SEC Filing | Credo Technology Group Holding Ltd

View:

crdo-20230128

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended January 28, 2023


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to ___________

Commission File Number: 001-41249

Credo Technology Group Holding Ltd

(Exact name of registrant as specified in its charter)


Cayman Islands									N/A
(State or other jurisdiction of incorporation or organization)									(I.R.S. Employer Identification No.)

c/o Maples Corporate Services, Limited, PO Box 309, Ugland House Grand Cayman, KY1-1104, Cayman Islands									N/A
(Address of principal executive offices)									(Zip Code)

(408) 664-9329

Registrant's telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Ordinary shares, par value $0.00005 per share	CRDO	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:


Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☐
		Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

The registrant had 147,988,038 ordinary shares outstanding as of February 21, 2023.

Table of Contents


		Page
Forward-looking Statements		3
PART 1—FINANCIAL INFORMATION		4
Item 1.	Financial Statements	4
	Condensed Consolidated Balance Sheets	4
	Condensed Consolidated Statements of Operations	5
	Condensed Consolidated Statements of Comprehensive Income (Loss)	6
	Condensed Consolidated Statements of Convertible Preferred Shares and Shareholders’ Equity (Deficit)	7
	Condensed Consolidated Statements of Cash Flows	9
	Notes to Unaudited Condensed Consolidated Financial Statements	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32
Item 4.	Controls and Procedures	33
PART II—OTHER INFORMATION		34
Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 6.	Exhibits	36
	Signatures	37

Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains statements relating to our expectations, projections, beliefs, and prospects, which are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases, you can identify these statements by forward-looking words such as “believe,” “will,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “might”, “plan,” “expect,” “predict,” “could,” “potentially” or the negative of these terms or similar expressions. You should read these statements carefully because they may relate to future expectations around growth, strategy and anticipated trends in our business, contain projections of future results of operations or financial condition or state other “forward-looking” information. These statements are only predictions based on our current expectations, estimates, assumptions, and projections about future events and are applicable only as of the dates of such statements. These forward-looking statements are subject to certain risks and uncertainties that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified herein, and those discussed in the section titled “Risk Factors” of our Forms 10-K and 10-Q and other reports we file with the U.S. Securities and Exchange Commission (SEC), including in our Annual Report on Form 10-K for the fiscal year ended April 30, 2022. Factors that could cause actual results to differ materially from those predicted include, but are not limited to:

•risks related to the impact of the COVID-19 pandemic and armed conflict, war, terrorism and other geopolitical conflicts on our business, suppliers and customers;

•risks related to customer demand and product life cycles;

•risks related to the receipt, reduction or cancellation of, or changes in the forecasts or timing of, orders by customers;

•risks related to the gain or loss of one or more significant customers;

•risks related to changes in orders or purchasing patterns from one or more of our major customers;

•risks related to delays in completing sales due to our lengthy sales cycle, which often includes a substantial customer evaluation and approval process;

•risks related to market acceptance of our products and our customers’ products;

•risks related to our ability to develop, introduce and market new products and technologies on a timely basis;

•risks related to the timing and extent of product development costs;

•risks related to new product announcements and introductions by us or our competitors;

•risks related to our research and development costs and related new product expenditures and our ability to achieve cost reductions in a timely or predictable manner; and

•risks related to seasonality and fluctuations in sales by product manufacturers that incorporate our technology into their products.

The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Quarterly Report on Form 10-Q. Except as may be required by law, we assume no obligation to update these forward-looking statements or the reasons that results could differ from these forward-looking statements. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q.

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or will occur.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Credo Technology Group Holding Ltd

Condensed Consolidated Balance Sheets

(unaudited, in thousands, except per share amounts)


	January 28, 2023		April 30, 2022
Assets
Current Assets:
Cash and cash equivalents	$	123,783	$	259,322
Short-term investments	109,228		—
Accounts receivable	43,168		29,524
Inventories	50,315		27,337
Contract assets	19,245		10,071
Prepaid expenses and other current assets	4,282		5,923
Total current assets	350,021		332,177
Property and equipment, net	39,087		21,844
Right of use assets	15,552		16,954
Other non-current assets	12,591		4,714
Total assets	$	417,251	$	375,689
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable	$	21,335	$	8,487
Accrued compensation and benefits	3,369		4,713
Accrued expenses and other current liabilities	15,141		12,063
Deferred revenue	3,537		1,234
Total current liabilities	43,382		26,497
Non-current operating lease liabilities	13,514		14,809
Other non-current liabilities	5,802		220
Total liabilities	62,698		41,526
Commitments and contingencies (Note 7)
Shareholders' equity:
Ordinary shares, $0.00005 par value; 1,000,000 shares authorized; 147,430 shares issued and outstanding at January 28, 2023; and 1,000,000 shares authorized; 144,755 shares issued and outstanding at April 30, 2022	7		7
Additional paid in capital	445,654		424,562
Accumulated other comprehensive income (loss)	(69)		23
Accumulated deficit	(91,039)		(90,429)
Total shareholders' equity	354,553		334,163
Total liabilities and shareholders' equity	$	417,251	$	375,689

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Credo Technology Group Holding Ltd

Condensed Consolidated Statements of Operations

(unaudited, in thousands, except per share amounts)


