This Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the accompanying condensed
consolidated financial statements and notes included in this report. This
Form 10-Q contains forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, which include, without limitation, statements
about the market for our technology, our strategy, competition, expected
financial performance and capital raising efforts, risks inherent in our ability
to consummate the proposed business combination with Peraso Technologies, Inc.,
the impacts of COVID-19 on our business, and other aspects of our business
identified in our most recent annual report on Form 10-K filed with the
Securities and Exchange Commission on March 18, 2021 and in other reports that
we file from time to time with the Securities and Exchange Commission. Any
statements about our business, financial results, financial condition and
operations contained in this Form 10-Q that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "believes," "anticipates," "expects," "intends," "plans,"
"projects" or similar expressions are intended to identify forward-looking
statements. Our actual results could differ materially from those expressed or
implied by these forward-looking statements as a result of various factors,
including the risk factors described under Item 1A of our annual report on
Form 10-K for the year ended December 31, 2020 and the risk factors described
below under Item 1A of this Form 10-Q. We undertake no obligation to update
publicly any forward-looking statements for any reason, except as required by
law, even as new information becomes available or events occur in the future.
Company Overview
Our strategy and primary business objective is to be a profitable, intellectual
property-rich, fabless semiconductor company offering integrated circuits, or
ICs, and related software, firmware and intellectual property, or IP, that
deliver unparalleled memory bandwidth and access rate performance for
high-performance data processing in cloud networking, communications, security
appliances, video, test and monitoring, and data center systems. Our 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 Programmable HyperSpeed Engine IC products, which integrate our proprietary,
1T-SRAM high-density embedded memory and a highly-efficient serial interface
protocol resulting in a monolithic memory IC solution optimized for memory
bandwidth and transaction access performance. Our second-generation Bandwidth
Engine, or Bandwidth Engine 2, products are expected to be our primary revenue
source through at least 2023, and we expect these products to continue to
generate significant revenue thereafter. As we are not developing new IC
products, from a product development perspective, we continue to leverage our
current technologies and core competencies to expand our product offerings
without incurring significant additional R&D expenses. We are developing our
Virtual Accelerator Engine, or VAE, IP solutions which consist of software,
firmware and other IP available for license. This product line will include
multiple function accelerator platform products, which target specific
application functions and will use a common software interface to allow
performance scalability over multiple hardware environments. These function
accelerator platform products are hardware agnostic and operate with or without
one of our Accelerator Engine ICs. This software-defined, hardware-accelerated
platform architecture utilizes an internally developed graphical memory engine
architecture to provide flexible data classification and analysis capability. We
believe the technology will generate new opportunities that require less
up-front architectural changes by system designers and provide a scalable
performance roadmap of options using our Accelerator Engine ICs. Despite our
limited new IC product development efforts, we believe our current hardware and
software/firmware product portfolio positions us for future growth and
profitability.
We incurred net losses of approximately $4.3 million for the nine months ended
September 30, 2021 and $3.8 million and $2.6 million for the years ended
December 31, 2020 and 2019, respectively, and had an accumulated deficit
of approximately $246.9 million as of September 30, 2021. These and prior year
losses have resulted in significant negative cash flows for almost a decade and
have necessitated that we raise substantial amounts of additional capital during
this period. To date, we have primarily financed our operations through multiple
offerings of common stock to investors and affiliates, as well as asset sale
transactions and one offering of convertible notes.
We may continue to incur operating losses and will need to increase revenues
substantially beyond levels that we have attained in the past in order to
generate sustainable operating profit and sufficient cash flows to continue
doing business without raising additional capital from time to time.
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Recent Developments - Proposed Arrangement with Peraso Technologies Inc.
On September 14, 2021, we and our newly formed subsidiaries, 2864552 Ontario
Inc. (Callco) and 2864555 Ontario Inc. (Canco), both corporations existing under
the laws of the province of Ontario, entered into an Arrangement Agreement (the
Agreement) with Peraso Technologies Inc., a corporation existing under the laws
of the province of Ontario (Peraso). Under the Agreement, we, indirectly through
Canco, are to acquire all of the issued and outstanding common shares of Peraso
(Peraso Shares), including those Peraso Shares to be issued in connection with
the conversion or exchange of secured convertible debentures of Peraso and
common share purchase warrants of Peraso, as applicable, by way of a statutory
plan of arrangement (the Arrangement) under the Business Corporations Act
(Ontario) (the OBCA), on and subject to the terms and conditions of the
Agreement
The Agreement provides that the Peraso stockholders may elect to receive either
shares of our common stock or shares of the capital stock of Canco (the
Exchangeable Shares) in exchange for such holder's Peraso Shares, in each case
based on an exchange ratio (the Exchange Ratio) to be determined based on the
number of Peraso Shares and shares of our common stock outstanding as of
immediately prior to the effective time of the Arrangement (the Effective Time).
