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 1, 2023, found in our Annual Report on Form   10-K filed with the Securities and Exchange Commission ( “ SEC ” ) on March 28, 2023. 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. We currently have a total of five patent applications pending.    Our semiconductor solutions typically fall into one of four categories: Sensor Processing, Hardware products consisting of Sensor Processing, Display Smart Connectivity, and eFPGA intellectual property and its associated tools. 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.   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 sensors, 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.   16 Table of Contents   Our eFPGA IP are currently developed on 12nm, 16nm, 22nm, 28nm, 40nm, 65nm, 90nm, 130nm, and 250nm process nodes. The licensable IP is generated by an automated compiler tool, called Australis TM , that enables our engineers to create an eFPGA IP for our licensees that they can then integrate into their SoC without significant involvement by QuickLogic. We believe this flow enables a scalable development and support model for QuickLogic. For our eFPGA strategy, we typically work with semiconductor manufacturing partners prior to this IP being 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 primarily from eFPGA IP licensing and professional services in Q4 2023 and FY2024.   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 third quarter of 2023, we generated total revenue of  $6.7 million , an increase  of  128%  compared to the prior quarter, and  an increase  of  93%  compared to the same quarter last year. Our new product revenue in the third quarter was  $6.1 million ,  an increase  of  173%  from the prior quarter and  an increase  of  171%  from the third quarter of  2022 . The  increase  in new product revenue from the prior quarter was primarily driven by a $3.97 million increase in eFPGA professional services revenue, partially offset by a decrease of $119 thousand in hardware product revenue. Our mature product revenue was $0.6 million  in the third quarter of  2023 , a decrease  of  17%  compared to the prior quarter, and a decrease  of  53%  compared to the third quarter of 2022 . 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 eFPGA  IP l icensin g and professional services and SensiML initiatives. Overall, we reported net income of $1.2 million  for the third quarter of 2023 , as compared to a net loss of $2.3 million in the prior quarter and a net loss of $1.3 million for the third quarter of 2022.   We have experienced net losses in recent years and expect losses to continue through at least fiscal year 2023 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 1, 2023 as filed with the SEC on March 28, 2023, provides additional information about our business and operations.   As of October 1, 2023, there have not been any material developments concerning the Cyber-Incident previously reported on our Form 10-K for the year ended January 1, 2023, which was filed with the Securities and Exchange Commission ("SEC") on March 28, 2023. The Company's investigation is complete and there was no impact on the Company's financial systems. The Company believes the incident has not had nor will have a material impact on its business operations, ability to serve its customers, or financial results. See Note 1, The Company and Basis of Presentation.   As of October 1, 2023, the Company had one operating lease with a remaining lease term of 0.5 years. The operating lease relates to the Company's headquarters in San Jose, CA. On October 24, 2023, the Company renewed its lease at its current location for an additional three years. The amended lease term will expire on April 14, 2027 with no change in terms.   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), and the assessment of excess, obsolete, and unsaleable inventories. 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 1, 2023, 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 1, 2023, filed with the SEC on March 28, 2023.   17 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     Nine Months Ended       October 1, 2023     October 2, 2022     October 1, 2023     October 2, 2022   Revenue     100 %     100 %     100 %     100 % Cost of revenue     23 %     51 %     36 %     45 % Gross profit     77 %     49 %     64 %     55 % Operating expenses:                                 Research and development     29 %     29 %     37 %     29 % Selling, general and administrative     29 %     56 %     42 %     50 % Income (loss) from operations     19 %     (36 )%     (15 )%     (24 )%                                   Interest expense     (1 )%     (1 )%     (1 )%     — % Interest income and other income (expense), net     — %     (2 )%     (1 )%     (1 )% Income (loss) before income taxes     18 %     (39 )%     (17 )%     (25 )% Provision for income taxes     — %     — %     — %     — % Net income (loss)     18 %     (39 )%     (17 )%     (25 )%     Three Months Ended October 1, 2023 Compared to Three Months Ended October 2, 2022   Revenue   The table below sets forth the changes in revenue in the three months ended October 1, 2023 compared to the three months ended October 2, 2022 (in thousands, except percentage data):       Three Months Ended                       October 1, 2023     October 2, 2022     Change               % of Total             % of Total                       Amount     Revenues     Amount     Revenues     Amount     Percentage   New products   $ 6,096       91 %   $ 2,252       65 %   $ 3,844       171 % Mature products     569       9 %     1,207       35 %     (638 )     (53 )% Total revenue   $ 6,665       100 %   $ 3,459       100 %   $ 3,206       93 %   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) revenue. Mature products include all products produced on semiconductor processes larger than 180 nanometer.   Product revenue for the third quarter of 2023 compared to the third quarter of 2022 increased $3.2 million. The increase resulted primarily from increases in professional services eFPGA revenues, partially offset by a decrease in revenue from devices.   