# Astera Labs, Inc. (ALAB) FY 2024 MD&A Verbatim Item 7 Management's Discussion and Analysis from Astera Labs, Inc.'s 10-K for fiscal year 2024. SEC filing source: https://www.sec.gov/Archives/edgar/data/1736297/000173629725000003/alab-20241231.htm Accession: 0001736297-25-000003 Filing date: 2025-02-14 Report date: 2024-12-31 Extracted from a substantive MD&A body after the formal Item 7 span was a TOC or reference stub. Confidence: high Company profile: /company/ALAB/ All MD&A years: /company/ALAB/mda/ Next year: /company/ALAB/mda/fy2025/ (FY 2025) Overview Our mission is to innovate, design, and deliver semiconductor-based connectivity solutions that are purpose-built to unleash the full potential of cloud and AI infrastructure. Building on years of experience with a singular focus on addressing connectivity challenges in data-centric systems, we have developed and deployed our Intelligent Connectivity Platform built from the ground up for cloud and AI infrastructure. Our Intelligent Connectivity Platform is comprised of semiconductor-based, high-speed, mixed-signal connectivity products that integrate a matrix of microcontrollers and sensors, and COSMOS, our software suite, which is embedded in our connectivity products and integrated into our customers’ systems. Our Intelligent Connectivity Platform provides our customers with the ability to deploy and operate high-performance cloud and AI infrastructure at scale, addressing an increasingly diverse set of requirements. We provide our connectivity products in various form factors, including Integrated Circuits (“ICs”), boards, and modules. Our patented software-defined platform approach delivers critical connectivity performance, enables flexibility and customization, and supports observability and predictive analytics. This approach aims to efficiently address the data, network, and memory bottlenecks, scalability, and other unique infrastructure requirements of our hyperscaler and system OEM customers. Based on trusted relationships with the leading hyperscalers and collaboration with data center infrastructure suppliers, our platform is designed to meet our customers’ unique cloud scale requirements. Our COSMOS software suite is foundational to our Intelligent Connectivity Platform and is designed to enable our customers to seamlessly configure, manage, monitor, optimize, troubleshoot, and customize functions in our IC, board, and module products. Today, our connectivity solutions are at the heart of major AI platforms deployed worldwide featuring both commercially available Graphic Processing Units (“GPUs”) and proprietary AI accelerators. We offer our customers four product families across multiple form factors including ICs, boards, and modules, shipping millions of devices across all of the major hyperscalers. Our products, which include Aries PCIe®/CXL® Smart DSP Retimers, Aries PCIe®/CXL® Smart Cable Modules™, Taurus Ethernet Smart Cable Modules™, Leo CXL Memory Connectivity Controllers, and Scorpio Smart Fabric Switches, are built upon industry standard connectivity protocols such as Peripherals Component Interconnect Express (“PCIe”), Ethernet, and Computer Express Link (“CXL”), to address the growing demand for purpose-built connectivity solutions that solve critical data, network, and memory bottlenecks inherent in cloud and AI infrastructure. Since our inception, we have created and commercialized first-to-market PCIe, Ethernet, and CXL products. We have become a trusted partner and a proven supplier to our hyperscaler and system OEM customers. We have experienced strong growth since the commercial launch of Aries in 2020. Our revenue grew from $34.8 million in 2021, $79.9 million in 2022, $115.8 million in 2023, and to $396.3 million in 2024, driven by a sizable increase in demand for our products. We have made significant investments in the design and development of new products and platform enhancements, and, as a result, we have not yet achieved profitability on an annual basis. 40 Table of Contents Summary of Financial Highlights Our revenue for the year ended December 31, 2024, increased by 242% compared to the year ended December 31, 2023, primarily due to an increase in overall unit shipments driven by higher demand for our Aries products and higher overall average selling prices resulting from a more favorable product mix. Gross margin increased 750 bps to 76.4% for the year ended December 31, 2024 from 68.9% for the year ended December 31, 2023, primarily driven by a net decrease of $10.2 million in inventory write-downs, partially offset by higher average unit cost as a result of product mix. The inventory write-downs during the year ended December 31, 2023 were due primarily to inventory in excess of our sales forecast for a legacy customer product. Operating expenses increased by $309.4 million or 283%, for the year ended December 31, 2024 compared to the year ended December 31, 2023, primarily driven by an increase of $223.1 million in non-cash stock-based compensation expense primarily due to both RSUs that had previously met the time-based and liquidity event vesting conditions in connection with our IPO as well as RSUs with time-based vesting after the liquidity event, and a $52.0 million increase in personnel-related expenses as a result of a 57% increase in average headcount. Initial Public Offering On March 22, 2024, we completed our initial public offering (the “IPO”) of 22,770,000 shares of our common stock, par value $0.0001 per share (our “Common Stock”), at a price to the public of $36.00 per share, which included 19,758,903 shares of Common Stock sold by us, inclusive of 2,970,000 shares sold by us pursuant to the full exercise of the underwriters’ over-allotment option, as well as 3,011,097 shares of Common Stock sold by certain of our existing stockholders. We received net proceeds of $672.2 million, after deducting underwriting discounts and commissions of $39.1 million, and we did not receive any proceeds from the sale of our common stock by our existing shareholders in the IPO. In connection with the IPO, we recognized and paid deferred offering costs of $6.2 million. We recognized $88.9 million of cumulative stock-based