What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-06 compared with 2020-08-07 · 184 added, 149 removed, 168 unchanged (66% of the section changed)

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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.

The following Management's Discussion and Analysis of Financial Condition and Results of Operations, as well as information contained in “Risk Factors”

in Part II, Item 1A and elsewhere in this Quarterly Report on Form 10-Q, contain “forward-looking statements”

within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

We intend that these forward-looking statements be subject to the safe harbor created by those provisions.

Forward-looking statements are generally written in the future tense and/or are preceded by words such as “will,” “may,” “should,” “forecast,” “could,” “expect,” “suggest,” “believe,” “anticipate,” “intend,” “plan,” "future," "potential," "target," "seek," "continue," "if" or other similar words.

Forward-looking statements include statements regarding our strategies as well as (1) our revenue levels, including the commercial success of our solutions and new products, (2) the conversion of our design opportunities into revenue, (3) our liquidity, (4) our gross profit and breakeven revenue level and factors that affect gross profit and the break-even revenue level, (5) our level of operating expenses, (6) our research and development efforts, (7) our partners and suppliers, (8) industry and market trends, (9) our manufacturing and product development strategies and (10) our competitive position.

The following discussion should be read in conjunction with the attached unaudited condensed consolidated financial statements and notes thereto, and with our audited consolidated financial statements and notes thereto for the fiscal year ended December 29, 2019, found in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 13, 2020.

Forward-looking statements are generally written in the future tense and/or are preceded by words such as “will,”

“may,”

“should,”

“forecast,”

“could,”

“expect,”

“suggest,”

“believe,”

“anticipate,”

“intend,”

“plan,”

"future," "potential," "target," "seek," "continue," "if" or other similar words.

Forward-looking statements include statements regarding our strategies as well as (1) our revenue levels, including the commercial success of our solutions and new products, (2) the conversion of our design opportunities into revenue, (3) our liquidity, (4) our gross profit and breakeven revenue level and factors that affect gross profit and the break-even revenue level, (5) our level of operating expenses, (6) our research and development efforts, (7) our partners and suppliers, (8) industry and market trends, (9) our manufacturing and product development strategies and (10) our competitive position.

The following discussion should be read in conjunction with the attached unaudited condensed consolidated financial statements and notes thereto, and with our audited consolidated financial statements and notes thereto for the fiscal year ended December 29, 2019, found in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 13, 2020.

Although we believe that the assumptions underlying the forward-looking statements contained in this Quarterly Report are reasonable, any of the assumptions could be inaccurate, and therefore there can be no assurance that such statements will be accurate.

The risks, uncertainties and assumptions referred to above that could cause our results to differ materially from the results expressed or implied by such forward-looking statements include, but are not limited to, those discussed under the heading “Risk Factors” in Part II, Item 1A hereto and the risks, uncertainties and assumptions discussed from time to time in our other public filings and public announcements.

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.

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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.

We develop low power, multi-core semiconductor platforms and intellectual property (“IP”) for artificial intelligence (“AI”) voice and sensor processing.

The solutions include an eFPGA for hardware acceleration and pre-processing, and heterogeneous multi-core System on Chip (“SoCs”) that integrate eFPGA with other processors and peripherals.

The SensiML Analytics Toolkit from wholly owned subsidiary, SensiML Corporation (“SensiML”) completes the “full stack” end-to-end solution with accurate sensor algorithms using AI technology.

The full range of platforms, software tools and eFPGA IP enables the practical and efficient adoption of AI, voice and sensor processing across mobile, wearable, hearable, consumer, industrial, edge and endpoint IoT applications.

Our solutions are created from our new silicon platforms including our EOS™, QuickAI™, SensiML Analytics Studio, ArcticLink® III, PolarPro®3, PolarPro II, PolarPro, and Eclipse II products (which together comprise our new product category).

Our mature products include primarily FPGA families named pASIC®3 and QuickRAM® as well as programming hardware and design software.

We develop low power, multi-core semiconductor platforms and intellectual property (“IP”) for artificial intelligence (“AI”) voice and sensor processing.

The solutions include an eFPGA for hardware acceleration and pre-processing, and heterogeneous multi-core System on Chip (“SoCs”) that integrate eFPGA with other processors and peripherals.

The SensiML Analytics Toolkit from wholly owned subsidiary, SensiML Corporation (“SensiML”) completes the “full stack”

end-to-end solution with accurate sensor algorithms using AI technology.

Our solutions are created from our new silicon platforms including our EOS™, QuickAI™, SensiML Analytics Studio, ArcticLink®

III, PolarPro®3, PolarPro II, PolarPro, and Eclipse II products (which together comprise our new product category).

Our mature products include primarily FPGA families named pASIC®3 and QuickRAM®

as well as programming hardware and design software.

In addition to delivering our own semiconductor solutions, we have an IP business that licenses our eFPGA technology for use in other semiconductor companies SoCs.

We began delivering our eFPGA IP product ArcticPro™ in 2017, which is included in the new product revenue category.

