QUICKLOGIC Corp 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations   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. 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.   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. 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. All forward-looking statements included in this document are based on information available to us as of the date hereof. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements or our objectives and plans will be achieved. Furthermore, past performance in operations and share price is not necessarily indicative of future performance. 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.   Overview   We develop low power, multi-core semiconductor platforms and IP for AI, voice and sensor processing. 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 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® 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 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. Inclusive of one pending, patent application disclosed in our fiscal 2021 annual report, at the end of the second 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 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, ("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.     15 Table of Contents     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, ("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.   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. We also work with mobile processor and communications semiconductor device manufacturers and companies that supply sensor, algorithms and applications. For our sensor processing solutions, we collaborate with sensor manufacturers to ensure interface compatibility. We also collaborate with sensor and voice/audio software companies, helping them optimize their software technology on our silicon platforms in terms of performance, power consumption and user experience.   Our ArcticPro eFPGA IP are currently developed on 65nm, 40nm and 22nm process nodes. The licensable IP is generated by a compiler tool that enables licensees to create an eFPGA block that they can integrate into their SoC without significant involvement by QuickLogic. We believe this flow enables a scalable support model for QuickLogic. For our eFPGA strategy, we work with semiconductor manufacturing partners to ensure our eFPGA IP is proven for a given foundry and process node before it is licensed to a SoC company.   In order to grow our revenue from its current level, we depend upon increased revenue from our new products including existing new product platforms, eFPGA IP and platforms currently in development. We expect our business growth to be driven mainly by our silicon solutions, eFPGA IP and SensiML AI Software. 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. We are expecting revenue growth from EOS S3, SensiML AI SaaS, and eFPGA IP licensing in fiscal year 2022.   We continue to seek to expand our revenue, including pursuing high-volume sales opportunities in our target market segments, by providing solutions incorporating IP, or industry standard interfaces. Our industry is characterized by intense price competition and by lower margins as order volumes increase. 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 second quarter of 2022, we generated total revenue of $4.5 million, an increase of 11% compared to the prior quarter, and an increase of 58% compared to the same quarter last year. Our new product revenue in the second quarter was $3.1 million, a decrease of 9% from the prior quarter and an increase of 148% from the second quarter of 2021. The increase in new product revenue was primarily driven by professional services revenue of $1.6 million in the current quarter. Our mature product revenue was $1.4 million in the second quarter of 2022, an increase of 118% compared to the prior quarter, and a decrease of 13% compared to the second 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 l icensin g and QuickAI initiatives. Overall, we reported a net loss of $0.5 million for the second quarter of 2022, a decrease of 55% compared with the prior quarter, and a decrease of 75% compared with the second quarter of 2021.   We have experienced net losses in the recent years and expect losses to continue through 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.   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, 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 six months ended July 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.     