Item 1. Financial Statements
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
PERASO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 60GHz and 5G semiconductor devices and modules, licensing of intellectual property 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, the legal subsidiary, Peraso Tech, has been treated as the accounting acquirer and the Company, the legal parent, has been treated as the accounting acquiree. The transaction was accounted for as a reverse acquisition in accordance with Financial Accounting Standards Board Accounting Standards Codification (ASC) No. 805, Business Combinations (ASC 805). Accordingly, these condensed 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.
The accompanying condensed consolidated financial statements of the Company have been prepared without audit.
The condensed consolidated balance sheet as of December 31, 2021 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 and six months ended June 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022 or for any other future period.
7
Liquidity
The Company incurred net losses of approximately $13.8 million for the six months ended June 30, 2022 and $10.8 million for the year ended December 31, 2021 and had an accumulated deficit of approximately $131.0 million as of June 30, 2022. These and prior year losses have resulted in significant negative cash flows and have required us to raise substantial amounts of additional capital. To date, the Company has primarily financed its operations through multiple offerings of common stock to investors and affiliates.
The Company expects to continue to incur operating losses for the foreseeable future as it secures 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 new 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, further 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. The Company previously classified intangible asset amortization expense related to the developed technology and customer relationships intangibles within research and development expenses (R&D) in its condensed consolidated statements of operations and comprehensive loss. Amortization expense on the developed technology intangible asset is now classified within cost of net revenue, and amortization expense on customer relationships is now classified in selling, general and administrative expenses (SG&A). Prior period amounts have been conformed to the current period presentation. See Note 5 for additional disclosure.
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.
8
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.
9
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 zero as of June 30, 2022 and approximately $61,000 as of December 31, 2021.
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 $160,000 and $37,000 during the six months ended June 30, 2022 and 2021, respectively.
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.
In addition, as a Canadian Controlled Private Corporation (CCPC), the Company is also a part of the Scientific Research and Experimental Development (SRED) Program, which uses tax incentives to encourage Canadian businesses of all sizes and in all sectors 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 credit or incentive. 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, they 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.
As of December 17, 2021, Peraso Tech ceased to be a CCPC and is no longer eligible for the expenditure refund program. However, it is eligible for a tax credit of 15% on qualified SRED expenditures. Unused 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.
10
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):
|
|
|
June 30, 2022 |
|
|
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
|
|
Carrying |
|
|
Accumulated |
|
|
Carrying |
|
|
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
|
Developed technology |
|
$ |
5,726 |
|
|
$ |
776 |
|
|
$ |
4,950 |
|
|
Customer relationships |
|
|
2,556 |
|
|
|
346 |
|
|
|
2,210 |
|
|
Other |
|
|
186 |
|
|
|
19 |
|
|
|
167 |
|
|
Total |
|
$ |
8,468 |
|
|
$ |
1,141 |
|
|
$ |
7,327 |
|
|
|
|
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 $0.3 million and $0.7 million for the three and six months ended June 30, 2022, respectively, 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 and $0.3 million for the three and six months ended June 30, 2022, respectively, has been included in selling, general and administrative expense in the condensed consolidated statements of operations and comprehensive loss.
Amortization expense was $0.5 million and $1.0 million for the three and six months ended June 30, 2022, respectively. There was no amortization expense for the three and six months ended June 30, 2021.
11
As of June 30, 2022, estimated future amortization expense related to intangible assets was as follows (in thousands):
|
|
|
|
|
|
|
Year ending December 31, |
|
|
|
|
|
2022 |
|
$ |
1,050 |
|
|
2023 |
|
|
2,099 |
|
|
2024 |
|
|
2,099 |
|
|
2025 |
|
|
2,011 |
|
|
2026 |
|
|
28 |
|
|
2027 |
|
|
10 |
|
|
Thereafter |
|
|
30 |
|
|
|
|
$ |
7,327 |
|
|
|
|
|
|
|
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.
Leases
ASC No. 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.
12
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.
License 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.
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 June 30, 2022 and December 31, 2021, contract liabilities were in a current position and included in deferred revenue.
During the six months ended June 30, 2022, the Company recognized approximately $61,000 of revenue that had been included in deferred revenue as of December 31, 2021.
See Note 6 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.
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.
13
Starting in 2020, certain Canadian businesses, which experienced a drop in revenue during the COVID-19 pandemic, became eligible for a rent and wage subsidy from the government. The Company’s subsidiary, Peraso Tech, began receiving this subsidy on a monthly basis beginning in the fourth quarter of 2020 and ending in the fourth quarter of 2021.