Through our wholly owned subsidiary SensiML, we now have an AI software platform that includes Software-as-a-Service (“SaaS”) subscriptions for development, per unit license fees when deployed in production, and proof-of-concept services, all of which are also included in the new product revenue category.

We began delivering our eFPGA IP product ArcticPro™

in 2017, which is included in the new product revenue category.

Our solutions typically fall into one of three categories:

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Our IP that enables always-on context-aware sensor applications includes our Flexible Fusion Engine, our Sensor Manager and Communications Manager technologies as well as IP that (i) improves multimedia content, such as our Visual Enhancement Engine technology, and Display Power Optimizer technology;

and (ii) implements commonly used mobile

system interfaces, such as Low Voltage Differential Signalling, Mobile Industry Processor Interface, and Secure Digital Input Output.

We provide complete solutions by first architecting the solution jointly with our customer’s or ecosystem partner’s engineering group, selecting the appropriate solution platform and Proven System Blocks (“PSBs”), providing custom logic, integrating the logic, programming the device with the PSBs and/or firmware, providing software drivers or application software required for the customer’s application, and supporting the customer on-site during integration, verification and testing.

and (ii) implements commonly used mobile system interfaces, such as Low Voltage Differential Signalling, Mobile Industry Processor Interface, and Secure Digital Input Output.

In many cases, we deliver software algorithms that have been optimized for use in a QuickLogic silicon platform.

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

These include a wide range of consumer and industrial sensing applications.

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Through reference designs that incorporate our solutions, we believe mobile processor manufacturers, sensor manufacturers, and sensor and voice algorithm companies can expand the available market for their respective products.

Furthermore, should a solution developed for a processor manufacturer or sensor and/or sensor algorithm company be applicable to a set of common OEMs or Original Design Manufacturers (“ODMs”), we can amortize our Research and Development (“R&D”) investment over that set of OEMs or ODMs.

There may also be cases when platform providers that intend to use always-on voice recognition will dictate certain performance requirements for the combined software/hardware solution before the platform provider certifies and/or qualifies our product for use by end customers.

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

In June 2020, we announced the QuickLogic Open Reconfigurable Computing (“QORC”) Initiative, developed in conjunction with Google and Antmicro.

The QORC initiative encompasses QuickLogic device support via multiple open source tools, including:

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Therefore, our revenue growth needs to be strong enough to enable us to sustain profitability while we continue to invest in the development, sales and marketing of our new solution platforms, IP and software.

During the second quarter of 2020, we generated total revenue of $2.2 million, which represents an increase of 2% compared to the first quarter of 2020 and 5% compared to the second quarter of 2019.

Our new product revenue in the second quarter was $820,000, which represents an increase of 69% from the prior quarter and 15% from the second quarter of 2019.

Our mature product revenue was $1.4 million in the second quarter of 2020, which represents a decrease of 18% from the prior

quarter and flat compared to the second quarter of 2019.

During the third quarter of 2020, we generated total revenue of $1.8 million, which represents a decrease of 19% compared to the second quarter of 2020 and 18% compared to the third quarter of 2019.

Our new product revenue in the third quarter was $639,000, which represents a decrease of 22% from the prior quarter and 37% from the third quarter of 2019.

Our mature product revenue was $1.1 million in the third quarter of 2020, which represents a decrease of 17% from the prior quarter and flat compared to the third quarter of 2019.

We expect our mature product revenue to continue to fluctuate over time.

We devote substantially all of our development, sales and marketing efforts to our new sensor processing solutions using our EOS TM 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 $3.0 million for the second quarter of 2020, a decrease of 6% compared with the prior quarter and a decrease of 36% compared with the second quarter of 2019.

Overall, we reported a net loss of $2.1 million for the third quarter of 2020, a decrease of 31% compared with the prior quarter and a decrease of 52% compared with the third quarter of 2019.  

COVID-19 Response

Our top priority during the ongoing COVID-19 pandemic remains the health and safety of our employees and their families.

As global governments institute restrictions on commercial operations, we are working to ensure our compliance while also maintaining business continuity for operations.

Our Employees

We are in the midst of what is a historic deployment of remote work and digital access to services.

 The COVID-19 pandemic and its potential effects on the Company’s business in its fiscal 2020 and beyond remain uncertain.

It is expected that there will be further restrictions by the governmental authorities as a result of an impending surge in COVID-19 cases during the winter of 2020.

These restrictions and other impacts from COVID-19 could cause further disruptions or restrictions on the Company’s ability to source, manufacture or distribute its products, including temporary disruptions to the facilities of its contract manufacturers in China, Taiwan, Philippines and Singapore, or the facilities of its suppliers and their contract manufacturers globally.

Additionally, multiple countries have imposed and may further impose restrictions on business operations and movement of people and products to limit the spread of COVID-19.

This might cause delays in production or delivery of components or raw materials that are part of the Company’s global supply chain.

If COVID-19 cases surge and the Company experiences more pronounced disruptions in its operations, the Company may experience constrained supply or curtailed demand that may materially adversely impact its business and results of operations.