16 Table of Contents   Results of Operations   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     Six Months Ended       July 3, 2022     July 4, 2021     July 3, 2022     July 4, 2021   Revenue     100 %     100 %     100 %     100 % Cost of revenue     44 %     49 %     42 %     49 % Gross profit     56 %     51 %     58 %     51 % Operating expenses:                                 Research and development     26 %     57 %     29 %     69 % Selling, general and administrative     44 %     63 %     48 %     73 % Loss from operations     (14 )%     (69 )%     (19 )%     (91 )%                                   Interest expense     — %     (1 )%     — %     (1 )% Gain on forgiveness of debt     — %     — %     — %     23 % Interest income and other income (expense), net     3 %     (2 )%     — %     (1 )% Loss before income taxes     (11 )%     (71 )%     (19 )%     (70 )% Provision for income taxes     1 %     — %     1 %     3 % Net loss     (12 )%     (71 )%     (20 )%     (73 )%     Three Months Ended July 3, 2022 Compared to Three Months Ended July 4, 2021   Revenue   The table below sets forth the changes in revenue in the three months ended July 3, 2022 compared to the three months ended July 4, 2021 (in thousands, except percentage data):     Three Months Ended                       July 3, 2022     July 4, 2021     Change               % of Total             % of Total                       Amount     Revenues     Amount     Revenues     Amount     Percentage   New products   $ 3,131       69 %   $ 1,262       44 %   $ 1,869       148 % Mature products     1,410       31 %     1,620       56 %     (210 )     (13 )% Total revenue   $ 4,541       100 %   $ 2,882       100 %   $ 1,659       58 %   Note: For all periods presented, New products include hardware products and related revenues manufactured on 180 nanometer or smaller semiconductor processes, intellectual property 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 revenue for the second quarter of 2022 compared to the second quarter of 2021 increased $1.7 million. The $1.9 million increase in new products revenue was partially offset by a 13% net decrease in mature product revenue from a reduction in QECL and Eclipse Plus products, partially offset by an increase in PASIC4 products.    New Product Revenue   The table below sets forth the changes in new product revenue in the three months ended July 3, 2022 compared to the three months ended July 4, 2021 (in thousands, except percentage data):         Three Months Ended                       July 3, 2022     July 4, 2021     Change               % of Total             % of Total                       Amount     Revenues     Amount     Revenues     Amount     Percentage   Hardware products   $ 1,464       32 %   $ 1,068       37 %   $ 396       37 % eFPGA IP     1,617       36 %     148       5 %     1,469       993 % SaaS     50       1 %     46       2 %     4       9 % Total new product revenue   $ 3,131       69 %   $ 1,262       44 %   $ 1,869       148 %   The $0.4 million increase in new hardware product revenue was primarily comprised of a $0.8 million increase smart connectivity products partially offset by a $0.4 million decrease in sensor revenue. eFPGA IP revenue increased $1.5 million, or 993%, as compared to the same quarter in the prior year. The increase in eFPGA IP revenue was primarily driven by an increase in professional services revenue of $1.5 million partially offset by a 2% decrease in IP revenue.   17 Table of Contents     Gross Profit   The table below sets forth the changes in gross profit for the three months ended July 3, 2022 compared to the three month ended July 4, 2021 (in thousands, except percentage data):     Three Months Ended                       July 3, 2022     July 4, 2021     Change               % of Total             % of Total                       Amount     Revenues     Amount     Revenues     Amount     Percentage   Revenue   $ 4,541       100 %   $ 2,882       100 %   $ 1,659       58 % Cost of revenue     1,997       44 %     1,416       49 %     581       41 % Gross profit   $ 2,544       56 %   $ 1,466       51 %   $ 1,078       74 %   In the second quarter of 2022, gross profit increased $1.1 million, or 74%, as compared to the same quarter in the prior year. The increase in gross profit reflects a 58% increased in revenue, primarily composed of an increase of $0.4 million in new product hardware revenue and an increase of $1.5 million in eFPGA IP revenue, partially offset by a $0.2 million decrease in mature product revenue. The net increase in revenue was partially offset by a $0.6 million increase in cost of revenues, primarily comprised of $0.8 million in costs related to eFPGA IP, and partially offset by a $0.2 million decrease in product cost standards. eFPGA IP revenue and costs related to eFPGA IP revenue were c omprised eFPGA intellectual property license revenue and costs, respectively, and professional services revenue and costs, 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.     Operating Expenses   The table below sets forth the changes in operating expenses for the three months ended July 3, 2022, compared to the three months ended July 4, 2021 (in thousands, except percentage data):     Three Months Ended                       July 3, 2022     July 4, 2021     Change               % of Total             % of Total                       Amount     Revenues     Amount     Revenues     Amount     Percentage   R&D expense   $ 1,190       26 %   $ 1,652       57 %   $ (462 )     (28 )% SG&A expense     1,981       44 %     1,794       62 %     187       10 % Total operating expenses   $ 3,171       70 %   $ 3,446       120 %   $ (275 )     (8 )%   Research and Development   Our R&D expense s 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 $0.5 million   decrease  in R&D expenses in the second quarter of 2022 , as compared to the second quarter of 2021 , was primarily attributable to R&D costs allocable to cost of revenue  related to eFPGA IP revenue , a reduction in amortization and depreciation, and in expensed software. These were partially offset by increases in salary and related expenses, higher recruiting expenses, increased printing expenses, consulting and other outside services. R&D costs allocable to cost of revenue related to  eFPGA IP revenue included costs related to eFPGA intellectual property license revenue and professional services revenue.   