UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended
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:
QUICKLOGIC CORPORATION
(Exact name of registrant as specified in its charter)
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| (State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
(Address of principal executive offices including zip code))
(
(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 |
| | | The |
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.
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).
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 |
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| Accelerated Filer |
| ☐ |
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| ☒ |
| Smaller Reporting Company |
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| Emerging growth company |
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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
As of November 11,2021, there were
FORM 10-Q
October 3, 2021
TABLE OF CONTENTS
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value amount)
| October 3, | January 3, | |||||||
| 2021 | 2021 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash, cash equivalents and restricted cash | $ | $ | ||||||
| Accounts receivable, net of allowances for doubtful accounts of and , respectively | ||||||||
| Inventories | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Capitalized internal-use software, net | ||||||||
| Right of use assets | ||||||||
| Intangible assets | ||||||||
| Goodwill | ||||||||
| Other assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities: | ||||||||
| Revolving line of credit | $ | $ | ||||||
| Trade payables | ||||||||
| Accrued liabilities | ||||||||
| Deferred revenue | ||||||||
| Lease liabilities, current | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities: | ||||||||
| Notes payable, non-current | ||||||||
| Lease liabilities, non-current | ||||||||
| Other liabilities, non-current | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (see Note 11) | ||||||||
| Stockholders' equity: | ||||||||
| Preferred stock, par value; shares authorized; shares issued and outstanding | ||||||||
| Common stock, par value; authorized; and shares issued and outstanding as of October 3, 2021 and January 3, 2021, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders' equity | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | $ | ||||||
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| October 3, | September 27, | October 3, | September 27, | |||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Cost of revenue | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Research and development | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Restructuring costs | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gain on forgiveness of debt | ||||||||||||||||
| Interest income and other income (expense), net | ( | ) | ( | ) | ||||||||||||
| Loss before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Provision for (benefit from) income taxes | ( | ) | ||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss per share: | ||||||||||||||||
| Basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average shares outstanding: | ||||||||||||||||
| Basic and diluted | ||||||||||||||||
Note: Net loss equals comprehensive loss for all periods presented.
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| Nine Months Ended |
||||||||
| October 3, |
September 27, |
|||||||
| 2021 |
2020 |
|||||||
| Cash flows from operating activities: |
||||||||
| Net loss |
$ | ( |
) | $ | ( |
) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
| Depreciation and amortization |
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| Stock-based compensation |
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| Write-down of inventories |
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| Write-off of equipment |
( |
) | ||||||
| Gain on forgiveness of debt |
( |
) | ||||||
| Allowance for bad debt |
||||||||
| Changes in operating assets and liabilities: |
||||||||
| Accounts receivable |
( |
) | ||||||
| Inventories |
||||||||
| Other assets |
( |
) | ||||||
| Trade payables |
||||||||
| Accrued liabilities and deferred revenue |
||||||||
| Other long-term liabilities |
||||||||
| Net cash used in operating activities |
( |
) | ( |
) | ||||
| Cash flows from investing activities: |
||||||||
| Capital expenditures for property and equipment |
( |
) | ( |
) | ||||
| Capitalized internal-use software |
( |
) | ( |
) | ||||
| Net cash used in investing activities |
( |
) | ( |
) | ||||
| Cash flows from financing activities: |
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| Payment of finance lease obligations |
( |
) | ( |
) | ||||
| Proceeds from paycheck protection program loan |
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| Proceeds from line of credit |
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| Repayment of line of credit |
( |
) | ( |
) | ||||
| Proceeds from issuance of common stock |
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| Proceeds from equity funding, net of issuance costs |
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| Taxes paid related to settlement of equity awards |
( |
) | ( |
) | ||||
| Net cash provided by financing activities |
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| Net (decrease) increase in cash, cash equivalents and restricted cash |
( |
) | ||||||
| Cash, cash equivalents and restricted cash at beginning of period |
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| Cash, cash equivalents and restricted cash at end of period |
$ | $ | ||||||
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
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 January 3, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Common stock issued under stock plans and employee stock purchase plan | ( | ) | ( | ) | ||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||
| Balance at April 4, 2021 | ( | ) | ||||||||||||||||||
| Common stock issued under stock plans and employee stock purchase plan | ||||||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||
| Balance at July 4, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Common stock issued under stock plans and employee stock purchase plan | ||||||||||||||||||||
| Common stock offering, net of issuance costs of | ||||||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||
| Balance at October 3, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Additional | Total | |||||||||||||||||||
| Common Stock | Paid-In | Accumulated | Stockholders' | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||
| Balance at December 29, 2019 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Common stock issued under stock plans and employee stock purchase plan | ( | ) | ( | ) | ||||||||||||||||
| Stock-based compensation | — | ( | ) | ( | ) | |||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||
| Balance at March 29, 2020 | ( | ) | ||||||||||||||||||
| Common stock issued under stock plans and employee stock purchase plan | ( | ) | ( | ) | ||||||||||||||||
| Common stock offering, net of issuance costs of million | ||||||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||
| Balance at June 28, 2020 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Common stock issued under stock plans and employee stock purchase plan | ( | ) | ( | ) | ||||||||||||||||
| Stock issuance costs | ||||||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||
| Balance at September 27, 2020 | $ | $ | $ | ( | ) | $ | ||||||||||||||
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
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, ultra-low power Field Programmable Gate Arrays (“FPGAs”), and embedded FPGA (eFPGA) intellectual property (IP). 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 Unaudited Condensed Consolidated Financial Statements be read in conjunction with the Company's Form 10-K for the year ended January 3, 2021, which was filed with the Securities and Exchange Commission (“SEC”) on March 23, 2021. Operating results for the three and nine months ended October 3, 2021 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 2021 and 2020 ended on October 3, 2021 and September 27, 2020, 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 and countries across the world continue to manage repeated waves of the pandemic, including variant strains of COVID-19 amid increasing, yet uneven progress toward vaccination. 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 further shelter-in-place or similarly restrictive work-from-home orders would impact many of the Company’s offices and employees, including those located in the United States. As a result, the Company has 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 October 3, 2021, the COVID-19 pandemic and its potential effects on the Company’s business in its fiscal 2021 remain dynamic, and the broader implications for its business and future results of operations remain uncertain and cannot be predicted. 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. The restructuring plan was approved by the Company’s Board of Directors on January 24, 2020. Pursuant to the restructuring plan, the Company recorded $
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 October 3, 2021, the Company's principal sources of liquidity consisted of cash, cash equivalents and restricted cash of $
On December 11, 2020, the Company entered into a Second Amendment (the “Second Amendment”) to the Amended and Restated Loan Agreement with Heritage Bank originally entered into on December 21, 2018 (the "Amended and Restated Loan Agreement"). The Second Amendment extended the loan maturity date for year through September 28 2022, and amended the interest to a rate per annum equal to one half of one percentage point (
On August 16, 2021, the Company entered into a Third Amendment to the Amended and Restated Loan Agreement with Heritage Bank (the "Third Amendment"). The Third Amendment (a) amended the Company’s non-compliance with the minimum cash covenant which obligated the Company to maintain at least $
The Company was in compliance with all loan covenants as of October 3, 2021. As of October 3, 2021, the Company had $
On May 6, 2020, the Company entered into a loan agreement with Heritage Bank for a loan of $
On June 22, 2020, the Company closed an underwritten public offering of
On September 22, 2021, the Company entered into a Share Subscription Agreement for the sale of
The Company currently uses its cash to fund its working capital to accelerate the development of next generation products and for general corporate purposes. Based on past performance and current expectations, the Company believes that its existing cash and cash equivalents, together with available financial resources from the Revolving Facility with Heritage Bank, will be sufficient to fund its operations and capital expenditures and provide adequate working capital for the next twelve months. We continue to monitor our financial performance to ensure sufficient liquidity to fund operations and execute on our business plan.