compensation expense associated with the time-based vesting and settlement of RSUs that had previously met the time-based vesting condition and for which the liquidity event vesting condition was satisfied in connection with our IPO. Based on our IPO price of $36.00 per share, our tax withholding obligation in connection with the vesting of these RSUs was $20.1 million, which we paid in the first quarter of 2024. Key Components of Results of Operations Revenue The vast majority of our revenue consists of product sales and a small portion is derived from engineering services. Product sales consists primarily of shipments of our Intelligent Connectivity Platform solutions. Engineering services revenue consists of engineering fees associated with customer-defined engineering services. Engineering services revenue accounted for an immaterial percentage of total revenue for each of the years ended December 31, 2024 and 2023. For product sales, we transact with customers primarily pursuant to standard purchase orders for delivery of products and generally do not allow customers to cancel or change purchase orders within limited notice periods. We recognize product sales when control transfers to the customer, generally at the time of product shipment from our facilities, in an amount that reflects the consideration we expect to receive in exchange for those goods, net of estimated sales returns, distributor price adjustments, rebates, and other customer incentives. Revenue is also recognized net of any taxes collected, which are subsequently remitted to governmental authorities. Cost of Revenue Cost of revenue includes cost of product sales and cost of engineering services. Cost of product sales includes the cost of materials, such as wafers processed by third-party foundries, costs associated with packaging, assembly, shipping, depreciation of equipment associated with manufacturing, cost of logistics and quality assurance, warranty costs, amortization of capitalized production masks, cost of personnel including salaries, stock-based compensation, employee benefits, write-down of inventories, and allocation of general corporate expenses. While amortization of capitalized production masks has historically not been material, we expect to incur significant amortization costs in the future as we continue to increase the number of additional products. Gross Profit and Gross Margin Gross profit represents revenue less cost of revenue. Gross margin is gross profit expressed as a percentage of revenue. Our gross profit has been, and may in the future be, primarily influenced by several factors, including sales 41 Table of Contents volumes, pricing of our products and services, changes in product costs, contract manufacturing supplier pricing, personnel costs, shipping and logistics costs, and inventory write-downs. Operating Expenses Our operating expenses consist of research and development, sales and marketing, and general and administrative expenses. Personnel costs are the most significant component of operating expenses and consist of salaries, stock-based compensation expense, employee benefits, and bonuses. Operating expenses also include software license and cloud hosting services costs, pre-production engineering mask costs, professional and consulting services fees, insurances costs, and overhead costs for facilities and other shared expenses, including depreciation expense. Research and Development Research and development expenses consist of costs incurred in performing research and development activities and include salaries, stock-based compensation expense, employee benefits, bonuses, pre-production engineering mask costs, software license and cloud hosting services costs, prototype wafer, packaging and test costs, and allocated shared expenses. Research and development costs are expensed as incurred. Pre-production engineering mask costs are expensed. We capitalize the costs of production masks with alternative future use and amortize these costs on a straight-line basis over the useful lives of the production masks. To determine if a production mask has alternative future use or benefits, we evaluate risks associated with developing new technologies and capabilities, and the related risks associated with entering new markets. Production masks that do not meet the criteria for capitalization are expensed as research and development costs. We believe that continued investments in our products are important to our future growth and, as a result, we expect our research and development expenses to continue to increase in absolute dollars and moderately decline as a percentage of revenue over time as our revenue increases. Sales and Marketing Sales and marketing expenses consist of personnel costs including salaries, stock-based compensation expense, employee benefits, bonuses, samples to potential customers, product marketing and conferences, travel and entertainment costs, and allocated shared expenses. We expect that our sales and marketing expenses will increase in absolute dollars as we increase our sales and marketing personnel and continue to expand our customer engagement with more design activities and increased product offerings and moderately decline as a percentage of revenue over time as our revenue increases. General and Administrative General and administrative expenses consist primarily of personnel costs including salaries, stock-based compensation expense, employee benefits and bonuses related to corporate, finance, information technology, legal, and human resource functions, professional services fees, audit and compliance expenses, insurance costs, and general corporate expenses including allocated shared expenses. We expect general and administrative expenses to increase in absolute dollars as we grow our operations and continue to incur additional expenses associated with operating as a public company and moderately decline as a percentage of revenue over time as our revenue increases. Interest Income Interest income consists of income earned on our short-term investments included in cash and cash equivalents and marketable securities. Income Tax Provision Income tax provision consists primarily of U.S. federal, state, and foreign income taxes. We maintain a full valuation allowance on our federal and state deferred tax assets as we have concluded that it is more likely than not that the deferred tax assets will not be realized. 