Selling, General and Administrative   Our selling, general an d 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 millionincrease in SG&A expenses in the second quarter of 2022 , as compared to the second quarter of 2021 was primarily attributable to increases in salary and related expenses, stock-based compensation expenses, legal expenses and occupancy costs, and accounting and audit expenses, partially offset by a decrease in selling expenses and consulting costs.         18 Table of Contents   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 July 3, 2022, compared to the three months ended July 4, 2021 (in thousands, except percentage data):     Three Months Ended     Change       July 3,     July 4,                       2022     2021     Amount     Percentage   Interest expense   $ (22 )   $ (32 )   $ 10       (31 )% Interest income and other income (expense), net     142       (45 )     187       (416 )% Total interest income and other income (expense), net   $ 120     $ (77 )   $ 197       (256 )%   Interest expense relates primarily to our revolving 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. Interest expense for the second quarter of this year as compared to the same period in the prior year decreased approximately $10 thousand, which reflected a reduction in interest expense from finance lease liabilities partially offset by an increase in interest rates on our revolving line of credit loan. Interest income and other income (expense), net, was a net income of approximately $0.1 million and a net expense of approximately $77 thousand for the three months ended July 3, 2022 and July 4, 2021, respectively. The increase in total interest income and other income (expense), net reflected an increase in net foreign exchange gains and in other income and a reduction in interest expense over the prior period presented.   Provision for Income Taxes   The table below sets forth the changes in the provisions for income taxes in the three months ended July 3, 2022, compared to the three months ended July 4, 2021 (in thousands, except percentage data):     Three Months Ended     Change       July 3,     July 4,                       2022     2021     Amount     Percentage   Provision for income taxes   $ 17     $ 5     $ 12       240 %   The majority of the income tax expense for the three months ended July 3, 2022 and July 4, 2021 related to our foreign subsidiaries, which are cost-plus entities.   Six Months Ended July 3, 2022 Compared to Six Months Ended July 4, 2021   Revenue   The table below sets forth the changes in revenue for the six months ended July 3, 2022, compared to the six months ended July 4, 2021 (in thousands, except percentage data):     Six Months Ended                       July 3, 2022     July 4, 2021     Change               % of Total             % of Total                       Amount     Revenues     Amount     Revenues     Amount     Percentage   New products   $ 6,581       76 %   $ 2,337       46 %   $ 4,244       182 % Mature products     2,056       24 %     2,785       54 %     (729 )     (26 )% Total revenue   $ 8,637       100 %   $ 5,122       100 %   $ 3,515       69 % Note: 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 revenue for the six months ended July 3, 2022, as compared to the six months ended July 4, 2021 increased $3.5 million. The increase in product revenue was comprised of a $4.2 million increase in new product revenue partially offset by a 26% decrease in mature product revenue.     19 Table of Contents     New Product Revenue   The table below sets forth the changes in new product revenue in the six months ended July 3, 2022 compared to the six months ended July 4, 2021 (in thousands, except percentage data):       Six Months Ended                       July 3, 2022     July 4, 2021     Change               % of Total             % of Total                       Amount     Revenues     Amount     Revenues     Amount     Percentage   Hardware products   $ 3,299       38 %   $ 2,074       40 %   $ 1,225       59 % eFPGA IP     3,188       37 %     148       3 %     3,040       2054 % SaaS     94       1 %     115       2 %     (21 )     (18 )% Total new product revenue   $ 6,581       76 %   $ 2,337       46 %   $ 4,244       182 %   The $1.2 million increase in new hardware product revenue was primarily comprised of $1.0 million in higher connectivity product revenue, $1.0 million in higher display product revenue, partially offset by decrease a $0.7 million decrease in sensor product revenue. eFPGA IP revenue increased $3.0 million, or 2054%, as compared to the same period in the prior year, primarily driven by an increase in professional services. eFPGA IP revenue was comprised of eFPGA intellectual property license revenue and professional services revenue.   