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, the 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, the fluctuations in revenue as a result of product end-of-life, the fluctuations in revenue as a result of the stage in the product life cycle of its customers’ products, the costs of securing access to and availability of adequate manufacturing capacity, the levels of inventories and wafer purchase commitments, customer credit terms, the amount and timing of research and development expenditures, the timing of new product introductions, production volumes and 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 and existing cash and cash equivalents, with financial resources from its Revolving Facility with the Heritage Bank 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. On November 16, 2021, we entered into a Fourth Amendment to extend the Amended and Restated Loan Agreement with Heritage Bank to extend the maturity date to December 31, 2023. See Note 12.
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 income (expense), net in the unaudited condensed consolidated statements of operations.
Uses of Estimates
The preparation of these Unaudited Condensed 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 10 to the Unaudited Condensed Consolidated Financial Statements for information regarding concentrations associated with accounts receivable.
Note 2 — Significant Accounting Policies
During the nine months period ended October 3, 2021, 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 January 3, 2021, except for the new accounting standards adopted during the nine months ended October 3, 2021. For a discussion of the significant accounting policies, please see the Annual Report on Form 10-K for the fiscal year ended January 3, 2021, filed with the SEC on March 23, 2021. For a discussion of the new accounting standards adopted during the nine months of 2021, see “New Accounting Pronouncements” below.
Included in the results for the third quarter of fiscal 2021, was IP Licensing revenue of approximately $
Fair Value Measurements
The Company’s cash, cash equivalents and restricted cash include money market account balance of $
Restricted Cash
Cash, cash equivalent and restricted cash includes an amount of $
New Accounting Pronouncements
Recently adopted accounting pronouncements
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. The Company adopted this standard prospectively effective January 4, 2021, with an insignificant impact to the Unaudited Condensed Consolidated Financial Statements.
New accounting pronouncements not yet adopted
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 Unaudited Condensed 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 October 3, 2021 and September 27, 2020,
Note 4 — Balance Sheet Components
The following table provides details relating to certain balance sheet line items as of October 3, 2021, and January 3, 2021 (in thousands):
| October 3, | January 3, | |||||||
| 2021 | 2021 | |||||||
| Inventories: | ||||||||
| Raw materials | $ | $ | ||||||
| Work-in-process | ||||||||
| Finished goods | ||||||||
| $ | $ | |||||||
| Other current assets: | ||||||||
| Prepaid taxes, royalties and other prepaid expenses | $ | $ | ||||||
| Other | ||||||||
| $ | $ | |||||||
| Property and equipment, net: | ||||||||
| Equipment | $ | $ | ||||||
| Software | ||||||||
| Furniture and fixtures | ||||||||
| Leasehold improvements | ||||||||
| Less: Accumulated depreciation and amortization | ( | ) | ( | ) | ||||
| $ | $ | |||||||
| Capitalized internal-use software, net: | ||||||||
| Capitalized internal-use software | $ | $ | ||||||
| Less: Accumulated amortization | ( | ) | ( | ) | ||||
| $ | $ | |||||||
| Accrued liabilities: | ||||||||
| Employee related accruals | $ | $ | ||||||
| Other | ||||||||
| $ | $ | |||||||
Note 5 — Debt Obligations
Revolving Line of Credit
As of October 3, 2021 and January 3, 2021, the Company had $
Payroll Protection Program Loan
On May 6, 2020, the Company entered into a $
Note 6 — Leases
The Company entered into operating leases for office space for its headquarters, for its domestic and foreign subsidiaries and for its sales offices. Finance leases are primarily for engineering design software. Operating leases generally have lease terms of to years. Finance leases are generally to years. As of October 3, 2021, the balance of right-of-use assets was approximately $
The following table provides the expenses related to operating and finance leases (in thousands):
| Three Months Ended | Nine Months Ended | |||||||||||||||
| October 3, 2021 | September 27, 2020 | October 3, 2021 | September 27, 2020 | |||||||||||||
| Operating lease costs: | ||||||||||||||||
| Fixed | $ | $ | $ | $ | ||||||||||||
| Short term | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| Finance lease costs: | ||||||||||||||||
| Amortization of ROU asset | $ | $ | $ | $ | ||||||||||||
| Interest | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
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 October 3, 2021 and September 27, 2020 (in thousands):
| Nine Months Ended | ||||||||
| October 3, | September 27, | |||||||
| 2021 | 2020 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Operating cash flows used for operating leases | $ | $ | ||||||
| Operating cash flows used for finance leases | ||||||||
| Financing cash flows used for financing leases | ||||||||
| Total | $ | $ | ||||||
| Right-of-use assets obtained in exchange for finance lease obligations | $ | $ | ||||||
The following table provides the details of right-of-use assets and lease liabilities as of October 3, 2021 and January 3, 2021 (in thousands):
| October 3, | January 3, | |||||||
| 2021 | 2021 | |||||||
| Right-of-use assets: | ||||||||
| Operating leases | $ | $ | ||||||
| Finance leases | ||||||||
| Total right-of-use assets | $ | $ | ||||||
| Lease liabilities: | ||||||||
| Operating leases | $ | $ | ||||||
| Finance leases | ||||||||
| Total lease liabilities | $ | $ | ||||||
The following table provided the details of future lease payments for operating and finance leases as of October 3, 2021 (in thousands):
| Operating Leases | Finance Leases | |||||||
| 2021 (Remaining period) | $ | $ | ||||||
| 2022 | ||||||||
| 2023 | ||||||||
| 2024 | ||||||||
| Total lease payments | ||||||||
| Less: Interest | ( | ) | ( | ) | ||||
| Present value of lease liabilities | $ | $ | ||||||
The following table provides the details of lease terms and discount rates as of October 3, 2021 and January 3, 2021:
| October 3, | January 3, | |||||||
| 2021 | 2021 | |||||||
| Right-of-use assets: | ||||||||
| Weighted-average remaining lease term (years) | ||||||||
| Operating leases | ||||||||
| Finance leases | ||||||||
| Weighted-average discount rates: | ||||||||
| Operating leases | % | % | ||||||
| Finance leases | % | % | ||||||
Note 7 — Employee Stock Plans
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 Stock Plan. Under the 2019 Plan,
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, reserve an additional
2009 Employee Stock Purchase Plan
The 2009 Employee Stock Purchase Plan (“2009 ESPP”) was adopted in March 2009 and amended by the Board of Directors in January 2015 and in February 2017, and approved by the Company's stockholders on April 23, 2015 and April 26, 2017, to reserve an additional
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. The amendment, among other things, extend the term of the plan until March 5, 2029 and reserved an additional
Note 8 — Stock-Based Compensation
Stock-based compensation expense included in the Company's consolidated financial statements for the three and nine months ended October 3, 2021 and September 27, 2020 was as follows (in thousands):
| Three Months Ended | Nine Months Ended | |||||||||||||||
| October 3, | September 27, | October 3, | September 27, | |||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Cost of revenue | $ | $ | $ | $ | ||||||||||||
| Research and development | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
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 options were granted during the three and nine months ended October 3, 2021 and September 27, 2020.
