QUIK 10-Q Quarter ended Oct. 2, 2022

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”), military, aerospace and defense products. 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. The Company is a fabless semiconductor provider of comprehensive, flexible sensor processing solutions, ultra-low power display bridges, and ultra-low power Field Programmable Gate Arrays (“FPGAs”). The Company’s wholly owned subsidiary, SensiML Corporation (“SensiML”) provides Analytics Toolkit, which is used in many of the applications where the Company’s ArcticPro™, eFPGA intellectual property (“IP”) plays a critical role. SensiML Analytics toolkit is an end-to-end software suite that provides OEMs a straightforward process for developing pattern matching sensor algorithms using machine learning technology that are optimized for ultra-low power consumption.

The accompanying interim condensed consolidated financial statements are unaudited. In the opinion of the Company’s management, these statements have been prepared in accordance with the United States generally accepted accounting principles (“U.S. GAAP”), and include all adjustments, consisting only of normal recurring adjustments, necessary to provide a fair statement of results for the interim periods presented. The Company recommends that these interim unaudited condensed consolidated financial statements be read in conjunction with the Company's Form 10 -K for the year ended January 2, 2022, which was filed with the Securities and Exchange Commission (“SEC”) on March 22, 2022. Operating results for the three and nine months ended October 2, 2022 are not necessarily indicative of the results that may be expected for the full fiscal 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 quarter for 2022 and 2021 ended on October 2, 2022 and October 3, 2021 , respectively.

COVID- 19 - Impact on Business

There have been no material changes due to the impact of the Covid- 19 pandemic on our business from that disclosed in our most recently filed Annual Report. Our most recent Annual Report on Form 10 -K for the year ended January 2, 2022 as filed with the SEC on March 22, 2022 provides additional information about our business and operations.

Liquidity

The Company has financed its operations and capital investments through public and private offerings of our common stock, finance and operating leases, and borrowing under a revolving line of credit with Heritage Bank (the "Revolving Facility"), partially offset by cash used in operations. In addition to the Company's $ 20.0 million of cash, cash equivalents and restricted cash, as of October 2, 2022 other sources of liquidity included $ 45 million drawn down from the Revolving Facility and $ 4.8 million in net proceeds from the Company's sale of common stock in nine months ended October 2, 2022 .

The Company was in compliance with all the Heritage Bank Revolving Facility loan covenants as of October 2, 2022 . As of October 2, 2022 , the Company had $ 15.0 million outstanding on the Revolving Facility with an interest rate of 6.75 %.

On September 14, 2022 and February 9, 2022, the Company entered into common stock purchase agreements with certain investors for the sale of an aggregate of 487,279 and 310,000 shares of common stock, respectively, par value $ 0.001 , in registered direct offerings, resulting in net cash proceeds of approximately $ 3.2 million and $1.5 million, respectively. Issuance costs related to September 14, 2022 and the February 9, 2022 offering were immaterial. The purchase price for each share of common stock in the September 14, 2022 and in the February 9, 2022 placements were $ 6.57 and $ 4.78 , respectively. The Company currently intends to use the net proceeds from financings for working capital, the development of next generation eFPGA-based products, including AI and open source hardware or software, and general corporate purposes, and 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, the Company currently has no commitments or agreements and is not involved in any negotiations with respect to any such transactions.

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, 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, market acceptance of existing and new products including solutions based on its eFPGA IP, ArcticLink ^® , and PolarPro ^® platforms, eFPGA, EOS S3 SoC, Quick AI solution, and SensiML software fluctuations in revenue as a result of product end-of-life, fluctuations in revenue as a result of the stage in the product life cycle of its customers’ products, costs of securing access to and availability of adequate manufacturing capacity; levels of inventories; wafer purchase commitments; customer credit terms; the amount and timing of research development expenditures; the timing of new product introductions; production volumes; product quality; sales and marketing efforts; the value and liquidity of its investment portfolio; changes in operating assets and liabilities; the ability to obtain or renew debt financing and to remain in compliance with the terms of existing credit facilities; the ability to raise funds from the sale of equity in the Company; the 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, together with financial resources from its Revolving Facility, assuming renewal of the Revolving Facility or the Company entering into a new debt agreement with an alternative lender prior to the expiration of the Revolving Facility in December 2023, 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.

Principles of Consolidation

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

Foreign Currency

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

Uses of Estimates

The preparation of these 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, fair value measurements, 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. For additional information, please refer to the Company's most recent annual report which was filed with the SEC on March 22, 2022.

Concentration of Risk

The Company's accounts receivable is 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 9, Information Concerning Product Lines, Geographic Information and Revenue Concentration, for information regarding concentrations associated with accounts receivable.