Gross Profit   The table below sets forth the changes in gross profit for the six months ended July 3, 2022, compared to the six months ended July 4, 2021 (in thousands, except percentage data):     Six Months Ended                       July 3, 2022     July 4, 2021     Change               % of Total             % of Total                       Amount     Revenues     Amount     Revenues     Amount     Percentage   Revenue   $ 8,637       100 %   $ 5,122       100 %   $ 3,515       69 % Cost of revenue     3,632       42 %     2,512       49 %     1,120       45 % Gross profit   $ 5,005       58 %   $ 2,610       51 %   $ 2,395       92 %   Gross profit for the six months ended July 3, 2022, as compared to the six months ended July 4, 2021, increased $2.4 million, or 92%. The increase was primarily due to an increase revenue of $3.5 million or 69%. The increase in revenue was primarily composed of an increase of $1.2 million in new product revenue and an increase in eFPGA IP revenue of $3.1 million was partially offset a decrease of $0.7 million in mature product revenue. The increase in revenue was partially offset by an increase of $1.2 million in eFPGA IP cost of revenue, partially offset by a reduction in product cost of revenue due to the mix of products sold. eFPGA IP revenue and costs related to eFPGA IP revenue were c omprised eFPGA intellectual property license revenue and costs, respectively, and professional services revenue and costs, 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.   Operating Expenses   The table below sets forth the changes in operating expenses for the six months ended July 3, 2022, compared to the six months ended July 4, 2021 (in thousands, except percentage data):     Six Months Ended                       July 3, 2022     July 4, 2021     Change               % of Total             % of Total                       Amount     Revenues     Amount     Revenues     Amount     Percentage   R&D expense   $ 2,523       29 %   $ 3,539       69 %   $ (1,016 )     (29 )% SG&A expense     4,118       48 %     3,741       73 %     377       10 % Total operating expenses   $ 6,641       77 %   $ 7,280       142 %   $ (639 )     (9 )%   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 in the six months ended July 3, 2022, as compared to the six months ended July 4, 2021, decreased $1 million. The decrease in R&D expenses was  primarily attributable to R&D costs allocable to cost of revenue in support of  eFPGA IP  and decreases in stock-based compensation costs and consulting services, partially offset increases in salary and related expenses, and amortization expense.  R&D costs allocable to cost of revenues in support of eFGPA IP  included costs related to eFPGA intellectual property license revenue and professional services revenue.   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. SG&A expenses in the six months ended July 3, 2022, as compared to the six months ended July 4, 2021, increased $0.4 million. The increase was primarily attributable to higher stock-based compensation expenses, legal fees and accounting and audit expenses, outside services expenses, insurance costs, dues and subscriptions and director service fees, partially offset by reductions in consulting expenses.       20 Table of Contents   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 six months ended July 3, 2022, compared to the six months ended July 4, 2021 (in thousands, except percentage data):     Six Months Ended     Change       July 3,     July 4,                       2022     2021     Amount     Percentage   Interest expense   $ (55 )   $ (64 )   $ 9       (14 )% Gain on forgiveness of debt     —       1,192       (1,192 )     (100 )% Interest income and other expense, net     19       (52 )     71       (137 )%     $ (36 )   $ 1,076     $ (1,112 )     (103 )%   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. Interest expense for the six months ended July 3, 2022 compared to the same period in the previous year declined $9 thousand, which reflected a decrease in interest expense from finance lease liabilities partially offset by an increase in interest rates on our revolving line of credit loan. Interest income and other expense, net, for the six months ended July 3, 2022 compared to the same period in the previous year, increased $71 thousand, which primarily reflected an increase in net foreign exchange gains. Interest expense and interest income and other income (expense), net, for the six months ended July 4, 2021 was $1.1 million and which included a gain on forgiveness of debt relates to the gain related to the forgiveness of the PPP loan of $1.2 million.   Provision for Income Taxes   The table below sets forth the changes in provision for income taxes for the six months ended July 3, 2022, compared to the six months ended July 4, 2021 (in thousands, except percentage data):     Six Months Ended     Change       July 3,     July 4,                       2022     2021     Amount     Percentage   Provision for income taxes   $ 16     $ 157     $ 141       90 %   The majority of the income tax expense for the six months ended July 3, 2022 and July 4, 2021 relates to our foreign subsidiaries, which are cost-plus entities. Included in the provision for the six months ended July 4, 2021 was a $125,000 deferred tax provision related to a one-time repatriation of funds from our India entity.     