0000882508 QUICKLOGIC Corp false --01-03 Q3 2020 0 0 0.001 0.001 10,000 10,000 0 0 0 0 0.001 0.001 200,000 200,000 11,068 11,068 8,331 8,331 1,100 52 1,200 1 0.50 5.50 1.2 100,000 979,363 559,587 9,000,000 3,000,000 1 0.50 5.50 15.0 15.0 5.5 5.5 15.0 1.2 18 67,000 11 1.2 10 0 0 0 0 0 0 0 0 0 North America includes revenue from the United States of $1.1 million, or 61% of total revenue, and $1.4 million, or 67% of total revenue, for the three months ended September 27, 2020 and September 29, 2019, respectively. For the nine months ended September 27, 2020 and September 29, 2019 revenue from the United States was $3.3 million, or 54% of total revenue, and $3.6 million, or 49% of total revenue, respectively. Net loss per share, and weighted average shares outstanding basic and diluted for the three and nine months ended September 29, 2019 are adjusted to reflect 1-for-14 reverse stock split effected on December 23, 2019. Common stock shares and additional paid-in capital amounts as of December 31, 2018, and in the three-months ended March 31, 2019 and September 29, 2019 are adjusted to reflect 1-for-14 reverse stock split effected on December 23, 2019. Asia Pacific includes revenue from Japan of $271,000, or 15% of total revenue and $510,000 or 24% of total revenue for the quarters ended September 27, 2020 and September 29, 2019, respectively. For the nine months ended September 27, 2020 and September 29, 2019, revenue from Japan was $1.4 million, or 23% of total revenue, and $1.3 million, or 17% of total revenue, respectively. For all periods presented: New products include all products manufactured on 180 nanometer or smaller semiconductor processes, eFPGA IP license, Quick AI and SensiML AI software as a service ("SaaS") revenues. 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Table of Contents



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 September 27, 2020

 

OR

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: 000-22671

 


 

QUICKLOGIC CORPORATION

(Exact name of registrant as specified in its charter)

 


 

Delaware

 

77-0188504

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

2220 Lundy Avenue, San Jose, CA 95131-1816

(Address of principal executive offices including zip code))

 

(408990-4000

(Registrant's telephone number, including area code)

 

Securities registered pursuant Section 12(b) of the act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $.001 per share

QUIK

The Nasdaq Capital Market

 

 

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 definition 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 Securities Exchange Act).

Yes      No  ☒

 

As of October 30, 2020, there were 11,068,479 shares of registrant’s common stock, par value $0.001 per share, outstanding.

 

 

 
 

 

QUICKLOGIC CORPORATION

FORM 10-Q

September 27, 2020

 

TABLE OF CONTENTS

 

 

 

 

Page

Part I - Financial Information

 

3

 

 

 

 

Item 1.

Unaudited Condensed Consolidated Financial Statements

 

3

 

 

 

 

 

Consolidated Balance Sheets

 

3

 

 

 

 

 

Consolidated Statements of Operations

 

4

 

 

 

 

 

Consolidated Statements of Cash Flows

 

5

 

 

 

 

 

Consolidated Statements of Changes in Stockholders’ Equity

 

6

 

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

7

 

 

 

 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

20

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

31

 

 

 

 

Item 4.

Controls and Procedures

 

31

 

 

 

 

Part II - Other Information

 

33

 

 

 

 

Item 1.

Legal Proceedings

 

33

 

 

 

 

Item 1A.

Risk Factors

 

33

 

 

 

 

Item 6.

Exhibits

 

34

 

 

 

 

Signatures

 

 

35

 

 

 

 

 

PART I. Financial Information

 

Item 1. Financial Statements

 

QUICKLOGIC CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value amount)

 

  

September 27,

  

December 29,

 
  

2020

  

2019

 

ASSETS

        

Current assets:

        

Cash, cash equivalents and restricted cash

 $24,685  $21,548 

Accounts receivable, net of allowances for doubtful accounts of $0

  1,115   1,991 

Inventories

  3,138   3,260 

Other current assets

  1,167   1,565 

Total current assets

  30,105   28,364 

Property and equipment, net

  563   830 

Capitalized internal-use software, net

  844   333 

Right of use assets

  1,995   2,370 

Intangible assets

  897   1,008 

Goodwill

  185   185 

Other assets

  279   314 

TOTAL ASSETS

 $34,868  $33,404 
         

LIABILITIES AND STOCKHOLDERS' EQUITY

        

Current liabilities:

        

Revolving line of credit

 $15,000  $15,000 

Trade payables

  1,010   1,003 

Accrued liabilities

  1,368   1,133 

Paycheck protection program loan

  660    

Deferred revenue

  45   158 

Lease liabilities-current

  709   704 

Total current liabilities

  18,792   17,998 

Long-term liabilities:

        

Paycheck protection program loan, less current portion

  532    

Lease liabilities-non-current

  1,297   1,583 

Total liabilities

  20,621   19,581 

Commitments and contingencies (see Note 13)

          

Stockholders' equity:

        

Preferred stock, $0.001 par value; 10,000 shares authorized; no shares issued and outstanding

      

Common stock, $0.001 par value; 200,000 authorized; 11,068 and 8,331 shares issued and outstanding as of September 27, 2020 and Balance at December 29, 2019, respectively

  11   8 

Additional paid-in capital

  305,703   297,073 

Accumulated deficit

  (291,467)  (283,258)

Total stockholders' equity

  14,247   13,823 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 $34,868  $33,404 

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

3

 

 

QUICKLOGIC CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 27, 2020

  

September 29, 2019

  

September 27, 2020

  

September 29, 2019

 

Revenue

 $1,780  $2,158  $6,134  $7,439 

Cost of revenue

  857   1,117   3,092   3,397 

Gross profit

  923   1,041   3,042   4,042 

Operating expenses:

                

Research and development

  1,380   3,139   5,399   9,596 

Selling, general and administrative

  1,478   2,095   5,022   6,881 

Restructuring costs

  111      624    

Total operating expenses

  2,969   5,234   11,045   16,477 

Loss from operations

  (2,046)  (4,193)  (8,003)  (12,435)

Interest expense

  (36)  (63)  (299)  (270)

Interest income and other expense, net

  27   55   94   153 

Loss before income taxes

  (2,055)  (4,201)  (8,208)  (12,552)

Provision for (benefit from) income taxes

  10   70   1   (171)

Net loss

 $(2,065) $(4,271) $(8,209) $(12,381)

Net loss per share:

                

Basic and diluted (1)

 $(0.19) $(0.51) $(0.88) $(1.66)

Weighted average shares outstanding:

                

Basic and diluted (1)

  11,023   8,313   9,315   7,441 

 

Note: Net loss equals to comprehensive loss for all periods presented.

(1) Net loss per share, and weighted average shares outstanding basic and diluted for the three and nine months ended September 29, 2019 are adjusted to reflect 1-for-14 reverse stock split effected on December 23, 2019.

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

4

 

 

QUICKLOGIC CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

  

Nine Months Ended

 
  

September 27,

  

September 29,

 
  

2020

  

2019

 

Cash flows from operating activities:

        

Net loss

 $(8,209) $(12,381)

Adjustments to reconcile net loss to net cash used in operating activities:

        

Depreciation and amortization

  644   900 

Stock-based compensation

  601   2,490 

Write-down of inventories

  55   80 

Write-off of equipment

  41   2 

Tax benefit from acquisition

     (282)

Changes in operating assets and liabilities:

        

Accounts receivable

  876   950 

Inventories

  67   378 

Other assets

  433   304 

Trade payables

  225   (492)

Accrued liabilities

  235   (702)
Deferred revenue  (113)  19 

Other long-term liabilities

     (16)

Net cash used in operating activities

  (5,145)  (8,750)

Cash flows from investing activities:

        

Capital expenditures for property and equipment

  (155)  (599)

Capitalized internal-use software

  (607)   

Cash received from business acquisition

     20 

Net cash used in investing activities

  (762)  (579)

Cash flows from financing activities:

        

Payment of finance lease obligations

  (179)  (283)

Proceeds from paycheck protection program loan

  1,191    

Proceeds from line of credit

  42,000   32,000 

Repayment of line of credit

  (42,000)  (32,000)

Proceeds from issuance of common stock, net of issuance costs

  8,099   8,258 

Taxes paid related to net settlement of equity awards

  (67)  (287)

Net cash provided by financing activities

  9,044   7,688 

Net increase in cash, cash equivalents and restricted cash

  3,137   (1,641)

Cash, cash equivalents and restricted cash at beginning of period

  21,548   26,463 

Cash, cash equivalents and restricted cash at end of period

 $24,685  $24,822 

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

5

 