42 Table of Contents Results of Operations Comparison of Years Ended December 31, 2024 and 2023 Revenue [[GREPCENT_TABLE]] [["","Years EndedDecember 31,"],["","2024","","2023","","Change","","% Change"],["","(in thousands, except percentages)"],["Revenue","$","396,290","","","$","115,794","","","$","280,496","","","242","%"]] [[/GREPCENT_TABLE]] Total revenue increased $280.5 million, or 242%, for the year ended December 31, 2024 compared to the year ended December 31, 2023, primarily due to a 217% increase in overall unit shipments driven by higher demand for our Aries products. The increase in revenue was also attributable to higher overall average selling prices resulting from an increased mix of hardware modules. Cost of Revenue, Gross Profit, and Gross Margin [[GREPCENT_TABLE]] [["","Years EndedDecember 31,"],["","2024","","2023","","Change","","% Change"],["","(in thousands, except percentages and bps)"],["Cost of revenue","$","93,591","","","$","35,967","","","$","57,624","","","160","%"],["Gross profit","$","302,699","","","$","79,827","","","$","222,872","","","279","%"],["Gross margin","76.4","%","","68.9","%","","750 bps"]] [[/GREPCENT_TABLE]] Total cost of revenue increased $57.6 million, or 160%, for the year ended December 31, 2024 compared to the year ended December 31, 2023, primarily due to a 217% increase in overall unit shipments partially offset by a $10.2 million decrease in inventory write-downs. The inventory write-downs during the year ended December 31, 2023 were primarily due to inventory in excess of our sales forecast for a legacy customer product. Gross margin increased 750 bps to 76.4% for the year ended December 31, 2024 compared to 68.9% for the year ended December 31, 2023. The increase was primarily driven by a net decrease of $10.2 million in inventory write-downs, partially offset by higher average unit cost as a result of product mix. Research and Development [[GREPCENT_TABLE]] [["","Years EndedDecember 31,"],["","2024","","2023","","Change","","% Change"],["","(in thousands, except percentages)"],["Research and development","$","200,830","","","$","73,407","","","$","127,423","","","174","%"],["Percentage of revenue","51","%","","63","%"]] [[/GREPCENT_TABLE]] Research and development expense increased $127.4 million, or 174%, for the year ended December 31, 2024 compared to the year ended December 31, 2023. The increase was attributable to a $69.1 million increase in non-cash stock-based compensation expense primarily due to both RSUs that had previously met the time-based and liquidity event vesting conditions in connection with our IPO as well as RSUs with time-based vesting after the liquidity event. Additionally, there were $33.9 million higher personnel-related expenses as a result of a 63% increase in average headcount and a $21.2 million increase in software licenses and cloud hosting services related to our development projects. 43 Table of Contents Sales and Marketing [[GREPCENT_TABLE]] [["","Years EndedDecember 31,"],["","2024","","2023","","Change","","% Change"],["","(in thousands, except percentages)"],["Sales and marketing","$","123,652","","","$","19,992","","","$","103,660","","","519","%"],["Percentage of revenue","31","%","","17","%"]] [[/GREPCENT_TABLE]] Sales and marketing expense increased $103.7 million, or 519%, for the year ended December 31, 2024 compared to the year ended December 31, 2023. The increase was attributable to a $93.8 million increase in non-cash stock-based compensation expense primarily due to both RSUs that had previously met the time-based and liquidity event vesting conditions in connection with our IPO as well as RSUs with time-based vesting after the liquidity event, and a $8.2 million increase in personnel-related expenses as a result of a 29 % increase in average headcount. General and Administrative [[GREPCENT_TABLE]] [["","Years EndedDecember 31,"],["","2024","","2023","","Change","","% Change"],["","(in thousands, except percentages)"],["General and administrative","$","94,283","","","$","15,925","","","$","78,358","","","492","%"],["Percentage of revenue","24","%","","14","%"]] [[/GREPCENT_TABLE]] General and administrative expense increased $78.4 million, or 492%, for the year ended December 31, 2024 compared to the year ended December 31, 2023. The increase was attributable to a $60.2 million increase in non-cash stock-based compensation expense primarily due to both RSUs that had previously met the time-based and liquidity event vesting conditions in connection with our IPO as well as RSUs with time-based vesting after the IPO, a $9.9 million higher in personnel-related expenses as a result of a 81% increase in average headcount, and a $3.4 million increase in professional services fees as we continue to build out our public company infrastructure. Interest Income [[GREPCENT_TABLE]] [["","Years EndedDecember 31,"],["","2024","","2023","","Change","","% Change"],["","(in thousands, except percentages)"],["Interest income","$","34,288","","","$","6,549","","","$","27,739","","","424","%"]] [[/GREPCENT_TABLE]] For the year ended December 31, 2024, interest income increased $27.7 million, or 424%, compared to the year ended December 31, 2023, respectively. The increase was primarily due to higher average short-term investments and cash equivalents balances primarily as a result of our IPO. Income Tax Provision [[GREPCENT_TABLE]] [["","Years EndedDecember 31,"],["","2024","","2023","","Change","","% Change"],["","(in thousands, except percentages)"],["Income tax provision","$","1,643","","","$","3,309","","","$","(1,666)","","","(50)","%"]] [[/GREPCENT_TABLE]] Income tax provision decreased $1.7 million, or 50%, for the year ended December 31, 2024 compared to the year ended December 31, 2023. The effective tax rate decreased from 14.5% for the year ended December 31, 2023 to 2.0% for the year ended December 31, 2024. The change was p primarily due to a significant increase in stock-based compensation tax deductions post our IPO, and U.S. research and development credits, partially offset by an increase in taxable income, and the foreign-derived intangible income deduction. 