Our Employees and customers

Our top priority during the ongoing COVID-19 pandemic remains the health and safety of our employees and their families, as well as our customers.

As global governments institute restrictions 

on commercial operations, we are working to ensure our compliance while also maintaining business continuity for operations.

Most of our personnel continue to work from home except few personnel, who are required for minimum operations.

We only allow employees in our facilities who are essential to the facilities’ operations under best practices guidelines on maintaining physical distancing, utilizing enhanced cleaning protocols and usage of personal protective equipment.

Our Customers

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.

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In anticipation of further COVID-19 related disruptions to our business, we have undertaken a comprehensive review of our spending plans and expect to reduce discretionary spending in future periods while maintaining an ongoing focus on key initiatives.

Our balance sheet is well positioned and had $26.4 million of cash, cash equivalents and restricted cash as of June 28, 2020, including the draw-down of $15.0 million from revolving credit facility maturing in September 2021 and net proceeds of $7.9 million received after deducting the commissions and other expenses from the equity offering closed on June 22, 2020.

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 net proceeds to the Company of approximately $461,000 after deduction of underwriting discounts.

On May 6, 2020 we entered into a loan agreement with Heritage Bank for a loan of $1.2 million pursuant to the Paycheck Protection Program (“PPP Loan”) under the Coronavirus Aid, Relief, and Economic Security Act enacted on March 27 (“CARES Act”) .

On June 5, 2020, the President of the United States of America signed into law the Paycheck Protection Flexibility Act (“PPPFA”) to address many concerns expressed by the small business community around the Paycheck Protection Program.

PPPFA among other changes (i) reduces the amount of the loan required to be spent on payroll from 75% to 60%, thus increasing the amount of funds available for other expenses from 25% to 40%, (ii) extends the period to spend the loans to 24 weeks from 8 weeks, (iii) amends the June 30 deadline to rehire workers to December 31, 2020, (iv) eases rehire requirements, and (v) extends the repayment term of the PPP Loan from 2 years to 5 years.

Our balance sheet is well positioned and had $24.7 million of cash, cash equivalents and restricted cash as of September 27, 2020, including the draw-down of $15.0 million from revolving credit facility maturing in September 2021 and net proceeds of $8.1 million received from the equity offering, after deducting the commissions and other stock issuance expenses.

On May 6, 2020, we entered into a loan agreement with Heritage Bank for a loan of $1.2 million pursuant to the Paycheck Protection Program (“PPP Loan”) under the Coronavirus Aid, Relief, and Economic Security Act enacted on March 27, 2020 (“CARES Act”).

PPPFA among other changes (i) reduced the amount of the loan required to be spent on payroll from 75% to 60%, thus increasing the amount of funds available for other expenses from 25% to 40%, (ii) extended the period to spend the loans to 24 weeks from 8 weeks, (iii) amended the June 30 deadline to rehire workers to December 31, 2020, (iv) eased rehire requirements, and (v) extended the repayment term of the PPP Loan from 2 years to 5 years.

For the loans disbursed before June 5, 2020, PPPFA provides the option to opt for 24 weeks for spending the loan instead of 8 weeks.

The Company has opted for 24 weeks to spend the loan.

As of June 28, 2020, the unutilized PPP loan funds were $89,322, which is expected to be utilized within the Company’s third fiscal quarter.

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

The COVID-19 pandemic and its potential effects on the Company’s business in its fiscal 2020 remain dynamic, and the broader implications for its business and results of operations remain uncertain.

These implications could include further disruptions or restrictions on the Company’s ability to source, manufacture or distribute its products, including temporary disruptions to the facilities of its contract manufacturers in China, Taiwan, Philippines and Singapore, or the facilities of its suppliers and their contract manufacturers globally.

The Company has opted for 24 weeks to spend the PPP Loan.

As of September 27, 2020, the Company fully utilized the loan proceeds in compliance with PPPFA guidelines.

The Company expects to apply for the full loan forgiveness in the fourth quarter of 2020.

However, Forgiveness of this loan will be recognized if/when legal release is received.

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

Additionally, multiple countries have imposed and may further impose restrictions on business operations and movement of people and products to limit the spread of COVID-19.

Delays in production or delivery of components or raw materials that are part of the Company’s global supply chain due to restrictions imposed to limit the spread of COVID-19 could delay or inhibit its ability to obtain the supply of components and finished goods.

If COVID-19 becomes more prevalent in the locations where the Company, its customers or suppliers conduct business, or the Company experiences more pronounced disruptions in its operations, the Company may experience constrained supply or curtailed demand that may materially adversely impact its business and results of operations.

In addition, any other widespread health crisis that could adversely affect global and regional economies, financial markets and overall demand environment for the Company's products could have a material adverse effect on the Company’s business, cash flows or results of operations.

Critical Accounting Estimates

The methods, estimates and judgments we use in applying our most critical accounting policies have a significant impact on the results we report in our consolidated financial statements.

