Peraso Inc.

Good afternoon and welcome to Parezo Inc's second quarter 2023 conference call. At this time, all participants are in a listen-only mode. If anyone needs assistance at any time during the conference call, please press the star key followed by the zero on your touchtone phone. As a reminder, this conference call is being recorded today, Monday, August 14th, 2023. I would now like to turn the call over to the host for today's program, Mr. Jim Sullivan. Please go ahead.

Thank you. Good afternoon, and thank you all for joining today's conference call to discuss Perasso's second quarter 2023 financial results. I'm Jim Sullivan, CFO of Perasso, and joining me today is Ron Glivery, our CEO. Today, after the market closed, we issued a press release in related Form 8K, which was filed with the Securities and Exchange Commission. The press release and Form 8K are available on Perasso's website at www.perassoinc.com under the Investor Relations section. There is also a slide presentation that we will be using in conjunction with today's call that may be accessed through the webcast link on the IR website. As a reminder, comments made during today's conference call may include forward-looking statements. All statements other than statements of historical fact could be deemed as forward-looking. PARASO advises caution and reliance on forward-looking statements. These statements include, without limitation, any projections of revenue, margins, expenses, non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating expenses, adjusted EBITDA, non-GAAP net loss, cash flows, or other financial items, including anticipated cost savings. Also, any statements concerning the expected development, performance, and market share or competitive performance of our products or technologies. All forward-looking statements are based on information available to PROSO and the date hereof. These statements involve known and unknown uncertainties and other factors that may cause PRASO's actual results to differ materially from those implied by the forward-looking statements, including unexpected changes in the company's business. More detailed information about these risk factors and additional risk factors are set forth in PRASO's public filings with the SEC. PRASO expressly disclaims any obligation to update or alter its forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by applicable law. Additionally, the company's press release and management statements during this conference call will include discussions of certain measures and financial information in terms of GAAP and non-GAAP. With respect to remarks on today's call involving non-GAAP, unless otherwise indicated, referenced amounts exclude stock-based compensation expense, amortization of reported intangible assets, and the change in fair value of one liability. These non-GAAP financial measures, definitions, and the reconciliation of the differences between them and comparable gap measures are presented in our press release and related form 8K, which was filed today with the SEC, which provide additional details. For those of you unable to listen to the entire call at this time, a recording will be available on the IR section of our website. With that, I will start today's call with an overview of the company's financial results for the quarter, and then turn the call over to Ron to update. Now turning to the results. Total revenue in the second quarter decreased to $2.4 million from $5 million in the prior quarter and $4.3 million during the same quarter a year ago. Product revenue from the sale of our memory-inducing Qlikits and millimeter-wave integrated antenna solutions in the second quarter was $2.2 million, compared with $4.9 million in the prior quarter and $4.1 million in the second quarter of 2022. The sequential and year-over-year decrease in second quarter product revenue was primarily attributable to lower shipments of both millimeter wave products and memory ICs, which we primarily attribute to the inventory correction that has been underway in the market. Royalty and other revenues in the second quarter of 2023 comprised $0.2 million of royalty revenues from licenses of our memory technology and other revenues from performance of non-recurring engineering services for a millimeter wave customer. Gap gross margin was 25.3% in the second quarter, compared with 38.3% in the prior quarter and 34.7% in the year-ago quarter. On a non-GAAP basis, excluding amortization of acquired intangible assets, gross margin for the second quarter was 45.9%, compared with 45.4% in the prior quarter and 43% in the second quarter of 2022. The higher non-GAAP gross margins for the second quarter were primarily the result of revenue mix, reflecting increased revenue contribution from memory IC products. As stated in previous quarters, we continue to target a corporate non-GAF gross margin of approximately 50% through a combination of the benefits from the pre-scale and reduced production costs on our millimeter wave products, as well as the contribution from sales for our higher margin memory IC products. GAF operating expenses for the second quarter were $5.6 million. This compared with $5.7 million in the prior quarter, which included a $0.4 million gain on a previously completed license and asset sale. and $8.5 million in the second quarter of 2022. Total operating expenses for the second quarter of 2023 on a non-GAAP basis, which includes stock-based compensation and amortization of reported intangible assets, were $4.1 million, compared with $4.3 million in the prior quarter and $6.6 million in the same quarter a year ago. The sequential and year-over-year decrease in operating expenses reflects the incremental benefits from cost reduction initiatives and other previous actions we began implementing during the second half of 2022 to streamline operations, including the license and asset sale for certain memory technology that closed in the third quarter of 2022. We continue to expect these collective actions will result in lowering our operating expenses by approximately $5 million on an annual basis as we realize the full anticipated benefits over the next few quarters. GAAP net loss for the second quarter of 2023 was $4.1 million, or a loss of $0.17 per share, compared with a net loss of $3.1 million, or $0.15 per share in the prior quarter, and compared with a net loss of $7 million, or $0.33 per share in the same quarter a year ago. On a non-GAAP basis, net loss for the second quarter of 2023 was $3 million, or a loss of $0.12 per share, which