Note 2 — Significant Accounting Policies

During the three and nine months ended October 2, 2022 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 2, 2022 . For a discussion of the significant accounting policies, please see the Annual Report on Form 10 -K for the fiscal year ended January 2, 2022, filed with the SEC on March 22, 2022.

Note 3 — Net Loss Per Share

Basic loss per share is computed by dividing net loss 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 2, 2022 and October 3, 2021 , 398 thousand and 691 thousand shares of common stoc k, respectively, associated with equity awards and the estimated number of shares to be purchased under the current offering period of the 2009 Employee Stock Purchase Plan were outstanding. These shares were not included in the computation of diluted net loss per share, as they were considered anti-dilutive due to the net losses the Company experienced during these periods. Warrants to purchase up to 386 thousand shares were issued in connection with May 29, 2018, stock offering were not included in the diluted loss per share calculation of the periods presented as they were also considered anti-dilutive due to the net loss the Company experienced during these periods. The warrants are exercisable through May 29, 2023 at a price of $ 19.32 per share.

Note 4 — Balance Sheet Components

The following table provides details relating to certain balance sheet line items as of October 2, 2022 , and January 2, 2022 (in thousands):

Note 5 — Debt Obligations

Revolving Line of Credit

As of October 2, 2022 and January 2, 2022 , the Company had $ 15.0 million of revolving debt outstanding with an interest rate of 6.75 % and 3.75 % per annum, respectively. Heritage Bank has a first priority security interest in substantially all of the Company's tangible and intangible assets to secure any outstanding amounts under the agreement. The Company was in compliance with all loan covenants under the agreement as of the end of the current reporting period. Interest expense recognized were $ 11 tho usand and $ 50 thousand for th e three and nine months ended October 2, 2022 , r espectively, an d $ 22 thousand and $ 68 thou sand for the three and nine months ended October 3, 2021 , respectively.

On April 4, 2022, the Company entered into a Fifth Amendment (the "Amendment") to the December 21, 2018 Amended and Restated Loan and Security Agreement (as amended, the "Agreement") with Heritage Bank. The purpose of the Fifth Amendment was primarily to clarify certain terms of the Agreement as follows: (i) added a definition of "Remaining Months Liquidity" to be defined as the Borrower's unrestricted cash maintained at Bank (including cash in the Pledged Account) minus the outstanding principal amount of the Advances, divided by the absolute value of the average trailing three ( 3 ) month EBITDA; and (ii) revised the minimum cash and remaining months liquidity financial covenants. The minimum cash covenant was revised such that the balance of unrestricted cash in the pledged account shall at all times exceed the principal amount of all advances owed that are outstanding at any time. The remaining months liquidity covenant specified that it should not be less than nine months. The Company does not believe that the clarifications of the terms in the Amendment will have a material impact on the Company's liquidity or utilization of the revolving loan under the Agreement.

Note 6 — Leases

The Company entered into operating leases for office space for its headquarters. The Company has elected the practical expedient to apply to recognition requirements to short-term leases for its domestic and foreign subsidiaries and for its sales offices and recognized rent payments on short-term leases on a straight-line basis over the lease term. Finance leases are primarily for engineering design software. Operating leases generally have lease terms of one to five years. Finance leases are generally two to three years. As of October 2, 2022 and January 2, 2022 , the balance of right-of-use assets was approximately $ 0.9 million and $ 1.5 million, respectively, and the lease liability was approximately $ 1 million and $ 1.6 million, respectively, for operating and finance leases for the headquarters in San Jose and for the operating subsidiaries of SensiML in Oregon and the Company's subsidiary in India. Total rent expense was $ 0.1 million and $ 0.3 million for the three and nine months ended October 2, 2022 and October 3, 2021 , respectively.

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

The following table provides the details of supplemental cash flow information. 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 2, 2022 and the nine months ended October 3, 2021 were $ 0 and $ 0.4 million, respectively (in thousands):

The following table provides the details of right-of-use assets and lease liabilities as of October 2, 2022 and January 2, 2022 (in thousands):

The following table provided the details of future lease payments for operating and finance leases as of October 2, 2022 (in thousands):

The following table provides the details of lease terms and discount rates as of October 2, 2022 and January 2, 2022 :

Note 7 — Capital Stock

Employee Stock Plan

On May 10, 2022 at the Company's Annual Meeting, Company stockholders approved increasing the reservation of the additional shares under the 2019 Stock Plan, as amended on May 10, 2022. The approval of an additional 900 thousand shares of common stock increased the total number of available shares to 1.4 million under the 2019 Stock Plan, as amended. The number of shares available for future awards as of the date of the Annual Meeting are the sum of ( 1 ) 900 thousand, ( 2 ) the number of shares available for future awards under the plan immediately before such approval which were 522 thousand shares and ( 3 ) any shares subject to outstanding awards under the 2019 Plan or the 2009 Plan, that are terminated, canceled, surrendered, or forfeited as of May 10, 2022. On May 19, 2022, the Company filed a Registration Statement on Form S- 8 with the SEC to register an additional 900 thousand shares of its common stock that may be issued under the Company’s 2019 Stock Plan, as amended.

