QUIK 10-Q Quarter ended Oct. 1, 2023

Note 1 — The Company and Basis of Presentation

QuickLogic Corporation ("QuickLogic" or, the "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 or IoT hardware products, 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"). Starting in late 2021, the Company increased its professional engineering services business related to its eFPGA products for both civilian and military applications. The Company’s wholly owned subsidiary, SensiML Corp. ("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 1, 2023, which was filed with the Securities and Exchange Commission (“SEC”) on March 28, 2023. Operating results for the three and nine months ended October 1, 2023 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 2023 and 2022 ended on October 1, 2023 and October 2, 2022 , respectively.

2023 Cybersecurity Incident

On January 20, 2023, the Company detected a ransomware infection affecting a limited number of IT systems, including systems that contained personal information of our employees. Upon detection of the incident, the Company promptly began an assessment of all Company IT systems, notified law enforcement, and engaged legal counsel and other incident response professionals. Through counsel, the Company retained a leading cybersecurity forensics firm to review and investigate the incident. We have completed our forensic work and have found no impact on our financial systems. For potentially affected individuals or entities whose personally identifiable data may have been accessed, we are providing free credit monitoring services to them.

The Company is voluntarily taking steps to further secure its IT infrastructure, systems, and security. The Company believes the incident has not had nor will have a material impact on its business operations, ability to service its customers, or financial results. The Company carries insurance, including cyber insurance, commensurate with its size and the nature of its operations.

Liquidity

The Company has financed its operations and capital investments through the sale of common stock, finance and operating leases, a revolving line of credit with Heritage Bank (the "Revolving Facility"), and cash flows from operations. As of October 1, 2023 , the Company's principal sources of liquidity consisted of cash, cash equivalents and restricted cash of $ 18.6 million, inclusive of a $ 15.0 million advance from its Revolving Facility, and $ 2.3 million in net proceeds from the Company's sale of common stock in the nine months ended October 1, 2023 . The Company's restricted cash balance as of October 1, 2023 was $ 0.1 million and relates to amounts pledged as cash security for the use of credit cards.

The Company was in compliance with all the Revolving Facility loan covenants as of October 1, 2023 . As of October 1, 2023 , the Company had $ 15.0 million outstanding on the Revolving Facility with an interest rate of 9.00 %.

On April 28, 2023, the Company converted accounts receivable for a customer in the amount of approximately $ 1.16 million to notes receivable (the "Note"). At the time, the Note bore an interest rate of 3.0 % compounded monthly. On June 28, 2023, the Company cancelled the original note and entered into a revised promissory note with the customer, where the interest rate changed to 4.69 % compounded monthly, or a 4.8 % effective annual interest rate, accruing from the date of the prior note. If not prepaid prior to the Note maturity date of June 28, 2024, the principal and all accrued and unpaid interest will be due and payable to the Company. If an event of default occurs, the interest rate will increase to 10.0 %. All other terms of the note remained the same.

On March 21, 2023, the Company entered into common stock purchase agreements with certain investors for the sale of an aggregate of 450 thousand shares of common stock, par value $ 0.001 , in a registered direct offering, resulting in net cash proceeds of approximately $ 2.3 million. Issuance costs related to the offering were negligible. The purchase price for each share of common stock was $ 5.14 . See Note 7 for additional information.

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 as of October 1, 2023, together with its revenues from operations, and the 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 affect the Company’s liquidity, including, among others: the level of revenue and gross profit as a result of the cyclicality of the semiconductor industry; the conversion of design opportunities into revenue; market acceptance of existing and new products including solutions based on its ArcticLink® and PolarPro® platforms, ArcticPro™, EOS S3 SoC, Quick AI solution, QuickAI™, SensiML Analytics Toolkit, Eclipse II products, and eFPGA IP licenses and professional services; fluctuations in revenue as a result of product end-of-life; fluctuations in revenue as a result of the stage in the product life cycle of its customers’ products; costs of securing access to and availability of adequate manufacturing capacity; levels of inventories; wafer purchase commitments; customer credit terms; the amount and timing of research and development expenditures; the timing of new product introductions; production volumes; product quality; sales and marketing efforts; the value and liquidity of its investment portfolio; changes in operating assets and liabilities; the ability to obtain or renew debt financing and to remain in compliance with the terms of existing credit facilities; the ability to raise funds from the sale of equity in the Company; the ability to capitalize on synergies with our subsidiary SensiML; the issuance and exercise of stock options and participation in the Company’s employee stock purchase plan; and other factors related to the uncertainties of the industry and global economics.

Over the longer term, the Company anticipates that sales generated from its new product offerings, existing cash and cash equivalents, together with financial resources from its Revolving Facility with Heritage Bank, assuming renewal of the Revolving Facility or the Company entering into a new debt agreement with an alternative lender prior to the expiration of the revolving line of credit in December 2024, 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, and are insignificant for all periods presented.

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.