	Three Months Ended				Nine Months Ended
	January 28, 2023		January 31, 2022		January 28, 2023		January 31, 2022
Revenue:
Product sales	$	38,033	$	22,706	$	117,645	$	48,423
Product engineering services	3,635		3,954		8,209		6,628
IP license	11,715		5,022		24,179		12,194
IP license engineering services	887		118		2,073		1,706
Total revenue	54,270		31,800		152,106		68,951
Cost of revenue:
Cost of product sales revenue	21,833		12,230		62,016		26,436
Cost of product engineering services revenue	228		410		746		1,807
Cost of IP license revenue	—		—		1,179
Cost of IP license engineering services revenue	222		48		556		462
Total cost of revenue	22,283		12,688		64,497		28,705
Gross profit	31,987		19,112		87,609		40,246
Operating expenses:
Research and development	20,530		10,995		55,371		32,488
Selling, general and administrative	11,936		8,568		34,674		23,393
Impairment charges	2,407		—		2,407		—
Total operating expenses	34,873		19,563		92,452		55,881
Operating loss	(2,886)		(451)		(4,843)		(15,635)
Other income (expense), net	2,530		(80)		1,618		(70)
Loss before income taxes	(356)		(531)		(3,225)		(15,705)
Provision (benefit) for income taxes	(3,179)		(387)		(2,615)		1,116
Net income (loss)	$	2,823	$	(144)	$	(610)	$	(16,821)
Net income (loss) per share:
Basic	$	0.02	$	—	$	—	$	(0.24)
Diluted	$	0.02	$	—	$	—	$	(0.24)
Weighted-average shares:
Basic	146,908		73,815		146,000		70,439
Diluted	156,519		73,815		146,000		70,439

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Credo Technology Group Holding Ltd

Condensed Consolidated Statements of Comprehensive Income (Loss)

(unaudited, in thousands)


	Three Months Ended				Nine Months Ended
	January 28, 2023		January 31, 2022		January 28, 2023		January 31, 2022
Net income (loss)	$	2,823	$	(144)	$	(610)	$	(16,821)
Other comprehensive gain (loss):
Foreign currency translation gain (loss)	324		(232)		(92)		(205)
Total comprehensive income (loss)	$	3,147	$	(376)	$	(702)	$	(17,026)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Credo Technology Group Holding Ltd

Condensed Consolidated Statements of Convertible Preferred Shares and Shareholders’ Equity (Deficit)

(unaudited, in thousands)


	Convertible Preferred Shares			Ordinary Shares			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total Shareholders’ Equity (Deficit)
	Number of Shares	Amount		Number of Shares	Amount
Balances at April 30, 2022	—	$	—	144,755	$	7	$	424,562	$	23	$	(90,429)	$	334,163
Ordinary shares issued under equity incentive plans	—	—		589	—		1,977		—		—		1,977
Share-based compensation	—	—		—	—		5,546		—		—		5,546
Warrant contra revenue	—	—		—	—		388		—		—		388
Total comprehensive loss	—	—		—	—		—		(96)		(73)		(169)
Balances at July 30, 2022	—	$	—	145,344	$	7	$	432,473	$	(73)	$	(90,502)	$	341,905
Ordinary shares issued under equity incentive plans	—	—		1,142	—		741		—		—		741
Share-based compensation	—	—		—	—		4,891		—		—		4,891
Warrant contra revenue	—	—		—	—		247		—		—		247
Total comprehensive loss	—	—		—	—		—		(320)		(3,360)		(3,680)
Balances at October 29, 2022	—	$	—	146,486	$	7	$	438,352	$	(393)	$	(93,862)	$	344,104
Ordinary shares issued under equity incentive plans	—	—		944	—		1,873		—		—		1,873
Share-based compensation	—	—		—	—		5,169		—		—		5,169
Warrant contra revenue	—	—		—	—		260		—		—		260
Total comprehensive income	—	—		—	—		—		324		2,823		3,147
Balances at January 28, 2023	—	$	—	147,430	$	7	$	445,654	$	(69)	$	(91,039)	$	354,553


	Convertible Preferred Shares			Ordinary Shares			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total Shareholders’ Equity (Deficit)
	Number of Shares	Amount		Number of Shares	Amount
Balances at April 30, 2021	50,809	$	197,965	68,282	$	3	$	12,592	$	227	$	(68,253)	$	(55,431)
Issuance of Series D+ convertible preferred shares, net of issuance costs	1,251	7,245		—	—		—		—		—		—
Ordinary shares issued under equity incentive plans	—	—		554	—		461		—		—		461
Share-based compensation	—	—		—	—		1,075		—		—		1,075
Total comprehensive loss	—	—		—	—		—		(5)		(12,577)		(12,582)
Balances at July 31, 2021	52,060	$	205,210	68,836	$	3	$	14,128	$	222	$	(80,830)	$	(66,477)
Ordinary shares issued under equity incentive plans	—	—		667	—		587		—		—		587
Share-based compensation	—	—		—	—		1,307		—		—		1,307
Total comprehensive loss	—	—		—	—		—		32		(4,100)		(4,068)
Balances at October 29, 2022	52,060	$	205,210	69,503	$	3	$	16,022	$	254	$	(84,930)	$	(68,651)
Conversion of preferred shares into ordinary shares	(52,060)	(205,210)		52,060	3		205,207		—		—		205,210
Issuance of common stock in connection with initial public offering, net of offering costs, underwriting discounts and commissions	—	—		18,384	1		166,593		—		—		166,594
Ordinary shares issued under employee share plan	—	—		1,073	—		1,067		—		—		1,067
Share-based compensation	—	—		—	—		1,438		—		—		1,438
Warrant contra revenue	—	—		—	—		407		—		—		407
Total comprehensive loss	—	—		—	—		—		(232)		(144)		(376)
Balances at January 31, 2022	—	$	—	141,020	$	7	$	390,734	$	22	$	(85,074)	$	305,689

