What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-18 compared with 2021-11-17 · 112 added, 224 removed, 112 unchanged (75% of the section changed)

17 unchanged sentences

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

The following discussion should be read in conjunction with the attached unaudited condensed consolidated financial statements and notes thereto, and with our audited consolidated financial statements and notes thereto for the fiscal year ended January 2, 2022, found in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 22, 2022.

8 unchanged sentences

The solutions include an eFPGA for hardware acceleration and pre-processing, and heterogeneous multi-core SoCs that integrate eFPGA with other processors and peripherals.

The SensiML Analytics Toolkit from our recently acquired wholly owned subsidiary, SensiML completes the “full stack”

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

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

The SensiML Analytics Toolkit from our wholly owned subsidiary, SensiML completes the “full stack”

end-to-end solution with accurate sensor algorithms using AI technology. The full range of platforms, software tools and eFPGA IP enables the practical and efficient adoption of AI, voice and sensor processing across Consumer/Industrial IoT, Consumer Electronics, Military, Aerospace and Defense applications. 

Our new products include our EOS™, QuickAI™, SensiML Analytics Studio, ArcticLink®

6 unchanged sentences

Through the acquisition of SensiML, we now have an IoT AI software platform that includes SaaS subscriptions for development, per unit license fees when deployed in production, and proof-of-concept services –

all of which are also included in the new product revenue category.

all of which are also included in the new product revenue category.  Inclusive of one pending, patent application disclosed in our fiscal 2021 annual report, at the end of  the first quarter of fiscal 2022 we had a total of five patent applications pending. 

Our semiconductor solutions typically fall into one of three categories:

Sensor Processing, Display and Visual Enhancement, and Smart Connectivity.

Sensor Processing, Display and Smart Connectivity.

Our solutions include a unique combination of our silicon platforms, IP cores, software drivers, and in some cases, firmware and application software.

All of our silicon platforms are standard devices and must be programmed to be effective in a system.

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

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

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, ("VEE"), technology, and Display Power Optimizer, ("DPO"), technology;

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

Through the acquisition of SensiML, our core IP also includes the SensiML AI Toolkit that enables OEMs to develop AI software for a broad array of resource-constrained time-series sensor endpoint applications.

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

We also work with mobile processor manufacturers, sensor manufacturers, and voice recognition, sensor fusion and context awareness algorithm developers in the development of reference designs.

We also work with processor manufacturers, sensor manufacturers, and voice recognition, sensor fusion and context awareness algorithm developers in the development of reference designs.

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

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

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.

14 unchanged sentences

While winning large volume sales opportunities will increase our revenue, we believe these opportunities may decrease our gross profit as a percentage of revenue.

During the third quarter of 2021, we generated total revenue of $3.9 million, which represents an increase of 34% compared to the prior quarter and an increase of 117% compared to the same quarter last year.

Our new product revenue in the third quarter was $2.8 million, which represents an increase of 119% from the prior quarter and an increase of 332% from the third quarter of 2020, primarily driven by our IP license revenue amounting to $1.0 million the current quarter.

Our mature product revenue was $1.1 million in the third quarter of 2021, which was  a decrease of 32% compared to the prior quarter and a decrease of 4% compared to the third quarter of 2020.

During the first quarter of 2022, we generated total revenue of $4.1 million, which represents an increase of 11% compared to the prior quarter and an increase of 83% compared to the same quarter last year.

Our new product revenue in the first quarter of 2022 was $3.5 million, an increase of 29% from the prior quarter and an increase of 221% from the first quarter of 2021.

Our mature product revenue was $0.6 million in the first quarter of 2022, which was a decrease of 38% compared to the prior quarter and a decrease of 45% compared to the first quarter of 2021.

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 $1.3 million for the third quarter of 2021, a decrease of 38% compared with the prior quarter and a decrease of 38% compared with the third quarter of 2020.  

We have experienced net losses in the recent years and expect losses to continue through at least fiscal year 2021 as we continue to develop new products, applications and technologies.

Overall, we reported a net loss of $1.2 million for the first quarter of 2022, a decrease of 26% compared with the prior quarter and a decrease of 31% compared with the first quarter of 2021. 

We have experienced net losses in the recent years and expect losses to continu e throug h at least fiscal year 2022 as we continue to develop new products, applications and technologies.

Whether we can achieve cash flow levels sufficient to support our operations cannot be accurately predicted.

Unless such cash flow levels are achieved in addition to the proceeds we received from our recent sale of our equity securities, we may need to borrow additional funds or sell debt or equity securities, or some combination thereof, to provide funding for our operations, and such additional funding may not be available on commercially reasonable terms, or at all.