 

QUICKLOGIC CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands)

 

          

Additional

      

Total

 
  

Common Stock

  

Paid-In

  

Accumulated

  

Stockholders'

 
  

Shares

  

Amount

  

Capital

  

Deficit

  

Equity

 

Balance at December 29, 2019

  8,331  $8  $297,073  $(283,258) $13,823 

Common stock issued under stock plans and employee stock purchase plan

  52      (25)     (25)

Stock-based compensation

        (398)     (398)

Net loss

           (3,165)  (3,165)

Balance at March 29, 2020

  8,383   8   296,650   (286,423)  10,235 

Common stock issued under stock plans and employee stock purchase plan

  29      (31)     (31)

Common stock offering, net of issuance costs of $1,100

  2,500   3   7,653      7,656 

Stock-based compensation

        741      741 

Net loss

           (2,979)  (2,979)

Balance at June 28, 2020

  10,912   11   305,013   (289,402)  15,622 
Common stock issued under stock plans and employee stock purchase plan  14      (13)     (13)
Common stock offering, net of issuance costs of $52  142      445      445 
Stock-based compensation        258      258 
Net loss           (2,065)  (2,065)
Balance at September 27, 2020  11,068  $11  $305,703  $(291,467) $14,247 

 

          

Additional

      

Total

 
  

Common Stock (1)

  

Paid-In (1)

  

Accumulated

  

Stockholders'

 
  

Shares

  

Amount

  

Capital

  

Deficit

  

Equity

 

Balance at December 30, 2018

  6,823  $7  $285,062  $(267,814) $17,255 

Common stock issued under stock plans and employee stock purchase plan

  35      (163)     (163)

Common stock issued for SensiML acquisition

  84      903      903 

Stock-based compensation

        951      951 

Net loss

           (3,476)  (3,476)

Balance at March 31, 2019

  6,942   7   286,753   (271,290)  15,470 

Common stock issued under stock plans and employee stock purchase plan

  38      210      210 

Common stock offering, net of issuance costs of $1,200

  1,314   1   8,024      8,025 

Stock-based compensation

        791      791 

Net loss

           (4,634)  (4,634)

Balance at June 30, 2019

  8,294   8   295,778   (275,924)  19,862 
Common stock issued under stock plans and employee stock purchase plan  31      (94)     (94)
Stock issuance costs        (6)     (6)
Stock-based compensation        747      747 
Net loss           (4,271)  (4,271)
Balance at September 29, 2019  8,325  $8  $296,425  $(280,195) $16,238 

 

1)

Common stock shares and additional paid-in capital amounts as of December 31, 2018, and in the three-months ended March 31, 2019, June 30, 2019 and September 29, 2019 are adjusted to reflect 1-for-14 reverse stock split effected on December 23, 2019.

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements

 

6

 

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 — The Company and Basis of Presentation

 

QuickLogic Corporation (“QuickLogic” or “Company”) was founded in 1988 and reincorporated in Delaware in 1999. The Company enables Original Equipment Manufacturers (“OEMs”) to maximize battery life for highly differentiated, immersive user experiences with Smartphone, Wearable, Hearable, Tablet and Internet-of-Things (“IoT devices”). QuickLogic delivers these benefits through industry leading ultra-low power customer programmable System on Chip (“SoC”) semiconductor solutions, embedded software, and algorithm solutions for always-on voice and sensor processing, and enhanced visual experiences. The Company is a fabless semiconductor provider of comprehensive, flexible sensor processing solutions, ultra-low power display bridges, and ultra-low power Field Programmable Gate Arrays (“FPGAs”). The Company’s wholly owned subsidiary, SensiML Corporation (“SensiML”) provides Analytics Toolkit, which is used in many of the applications where the Company’s ArcticPro™, eFPGA intellectual property (“IP”) plays a critical role. SensiML Analytics toolkit is an end-to-end software suite that provides OEMs a straightforward process for developing pattern matching sensor algorithms using machine learning technology that are optimized for ultra-low power consumption.

 

The accompanying interim condensed consolidated financial statements are unaudited. In the opinion of the Company’s management, these statements have been prepared in accordance with the United States generally accepted accounting principles (“U.S. GAAP”), and include all adjustments, consisting only of normal recurring adjustments, necessary to provide a fair statement of results for the interim periods presented. The Company recommends that these interim condensed consolidated financial statements be read in conjunction with the Company's Form 10-K for the year ended December 29, 2019, which was filed with the Securities and Exchange Commission (“SEC”) on March 13, 2020. Operating results for the three and nine months ended September 27, 2020 are not necessarily indicative of the results that may be expected for the full year.

 

QuickLogic's fiscal year ends on the Sunday closest to December 31 and each fiscal quarter ends on the Sunday closest to the end of each calendar quarter. QuickLogic's third fiscal quarters for 2020 and for 2019 ended on September 27, 2020 and September 29, 2019, respectively.

 

COVID-19 - Impact on Business

 

On January 30, 2020, the World Health Organization (“WHO”) declared a global emergency due to the COVID-19 pandemic, and on February 28, 2020, the WHO raised its assessment of the threat from high to very high at a global level. The social and economic impact of the COVID-19 outbreak has continued to increase exponentially since this declaration. The outbreak has resulted in significant governmental measures being implemented to control the spread of COVID-19, including, among others, restrictions on travel, business operations and the movement of people in many regions of the world in which the Company operates, and the imposition of shelter-in-place or similarly restrictive work-from-home orders impacting many of the Company’s offices and employees, including those located in the United States. As a result, the Company has temporarily closed or substantially limited the presence of personnel in its offices in several impacted locations, implemented travel restrictions and withdrawn from various industry events. The Company has also experienced some disruption and delays in its supply chain, customer deployment plans, and logistics challenges, including certain limitations on its ability to access customer fulfillment and service sites.

 

As such, while COVID-19 has had an impact on the Company's financial results on the three and nine months ended September 27, 2020,  the COVID-19 pandemic and its potential effects on the Company’s business in its fiscal 2020 remain dynamic, and the broader implications for its business and future results of operations remain uncertain. These implications could include further disruptions or restrictions on the Company’s ability to source, manufacture or distribute its products, including temporary disruptions to the facilities of its contract manufacturers in China, Taiwan, Philippines and Singapore, or the facilities of its suppliers and their contract manufacturers globally. Additionally, multiple countries have imposed and may further impose restrictions on business operations and movement of people and products to limit the spread of COVID-19. Delays in production or delivery of components or raw materials that are part of the Company’s global supply chain due to restrictions imposed to limit the spread of COVID-19 could delay or inhibit its ability to obtain the supply of components and finished goods. If COVID-19 becomes more prevalent in the locations where the Company, its customers or suppliers conduct business, or the Company experiences more pronounced disruptions in its operations, the Company may experience constrained supply or curtailed demand that may materially adversely impact its business and results of operations. In addition, any other widespread health crisis that could adversely affect global and regional economies, financial markets and overall demand environment for the Company's products could have a material adverse effect on the Company’s business, cash flows or results of operations. It is difficult to accurately predict the full impact that COVID-19 will have on the Company's future results from operations, financial condition, liquidity and cash flows due to numerous uncertainties, including the duration and severity of the pandemic and related containment measures. The Company will continue to closely monitor the pandemic's associated effects on all aspects of the business.

Restructuring

In January 2020, the Company implemented a restructuring plan to lower annual operating expenses and strategically align resources around the Company's open source, AI SaaS and IP Leasing businesses. The restructuring plan was approved by the Company’s Board of Directors on January 24, 2020. Pursuant to the restructuring plan, the Company recorded $624,000 of restructuring charges during the nine-month period ended September 27, 2020, consisting primarily of employee severance related costs and facility costs. During the third quarter, the Company incurred additional restructuring expenses of $111,000 relating to the closure of the San Diego and India facilities.

 

Liquidity

 

The Company has financed its operations and capital investments through sales of common stock, finance and operating leases, a revolving line of credit and cash flows from operations. As of September 27, 2020, the Company's principal sources of liquidity consisted of cash and cash equivalents and restricted cash of  $24.7 million, including $15.0 million drawn down from its revolving line of credit (“Revolving Facility”) with Heritage Bank of Commerce (“Heritage Bank”), and $1.2  million loan proceeds received under Paycheck Protection Program (“PPP”). On November 6, 2019 the Company entered into a First Amendment to the Revolving Facility with Heritage Bank to extend the maturity date for one year through September 28, 2021. Under this amendment the Revolving Facility advances shall bear interest, on the outstanding daily balance thereof, at a rate per annum equal to the greater of (i) one half of one percentage point (0.50%) above the Prime Rate, or (ii) five and one half of one percentage points (5.50%).