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Credo Technology Group Holding Ltd

Condensed Consolidated Statements of Cash Flows

(unaudited, in thousands)


	Nine Months Ended
	January 28, 2023		January 31, 2022
Cash flows from operating activities:
Net income (loss)	$	(610)	$	(16,821)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization	6,533		3,262
Share-based compensation	15,606		3,820
Warrant contra revenue	895		407
Write-downs for excess and obsolete inventory	3,087		1,256
Impairment of assets	2,407		—
Changes in operating assets and liabilities:
Accounts receivable	(13,644)		(8,049)
Inventories	(26,065)		(20,274)
Contract assets	(9,185)		(5,239)
Prepaid and other current assets	1,642		(585)
Other non-current assets	(5,598)		(2,164)
Accounts payable	11,703		3,245
Accrued expenses, compensation and other liabilities	(1,850)		5,890
Deferred revenue	2,303		2,060
Net cash used in operating activities	(12,776)		(33,192)
Cash flows from investing activities:
Purchases of property and equipment	(17,815)		(7,932)
Purchases of short-term investments	(109,228)		—
Net cash used in investing activities	(127,043)		(7,932)
Cash flows from financing activities:
Proceeds from issuance of ordinary share upon initial public offering, net of underwriter discounts	—		171,889
Payments for IPO offering costs	—		(3,056)
Payments on technology license obligations	(308)		—
Proceeds from employee share incentive plans	4,595		1,936
Proceeds from issuance of convertible preferred shares, net of issuance costs	—		7,245
Net cash provided by financing activities	4,287		178,014
Effect of exchange rate changes on cash	(7)		(118)
Net decrease in cash and cash equivalents	(135,539)		136,772
Cash and cash equivalents at beginning of the period	259,322		103,757
Cash and cash equivalents at end of the period	$	123,783	$	240,529
Supplemental cash flow information:
Purchase of property and equipment included in accounts payable, accrued expenses and other liabilities	$	10,789	$	200
Conversion of convertible preferred share into ordinary share upon initial public offering	$	—	$	205,210
Deferred offering costs included in accounts payable and accrued expenses	$	—	$	2,239

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Credo Technology Group Holding Ltd

Notes to Unaudited Condensed Consolidated Financial Statements

1. Description of Business and Basis of Presentation

Credo Technology Group Holding Ltd was formed under the laws of the Cayman Islands in September 2014. Credo Technology Group Holding Ltd directly owns Credo Technology Group Ltd., which owns, directly and indirectly, all of the shares of its subsidiaries in mainland China, Hong Kong, and the United States (“U.S.”). References to the “Company” in these notes refer to Credo Technology Group Holding Ltd and its subsidiaries on a consolidated basis, unless otherwise specified.

The Company is an innovator in providing secure, high-speed connectivity solutions that deliver improved power and cost efficiency. The Company’s connectivity solutions are optimized for optical and electrical Ethernet applications, including the emerging 100G, 200G, 400G and 800G markets. The Company’s products are based on its Serializer/Deserializer (“SerDes”) and Digital Signal Processor (“DSP”) technologies. The Company’s product families include integrated circuits (“ICs”), Active Electrical Cables (“AECs”) and SerDes Chiplets. The Company’s intellectual property (“IP”) solutions consist primarily of SerDes IP licensing.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements are presented in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted as permitted by the SEC. These unaudited condensed consolidated financial statements and related notes should be read in conjunction with the Company’s fiscal year 2022 audited financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2022. The unaudited condensed consolidated financial statements include all adjustments, including normal recurring adjustments and other adjustments, that are considered necessary for fair presentation of the Company’s financial position and results of operations. All inter-company accounts and transactions have been eliminated. Operating results for the periods presented herein are not necessarily indicative of the results that may be expected for the entire year.

Effective May 1, 2022, the Company changed its fiscal year to a 52- or 53-week period ending on the Saturday closest to April 30. Our fiscal year ending April 29, 2023 (“fiscal year 2023”) is a 52-week fiscal year. The first quarter of our fiscal year 2023 ended on July 30, 2022, the second quarter ended on October 29, 2022 and the third quarter ended on January 28, 2023.

2. Significant Accounting Policies

The Company believes that other than the adoption of new accounting pronouncements and the accounting policies as described below, there have been no significant changes during the three and nine months ended January 28, 2023 to the items disclosed in Note 2, “Significant Accounting Policies,” included in the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2022.

Use of Estimates

The preparation of these condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Company’s condensed consolidated financial statements and accompanying notes.