Pursuant to the terms of the Agreement, at the Effective Time, we shall hold an
aggregate of 1,815,445 Exchangeable Shares and Common Stock (collectively, the
Earnout Shares). Such Earnout Shares shall be escrowed pursuant to the terms of
an escrow agreement on a pro rata basis from the aggregate consideration to be
received by the Peraso stockholders, subject to the offset by us for any losses
in accordance with the Agreement. Such Earnout Shares shall be released, subject
to any offset claim, upon the satisfaction of the earlier of: (a) any date
following the first anniversary of the Effective Time and prior to the third
anniversary of the Effective Time where the volume weighted average price of our
common stock for any 20 trading days within a period of 30 consecutive trading
days is at least $8.57 per share, subject to adjustment for stock splits or
other similar transaction; (b) the date of any sale of all or substantially all
of the assets or shares of us; or (c) the date of any bankruptcy, insolvency,
restructuring, receivership, administration, wind-up, liquidation, dissolution,
or similar event involving us.
Following the Effective Time, each Exchangeable Share will be exchangeable by
the holder for one share of common stock (subject to customary adjustments for
stock splits or other reorganizations). In addition, we may require all
outstanding Exchangeable Shares to be exchanged upon the occurrence of certain
events and at any time following the seventh anniversary of the closing of the
Arrangement. While outstanding, holders of Exchangeable Shares will be entitled
to cast votes on matters for which holders of our common stock are entitled to
vote and will be entitled to receive dividends economically equivalent to the
dividends declared by us with respect to our common stock. Eligibility to
receive Exchangeable Shares will be subject to certain Canadian residency
restrictions and tax statuses.
The Agreement also provides that Peraso stock options, which are exercisable for
Peraso Shares, will be replaced with an option to acquire common stock to be
issued by us in consideration for cancellation of the Peraso options and
exercisable for shares of our common stock after the Effective Time, in each
case with adjustments based on the Exchange Ratio. The exact number of shares of
common stock that will be issued pursuant to the Arrangement will be determined
at the Effective Time in accordance with the Exchange Ratio.
Immediately following the Effective Time, based on the Exchange Ratio, the
former stockholders of Peraso are anticipated to own approximately 61% of the
economic and voting interest of the combined company with our current
stockholders holding the remaining 39% economic and voting interest, as
calculated on a fully-diluted basis and including the Earnout Shares.
The consummation of the Arrangement is subject to certain closing conditions
precedent, including both our and Peraso's stockholders approval of the
Agreement and transactions contemplated therein; the order of the Ontario
Superior Court of Justice (Commercial List) granted pursuant to Section 182(5)
of the Business Corporations Act (Ontario); all regulatory approvals; the
continuing listing of our common stock on the Nasdaq Capital Market; and other
customary closing conditions.
The transaction is expected to close in the fourth calendar quarter of 2021 and
to be implemented by way of an arrangement under the OBCA. The Agreement
provides for customary representations, warranties and covenants, including
covenants of each party to (i) subject to certain exceptions, carry on its
business in the ordinary course of business consistent with past practice during
the period between the execution of the Agreement and the Effective Time and
(ii) not solicit any alternate transactions or, subject to certain exceptions,
to engage in any discussions or negotiations with respect thereto. Subject to
certain terms and conditions, the Agreement may be terminated if the
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Effective Time does not occur on or before November 30, 2021, subject to certain
automatic extensions. The Agreement may also be terminated by either party, if
the respective stockholders' approval is not obtained, in the event of material
adverse effect, or a superior proposal in connection with an alternative
acquisition. The Agreement subjects the parties to certain termination payment
obligations. If the Agreement is terminated because of the failure to obtain
stockholders' approval, the party that failed to obtain such approval will be
obligated to pay a fee of $750,000 to the other party. If the Agreement is
terminated by either party as a result of obtaining a superior proposal from a
third party, breach of non-solicitation covenants of the Agreement, or because
either party's board of directors fails to unanimously recommend to proceed with
the Arrangement or withdraws its recommendation, the breaching party will be
required to pay a termination fee of $3,500,000.