 

On May 6, 2020, the Company entered into a loan agreement with Heritage Bank for a loan of $1.2 million pursuant to the PPP under the CARES Act enacted on March 27, 2020. See Note 6 to the Unaudited Condensed Consolidated Financial Statements for the details.

 

On June 22, 2020, the Company closed an underwritten public offering of 2.5 million shares of common stock, $0.001 par value per share at a price of $3.50 per share. The Company received total gross proceeds from the offering of approximately $9.3 million, including $0.5 million received from the overallotment under the terms of the Underwriting Agreement to purchase up to an additional 375,000 shares. Underwriters partially exercised the option to purchase 141,733 additional shares of Common Stock. The Company incurred approximately $1.2 million of stock issuance costs for this offering. Total net proceeds received from this offering was $8.1 million after deducting underwriting discounts and other stock issuance costs. See Note 8 to the Unaudited Condensed Consolidated Financial Statements for the details.

 

Various factors can affect the Company’s liquidity, including, among others: the level of revenue and gross profit as a result of the cyclicality of the semiconductor industry; the conversion of design opportunities into revenue; market acceptance of existing and new products including solutions based on its ArcticLink®, PolarPro® platforms, eFPGA, EOS S3 SoC, Quick AI solution, and SensiML software tools; fluctuations in revenue as a result of product end-of-life; fluctuations in revenue as a result of the stage in the product life cycle of its customers’ products; costs of securing access to and availability of adequate manufacturing capacity; levels of inventories; wafer purchase commitments; customer credit terms; the amount and timing of research and development expenditures; the timing of new product introductions; production volumes; product quality; sales and marketing efforts; the value and liquidity of its investment portfolio; changes in operating assets and liabilities; the ability to obtain or renew debt financing and to remain in compliance with the terms of existing credit facilities; the ability to raise funds from the sale of equity in the Company; the ability to capitalize on synergies with our newly acquired subsidiary SensiML; the issuance and exercise of stock options and participation in the Company’s employee stock purchase plan; and other factors related to the uncertainties of the industry and global economics.

 

Over the longer term, the Company anticipates that sales generated from its new product offerings, existing cash and cash equivalents, together with financial resources from its Revolving Facility with the Heritage Bank, assuming renewal of the Revolving Facility or the Company entering into a new debt agreement with an alternative lender prior to the expiration of the revolving line of credit in September 2021, and its ability to raise additional capital in the public capital markets will be sufficient to satisfy its operations and capital expenditures. However, the Company cannot provide any assurance that it will be able to raise additional capital, if required, or that such capital will be available on terms acceptable to the Company. The inability of the Company to generate sufficient sales from its new product offerings and/or raise additional capital if needed could have a material adverse effect on the Company’s operations and financial condition, including its ability to maintain compliance with its lender’s financial covenants.

 

Reverse Stock Split

 

Effective on December 23, 2019, the Company enacted a 1-for-14 reverse stock split of its outstanding common stock, in which, every 14 issued and outstanding shares of common stock of the Company were automatically combined into one issued and outstanding share of common stock without any change in the par value per share. Stockholders who would have otherwise been entitled to fractional shares of common stock as a result of the reverse stock split received a cash payment in lieu of receiving fractional shares. All share, equity awards, and per share amounts contained in this Form 10-Q and the accompanying Unaudited Condensed Consolidated Financial Statements have been adjusted to reflect the reverse stock split for all prior periods presented. Warrants issued in connection with the May 2018 stock issuance were also adjusted to reflect the reverse stock split for all periods presented.

 

7

 

Principles of Consolidation

 

The unaudited condensed consolidated financial statements include the accounts of QuickLogic and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated.

 

Foreign Currency

 

The functional currency of the Company's non-U.S. operations is the U.S. dollar. Accordingly, all monetary assets and liabilities of these foreign operations are translated into U.S. dollars at current period-end exchange rates and non-monetary assets and related elements of expense are translated using historical exchange rates. Income and expense elements are translated to U.S. dollars using the average exchange rates in effect during the period. Gains and losses from the foreign currency transactions of these subsidiaries are recorded as interest income and other expense, net in the unaudited condensed consolidated statements of operations.

 

Uses of Estimates

 

The preparation of these consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities and the reported amounts of revenue and expenses during the period. Actual results could differ materially from those estimates, particularly in relation to revenue recognition, the allowance for doubtful accounts, sales returns, valuation of long-lived assets including mask sets, valuation of goodwill, capitalized internal-use software and related amortizable lives and intangibles related to the acquisition of SensiML, including the estimated useful lives of acquired intangible assets, valuation of inventories including identification of excess quantities, market value and obsolescence, measurement of stock-based compensation awards, accounting for income taxes and estimating accrued liabilities.

 

Contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment.

 

Judgment is required to determine the Stand-alone Selling Price (“SSP”) for each distinct performance obligation. The Company uses a range of amounts to estimate SSP when each of the products and services are sold separately and determines the discount to be allocated based on the relative SSP of the various products and services when products and services sold are bundled. In instances where SSP is not directly observable, such as when the Company does not sell the product or service separately, it determines the SSP using information that may include market conditions and other observable inputs. The Company typically has more than one SSP for individual products and services due to the stratification of those products and services by customers. In these instances, the Company may use information such as the size of the customer, customer tier, type of the technology used, customer demographics, geographic region and other factors in determining the SSP.

 

Concentration of Risk

 

The Company's accounts receivable are denominated in U.S. dollars and are derived primarily from sales to customers located in North America, Asia Pacific, and Europe. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. See Note 12 to the Unaudited Condensed Consolidated Financial Statements for information regarding concentrations associated with accounts receivable.

 

 

Note 2 — Significant Accounting Policies

 

During the nine-month period ended September 27, 2020, there were no changes in the Company's significant accounting policies from its disclosures in the Annual Report on Form 10-K for the year ended December 29, 2019, except for the new accounting standards adopted during the nine months ended September 27, 2020. For a discussion of the significant accounting policies, please see the Annual Report on Form 10-K for the fiscal year ended December 29, 2019, filed with the SEC on March 13, 2020. For a discussion of the new accounting standards adopted during the first nine months of 2020, see “New Accounting Pronouncements” below.

 

 

 

Fair Value Measurements

 

The Company’s cash, cash equivalents and restricted cash include money market account balance of $24.1 million and $20.9 million as of September 27, 2020 and December 29, 2019, respectively. Fair value of the Company’s money market account balance with Heritage Bank equals to book value.

 

Restricted cash

 

Cash, cash equivalent and restricted cash includes an amount of $100,000 pledged as cash security related to the use of credit cards as of September 27, 2020 and December 29, 2019.

 

New Accounting Pronouncements

 

Recently adopted accounting pronouncements:

 

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU"), No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This new standard modifies certain disclosure requirements on fair value measurements. The Company adopted this standard prospectively effective December 30, 2019 with no impact on the Consolidated Financial Statements.

 

In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementations Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. Under the new standard, implementations costs related to a cloud computing arrangement will be deferred or expensed as incurred, in accordance with the existing internal-use software guidance for similar costs. The new standard also prescribes the balance sheet, income statement and cash flow classification of the capitalized implementation costs and related amortizations expenses. The effective date for public companies is for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For all other entities, the effective date is fiscal years beginning after December 15, 2021. The Company adopted this standard prospectively effective December 30, 2019 with no impact on the Consolidated Financial Statements.

 

In June 2016, FASB issued ASU No. 2016-13 (“ASU 2016-13”) Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model which requires the use of forward-looking information to calculate credit loss estimates. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to certain available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. These changes result in earlier recognition of credit losses. The Company adopted ASU 2016-13 using the modified retrospective approach on December 30, 2019 with no impact on the Condensed Consolidated Financial Statements.

 

New accounting pronouncements not yet adopted:

 

In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes, which removes certain exceptions to the general principles of ASC 740, in order to reduce the cost and complexity of its application. These changes include elimination to the exceptions for (1) Intra-period tax allocation, (2) Deferred tax liabilities related to outside basis differences, and (3) Year-to-date losses in interim periods. This standard is effective for the fiscal years beginning after December 15, 2020. The Company is currently evaluating the potential impact on its Consolidated Financial Statements.

 

In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which address issues identified as a result of the complexity associated with applying generally accepted accounting principles for certain financial instruments with characteristics of liabilities and equity. This amendment is effective for public business entities that meet the definition of a Securities and Exchange Commission ("SEC") filer, excluding entities eligible to be smaller reporting companies as defined by the SEC, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. The Company is currently evaluating the potential impact on its Consolidated Financial Statements.