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 October 3, 2021 (in thousands):
| Shares Available for Grants | ||||
| Balance at January 3, 2021 | ||||
| Authorized shares | ||||
| RSUs granted | ( | ) | ||
| PRSU's granted | ( | ) | ||
| Options cancelled | ||||
| RSUs forfeited or expired | ||||
| PRSUs forfeited or expired | ||||
| Balance at October 3, 2021 | ||||
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 October 3, 2021:
| Weighted | Weighted | |||||||||||||||
| Average | Average | Aggregate | ||||||||||||||
| Number of | Exercise | Remaining | Intrinsic | |||||||||||||
| Shares | Price | Term | Value | |||||||||||||
| (in thousands) | (in years) | (in thousands) | ||||||||||||||
| Balance outstanding at January 3, 2021 | $ | — | ||||||||||||||
| Forfeited or expired | ( | ) | $ | |||||||||||||
| Balance outstanding at October 3, 2021 | $ | $ | ||||||||||||||
| Exercisable at October 3, 2021 | $ | $ | ||||||||||||||
| Vested and expected to vest at October 3, 2021 | $ | $ | ||||||||||||||
Total stock-based compensation related to stock options was approximately $
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 expense related to RSUs and PRSUs was approximately $
As of October 3, 2021 and September 27, 2020, there was approximately $
A summary of activity for the Company's RSUs and PRSUs for the nine months ended October 3, 2021 is as follows:
| RSUs & PRSUs Outstanding | ||||||||
| Weighted | ||||||||
| Average | ||||||||
| Number of | Grant Date | |||||||
| Shares | Fair Value | |||||||
| (in thousands) | ||||||||
| Nonvested at January 3, 2021 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Forfeited | ( | ) | ||||||
| Nonvested at October 3, 2021 | $ | |||||||
Employee Stock Purchase Plan
Total stock-based compensation related to the Company's ESPP was approximately $
Note 9 — Income Taxes
The Company recorded a net income tax (benefit) expense of ($
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. Accordingly, the Company continues to maintain a valuation allowance against all of U.S. and certain foreign net deferred tax assets as of October 3, 2021. 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
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 United States enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) as a result of the Coronavirus pandemic. The Act includes provisions relating to loan programs for small businesses ("Paycheck Protection Program" or "PPP"), refundable payroll tax credits, deferment of the employer portion of certain payroll taxes, net operating loss carryback periods, alternative minimum tax credit refunds, modifications of the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The Company applied for and received of the PPP loan in Q2 2020 and the amount was utilized on qualified business expenses under the guidance of PPP. On December 27, 2020, the President signed the Consolidated Appropriations Act 2021 (the "Bill") into law. The Bill confirms the business expenses paid out of PPP loans maybe deducted for federal income tax purposes and the borrower's tax basis and other attributes of the borrower's assets will not be reduced as a result of the loan forgiveness. The Company applied for the loan forgiveness and the application was approved by the lender on January 26, 2021. The loan was reclassified to gain on forgiveness of debt in Q1 2021 for GAAP and is not taxable for federal purposes according to the CARES Act.
California has issued specific guidance regarding its conformity to the CARES Act. No provisions are expected to have a material impact on the Company, except for that under Assembly Bill 80 ("AB 80"), which was signed into law on April 29, 2021, the business expenses paid out of the PPP loan is not deductible for publicly-traded companies for California tax purposes.
On June 29, 2020, California Governor Gavin Newsom signed Assembly Bill 85 ("AB 85") into law, which temporarily suspends net operating loss deductions for most businesses and limits certain general business credits. These provisions will be applied retroactively to tax years beginning on or after January 1, 2020 through December 31, 2022. However, the law provides for a small business exemption for taxpayers with income subject to tax under $1 million. The Company has evaluated the current legislation and does not anticipate AB 85 to have a material impact on its financial statements.
On December 18, 2019, the FASB issued new guidance ASU 2019-12 that simplifies the accounting for income taxes to reduce complexity in accounting standards which the Company adopted on January 4, 2021. The majority of the key provisions of the ASU 2019-12 does not have a material impact on the Company's consolidated financial statements.
We considered the majority of our non-U.S. subsidiaries’ undistributed earnings to be permanently reinvested. Therefore no U.S. or foreign income taxes have been recorded on the permanently reinvested amount as of July 4, 2021. Due to potential restructuring plans in India, there may be a one-time distribution in 2021. As a result, we have recorded withholding taxes of approximately $
Note 10 — 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 | |||||||||||||||
| October 3, | September 27, | October 3, | September 27, | |||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| New products | $ | $ | $ | $ | ||||||||||||
| Mature products | ||||||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||
Note: New products include products and related revenues for all products manufactured on 180 nanometer or smaller semiconductor processes, eFPGA IP license, Quick AI and SensiML AI software as a service (“SaaS”) revenue. Mature products include all products produced on semiconductor processes larger than 180 nanometer and includes related royalty revenue.
The following is a breakdown of revenue by type (in thousands):
| Three Months Ended | Nine Months Ended | |||||||||||||||
| October 3, | September 27, | October 3, | September 27, | |||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Device sales | $ | $ | $ | $ | ||||||||||||
| IP license and other services | ||||||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||
Note: Device revenue includes new product revenues and mature product revenues, except for IP License and other services.
The following is a breakdown of revenue by shipment destination (in thousands):
| Three Months Ended | Nine Months Ended | |||||||||||||||
| October 3, | September 27, | October 3, | September 27, | |||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Asia Pacific (1) (4) | $ | $ | $ | $ | ||||||||||||
| North America (2) | ||||||||||||||||
| Europe (3) | ||||||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||
| (1) | Asia Pacific includes revenue from Japan of ,000, or |
| (2) | North America includes revenue from the United States of million or |
| (3) | Europe includes revenue from United Kingdom of $ |
| (4) | Certain prior period amounts have been reclassified to conform to current period presentation. |
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 | |||||||||||||||
| October 3, | September 27, | October 3, | September 27, | |||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Distributor "A" | % | % | % | % | ||||||||||||
| Distributor "C" | * | % | % | % | ||||||||||||
| Distributor "E" | % | % | % | % | ||||||||||||
| Customer "B" | * | % | * | % | ||||||||||||
| Customer "E" | * | * | % | * | ||||||||||||
| Customer "F" | % | % | % | % | ||||||||||||
| Customer "K" | * | % | * | * | ||||||||||||
| Customer "N" | % | % | % | * | ||||||||||||
| Customer "O" | % | * | % | * | ||||||||||||
* Represents less than 10% of revenue as of the dates presented.
The following distributors and customers accounted for 10% or more of the Company's accounts receivable as of the dates presented:
| October 3, | January 3, | |||||||
| 2021 | 2021 | |||||||
| Distributor "A" | % | * | ||||||
| Distributor "E" | % | * | ||||||
| Distributor "J" | % | * | ||||||
| Customer "O" | % | * | ||||||
| Customer "P" | * | % | ||||||
| Customer "Q" | * | % | ||||||
* Represents less than 10% of accounts receivable as of the dates presented.
Note 11 — 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 this forecasted wafer volume. As of October 3, 2021, and January 3, 2021, the Company had $
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 October 3, 2021, total outstanding purchase obligations for other goods and services were $
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 October 3, 2021, the Company was not involved in any litigation.