The Company bases its estimates and judgments on historical experience, knowledge of current conditions and beliefs of what could occur in the future, given the available information. Estimates are used for, but not limited to, write-down for excess and obsolete inventories, the standalone selling price for each distinct performance obligation included in customer contracts with multiple performance obligations, variable consideration from revenue contracts, determination of the fair value of share-based awards, ordinary shares and a customer warrant, realization of tax assets and estimates of tax reserves, and incremental borrowing rate used in the Company’s operating lease calculations. Actual results may differ from those estimates and such differences may be material to the financial statements. In the current macroeconomic environment affected by COVID-19, these estimates require increased judgment and carry a higher degree of variability and volatility. As events continue to evolve and additional information becomes available, these estimates may change materially in future periods.

Reclassifications

Credo Technology Group Holding Ltd

Notes to Unaudited Condensed Consolidated Financial Statements

Certain prior period balances were reclassified to conform to the current period’s presentation. None of these reclassifications had an impact on reported net income or cash flows for any of the periods presented.

Revenue Recognition

The Company’s revenues consist of sale of its products, licensing of its IP and providing product and IP license engineering services. Product sales consists of shipment of its ICs and AEC products. IP license revenue includes fees from licensing of the Company’s SerDes IP and related support and royalties. Product and IP license engineering services revenue consists of engineering fees associated with integration of the Company’s technology solutions into its customers’ products and IP, respectively. The Company’s customers are primarily original equipment manufacturers who design and manufacture end market devices for the communications and enterprise networks markets. The Company’s revenue is driven by various trends in these markets. The Company’s revenue is also impacted by changes in the number and average selling prices of its IC products.

The Company recognizes revenue upon transfer of control of promised goods and services in an amount that reflects the consideration it expects to receive in exchange for those goods and services. Where an arrangement includes multiple performance obligations, the transaction price is allocated to these on a relative standalone selling price (“SSP”) basis. The Company determines the SSP based on an observable standalone selling price when it is available, as well as other factors, including the price charged to customers and the Company’s overall pricing objectives, while maximizing observable inputs. The determination of the SPP for certain of our IPs requires fair value estimate under income approach, involving the estimation of future cash flow expected to be generated from the IPs. The Company’s policy is to record revenue net of any applicable sales, use or excise taxes. Changes in the Company’s contract assets and contract liabilities primarily result from the timing difference between the Company’s performance and the customer’s payment. The Company fulfills its obligations under a contract with a customer by transferring products or services in exchange for consideration from the customer. The Company recognizes a contract asset when it transfers products or services to a customer and the right to consideration is conditional on something other than the passage of time. Accounts receivable are recorded when the customer has been billed or the right to consideration is unconditional. The Company recognizes deferred revenue when it has received consideration or an amount of consideration is due from the customer and it has a future obligation to transfer products or services.

Product Sales - The Company transacts with customers primarily pursuant to standard purchase orders for delivery of products and generally allows customers to cancel or change purchase orders within limited notice periods prior to the scheduled shipment date. The Company offers standard performance warranties of twelve months after product delivery and offers limited product return rights to certain distributors. The Company recognizes product sales when it transfers control of promised goods in an amount that reflects the consideration to which it expects to be entitled to in exchange for those goods, net of accruals for estimated sales returns and rebates.

IP License Revenue - The Company’s IP license revenue consists of perpetual licenses, support and maintenance, and royalties. The Company enters into perpetual semiconductor IP license agreements, that have a fixed fee, whereby licensees pay a fixed fee for the right to incorporate the Company’s IP technologies into the licensee’s products. The IP license agreements do not typically grant the customer the right to terminate for convenience. Where such rights exist, termination is prospective, with no refund of fees already paid by the customer.

IP revenue recognition is dependent on the nature and terms of each agreement. The Company recognizes license revenue at the point of time of the delivery of the IP. In connection with the license arrangements, the Company offers support to assist customers in qualifying their final product. Revenue from customer support is deferred and recognized ratably over the support period, which is typically one year.

In certain cases, the Company also charges licensees royalties related to the distribution or sale of products that use its technologies. Such royalties are reported to us on a quarterly basis. The Company estimates the sales-based royalties earned each quarter primarily based on its customers’ reporting of sales activity incurred in that quarter. The Company recognizes the estimated royalty revenue when it is probable that reversal of such amounts will not occur. Any differences between actual royalties owed by a customer and the quarterly estimates are recognized when updated information becomes available.

Product and IP License Engineering Services Revenue - Some product and IP revenue contracts include non-recurring engineering services deliverables. The Company recognizes revenue from these agreements over time as services are provided or at point in time upon completion and acceptance by the customer of contract deliverables, depending on the terms of the arrangement. Revenue is deferred for any amounts billed or received prior to delivery of

Credo Technology Group Holding Ltd

Notes to Unaudited Condensed Consolidated Financial Statements

services. The Company believes the input method, based on time spent by its engineers, best depicts the efforts expended to transfer services to the customers.

Certain contracts may include multiple performance obligations for which the Company allocates revenue to each performance obligation based on relative SSP. The Company determines SSPs based on observable evidence. When SSPs are not directly observable, the Company uses the adjusted market assessment approach or residual approach, if applicable. The Company also considers the constraint on estimates of variable consideration when estimating the total transaction price. The Company records liabilities for amounts that are collected in advance of the satisfaction of performance obligations under deferred revenue.

Cash, Cash Equivalents and Short-term Investments

Cash and cash equivalents are highly liquid investments with insignificant interest rate risk and maturities of three months or less at the time of acquisition. Cash and cash equivalents consist primarily of cash balances in the Company’s bank checking and savings accounts, and government and institutional money market funds.