 

 

Note 3 — Net Loss Per Share

 

Basic loss per share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net loss per share was computed using the weighted average number of common shares outstanding during the period plus potentially dilutive common shares outstanding during the period under the treasury stock method. In computing diluted net loss per share, the weighted average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options and warrants.

 

For the three and nine months ended September 27, 2020 and September 29, 2019, 979,363 and 559,587 shares of common stock, respectively, associated with equity awards and the estimated number of shares to be purchased under the current offering period of the 2009 Employee Stock Purchase Plan were outstanding. These shares were not included in the computation of diluted net loss per share as they were considered anti-dilutive due to the net losses the Company experienced during these periods. Warrants to purchase up to 386,100 shares were issued in connection with May 29, 2018 stock offering were also not included in the diluted loss per share calculation of the three and nine months ended September 27, 2020 and September 29, 2019 as they were also considered anti-dilutive due to the net loss the Company experienced during these periods.

 

9

 

All shares, equity awards, and per share amounts have been adjusted to reflect the 1-for-14 reverse stock split of the Company’s outstanding common stock for all periods presented.

 

 

Note 4 — Balance Sheet Components

 

The following table provides details relating to certain balance sheet line items as of September 27, 2020, and December 29, 2019 (in thousands):

 

  

September 27,

  

December 29,

 
  

2020

  

2019

 

Inventories:

        

Raw materials

 $191  $222 

Work-in-process

  2,229   2,370 

Finished goods

  718   668 
  $3,138  $3,260 

Other current assets:

        

Prepaid taxes, royalties and other prepaid expenses

 $906  $1,296 

Other

  261   269 
  $1,167  $1,565 

Property and equipment, net:

        

Equipment

 $10,426  $10,694 

Software

  1,786   1,789 

Furniture and fixtures

  33   36 

Leasehold improvements

  466   474 
   12,711   12,993 

Less: Accumulated depreciation and amortization

  (12,148)  (12,163)
  $563  $830 

Capitalized internal-use software, net:

        

Capitalized internal-use software

 $972  $365 

Less: Accumulated amortization

  (128)  (32)
  $844  $333 

Accrued liabilities:

        

Employee related accruals

 $1,011  $713 

Other

  357   420 
  $1,368  $1,133 

 

10

 

 

Note 5 — Intangible Assets

 

The following table provides the details of the carrying value of intangible assets recorded from the acquisition of SensiML as of September 27, 2020 (in thousands):

 

  

September 27, 2020

 
  

Gross Carrying Amount

  

Accumulated Amortization

  

Net Carrying Amount

 
Developed technology $959  $(168) $791 
Customer relationships  81   (70)  11 
Trade names and trademarks  116   (21)  95 

Total acquired identifiable intangible assets

 $1,156  $(259) $897 

 

The following table provides the details of expected future annual amortization of intangible assets, based upon the current useful lives as of September 27, 2020 (in thousands):

 

Annual Fiscal Years

    
2020 (remaining period) $38 
2021  107 
2022  107 
2023  107 
2024  107 
Thereafter  431 

Total

 $897 

 

 

Note 6 — Debt Obligations

 

Revolving Line of credit

 

On September 28, 2018, the Company entered into a Loan and Security Agreement (“Loan Agreement”) with Heritage Bank. The Loan Agreement provided for, among other things, the Revolving Facility with aggregate commitments of $9,000,000.

 

On December 21, 2018, the Company entered into an Amended and Restated Loan and Security Agreement (“Amended and Restated Loan Agreement”) with Heritage Bank to replace in its entirety the Loan Agreement. The Amended and Restated Loan Agreement increased the Revolving Facility from $9,000,000 to $15,000,000. The Amended and Restated Loan Agreement requires the Company to maintain at least $3,000,000 in unrestricted cash at Heritage Bank.

 

On November 6, 2019 the Company entered into a First Amendment to the Amended and Restated Loan Agreement (“First Amendment”) to extend the maturity date of the Revolving Facility for one year through September 28, 2021. Under this First Amendment, the Revolving Facility advances shall bear interest, on the outstanding daily balance thereof, at a rate per annum equal to the greater of (i) one half of one percentage point (0.50%) above the Prime Rate, or (ii) five and one half of one percentage points (5.50%).

 

As of September 27, 2020 and December 29, 2019, the Company had $15.0 million of revolving debt outstanding with an interest rates of 5.5% per annum. The Bank has a first priority security interest in substantially all of the Company's tangible and intangible assets to secure any outstanding amounts under the Amended and Restated Loan Agreement. The Company was in compliance with all loan covenants under the Amended and Restated Loan Agreement as of the end of the current reporting period. On September 28, 2020, the Company repaid the $15.0 million loan.

 

 

Payroll Protection Program Loan

 

On May 6, 2020, the Company entered into a loan agreement with Heritage Bank (“PPP Loan”) for a loan of $1.2 million pursuant to the PPP under the CARES Act, as implemented by the U.S. Small Business Administration.

 

The PPP Loan is evidenced by a promissory note (“Note”) dated May 6, 2020, and matures two years from the disbursement date. The Note bears interest at a rate of 1.00% per annum, with the first six months of interest deferred. Principal and interest are payable monthly commencing six months after the disbursement date and may be prepaid by the Company at any time prior to maturity with no prepayment penalties. The Note contains customary events of default relating to, among other things, payment defaults or breaches of the terms of the Note. Upon the occurrence of an event of default, the lender may require immediate repayment of all amounts outstanding under the Note.

 

11

 

The principal and interest of the Loan are repayable in 18 monthly equal installments of $67,000 each starting in December 2020. Interest accrued in the first six months is included in the monthly installments. Installments must be paid by the fifth calendar day of each month.

 

On June 5, 2020, the Paycheck Protection Flexibility Act (“PPPFA”) was signed into law. Among other changes, the PPPFA (i) reduced the amount of the loan required to be spent on payroll from 75% to 60%, (ii) extended the covered period to 24 weeks from 8 weeks, and (iii) extended the repayment term of PPP loan from 2 years to 5 years. For the loans disbursed before June 5, 2020, the PPPFA provides the option to opt for 24 weeks for spending the loan instead of 8 weeks. The Company has opted for 24 weeks to spend the PPP Loan. As of September 27, 2020, the Company fully utilized the loan proceeds in compliance with the PPPFA guidelines. The Company expects to apply for the full loan forgiveness in the fourth quarter of 2020. Forgiveness of this loan will only be recognized if/when legal release is received.

 

 

Note 7 — Leases

 

The Company entered into operating leases for office space for its headquarter, domestic and foreign subsidiaries and sales offices. Finance leases are primarily for engineering design software. Operating leases generally have lease terms of 1 year to 5 years. Finance leases are generally 2 years to 3 years. As of September 27, 2020, the balance of right-of-use assets was approximately $2.0 million and lease liability was approximately $2.0 million relating to the operating and finance leases signed for the premises of its headquarters in San Jose and its subsidiaries SensiML in Oregon and India. Lease term of San Diego facility expired in July, 2020. The Company did not renew the lease agreement as San Diego office was closed. On July 10, 2020, Indian subsidiary leased a smaller office premises of approximately 1100 square feet for a period of eleven months to accommodate the reduced headcount. Effective July 2020, the rental expense of the old office is expensed to restructuring charges. Total rent expense for the three months ended September 27, 2020 and September 29, 2019 was approximately $150,000 and $192,000, respectively. Total rent expense for the nine months ended September 27, 2020 and September 29, 2019 was approximately $455,000 and $629,000, respectively.

