QUIK 10-Q Quarter ended April 2, 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 or 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 months ended April 2, 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 first fiscal quarter for 2023 and 2022 ended on April 2, 2023 and April 3, 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 system, 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. The Company's investigation and assessment of the incident's impact is ongoing.

The Company continued its business operations during this incident and successfully restored all of its critical operational data. The Company has also taken steps to further secure its IT systems. Based on the ongoing investigation and information currently known at this time, the Company believes the incident has not had nor will have a material impact on its business operations, ability to serve 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 April 2, 2023 , the Company's principal sources of liquidity consisted of cash, cash equivalents and restricted cash of $ 20.9 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 three months ended April 2, 2023 .

The Company was in compliance with all the Heritage Bank Revolving Facility loan covenants as of April 2, 2023 . As of April 2, 2023 , the Company had $ 15.0 million outstanding on the Revolving Facility with an interest rate of 8.5 %.

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 April 2, 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, and ™, QuickAI™, SensiML Analytics Toolkit, Eclipse II products, 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 ultimately 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 policies 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 valuation of 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 generally 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 April 2, 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 8.5 % 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 April 2, 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 generally, 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 months ended April 2, 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 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 months ended April 2, 2023 and April 3, 2022 , 740 thousand and 578 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 was 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 April 2, 2023 , and January 1, 2023 (in thousands):

Note 5 — Debt Obligations

Revolving Line of Credit

As of April 2, 2023 and January 1, 2023 , the Company had $ 15.0 million of revolving debt outstanding with an interest rate of 8.5 % 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. Interest expenses recognized were $ 33 tho usand and $ 24 thousand for th e three months ended April 2, 2023 a nd April 3, 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 for each of t he three months ended April 2, 2023 and April 3, 2022 .

Right-of-use assets were approximately $ 1.6 million and $ 1.4 million as of April 2, 2023 and January 1, 2023 , respectively. Lease liabilities were approximately $ 1.6 million and $ 1.4 million as of April 2, 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 three months ended April 2, 2023 and April 3, 2022 was $ 445 thousand and $ 0 , respectively.

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

Non-cash ROU assets included in the operating cash flows for the three months ended April 2, 2023 and April 3, 2022 were $ 155 thousand and $ 193 thousand, respectively.

The following table provides the details of right-of-use assets and lease liabilities as of April 2, 2023 and January 1, 2023 (in thousands):

The following table provided the details of future lease payments for operating and finance leases as of April 2, 2023 (in thousands):

The following table provides the details of lease terms and discount rates as of April 2, 2023 and January 1, 2023 :

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 offering 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 months ended April 2, 2023 and April 3, 2022 was as follows (in thousands):

The Company capitalized stock-based compensation amounts were $ 18 thousand and $ 0 for the three months ended April 2, 2023 and April 3, 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 three months ended April 2, 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 three months ended April 2, 2023 :

No stock options were granted, exercised, forfeited, or expired during the three months ended April 2, 2023 and April 3, 2022 .

Total stock-based compensation related to stock options was $ 0 during the three months ended April 2, 2023 and April 3, 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 $ 0.7 million and $ 0.4 million for the three months ended April 2, 2023 and April 3, 2022, respectively.

As of April 2, 2023 and April 3, 2022 , there was approximately $ 2.2 million and $ 1.3 million , respectively, in unrecognized compensation expense related to RSUs. The remaining unrecognized stock-based compensation expense as of April 2, 2023 is expected to be recorded over a weighted average period of 1.38 years.

A summary of activity for the Company's RSUs and PRSUs for the three months ended April 2, 2023 is as follows:

Employee Stock Purchase Plan

Total stock-based compensation related to the Company's Employee Stock Purchase Plan was approximately $ 30 thousand and $ 23 thousand for the three months ended April 2, 2023 , and April 3, 2022, respectively.

Note 9 — Income Taxes

The Company recorded a net income tax expense of $ 7 thousand for the three months ended April 2, 2023 and a net income tax benefit of $ 1 thousand for the three months ended April 3, 2022 . The effective tax rate was ( 0.6 %) and 0.1 % for the three months ended March 31, 2022 and 2021, respectively. The effective tax rates differ from the statutory tax rate of 21 %, 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 April 2, 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 April 2, 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):

eFPGA IP revenue for the three months ended April 3, 2023 was $ 2.8 million which was comprised of approximately $ 2.6 professional services revenue and $ 0.2 million in eFPGA intellectual property license revenue. eFPGA IP revenue for the three months ended April 3, 2022 of $ 1.6 million was primarily professional service revenue.

Contract assets related to professional services revenue were $ 2.3 million and $ 0.1 million for the three months ended April 2, 2023 and April 3, 2022, respectively. Contract liabilities related to professional services revenue were $ 0.3 million and $ 0 for the three months ended April 2, 2023 and April 3, 2022, respectively.

The tables below present disaggregated revenues by geographical location. Revenue attributed to geographic location is based on the destination of the product or service. Substantially all revenues in North America were in the United States. Revenue in the United States was $ 3.3 million, or 80 % of total revenue, for the three months ended April 2, 2023 , and $ 2.4 million, or 59 % of total revenue for the three months ended April 3, 2022 .

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

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

* 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:

Note 11 — Commitments and Contingencies

Commitments

The Company's principal contractual commitments include purchase obligations, re-payments of draw downs from the revolving line of credit, and payments under operating and finance leases. Purchase obligations are largely comprised of open purchase order commitments to suppliers and to subcontractors under professional services agreements. Our risk associated with the purchase obligations under professional services agreements is limited to the termination liability provisions within those contracts, and as such, we do not believe they represent a material liquidity risk to us.

Certain wafer manufacturers require the Company to forecast wafer starts several months in advance. The Company is committed to take delivery of and to pay for a portion of forecasted wafer volume. As of April 2, 2023 , the Company had no significant outstanding commitments for the purchase of wafer inventory.

Purchase Obligations

Purchase obligations represent contractual agreements to purchase goods or services entered into in the ordinary course of business. Purchase obligations are legally binding and amongst other things specify a minimum or a range of quantities, pricing and approximate timing of the transaction. Purchase obligations include amounts that are recorded on the Company's consolidated balance sheets as well as amounts that are not recorded on the Company's consolidated balance sheets. As of April 2, 2023 , total outstanding purchase obligations for other goods and services were $ 1.3 million due within the next twelve months.

Contingencies

Contingent commitments are not recorded on the Company’s consolidated balance sheets and represent significant contractual obligations on procurement contracts with determinable prices and quantities, but where the timing and probability of incurring the obligation is dependent on numerous variables which are not reasonably predictable. These obligations require our suppliers to build and deliver certain products in sufficient time to meet the Company’s planning horizon. The actual amounts we pay to our suppliers and the timing of payments for these future obligations could differ materially from our current estimates. As of April 2, 2023 , contingent commitments were approximately $ 3.8 million due within the next twelve months and $ 8.7 million d ue within two to three years. These amounts represent the Company’s best estimates for contingent commitments which are expected to be delivered at some time in the future but for which delivery is currently undefined.

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.

Note 12 — Subsequent Events

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"). If not prepaid prior to the Note maturity date of April 28, 2024, the principal and all accrued and unpaid interest will be due and payable to the Company. The Note will bear an interest rate of 3.0 % compounded monthly. If an event of default occurs, the interest will increase to 10.0 %.