The SEC has defined critical accounting policies as those that are most important to the portrayal of our financial condition and results of operations and require us to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain.

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.

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However, any factual errors or errors in these judgments and estimates may have a material impact on our financial statements.

During the three and six months ended June 28, 2020, there were no changes in our critical accounting policies from our disclosure in our Annual Report on Form 10-K for the fiscal year ended December 29, 2019, filed with the SEC on March 13, 2020, except for the new accounting standards adopted in the first quarter of 2020 as described in Note 2 to the condensed consolidated financial statements as of and for the three and six months ended June 28, 2020.

For a discussion of critical accounting policies and estimates, please see Item 7 in our Annual Report on Form 10-K for the fiscal year ended December 29, 2019, filed with the SEC on March 13, 2020.

See also Note 2 to the Unaudited Condensed Consolidated Financial Statements as of and for the three months ended March 29, 2020 for the details of the newly adopted accounting standards.

During the three and nine months ended September 27, 2020, there were no changes in our critical accounting policies from our disclosure in our Annual Report on Form 10-K for the fiscal year ended December 29, 2019, filed with the SEC on March 13, 2020, except for the new accounting standards adopted in the first quarter of 2020 as described in Note 2 to the condensed consolidated financial statements as of and for the three and nine months ended September 27, 2020.

For a discussion of critical accounting policies and estimates, please see Item 7 in our Annual Report on Form 10-K for the fiscal year ended December 29, 2019, filed with the SEC on March 13, 2020.

See also Note 2 to the Unaudited Condensed Consolidated Financial Statements as of and for the three and nine months ended September 27, 2020 for the details of the newly adopted accounting standards.

Results of Operations

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Three Months Ended

Six Months Ended

Nine Months Ended

September 27,

September 29,

September 27,

September 29,

Cost of revenue

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Loss before income taxes

(Benefit from) provision for income taxes

Three Months Ended June 28, 2020 Compared to Three Months Ended June 30, 2019

The table below sets forth the changes in revenue for the three months ended June 28, 2020, as compared to the three months ended June 30, 2019 (in thousands, except percentage data):

Provision for (benefit from) income taxes (1)

_________________

(1) Insignificant percentages are rounded to zero percentage (-%) for disclosure

Three Months Ended September 27, 2020 Compared to Three Months Ended September 29, 2019

The table below sets forth the changes in revenue for the three months ended September 27, 2020, as compared to the three months ended September 29, 2019 (in thousands, except percentage data):

Three Months Ended

June 28, 2020

June 30, 2019

September 27, 2020

September 29, 2019

Revenue by product line (1):

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Total revenue

For all periods presented:

New products include all products manufactured on 180 nanometer or smaller semiconductor processes, eFPGA IP license, QuickAI and SensiML AI SaaS revenues.

For all periods presented: New products include all products manufactured on 180 nanometer or smaller semiconductor processes, eFPGA IP license, QuickAI and SensiML AI SaaS revenues.

Mature products include all products produced on semiconductor processes larger than 180 nanometer.

The net increase of $109,000 in the revenue of new products was primarily due to an increase of EOS S3 product revenue, which was partially offset by decrease in other new products.

Mature product revenue was flat compared to the second quarter of 2019.

The table below sets forth the changes in gross profit for the three months ended June 28, 2020 as compared to the three months ended June 30, 2019 (in thousands, except percentage data):

The net decrease of $376,000 in the revenue of new products was primarily due to a decrease of connectivity product revenue, which was partially offset by increase in other new product revenue.

Mature product revenue was flat compared to the third quarter of 2019.

The table below sets forth the changes in gross profit for the three months ended September 27, 2020 as compared to the three months ended September 29, 2019 (in thousands, except percentage data):

Three Months Ended

June 28, 2020

June 30, 2019

September 27, 2020

September 29, 2019

Cost of revenue

In the second quarter of 2020, gross profit was lower by $18,000 or 2% as compared to the same quarter in the prior year.

In the third quarter of 2020, gross profit was lower by $118,000 or 11% as compared to the same quarter in the prior year.

This was primarily due to the product mix shipped during the quarter.

The sale of previously reserved inventory was $16,000 and $32,000 in the second quarters of 2020 and 2019, respectively.

The sale of previously reserved inventory was $26,000 and $31,000 in the third quarters of 2020 and 2019, respectively.

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.

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 June 28, 2020, as compared to the three months ended June 30, 2019 (in thousands, except percentage data):

The table below sets forth the changes in operating expenses for the three months ended September 27, 2020, as compared to the three months ended September 29, 2019 (in thousands, except percentage data):

Three Months Ended

June 28, 2020

June 30, 2019

September 27, 2020

September 29, 2019

Restructuring expense

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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 $1.0 million decrease in R&D expenses in the second quarter of 2020, as compared to the second quarter of 2019, was primarily attributable to the restructuring plan implemented in January 2020.

Lower travel expenses due to COVID-19 also contributed to the decrease of R&D expenses.