 

The following table provides the expenses related to operating and finance leases (in thousands):

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 27, 2020

  

September 29, 2019

  

September 27, 2020

  

September 29, 2019

 

Operating lease costs:

                

Fixed

 $146  $186  $440  $596 

Short term

  4   6   15   33 

Total

 $150  $192  $455  $629 

Finance lease costs:

                

Amortization of ROU asset

 $91  $91  $224  $273 

Interest

  9   3   29   14 

Total

 $100  $94  $253  $287 

 

The following table provides the details of supplemental cash flow information. The right-of-use assets obtained in exchange for new finance and operating lease liabilities represent the new operating and finance leases entered into during the nine months ended September 27, 2020 and September 29, 2019 (in thousands):

 

  

Nine Months Ended

 
  

September 27,

  

September 29,

 
  

2020

  

2019

 

Cash paid for amounts included in the measurement of lease liabilities:

        

Operating cash flows used for operating leases

 $427  $633 

Operating cash flows used for finance leases

  29   20 

Financing cash flows used for financing leases

  179   283 

Total

 $635  $936 

Right-of-use assets obtained in exchange for obligations:

        

Operating leases

 $  $1,920 

Finance leases

  773   250 

Total

 $773  $2,170 

 

12

 

The following table provides the details of right-of-use assets and lease liabilities as of September 27, 2020 and December 29, 2019 (in thousands):

 

  

September 27, 2020

  

December 29, 2019

 

Right-of-use assets:

        

Operating leases

 $1,344  $2,200 

Finance leases

  651   170 

Total right of use assets

 $1,995  $2,370 

Lease liabilities:

        

Operating leases

 $1,386  $1,816 

Finance leases

  620   471 

Total lease liabilities

 $2,006  $2,287 

 

The following table provided the details of future lease payments for operating and finance leases as of September 27, 2020 (in thousands):

 

Annual Fiscal Years

 

Operating Leases

  

Finance Leases

 
2020 (Remaining period) $110  $103 
2021  488   281 
2022  409   278 
2023  422    
2024  106    

Total lease payments

  1,535   662 
Less: Interest  (149)  (42)

Present value of lease liabilities

 $1,386  $620 

 

The following table provides the details of lease terms and discount rates as of September 27, 2020 and December 29, 2019:

 

  

September 27, 2020

  

December 29, 2019

 

Right-of-use assets:

        

Weighted-average remaining lease term (years)

        

Operating leases

  3.26   3.81 
Finance leases  2.25   2.65 

Weighted-average discount rates:

        

Operating leases

  6.00%  6.00%
Finance leases  5.50%  5.81%

 

 

Note 8 — Stockholders' Equity

 

Common and Preferred Stock

 

As of September 27, 2020, the Company was authorized to issue 200 million shares of common stock and had 10 million shares of authorized but unissued undesignated preferred stock. Without any further vote or action by the Company’s stockholders, the Board of Directors has the authority to determine the powers, preferences, rights, qualifications, limitations or restrictions granted to or imposed upon any wholly unissued shares of undesignated preferred stock.

 

13

 

Issuance of Common Stock

 

On March 15, 2019, the Company filed a shelf registration statement on Form S-3, under which the Company may, from time to time, sell securities in one or more offerings up to a total amount of $75 million. The Company’s shelf registration statement was declared effective on March 29, 2019.

 

On June 21, 2019, the Company closed an underwritten public offering of 1.3 million shares of common stock, $0.001 par value per share at a price of $7.00 per share, which included 171,429 shares issued pursuant to the underwriters’ full exercise of their over-allotment option. The Company received net proceeds from the offering of approximately $8.0 million, net of underwriter’s commission and other offering expenses.

 

On June 22, 2020, the Company closed an underwritten public offering of 2.5 million shares of common stock, $0.001 par value per share at a price of $3.50 per share. The Company received gross proceeds from the offering of approximately $8.8 million and incurred stock issuance costs of approximately $1.1 million. Under the terms of the underwriting agreement, the Company granted the underwriter a 30-day option to purchase up to an additional 375,000 shares of common stock to cover overallotments. On July 21, 2020, the underwriter’s partially exercised the option to purchase 141,733 additional shares of common stock in connection with the offering, resulting in additional gross proceeds to the Company of approximately $0.5 million and incurred additional stock issuance costs of approximately $52,000. Total gross proceeds received from this offering was approximately $9.3 million and incurred total stock issuance costs of approximately $1.2 million. Net proceeds received from this offering after deducting stock issuance costs was approximately $8.1 million.

 

 As of September 27, 2020, warrants exercisable for 386,100 shares of common stock at an exercise price of $19.32 per share remain outstanding.

 

 

Note 9 — Employee Stock Plans

 

2009 Stock Plan

 

On April 24, 2019, the 2009 Stock Plan was replaced by the 2019 Stock Plan with an extended term of ten years through March 15, 2028. The remaining balance of available shares under the 2009 Plan of 299,070 were cancelled as of April 24, 2019.

 

2019 Stock Plan

 

On April 24, 2019, the Company’s Board of Directors and shareholders approved the 2019 Stock Plan (“2019 Plan”) to replace the 2009 Plan. Under the 2019 Plan, 357,143 shares of common stock are available for grants, plus any shares subject to any outstanding options or other awards granted under the Company’s 2009 Plan that expire, are forfeited, cancelled, returned to the Company for failure to satisfy vesting requirements, settled for cash or otherwise terminated without payment being made thereunder.

 

The 2019 Plan was amended and restated by the Board of Directors on March 5, 2020 and approved by the Company’s stockholders on April 22, 2020 to, among other things, reserved an additional 550,000 shares of common stock for issuance under the 2019 Plan. As of September 27, 2020, approximately 286,628 shares of the Company’s common stock were reserved for issuance under the 2019 Plan.

 

2009 Employee Stock Purchase Plan

 

The 2009 Employee Stock Purchase Plan (“2009 ESPP”) was adopted in March 2009. The 2009 ESPP was amended by the Board of Directors in January 2015 and in February 2017, and was approved by the Company's stockholders on April 23, 2015 and April 26, 2017, to reserve an additional 71,429 and 107,143 shares of common stock, respectively, for issuance under the 2009 ESPP.    

 

The 2009 ESPP was amended and restated by the Board of Directors on March 5, 2020, and approved by the Company’s stockholders on April 22, 2020 to, among other things, extend the term of the plan until March 5, 2029.

 

Further, the 2009 ESPP was amended and restated by the Board of Directors on March 5, 2020 and approved by the Company’s stockholders on April 22, 2020 to, among other things reserved an additional 300,000 shares of common stock for issuance under the 2009 ESPP. As of September 27, 2020, approximately 362,335 shares of the Company’s common stock were reserved for issuance under the 2009 ESPP.

 

14

 

 

Note 10 — Stock-Based Compensation

 

Stock-based compensation expense included in the Company's consolidated financial statements for the three and nine months ended September 27, 2020 and September 29, 2019 was as follows (in thousands):

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 27,

  

September 29,

  

September 27,

  

September 29,

 
  

2020

  

2019

  

2020

  

2019

 

Cost of revenue

 $37  $15  $80  $59 

Research and development

  51   521   73   1,708 

Selling, general and administrative

  170   212   448   723 

Total

 $258  $748  $601  $2,490 

 

During the nine months ended September 27, 2020, the Company reversed stock-based compensation expense related to the cancellation of certain unvested performance based RSUs and restructuring-related terminations. During the second quarter of 2020, the Company issued fully vested RSUs in lieu of cash for variable compensation to certain employees.

 

No stock-based compensation was capitalized during any period presented above.

 

No stock options were granted during the three and nine months ended September 27, 2020 and September 29, 2019.

 

Stock-Based Compensation Award Activity

 

The following table summarizes the activity in the shares available for grant under the 2019 Plan during the nine months ended September 27, 2020 (in thousands):

 

  

Shares Available for Grants

 
  

2020 Plan

 

Balance at December 29, 2019

  272 
Authorized shares  550 
RSUs granted  (356)
PRSU's granted  (440)
Options cancelled  50 
RSUs forfeited or expired  168 
PRSUs forfeited or expired  43 

Balance at September 27, 2020

  287 

 

Stock Options

 

The following table summarizes stock options outstanding and stock option activity under the 2009 Plan and the 2019 Plan, and the related weighted average exercise price, for the nine months ended September 27, 2020:

 

      

Weighted

  

Weighted

     
      

Average

  

Average

  

Aggregate

 
  

Number of

  

Exercise

  

Remaining

  

Intrinsic

 
  

Shares

  

Price

  

Term

  

Value

 
  

(in thousands)

      

(in years)

  

(in thousands)

 

Balance outstanding at December 29, 2019

  186  $32.09   3.32    

Forfeited or expired

  (50)           

Exercised

              

Balance outstanding at September 27, 2020

  136  $29.37   3.60  $ 

Exercisable at September 27, 2020

  136  $29.37   3.60  $ 

Vested and expected to vest at September 27, 2020

  136  $29.37   3.60  $ 

 

15

 

There was no intrinsic value for the stock options based on the Company’s closing stock price of $3.12 per share as of September 27, 2020, which would have been received by the option holders had all option holders exercised their options as of that date.

 

There were no stock options exercises for the three and nine months ended September 27, 2020. The total intrinsic value of options exercised during the three and nine months ended September 27, 2020 was $0. Total cash received from employees as a result of employee stock option exercises during the nine months ended September 29, 2019 was $3,600. The Company settles employee stock option exercises with newly issued common shares. In connection with these exercises, there was no tax benefit realized by the Company due to the Company's current loss position.