Investments not considered cash equivalents and with maturities of one year or less from the consolidated balance sheet date are classified as short-term investments. Short-term investments consist of a certificate of deposit with original maturity date between three and twelve months.

The classification of our investments in marketable debt securities is determined at the time of purchase, and such determination is reevaluated at each balance sheet date. Marketable debt securities are classified as available-for-sale. These investments are considered impaired when a decline in fair value is judged to be other-than-temporary. We consult with our investment managers and consider available quantitative and qualitative evidence in evaluating potential impairment of our investments on a quarterly basis. If the cost of an individual investment exceeds its fair value, we evaluate, among other factors, general market conditions, the duration and extent to which the fair value is less than cost, and our intent and ability to hold the investment. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis in the investment is established.

Accounting Pronouncement Recently Adopted

In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by eliminating some exceptions to the general approach in Topic 740 in order to reduce cost and complexity of its application. This new guidance is effective for the Company for its fiscal year beginning May 1, 2022. The Company adopted this guidance on May 1, 2022 prospectively, and the impact on its consolidated financial statements was not material.

Recent Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires a financial asset measured at amortized cost basis to be presented at the net amount expected to be collected, with further clarifications made more recently. For trade receivables, loans and other financial instruments, the Company will be required to use a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses which reflects losses that are probable. Credit losses relating to available-for-sale debt securities are required to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. This guidance is effective for the Company for its fiscal year beginning April 30, 2023 and interim periods within its fiscal year beginning April 28, 2024. The Company is currently evaluating the impact of the adoption of this guidance on its consolidated financial statements.

3. Concentrations

Financial instruments that subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, short term investments and accounts receivable. Cash is placed in major financial institutions around the world. The Company’s cash deposits exceed insured limits. Short-term investments are subject to counterparty risk up to the amount presented on the balance sheet.

Historically, a relatively small number of customers have accounted for a significant portion of the Company’s revenue. The particular customers which account for revenue concentration have varied from period-to-period as a result of the addition of new contracts, completion of existing contracts, and the volumes and prices at which the

Credo Technology Group Holding Ltd

Notes to Unaudited Condensed Consolidated Financial Statements

customers have recently bought the Company’s products. These variations are expected to continue in the foreseeable future.

The following table summarizes the significant customers’ accounts receivable and revenue as a percentage of total accounts receivable and total revenue, respectively:


Accounts Receivable	January 28, 2023		April 30, 2022
Customer A	69	%	*
Customer B	12	%	*
Customer C	*		52	%
Customer D	*		14	%


	Three months ended				Nine months ended
Revenue	January 28, 2023		January 31, 2022		January 28, 2023		January 31, 2022
Customer A	52	%	*		46	%	*
Customer C	*		40	%	*		33	%
Customer D	*		22	%	11	%	18	%
Customer E	20	%	*		14	%	*
Customer F	*		*		*		13	%

* Less than 10% of total accounts receivable or total revenue.

4. Revenue Recognition

The following table summarizes revenue disaggregated by primary geographical market based on destination of shipment and location of contracting entity, which may differ from the customer’s principal offices (in thousands):


	Three Months Ended				Nine Months Ended
	January 28, 2023		January 31, 2022		January 28, 2023		January 31, 2022
Mainland China	$	29,233	$	14,729	$	83,412	$	24,065
United States	16,513		5,924		35,001		18,999
Hong Kong	1,583		3,277		8,636		6,257
Singapore	—		2,380		4,150		7,342
Rest of World	6,941		5,490		20,907		12,288
	$	54,270	$	31,800	$	152,106	$	68,951

Contract Balances

The contract assets are primarily related to the Company’s fixed fee IP licensing arrangements and rights to consideration for performance obligations delivered but not billed as of January 28, 2023 and April 30, 2022.

During the three months ended January 28, 2023, the Company recognized $1.1 million of revenue that was included in the deferred revenue balance as of October 29, 2022. During the three months ended January 31, 2022, the Company recognized $0.3 million of revenue that was included in the deferred revenue balance as of October 31, 2021.

During the nine months ended January 28, 2023, the Company recognized $1.1 million of revenue that was included in the deferred revenue balance as of April 30, 2022. During the nine months ended January 31, 2022, the Company recognized $4.0 million of revenue that was included in the deferred revenue balance as of April 30, 2021.

During the nine months ended January 28, 2023, the increase in contract assets of $9.2 million was primarily driven by an IP licensing and engineering services arrangement where certain billing milestones had not yet been reached, but the criteria for revenue had been met. During the nine months ended January 28, 2023, the increase in deferred revenue of $2.3 million was primarily driven by a product engineering services arrangement where certain billing milestones had been reached prior to the timing of revenue recognition.