COVID-19 Response

The COVID-19 pandemic and its effects on our business in fiscal 2020, the three quarters of fiscal 2021, and potential effects on the remainder of fiscal 2021 and beyond remain uncertain.

There have been further restrictions by the governmental authorities as a result of a surge in COVID-19 cases during the winter of 2020 and continuing into fiscal 2021, as a result of variant strains of COVID-19 amid uneven progress toward vaccination.

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

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

This might cause delays in production or delivery of components or raw materials that are part of our global supply chain.

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

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

Restructuring

In January 2020, we implemented a restructuring plan to lower annual operating expenses. The restructuring plan was approved by our Board of Directors on January 24, 2020.

Pursuant to the restructuring plan, we recorded $624,000 restructuring costs during the nine months ended September 27, 2020, consisting primarily of employee severance related costs and facilities costs.

There were no restructuring charges incurred for nine months ended October 3, 2021.

Our employees and customers

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

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

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

We only allow employees in our facilities who are essential to the facilities’

operations under best practices guidelines on maintaining physical distancing, utilizing enhanced cleaning protocols and usage of personal protective equipment.

We are committed to our customers to enable the support they need to continue providing vital services and tools.

Our global offices remain operational to meet customer needs during the pandemic in compliance with the orders and restrictions imposed by local authorities in each of our locations, and we are working with our customers to meet their specific shipment needs.

While the pandemic has created delays on the inbound supply chain at our partners and our own facilities and both inbound and outbound logistical challenges, we have been able to identify alternative solutions such that none of the issues have had a material impact on our ability to fulfill demand.

Critical Accounting Estimates

There have been no material changes due to the impact of the Covid-19 pandemic on our business from that disclosed in our most recently filed Annual Report.

Our most recent Annual Report on Form 10-K for the year ended January 2, 2022 as filed with the SEC on March 22, 2022 provides additional information about our business and operations.

Critical Accounting Policies and Estimates

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

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

Based on this definition, our critical policies include revenue recognition, valuation of inventories, including identification of excess quantities and product obsolescence, valuation of investments, valuation of long-lived assets, valuation of goodwill, capitalized internal-use software and related amortizable lives and intangibles related to the acquisition of SensiML, including the estimated useful lives of acquired intangible assets, measurement of stock-based compensation and estimation of accrued liabilities.

We believe that we apply judgments and estimates in a consistent manner and that this consistent application results in our financial statements and accompanying notes that fairly represent all periods presented.

Based on this definition, our critical policies include revenue recognition, and determination of the Stand-Alone Selling Price ("SSP") for certain distinct performance obligations (such as for IP licensing and professional services contracts), goodwill and intangible assets, valuation of inventories including identification of excess quantities and product obsolescence, allowance for doubtful accounts, valuation of long-lived assets, leases, measurement of stock-based compensation, and accounting for income taxes.

We believe that we apply judgments and estimates in a consistent manner and that this consistent application results in our 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.

During the three and nine months ended October 3, 2021, there were no changes in our critical accounting policies from our disclosure in our Annual Report on Form 10-K for the fiscal year ended January 3, 2021, filed with the SEC on March 23, 2021, except for the new accounting standards adopted in the first quarter of 2021 as described in Note 2 to the Unaudited Condensed Consolidated Financial Statements as of and for the three and nine months ended October 3, 2021 filed herewith. For a discussion of critical accounting policies and estimates, please see Item 7 in our Annual Report on Form 10-K for the fiscal year ended January 3, 2021, filed with the SEC on March 23, 2021.

During the three months ended April 3, 2022, there were no changes in our critical accounting policies from our disclosure in our Annual Report on Form 10-K for the fiscal year ended January 2, 2022, filed with the SEC on March 22, 2022.

Results of Operations

The following table sets forth the percentage of revenue for certain items in our condensed consolidated statements of operations for the periods indicated:

The following table sets forth the percentage of revenue for certain items in our unaudited condensed consolidated statements of operations for the periods indicated:

Three Months Ended

Nine Months Ended

September 27,

April 3, 2022

April 4, 2021

Cost of revenue

2 unchanged sentences

Selling, general and administrative

Restructuring costs

Loss from operations

3 unchanged sentences

Loss before income taxes

Provision for (benefit from) income taxes

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

Three Months Ended October 3, 2021 Compared to Three Months Ended September 27, 2020

The table below sets forth the changes in revenue for the three months ended October 3, 2021, as compared to the three months ended September 27, 2020 (in thousands, except percentage data): 

(Benefit from) provision for income taxes

Three Months Ended April 3, 2022 Compared to Three Months Ended April 4, 2021

The table below sets forth the changes in revenue for the three months ended April 3, 2022, as compared to the three months ended April 4, 2021 (in thousands, except percentage data): 

Three Months Ended

October 3, 2021

September 27, 2020

April 3, 2022

April 4, 2021

Mature products

Total revenue

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

Mature products include all products produced on semiconductor processes larger than 180 nanometer and includes related royalty revenue.