 

Total stock-based compensation related to stock options was approximately $11,000 and $24,000 for the three months ended September 27, 2020 and September 29, 2019, respectively, and $39,000 and $73,000 for the nine months ended September 27, 2020 and September 29, 2019, respectively. As of September 27, 2020, the fair value of unvested stock options, net of forfeitures, was $0

 

Restricted Stock Units

 

The Company grants restricted stock units (“RSUs”) and performance restricted stock units ("PRSUs") to employees and directors with various vesting terms. RSUs entitle the holder to receive, at no cost, one common share for each RSU as it vests. In general, the Company's policy is to withhold shares in settlement of employee tax withholding obligations upon the vesting of RSUs. The stock-based compensation related to RSUs was approximately $231,000 and $724,000 for the three months ended September 27, 2020 and September 29, 2019 and $538,000 and $2.4 million for the nine months ended September 27, 2020 and September 29, 2019, respectively. As of September 27, 2020 and September 29, 2019, there was approximately $1.2 million and $2.7 million, respectively, in unrecognized compensation expense related to RSUs. The remaining unrecognized stock-based compensation expense is expected to be recorded over a weighted average period of 0.59 year.

 

A summary of activity for the Company's RSUs for the nine months ended September 27, 2020 is as follows:

 

  

RSUs & PRSUs Outstanding

 
      

Weighted

 
      

Average

 
  

Number of

  

Grant Date

 
  

Shares

  

Fair Value

 
  

(in thousands)

     

Nonvested at December 29, 2019

  377  $12.55 
Granted  796  $3.99 
Vested  (137) $10.59 
Forfeited  (210) $ 

Nonvested at September 27, 2020

  826  $6.24 

 

2009 Employee Stock Purchase Plan

 

As of September 27, 2020362,335 shares remained available for issuance under the 2009 ESPP. For the three months ended September 27, 2020 and September 29, 2019, the Company recorded stock-based compensation expense related to the 2009 ESPP of approximately $16,000 and $0, respectively. For the nine months ended September 27, 2020 and September 29, 2019, the Company recorded stock-based compensation expense related to the 2009 ESPP of $24,000 and $60,000, respectively. The weighted average estimated fair value, as defined by the amended authoritative guidance, of rights issued pursuant to the Company's 2009 ESPP during the quarter ended September 27, 2020 and September 29, 2019, was $1.83 and $0, respectively, per right, respectively.

 

16

 

The fair value of rights issued pursuant to the Company's 2009 ESPP was estimated on the commencement date of each offering period using the following weighted average assumptions:

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 27,

  

September 29,

  

September 27,

  

September 29,

 
  

2020

  

2019

  

2020

  

2019

 

Expected term (months)

        6.08   6.00 

Risk-free interest rate

        0.15%  2.40%

Volatility

        88.35%  53.77%

Dividend yield

            

 

As of September 27, 2020, there was $9,000 an unrecognized stock-based compensation expense relating to the Company's 2009 ESPP, which is expected to be recognized over a period of 1.7 months.  

 

 

Note 11 — Income Taxes

 

The Company recorded a net income tax expense of approximately $10,000 and $70,000 for the three months ended September 27, 2020 and September 29, 2019, respectively. For the nine months ended September 27, 2020 and September 29, 2019 the Company recorded net income tax expense of $1,000 and benefit of $171,000 respectively. A majority of the income tax expense for the third quarter of 2020 and 2019 relates to the Company's foreign subsidiaries, which are cost-plus entities. A majority of the income tax expense for the nine months ended September 27, 2020 relates to foreign subsidiaries and benefit for the nine months ended September 29, 2019 relates to the deferred tax benefit arising from Intangible assets acquired from the acquisition of SensiML, which was offset by the income taxes from the Company's foreign subsidiaries, which are cost-plus entities.   

 

The Company believes it is more likely than not that federal and state net deferred tax assets will not be fully realized. In assessing the realizability of deferred tax assets, the Company’s management considers whether it is more likely than not that some portion or all of our deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. A valuation allowance is recorded for loss carryforwards and other deferred tax assets where it is more likely than not that such deferred tax assets will not be realized. As of September 27, 2020, the Company continues to maintain a full valuation allowance against net federal, state and certain foreign deferred tax assets until there is sufficient evidence to support recoverability of the Company’s deferred tax assets.  

 

The Company had no unrecognized tax benefits as of September 27, 2020 and December 31, 2019, which would affect the Company's effective tax rate. The Company does not anticipate any material changes to its unrecognized tax benefits during the next 12 months.

 

Accrued interest and penalties related to unrecognized tax benefits are recognized as part of the income tax provision in the condensed consolidated statements of operations.

 

The Company is subject to U.S. federal income tax as well as income taxes in many U.S. states and foreign jurisdictions in which the Company operates. The U.S. tax years from 1999 forward remain effectively open to examination due to the carryover of unused net operating losses and tax credits.

 

Under the Tax Reform Act of 1986, the amount of and the benefit from net operating loss carryforwards and credit carryforwards may be impaired or limited in certain circumstances. Events which may restrict utilization of a company's net operating loss and credit carryforwards include, but are not limited to, certain ownership change limitations as defined in Internal Revenue Code Section 382 and similar state provisions. In the event the Company has had a change of ownership, utilization of carryforwards could be restricted to an annual limitation. The annual limitation may result in the expiration of net operating loss carryforwards and credit carryforwards before utilization.

 

The Company has not undertaken a study to determine if its net operating losses are limited. In the event the Company previously experienced an ownership change, or should experience an ownership change in the future, the amount of net operating losses and research and development credit carryovers available in any taxable year could be limited and may expire unutilized.

 

On March 27, 2020, the “Coronavirus Aid, Relief and Economic Security Act (“CARES ACT”) was signed into law and GAAP requires recognition of the tax effects of new legislation during the reporting period that includes the enacted date. The CARES Act includes provisions relating to refundable payroll tax credits, deferment of the employer portion of certain payroll taxes, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The Company is currently analyzing the impact of these changes and therefore an estimate of the impact to income taxes is not yet available. The Company will continue to make and refine the calculations as additional analysis is completed.

 

On June 29, 2020, California's Legislature passed Assembly Bill 85 ("A.B.85"), which includes a three-year suspension of the use of net operating losses for medium and large business and a three-year cap on the use of business incentive tax credits to offset no more than $5 million of tax per year. Generally, A.B.85 suspends the use of net operating losses for taxable years 2020, 2021 and 2022 for tax payers with taxable income of $1 million or more and applies to any taxable year beginning on or after January 1, 2020, and before January 1, 2023. Both sections of A.B.85 will not have a material impact to the company in 2020 as per the annual forecast.

 

17

 

 

Note 12 — Information Concerning Product Lines, Geographic Information and Revenue Concentration

 

The Company identifies its business segment based on business activities, management responsibility and geographic location. For all periods presented, the Company operated in a single reportable business segment.

 

The following is a breakdown of revenue by product line (in thousands):

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 27,

  

September 29,

  

September 27,

  

September 29,

 
  

2020

  

2019

  

2020

  

2019

 

Revenue by product line (1):

                

New products

 $639  $1,015  $1,945  $2,413 

Mature products

  1,141   1,143   4,189   5,026 

Total revenue

 $1,780  $2,158  $6,134  $7,439 

 

(1)

For all periods presented: New products include all products manufactured on 180 nanometer or smaller semiconductor processes, eFPGA IP license, Quick AI and SensiML AI software as a service (“SaaS”) revenues. Mature products include all products produced on semiconductor processes larger than 180 nanometer.

 

The following is a breakdown of revenue by shipment destination (in thousands):

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 27,

  

September 29,

  

September 27,

  

September 29,

 
  

2020

  

2019

  

2020

  

2019

 

Revenue by geography:

                

Asia Pacific (1)

 $320  $528  $1,505  $2,496 

North America (2)

  1,087   1,518   3,321   3,747 

Europe

  373   112   1,308   1,196 

Total revenue

 $1,780  $2,158  $6,134  $7,439 

 

(1)

Asia Pacific includes revenue from Japan of $271,000, or 15% of total revenue and $510,000 or 24% of total revenue for the quarters ended September 27, 2020 and September 29, 2019, respectively. For the nine months ended September 27, 2020 and September 29, 2019, revenue from Japan was $1.4 million, or 23% of total revenue, and $1.3 million, or 17% of total revenue, respectively.

(2)

North America includes revenue from the United States of $1.1 million, or 61% of total revenue, and $1.4 million, or 67% of total revenue, for the three months ended September 27, 2020 and September 29, 2019, respectively. For the nine months ended September 27, 2020 and September 29, 2019 revenue from the United States was $3.3 million, or 54% of total revenue, and $3.6 million, or 49% of total revenue, respectively.