Selling, General and Administrative Expense

The $675,000 decrease in SG&A expenses in the second quarter of 2020, as compared to the second quarter of 2019 was primarily attributable to lower compensation costs, including stock-based compensation, due to the restructuring plan implemented in January 2020 and lower travel costs due to COVID-19 and lower facility related costs.

The $1.8 million decrease in R&D expenses in the third quarter of 2020, as compared to the third quarter of 2019, was primarily attributable to the lower compensation costs, including lower stock based compensation due to the restructuring plan implemented in January 2020.

Lower outside services costs and lower travel expenses due to COVID-19 also contributed to the decrease of R&D 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 $617,000 decrease in SG&A expenses in the third quarter of 2020, as compared to the third quarter of 2019 was primarily attributable to lower compensation costs, including stock-based compensation, due to the restructuring plan implemented in January 2020.

Further, lower outside services costs and lower facilities costs due to cost reduction measures and lower travel costs due to COVID-19 also contributed to the decrease of SG&A expenses.

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 $513,000 of restructuring charges during the first half of fiscal year 2020, including $34,000 in the second quarter,

consisting primarily of employee severance related costs.

The restructuring plan was approved by the Company’s Board of Directors on January 24, 2020.

Pursuant to the restructuring plan, the Company recorded $624,000 of restructuring charges during the nine months of fiscal year 2020, including $111,000 in the third quarter, consisting primarily of employee severance related costs and facilities costs.

See Note 1 to the Condensed Consolidated Financial Statements for details.

Interest Expense and Interest Income and Other Expense, Net

The table below sets forth the changes in interest expense and interest income and other (expense), net for the three months ended June 28, 2020 as compared to the three months ended June 30, 2019 (in thousands, except percentage data):

The table below sets forth the changes in interest expense and interest income and other (expense), net for the three months ended September 27, 2020 as compared to the three months ended September 29, 2019 (in thousands, except percentage data):

Three Months Ended

September 27,

September 29,

Interest expense

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Provision for Income Taxes

The table below sets forth the changes in the provisions for income tax for the three months ended June 28, 2020 as compared to the three months ended June 30, 2019 (in thousands, except percentage data):

The table below sets forth the changes in the provisions for income tax for the three months ended September 27, 2020 as compared to the three months ended September 29, 2019 (in thousands, except percentage data):

Three Months Ended

(Benefit from) / provision for income taxes

The majority of the income tax expense for the quarter ended June 28, 2020 and June 30, 2019 relates to the Company's foreign subsidiaries, which are cost-plus entities.

September 27,

September 29,

Provision for income taxes

The majority of the income tax expense for the quarter ended September 27, 2020 and September 29, 2019 relates to the Company's foreign subsidiaries, which are cost-plus entities.

The Company is subject to U.S.

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states and foreign jurisdictions in which the Company operates.

tax years from 1999 forward remain effectively open to examination due to the carryover of unused net operating losses and tax credits.

Six Months Ended June 28, 2020 and June 30, 2019

The table below sets forth the changes in revenue for the six months ended June 28, 2020, as compared to the six months ended June 30, 2019 (in thousands, except percentage data):

Six Months Ended

June 28, 2020

June 30, 2019

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 September 27, 2020 and September 29, 2019

The table below sets forth the changes in revenue for the nine months ended September 27, 2020, as compared to the nine months ended September 29, 2019 (in thousands, except percentage data):

Nine Months Ended

September 27, 2020

September 29, 2019

Revenue by product line (1):

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Total revenue

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For all periods presented:

New products include all products manufactured on 180 nanometer or smaller semiconductor processes, eFPGA IP license, QuickAI and SensiML AI SaaS revenues.

Mature products include all products produced on semiconductor processes larger than 180 nanometers.

The $92,000 decrease in the revenue of new products was primarily due to decreased shipment of connectivity and display products, which was partially offset by the increase in EOS S3 and SaaS revenue recognized in the first six months of 2020.

Mature products include all products produced on semiconductor processes larger than 180 nanometers.

The $468,000 decrease in the revenue of new products was primarily due to decreased shipment of connectivity and display products, which was partially offset by the increase in EOS S3 revenue recognized in the first nine months of 2020.

The $837,000 decrease in the revenue of mature products was primarily due to decreased orders from our customers in the aerospace, military and industrial sectors.

The table below sets forth the changes in gross profit for the six months ended June 28, 2020, as compared to the six months ended June 30, 2019 (in thousands, except percentage data):

Six Months Ended

June 28, 2020

June 30, 2019

The table below sets forth the changes in gross profit for the nine months ended September 27, 2020, as compared to the nine months ended September 29, 2019 (in thousands, except percentage data):

Nine Months Ended

September 27, 2020

September 29, 2019

Cost of revenue

The $882,000 or 29% decrease in gross profit was primarily due to product mix changes and additional test costs to support the higher volume of products shipped to our primary smartphone customer in the first six months of 2020 compared to the first six months of 2019.

The sale of previously reserved inventory was $33,000 and $64,000 in the first six months of 2020 and 2019, respectively.