COVID-19
The global outbreak of the coronavirus disease 2019 (COVID-19) was declared a
pandemic by the World Health Organization and a national emergency by the U.S.
government in March 2020. This has negatively affected the U.S. and global
economy, disrupted global supply chains, significantly restricted travel and
transportation, resulted in mandated closures and orders to "shelter-in-place"
and created significant disruption of the financial markets. The full extent of
the COVID-19 impact on our operational and financial performance will depend on
future developments, including the duration and spread of the pandemic and
related actions taken by the U.S. and foreign government agencies to prevent
disease spread, all of which are uncertain, out of our control, and cannot be
predicted.
In March 2020, Santa Clara County in California, where we are based, issued a
"shelter-in-place" order (the Order) that was effective through the first
quarter of 2021. We have been complying with the Order and have minimized
business activities at our San Jose headquarters facility (our only facility)
since March 2020. We have implemented a teleworking policy for our employees and
contractors to reduce on-site activity at our facility.
We remain diligent in continuing to identify and manage risks to our business
given the changing uncertainties related to COVID-19. The ultimate impact of the
Covid-19 pandemic on our business and results of operations is uncertain and
difficult to predict, and we are closely monitoring impacts, especially to
customer programs and our supply chain. We expect that the impacts of the
COVID-19 pandemic will continue to have a negative impact on our revenues for
the remainder of 2021, although we are not in a position to quantify such
impacts. In addition, we have and continue to experience shortages and longer
lead times for certain components used to manufacture our IC products. While we
believe that our operations personnel are currently in a position to meet
expected customer demand levels in the coming quarters, we recognize that
unpredictable events could create difficulties in the months ahead. We may not
be able to address these difficulties in a timely manner, which could negatively
impact our business, results of operations, financial condition and cash flows.
The continued spread of COVID-19 has also led to disruption and volatility in
the global capital markets. During the nine months ended September 30, 2021, we
were able to raise additional capital and make full repayment of our convertible
notes payable (see discussion below under Liquidity and in Notes 8 and 9 to the
condensed consolidated financial statements included in Part I, Item I of this
Form 10-Q), however, if we need to raise additional capital to support
operations in the future, we may be unable to access the capital markets and
additional capital may only be available to us on terms that could be
significantly detrimental to our existing stockholders and to our business.
For additional information on risks that could impact our future results, please
refer to "Risk Factors" in Part II, Item 1A. of this quarterly report on Form
10-Q.
Sources of Revenue
Product. Product revenue is generally recognized at the time of shipment to our
customers. An estimated allowance may be recorded, at the time of shipment, for
future returns and other charges against revenue consistent with the terms of
sale.
Royalty and other. Our licensing contracts typically provide for royalties based
on the licensee's use of our memory technology in their currently shipping
commercial products. We estimate royalty revenue in the period in which the
licensee uses the licensed technology. Payments are received in the following
period.
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Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations
are based upon our condensed consolidated financial statements, which have been
prepared in accordance with GAAP. The preparation of these condensed
consolidated financial statements requires us to make certain estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses. On an ongoing basis we make these estimates based on our historical
experience and on assumptions that we consider reasonable under the
circumstances. Actual results may differ from these estimates and reported
results could differ under different assumptions or conditions. Our significant
accounting policies and estimates are disclosed in Note 1 of the "Notes to
Consolidated Financial Statements" in our annual report on Form 10-K for the
year ended December 31, 2020. As of September 30, 2021, there have been no
material changes to our significant accounting policies and estimates.
Results of Operations
Net Revenue
September 30, Change
2021 2020 2020 to 2021
(dollar amounts in thousands)
Product -three months ended $ 1,210 $ 1,803 $ (593 ) (33 )%
Percentage of total net revenue 91 % 91 %
Product -nine months ended $ 3,405 $ 4,550 $ (1,145 ) (25 )%
Percentage of total net revenue 89 % 88 %
Product revenue decreased for the three and nine months ended September 30, 2021
compared with the same period of 2020 primarily due to lower sales of our
Bandwidth Engine 2 and LineSpeed IC products.