44 Table of Contents Non-GAAP Financial Measures This Annual Report on Form 10-K contains certain financial measures that are not presented in accordance with generally accepted accounting principles in the United States (“GAAP”), which we use to supplement the performance measures in our consolidated financial statements, which are presented in accordance with GAAP. We refer to these measures as “non-GAAP financial measures.” These non-GAAP financial measures include non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating income (loss), and non-GAAP net income (loss). We use these non-GAAP financial measures for financial and operational decision-making and as a means to assist us in evaluating period-to-period comparisons. By excluding certain items that may not be indicative of our recurring core operating results, we believe that non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating income (loss), and non-GAAP net income (loss) provide meaningful supplemental information regarding our performance. Accordingly, we believe these non-GAAP financial measures are useful to investors and others because they allow for additional information with respect to financial measures used by management in its financial and operational decision-making and they may be used by our institutional investors and the analyst community to help them analyze the health of our business. However, there are a number of limitations related to the use of non-GAAP financial measures, and these non-GAAP measures should be considered in addition to, not as a substitute for or in isolation from, our financial results prepared in accordance with GAAP. Other companies, including companies in our industry, may calculate these non-GAAP financial measures differently or not at all, which reduces their usefulness as comparative measures. Non-GAAP Gross Profit and Non-GAAP Gross Margin We define non-GAAP gross profit as gross profit presented in accordance with GAAP, adjusted to exclude stock-based compensation expenses. The non-GAAP gross margin is non-GAAP gross profit divided by revenue. We have presented non-GAAP gross profit because we consider non-GAAP gross profit to be a useful metric for investors and other users of our financial information in evaluating our operating performance as it excludes the impact of non-cash stock-based compensation, a charge that can vary from period to period for reasons that are unrelated to our core operating performance. This metric also provides investors and other users of our financial information with an additional tool to eliminate the effects of items that may vary for different companies for reasons unrelated to core operating performance. A reconciliation of our GAAP gross profit and gross margin, the most directly comparable GAAP financial measure, to non-GAAP gross profit and non-GAAP gross margin is presented below: [[GREPCENT_TABLE]] [["","Years Ended December 31,"],["","2024","","2023"],["","(in thousands, except percentages)"],["GAAP gross profit","$","302,699","","","$","79,827"],["Stock-based compensation expense upon IPO (1)","516","","","\u2014"],["Stock-based compensation expense","329","","","24"],["Non-GAAP gross profit","$","303,544","","","$","79,851"],["GAAP gross margin","76.4","%","","68.9","%"],["Stock-based compensation expense upon IPO (1)","0.1","","","\u2014"],["Stock-based compensation expense","0.1","","","0.1"],["Non-GAAP gross margin","76.6","%","","69.0","%"]] [[/GREPCENT_TABLE]] (1) Stock-based compensation expense recognized in connection with the time-based vesting and settlement of RSUs that had previously met the time-based vesting condition and for which the liquidity event vesting condition was satisfied in connection with our IPO. 45 Table of Contents Non-GAAP Operating Income (Loss) We define non-GAAP operating income (loss) as operating loss presented in accordance with GAAP, adjusted to exclude stock-based compensation expenses and employer payroll taxes related to the time-based vesting and net settlement of RSUs with a liquidity event-based vesting condition that was satisfied in connection with the IPO. We have presented non-GAAP operating income (loss) because we consider non-GAAP operating income (loss) to be a useful metric for investors and other users of our financial information in evaluating our operating performance as it excludes the impact of non-cash stock-based compensation expense and employer payroll taxes related to the time-based vesting and net settlement of RSUs in connection with our IPO, charges that can vary from period to period or are one time charges for reasons that are unrelated to our core operating performance. This metric also provides investors and other users of our financial information with an additional tool to eliminate the effects of items that may vary for different companies for reasons unrelated to core operating performance. A reconciliation of our GAAP operating loss, the most directly comparable GAAP financial measure, to non-GAAP operating income (loss) is presented below: [[GREPCENT_TABLE]] [["","Years Ended December 31,"],["","2024","","2023"],["","(in thousands, except percentages)"],["GAAP operating loss","$","(116,066)","","","$","(29,497)"],["Stock-based compensation expense upon IPO (1)","88,873","","","\u2014"],["Stock-based compensation expense","145,715","","","10,679"],["Employer payroll tax related to stock-based compensation from IPO (2)","1,072","","","\u2014"],["Non-GAAP operating income (loss)","$","119,594","","","$","(18,818)"],["GAAP operating margin","(29.3)","%","","(25.5)","%"],["Stock-based compensation expense upon IPO (1)","22.4","","","\u2014"],["Stock-based compensation expense","36.8","","","9.2"],["Employer payroll tax related to stock-based compensation from IPO (2)","0.3","","","\u2014"],["Non-GAAP operating margin","30.2","%","","(16.3)","%"]] [[/GREPCENT_TABLE]] (1) Stock-based compensation expense recognized in connection with the time-based vesting and settlement of RSUs that had previously met the