Product revenue for the third quarter of 2021 compared to the third quarter of 2020 increased by $2.1 million.

The net increase of $2.1 million in the revenue of new products was primarily due to an increase of $1.0 million related to eFPGA IP license revenue as well as increases of connectivity and sensor product revenue.

The net decrease of 4% in mature product revenue compared to the third quarter of 2020 was due primarily to decrease in QuickRAM and other products, partially offset by an increase in Eclipse and Eclipse Plus products.

The table below sets forth the changes in gross profit for the three months ended October 3, 2021 as compared to the three months ended September 27, 2020 (in thousands, except percentage data):

For all periods presented, New products include all products and related revenues manufactured on 180 nanometer or smaller semiconductor processes, eFPGA IP license, professional services, QuickAI and SensiML AI software as a service (SaaS) revenues.

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

Product rev enue for the first quarter of 2022 compared to the first quarter of 2021  increased by 

$1.9  million.

New product revenue  

increased  

$ 2.4 million  

primarily due to $ 1.6  million increase in professional engineering services revenue related to eFPGA IP and a $0.8 million increase i n  smart 

connectivity and display product revenue .

Mature product revenue decreased 45%  co mpared to the first quarter of 2021 .

The decrease in mature product revenue was primarily due  to a reduction in  

QPCID, other products, a nd royalty revenue, partially offset by a increases in PASIC 3 and QuickRAM.

The table below sets forth the changes in gross profit for the three months ended April 3, 2022 as compared to the three months ended April 4, 2021 (in thousands, except percentage data):

Three Months Ended

October 3, 2021

September 27, 2020

April 3, 2022

April 4, 2021

Cost of revenue

In the third quarter of 2021, gross profit increased $1.8 million or 196% as compared to the same quarter in the prior year.

This was primarily due to the increase in revenue of 117% including $1.0 million related to IP License revenue with minimal associated cost and product mix in the third quarter as compared to last year, and an increase of 31% in cost of revenue as compared to last year.

In the first quarter of 2022, gross profit increased $1.3 million or 115% as compared to the same quarter in the prior year.

This was primarily due to an increase in revenue of 83%, which was comprised of $2.4 million in new product revenue, of which $1.6 million was related to higher margin eFPGA IP professional engineering services, and $0.8 million related to smart connectivity and display product revenue.

The increase in gross profit from new product revenue was partially offset by a $0.5 million decrease in mature product revenue.

Our semiconductor products have historically had long product life cycles and obsolescence has not been a significant factor in the valuation of inventories.

1 unchanged sentence

Operating Expenses

The table below sets forth the changes in operating expenses for the three months ended October 3, 2021, as compared to the three months ended September 27, 2020 (in thousands, except percentage data):

The table below sets forth the changes in operating expenses for the three months ended April 3, 2022, as compared to the three months ended April 4, 2021 (in thousands, except percentage data):

Three Months Ended

October 3, 2021

September 27, 2020

Restructuring costs

April 3, 2022

April 4, 2021

Total operating expenses

1 unchanged sentence

Our R&D expenses consist primarily of personnel, overhead and other costs associated with System on Chip (SoC) and software development, programmable logic design, AI and eFPGA development.

The $427,000 increase in R&D expenses in the third quarter of 2021, as compared to the third quarter of 2020, was primarily attributable to an increase in stock-based compensation, salary and related expenses, allocable expenses, partially offset by lower outside services and depreciation expenses due primarily to our restructuring in 2020 and to reductions in spending caused by the COVID -19 pandemic.

The $0.6 million decrease in R&D expenses in the first quarter of 2022, as compared to the first quarter of 2021, was primarily attributable to a decrease in allocable expense, consulting costs, and stock-based compensation, partially offset by increases in salary and related 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 $708,000 increase in SG&A expenses in the third quarter of 2021, as compared to the third quarter of 2020 was primarily attributable to outside legal and consulting costs, stock-based compensation expenses, and occupancy costs, partially offset by a decrease in salary and related costs.

Restructuring

In January 2020, we implemented a restructuring plan to lower annual operating expenses.

The restructuring plan was approved by our Board of Directors on January 24, 2020.