India Transfer Pricing Notice
On January 27, 2021, the Company received an order from the Income Tax Department of the Ministry of Finance in India (the "DRP, or "the Department") disputing the transfer pricing rate the Company used for Assessment Years 2017-18, the result of which may affect later years. It is the intention of the Company to appeal such order as the rate requested by the government of India is not representative of the results of operations of the company, as well as other factors. In addition, on April 30, 2021, the Company filed an appeal with the DRP, citing various issues with the Department's calculations and choice of comparable entities used to arrive at its initial assessment. A hearing before the DRP was held on October 7, 2021, subsequent to the end of the Company's third quarter of fiscal 2021. Based on the facts presented, the Panel is expected to adjudicate the case. The due date for closure of these appeals is December 31, 2021 and it is expected that the Panel will pass its orders before this date. The Company is in the process of evaluating the effect such order may have on its foreign tax provision. Such effect, if any, would be to the tax provision and amounts owed under taxes to foreign jurisdictions only.
Note 12 — Subsequent Events
On November 16, 2021, the Company entered into a Fourth Amendment (the “Fourth Amendment”) to the Amended and Restated Loan Agreement with Heritage Bank originally entered into on December 21, 2018 (the "Amended and Restated Loan Agreement"). The Fourth Amendment extended the loan maturity date through December 31, 2023.
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 January 3, 2021, found in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 23, 2021. 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 IP for AI, voice and sensor processing. The solutions include an eFPGA for hardware acceleration and pre-processing, and heterogeneous multi-core SoCs that integrate eFPGA with other processors and peripherals. The SensiML Analytics Toolkit from our recently acquired wholly owned subsidiary, 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 new products include 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 the acquisition of SensiML, we now have an IoT AI software platform that includes 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 semiconductor 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, or VEE, technology, and Display Power Optimizer, or DPO, technology; and (ii) implements commonly used mobile system interfaces, such as Low Voltage Differential Signaling, or LVDS, Mobile Industry Processor Interface, or MIPI, and Secure Digital Input Output, or SDIO.
Through the acquisition of SensiML, our core IP also includes the SensiML AI Toolkit that enables 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, or ODMs, we can amortize our Research and Development, or 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.
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. We also work with mobile processor and communications semiconductor device manufacturers and companies that supply sensor, algorithms and applications. 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.
Our ArcticPro eFPGA IP are 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 QuickLogic. We believe this flow enables a scalable support model for QuickLogic. 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 a 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 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. We are expecting revenue growth from EOS S3, SensiML AI SaaS, and eFPGA IP licensing in fiscal year 2021.
We continue to seek to expand our revenue, including pursuing high-volume sales opportunities in our target market segments, by providing solutions incorporating IP, or industry standard interfaces. Our industry is characterized by intense price competition and by lower margins as order volumes increase. While winning large volume sales opportunities will increase our revenue, we believe these opportunities may decrease our gross profit as a percentage of revenue.
During the third quarter of 2021, we generated total revenue of $3.9 million, which represents an increase of 34% compared to the prior quarter and an increase of 117% compared to the same quarter last year. Our new product revenue in the third quarter was $2.8 million, which represents an increase of 119% from the prior quarter and an increase of 332% from the third quarter of 2020, primarily driven by our IP license revenue amounting to $1.0 million the current quarter. Our mature product revenue was $1.1 million in the third quarter of 2021, which was a decrease of 32% compared to the prior quarter and a decrease of 4% compared to the third quarter of 2020. We expect our mature product revenue to continue to fluctuate over time.
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 $1.3 million for the third quarter of 2021, a decrease of 38% compared with the prior quarter and a decrease of 38% compared with the third quarter of 2020.
We have experienced net losses in the recent years and expect losses to continue through at least fiscal year 2021 as we continue to develop new products, applications and technologies. Whether we can achieve cash flow levels sufficient to support our operations cannot be accurately predicted. Unless such cash flow levels are achieved in addition to the proceeds we received from our recent sale of our equity securities, we may need to borrow additional funds or sell debt or equity securities, or some combination thereof, to provide funding for our operations, and such additional funding may not be available on commercially reasonable terms, or at all.
COVID-19 Response
The COVID-19 pandemic and its effects on our business in fiscal 2020, the three quarters of fiscal 2021, and potential effects on the remainder of fiscal 2021 and beyond remain uncertain. There have been further restrictions by the governmental authorities as a result of a surge in COVID-19 cases during the winter of 2020 and continuing into fiscal 2021, as a result of variant strains of COVID-19 amid uneven progress toward vaccination. These restrictions and other impacts from COVID-19 could cause further disruptions or restrictions on our 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 our global supply chain. If COVID-19 cases surge and we experience more pronounced disruptions in our operations, the Company may experience constrained supply or curtailed demand that may materially adversely impact its business and results of operations.
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, the success and availability of the recent vaccine, 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.
Restructuring
In January 2020, we implemented a restructuring plan to lower annual operating expenses. The restructuring plan was approved by our Board of Directors on January 24, 2020. Pursuant to the restructuring plan, we recorded $624,000 restructuring costs during the nine months ended September 27, 2020, consisting primarily of employee severance related costs and facilities costs. There were no restructuring charges incurred for nine months ended October 3, 2021.
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 fulfill demand.
Critical Accounting Estimates
The methodologies, estimates and judgments we use in applying our most critical accounting policies have a significant impact on the results we report in our Unaudited Condensed 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 our 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 October 3, 2021, 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 January 3, 2021, filed with the SEC on March 23, 2021, except for the new accounting standards adopted in the first quarter of 2021 as described in Note 2 to the Unaudited Condensed Consolidated Financial Statements as of and for the three and nine months ended October 3, 2021 filed herewith. 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 January 3, 2021, filed with the SEC on March 23, 2021.
Results of Operations
The following table sets forth the percentage of revenue for certain items in our condensed consolidated statements of operations for the periods indicated:
| Three Months Ended |
Nine Months Ended |
|||||||||||||||
| October 3, |
September 27, |
October 3, |
September 27, |
|||||||||||||
| 2021 |
2020 |
2021 |
2020 |
|||||||||||||
| Revenue |
100 | % | 100 | % | 100 | % | 100 | % | ||||||||
| Cost of revenue |
29 | % | 48 | % | 41 | % | 50 | % | ||||||||
| Gross profit |
71 | % | 52 | % | 59 | % | 50 | % | ||||||||
| Operating expenses: |
||||||||||||||||
| Research and development |
47 | % | 78 | % | 60 | % | 88 | % | ||||||||
| Selling, general and administrative |
57 | % | 83 | % | 66 | % | 82 | % | ||||||||
| Restructuring costs |
— | % | 6 | % | — | % | 10 | % | ||||||||
| Loss from operations |
(33 | )% | (115 | )% | (66 | )% | (130 | )% | ||||||||
| Interest expense |
(1 | )% | (2 | )% | (1 | )% | (5 | )% | ||||||||
| Gain on forgiveness of debt |
— | % | — | % | 13 | % | — | % | ||||||||
| Interest income and other income (expense), net |
(0 | )% | 2 | % | (1 | )% | 2 | % | ||||||||
| Loss before income taxes |
(34 | )% | (115 | )% | (55 | )% | (133 | )% | ||||||||
| Provision for (benefit from) income taxes |
(1 | )% | 1 | % | 2 | % | — | % | ||||||||
| Net loss |
(33 | )% | (116 | )% | (56 | )% | (133 | )% | ||||||||
Note: Insignificant percentages are rounded to zero percentage (—%) for disclosure
Three Months Ended October 3, 2021 Compared to Three Months Ended September 27, 2020
Revenue
The table below sets forth the changes in revenue for the three months ended October 3, 2021, as compared to the three months ended September 27, 2020 (in thousands, except percentage data):
| Three Months Ended |
||||||||||||||||||||||||
| October 3, 2021 |
September 27, 2020 |
Change |
||||||||||||||||||||||
| % of Total |
% of Total |
|||||||||||||||||||||||
| Amount |
Revenues |
Amount |
Revenues |
Amount |
Percentage |
|||||||||||||||||||
| New products |
$ | 2,758 | 71 | % | $ | 639 | 36 | % | $ | 2,119 | 332 | % | ||||||||||||
| Mature products |
1,100 | 29 | % | 1,141 | 64 | % | (41 | ) | (4 | )% | ||||||||||||||
| Total revenue |
$ | 3,858 | 100 | % | $ | 1,780 | 100 | % | $ | 2,078 | 117 | % | ||||||||||||
Note: For all periods presented - New products include all products and related revenues manufactured on 180 nanometer or smaller semiconductor processes, eFPGA IP license and related revenue, QuickAI and SensiML AI SaaS revenues. Mature products include all products produced on semiconductor processes larger than 180 nanometer and includes related royalty revenue.
Product revenue for the third quarter of 2021 compared to the third quarter of 2020 increased by $2.1 million. The net increase of $2.1 million in the revenue of new products was primarily due to an increase of $1.0 million related to eFPGA IP license revenue as well as increases of connectivity and sensor product revenue. The net decrease of 4% in mature product revenue compared to the third quarter of 2020 was due primarily to decrease in QuickRAM and other products, partially offset by an increase in Eclipse and Eclipse Plus products.
Gross Profit
The table below sets forth the changes in gross profit for the three months ended October 3, 2021 as compared to the three months ended September 27, 2020 (in thousands, except percentage data):
| Three Months Ended |
||||||||||||||||||||||||
| October 3, 2021 |
September 27, 2020 |
Change |
||||||||||||||||||||||
| % of Total |
% of Total |
|||||||||||||||||||||||
| Amount |
Revenues |
Amount |
Revenues |
Amount |
Percentage |
|||||||||||||||||||
| Revenue |
$ | 3,858 | 100 | % | $ | 1,780 | 100 | % | $ | 2,078 | 117 | % | ||||||||||||
| Cost of revenue |
1,126 | 29 | % | 857 | 48 | % | 269 | 31 | % | |||||||||||||||
| Gross profit |
$ | 2,732 | 71 | % | $ | 923 | 52 | % | $ | 1,809 | 196 | % | ||||||||||||
In the third quarter of 2021, gross profit increased $1.8 million or 196% as compared to the same quarter in the prior year. This was primarily due to the increase in revenue of 117% including $1.0 million related to IP License revenue with minimal associated cost and product mix in the third quarter as compared to last year, and an increase of 31% in cost of revenue as compared to last year.
Our semiconductor products have historically had long product life cycles and obsolescence has not been a significant factor in the valuation of inventories. However, as we continue to pursue opportunities in the mobile market and develop new solutions and products, our product life cycle will be shorter and the risk of obsolescence will increase. In general, our standard manufacturing lead times are longer than the binding forecasts we receive from customers.
Operating Expenses
The table below sets forth the changes in operating expenses for the three months ended October 3, 2021, as compared to the three months ended September 27, 2020 (in thousands, except percentage data):
| Three Months Ended |
||||||||||||||||||||||||
| October 3, 2021 |
September 27, 2020 |
Change |
||||||||||||||||||||||
| % of Total |
% of Total |
|||||||||||||||||||||||
| Amount |
Revenues |
Amount |
Revenues |
Amount |
Percentage |
|||||||||||||||||||
| R&D expense |
$ | 1,807 | 47 | % | $ | 1,380 | 78 | % | $ | 427 | 31 | % | ||||||||||||
| SG&A expense |
2,186 | 57 | % | 1,478 | 83 | % | 708 | 48 | % | |||||||||||||||
| Restructuring costs |
— | — | % | 111 | 6 | % | (111 | ) | (100 | )% | ||||||||||||||
| Total operating expenses |
$ | 3,993 | 104 | % | $ | 2,969 | 167 | % | $ | 1,024 | 34 | % | ||||||||||||
Research and Development
Our R&D expenses consist primarily of personnel, overhead and other costs associated with System on Chip (SoC) and software development, programmable logic design, AI and eFPGA development. The $427,000 increase in R&D expenses in the third quarter of 2021, as compared to the third quarter of 2020, was primarily attributable to an increase in stock-based compensation, salary and related expenses, allocable expenses, partially offset by lower outside services and depreciation expenses due primarily to our restructuring in 2020 and to reductions in spending caused by the COVID -19 pandemic.
Selling, General and Administrative
Our selling, general and administrative (SG&A) expenses consist primarily of personnel and related overhead costs for sales, marketing, finance, administration, human resources and general management. The $708,000 increase in SG&A expenses in the third quarter of 2021, as compared to the third quarter of 2020 was primarily attributable to outside legal and consulting costs, stock-based compensation expenses, and occupancy costs, partially offset by a decrease in salary and related costs.
Restructuring
In January 2020, we implemented a restructuring plan to lower annual operating expenses. The restructuring plan was approved by our Board of Directors on January 24, 2020. Pursuant to the restructuring plan, we recorded restructuring costs of $0 in the third quarter of 2021 as compared to $111,000 in the third quarter of 2020. Restructuring costs consists primarily of employee severance-related costs. See Note 1 to the Unaudited Condensed Consolidated Financial Statements for details.
Interest Expense and Interest Income and Other Income (Expense), Net
The table below sets forth the changes in interest expense and interest income and other income (expense), net for the three months ended October 3, 2021 as compared to the three months ended September 27, 2020 (in thousands, except percentage data):
| Three Months Ended |
Change |
|||||||||||||||
| October 3, |
September 27, |
|||||||||||||||
| 2021 |
2020 |
Amount |
Percentage |
|||||||||||||
| Interest expense |
$ | (35 | ) | $ | (36 | ) | $ | 1 | (3 | )% | ||||||
| Interest income and other income (expense), net |
(7 | ) | 27 | (34 | ) | (126 | )% | |||||||||
| Total interest income and other income (expense), net |
$ | (42 | ) | $ | (9 | ) | $ | (33 | ) | 367 | % | |||||
Interest expense relates primarily to our line of credit facility. Interest income and other income (expense), net, relates to the interest earned on our money market accounts and foreign exchange gain or losses recorded. Changes in interest expense related for our revolving loan relate to the variability and timing of our outstanding loan balance. Interest expense for the third quarter of this year as compared to the same period in the prior year remained fairly flat. For the three months ended October 3, 2021 interest income and other income (expense), net for this period was approximately ($7,000) as compared to $27,000 for the three months ended September 27, 2020
Provision for (Benefit from) Income Taxes
The table below sets forth the changes in the provisions for income tax for the three months ended October 3, 2021 as compared to the three months ended September 27, 2020 (in thousands, except percentage data):
| Three Months Ended |
Change |
|||||||||||||||
| October 3, |
September 27, |
|||||||||||||||
| 2021 |
2020 |
Amount |
Percentage |
|||||||||||||
| Provision for (benefit from) income taxes |
$ | (21 | ) | $ | 10 | $ | (31 | ) | (310 | )% | ||||||
The majority of the income tax expense for the quarter ended October 3, 2021 and September 27, 2020 relates to our foreign subsidiaries, which are cost-plus entities.
We are subject to U.S. federal income tax as well as income taxes in many U.S. states and foreign jurisdictions in which we operate. 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.
Nine Months Ended October 3, 2021 Compared to Nine Months Ended September 27, 2020
Revenue
The table below sets forth the changes in revenue for the nine months ended October 3, 2021, as compared to the nine months ended September 27, 2020 (in thousands, except percentage data):
| Nine Months Ended |
||||||||||||||||||||||||
| October 3, 2021 |
September 27, 2020 |
Change |
||||||||||||||||||||||
| % of Total |
% of Total |
|||||||||||||||||||||||
| Amount |
Revenues |
Amount |
Revenues |
Amount |
Percentage |
|||||||||||||||||||
| New products |
$ | 5,095 | 57 | % | $ | 1,945 | 32 | % | $ | 3,150 | 162 | % | ||||||||||||
| Mature products |
3,885 | 43 | % | 4,189 | 68 | % | (304 | ) | (7 | )% | ||||||||||||||
| Total revenue |
$ | 8,980 | 100 | % | $ | 6,134 | 100 | % | $ | 2,846 | 46 | % | ||||||||||||
Note: For all periods presented - New products include all products and related revenues manufactured on 180 nanometer or smaller semiconductor processes, eFPGA IP license and related revenues, QuickAI and SensiML AI SaaS revenues. Mature products include all products produced on semiconductor processes larger than 180 nanometer and includes related royalty revenue.
Product revenue for the nine months ended October 3, 2021 compared to the nine months ended September 27, 2020 increased by $2.8 million. The net increase of $3.2 million in the revenue of new products was primarily due to an increase in eFPGA IP License revenue of approximately $1.1 million, and increases in connectivity and sensor product revenue. The net decrease of $304,000 in mature product revenue compared to the nine months ended September 27, 2020 was due primarily to decreases in PASIC 3, QuickRAM, and other products, partially offset by increases in Eclipse and Eclipse Plus products.
Gross Profit
The table below sets forth the changes in gross profit for the nine months ended October 3, 2021 as compared to the nine months ended September 27, 2020 (in thousands, except percentage data):
| Nine Months Ended |
||||||||||||||||||||||||
| October 3, 2021 |
September 27, 2020 |
Change |
||||||||||||||||||||||
| % of Total |
% of Total |
|||||||||||||||||||||||
| Amount |
Revenues |
Amount |
Revenues |
Amount |
Percentage |
|||||||||||||||||||
| Revenue |
$ | 8,980 | 100 | % | $ | 6,134 | 100 | % | $ | 2,846 | 46 | % | ||||||||||||
| Cost of revenue |
3,638 | 41 | % | 3,092 | 50 | % | 546 | 18 | % | |||||||||||||||
| Gross profit |
$ | 5,342 | 59 | % | $ | 3,042 | 50 | % | $ | 2,300 | 76 | % | ||||||||||||
In the nine months ended October 3, 2021, gross profit was higher by $2.3 million or 76% as compared to the nine months ended September 27, 2020. This was primarily due to the increase revenue of $2.8 million or 46%, including the increase of IP License related revenue of $1.1 million with minimal associated costs, and product mix in the nine months of 2021, as compared to same period last year, partially offset by cost variances and write-downs of excess and obsolete inventories.
Our semiconductor products have historically had long product life cycles and obsolescence has not been a significant factor in the valuation of inventories. However, as we continue to pursue opportunities in the mobile market and develop new solutions and products, our product life cycle will be shorter and the risk of obsolescence will increase. In general, our standard manufacturing lead times are longer than the binding forecasts we receive from customers.
Operating Expenses
The table below sets forth the changes in operating expenses for the nine months ended October 3, 2021, as compared to the nine months ended September 27, 2020 (in thousands, except percentage data):
| Nine Months Ended |
||||||||||||||||||||||||
| October 3, 2021 |
September 27, 2020 |
Change |
||||||||||||||||||||||
| % of Total |
% of Total |
|||||||||||||||||||||||
| Amount |
Revenues |
Amount |
Revenues |
Amount |
Percentage |
|||||||||||||||||||
| R&D expense |
$ | 5,346 | 60 | % | $ | 5,399 | 88 | % | $ | (53 | ) | (1 | )% | |||||||||||
| SG&A expense |
5,927 | 66 | % | 5,022 | 82 | % | 905 | 18 | % | |||||||||||||||
| Restructuring expenses |
— | — | % | 624 | 10 | % | (624 | ) | 100 | % | ||||||||||||||
| Total operating expenses |
$ | 11,273 | 126 | % | $ | 11,045 | 180 | % | $ | 228 | 2 | % | ||||||||||||
Research and Development
Our research and development (R&D) expenses consist primarily of personnel, overhead and other costs associated with System on Chip (SoC) and software development, programmable logic design, AI and eFPGA development. R&D expenses decreased slightly for the nine months ended October 3, 2021 as compared to the nine months ended September 27, 2020. The $53,000 decrease in R&D expenses in the nine months ended October 3, 2021 as compared to nine months ended September 27, 2020, was primarily attributable to decreases in salary and related expenses, outside services, occupancy costs and lower depreciation due primarily to restructuring in 2020 and to reductions in spending caused by the COVID-19 pandemic, partially offset primarily by an increase in stock-based compensation and allocable expenses.
Selling, General and Administrative
Our selling, general and administrative (SG&A) expenses consist primarily of personnel and related overhead costs for sales, marketing, finance, administration, human resources and general management. The $905,000 million increase in SG&A expenses in the nine months ended October 3, 2021, as compared to the nine months ended September 27, 2020 was primarily attributable to outside legal and consulting costs, stock-based compensation, offset by decreases in salary and related expenses, travel and entertainment expenses and allocable expenses.
Restructuring
In January 2020, we implemented a restructuring plan to lower annual operating expenses. The restructuring plan was approved by our Board of Directors on January 24, 2020. Pursuant to the restructuring plan, we recorded restructuring costs of $0 in the third quarter of 2021 as compared to $624,000 in the third quarter of 2020. Restructuring costs consists primarily of employee severance-related costs and facilities costs. See Note 1 to the Unaudited Condensed Consolidated Financial Statements for details.
Interest Expense and Interest Income and Other Income (Expense), Net
The table below sets forth the changes in interest expense and interest income and other income (expense), net for the nine months ended October 3, 2021 as compared to the nine months ended September 27, 2020 (in thousands, except percentage data):
| Nine Months Ended |
Change |
|||||||||||||||
| October 3, |
September 27, |
|||||||||||||||
| 2021 |
2020 |
Amount |
Percentage |
|||||||||||||
| Interest expense |
$ | (99 | ) | $ | (299 | ) | $ | 200 | (67 | )% | ||||||
| Gain on forgiveness of debt |
1,192 | — | 1,192 | 100 | % | |||||||||||
| Interest income and other expense, net |
(59 | ) | 94 | (153 | ) | (163 | )% | |||||||||
| $ | 1,034 | $ | (205 | ) | $ | 1,239 | (604 | )% | ||||||||
Interest expense relates primarily to our line of credit facility. Interest income and other income (expense), net, relates to the interest earned on our money market accounts and foreign exchange gain or losses recorded. Changes in interest expense related for our revolving loan relate to the variability and timing of our outstanding loan balance. Gain on forgiveness of debt for the nine months ended October 3, 2021, relates to the gain related to the forgiveness of the PPP loan of $1.2 million recorded in the first quarter of fiscal 2021. Interest rates for this year as compared to the prior year were significantly lower, accounting for most of the decrease relating to interest income. Interest income and other income (expense), net for this period was approximately ($59,000) as compared to the nine months ended September 27, 2020 of $94,000.