 

The following distributors and customers accounted for 10% or more of the Company's revenue for the periods presented:

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 27,

  

September 29,

  

September 27,

  

September 29,

 
  

2020

  

2019

  

2020

  

2019

 

Distributor "A"

  22%  55%  29%  43%

Distributor "C"

  20%  *   18%  10%

Distributor "E"

  13%  11%  19%  * 

Distributor "G"

  *   *   *   12%

Customer "B"

  10%  17%  12%  14%

Customer "F"

  13%  11%  19%  * 

Customer "I"

  *   *   *   11%

Customer "J"

  *   10%  *   * 
Customer "K"  12%  *   *   * 
Customer "N"  16%  14%  *   * 

 

18

 

The following distributors and customers accounted for 10% or more of the Company's accounts receivable as of the dates presented:

 

  

September 27,

  

December 29,

 
  

2020

  

2019

 

Distributor "A"

  12%  20%

Distributor "C"

  20%  23%

Distributor "E"

  10%  12%

Distributor "J"

  27%  31%

 


*

Represents less than 10% of revenue and accounts receivable as of the date presented.

 

As of September 27, 2020, 6% of the Company's long-lived assets, including property and equipment and other assets, were located outside the United States.

 

 

Note 13 — Commitments and Contingencies

 

Commitments

 

The Company's manufacturing suppliers require the forecast of wafer starts several months in advance. The Company is required to take delivery of and pay for a portion of forecasted wafer volume. As of September 27, 2020, and December 29, 2019, the Company had $141,000 and $57,000, respectively, of outstanding commitments for the purchase of wafer and finished goods inventory.

 

The Company has purchase obligations with certain suppliers for the purchase of other goods and services entered into in the ordinary course of business. As of September 27, 2020, total outstanding purchase obligations for other goods and services were $469,000, which are due within the next twelve months.

 

 

Note 14 — Litigation

 

From time to time, the Company may become involved in legal actions arising in the ordinary course of business including, but not limited to, intellectual property infringement and collection matters. Absolute assurance cannot be given that any such third party assertions will be resolved without costly litigation; in a manner that is not adverse to the Company’s financial position, results of operations or cash flows; or without requiring royalty or other payments which may adversely impact gross profit. As of September 27, 2020, the Company was not involved in any litigation.

 

19

 

 

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

 

Forward-Looking Statements

 

The following Management's Discussion and Analysis of Financial Condition and Results of Operations, as well as information contained in “Risk Factors” in Part II, Item 1A and elsewhere in this Quarterly Report on Form 10-Q, contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We intend that these forward-looking statements be subject to the safe harbor created by those provisions. Forward-looking statements are generally written in the future tense and/or are preceded by words such as “will,” “may,” “should,” “forecast,” “could,” “expect,” “suggest,” “believe,” “anticipate,” “intend,” “plan,” "future," "potential," "target," "seek," "continue," "if" or other similar words. Forward-looking statements include statements regarding our strategies as well as (1) our revenue levels, including the commercial success of our solutions and new products, (2) the conversion of our design opportunities into revenue, (3) our liquidity, (4) our gross profit and breakeven revenue level and factors that affect gross profit and the break-even revenue level, (5) our level of operating expenses, (6) our research and development efforts, (7) our partners and suppliers, (8) industry and market trends, (9) our manufacturing and product development strategies and (10) our competitive position.

 

The following discussion should be read in conjunction with the attached unaudited condensed consolidated financial statements and notes thereto, and with our audited consolidated financial statements and notes thereto for the fiscal year ended December 29, 2019, found in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 13, 2020. Although we believe that the assumptions underlying the forward-looking statements contained in this Quarterly Report are reasonable, any of the assumptions could be inaccurate, and therefore there can be no assurance that such statements will be accurate. The risks, uncertainties and assumptions referred to above that could cause our results to differ materially from the results expressed or implied by such forward-looking statements include, but are not limited to, those discussed under the heading “Risk Factors” in Part II, Item 1A hereto and the risks, uncertainties and assumptions discussed from time to time in our other public filings and public announcements. All forward-looking statements included in this document are based on information available to us as of the date hereof. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements or our objectives and plans will be achieved. Furthermore, past performance in operations and share price is not necessarily indicative of future performance. We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise that may arise after the date of this Quarterly Report on Form 10-Q.

 

Overview

 

We develop low power, multi-core semiconductor platforms and intellectual property (“IP”) for artificial intelligence (“AI”) voice and sensor processing. The solutions include an eFPGA for hardware acceleration and pre-processing, and heterogeneous multi-core System on Chip (“SoCs”) that integrate eFPGA with other processors and peripherals. The SensiML Analytics Toolkit from wholly owned subsidiary, SensiML Corporation (“SensiML”) completes the “full stack” end-to-end solution with accurate sensor algorithms using AI technology. The full range of platforms, software tools and eFPGA IP enables the practical and efficient adoption of AI, voice and sensor processing across mobile, wearable, hearable, consumer, industrial, edge and endpoint IoT applications. 

 

Our solutions are created from our new silicon platforms including our EOS™, QuickAI™, SensiML Analytics Studio, ArcticLink® III, PolarPro®3, PolarPro II, PolarPro, and Eclipse II products (which together comprise our new product category). Our mature products include primarily FPGA families named pASIC®3 and QuickRAM® as well as programming hardware and design software. In addition to delivering our own semiconductor solutions, we have an IP business that licenses our eFPGA technology for use in other semiconductor companies SoCs. We began delivering our eFPGA IP product ArcticPro™ in 2017, which is included in the new product revenue category. Through our wholly owned subsidiary SensiML, we now have an AI software platform that includes Software-as-a-Service (“SaaS”) subscriptions for development, per unit license fees when deployed in production, and proof-of-concept services, all of which are also included in the new product revenue category.

 

Our solutions typically fall into one of three categories: Sensor Processing, Display and Visual Enhancement, and Smart Connectivity. Our solutions include a unique combination of our silicon platforms, IP cores, software drivers, and in some cases, firmware and application software. All of our silicon platforms are standard devices and must be programmed to be effective in a system. Our IP that enables always-on context-aware sensor applications includes our Flexible Fusion Engine, our Sensor Manager and Communications Manager technologies as well as IP that (i) improves multimedia content, such as our Visual Enhancement Engine technology, and Display Power Optimizer technology; and (ii) implements commonly used mobile system interfaces, such as Low Voltage Differential Signalling, Mobile Industry Processor Interface, and Secure Digital Input Output.

 

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We provide complete solutions by first architecting the solution jointly with our customer’s or ecosystem partner’s engineering group, selecting the appropriate solution platform and Proven System Blocks (“PSBs”), providing custom logic, integrating the logic, programming the device with the PSBs and/or firmware, providing software drivers or application software required for the customer’s application, and supporting the customer on-site during integration, verification and testing. In many cases, we deliver software algorithms that have been optimized for use in a QuickLogic silicon platform.

 

Our core IP also includes the SensiML AI Toolkit that enables original equipment manufacturers (“OEMs”) to develop AI software for a broad array of resource-constrained time-series sensor endpoint applications. These include a wide range of consumer and industrial sensing applications.

 

We also work with mobile processor manufacturers, sensor manufacturers, and voice recognition, sensor fusion and context awareness algorithm developers in the development of reference designs. Through reference designs that incorporate our solutions, we believe mobile processor manufacturers, sensor manufacturers, and sensor and voice algorithm companies can expand the available market for their respective products. Furthermore, should a solution developed for a processor manufacturer or sensor and/or sensor algorithm company be applicable to a set of common OEMs or Original Design Manufacturers (“ODMs”), we can amortize our Research and Development (“R&D”) investment over that set of OEMs or ODMs. There may also be cases when platform providers that intend to use always-on voice recognition will dictate certain performance requirements for the combined software/hardware solution before the platform provider certifies and/or qualifies our product for use by end customers.

 

Our ArcticPro eFPGA IP is currently developed on 65nm, 40nm and 22nm process nodes. The licensable IP is generated by a compiler tool that enables licensees to create an eFPGA block that they can integrate into their SoC without significant involvement by us. We believe this flow enables a scalable support model for us.

 

In addition to working directly with our customers, we partner with other companies that are experts in certain technologies to develop additional IP, reference platforms and system software to provide application solutions, particularly in the area of hardware acceleration for AI-type applications.

 

In June 2020, we announced the QuickLogic Open Reconfigurable Computing (“QORC”) Initiative, developed in conjunction with Google and Antmicro. The QORC initiative encompasses QuickLogic device support via multiple open source tools, including: the SymbiFlow open source FPGA toolchain, the Renode open source simulation framework for rapid prototyping, development and testing of multi-node systems, the Zephyr Real-Time Operating System (RTOS), and an open source development kit.

 

We also work with mobile processor and communications semiconductor device manufacturers and companies that supply sensor, algorithms and applications. The depth of these relationships vary depending on the partner and the dynamics of the end market being targeted, but they are typically a co-marketing relationship that includes joint account calls, promotional activities and/or engineering collaboration and developments, such as reference designs. For our sensor processing solutions, we collaborate with sensor manufacturers to ensure interface compatibility. We also collaborate with sensor and voice/audio software companies, helping them optimize their software technology on our silicon platforms in terms of performance, power consumption and user experience.

 

For our eFPGA strategy, we work with semiconductor manufacturing partners to ensure our eFPGA IP is proven for a given foundry and process node before it is licensed to an SoC company.

 

In order to grow our revenue from its current level, we depend upon increased revenue from our new products including existing new product platforms, eFPGA IP and platforms currently in development. We expect our business growth to be driven mainly by our silicon solutions, eFPGA IP, open source tools, and SensiML AI Software. Therefore, our revenue growth needs to be strong enough to enable us to sustain profitability while we continue to invest in the development, sales and marketing of our new solution platforms, IP and software.

 

During the third quarter of 2020, we generated total revenue of $1.8 million, which represents a decrease of 19% compared to the second quarter of 2020 and 18% compared to the third quarter of 2019. Our new product revenue in the third quarter was $639,000, which represents a decrease of 22% from the prior quarter and 37% from the third quarter of 2019. Our mature product revenue was $1.1 million in the third quarter of 2020, which represents a decrease of 17% from the prior quarter and flat compared to the third quarter of 2019. We expect our mature product revenue to continue to fluctuate over time.

 

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We devote substantially all of our development, sales and marketing efforts to our new sensor processing solutions using our EOSTM S3 platforms, derivative products based on software-driven features, development of additional new products and solution platforms, our new eFPGA IP licensing and QuickAI initiatives. Overall, we reported a net loss of $2.1 million for the third quarter of 2020, a decrease of 31% compared with the prior quarter and a decrease of 52% compared with the third quarter of 2019.  

 

COVID-19 Response

 

 The COVID-19 pandemic and its potential effects on the Company’s business in its fiscal 2020 and beyond remain uncertain. It is expected that there will be further restrictions by the governmental authorities as a result of an impending surge in COVID-19 cases during the winter of 2020. These restrictions and other impacts from COVID-19 could cause further disruptions or restrictions on the Company’s ability to source, manufacture or distribute its products, including temporary disruptions to the facilities of its contract manufacturers in China, Taiwan, Philippines and Singapore, or the facilities of its suppliers and their contract manufacturers globally. Additionally, multiple countries have imposed and may further impose restrictions on business operations and movement of people and products to limit the spread of COVID-19. This might cause delays in production or delivery of components or raw materials that are part of the Company’s global supply chain. If COVID-19 cases surge and the Company experiences more pronounced disruptions in its operations, the Company may experience constrained supply or curtailed demand that may materially adversely impact its business and results of operations.

 

Our Employees and customers

 

Our top priority during the ongoing COVID-19 pandemic remains the health and safety of our employees and their families, as well as our customers. As global governments institute restrictions    on commercial operations, we are working to ensure our compliance while also maintaining business continuity for operations.

 

Most of our personnel continue to work from home except few personnel, who are required for minimum operations. We only allow employees in our facilities who are essential to the facilities’ operations under best practices guidelines on maintaining physical distancing, utilizing enhanced cleaning protocols and usage of personal protective equipment.

 

We are committed to our customers to enable the support they need to continue providing vital services and tools. Our global offices remain operational to meet customer needs during the pandemic in compliance with the orders and restrictions imposed by local authorities in each of our locations, and we are working with our customers to meet their specific shipment needs. While the pandemic has created delays on the inbound supply chain at our partners and our own facilities and both inbound and outbound logistical challenges, we have been able to identify alternative solutions such that none of the issues have had a material impact on our ability to fulfil demand.

 

Liquidity

 

In anticipation of further COVID-19 related disruptions to our business, we have undertaken a comprehensive review of our spending plans and expect to reduce discretionary spending in future periods while maintaining an ongoing focus on key initiatives. Our balance sheet is well positioned and had $24.7 million of cash, cash equivalents and restricted cash as of September 27, 2020, including the draw-down of $15.0 million from revolving credit facility maturing in September 2021 and net proceeds of $8.1 million received from the equity offering, after deducting the commissions and other stock issuance expenses.

 

On May 6, 2020, we entered into a loan agreement with Heritage Bank for a loan of $1.2 million pursuant to the Paycheck Protection Program (“PPP Loan”) under the Coronavirus Aid, Relief, and Economic Security Act enacted on March 27, 2020 (“CARES Act”). On June 5, 2020, the President of the United States of America signed into law the Paycheck Protection Flexibility Act (“PPPFA”) to address many concerns expressed by the small business community around the Paycheck Protection Program. PPPFA among other changes (i) reduced the amount of the loan required to be spent on payroll from 75% to 60%, thus increasing the amount of funds available for other expenses from 25% to 40%, (ii) extended the period to spend the loans to 24 weeks from 8 weeks, (iii) amended the June 30 deadline to rehire workers to December 31, 2020, (iv) eased rehire requirements, and (v) extended the repayment term of the PPP Loan from 2 years to 5 years. For the loans disbursed before June 5, 2020, PPPFA provides the option to opt for 24 weeks for spending the loan instead of 8 weeks. The Company has opted for 24 weeks to spend the PPP Loan. As of September 27, 2020, the Company fully utilized the loan proceeds in compliance with PPPFA guidelines. The Company expects to apply for the full loan forgiveness in the fourth quarter of 2020. However, Forgiveness of this loan will be recognized if/when legal release is received.

 

The extent of the impact of COVID-19 on our operational and financial performance will depend on future developments, including the duration and spread of the pandemic, restrictions on travel, transportation and other containment measures, our compliance with these measures and the impact on our employees, customers, contractors and supply chain, all of which are uncertain and cannot be predicted.

 

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The COVID-19 pandemic and its potential effects on the Company’s business in its fiscal 2020 remain dynamic, and the broader implications for its business and results of operations remain uncertain. These implications could include further disruptions or restrictions on the Company’s ability to source, manufacture or distribute its products, including temporary disruptions to the facilities of its contract manufacturers in China, Taiwan, Philippines and Singapore, or the facilities of its suppliers and their contract manufacturers globally. Additionally, multiple countries have imposed and may further impose restrictions on business operations and movement of people and products to limit the spread of COVID-19. Delays in production or delivery of components or raw materials that are part of the Company’s global supply chain due to restrictions imposed to limit the spread of COVID-19 could delay or inhibit its ability to obtain the supply of components and finished goods. If COVID-19 becomes more prevalent in the locations where the Company, its customers or suppliers conduct business, or the Company experiences more pronounced disruptions in its operations, the Company may experience constrained supply or curtailed demand that may materially adversely impact its business and results of operations. In addition, any other widespread health crisis that could adversely affect global and regional economies, financial markets and overall demand environment for the Company's products could have a material adverse effect on the Company’s business, cash flows or results of operations.

 

Critical Accounting Estimates

 

The methods, estimates and judgments we use in applying our most critical accounting policies have a significant impact on the results we report in our consolidated financial statements. The SEC has defined critical accounting policies as those that are most important to the portrayal of our financial condition and results of operations and require us to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, our critical policies include revenue recognition, valuation of inventories, including identification of excess quantities and product obsolescence, valuation of investments, valuation of long-lived assets, valuation of goodwill, capitalized internal-use software and related amortizable lives and intangibles related to the acquisition of SensiML, including the estimated useful lives of acquired intangible assets, measurement of stock-based compensation and estimation of accrued liabilities. We believe that we apply judgments and estimates in a consistent manner and that this consistent application results in consolidated financial statements and accompanying notes that fairly represent all periods presented. However, any factual errors or errors in these judgments and estimates may have a material impact on our financial statements. During the three and nine months ended September 27, 2020, there were no changes in our critical accounting policies from our disclosure in our Annual Report on Form 10-K for the fiscal year ended December 29, 2019, filed with the SEC on March 13, 2020, except for the new accounting standards adopted in the first quarter of 2020 as described in Note 2 to the condensed consolidated financial statements as of and for the three and nine months ended September 27, 2020. For a discussion of critical accounting policies and estimates, please see Item 7 in our Annual Report on Form 10-K for the fiscal year ended December 29, 2019, filed with the SEC on March 13, 2020. See also Note 2 to the Unaudited Condensed Consolidated Financial Statements as of and for the three and nine months ended September 27, 2020 for the details of the newly adopted accounting standards.