Pursuant to the restructuring plan, we recorded restructuring costs of $0 in the third quarter of 2021 as compared to $111,000 in the third quarter of 2020.

Restructuring costs consists primarily of employee severance-related costs.

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

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 $0.2 million increase in SG&A expenses in the first quarter of 2022, as compared to the first quarter of 2021 was primarily due to an increase in stock-based compensation, accounting costs, and other outside service expenses, partially offset by a reduction in consulting costs.

Interest Expense and Interest Income and Other Income (Expense), Net

The table below sets forth the changes in interest expense and interest income and other income (expense), net for the three months ended October 3, 2021 as compared to the three months ended September 27, 2020 (in thousands, except percentage data):

The table below sets forth the changes in interest expense and interest income and other income (expense), net, for the three months ended April 3, 2022 as compared to the three months ended April 4, 2021 (in thousands, except percentage data):

Three Months Ended

September 27,

Interest expense

Gain on forgiveness of debt

Interest income and other income (expense), net

Total interest income and other income (expense), net

Interest expense relates primarily to our line of credit facility.

For the three months ended October 3, 2021 interest income and other income (expense), net for this period was approximately ($7,000) as compared to $27,000 for the three months ended September 27, 2020

Provision for (Benefit from) Income Taxes

The table below sets forth the changes in the provisions for income tax for the three months ended October 3, 2021 as compared to the three months ended September 27, 2020 (in thousands, except percentage data):

Interest expense relates primarily to our revolving line of credit facility.

The gain on forgiveness of debt relates to the gain related to the forgiveness of the PPP loan of $1.2 million for the three months ended April 4, 2021. For the three months ended April 3, 2022 interest income and other income (expense), net, was an expense of approximately $0.1 million as compared to $7 thousand for the three months ended April 4, 2021 and, reflecting an increase in net foreign exchange losses and other expenses.

(Benefit from) provision for Income Taxes

The table below sets forth the changes in the provisions for income tax for the three months ended April 3, 2022 as compared to the three months ended April 4, 2021 (in thousands, except percentage data):

Three Months Ended

September 27,

Provision for (benefit from) income taxes

The majority of the income tax expense for the quarter ended October 3, 2021 and September 27, 2020 relates to our foreign subsidiaries, which are cost-plus entities.

We are subject to U.S.

federal income tax as well as income taxes in many U.S.

states and foreign jurisdictions in which we operate.

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

Nine Months Ended October 3, 2021 Compared to Nine Months Ended September 27, 2020

The table below sets forth the changes in revenue for the nine months ended October 3, 2021, as compared to the nine months ended September 27, 2020 (in thousands, except percentage data): 

Nine Months Ended

October 3, 2021

September 27, 2020

Mature products

Total revenue

Mature products include all products produced on semiconductor processes larger than 180 nanometer and includes related royalty revenue.

Product revenue for the nine months ended October 3, 2021 compared to the nine months ended September 27, 2020 increased by $2.8 million.

The net increase of $3.2 million in the revenue of new products was primarily due to an increase in eFPGA IP License revenue of approximately $1.1 million, and increases in connectivity and sensor product revenue.

The net decrease of $304,000 in mature product revenue compared to the nine months ended September 27, 2020 was due primarily to decreases in PASIC 3, QuickRAM, and other products, partially offset by increases in Eclipse and Eclipse Plus products.

The table below sets forth the changes in gross profit for the nine months ended October 3, 2021 as compared to the nine months ended September 27, 2020 (in thousands, except percentage data):

Nine Months Ended

October 3, 2021

September 27, 2020

Cost of revenue

In the nine months ended October 3, 2021, gross profit was higher by $2.3 million or 76% as compared to the nine months ended September 27, 2020.

This was primarily due to the increase revenue of $2.8 million or 46%, including the increase of IP License related revenue of $1.1 million with minimal associated costs, and product mix in the nine months of 2021, as compared to same period last year, partially offset by cost variances and write-downs of excess and obsolete inventories.

Our semiconductor products have historically had long product life cycles and obsolescence has not been a significant factor in the valuation of inventories.

However, as we continue to pursue opportunities in the mobile market and develop new solutions and products, our product life cycle will be shorter and the risk of obsolescence will increase. In general, our standard manufacturing lead times are longer than the binding forecasts we receive from customers.

Operating Expenses

The table below sets forth the changes in operating expenses for the nine months ended October 3, 2021, as compared to the nine months ended September 27, 2020 (in thousands, except percentage data):

Nine Months Ended

October 3, 2021

September 27, 2020

Restructuring expenses

Total operating expenses

Research and Development

Our research and development (R&D) expenses consist primarily of personnel, overhead and other costs associated with System on Chip (SoC) and software development, programmable logic design, AI and eFPGA development.