Credo Technology Group Holding Ltd

Notes to Unaudited Condensed Consolidated Financial Statements

Remaining Performance Obligations

Revenue allocated to remaining performance obligations represents the transaction price allocated to the performance obligations that are unsatisfied, or partially unsatisfied, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods. The contracted but unsatisfied performance obligation was approximately $11.7 million and the satisfied but unrecognized performance obligations was approximately $10.1 million as of January 28, 2023, which the Company expects to recognize over the next year. The amounts stated above include amounts relating to an IP licensing and development contract we entered into with a customer in September 2021, for total cash consideration of $43.5 million, which is receivable over an estimated period of three years upon meeting certain contractual milestones. As of January 28, 2023, we had billed $22.2 million and recognized revenue amounting to $32.7 million upon delivery of certain milestones of the contract. We have applied constraints on a remaining milestone due to significant uncertainty relating to the delivery of the milestone as of January 28, 2023 associated with dependency on actions by the customer. The constraints will be re-evaluated at each future reporting period.

Customer Warrant

On December 28, 2021, the Company issued a warrant to Amazon.com NV Investment Holdings LLC (“Holder”) to purchase an aggregate of up to 4,080,000 of our ordinary shares at an exercise price of $10.74 per share (the “Warrant”). The exercise period of the Warrant is through the seventh anniversary of the issue date. Upon issuance of the Warrant, 40,000 of the shares issuable upon exercise of the Warrant vested immediately and the remainder of the shares issuable will vest in tranches over the contract term based on the amount of global payments by Holder and its affiliates to us, up to $201 million in aggregate payments. A total of 80,000 Warrant shares were vested as of January 28, 2023.

The grant date fair value of the Warrant share was determined at $4.65 per share using the Black-Scholes option pricing model. The grant date fair value of the Warrant share was estimated using the following assumptions:


			At Grant Date
Expected volatility			40.00%
Weighted-average expected term (in years)			7.00
Risk-free interest rate			1.41%
Dividend yield			—%
Fair value per ordinary share			$10.74

During the three and nine months ended January 28, 2023, the Company recognized $0.3 million and $0.9 million, respectively, as contra revenue within the product sales revenue on the condensed consolidated statements of operations.

5. Fair Value Measurements

Fair value is an exit price representing the amount that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, the accounting guidance establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:

Level 1 - Observable inputs that reflect quoted prices for identical assets or liabilities in active markets.

Level 2 - Other inputs that are directly or indirectly observable in the marketplace.

Level 3 - Unobservable inputs that are supported by little or no market activity.

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The Company measures the fair value of money market funds using Level 1 inputs. The Company’s certificates of deposit are classified as a held-to-maturity security as the Company intends to hold until their maturity dates. The certificates of deposit are valued using Level 2 inputs. Pricing sources may include industry standard data providers,

Credo Technology Group Holding Ltd

Notes to Unaudited Condensed Consolidated Financial Statements

security master files from large financial institutions, and other third-party sources used to determine a daily market value.

The following table present the fair value of the financial instruments measured on a recurring basis as of January 28, 2023 (in thousands).


	January 28, 2023
	Level 1		Level 2		Level 3		Total
Cash equivalents:
Money market funds	$	112,338	$	—	$	—	$	112,338
Short-term investments:
Certificate of deposit	—		109,228		—		109,228
Total cash equivalents and short-term investments	$	112,338	$	109,228	$	—	$	221,566

The carrying amount of the Company’s financial instruments, including cash equivalents, short-term investments, accounts receivable and accounts payable, approximate their respective fair values because of their short maturities. As of January 28, 2023, there were no unrealized loss or gains associated with the Company’s financial instruments.

6. Supplemental Financial Information

Inventories

Inventories consisted of the following (in thousands):


	January 28, 2023		April 30, 2022
Raw materials	$	18,745	$	11,610
Work in process	10,337		10,352
Finished goods	21,233		5,375
	$	50,315	$	27,337

Property and Equipment, Net

Property and equipment consisted of the following (in thousands):


	January 28, 2023		April 30, 2022
Computer equipment and software	$	14,106	$	1,736
Laboratory equipment	12,310		9,521
Production equipment	16,176		15,502
Leasehold improvements	1,681		1,465
Others	633		524
Construction in progress	9,610		2,932
	54,516		31,680
Less: accumulated depreciation and amortization	(15,429)		(9,836)
	$	39,087	$	21,844

Depreciation and amortization expense for the three months ended January 28, 2023 and January 31, 2022 was $2.3 million and $1.3 million, respectively. Depreciation and amortization expense for the nine months ended January 28, 2023 and January 31, 2022 was $6.5 million and $3.3 million, respectively. Computer equipment and software primarily includes electronic design automation software relating to the Company’s R&D design of future products and intellectual properties. Construction in progress and production equipment primarily includes mask set costs capitalized relating to the Company’s new products already introduced or to be introduced.

During the three months ended January 28, 2023, the Company recorded $2.4 million impairment charges primarily related to an impairment on property and equipment. The impairment charges were presented under

Credo Technology Group Holding Ltd

Notes to Unaudited Condensed Consolidated Financial Statements

operating expenses in the condensed consolidated statements of operations for equipment and related assets that did not reach production qualification.

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following (in thousands):


	January 28, 2023		April 30, 2022
Accrued expenses	$	7,851	$	8,372
Current payables relating to purchases of property and equipment	3,940		—
Current portion of operating lease liabilities	2,676		2,379
Income tax payable	674		1,312
	$	15,141	$	12,063

Other non-current Liabilities

Other non-current liabilities consisted of the following (in thousands):


	January 28, 2023		April 30, 2022
Non-current payables relating to purchases of property and equipment	$	5,537	$	—
Deferred tax liabilities	265		220
	$	5,802	$	220

7. Commitments and Contingencies

Non-cancelable Purchase Obligations

Total future non-cancelable purchase obligations as of January 28, 2023 are as follows (in thousands):


Fiscal Year	Purchase Commitments to Manufacturing Vendors		Technology License Fees
Remainder of 2023	$	863	$	1,893
2024	5,423		5,177
2025	6,763		5,432
2026	8,131		350
2027	9,282		350
Thereafter	7,319		700
Total unconditional purchase commitments	$	37,781	$	13,902

Technology license fees include the liabilities under agreements for technology licenses between the Company and various vendors.

Under the Company’s manufacturing relationships with its foundry partners, cancellation of outstanding purchase orders is allowed but requires payment of all costs and expenses incurred through the date of cancellation.

As of January 28, 2023, the total value of non-cancelable purchase orders payable within the next one year that were committed with the Company’s third party subcontractors was approximately $2.2 million. Such purchase commitments are included in the preceding table.

The Company entered into a manufacturing supply capacity reservation agreement with an assembly subcontractor during the current fiscal year due to the current global supply shortage environment. Under this arrangement, the Company agreed to pay refundable deposits to the supplier in exchange for reserved manufacturing production capacity over the term of the agreement, which approximates five years. In addition, the Company committed to certain purchase levels that were in line with the capacity reserved. If the Company does not meet the purchase level commitment, the agreement requires the Company to pay a fee equal to the difference between the actual purchase and the purchase commitment, up to the value of refundable deposits made. The Company currently estimates that it has made purchase level commitments of at least $35.5 million for the fiscal 2024 through fiscal 2028

Credo Technology Group Holding Ltd

Notes to Unaudited Condensed Consolidated Financial Statements

under the capacity reservation agreement. Such purchase commitments are included in the preceding table. In addition, refundable deposits of $2.0 million were paid as of January 28, 2023, and refundable deposits payable under this arrangement are $3.4 million during the remainder of fiscal 2023 and $3.4 million in fiscal 2024.

Warranty Obligations

The Company’s products generally carry a standard one-year warranty. The Company’s warranty expense has not been material in the periods presented.

Indemnifications

In the ordinary course of business, the Company has made certain indemnifications of varying scope and terms to customers, vendors, lessors, investors, directors, officers, employees and other parties with respect to certain matters, including, but not limited to, losses arising out of the Company’s breach of such agreements, services to be provided by the Company or from intellectual property infringement claims made by third parties. These indemnifications may survive termination of the underlying agreement and the maximum potential amount of future payments the Company could be required to make under these indemnification provisions may not be subject to maximum loss clauses. The Company has not incurred material costs to defend lawsuits or settle claims related to these indemnifications. Accordingly, the Company has no liabilities recorded for these agreements as of January 28, 2023 and April 30, 2022.

Legal Proceedings

From time to time, the Company may be a party to various litigation claims in the normal course of business. Legal fees and other costs associated with such actions are expensed as incurred. The Company assesses, in conjunction with legal counsel, the need to record a liability for litigation and contingencies. Accrual estimates are recorded when and if it is determined that such a liability for litigation and contingencies are both probable and reasonably estimable. As of the date of issuance of these unaudited condensed consolidated financial statements, the Company was not subject to any litigation. No accruals for loss contingencies or recognition of actual losses have been recorded in any of the periods presented.

8. Convertible Preferred Shares

The Company had previously issued Series A convertible preferred shares, Series B convertible preferred shares, Series C convertible preferred shares, Series D convertible preferred shares and Series D+ convertible preferred shares (collectively, the “Preferred Shares”).

Immediately prior to the completion of the IPO during the quarter ended January 31, 2022, all of the then outstanding 52,059,826 shares of the Company’s convertible Preferred Shares were automatically converted into an aggregate 52,059,826 shares of ordinary shares on a one-for-one basis, and such Preferred Shares were cancelled, retired and eliminated from the shares that the Company is authorized to issue and shall not be reissued by the Company.

A summary of the Preferred Shares prior to the conversion into ordinary shares consisted of the following:


Series	Shares Authorized	Shares Issued and Outstanding	Per Share Liquidation Preference		Aggregate Liquidation Preference (in thousands)
Series A	8,313	8,313	$	1.00	$	8,313
Series B	8,593	8,593	2.10		18,000
Series C	5,245	5,245	4.29		22,500
Series D	20,028	20,028	4.99		100,000
Series D+	9,881	9,881	5.81		57,361
	52,060	52,060			$	206,174

The rights, privileges, and preferences of each of the Preferred Shares were as follows:

Conversion Rights - Each Preferred Share was convertible, at the option of the holder, at any time, and without the payment of any additional consideration, into such number of fully paid ordinary shares as was determined by dividing the applicable original issue price for each such series of Preferred Shares by the applicable conversion price in effect at the time of the conversion. The conversion price per share for each series of Preferred Share shall initially

Credo Technology Group Holding Ltd

Notes to Unaudited Condensed Consolidated Financial Statements

be equal to the original issue price of such series, which means $1.00 per share for Series A, $2.10 per share for Series B, $4.29 per share for Series C, $4.99 per share for Series D and $5.81 per share for Series D+. The conversion price shall be subject to adjustment in order to adjust the number of ordinary shares into which the Preferred Shares are convertible.