Although these estimates are based on the Company’s knowledge of current events and actions it may undertake in the future, actual results may materially differ from these estimates and assumptions in regard to revenue recognition; and the valuation of inventories including identification of excess quantities, market value and obsolescence.

The methods, estimates and judgments we use in applying our most critical accounting policies have a significant impact on the results we report in our consolidated financial statements. The SEC has defined critical accounting policies as those that are most important to the portrayal of our financial condition and results of operations and require us to make our most 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 accounting estimates include revenue recognition and determination of the standalone selling price for certain distinct performance obligations (such as for IP licensing and professional services contracts) and the assessment of excess, obsolete, and unsaleable inventories. We believe that we apply judgments and estimates in a consistent manner and that such consistent application results in consolidated financial statements and accompanying notes that fairly represent all periods presented. However, any factual errors or errors in these judgments and estimates may have a material impact on our financial statements. For additional information, please refer to the Company's most recent Annual Report on Form 10 -K which was filed with the SEC on March 28, 2023.

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 does not require collateral. See Note 10, Information Concerning Product Lines, Geographic Information and Revenue Concentration, for information regarding concentrations associated with accounts receivable.

As of October 1, 2023 and January 1, 2023, the Company had $ 15.0 million of revolving debt outstanding with Heritage Bank; the revolving debt carried an interest rate of 9.00 % and 8.00 % 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. The maturity date for advances under the revolving debt agreement is December 31, 2024. At October 1, 2023, the Company had utilized a significant portion of the revolving debt, and as a result, it maintains a substantial amount of cash deposits with Heritage Bank. The concentration of cash with one financial institution poses certain risks.

For instance, adverse developments affecting financial institutions, companies in the financial services industry or the financial services industry, such as actual events or concerns involving liquidity, defaults, or non-performance, could adversely impact the stability of Heritage Bank, leading to additional financial risks for the Company.

Any material decline in available funding or our ability to access our cash, cash equivalents, and liquidity resources, inclusive of those at Heritage Bank, could adversely impact our ability to meet our operating expenses, financial and contractual obligations, or result in breaches of our contractual obligations. Any of these impacts could have material adverse impacts on our operations and liquidity.

Note 2 — Significant Accounting Policies

During the three and nine months ended October 1, 2023 there were no changes to the Company's significant accounting policies from its disclosures in the Annual Report on Form 10 -K for the year ended January 1, 2023 . For a discussion of the significant accounting policies, please see the Annual Report on Form 10 -K for the fiscal year ended January 1, 2023, filed with the SEC on March 28, 2023.

Note 3 — Net Income (Loss) Per Share

Basic income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income (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 income (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 periods in which the Company has reported a net loss, diluted net loss per share attributable to common stockholders is the same as basic net loss per share attributable to common stockholders as dilutive common shares are not assumed to have been issued if their effect is anti-dilutive.  For periods in which the Company has reported a net income, diluted net income per share attributable to common stockholders is different from basic net income per share attributable to common stockholders as dilutive common shares would increase the amount of shares outstanding reduced by the amounts of treasury shares repurchased from the proceeds at the average market price for the period.

For the three months ended October 1, 2023, 925 thousand shares of common stock associate 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. Of these, a 276 thousand share equivalent was determined to be dilutive and included in the computation of diluted net income per share for the period. Estimated proceeds for the dilutive shares were determined to be $ 147 thousand, which resulted in a reduction of dilutive shares by 4,672 using the treasury stock method at an average market price of $ 8.41 .

For the nine months ended October 1, 2023 and the three and nine months ended October 2, 2022, 925 thousand and 398 thousand shares of common stock, respectively, associated with equity awards and the estimated number of shares to be purchased under the current offering period of the 2009 Employee Stock Purchase Plan were outstanding. These shares were not included in the computation of diluted net loss per share, as they were considered anti-dilutive due to the net losses the Company experienced during these periods. Warrants to purchase up to 386 thousand shares were issued in connection with the 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 were exercisable through May 29, 2023 at a price of $ 19.32 per share. The warrants expired unexercised on May 29, 2023 .

Note 4 — Balance Sheet Components

The following table provides details relating to certain balance sheet line items as of October 1, 2023 , and January 1, 2023 (in thousands):

( 1 ) In the nine months ended October 1 2023, the Company capitalized $ 3.86 million related to tooling to be utilized under its long-term professional services contracts. The tooling will be depreciated over an estimated useful life of seven years.

Note 5 — Debt Obligations

Revolving Line of Credit

As of October 1, 2023 and January 1, 2023 , the Company had $ 15.0 million of revolving debt outstanding with an interest rate of 9.00 % a nd 8.00 % 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. Related interest expenses and annual facility fees recognized were $ 30 tho usand and $ 92 thousand for th e three and nine months ended October 1, 2023 a nd $ 20 thousand and $ 59 thousand for the three and nine months ended October 2, 2022 , respectively.