Provision for (Benefit from) Income Taxes
The table below sets forth the changes in the provisions for income tax for the nine months ended October 3, 2021 as compared to the nine months ended September 27, 2020 (in thousands, except percentage data):
| Nine Months Ended |
Change |
|||||||||||||||
| October 3, |
September 27, |
|||||||||||||||
| 2021 |
2020 |
Amount |
Percentage |
|||||||||||||
| Provision for (benefit from) income taxes |
$ | 136 | $ | 1 | $ | (135 | ) | (13500 | )% | |||||||
The majority of the income tax expense for the quarter ended October 3, 2021 and September 27, 2020 relates to our foreign subsidiaries, which are cost-plus entities. Included in the provision for the quarter ended October 3, 2021, was a $125,000 deferred tax provision related to a one-time repatriation of funds from our India entity.
We are subject to U.S. federal income tax as well as income taxes in many U.S. states and foreign jurisdictions in which we operate. 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.
Liquidity and Capital Resources
We have financed our 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 October 3, 2021, our principal sources of liquidity consisted of cash, cash equivalents and restricted cash of $19.6 million, including $15.0 million drawn down from our revolving line of credit with Heritage Bank of Commerce (“Heritage Bank”) and $1.2 million loan received under the Paycheck Protection Program (“PPP”) which was forgiven in January 2021.
On December 11, 2020, we entered into a Second Amendment (the “Second Amendment”) to the Amended and Restated Loan Agreement with Heritage Bank. The Second Amendment extended the loan maturity date for one year through September 28, 2022 and amended the interest to a rate per annum equal to one half of one percentage point (0.50%) above the prime rate.
On August 16, 2021, the Company entered into a Third Amendment to the Amended and Restated Loan Agreement with Heritage Bank (the "Third Amendment"). The Third Amendment (a) waived the Company’s non-compliance with the minimum cash covenant which obligated the Company to maintain at least $3.0 million of unrestricted cash at all times and (b) amended this obligation such that the Company shall now be required to maintain unrestricted cash in its accounts at the Bank in an amount of at least $3.0 million measured i) immediately prior to the funding of any credit extension, and ii) at all times that any advance is outstanding.
We were in compliance with all loan covenants as of October 3, 2021. As of October 3, 2021, we had $15.0 million of outstanding revolving line of credit with an interest rate of 3.75%.
On May 6, 2020, we 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. On January 26, 2021, we received notice from Heritage Bank that amounts under the loan agreement had been forgiven. See Note 5 to these 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 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 $496,000 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.
On September 22, 2021, we entered into a Share Subscription Agreement for the sale of 125,000 shares of our common stock (the “Private Placement”). On September 30, 2021, the Company entered into a Common Stock Purchase Agreement for the sale of 73,664 shares of our common stock, in a registered direct offering pursuant to our effective shelf registration statement on Form S-3 (File No. 333-230352) (the “Registered Direct Offering,” and together with the Private Placement, the “Share Placements”). The net proceeds to us from the Share Placements, after deducting equity issuance costs of approximately $45,000, were approximately $1.0 million.
We currently use our cash to fund our working capital to accelerate the development of next generation products and for general corporate purposes. Based on past performance and current expectations, we believe that its existing cash and cash equivalents, together with available financial resources from the Revolving Facility with Heritage Bank, will be sufficient to fund its operations and capital expenditures and provide adequate working capital for the next twelve months.
Various factors can affect our 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, the 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, the fluctuations in revenue as a result of product end-of-life, the fluctuations in revenue as a result of the stage in the product life cycle of its customers’ products, the costs of securing access to and availability of adequate manufacturing capacity, the levels of inventories and wafer purchase commitments, customer credit terms, the amount and timing of research and development expenditures, the timing of new product introductions, production volumes and 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 our employee stock purchase plan and other factors related to the uncertainties of the industry and global economics.
Over the longer term, we anticipate that sales generated from our new product offerings and existing cash and cash equivalents, with financial resources from our Revolving Facility with Heritage Bank and our ability to raise additional capital in the public capital markets, will be sufficient to satisfy our operations and capital expenditures. However, we cannot provide any assurance that we will be able to raise additional capital, if required, or that such capital will be available on terms acceptable to us. The inability of us to generate sufficient sales from our new product offerings and/or raise additional capital if needed could have a material adverse effect on our operations and financial condition, including our ability to maintain compliance with our lender’s financial covenants. On November 16, 2021, we entered into a Fourth Amendment to extend the Amended and Restated Loan Agreement with Heritage Bank to extend the maturity date to December 31, 2023 See Note 12.
As of October 3, 2021, most of our cash, cash equivalents and restricted cash were invested in the money market account at Heritage Bank. As of October 3, 2021, our interest-bearing debt consisted of $836,000 outstanding under finance leases and $15.0 million outstanding under our Revolving Facility. See Note 5 and Note 6 to the Unaudited Condensed Consolidated Financial Statements for more details.
Cash balances held at our foreign subsidiaries were approximately $379,000 and $342,000 as of October 3, 2021 and January 3, 2021, respectively. Earnings from our foreign subsidiaries are currently deemed to be indefinitely reinvested. We do not expect such reinvestment to affect our liquidity and capital resources, and we continually evaluate our liquidity needs and ability to meet global cash requirements as a part of our overall capital deployment strategy. Factors that affect our global capital deployment strategy include anticipated cash flows, the ability to repatriate cash in a tax-efficient manner, funding requirements for operations and investment activities, acquisitions and divestitures and capital market conditions.
In summary, our cash flows were as follows (in thousands):
| Nine Months Ended |
||||||||
| October 3, |
September 27, |
|||||||
| 2021 |
2020 |
|||||||
| Net cash used in operating activities |
$ | (3,053 | ) | $ | (5,145 | ) | ||
| Net cash used in investing activities |
(580 | ) | (762 | ) | ||||
| Net cash provided by financing activities |
466 | 9,044 | ||||||
Net cash used in operating activities
For the nine months ended October 3, 2021, net cash used in operating activities was $3.1 million, which was primarily due to the net loss of $5.0 million, adjusted for net non-cash charges of $1.0 million including $1.5 million of stock-based compensation, depreciation and amortization expenses of $471,000, and inventory write-downs of $225,000 partially offset by the gain recognized from the forgiveness of debt of $1.2 million related to the PPP loan which was forgiven in the first quarter of fiscal 2021. Cash inflows from changes in operating assets and liabilities were approximately $1.0 million, primarily due to a decrease in inventory, and increases in accounts payable and accrued liabilities subject to the variability of the timing of payments, partially offset by an increase in trade receivables due to the increase in revenue during the third quarter.
For the nine months ended September 27, 2020, net cash used in operating activities was $5.1 million, which was primarily due to the net loss of $8.2 million, adjusted for non-cash charges of $1.3 million. Non-cash charges consisted primarily of $601,000 net gain from reversal of stock-based compensation expense of and depreciation and amortization expense of $644,000. The net gain from the reversal of stock-based compensation was a result of the cancellation of certain performance based RSUs, as established goals required for vesting were not achieved and cancellation of RSUs due to restructuring related terminations. Cash inflows from changes in operating assets and liabilities were approximately $1.7 million, primarily due to a decrease in inventory and a decrease in trade receivables.