time-based vesting condition and for which the liquidity event vesting condition was satisfied in connection with our IPO. (2) Employer payroll taxes related to the time-based vesting and settlement of RSUs that had previously met the time-based vesting condition and for which the liquidity event vesting condition was satisfied in connection with our IPO. Non-GAAP Net Income (Loss) We monitor non-GAAP net income (loss) for planning and performance measurement purposes. We define non-GAAP net income (loss) as net loss reported on our consolidated statements of operations, excluding the impact of stock-based compensation expenses, employer payroll taxes related to the time-based vesting and net settlement of RSUs with a liquidity event-based vesting condition that was satisfied in connection with our IPO, and the related tax impact on the adjustments. We have presented non-GAAP net income (loss) because we believe that the exclusion of these charges allows for a more relevant comparison of our results of operations to other companies in our industry and facilitates period-to-period comparisons as it eliminates the effect of certain factors unrelated to our overall operating performance. 46 Table of Contents A reconciliation of our GAAP net loss, the most directly comparable GAAP financial measure, to our non-GAAP net income (loss) is presented below: [[GREPCENT_TABLE]] [["","Years Ended December 31,"],["","2024","","2023"],["","(in thousands)"],["GAAP net loss","$","(83,421)","","","$","(26,257)"],["Stock-based compensation expense upon IPO (1)","88,873","","","\u2014"],["Stock-based compensation expense","145,715","","","10,679"],["Employer payroll tax related to stock-based compensation from IPO (2)","1,072","","","\u2014"],["Income tax effect (3)","(8,910)","","","\u2014"],["Non-GAAP net income (loss)","$","143,329","","","$","(15,578)"]] [[/GREPCENT_TABLE]] (1) Stock-based compensation expense recognized in connection with the time-based vesting and settlement of RSUs that had previously met the time-based vesting condition and for which the liquidity event vesting condition was satisfied in connection with our IPO. (2) Employer payroll taxes related to the time-based vesting and settlement of RSUs that had previously met the time-based vesting condition and for which the liquidity event vesting condition was satisfied in connection with our IPO. (3) Income tax effect is calculated based on the tax laws in the jurisdictions in which we operate and is calculated to exclude the impact of stock-based compensation expense and one-off discrete tax adjustments that are unrelated to our core operating performance. For the year ended December 31, 2024, the non-GAAP tax expense rate was 6.9%, compared to a tax benefit rate of 27.0% for the year ended December 31, 2023. The reduction of the rate was due to the realization in deferred tax asset related to the release of valuation allowance, on a non-GAAP basis. Liquidity and Capital Resources Since our inception, we have financed our operations primarily through proceeds from the issuance of our redeemable convertible preferred stock, net proceeds from IPO, and cash generated from the sale of our products. As of December 31, 2024, our principal sources of liquidity were cash, cash equivalents, and marketable securities of $914.3 million. Our principal use of cash is to fund our operations, invest in research and development, fund production mask capital expenditures, and to support our overall growth. While we have generated $136.7 million in cash flow from operating activities for the year ended December 31, 2024, in prior years significant losses from operations and negative cash flows from operating activities have resulted in our accumulated deficit of $208.8 million as of December 31, 2024. We believe that our current cash, cash equivalents, and marketable securities will be sufficient to fund our operations for at least the next 12 months and beyond. Our future capital requirements, however, will depend on many factors, including our growth rate, the timing and extent of our sales and marketing and research and development expenditures, capital expenditures for production masks, the continuing market acceptance of our products, and the use of cash to fund potential mergers or acquisitions. In the event that additional financing is required from outside sources, we may seek to raise additional funds through equity, equity-linked arrangements, and debt. If we are unable to raise additional capital when desired and at reasonable rates, our business, results of operations, and financial condition could be adversely affected. Cash Flows The following table summarizes our cash flows for the periods presented: [[GREPCENT_TABLE]] [["","Years Ended December 31,"],["","2024","","2023"],["","(in thousands)"],["Net cash provided by (used in) operating activities","$","136,676","","","$","(12,716)"],["Net cash used in investing activities","$","(757,568)","","","$","(17,772)"],["Net cash provided by (used in) financing activities","$","655,838","","","$","(502)"]] [[/GREPCENT_TABLE]] 47 Table of Contents Operating Activities Net cash provided by operating activities for the year ended December 31, 2024 of $136.7 million resulted primarily from non-cash charges of $233.4 million primarily related to $234.6 million in stock-based compensation expense partially offset by a net loss of $83.4 million and cash used by operating assets and liabilities of $13.3 million. Cash used in operating assets and liabilities during the period was primarily from an increase of $30.5 million in accounts receivable due to higher product sales and timing of customer payments, $19.3 million increase in inventory for anticipated future demand, a $13.0 million increase in prepaid expenses and other assets primarily related to accrued interest receivable on our short-term investments, and $2.4 million decrease in operating lease liability. The net cash flow used in operating assets and liabilities were partially offset by $31.0 million increase in accrued expenses and other liabilities primarily due to accrued customer deposits and timing of payments, a $20.9 million increase in accounts payable primarily due to timing of payments, as well as increase in purchases. Net cash used in operating activities for the year ended December 31, 2023 of $12.7 million resulted primarily from a net loss of $26.3 million and cash used in operating assets and liabilities of $9.7 million offset by non-cash charges of $23.2 million primarily consisting of stock-based compensation of $10.7 million, an inventory write down of $10.3 million and depreciation of $1.8 million. Cash used in operating assets and liabilities during the period was primarily from a $5.6 million increase in inventory primarily due to build up for anticipated demand, a $4.3 million decrease in accounts payable primarily due to timing of payments, and a $1.3 million decrease in operating lease liability due to the maturing of the lease, and $0.7 million decrease in prepaid expenses and other assets due to timing. These cash flow uses were partially offset by a $2.4 million decrease in accounts receivable due to timing of customer payments. Investing Activities Net cash used in investing activities for the year ended December 31, 2024 of $757.6 million resulted primarily from $930.6 million in purchases of marketable securities, and $34.2 million in purchases of property and equipment, partially offset by $208.7 million in proceeds from sales and maturities of marketable securities. Net cash used in investing activities for the year ended December 31, 2023 of $17.8 million resulted primarily from $126.2 million in purchases of marketable securities and $2.8 million in purchases of property and equipment, offset by $111.2 million in proceeds from sales and maturities of marketable securities. Financing Activities Net cash provided by financing activities for the year ended December 31, 2024 of $655.8 million resulted primarily from $672.2 million in proceeds from our IPO, net of underwriting discounts and commissions, $5.5 million in proceeds from exercises of stock options, and $4.2 million in proceeds from the employee stock purchase plan. This was partially offset by $20.1 million in tax withholding related to net share settlement of RSUs that had previously met the time-based vesting condition and for which the liquidity event vesting condition was satisfied in connection with our IPO, $4.8 million in payments of deferred offering costs and $1.1 million from our repurchase of our common stock. Net cash used in financing activities for the year ended December 31, 2023 of $0.5 million resulted primarily from $1.4 million of payments for deferred offering costs and $0.2 million from the repurchase of common stock, partially offset by $1.1 million in proceeds from stock option exercises. Material Cash Requirements Operating lease commitments. Our operating lease commitments primarily include corporate offices. As of December 31, 2024, we had fixed lease payment obligations of $39.9 million including our commitment for our future corporate headquarters office, with approximately $5.0 million to be paid within 12 months and the remainder thereafter. For an additional discussion on our operating leases, see Note 5 - Leases in the Notes to the Consolidated Financial Statements set forth in Part II, Item 8 of this annual report on Form 10-K. Purchase commitments. Our purchase commitments are primarily related to software licenses and cloud hosting services. As of December 31, 2024, we had purchase commitments of $27.5 million, with $12.0 million to be paid within 12 months and the remainder thereafter. In January 2025, the Company entered into an agreement for a non-cancellable purchase commitment of $14.9 million with a three year term. For an additional discussion on our purchase commitments, see Note 6 - Commitments and Contingencies in the Notes to the Consolidated Financial Statements set forth in Part II, Item 8 of this Annual Report on Form 10-K. 48 Table of Contents Indemnification Agreements See Note 6 - Commitments and Contingencies in the Notes to the Consolidated Financial Statements set forth in Part II, Item 8 of this Annual Report on Form 10-K. Critical Accounting Estimates We prepare our financial statements in conformity with GAAP. The preparation of financial statements in conformity with GAAP required certain estimates and assumptions to be made that may affect our consolidated financial statements. Accounting policies that have a significant impact on our results are described in Note 1 to our consolidated financial statements included in Part II, Item 8 of this annual report. The accounting policies discussed in this section are those that we consider to be the most critical. We consider an accounting policy to be critical if the policy is subject to a material level of judgment and if changes in those judgments are reasonably likely to materially impact our results. We base our estimates and judgments on reasonably available information. Our estimates and assumptions may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from those estimates and such differences may be material to the financial statements. We continue to monitor and assess our critical estimates in light of developments, and as new events occur and additional information is obtained, our estimates may change materially in future periods. Revenue Recognition We recognize revenue upon transfer of control of promised goods and services in an amount that reflects the consideration we expect to receive in exchange for those goods and services. Under Accounting Standards Codification 606, Revenue from Contracts with Customers (“ASC 606”), we apply the following five step approach: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when, or as, a performance obligation is satisfied. Where an arrangement includes multiple performance obligations, the transaction price is allocated to each performance obligation on a relative standalone selling price (“SSP”) basis. We determine 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 our overall pricing objectives, while maximizing observable inputs. Accounts receivable are recorded when the customer has been billed or the right to consideration is unconditional. We record deferred revenue when we have received consideration, or an amount of consideration