September 30, Change
2021 2020 2020 to 2021
(dollar amounts in thousands)
Royalty and other -three months ended $ 127 $ 168 $ (41 ) (24 )%
Percentage of total net revenue
9 % 9 %
Royalty and other -nine months ended $ 438 $ 649 $ (211 ) (33 )%
Percentage of total net revenue
11 % 12 %
Royalty and other includes license, royalty and related revenues generated from
licensing agreements. The decrease in royalty and other revenue for the three
months ended September 30, 2021 compared with the same period of 2020 was due to
a decrease in legacy royalty revenues. The decrease in royalty and other revenue
for the nine months ended September 30, 2021 compared with the same period of
2020 was due to a decrease in royalty revenues and $0.1 million of non-recurring
license revenues recognized during the three months ended June 30, 2020.
Cost of Net Revenue and Gross Profit
September 30, Change
2021 2020 2020 to 2021
(dollar amounts in thousands)
Cost of net revenue -three months ended $ 376 $ 677 $ (301 ) (44 )%
Percentage of total net revenue
28 % 34 %
Cost of net revenue -nine months ended $ 1,315 $ 1,811 $ (496 ) (27 )%
Percentage of total net revenue
34 % 35 %
September 30, Change
2021 2020 2020 to 2021
(dollar amounts in thousands)
Gross profit -three months ended $ 961 $ 1,294 $ (333 ) (26 )%
Percentage of total net revenue 72 % 66 %
Gross profit -nine months ended $ 2,528 $ 3,388 $ (860 ) (25 )%
Percentage of total net revenue 66 % 65 %
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Cost of net revenue is primarily comprised of direct and indirect costs related
to the sale of our IC products.
Cost of net revenue decreased for the three and nine months ended September 30,
2021 when compared with the same periods in 2020, primarily due to decreased
shipment volumes of our LineSpeed and Bandwidth Engine IC products.
Gross profit decreased for the three and nine months ended September 30, 2021
compared with the same period of 2020 due to the decrease in gross profit
attributable to the decreases in revenues.
Research and Development
September 30, Change
2021 2020 2020 to 2021
(dollar amounts in thousands)
Research and development -three months ended $ 1,281 $ 972 $ 309 32 %
Percentage of total net revenue
96 % 49 %
Research and development -nine months ended $ 3,662 $ 2,918 $ 744 25 %
Percentage of total net revenue
95 % 56 %
Our research and development expenses include costs related to the development
of our IC products and VAE IP. We expense research and development costs as they
are incurred.
The increase for the three and nine months ended September 30, 2021 compared
with the same period of 2020 was primarily due to increases in personnel costs
due to headcount increases and increases in consulting costs for development of
our VAE IP. We expect that total research and development expenses will increase
in 2021 compared with 2020 as we incur increased development costs for our VAE
IP.
Selling, General and Administrative
September 30, Change
2021 2020 2020 to 2021
(dollar amounts in thousands)
SG&A -three months ended $ 1,398 $ 955 $ 443 46 %
Percentage of total net revenue 105 % 48 %
SG&A -nine months ended
$ 3,756 $ 3,054 $ 702 23 %
Percentage of total net revenue 98 % 59 %
Selling, general and administrative, or SG&A, expenses consist primarily of
personnel and related overhead costs for sales, marketing, finance, human
resources and general management.
The increase for the three and nine months ended September 30, 2021 compared
with the same period of 2020 was primarily due to increases in transaction costs
related to the Arrangement with Peraso. Transaction costs incurred in connection
with the Arrangement were $0.3 million and $0.7 million for the three and nine
months ended September 30, 2021, respectively. We expect total SG&A expenses to
remain relatively consistent for the remainder of 2021.
Interest expense
September 30, Change
2021 2020 2020 to 2021
(dollar amounts in thousands)
Interest expense - three months ended $ - $ 54 $ (54 ) (100 )%
Percentage of total net revenue
- 3 %
Interest expense - nine months ended $ 30 $ 164 $ (134 ) (82 )%
Percentage of total net revenue
1 % 3 %
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Interest expense consisted of interest expense on our senior secured convertible
notes (the Notes). As of March 31, 2021, we had repaid the full remaining
principal amount of the Notes and accrued interest. We do not expect to incur
interest expense during the remainder of 2021. See Note 10 to the condensed
consolidated financial statements included in this report for additional
disclosure.
Liquidity and Capital Resources; Changes in Financial Condition
Cash Flows
As of September 30, 2021, we had cash, cash equivalents and investments of $21.2
million and working capital of $18.6 million. We believe that cash generated
from our liquidity sources will be sufficient to meet both our short-term and
long-term working capital and capital expenditure needs for the foreseeable
future.