During the six months ended June 30, 2021, the Company recognized payroll subsidies of $861,352 as a reduction in the associated wage costs and rent subsidies of $160,865 as a reduction of operating expenses in the condensed consolidated statement of operations.
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 shares of common stock outstanding during the period. Diluted net loss per share gives effect to all potentially dilutive common shares outstanding during the period. Potentially dilutive common shares consist of incremental shares of common stock issuable upon the 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):
|
|
|
|
|
|
|
|
June 30, |
|
|
|
|
2022 |
|
|
2021 |
|
|
Escrow shares |
|
|
1,815 |
|
|
|
— |
|
|
Options to purchase common stock |
|
|
1,537 |
|
|
|
1,048 |
|
|
Unvested restricted common stock units |
|
|
1,303 |
|
|
|
— |
|
|
Convertible debt |
|
|
— |
|
|
|
5,500 |
|
|
Warrants |
|
|
134 |
|
|
|
508 |
|
|
Total |
|
|
4,789 |
|
|
|
7,056 |
|
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
14
update is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years for smaller reporting companies. The Company is still evaluating the impact of this accounting guidance on its results of operations and financial position.
In May 2021, the FASB issued ASU 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.
15
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.
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. 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, to receive dividends that are economically equivalent to any dividends declared with respect to the shares of common stock.
The Exchangeable Shares, which can be converted into common stock at the option of the holder and have the same voting rights as common stock, are similar in substance to shares of common stock and, therefore, 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.
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
16
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 |
|
|
|
|
|
|
|
|
Total fair value of the Company's share-based awards (iii) |
|
|
782 |
|
|
Percent related to pre-combination service |
|
|
80.76 |
% |
|
Fair value of the Company's pre-combination 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 |
|
|
|
|
|
|
|
17
Unaudited pro forma results of operations for the three and six months ended June 30, 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.
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
(in thousands) |
|
June 30, 2021 |
|
|
June 30, 2021 |
|
|
Revenue |
|
$ |
1,865 |
|
|
$ |
4,304 |
|
|
Net loss |
|
$ |
(6,634 |
) |
|
$ |
(12,160 |
) |
|
|
|
|
|
|
|
|
|
|
Note 3: Fair Value of Financial Instruments
The estimated fair values of financial instruments outstanding were (in thousands):
|
|
|
June 30, 2022 |
|
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
Cash and cash equivalents |
|
$ |
2,820 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
2,820 |
|
|
Short-term investments |
|
|
2,100 |
|
|
|
— |
|
|
|
(6 |
) |
|
|
2,094 |
|
|
Long-term investments |
|
|
1,117 |
|
|
|
— |
|
|
|
(35 |
) |
|
|
1,082 |
|
|
|
|
$ |
6,037 |
|
|
$ |
— |
|
|
$ |
(41 |
) |
|
$ |
5,996 |
|
|
|
|
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 |
|
The following table represents the Company’s fair value hierarchy for its financial assets (cash equivalents and investments) (in thousands):
|
|
|
June 30, 2022 |
|
|
|
|
Fair Value |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Money market funds |
|
$ |
263 |
|
|
$ |
263 |
|
|
$ |
— |
|
|
$ |
— |
|
|
Corporate notes and commercial paper |
|
$ |
3,176 |
|
|
$ |
— |
|
|
$ |
3,176 |
|
|
$ |
— |
|
|
|
|
$ |
3,439 |
|
|
$ |
263 |
|
|
$ |
3,176 |
|
|
$ |
— |
|
|
|
|
December 31, 2021 |
|
|
|
|
Fair Value |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Money market funds |
|
$ |
1,159 |
|
|
$ |
1,159 |
|
|
$ |
— |
|
|
$ |
— |
|
|
Corporate notes and commercial paper |
|
$ |
12,195 |
|
|
$ |
— |
|
|
$ |
12,195 |
|
|
$ |
— |
|
There were no transfers in or out of Level 1 and Level 2 securities during the six months ended June 30, 2022 or December 31, 2021.
18
Note 4. Balance Sheet Detail
Inventories
|
|
|
June 30, |
|
|
December 31, |
|
|
|
|
2022 |
|
|
2021 |
|
|
|
|
(in thousands) |
|
|
Raw materials |
|
$ |
1,238 |
|
|
$ |
879 |
|
|
Work-in-process |
|
|
2,597 |
|
|
|
2,170 |
|
|
Finished goods |
|
|
550 |
|
|
|
775 |
|
|
|
|
$ |
4,385 |
|
|
$ |
3,824 |
|
Note 5. Revision of Prior Period Financial Statements
The Company previously classified amortization expense related to the developed technology and customer relationships intangible assets within R&D in its condensed consolidated statements of operations and comprehensive loss. Amortization expense on the developed technology intangible asset is now classified within cost of net revenue, and amortization expense on customer relationships is now classified in SG&A. Prior period amounts have been conformed to the current period presentation. The reclassification had no impact on the Company's net loss or cash flows for the three months ended March 31, 2022 and six months ended June 30, 2022.