R&D expenses decreased slightly for the nine months ended October 3, 2021 as compared to the nine months ended September 27, 2020.

The $53,000  decrease in R&D expenses in the nine months ended October 3, 2021 as compared to nine months ended September 27, 2020, was primarily attributable to decreases in salary and related expenses, outside services, occupancy costs and lower depreciation due primarily to restructuring in 2020 and to reductions in spending caused by the COVID-19 pandemic, partially offset primarily by an increase in stock-based compensation and allocable expenses.

Selling, General and Administrative

The $905,000 million increase in SG&A expenses in the nine months ended October 3, 2021, as compared to the nine months ended September 27, 2020 was primarily attributable to outside legal and consulting costs, stock-based compensation, offset by decreases in salary and related expenses, travel and entertainment expenses and allocable expenses.

Restructuring

In January 2020, we implemented a restructuring plan to lower annual operating expenses.

The restructuring plan was approved by our Board of Directors on January 24, 2020.

Pursuant to the restructuring plan, we recorded restructuring costs of $0 in the third quarter of 2021 as compared to $624,000 in the third quarter of 2020.

Restructuring costs consists primarily of employee severance-related costs and facilities costs.

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

Interest Expense and Interest Income and Other Income (Expense), Net

The table below sets forth the changes in interest expense and interest income and other income (expense), net for the nine months ended October 3, 2021 as compared to the nine months ended September 27, 2020 (in thousands, except percentage data):

Nine Months Ended

September 27,

Interest expense

Gain on forgiveness of debt

Interest income and other expense, net

Interest expense relates primarily to our line of credit facility.

Interest income and other income (expense), net, relates to the interest earned on our money market accounts and foreign exchange gain or losses recorded. Changes in interest expense related for our revolving loan relate to the variability and timing of our outstanding loan balance. Gain on forgiveness of debt for the nine months ended October 3, 2021, relates to the gain related to the forgiveness of the PPP loan of $1.2 million recorded in the first quarter of fiscal 2021. Interest rates for this year as compared to the prior year were significantly lower, accounting for most of the decrease relating to interest income.

Interest income and other income (expense), net for this period was approximately ($59,000) as compared to the nine months ended September 27, 2020 of $94,000.

Provision for (Benefit from) Income Taxes

The table below sets forth the changes in the provisions for income tax for the nine months ended October 3, 2021 as compared to the nine months ended September 27, 2020 (in thousands, except percentage data):

Nine Months Ended

September 27,

Provision for (benefit from) income taxes

The majority of the income tax expense for the quarter ended October 3, 2021 and September 27, 2020 relates to our foreign subsidiaries, which are cost-plus entities.

Included in the provision for the quarter ended October 3, 2021, was a $125,000 deferred tax provision related to a one-time repatriation of funds from our India entity.

(Benefit from) provision for income taxes

The income tax benefit for the first quarter ended April 3, 2022 

relates primarily to tax benefits from foreign income tax returns related to the Company's foreign subsidiaries, which are cost-plus entities, partially offset by state minimum income taxes.

The majority of income tax expense for the quarter ended April 4, 2021 relates to taxes from our foreign subsidiaries.

We are subject to U.S.

1 unchanged sentence

states and foreign jurisdictions in which we operate.

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

Liquidity and Capital Resources 

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

As of October 3, 2021, our principal sources of liquidity consisted of cash, cash equivalents and restricted cash of $19.6 million, including $15.0 million drawn down from our revolving line of credit with Heritage Bank of Commerce (“Heritage Bank”) and $1.2 million loan received under the Paycheck Protection Program (“PPP”) which was forgiven in January 2021.

On December 11, 2020, we entered into a Second Amendment (the “Second Amendment”) to the Amended and Restated Loan Agreement with Heritage Bank.

The Second Amendment extended the loan maturity date for one year through September 28, 2022 and amended the interest to a rate per annum equal to one half of one percentage point (0.50%) above the prime rate.

On August 16, 2021, the Company entered into a Third Amendment to the Amended and Restated Loan Agreement with Heritage Bank (the "Third Amendment"). The Third Amendment (a) waived the Company’s non-compliance with the minimum cash covenant which obligated the Company to maintain at least $3.0 million of unrestricted cash at all times and (b) amended this obligation such that the Company shall now be required to maintain unrestricted cash in its accounts at the Bank in an amount of at least $3.0 million measured i) immediately prior to the funding of any credit extension, and ii) at all times that any advance is outstanding. 