Note 6 — Leases

The Company's principal research and development and corporate facilities are leased office buildings located in the United States. These lease facilities are classified as operating leases and have lease terms of one to five years. The Company maintains sales offices out of which it conducts sales and marketing activities in various countries outside of the United States which are rented under short-term leases. The Company has elected the practical expedient to apply to recognition requirements to short-term leases and recognizes rent payments on short-term leases on a straight-line basis over the lease term. Finance leases are primarily for engineering design software and have leases terms of generally two to three years. Total rent expenses were $ 0.1 million and $ 0.3 million for t he three and nine months ended October 1, 2023 and $ 0.1 million and $ 0.3 million for t he three and nine months ended October 2, 2022 , respectively.

Right-of-use assets were approximately $ 1.1 million and $ 1.4 million as of October 1, 2023 and January 1, 2023 , respectively. Lease liabilities were approximately $ 1.1 million and $ 1.4 million as of October 1, 2023 and January 1, 2023 , respectively.

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

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 1, 2023 and October 2, 2022 was $ 445 thousand and $ 0 , respectively.

The following table provides the details of supplemental cash flow information (in thousands):

Non-cash ROU assets related to operating leases included in the operating cash flows for the nine months ended October 1, 2023 and October 2, 2022 were $ 274 thousand and $ 257 thousand, respectively. Non-cash ROU assets related to finance leases included in the financing cash flows for the nine months ended October 1, 2023 and October 2, 2022 were $ 486 thousand and $ 328 thousand, respectively.

The following table provides the details of right-of-use assets and lease liabilities as of October 1, 2023 and January 1, 2023 (in thousands):

The following table provided the details of future lease payments for operating and finance leases as of October 1, 2023 (in thousands):

The following table provides the details of lease terms and discount rates as of October 1, 2023 and January 1, 2023 :

^{( 1 )} The operating lease relates to the Company's headquarters in San Jose, CA. On October 24, 2023, the Company renewed its lease at its current location for an additional three years. The amended lease term will expire on April 14, 2027 with no change in terms.

Note 7 — Capital Stock

Issuance of Common Stock

On March 21, 2023, the Company entered into common stock purchase agreements with certain investors for the sale of an aggregate of 450 thousand shares of common stock in registered direct offerings pursuant to our effective shelf registration statement on Form S- 3 (File No. 333 - 266942 ), resulting in net cash proceeds of approximately $ 2.3 million. Issuance costs related to the registered direct offering were insignificant. The purchase price for each share of common stock was $ 5.14 .

On August 17, 2022, the Company filed a Registration Statement on Form S- 3 (File No. 333 - 266942 ) 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 1, 2023 and October 2, 2022 was as follows (in thousands):

The Company capitalized stock-based compensation amounts to capitalized internal-use software and tooling, net of $ 119 thousand and $ 0 for the nine months ended October 1, 2023 and October 2, 2022 , respectively.

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 1, 2023 (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 1, 2023 :

No stock options were granted or exercised during the nine months ended October 1, 2023. No stock options were granted, exercised, forfeited, or expired during the nine months ended October 2, 2022.

Total stock-based compensation related to stock options was $ 0 during the nine months ended October 1, 2023 and October 2, 2022 .

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 were approximately $ 0.6 million and $ 1.8 million for the three and nine months ended October 1, 2023 and approximately $ 0.5 million and $ 1.3 million for the three and nine months ended October 2, 2022, respectively.

As of October 1, 2023 and October 2, 2022 , there was approximately $ 3.7 million and $ 1.1 million , respectively, in unrecognized compensation expense related to RSUs. The remaining unrecognized stock-based compensation expense as of October 1, 2023 is expected to be recorded over a weighted average period of 1.52 years.

A summary of activity for the Company's RSUs and PRSUs for the nine months ended October 1, 2023 is as follows:

Employee Stock Purchase Plan

Total stock-based compensation related to the Company's Employee Stock Purchase Plan was approximately $ 25 thousand and $ 100 thousand for the three and nine months ended October 1, 2023 , respectively, and $ 20 thousand and $ 54 thousand for the three and nine months ended October 2, 2022, respectively.

Note 9 — Income Taxes

The Company recorded a net income tax expense of $ 4 thousand and $ 4 thousand for the three and nine months ended October 1, 2023 , respectively, and a net income tax expense of $ 3 thousand and $ 19 thousand for the three and nine months ended October 2, 2022 , respectively. The difference between the estimated annual effective tax rate of 2.67 % and the U.S. federal statutory tax rate of 21 % is primarily due to the Company's valuation allowance movement in each period presented. It is more likely than not that the Company will not realize the federal, state, and certain foreign deferred tax assets as of October 1, 2023. As such, the Company continues to maintain a full valuation allowance against all of its US and certain foreign net deferred tax assets as of October 1, 2023.

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 family (in thousands):

New products revenue consists of revenues from the sale of hardware products manufactured on 180 nanometer or smaller semiconductor processes, eFPGA IP license and eFPGA-related professional services, 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):