Net cash used in operating activities was $4.6 million for the first nine months
of 2021, which primarily resulted from our net loss of $4.3 million, adjusted
for a $0.6 million of gains for debt extinguishment and $0.1 million in net
changes in assets and liabilities, which was partially offset by non-cash
charges of $0.4 million. The changes in assets and liabilities primarily related
to the timing of accounts receivable collections, purchases of inventory and
other vendor payables and prepayments.
Net cash used in operating activities was $1.6 million for the first nine months
of 2020, which primarily resulted from our net loss of $2.8 million, which was
partially offset by $0.7 million in net changes in assets and liabilities and
non-cash charges of $0.2 million of stock-based compensation, depreciation and
amortization expenses and $0.2 million of accrued interest. The changes in
assets and liabilities primarily related to the timing of accounts receivable
collections, and inventory and other vendor payables and prepayments.
Net cash used in investing activities of $11.4 million for the nine months ended
September 30, 2021 represented $12.7 million in purchases of short and long-term
investments, partially offset by $1.3 million in proceeds from maturities of
short-term investments. Net cash provided by investing activities for the nine
months ended September 30, 2020 was mainly due to the proceeds from maturities
of short-term investments of $0.3 million.
Net cash provided by financing activities of $19.9 million for the nine months
ended September 30, 2021 primarily consisted of $6.8 million and $12.0 million
in net proceeds received from the registered direct offerings of our common
stock completed in February 2021 and June 2021, respectively, and $4.2 million
of proceeds from the exercise of warrants to purchase shares of common stock at
a price of $2.40 per share. We used approximately $3 million of these proceeds
to repay in full the outstanding balance of the Notes.
Net cash provided by financing activities of $2.2 million for the nine months
ended September 30, 2020 primarily consisted of $1.6 million in net proceeds
received from the sale of common stock in a registered direct offering of
securities completed in April 2020 and $0.6 million of proceeds from an
unsecured loan under the Paycheck Protection Program.
Our future liquidity and capital requirements are expected to vary from
quarter-to-quarter, depending on numerous factors, including:
• level of revenue;
• cost, timing and success of technology development efforts, especially
for our VAE IP;
• inventory levels, timing of product shipments and length of billing and
collection cycles;
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• variations in manufacturing yields, material lead time and costs and
other manufacturing risks;
• profitability of our business;
• impacts of our proposed Arrangement with Peraso; and
• costs of acquiring other businesses and integrating the acquired operations.
Working Capital
Our primary need for liquidity is to fund working capital requirements of our
business and capital expenditures, as well as for general corporate purposes. We
expect our cash expenditures to exceed receipts in 2021, as our revenues will
not be sufficient to offset our working capital requirements. During the nine
months ended September 30, 2021, we completed two registered direct offerings of
our common stock that generated net proceeds of approximately $18.8 million.
Also, during 2021, we received proceeds of $4.2 million from the exercise of
common stock warrants. During the three months ended March 31, 2021, we repaid
in full the outstanding principal balance of our Notes. In May 2020, we entered
into a Promissory Note with Wells Fargo Bank, N.A. (the Lender) in an aggregate
principal amount of approximately $0.6 million (the PPP Note), pursuant to the
Paycheck Protection Program (the PPP) under the CARES Act. In March 2021, we
applied for forgiveness of the PPP Note under the terms of the PPP, and, in May
2021, we obtained forgiveness of the full amount of the PPP Note from the
Lender. As a result of these activities, at September 30, 2021, we had
approximately $21.2 million in cash and investments and no debt.
In the event that additional financing is required through sales of our equity
securities, our stockholders would suffer dilution of their equity ownership,
and we may be required to accept other terms that could be significantly
detrimental to our existing stockholders and to our business. 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 be significantly detrimental to our business,
operating results and financial condition. If we need additional capital and
cannot raise it on acceptable terms, we may not be able to, among other things:
• develop or enhance our products;
• expand our product development and sales and marketing organizations;
• acquire complementary technologies, products or businesses;
• expand operations;
• hire, train and retain employees; or
• respond to competitive pressures or unanticipated working capital
requirements.
Our failure to do any of these things could seriously harm our ability to
execute our business strategy and may force us to curtail our existing
operations or research and development plans.
Off-Balance Sheet Arrangements
We do not maintain any off-balance sheet arrangements or obligations that are
reasonably likely to have a material current or future effect on our financial
condition, results of operations, liquidity or capital resources.
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