The $1.0 million or 25% decrease in gross profit was primarily due to product mix changes, lower shipments of high margin mature products and additional test costs to support the higher volume of products shipped to our primary smartphone customer in the first nine months of 2020 compared to the first nine months of 2019.

The sale of previously reserved inventory was $59,000 and $95,000 in the first nine months of 2020 and 2019, respectively.

Operating Expenses

The table below sets forth the changes in operating expenses for the six months ended June 28, 2020, as compared to the six months ended June 30, 2019 (in thousands, except percentage data):

Six Months Ended

June 28, 2020

June 30, 2019

The table below sets forth the changes in operating expenses for the nine months ended September 27, 2020, as compared to the nine months ended September 29, 2019 (in thousands, except percentage data):

Nine Months Ended

September 27, 2020

September 29, 2019

Restructuring expenses

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Our R&D expenses consist primarily of personnel, overhead and other costs associated with, sensor processing and algorithm development, programmable logic design, SoC software and eFPGA development.

The $2.4 million decrease in R&D expenses in the first six months of 2020, as compared to the first six months of 2019 was primarily attributable to the restructuring plan implemented in January 2020.

Decrease in travel expenses due to COVID-19 also contributed to lower R&D expenses.

Selling, General and Administrative Expense

Our SG&A expenses consist primarily of personnel and related overhead costs for sales, marketing, finance, administration, human resources and general management.

The $1.2 million decrease in SG&A expenses in the first six months of 2020, as compared to the first six months of 2019, was primarily due to a decrease of compensation-related costs, including stock-based compensation expenses and lower outside services expenses due to restructuring plan implemented in January 2020.

Decrease in travel expenses due to COVID-19 also contributed to lower SG&A expenses.

The $4.2 million decrease in R&D expenses in the first nine months of 2020, as compared to the first nine months of 2019 was primarily attributable to the restructuring plan implemented in January 2020, which resulted in lower compensation related costs, lower consulting and outside services expenses.

Cancellation of performance based restricted stock units contributed to lower stock based compensation.

Decrease in travel expenses also contributed to lower R&D expenses. 

Selling, General and Administrative

Our SG&A expenses consist primarily of personnel and related overhead costs for sales, marketing, finance, administration, human resources and general management. The $1.9 million decrease in SG&A expenses in the first nine months of 2020, as compared to the first nine months of 2019, was primarily due to a decrease of compensation-related costs, including stock-based compensation expenses, lower outside services expenses and facility costs due to restructuring plan implemented in January 2020.

Decrease in travel expenses also contributed to lower SG&A expenses.

Interest Expense and Interest Income and Other Expense, Net

The table below sets forth the changes in interest expense and interest income and other (expense), net for the six months ended June 28, 2020 as compared to the six months ended June 30, 2019 (in thousands, except percentage data):

Six Months Ended

The table below sets forth the changes in interest expense and interest income and other (expense), net for the nine months ended September 27, 2020 as compared to the nine months ended September 29, 2019 (in thousands, except percentage data):

Nine Months Ended

September 27,

September 29,

Interest expense

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Interest expense relates primarily to the Company's line of credit facility and the PPP Loan.

Interest income relates to the interest earned on our money market account and foreign exchange gains or losses recorded .

Interest income relates to the interest earned on our money market account and foreign exchange gains or losses recorded.    

Provision for Income Taxes

The table below sets forth the changes in the income tax provisions for the six months ended June 28, 2020 as compared to the six months ended June 30, 2019 (in thousands, except percentage data):

Six Months Ended

Benefit from income taxes

Income tax benefit for the six months ended June 30, 2020 relates to the relates to the Company's foreign subsidiaries, which are cost-plus entities.

A majority of the income tax benefit for the six months ended June 30, 2019 relates to the deferred tax benefit arising from Intangible assets acquired from the acquisition of SensiML.

As of June 28, 2020, our ability to utilize our income tax loss carryforwards in future periods is uncertain, and accordingly, we recorded a full valuation allowance against the related U.S.

The table below sets forth the changes in the income tax provisions for the nine months ended September 27, 2020 as compared to the nine months ended September 29, 2019 (in thousands, except percentage data):

Nine Months Ended

September 27,

September 29,

Provision for (benefit from) income taxes

Income tax expense for the nine months ended September 27, 2020 relates to the relates to the Company's foreign subsidiaries, which are cost-plus entities.

A majority of the income tax benefit for the nine months ended September 29, 2019 relates to the deferred tax benefit arising from Intangible assets acquired from the acquisition of SensiML.

As of September 27, 2020, our ability to utilize our income tax loss carryforwards in future periods is uncertain, and accordingly, we recorded a full valuation allowance against the related U.S.

tax provision.

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We have financed our operating losses and capital investments through sales of common stock, finance leases, a revolving line of credit and cash flows from operations.

As of June 28, 2020, the Company's principal sources of liquidity consisted of cash, cash equivalents and restricted cash of $26.4 million, including $15.0 million line of credit with Heritage Bank.

We repaid the $15.0 million outstanding under our Revolving Facility in July 2020.