excluded stock-based compensation, amortization of acquired intangibles, and the change in fair value of warrant liabilities. This compared with a non-GAAP net loss of $2 million, or 9 cents per share in the prior quarter, and a net loss of $4.8 million, or loss per share of 0.3 cents in the same quarter a year ago. The weighted average number of basic and diluted shares outstanding for purposes of calculating both GAAP and non-GAAP EPS for the second quarter of 2023 was 24.3 million shares. which excludes 1.8 million shares of our common stock and exchangeable shares that are currently escrowed. Adjusted EBITDA, which we define as gap net income or losses reported, excluding stock-based compensation, amortization of reported intangibles, change in fair value of warrant liability, interest expense, depreciation and amortization, and the provision for income taxes was negative $2.8 million in the second quarter, compared with negative $1.8 million in the prior quarter, and negative $4.5 million in the prior year period. From a balance sheet perspective, as of June 30th, 2023, the company had cash, cash to come on, and short-term investments of approximately $2.7 million, which includes the remaining proceeds in the company's registered direct offering and concurrent private placement completed at the beginning of June 2023. As a result of the company's expected operating losses and cash burn and recurring losses from operations, The company will need to raise sufficient capital through additional equity or debt arrangements, as further described in the company's quarterly report on Form 10-Q for the period ended June 30, 2023, as filed with the Securities and Exchange Commission. Regarding our business outlook, similar to last quarter, our near-term visibility continues to be impacted by multiple unrelated factors that make it difficult to confidently forecast the full range of potential outcomes specific to the third quarter. In addition to the more general uncertainty associated with the broader macro environment and end market demand in the second half of the year, the two customer transactions that we discussed last quarter are still pending and have yet to close, and we may commence additional end-of-life shipments to our customers as early as this current quarter. Although the difficulty of predicting the timing and probability of these potential transactions and shipments prevents us from being in a position to provide specific guidance for the current quarter, We remain optimistic about closing one or more or both of these pending transactions by the fourth quarter of 2023. To the extent this occurs, we will consider providing future updates regarding our expectations for the third quarter. With that said, I'll now turn the call over to Ron to provide business updates. Ron?

Thank you, Jim. Good afternoon and welcome. We appreciate you joining us on today's conference call. Without question, it was a uniquely challenging quarter. As Jim discussed, our lower revenue during the second quarter was primarily attributed to a significant and ongoing inventory correction across our customers. Although we're disappointed with the reduced shipments during the quarter, we've continued to make progress on expanding the customer base for our millimeter-weight products. Additionally, despite the headwinds in our business, we remain encouraged by the continued positive momentum observed in the broader fixed wireless market, particularly as wireless internet service providers, or WISPs, expand deployments of multi gigabit connectivity in the unlicensed 60 gigahertz spectrum to a growing number of subscribers. Turning to slide five, turning to slide five, as discussed in recent quarters, one of our primary strategies has been to leverage Peraza's historical success with a relatively small group of leading millimeter wave fixed wireless customers to meaningfully expand and diversify our existing customer base. As it turns out, the current inventory correction has only further emphasized the importance of increased customer diversification. With this fundamental objective top of mind, I want to provide an update on the engagement pipeline metrics that we introduced last quarter. As a reminder, due to certain prior constraints, we only began executing on the strategic initiative to extend our commercial reach and broaden the customer base in late 2022. This slide shows the progression of Peraza's pipeline of new business engagements over just the past few months. Not only has our combined number of funnel and active engagements increased from 75 at the time of our last conference call in May to a total of 80 in mid-August, but during this period we also advanced several previous funnel opportunities to current active engagements. In addition to using these metrics internally to measure the projected economic value of our existing pipeline, They also view them as a leading indicator of our progress towards achieving a broader and more diversified customer base. Moving to slide six, as demonstrated proof points of converting active pipeline engagements into a new customer adoption and expansion, expanded commercial opportunities, I want to highlight a few of our recently announced customer wins. First, in June, we jointly announced the commercial production of Tachyon Network's new TNA30X product family and leveraging Peraza's prospective 60 gigahertz millimeter of antenna modules and unique point-to-point and point-to-multipoint capabilities for fixed wireless access applications. In July, together with Jaguar Wave, we announced the commercial production of its new point-to-point 6150 slash 51 product family, incorporating Peraza's millimeter wave technology. Also positioned as a point-to-point and point-to-multipoint solution for 60 gigahertz unlicensed fixed wireless access networks, this new Jaguar Wave product was specifically designed to target and withstand applications in harsh outdoor environments. And most recently, earlier this month, Zinwell, a leading Taiwan-based manufacturer of consumer broadband and enterprise-grade networking products, launched its new 2.5 gigabit Ethernet bridge radio incorporating Peraza's X120 chipset Designed as a solution to provide lower cost wireless connectivity between buildings and other geographical obstacles, this wireless networking bridge is INMOL's first 60 gigahertz enabled product. And they chose Peraza's millimeter wave solution with our phased array antenna technology for its unique ability to overcome the challenges of fixed wireless applications in dense urban environments. Lastly, I want to acknowledge one of the potential customer transactions that was pending at the time of our last conference call. We continue to be actively engaged with this opportunity, despite it taking longer than previously anticipated to formalize. This specific opportunity is envisioned by both parties to comprise of a multi-phase co-development agreement to create a customized solution for fixed wireless access applications, with the customer then purchasing production volume units of the resulting product from Perazzo. We remain optimistic and continue working towards a completed contractual agreement in the coming months. From a broader perspective, we continue to believe that Perazzo is the market leader in 60 GHz mmWave solutions for fixed wireless access. Given that a majority of the wireless ISPs or WISPs that utilize our mmWave technology don't buy directly from Perazzo, We recently initiated an internal project to better understand where and how broadly our millimeter wave technology is being deployed by WISPs across North America. On the left side of slide seven is a snapshot of our findings to date. This includes 15 of the WISPs we've identified as utilizing Peraza-enabled hardware and a map of their collective geographical deployments. Based on third party market research, the impressive growth of wireless ISP subscribers in the United States is forecast to continue to grow through at least 2025. With our market leading millimeter wave technology and portfolio solutions for 60 gigahertz fixed wireless access, we are well positioned to further capitalize on this sizable market trend. Also, and although still in the earlier stages, I would add that we do have and are working on to expand current active engagements targeting planned geographical deployments outside of North America. Slide 8 Slide 8 We continue to view 5G mmWave fixed wireless access as a massive and incremental market opportunity over the medium term. Although deployments in the mid-band spectrum temporarily slowed down the urgency among carriers to aggressively pursue 5G mmWave we've started seeing renewed interest and focus on the inevitable adoption of mmWave by carriers to maximize their bandwidth capacity. During the quarter, we achieved a major milestone with Peraza's announcement collaboration with PSemi, a subsidiary of Murata and a recognized global leader in the development and integration of high-performance RF solutions. This cooperation resulted in the successful integration of Peraza's 5G mmWave beamformer IC and PSemi's high-performance up-down converter to create a cost-effective RF solution for 5G fixed wireless access customer premise equipment, or CPE. This joint solution directly addresses one of the keys to unlocking broadband fixed wireless access adoption, which is the availability of a low-cost customer terminal. We also demonstrated the integrated RF module together with PCMA at the International Microwave Symposium in June, where it received strong interest and feedback from a combination of future prospective customers and partners. More generally, the ability of Peraza's 5G beam format to enable more cost-effective solutions and faster deployments for both 5G CPE applications as well as 5G millimeter wave in the carrier market has contributed to a growing number of prospective engagements and evaluations with a series of OEMs, equipment vendors, and 5G baseband vendors. Switching gears to an update on our memory IC business, As discussed in our previous call, we have noticed customers, we have notified customers of the end of life of our memory devices due to our family partner discontinuing the manufacturing process used to fabricate wafers for these products. We received initial forecasts from our memory customers, which thus far have been very encouraging. Based on these initial indications, we currently expect that customer purchase orders for the last time by will be $15 to $20 million. The associated shipments and revenue are anticipated to possibly begin this year, with the majority of POs being fulfilled throughout next year and potentially ending in 2025. Looking ahead, we remain focused on further expanding Peraza's leadership in millimeter-wave fixed wireless. As shipments related to the end of life of our legacy memory products initially ramp and come to an end over the next handful of quarters, Our millimeter-wave silicon will increasingly become the primary driver of our future business. The market opportunity for millimeter-wave across both unlicensed 60 gigahertz and licensed 5G fixed wireless access is substantial, and it continues to demonstrate growing momentum. In terms of our leading millimeter-wave technology and product portfolio, we believe Peraza was well-positioned today and with a future roadmap to meaningfully capitalize on our growth of the fixed wireless access market. That said, we also acknowledge the headwinds we're facing today in our business, including an extended industry-wide inventory correction, as well as general uncertainty related to the current macroeconomic environment. Specific to our balance sheet, we are pursuing a wide variety of potential funding arrangements to address the company's short-term cash needs and the working capital necessary to support existing operations. At the same time, we're conserving cash by delaying or deferring certain expenditures. In addition, we recently engaged an investment bank to assist with exploring potential strategic option alternatives, which could include a potential M&A, the sale of certain assets, or other similar transactions. As part of considering any such alternatives, our first priority will always remain on maximizing stockholder value while simultaneously seeking to extend our current business operations. We believe it's prudent, given the circumstances, to connect this exploration process in order to identify one or more potential alternative paths forward. That said, we expect any strategic alternatives as well as the optimal path forward will take additional time to fully materialize. Finally, I want to emphasize that our team's near-term focus is on day-to-day operation of the business. This includes continuing to advance our active engagement to drive renewed and more predictable revenue growth as well as expanding our pipeline of prospective engagements in support of establishing a more diversified customer base. That concludes our prepared remarks, and we would be glad to take a few questions. Operator, could you please assist with the Q&A session?