Credo Technology (CRDO) - 2023 Q2 - Quarterly Report

PART I—FINANCIAL INFORMATION Item 1. Financial Statements Presents Credo Technology Group Holding Ltd's unaudited condensed consolidated financial statements for the quarter ended October 29, 2022, detailing key financial positions and performance Condensed Consolidated Balance Sheets Total assets increased to $414.0 million by October 29, 2022, driven by higher inventories and property, while total liabilities also grew significantly Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | October 29, 2022 | April 30, 2022 | | :--- | :--- | :--- | | Total current assets | $349,807 | $332,177 | | Total assets | $414,032 | $375,689 | | Total current liabilities | $49,482 | $26,497 | | Total liabilities | $69,928 | $41,526 | | Total Shareholders' Equity | $344,104 | $334,163 | Condensed Consolidated Statements of Operations Total revenue nearly doubled to $51.4 million for the three months ended October 29, 2022, narrowing the net loss to $3.4 million despite a lower gross margin Statement of Operations Summary (in thousands, except per share data) | Metric | Three Months Ended Oct 29, 2022 | Three Months Ended Oct 31, 2021 | Six Months Ended Oct 29, 2022 | Six Months Ended Oct 31, 2021 | | :--- | :--- | :--- | :--- | :--- | | Total revenue | $51,369 | $26,427 | $97,836 | $37,151 | | Gross profit | $27,959 | $15,954 | $55,622 | $21,134 | | Operating loss | $(1,739) | $(3,554) | $(1,957) | $(15,184) | | Net loss | $(3,360) | $(4,100) | $(3,433) | $(16,677) | | Net loss per share (basic and diluted) | $(0.02) | $(0.06) | $(0.02) | $(0.24) | Condensed Consolidated Statements of Comprehensive Loss The company reported a total comprehensive loss of $3.7 million for the three months ended October 29, 2022, primarily from net loss and foreign currency translation adjustments Comprehensive Loss (in thousands) | Metric | Three Months Ended Oct 29, 2022 | Three Months Ended Oct 31, 2021 | | :--- | :--- | :--- | | Net loss | $(3,360) | $(4,100) | | Foreign currency translation gain (loss) | $(320) | $32 | | Total comprehensive loss | $(3,680) | $(4,068) | Condensed Consolidated Statements of Convertible Preferred Shares and Shareholders' Equity (Deficit) Total shareholders' equity increased to $344.1 million by October 29, 2022, primarily due to share-based compensation and equity incentive plan proceeds - Shareholders' equity grew to $344.1 million, with key positive contributions from share-based compensation ($10.4 million) and proceeds from equity plans ($2.7 million) over the six-month period[28] Condensed Consolidated Statements of Cash Flows Net cash used in operating activities significantly improved to $10.5 million for the six months ended October 29, 2022, resulting in a $68.8 million net decrease in cash Cash Flow Summary (in thousands) | Activity | Six Months Ended Oct 29, 2022 | Six Months Ended Oct 31, 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | $(10,462) | $(34,919) | | Net cash used in investing activities | $(60,925) | $(4,985) | | Net cash provided by financing activities | $2,723 | $7,166 | | Net decrease in cash | $(68,780) | $(32,710) | Notes to Unaudited Condensed Consolidated Financial Statements Details the company's high-speed connectivity business, significant accounting policies, customer revenue concentration, a warrant issued to an Amazon affiliate, and substantial non-cancelable purchase obligations - The company's business is focused on providing secure, high-speed connectivity solutions including ICs, AECs, and SerDes Chiplets, based on its proprietary SerDes and DSP technologies[35] Significant Customer Concentration (as a % of total) | Metric | Customer A | Customer C | Customer D | | :--- | :--- | :--- | :--- | | Accounts Receivable (Oct 29, 2022) | 44% | 14% | 11% | | Revenue (Q2 FY23) | 44% | 16% | 19% | - A warrant was issued to an Amazon affiliate to purchase up to 4,080,000 ordinary shares, vesting based on payments up to an aggregate of $201 million, with $0.6 million recognized as contra revenue for the six months ended Oct 29, 2022[62][63] - As of October 29, 2022, the company had total non-cancelable purchase obligations of approximately $56.0 million ($41.7 million for manufacturing and $14.2 million for technology license fees)[77] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses strong financial performance with 94.4% revenue growth, driven by product sales, alongside a gross margin decline and increased operating expenses, while maintaining sufficient liquidity Revenue by Type (in thousands) | Revenue Type | Three Months Ended Oct 29, 2022 | Three Months Ended Oct 31, 2021 | % Change | | :--- | :--- | :--- | :--- | | Product sales | $44,349 | $18,454 | 140.3% | | IP license | $2,084 | $6,142 | (66.1)% | | Total revenue | $51,369 | $26,427 | 94.4% | - The increase in product sales was primarily due to higher unit shipments of Active Electrical Cables (AECs) introduced in fiscal 2021[144] - Gross margin decreased by 6 percentage points in Q2 FY23 compared to the prior year, driven by a product mix shift towards lower-margin product sales[148] - Research and Development (R&D) expenses increased by 53.9% YoY to $18.2 million, and Selling, General & Administrative (SG&A) expenses increased by 49.7% YoY to $11.5 million, due to higher personnel costs and public company expenses[150][153] - The company ended the period with $190.5 million in cash and cash equivalents and believes its existing capital is sufficient for at least the next 12 months[157][158] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company reports no material changes to its market risk profile since its last Annual Report, with primary exposure to interest rate fluctuations affecting cash equivalents and investments - There were no material changes to the market risk assessment from the Annual Report for the year ended April 30, 2022, other than an updated disclosure on interest rate risk[173] - The company's main market risk is interest rate risk, as its excess cash is invested in fixed and floating rate securities like money market funds and time deposits[174] Item 4. Controls and Procedures The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of October 29, 2022, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[176] - No changes occurred during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[177] PART II—OTHER INFORMATION Item 1. Legal Proceedings The company is not currently involved in any legal proceedings expected to have a material adverse effect on its business or financial condition, acknowledging potential ordinary course claims - As of the filing date, the company is not a party to any litigation that it believes would have a material adverse effect on its business[183] Item 1A. Risk Factors Updates risk factors, highlighting continued share price volatility, supply chain disruptions from China's 'Zero-COVID' policy, geopolitical tensions, rising inflation, and challenges in implementing Sarbanes-Oxley internal controls - The company's ordinary share price has been highly volatile, trading between a low of $8.61 and a high of $18.00 since its IPO in January 2022[186] - Significant risks include geopolitical issues, particularly tensions between the People's Republic of China and Taiwan, and supply chain impacts from China's 'Zero-COVID' policy, which could interrupt operations[188] - The company faces challenges in implementing the stringent internal controls required under Section 404(a) of the Sarbanes-Oxley Act, and failure to do so could harm investor confidence[190][191] Item 6. Exhibits Lists exhibits filed with the Form 10-Q, including Sarbanes-Oxley Act certifications from the Principal Executive Officer and Principal Financial Officer, and Inline XBRL financial data files - The exhibits filed with this report include CEO and CFO certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002, as well as Inline XBRL documents[195]