is due from the customer, and we have a future obligation to transfer products or services. From time to time, we have contracts with initial terms that include performance obligations that extend beyond one year. We transact with customers primarily pursuant to standard purchase orders for delivery of products and do not allow customers to cancel or change purchase orders within limited notice periods. We recognize product sales when control transfers to the customer, generally at the time of product shipment from its facilities or at the time when products are received by customers depending on the shipping terms with our customers, in an amount that reflects the consideration we expect to receive in exchange for those goods, net of estimated sales returns, distributor price adjustments (“DPA”), rebates, and other customer incentives. We sell the majority of our products to distributors at a fixed list price. Distributors are authorized to resell our products to customers at a range of individually negotiated price points based on a variety of factors, including customer, product, quantity, geography, and competitive differentiation. The majority of our distributors’ resales are priced at a discount from list price (the original purchase price). After the resale transaction is completed, we issue credit memos to the distributor for the price adjustments. Sales to most distributors are made under programs common in the semiconductor industry whereby distributors receive DPAs to meet individual competitive opportunities. These programs may include credits granted to distributors or price protection credits when our standard published prices are lowered from the price the distributor paid for product still in its inventory. In determining the transaction price, DPAs are considered variable consideration that reduce the amount of revenue recognized. Our policy is to estimate such price adjustments based on our historical prices and contractual terms using the expected value method. To date, actual DPAs have been materially consistent with the provisions we have made, based on our historical estimates. However, because of the inherent nature of estimates, there is always a risk that there could be 49 Table of Contents significant differences between actual amounts and our estimates. We also consider the constraint on estimates of variable consideration when estimating the total transaction price. Our customer programs involve rebates, which are designed to serve as sales incentives to resellers of our products in various target markets. We account for rebates as a reduction to revenue and accrue for potential rebates based on the amount we expect to be claimed by customers. Revenue is recognized net of taxes collected, which are subsequently remitted to governmental authorities. Consideration payable includes cash amounts that we pay, or expect to pay, to a customer, and is included in accrued expenses and other current liabilities. Consideration payable also includes credits or other items. We account for consideration payable to a customer as a reduction of the transaction price, and therefore, of revenue, unless the payment to the customer is in exchange for a distinct good or service that the customer transfers to us. Stock-Based Compensation We measure and recognize our stock-based compensation expense for stock options based on the estimated fair value. We use the Black-Scholes-Merton pricing model to determine the grant date fair value of stock options. Stock-based compensation expense is recognized on a straight-line basis over the requisite service period of the awards, which is generally the vesting period. We measure and recognize our stock-based compensation expense for RSUs granted prior to IPO based on the estimated fair value of the underlying common stock on the date of grant. RSUs granted prior to the IPO vest upon the satisfaction of both service and liquidity event conditions and compensation expense were recognized on a straight-line basis over the four-year requisite service period for each separately vesting portion of the award. The liquidity event vesting condition for the RSUs was satisfied in connection with the IPO. On that date, we recorded cumulative stock-based compensation expense of $88.9 million using the accelerated attribution method. We measure and recognize our stock-based compensation expense for RSUs granted post IPO based on the fair value of the underlying common stock on the date of grant. RSUs granted post IPO includes only service-based vesting conditions and stock-based compensation expense will be recognized equal to the grant date fair value on a straight-line basis over the four-year requisite service period of the awards. We measure and recognize our stock-based compensation expense for performance stock units (“PSUs”) based on the fair value of the underlying common stock on the date of grant for PSUs granted post IPO. Stock-based compensation expense will be recognized equal to the grant date fair value in the period in which vesting becomes probable using the accelerated attribution method over the requisite service period for each separately vesting portion of the award. We measure and recognize our stock-based compensation expense for our Employee Stock Purchase Plan (“ESPP”) based on the estimated fair value. We use the Black-Scholes-Merton pricing model to determine the grant date fair value of purchase rights granted under the ESPP. Stock-based compensation expense is recognized on a straight-line basis over the term of each ESPP offering period, which was seven months for the first ESPP offering and six months for the second offering and prospectively. We account for forfeitures as they occur. The Black-Scholes-Merton assumptions are based on the following for each of the years presented: •Expected volatility – since we do not have sufficient trading history of our common stock, we estimate a blended expected volatility by taking the average historical volatility of a group of comparable publicly traded companies and our common stock price over a period equal to the expected term of the awards. •Expected term – expected term represents the period that our