21 Table of Contents   Liquidity and Capital Resources    We have financed our operations and capital investments through public and private offerings of our common stock, finance and operating leases, and borrowing under a revolving line of credit and cash flows used in operations, partially offset by cash used in operations. In addition to the Company's cash, cash equivalents and restricted cash of $18.5 million, as of July 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 $1.6 million in net proceeds from the Company's sale of common stock, of which $1.5 million represented a registered direct offering 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 July 3, 2022. As of July 3, 2022, we had $15.0 million of outstanding on the Revolving Facility with an interest rate of 5.25%.   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 affect the Company’s liquidity, including, among others: the level of revenue and gross profit as a result of the cyclicality of the semiconductor industry; the conversion of design opportunities into revenue; market acceptance of existing and new products including solutions based on its eFPGA IP, ArcticLink® and PolarPro® platforms, eFPGA, EOS S3 SoC, Quick AI solution, and SensiML software; fluctuations in revenue as a result of product end-of-life; fluctuations in revenue as a result of the stage in the product life cycle of its customers’ products; costs of securing access to and availability of adequate manufacturing capacity; levels of inventories; wafer purchase commitments; customer credit terms; the amount and timing of research 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 July 3, 2022, most of our cash, cash equivalents and restricted cash were invested in a money market account at Heritage Bank. As of July 3, 2022, our interest-bearing debt consisted of $0.5 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 subsidiarie s was approximately $0.1 million and $0.4 million  as of July 3, 2022 and January 2, 2022, respectively. Earnings from our foreign subsidiaries are currently deemed to be indefinitely reinvested. We do not expect such reinvestment to affect our liquidity and capital resources, and we continually evaluate our liquidity needs and ability to meet global cash requirements as a part of our overall capital deployment strategy. Factors that affect our global capital deployment strategy include anticipated cash flows, the ability to repatriate cash in a tax-efficient manner, funding requirements for operations and investment activities, acquisitions and divestitures and capital market conditions.     22 Table of Contents   In summary, our cash flows were as follows (in thousands):     Six Months Ended       July 3,     July 4,       2022     2021   Net cash used in operating activities   $ (2,063 )   $ (2,812 ) Net cash used in investing activities     (402 )     (447 ) Net cash provided by (used in) financing activities     1,406       (493 )   Net cash used in operating activities   For the six months ended July 3, 2022, net cash used in operating activities was $2.1 million, which was primarily due to the net loss of $1.7 million, adjusted for net non-cash charges of $1.2 million, which included $0.9 million of stock-based compensation, depreciation and amortization expenses of $0.3 million, an inventory write-downs of $54 thousand, partially offset by a gain on disposal of equipment of $76 thousand. Cash outflows from changes in operating assets and liabilities were approximately $1.5 million and were primarily due to an increases in accounts receivable, reflecting the increase in revenues during the period, a decrease in deferred revenue, and an increase in inventory. This was partially offset by an increase in trade payables, which are subject to variability of the timing of payments.   For the six months ended July 4, 2021, net cash used in operating activities was $2.8 million, which was primarily due to the net loss of $3.8 million, adjusted for net non-cash charges of $38 thousand including the gain recognized from the forgiveness of the PPP loan of $1.2 million. Other non-cash charges consisted primarily of $0.6 million of stock-based compensation, depreciation and amortization expenses of $0.3 million, and inventory write-downs of $0.2 million. 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 second quarter.   Net cash used in investing activities   For the six months ended July 3, 2022, cash used in investing activities was $0.4 million, which was primarily attributable to the capitalized internal-use software and capital expenditures relating to licensed software and computer equipment.   For the six months ended July 4, 2021, cash used in investing activities was $0.4 million, which was primarily attributable to the capitalized internal-use software and capital expenditure relating to leasehold improvements and computer equipment. .   Net cash provided by (used in) 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 six months ended July 3, 2022, cash provided by financing activities was $1.4 million, which was primarily derived from the net proceeds of $1.6 million from the stock issuances. We continue to use and repay our revolving line of credit as our cash needs require.   For the six months ended July 4, 2021 cash used in financing activities was $0.5 million and was primarily attributable to taxes paid relating to stock-based compensation equity awards.     23 Table of Contents Part I. Financial Information (continued)   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.   Item 3. Quantitative and Qualitative Disclosures about Market Risk   Not Applicable.