Registration Statement

On August 17, 2022, the Company filed a Registration Statement on Form S- 3 with the SEC, under which we may sell, from time-to-time common stock, preferred stock, depositary shares, warrants, debt securities, and units, individually or as units comprised of one or more of the other securities or a combination thereof. The Company's registration statement became effective on August 26, 2022.

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 2, 2022 and October 3, 2021 was as follows (in thousands):

There was no stock -based compensation expense reversal related to the cancellation of certain unvested performance-based RSUs for the three and nine months ended October 2, 2022 and October 3, 2021 .

No stock options were granted during the three and nine months ended October 2, 2022 and October 3, 2021 .

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 2, 2022 (in thousands):

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 2, 2022 :

No stock options were granted, exercised, forfeited, or expired during the nine months ended October 2, 2022 and October 3, 2021 .

Total stock-based compensation related to stock options was $ 0 during the nine months ended October 2, 2022 and October 3, 2021 .

As of October 2, 2022 , the fair value of unvested stock options, net of forfeitures, was $ 0 .

Restricted Stock Units

The Company grants restricted stock units (“RSUs”) and performance restricted stock units ("PRSUs") to employees and directors with various vesting terms. RSUs entitle the holder to receive, at no cost, one common share for each RSU as it vests. In general, the Company's policy is to withhold shares in settlement of employee tax withholding obligations upon the vesting of RSUs. The stock-based compensation expense related to RSUs and PRSUs was approximately $ 0.5 million and $ 1.3 million for the three and nine months ended October 2, 2022 , respectively, and approximately $ 0.9 million and $ 1.4 million for the three and nine months ended October 3, 2021 , respectively.

As of October 2, 2022 and October 3, 2021 , there was approximately $ 1.1 million and $ 2.1 million , respectively, in unrecognized compensation expense related to RSUs. The remaining unrecognized stock-based compensation expense as of October 2, 2022 is expected to be recorded over a weighted average period of 1.51 years.

A summary of activity for the Company's RSUs and PRSUs for the nine months ended October 2, 2022 is as follows:

Employee Stock Purchase Plan

Total stock-based compensation related to the Company's Employee Stock Purchase Plan was approximately $ 20 thousand and $ 54 thousand for the three and nine months ended October 2, 2022 , respectively, and $ 31 thousand and $ 97 thousand for the three and nine months ended October 3, 2021 , respectively.

Note 9 — Income Taxes

The Company recorded a net income tax expense of $ 3 thousand and $ 19 thousand for the three and nine months ended October 2, 2022 , respectively, and a net income tax benefit of $ 21 thousand and a net income tax expense of $ 0.1 million for the three and nine months ended October 3, 2021 , respectively. A majority of the income tax expense for the three months ended October 2, 2022 was related to the Company's foreign subsidiaries, which are cost-plus entities, and state minimum income taxes. A majority of the income tax expense for the nine months ended October 2, 2022 was related to income tax expense of the Company's foreign subsidiaries and state minimum income taxes, partially offset by tax benefits from foreign income tax returns related to the Company's foreign subsidiaries. The difference between the estimated annual effective income tax benefit rate of 1.2 % and the 21 % U.S. federal statutory expense rate reflects state income taxes, foreign income taxes, the effect of certain permanent differences, and a full valuation allowance against net deferred tax assets.

The valuation allowance primarily resulted from not having sufficient income from deferred tax liability reversals in the appropriate future periods to support the realization of certain deferred tax assets. Based on the estimated reversal patterns of the Company’s deferred tax assets and liabilities, it is more likely than not that the Company will not realize the federal, state, and certain foreign deferred tax assets generated as there is insufficient projected income from reversals of deferred tax liabilities. Accordingly, the Company continues to maintain a full valuation allowance against all of U.S. and certain foreign net deferred tax assets as of October 2, 2022 .

The Company had no unrecognized tax benefits as of October 2, 2022 and January 2, 2022 which would affect the Company's effective tax rate. The Company does not anticipate any material changes to its unrecognized tax benefits during the next 12 months.

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

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

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. We derive revenue from sales to customers located in North America, Europe and Asia Pacific.

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

New products revenue consists of revenues from the sale of hardware products manufactured on 180 nanometer or smaller semiconductor processes, eFPGA intellectual property licenses, professional services, and QuickAI and SensiML AI software as a service (“SaaS”) revenue. Mature products include all products produced on semiconductor processes larger than 180 nanometer.

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