Net cash used in investing activities
For the nine months ended October 3, 2021, cash used in investing activities was $580,000, which was primarily attributable to the capitalized internal-use software and capital expenditures relating to licensed software and computer equipment.
For the nine months ended September 27, 2020, cash used in investing activities was $762,000, which was primarily attributable to the capitalized internal-use software.
Net cash provided by financing activities
Cash flows from financing activities includes the draw-downs and repayments of our line of credit. For the quarter ended of 2021 and 2020, these draw-downs and repayments netted to zero.
For the nine months ended October 3, 2021, cash provided by financing activities was $466,000, which was primarily derived from the net proceeds of $1.0 million from the stock issuance of 199,000 shares, partially offset by taxes paid relating to stock-based compensation equity awards. We continue to use and repay our revolving line of credit as our cash needs require.
For the nine months ended September 27, 2020 cash provided by financing activities was $9.0 million, primarily derived from the net proceeds of $8.1 million from the stock issuance of 2.5 million shares of common stock in June 2020 and overallotment of 141,733 shares to underwriters in July 2020, proceeds from the PPP loan of $1.2 million, partially offset by scheduled repayments of $179,000 for finance lease obligations.
Contractual Obligations and Commercial Commitments
The following table summarizes our contractual obligations and commercial commitments as of October 3, 2021 and the effect such obligations and commitments are expected to have on our liquidity and cash flows in future fiscal periods. There are neither contractual obligations nor commercial commitments over three years (in thousands):
| Payments Due by Period |
||||||||||||
| Less than |
||||||||||||
| Total |
1 Year |
1-3 Years |
||||||||||
| Contractual obligations: |
||||||||||||
| Operating leases |
$ | 1,036 | $ | 406 | $ | 630 | ||||||
| Finance and software lease obligations |
836 | 445 | 391 | |||||||||
| Wafer purchases (1) |
632 | 632 | ||||||||||
| Other purchase commitments |
1,169 | 1,047 | 122 | |||||||||
| Total contractual obligations |
$ | 3,673 | $ | 2,530 | $ | 1,143 | ||||||
| Other commercial commitments: |
||||||||||||
| Revolving line of credit |
$ | 15,000 | $ | 15,000 | $ | — | ||||||
| Total commercial commitments |
15,000 | 15,000 | — | |||||||||
| Total contractual and commercial obligations |
$ | 18,673 | $ | 17,530 | $ | 1,143 | ||||||
| (1) |
Certain of our wafer manufacturers require us to forecast wafer starts several months in advance. We are committed to accept the delivery of and pay for a portion of forecasted wafer volume. |
Concentration of Suppliers
We depend on a limited number of contract manufacturers, subcontractors, and suppliers for wafer fabrication, assembly, programming and testing, and for the supply of programming equipment. These services are typically provided by one supplier for each of our devices. We generally purchase these single or limited source services through standard purchase orders. Because we rely on independent subcontractors to perform these services, we cannot directly control product delivery schedules, costs or quality levels. Our future success also depends on the financial viability of our independent subcontractors. The decision not to provide these services to us or the inability to supply these services to us, such as in the case of a natural or financial disaster, would have a significant impact on our business. In addition, these subcontracted manufacturers produce products for other companies and we must place orders up to several months in advance of expected delivery. Increased demand from other companies could result in these subcontract manufacturers allocating available capacity to customers that are larger or have long-term supply contracts in place and we may be unable to obtain adequate foundry and other capacity at acceptable prices, or we may experience delays or interruption in supply. As a result, we have only a limited ability to react to fluctuations in demand for our products, which could cause us to have an excess or a shortage of inventories of a particular product. Additionally, volatility of economic, market, social and political conditions in countries where these suppliers operate may be unpredictable and could result in a reduction in product revenue or increase our cost of revenue and could adversely affect our business, financial condition and results of operations.
Off-Balance Sheet Arrangements
We do not maintain any off-balance sheet partnerships, arrangements or other relationships with unconsolidated entities or others, often referred to as structured finance or special purpose entities, which are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Recently Issued Accounting Pronouncements
See Note 2 to the Unaudited Condensed Consolidated Financial Statements for a description of recent accounting pronouncements, including the respective dates of adoption and expected effects on the results of our operations and financial condition.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not Applicable.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Based on management's evaluation as of October 3, 2021, our Chief Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective at the reasonable assurance level to ensure that the information required to be disclosed by us in this Quarterly Report on Form 10-Q was (i) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and regulations and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Interim Chief Accounting Officer, to allow timely decisions regarding required disclosure.
Our management, including our Chief Executive Officer and Interim Chief Accounting Officer, does not expect that our disclosure controls and procedures or our internal controls over financial reporting will prevent all errors and frauds. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
None. See Note 11 of the Unaudited Condensed Consolidated Financial Statements for a description of legal proceedings.
Except as set forth below, there have been no material changes to the risk factors set forth in our 2020 Annual Report on Form 10-K for the year ended January 3, 2021, filed with the SEC on March 23, 2021, which includes a detailed discussion of our risk factors at Part I, Item 1A, Risk Factors, which discussion is hereby incorporated by reference into this Part II, Item 1A.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On September 22, 2021, QuickLogic Corporation (the “Company”) entered into a Share Subscription Agreement with an investor for the sale of 125,000 shares of common stock, par value $0.001 (the “Common Stock”) at market price of $5.43 per share. This share placement resulted in gross proceeds of approximately $678,000.
The Company currently intends to use the net proceeds from the Financing for working capital, the development of next generation eFPGA-based products, including AI and open source hardware or software, and general corporate purposes. We may also use a portion of the net proceeds to acquire and/or license technologies and acquire and/or invest in businesses when the opportunity arises; however, we currently have no commitments or agreements and are not involved in any negotiations with respect to any such transactions. Please refer to Form 8-K filed with SEC on September 30,2021.
a. Exhibits
The following Exhibits are filed or incorporated by reference into this report:
| Exhibit Number |
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Description |
Form |
Exhibit |
Filing Date |
| 10.1 | Form of Common Stock Purchase Agreement, dated September 30, 2021, between QuickLogic Corporation and the investor named therein | 8-K | 10.1 | September 30,2021 | |
| 10.2 | Form of Share Subscription Agreement, dated September 22, 2021, between QuickLogic Corporation and the purchaser named therein | 8-K | 10.2 | September 30, 2021 | |
| 10.3 | Fourth Amendment to Amended and Restated Loan and Security Agreement entered into as of November 16, 2021 | ||||
| 31.1 |
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| 31.2 |
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| 32.1 |
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| 32.2 |
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| 101.INS |
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Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
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| 101.SCH |
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Inline XBRL Taxonomy Extension Schema Document |
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| 101.CAL |
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Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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| 101.DEF |
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Inline XBRL Taxonomy Extension Definition Linkbase Document |
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| 101.LAB |
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Inline XBRL Taxonomy Extension Label Linkbase Document |
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| 101.PRE |
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Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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| 104 |
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The cover page from the Company’s quarterly report on Form 10-Q for the quarter ended October 3, 2021, has been formatted in Inline XBRL and contained in exhibit 101. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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QUICKLOGIC CORPORATION |
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/s/ Anthony Contos |
| Date: |
November 17, 2021 | Anthony Contos |
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Interim Chief Accounting Officer (as Principal Accounting and Financial Officer and on behalf of the Registrant) |