As of September 27, 2020, the Company's principal sources of liquidity consisted of cash, cash equivalents and restricted cash of $24.7 million, including $15.0 million line of credit with Heritage Bank.

We repaid the $15.0 million outstanding under our Revolving Facility on September 28, 2020.

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 net proceeds from the offering of approximately $7.9 million, net of underwriter’s commission and other offering expenses.

The Company received a total gross proceeds from the offering of approximately $9.3 million, including $0.5 million received from the overallotment under the terms of the underwriting agreement.

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 net proceeds to the Company of approximately $0.5. The Company incurred a total of approximately $1.2 million for underwriting discounts and other stock issuance costs.

Total net proceeds received from this offering was $8.1 million after deducting underwriting discounts and other stock issuance costs. See Note 8 to the Unaudited Condensed Consolidated Financial Statements for the details.

On June 5, 2020, the President of the United States of America signed into law the PPPFA, to address many concerns expressed by the small business community around the Paycheck Protection Program.

See Note 7 to the Unaudited Condensed Consolidated Financial Statements and COVID-19 Response above for more details.

See Note 6 to the Unaudited Condensed Consolidated Financial Statements and COVID-19 Response above for more details.

For the loans disbursed before June 5, 2020, PPPFA provides the option to opt for 24 weeks for spending the loan instead of 8 weeks.

The Company has opted for 24 weeks to spend the loan.

As of June 28, 2020, the unutilized PPP loan balance was $89,322, which is expected to be utilized within the third fiscal quarter.

The Company has opted for 24 weeks to spend the PPP Loan. 

On May 6, 2020, we entered into a loan agreement with Heritage Bank for a loan of $1.2 million pursuant to the Paycheck Protection Program under the CARES Act enacted on March 27, 2020.

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Interest accrued in the first six months is included in the monthly installments.

Installments must be paid by the fifth calendar day of each month.

On November 6, 2019, the Company entered into a First Amendment to the Amended and Restated Loan Agreement (“First Amendment”) with Heritage Bank to extend the maturity date of the Revolving Facility for one year through September 28, 2021.

Installments must be paid by the fifth calendar day of each month. The loan amount can be fully or partially forgiven if the funds are used as per revised guidelines under the PPPFA.

As of September 27, 2020, the Company fully utilized the loan funds complying PPPFA guidelines.

The Company expects to apply for the loan forgiveness in the fourth quarter of 2020. Forgiveness of this loan will be recognized if/when legal release is received.

Under this First Amendment the Revolving Facility advances shall bear interest, on the outstanding daily balance thereof, at a rate per annum equal to the greater of (i) one half of one percentage point (0.50%) above the Prime Rate, or (ii) five and one half of one percentage points (5.50%).

We were in compliance with all loan covenants under the Amended and Restated Loan Agreement as of the end of the current reporting period.

On June 21, 2019, we completed an underwritten public offering of 1.3 million shares of common stock, at a price of $7.00 per share, which included 171,429 shares issued pursuant to the underwriters’ full exercise of their over-allotment option.

We received net proceeds from the offering of approximately $8.

0 million, net of underwriter’s commission and other offering expenses.

full exercise of their over-allotment option.

We received net proceeds from the offering of approximately $8.0 million, net of underwriter’s commission and other offering expenses.

See Note 8 to the Unaudited Condensed Consolidated Financial Statements for the details.

On December 21, 2018, we entered into an Amended and Restated Loan and Security Agreement (“Amended and Restated Loan Agreement”) with Heritage Bank to replace in its entirety the Loan and Security Agreement entered into with Heritage Bank on September 28, 2018.

The Amended and Restated Loan Agreement increased the Revolving Facility from $9,000,000 to $15,000,000.

The Amended and Restated Loan Agreement requires us to maintain at least $3,000,000 in unrestricted cash at Heritage Bank.

As of June 28, 2020, we had $15.0 million of outstanding revolving line of credit with an interest rate of 5.5%.

The Amended and Restated Loan Agreement increased the Revolving Facility from $9,000,000 to $15,000,000. The Amended and Restated Loan Agreement requires us to maintain at least $3,000,000 in unrestricted cash at Heritage Bank.

As of September 27, 2020, we had $15.0 million of outstanding revolving line of credit with an interest rate of 5.5%.

We believe that our existing cash, cash equivalents and restricted cash, together with available financial resources from the revolving facility with Heritage Bank, and the funds raised from our equity offering that closed in June and July 2020 will be sufficient to fund our operations and capital expenditure and provide adequate working capital for the next twelve months.

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However, we cannot provide any assurance that PPP Loan will be forgiven or 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.

Our inability 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.

As of June 28, 2020, most of our cash, cash equivalents and restricted cash were invested in the money market account of Heritage Bank.

As of June 28, 2020, our interest-bearing debt consisted of $712,000 outstanding under finance leases, $1.2 million of PPP loan and $15.0 million outstanding under our Revolving Facility.

We repaid the $15.0 million outstanding under our Revolving Facility in July 2020.