The effects of the adjustments for the three months ended March 31, 2022 were as follows (in thousands):
|
|
|
As Reported |
|
|
Adjustment |
|
|
As Revised |
|
|
Condensed Consolidated Statement of Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of net revenue |
|
$ |
1,590 |
|
|
$ |
358 |
|
|
$ |
1,948 |
|
|
Gross profit |
|
|
1,813 |
|
|
|
(358 |
) |
|
|
1,455 |
|
|
Research and development |
|
|
6,003 |
|
|
|
(517 |
) |
|
|
5,486 |
|
|
Selling, general and administrative |
|
|
2,546 |
|
|
|
159 |
|
|
|
2,705 |
|
|
Total operating expenses |
|
$ |
8,549 |
|
|
$ |
(358 |
) |
|
$ |
8,191 |
|
Note 6. Commitments and Contingencies
Leases
The Company has five facility leases that it accounts for under ASC 842, and these include the operating leases for its corporate facility in San Jose, California, and facilities in Toronto, Markham and Waterloo, Ontario, Canada. The Waterloo and Toronto leases expire in September 2022 and December 2023, respectively. The current San Jose lease with a sublessor expires in July 2022, and the Company entered into a new, direct lease with the facility landlord, dated April 13, 2022, for an 18-month term, which commenced July 15, 2022. In addition, on May 26, 2022, the Company entered into a new lease for a facility in Markham, Ontario 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 right-to-use assets and corresponding liabilities for the 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.
19
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 on the balance sheet of approximately $274,000.
The following table provides the details of right-of-use assets and lease liabilities as of June 30, 2022 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
|
June 30, 2022 |
|
|
Right-of-use assets: |
|
|
|
|
|
|
|
|
Operating leases |
|
|
|
|
$ |
1,111 |
|
|
Finance lease |
|
|
|
|
|
245 |
|
|
Total right-of-use assets |
|
|
|
|
$ |
1,356 |
|
|
Lease liabilities: |
|
|
|
|
|
|
|
|
Operating leases |
|
|
|
|
$ |
1,140 |
|
|
Finance lease |
|
|
|
|
|
254 |
|
|
Total lease liabilities |
|
|
|
|
$ |
1,394 |
|
Future minimum payments under the leases at June 30, 2022 are listed in the table below (in thousands):
|
|
|
|
|
|
Operating |
|
|
Year ending December 31, |
|
|
|
|
leases |
|
|
2022 |
|
|
|
|
$ |
223 |
|
|
2023 |
|
|
|
|
|
768 |
|
|
2024 |
|
|
|
|
|
222 |
|
|
2025 |
|
|
|
|
|
139 |
|
|
2026 |
|
|
|
|
|
113 |
|
|
2027 |
|
|
|
|
|
84 |
|
|
Total future lease payments |
|
|
|
|
|
1,549 |
|
|
Less: imputed interest |
|
|
|
|
|
(155 |
) |
|
Present value of lease liabilities |
|
|
|
|
$ |
1,394 |
|
The following table provides the details of supplemental cash flow information (in thousands):
|
|
|
|
Six Months Ended |
|
|
|
|
|
June 30, |
|
|
|
|
|
2022 |
|
|
2021 |
|
|
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
|
|
|
Operating cash flows for leases |
|
$ |
283 |
|
|
$ |
147 |
|
Rent expense was approximately $0.2 million for each of the three month periods ended June 30, 2022 and 2021. Rent expense was approximately $0.4 million for the six months ended June 30, 2022 and $0.3 million for the six months ended June 30, 2021. 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.
20
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 six months ended June 30, 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 six months ended June 30, 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 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 7. 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 |
|
|
Six Months Ended |
|
|
|
|
June 30, |
|
|
June 30, |
|
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
North America |
|
$ |
3,127 |
|
|
$ |
106 |
|
|
$ |
5,503 |
|
|
$ |
161 |
|
|
Hong Kong |
|
|
587 |
|
|
|
555 |
|
|
|
879 |
|
|
$ |
1,030 |
|
|
Taiwan |
|
|
204 |
|
|
|
23 |
|
|
|
515 |
|
|
|
588 |
|
|
Japan |
|
|
245 |
|
|
|
— |
|
|
|
537 |
|
|
|
— |
|
|
Rest of world |
|
|
121 |
|
|
|
13 |
|
|
|
253 |
|
|
|
19 |
|
|
Total net revenue |
|
$ |
4,284 |
|
|
$ |
697 |
|
|
$ |
7,687 |
|
|
$ |
1,798 |
|
21
Customers who accounted for at least 10% of total net revenue were:
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
|
June 30, |
|
June 30, |
|
|
|
2022 |
|
2021 |
|
2022 |
|
2021 |
|
Customer A |
|
36% |
|
* |
|
31% |
|
* |
|
Customer B |
|
21% |
|
* |
|
12% |
|
* |
|
Customer C |
|
14% |
|
69% |
|
11% |
|
52% |
|
Customer D |
|
13% |
|
* |
|
23% |
|
* |
|
Customer E |
|
* |
|
* |
|
* |
|
33% |
|
* |
Represents less than 10% |
Three customers accounted for 80% of accounts receivable as of June 30, 2022. Three customers accounted for 96% of accounts receivable as of December 31, 2021.
Note 8. Income Tax Provision
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. All tax returns from 2015 to 2020 may be subject to examination by the Internal Revenue Service, California and other states. Returns filed in foreign jurisdictions may be subject to examination for the years 2011 to 2020. As of June 30, 2022, the Company has not recorded any liability for unrecognized tax benefits related to uncertain tax positions.
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), and it replaced 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.
22
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 $2.2 million and $2.3 million related to the vesting of stock options during the six month periods ended June 30, 2022 and 2021, respectively. At June 30, 2022, the unamortized compensation cost was approximately $10.2 million related to stock options and is expected to be recognized as expense over a weighted average period of approximately 2.6 years. The Company reflected compensation costs of $0.7 million and zero related to the vesting of restricted stock options during the six month ended June 30, 2022 and 2021, respectively. The unamortized compensation cost at June 30, 2022 was $2.8 million related to restricted stock units and is expected to be recognized as expense over a weighted average period of approximately 2.5 years.
Valuation Assumptions and Expense Information for Stock-Based Compensation
There were no stock options granted or exercised during the six months ended June 30, 2022 and 2021.
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 six months ended June 30, 2022 (in thousands, except exercise price):
|
|
|
|
|
|
Options Outstanding |
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
Shares |
|
|
|
|
|
Average |
|
|
|
|
Available |
|
Number of |
|
|
Exercise |
|
|
|
|
for Grant |
|
Shares |
|
|
Prices |
|
|
Balance as of December 31, 2021 |
|
|
3,024 |
|
|
1,558 |
|
|
$ |
3.49 |
|
|
Options cancelled |
|
|
— |
|
|
(13 |
) |
|
$ |
10.98 |
|
|
Balance as of March 31, 2022 |
|
|
3,024 |
|
|
1,545 |
|
|
$ |
3.43 |
|
|
RSUs granted |
|
|
(1,511 |
) |
|
— |
|
|
$ |
- |
|
|
RSUs cancelled and returned to the Plan |
|
|
43 |
|
|
— |
|
|
$ |
- |
|
|
Options cancelled |
|
|
— |
|
|
(8 |
) |
|
$ |
2.63 |
|
|
Balance as of June 30, 2022 |
|
|
1,556 |
|
|
1,537 |
|
|
$ |
3.38 |
|
23
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, 2021 |
|
|
88 |
|
|
$ |
4.84 |
|
|
Vested |
|
|
(13 |
) |
|
$ |
3.70 |
|
|
Non-vested shares as of March 31, 2022 |
|
|
75 |
|
|
$ |
5.67 |
|
|
Granted |
|
|
1,511 |
|
|
|
— |
|
|
Vested |
|
|
(271 |
) |
|
$ |
2.49 |
|
|
Cancelled |
|
|
(12 |
) |
|
|
— |
|
|
Non-vested shares as of June 30, 2022 |
|
|
1,303 |
|
|
$ |
2.28 |
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes significant ranges of outstanding and exercisable options as of June 30, 2022 (in thousands, except contractual life and exercise price):
Note 11. Debt
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 $513,438 for the three and six months ended June 30, 2021 consisted of i) $348,134 of amortization of debt discount, ii) $120,950 of interest expense on convertible debt, which was outstanding and retired in 2021, and iii) $44,354 of interest expense on the SRED financing.
Note 12. Related Party Transactions
A family member of one of the Company’s executive officers serves as a consultant to the Company. During the six months ended June 30, 2022 and 2021, the Company paid approximately $92,400 and $103,300, respectively, to the consultant. Additionally, a family member of one of the Company’s executive officers is an employee of the Company. During the six months ended June 30, 2022, the Company paid approximately $92,400 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 six months ended June 30, 2021, the Company paid approximately $46,000 to the employed family member.