We were in compliance with all loan covenants as of October 3, 2021.

As of October 3, 2021, we had $15.0 million of outstanding revolving line of credit with an interest rate of 3.75%.

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

On January 26, 2021, we received notice from Heritage Bank that amounts under the loan agreement had been forgiven. See Note 5 to these Unaudited Condensed Consolidated Financial Statements for the details.

On June 22, 2020, the Company closed an underwritten public offering of 2.5 million shares of common stock, $0.001 par value per share at a price of $3.50 per share.

The Company received gross proceeds from the offering of approximately $8.8 million and incurred stock issuance costs of approximately $1.1 million.

Under the terms of the underwriting agreement, the Company granted the underwriter a 30-day option to purchase up to an additional 375,000 shares of common stock to cover overallotments.

On July 21, 2020 the underwriter's partially exercised the option to purchase 141,733 additional shares of common stock in connection with the offering, resulting in additional gross proceeds to the Company of approximately $496,000 and incurred additional stock issuance costs of approximately $52,000.

Total gross proceeds received from this offering was approximately $9.3 million and incurred total stock issuance costs of approximately $1.2 million.

Net proceeds received from this offering after deducting stock issuance costs was approximately $8.1 million.

On September 22, 2021, we entered into a Share Subscription Agreement for the sale of 125,000 shares of our common stock (the “Private Placement”).

On September 30, 2021, the Company entered into a Common Stock Purchase Agreement for the sale of 73,664 shares of our common stock, in a registered direct offering pursuant to our effective shelf registration statement on Form S-3 (File No.

333-230352) (the “Registered Direct Offering,”

and together with the Private Placement, the “Share Placements”).

The net proceeds to us from the Share Placements, after deducting equity issuance costs of approximately $45,000, were approximately $1.0 million.

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

In addition to the Company's cash, cash equivalents and restricted cash of $20.1 million as of April 3, 2022, other sources of liquidity included a $15.0 million drawn down from our revolving line of credit ("Revolving Facility") with Heritage Bank of Commerce (“Heritage Bank”), and $1.5 million in net proceeds from the Company's sale of common stock in February 2022.

On February 9, 2022, the Company entered into common stock purchase agreements with certain investors for the sale of an aggregate of 310,000 shares of common stock, par value $0.001 in a registered direct offering.

These share placements resulted in net cash proceeds of approximately $1.5 million.

Issuance costs related to this offering were negligible.

The purchase price for each share of common stock in this placement was $4.78.

The Company currently intends to use the net proceeds from the financing for working capital, the development of next generation eFPGA-based products, including AI and open-source hardware or software, and general corporate purposes

We were in compliance with all the Heritage Bank Revolving Facility loan covenants as of April 3, 2022.

As of April 3, 2022, we had $15.0 million of outstanding Revolving Facility with an interest rate of 4.00%.

We currently use our cash to fund our working capital to accelerate the development of next generation products and for general corporate purposes.

Based on past performance and current expectations, we believe that its existing cash and cash equivalents, together with available financial resources from the Revolving Facility with Heritage Bank, will be sufficient to fund its operations and capital expenditures and provide adequate working capital for the next twelve months. 

Various factors can affect our liquidity, including, among others:

the level of revenue and gross profit as a result of the cyclicality of the semiconductor industry, the conversion of design opportunities into revenue, the market acceptance of existing and new products including solutions based on its ArcticLink®, PolarPro®

platforms, eFPGA, EOS S3 SoC, Quick AI solution, and SensiML software tools, the fluctuations in revenue as a result of product end-of-life, the fluctuations in revenue as a result of the stage in the product life cycle of its customers’

products, the costs of securing access to and availability of adequate manufacturing capacity, the levels of inventories and wafer purchase commitments, customer credit terms, the amount and timing of research and development expenditures, the timing of new product introductions, production volumes and product quality, sales and marketing efforts, the value and liquidity of its investment portfolio, changes in operating assets and liabilities, the ability to obtain or renew debt financing and to remain in compliance with the terms of existing credit facilities, the ability to raise funds from the sale of equity in the Company, the ability to capitalize on synergies with our newly acquired subsidiary SensiML;

the issuance and exercise of stock options and participation in our employee stock purchase plan and other factors related to the uncertainties of the industry and global economics.

Over the longer term, we anticipate that sales generated from our new product offerings and existing cash and cash equivalents, with financial resources from our Revolving Facility with Heritage Bank and our ability to raise additional capital in the public capital markets, will be sufficient to satisfy our operations and capital expenditures.

However, we cannot provide any assurance that we will be able to raise additional capital, if required, or that such capital will be available on terms acceptable to us.

The inability of us to generate sufficient sales from our new product offerings and/or raise additional capital if needed could have a material adverse effect on our operations and financial condition, including our ability to maintain compliance with our lender’s financial covenants.

On November 16, 2021, we entered into a Fourth Amendment to extend the Amended and Restated Loan Agreement with Heritage Bank to extend the maturity date to December 31, 2023 

As of October 3, 2021, most of our cash, cash equivalents and restricted cash were invested in the money market account at Heritage Bank.

As of October 3, 2021, our interest-bearing debt consisted of $836,000 outstanding under finance leases and $15.0 million outstanding under our Revolving Facility. See Note 5 and Note 6 to the Unaudited Condensed Consolidated Financial Statements for more details.

Cash balances held at our foreign subsidiaries were approximately $379,000 and $342,000 as of October 3, 2021 and January 3, 2021, respectively.

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 eFPGA IP, ArcticLink® and PolarPro® platforms, eFPGA, EOS S3 SoC, Quick AI solution, and SensiML software;

fluctuations in revenue as a result of product end-of-life;

fluctuations in revenue as a result of the stage in the product life cycle of its customers’

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 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 2023, and its ability to raise additional capital in the public capital markets will be sufficient to satisfy its operations and capital expenditures.

However, the Company cannot provide any assurance that it will be able to raise additional capital, if required, or that such capital will be available on terms acceptable to the Company.

The inability of the Company to generate sufficient sales from its new product offerings and/or raise additional capital if needed could have a material adverse effect on the Company’s operations and financial condition, including its ability to maintain compliance with its lender’s financial covenants.

As of April 3, 2022, most of our cash, cash equivalents and restricted cash were invested in a money market account at Heritage Bank.

As of April 3, 2022, our interest-bearing debt consisted of $0.6 million outstanding under finance leases and $15.0 million outstanding under our Revolving Facility. See Note 5, Debt Obligations, to the unaudited condensed consolidated financial statements for more details.

Cash balances held at our foreign subsidiaries was approximately $0.4 million as of April 3, 2022 and January 2, 2022.

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):

Nine Months Ended

September 27,

Three Months Ended

Net cash used in operating activities

Net cash used in investing activities

Net cash provided by financing activities

Net cash provided by (used in) financing activities

Net cash used in operating activities

For the nine months ended October 3, 2021, net cash used in operating activities was $3.1 million, which was primarily due to the net loss of $5.0 million, adjusted for net non-cash charges of $1.0 million including $1.5 million of stock-based compensation, depreciation and amortization expenses of $471,000, and inventory write-downs of $225,000 partially offset by the gain recognized from the forgiveness of debt of $1.2 million related to the PPP loan which was forgiven in the first quarter of fiscal 2021.

Cash inflows from changes in operating assets and liabilities were approximately $1.0 million, primarily due to a decrease in inventory, and increases in accounts payable and accrued liabilities subject to the variability of the timing of payments, partially offset by an increase in trade receivables due to the increase in revenue during the third quarter.

For the nine months ended September 27, 2020, net cash used in operating activities was $5.1 million, which was primarily due to the net loss of $8.2 million, adjusted for non-cash charges of $1.3 million.

Non-cash charges consisted primarily of $601,000 net gain from reversal of stock-based compensation expense of and depreciation and amortization expense of $644,000.

The net gain from the reversal of stock-based compensation was a result of the cancellation of certain performance based RSUs, as established goals required for vesting were not achieved and cancellation of RSUs due to restructuring related terminations. Cash inflows from changes in operating assets and liabilities were approximately $1.7 million, primarily due to a decrease in inventory and a decrease in trade receivables.

For the three months ended April 3, 2022, net cash used in operating activities was $0.7 million, which was primarily comprised of the net loss of $1.2 million, adjusted for net non-cash charges of $0.5 million comprised of $0.4 million of stock-based compensation, $0.2 million of depreciation and amortization expenses, partially offset by non-cash inventory reclassifications of $26 thousand and outflows from changes in operating assets and liabilities.

The outflows from changes in operating assets and liabilities were approximately $0.1 million due increases in accounts receivable related to higher revenue, partially offset by an increase in accrued liabilities and trade payables, and a decrease in deferred revenue.

For the three months ended April 4, 2021, net cash used in operating activities was $1.0 million, which was primarily due to the net loss of $1.7 million, adjusted for non-cash charges of $0.6 million including the gain recognized from the forgiveness of the PPP loan of $1.2 million.

Other non-cash charges consisted primarily of $0.4 million of stock-based compensation and depreciation and amortization expenses of $0.2 million.

Cash inflows from changes in operating assets and liabilities were $1.3 million, primarily due to a decrease in trade receivables from our collection efforts and an increase in accrued liabilities subject to the variability of the timing of payments, partially offset by an increase in other assets.

Net cash used in investing activities

For the nine months ended October 3, 2021, cash used in investing activities was $580,000, which was primarily attributable to the capitalized internal-use software and capital expenditures relating to licensed software and computer equipment.

For the nine months ended September 27, 2020, cash used in investing activities was $762,000, which was primarily attributable to the capitalized internal-use software.

Net cash provided by financing activities

Cash flows from financing activities includes the draw-downs and repayments of our line of credit. 

For the quarter ended of 2021 and 2020, these draw-downs and repayments netted to zero.

For the nine months ended October 3, 2021, cash provided by financing activities was $466,000, which was primarily derived from the net proceeds of $1.0 million from the stock issuance of 199,000 shares, partially offset by taxes paid relating to stock-based compensation equity awards. 

We continue to use and repay our revolving line of credit as our cash needs require.

For the nine months ended September 27, 2020 cash provided by financing activities was $9.0 million, primarily derived from the net proceeds of $8.1 million from the stock issuance of 2.5 million shares of common stock in June 2020 and overallotment of 141,733 shares to underwriters in July 2020, proceeds from the PPP loan of $1.2 million, partially offset by scheduled repayments of $179,000 for finance lease obligations.

Contractual Obligations and Commercial Commitments 

The following table summarizes our contractual obligations and commercial commitments as of October 3, 2021 and the effect such obligations and commitments are expected to have on our liquidity and cash flows in future fiscal periods.

There are neither contractual obligations nor commercial commitments over three years (in thousands):

Payments Due by Period

Contractual obligations:

Operating leases

Finance and software lease obligations

Wafer purchases (1)

Other purchase commitments

Total contractual obligations

Other commercial commitments:

Revolving line of credit

Total commercial commitments

Total contractual and commercial obligations

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

We are committed to accept the delivery of and pay for a portion of forecasted wafer volume.

Concentration of Suppliers

We depend on a limited number of contract manufacturers, subcontractors, and suppliers for wafer fabrication, assembly, programming and testing, and for the supply of programming equipment.

These services are typically provided by one supplier for each of our devices.

We generally purchase these single or limited source services through standard purchase orders.

Because we rely on independent subcontractors to perform these services, we cannot directly control product delivery schedules, costs or quality levels.

Our future success also depends on the financial viability of our independent subcontractors.

The decision not to provide these services to us or the inability to supply these services to us, such as in the case of a natural or financial disaster, would have a significant impact on our business.

In addition, these subcontracted manufacturers produce products for other companies and we must place orders up to several months in advance of expected delivery.

Increased demand from other companies could result in these subcontract manufacturers allocating available capacity to customers that are larger or have long-term supply contracts in place and we may be unable to obtain adequate foundry and other capacity at acceptable prices, or we may experience delays or interruption in supply.

As a result, we have only a limited ability to react to fluctuations in demand for our products, which could cause us to have an excess or a shortage of inventories of a particular product.

Additionally, volatility of economic, market, social and political conditions in countries where these suppliers operate may be unpredictable and could result in a reduction in product revenue or increase our cost of revenue and could adversely affect our business, financial condition and results of operations.

Cash used in investing activities was $0.1 million and 0.3 million for the three months ended April 3, 2022 and April 4, 2021 , respectively.

Cash used in investing activities was primarily attributable to the capitalized internal-use software and capital expenditure relating to computer equipment.

Net cash provided by (used in) financing activities

For the three months ended April 3, 2022, cash provided by financing activities was $1.4 million, which was primarily derived from the proceeds from the sale of common stock, offset by payments of finance lease obligations.

For the three months ended April 4, 2021 cash used in financing activities was $0.5 million, which was primarily attributable to taxes paid relating to stock-based compensation equity awards.

Off-Balance Sheet Arrangements

We do not maintain any off-balance sheet partnerships, arrangements or other relationships with unconsolidated entities or others, often referred to as structured finance or special purpose entities, which are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Recently Issued Accounting Pronouncements

See Note 2 to the Unaudited Condensed Consolidated Financial Statements for a description of recent accounting pronouncements, including the respective dates of adoption and expected effects on the results of our operations and financial condition.

Quantitative and Qualitative Disclosures about Market Risk

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What changed 10-Q

Item 2. Management’s Discussion and Analysis