See Note 7 and 8 to the Unaudited Consolidated Financial Statements for more details.

Cash balances held at our foreign subsidiaries were approximately $239,000 and $548,000 as of June 28, 2020 and December 29, 2019, respectively.

As of September 27, 2020, most of our cash, cash equivalents and restricted cash were invested in the money market account at Heritage Bank.

As of September 27, 2020, our interest-bearing debt consisted of $620,000 outstanding under finance leases, $1.2 million of PPP loan and $15.0 million outstanding under our Revolving Facility.

We repaid the $15.0 million outstanding under our Revolving Facility on September 28, 2020.

See Note 1 and 6 to the Unaudited Consolidated Financial Statements for more details.

Cash balances held at our foreign subsidiaries were approximately $330,000 and $548,000 as of September 27, 2020 and December 29, 2019, respectively.

Earnings from our foreign subsidiaries are currently deemed to be indefinitely reinvested.

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In summary, our cash flows were as follows (in thousands):

Six Months Ended

Nine Months Ended

September 27,

September 29,

Net cash used in operating activities

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Net cash used in operating activities

For the six months ended June 28, 2020, net cash used in operating activities was $3.6 million, which was primarily due to the net loss of $6.1 million, adjusted for non-cash charges of $880,000.

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 of stock-based compensation and depreciation and amortization expenses of $644,000.

Cash inflows from changes in operating assets and liabilities were $1.7 million, primarily due to decrease of accounts receivable due to lower sales and better collections, decrease of inventory due to shipping existing inventory, decrease of prepaid assets due to amortizations and VAT receipts and increase of trade payable due to timing of payments.

For the six months ended June 30, 2019, net cash used in operating activities was $6.0 million, which was primarily due to the net loss of $8.1 million, adjusted for non-cash charges of $2.1 million.

Non-cash charges consisted primarily of stock-based compensation of $1.7 million, depreciation, amortization of property, equipment, intangible assets, and right of use lease assets, and a write-down of inventory.

Cash outflows from changes in operating assets and liabilities were offset by an equal amount of cash inflows from the operating assets and liabilities.

For the nine months ended September 29, 2019, net cash used in operating activities was $8.8 million, which was primarily due to the net loss of $12.4 million, adjusted for non-cash charges of $3.2 million.

Non-cash charges consisted primarily of stock-based compensation of $2.5 million.

Other non-cash charges were depreciation, amortization of property, equipment, intangible assets, and right of use lease assets, and a write-down of inventory.

Cash inflows from changes in operating assets and liabilities were $1.6 million, which were offset by cash outflows of $1.2 million.

Net cash used in investing activities

For the six months ended June 28, 2020 cash used in investing activities was $436,000, which was primarily attributable to the capitalized internal-use software and capital expenditure relating to leasehold improvements and computer equipment.

For the six months ended June 30, 2019 cash used in investing activities was $503,000, which was primarily attributable to the leasehold improvements and computer equipment at the new office premises.

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 and capital expenditure relating to leasehold improvements and computer equipment.

For the nine months ended September 29, 2019, cash used in investing activities was $579,000, which was primarily attributable to capital expenditure relating to leasehold improvements and computer equipment at the new office premises.

Net cash provided by financing activities

For the six months ended June 28, 2020 cash provided by financing activities was $8.9 million, which was primarily derived from the net proceeds of $7.9 million from the stock issuance of 2.5 million shares of common stock in June 2020, proceeds from the PPP Loan of $1.2 million and scheduled repayments of $120,000 for finance lease obligations.

For the six months ended June 30, 2019 cash provided by financing activities was $8.2 million, primarily attributable to the net proceeds of $8.0 million received from the issuance of common stock in June 2019, and net proceeds from the issuance of common stock under our equity plans.

For the nine months ended September 27, 2020, cash provided by financing activities was $9.0 million, which was 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.

For the nine months ended September 29, 2019,cash provided by financing activities was $7.7 million, primarily attributable to the net proceeds of $8.0 million from the issuance of 18.4 million shares of common stock issued in June 2019, and net proceeds from the issuance of common stock under our equity plans.

These inflows were partially offset by scheduled repayments of finance lease obligations and tax payments related to net settlement of stock awards

Contractual Obligations and Commercial Commitments

The following table summarizes our contractual obligations and commercial commitments as of June 28, 2020 including the PPP Loan received in May 2020 and the effect such obligations and commitments are expected to have on our liquidity and cash flows in future fiscal periods (in thousands):

The following table summarizes our contractual obligations and commercial commitments as of September 27, 2020 including the PPP Loan received in May 2020 and the effect such obligations and commitments are expected to have on our liquidity and cash flows in future fiscal periods (in thousands):

Payments Due by Period

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Other purchase commitments

Total contractual cash obligations

Total contractual obligations

Other commercial commitments:

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Total commercial commitments

Total contractual cash obligations

________________________

Total contractual and commercial obligations

Certain of our wafer manufacturers require us to forecast wafer starts several months in advance.

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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.

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.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis