 1,684 | |
Customers who accounted
for at least 10% of total net revenue were:
| | |
Three Months Ended | |
| | |
March 31, | |
| | |
2023 | | |
2022 | |
| Customer A | |
| 27 | % | |
| * | |
| Customer B | |
| 25 | % | |
| 36 | % |
| Customer C | |
| 21 | % | |
| 24 | % |
| Customer D | |
| 13 | % | |
| * | |
| * | Represents less than 10% |
As of March 31,
2023, three customers accounted for 77% of accounts receivable. Four customers accounted for 79% of accounts receivable as of December
31, 2022.
Note 6. Stock-Based Compensation
Common Stock Equity Plans
In 2010, the Company
adopted the 2010 Equity Incentive Plan and later amended it in 2014, 2017 and 2018 (the Amended 2010 Plan). The Amended 2010 Plan was
terminated in August 2019 and remains in effect as to outstanding equity awards granted prior to the date of expiration. No new awards
may be made under the Amended 2010 Plan.
In August 2019,
the Company’s stockholders approved the 2019 Stock Incentive Plan (the 2019 Plan) to replace the Amended 2010 Plan. The 2019 Plan
authorizes the board of directors or the compensation committee of the board of directors to grant a broad range of awards including
stock options, stock appreciation rights, restricted stock, performance-based awards, and restricted stock units. Under the 2019 Plan,
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 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 $1.1 million related to the vesting of stock options during each of the three-month periods ended March 31, 2023
and 2022, respectively. At March 31, 2023, the unamortized compensation cost was approximately $6.6 million related to stock options
and is expected to be recognized as expense over a weighted average period of approximately 1.6 years. The Company reflected compensation
costs of $0.2 million and $0.1 million related to the vesting of restricted stock during the three months ended March 31, 2023 and 2022,
respectively. The unamortized compensation cost at March 31, 2023 was $1.8 million related to restricted stock units and is expected
to be recognized as expense over a weighted average period of approximately 1.8 years. There were no stock options granted or exercised
during the three months ended March 31, 2023 and 2022.
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 three months ended March 31, 2023 (in thousands,
except exercise price):
| | |
| | |
Options
Outstanding | |
| | |
| | |
| | |
Weighted | |
| | |
Shares | | |
| | |
Average | |
| | |
Available | | |
Number of | | |
Exercise | |
| | |
for
Grant | | |
Shares | | |
Prices | |
| Balance as of December 31, 2022 | |
| 1,556 | | |
| 1,499 | | |
$ | 3.32 | |
| RSUs granted | |
| (80 | ) | |
| — | | |
$ | — | |
| RSUs cancelled and returned to the Plans | |
| 51 | | |
| — | | |
$ | — | |
| Options cancelled | |
| — | | |
| (17 | ) | |
$ | 6.76 | |
| Balance as of March 31, 2023 | |
| 1,527 | | |
| 1,482 | | |
$ | 3.28 | |
A summary of RSU
activity under the Plans is presented below (in thousands, except for fair value):
| | |
| | |
Weighted | |
| | |
| | |
Average | |
| | |
Number of | | |
Grant-Date | |
| | |
Shares | | |
Fair
Value | |
| Non-vested shares as of December 31, 2022 | |
| 1,057 | | |
$ | 2.06 | |
| Granted | |
| 80 | | |
$ | 0.99 | |
| Vested | |
| (51 | ) | |
$ | 2.07 | |
| Non-vested shares as of March 31, 2023 | |
| 1,086 | | |
$ | 1.98 | |
The following table
summarizes significant ranges of outstanding and exercisable options as of March 31, 2023 (in thousands, except contractual life and
exercise price):