stock-based awards are expected to be outstanding. The expected term assumptions for options are determined based on the vesting terms, exercise terms, and contractual lives. The expected term of the ESPP represents the period of time that purchase rights are expected to be outstanding which is generally six months. •Risk-free interest rate – We use the U.S. Treasury yield for our risk-free interest rate that corresponds with the expected term. •Dividend yield – We utilize a dividend yield of zero, as we do not currently issue dividends, nor do we expect to do so in the future. •Fair value of common stock – Prior to our IPO, we estimated the fair value of common stock, see Common Stock Valuations below. Post to our IPO, the fair value of common stock for purposes of options is the fair value of the 50 Table of Contents underlying common stock on the date of grant and for ESPP purchases is based on the stock price on the first date of the respective offering period. Common Stock Valuations Prior to our IPO, the fair value of the common stock underlying our stock-based awards has historically been determined by our board of directors, with input from management and contemporaneous third-party valuations. We believe that our board of directors has the relevant experience and expertise to determine the fair value of our common stock. Given the absence of a public trading market of our common stock, and in accordance with the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation, our board of directors exercised reasonable judgment and considered numerous objective and subjective factors to determine the best estimate of the fair value of our common stock at each grant date. These factors include: •the results of contemporaneous valuations performed at periodic intervals by a third-party valuation firm; •the prices, rights, preferences, and privileges of our redeemable convertible preferred stock relative to those of our common stock; •the prices of our redeemable convertible preferred stock and common stock sold to investors in arms- length transactions; •our actual operating and financial performance and estimated trends and prospects for our future performance; •our stage of development; •the likelihood of achieving a liquidity event, such as an initial public offering, direct listing, or sale of our company, given prevailing market conditions; •the lack of marketability involving securities in a private company; •the market performance of comparable publicly traded companies; and •U.S. and global capital market conditions. In valuing our common stock, the fair value of our business was determined using various valuation methods, including combinations of the income approach and the market approach with input from management. The income approach involves applying an appropriate risk-adjusted discount rate to projected cash flows based on forecasted revenue and costs. The market approach estimates value based on a comparison of the subject company to comparable public companies in a similar line of business. From the comparable companies, a representative market value multiple was determined, which was applied to our operating results to estimate the enterprise value of our company. Once the enterprise value was determined under the market approach, we derived the equity value of our company and used a hybrid method that considered both an option pricing model (“OPM”) and the probability weighted expected return method (“PWERM”) to allocate that value among the various classes of securities to arrive at the fair value of the common stock. The OPM is based on the Black-Scholes-Merton option pricing model, which allows for the identification for a range of possible future outcomes, each with an associated probability. The OPM is appropriate to use when the range of possible future outcomes is difficult to predict and thus creates highly speculative forecasts. PWERM involves a forward-looking analysis of the possible future outcomes of the enterprise including an IPO as well as non-IPO market-based outcomes. After the equity value is determined and allocated to the various classes of shares, a discount for lack of marketability (“DLOM”) is applied to arrive at the fair value of ordinary shares. A DLOM is applied based on the theory that as an owner of a private company stock, the stockholder has limited opportunities to sell this stock and any such sale would involve significant transaction costs, thereby reducing overall fair market value. Application of these approaches involves the use of estimates, judgment, and assumptions that are highly complex and subjective, such as those regarding our expected future revenue, expenses, and future cash flows, discount rates, market multiples, the selection of comparable companies, and the probability of possible future events. Changes in any or all of these estimates and assumptions or the relationships between those assumptions impact our valuations as of each valuation date and may have a material impact on the valuation of our common stock. For valuations after the completion of our IPO, our board of directors determine the fair value of each share of underlying common stock based on the closing price of our common stock as reported on the date of grant. Increases and decreases in the market price of our common stocks increase and decrease the fair value of our stock-based awards granted in future periods. 51 Table of Contents Capitalized Production Masks We incur costs for the fabrication of masks used by our contract manufacturers to manufacture wafers that incorporate our products. We capitalize the costs of fabrication masks that are reasonably expected to be used during production manufacturing. These amounts are included within property and equipment and are depreciated over a period of five years to cost of revenue. If we do not reasonably expect to use the fabrication mask during production manufacturing, we expense the related mask costs to research and development in the period in which such determination is made. Recent Accounting Pronouncements For more information, see Note 1 to our consolidated financial statements included in Part II, Item 8 of this Annual Report.