Each share of each series of Preferred Shares automatically converted into the number of ordinary shares at the conversion rate at the time in effect upon the closing of a public offering of ordinary shares which results in at least $25.0 million of proceeds to the Company at a per share price not less than $9.99 or with the vote or written consent of the holders of a majority of the then outstanding Preferred Shares, voting as a separate class, to convert their Preferred Shares at the then effective Conversion Price.

Dividends - The holders of Preferred Shares were entitled to receive noncumulative dividends when and if declared by the Company’s board of directors. The holders of Preferred Shares were entitled to receive dividends prior and in preference to any payment of any dividend on ordinary shares in an amount equal to 8% of the original issue price per share of such Preferred Share. After payment of such dividends, any additional dividends shall be distributed among all holders of ordinary shares and Preferred Shares in proportion to the number of ordinary shares that would be held by each such holder if all Preferred Shares were converted to ordinary shares at the then effective conversion rate. No dividends had been declared by the board of directors from inception through the date of conversion into ordinary shares.

Liquidation Rights - In the event of any sale, lease, conveyance or other disposition of all or substantially all of the assets of the Company or the exclusive license of all or substantially all of the Company’s intellectual property used in generating all or substantially all of the Company’s revenues, reorganization, consolidation, acquisition, merger, liquidation, dissolution or winding up of the Company, either voluntary or involuntary, the holders of Preferred Shares shall be entitled to receive in preference to the holders of ordinary shares, an amount per share equal to the liquidation preference, plus any declared but unpaid dividends. After payment of the liquidation preference to holders of Preferred Shares, the remaining assets of the Company were available for distribution on a pro rata basis to the holders of ordinary shares.

Voting Rights - The holders of the Preferred Shares were entitled to the number of votes equal to the number of ordinary shares into which such Preferred Shares could be converted on the record date.

9. Leases

The Company leases office space, domestically and internationally, under operating leases. The Company’s leases have remaining lease terms generally between one year and eight years. Operating leases are included in right of use assets, accrued expenses and other current liabilities, and non-current operating lease liabilities on the Company’s unaudited condensed consolidated balance sheets. The Company does not have any finance leases.

Lease expense and supplemental cash flow information are as follows (in thousands):


	Three Months Ended				Nine Months Ended
	January 28, 2023		January 31, 2022		January 28, 2023		January 31, 2022
Operating lease expenses	$	935	$	709	$	2,715	$	2,064
Cash paid for amounts included in the measurement of operating lease liabilities	$	767	$	697	$	2,312	$	2,068
Right-of-use assets obtained in exchange for lease obligation	$	—	$	1,154	$	649	$	1,413

Credo Technology Group Holding Ltd

Notes to Unaudited Condensed Consolidated Financial Statements

The aggregate future lease payments for operating leases as of January 28, 2023 are as follows (in thousands):


Fiscal Year	Operating leases
Remainder of 2023	$	838
2024	3,312
2025	2,903
2026	2,355
2027	2,222
Thereafter	7,796
Total lease payments	19,426
Less: Interest	3,237
Present value of lease liabilities	$	16,189

As of January 28, 2023, the weighted average remaining lease term for the Company's operating leases is 6.94 years and the weighted average discount rate used to determine the present value of the Company's operating leases is 5.81%.

10. Share Incentive Plan

Share Issuances Subject to Repurchase

The Company has issued ordinary shares to certain employees that are subject to vesting periods pursuant to the respective share purchase agreements (“Restricted Share Awards” or “RSAs”). In addition, the Company allows early exercise for unvested ordinary share options granted under its 2015 Stock Plan. In regard to the ordinary shares purchased, but not vested, the Company has the right to repurchase shares at the original issue price in the event of termination of services. As of January 28, 2023, 127,780 shares from share option early exercises remained subject to the Company’s repurchase rights. As of April 30, 2022, 442,787 such ordinary shares, consisting of 16,667 shares from RSAs and 426,120 from share option early exercises, remained subject to the Company’s repurchase rights. These shares are excluded from ordinary shares outstanding.

Restricted Stock Unit (“RSU”) Awards

A summary of information related to RSU activity during the nine months ended January 28, 2023 is as follows:


	RSUs Outstanding
	Number of Shares	Weighted-Average Grant Date Fair Value	Weighted-Average Remaining Contractual Term	Aggregate Intrinsic Value (in thousands)
Balances as of April 30, 2022	4,133,751	$10.26
Granted	5,239,480	$12.36
Vested	(955,153)	$10.05
Canceled/ forfeited	(313,001)	$10.62
Balances and expected to vest as of January 28, 2023	8,105,077	$11.63	1.82	$	140,299

Share Option Awards

A summary of information related to share option activity during the nine months ended January 28, 2023 is as follows:

Credo Technology Group Holding Ltd

Notes to Unaudited Condensed Consolidated Financial Statements


	Options Outstanding
	Outstanding Share Options	Weighted-Average Exercise Price	Weighted-Average Remaining Contractual Term	Aggregate Intrinsic Value (in thousands)
Balance as of April 30, 2022	11,360,745	$1.94
Options exercised and vested	(1,456,539)	$1.70
Options canceled/ forfeited	(195,670)	$3.20
Balance and expected to vest as of January 28, 2023	9,708,536	$1.96	6.48	$	149,072
Exercisable as of January 28, 2023	9,580,756	$1.96