New Product Revenue   The table below sets forth the changes in new product revenue in the three months ended October 1, 2023 compared to the three months ended October 2, 2022 (in thousands, except percentage data):         Three Months Ended                       October 1, 2023     October 2, 2022     Change               % of Total             % of Total                       Amount     Revenues     Amount     Revenues     Amount     Percentage   Hardware products   $ 248       4 %   $ 308       9 %   $ (60 )     (19 )% eFPGA IP and professional services     5,838       88 %     1,700       49 %     4,138       243 % SaaS & Other     10       0 %     244       7 %     (234 )     (96 )% Total new product revenue   $ 6,096       91 %   $ 2,252       65 %   $ 3,844       171 %   eFPGA IP revenue for the three months ended October 1, 2023 and October 2, 2022 was $5.8 million and $1.7 million, respectively, which were primarily professional services revenue.   18 Table of Contents   Gross Profit   The table below sets forth the changes in gross profit for the three months ended October 1, 2023 compared to the three months ended October 2, 2022 (in thousands, except percentage data):       Three Months Ended                       October 1, 2023     October 2, 2022     Change               % of Total             % of Total                       Amount     Revenues     Amount     Revenues     Amount     Percentage   Revenue   $ 6,665       100 %   $ 3,459       100 %   $ 3,206       93 % Cost of revenue     1,537       23 %     1,781       51 %     (244 )     (14 )% Gross profit   $ 5,128       77 %   $ 1,678       49 %   $ 3,450       206 %   In the third quarter of 2023 , gross profit increased   $3.5 million , or 206% , compared to the same quarter in the prior year. The increase in gross profit reflects a 93%increase in revenues combined with a 14% net decrease in cost of revenue. While there was a decrease in product costs resulting from lower devices volumes, the timing of certain professional services cost into the fourth quarter of 2023 had a favorable impact on third-quarter 2023 margins. We expect the impact from the timing of these costs will result in higher costs of revenue in subsequent quarters in 2023 and 2024, with a commensurate decrease in gross margins for those quarters. Additionally, certain tooling costs for the Company's eFPGA professional services projects were determined to qualify for capitalization. As a result, the Company capitalized $2.1 million related to tooling to be utilized under its long-term professional services contracts. The tooling will be depreciated over an estimated useful life of seven years. The capitalization of this tooling also contributed to a reduced cost of revenues for the current period as compared with prior periods, resulting in a favorable impact on gross profit for the third quarter of 2023.   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 October 1, 2023, compared to the three months ended October 2, 2022 (in thousands, except percentage data):       Three Months Ended                       October 1, 2023     October 2, 2022     Change               % of Total             % of Total                       Amount     Revenues     Amount     Revenues     Amount     Percentage   R&D expense   $ 1,933       29 %   $ 1,018       29 %   $ 915       90 % SG&A expense     1,915       29 %     1,900       56 %     15       1 % Total operating expenses   $ 3,848       58 %   $ 2,918       85 %   $ 930       32 %   Research and Development   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 $0.9 million increase in R&D expenses in the third quarter of 2023, as compared to the third quarter of 2022, was attributable to increases in time and effort spent by engineering personnel on internal R&D projects in the current quarter.   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 Company had a net, immaterial increases in S&GA expenses in the third quarter of 2023, as compared to the third quarter of 2022. This is primarily attributable to some increases in compensation costs offset with decreases in legal and accounting and audit expenses.   Interest Expense, 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 1, 2023, compared to the three months ended October 2, 2022 (in thousands, except percentage data):       Three Months Ended     Change       October 1,     October 2,                       2023     2022     Amount     Percentage   Interest expense   $ (48 )   $ (44 )   $ 4       9 % Interest income and other income (expense), net     (36 )     (60 )     (24 )     (40 )% Total interest (expense), interest income and other income (expense), net   $ (84 )   $ (104 )   $ (20 )     (19 )%   19 Table of Contents   Interest expense relates primarily to our revolving line of credit facility and finance leases liabilities. Interest income and other income (expense), net, relates to net foreign exchange losses recorded, partially offset by interest earned in our money market accounts. Changes in interest expense are related to our revolving loan's interest rate variability. Interest expense for the third quarter of this year as compared to the same period in the prior year increased approximately $4 thousand which was comprised of a $10 thousand increase in interest expense related to software leases, a $8 thousand decrease in interest expense related to our revolving line of credit facility, and a $2 thousand increase in interest expense related to IT hardware financing costs. The change in interest income and other income (expense), net reflected decreased foreign exchange losses over the prior period.   Provision for Income Taxes   The table below sets forth the changes in the provisions for income taxes in the three months ended October 1, 2023, compared to the three months ended October 2, 2022 (in thousands, except percentage data):     Three Months Ended     Change       October 1,     October 2,                       2023     2022     Amount     Percentage   Provision for income taxes   $ 4     $ 3     $ 1       33 %   The majority of the income tax expense for the three months ended October 1, 2023 and October 2, 2022 are related to our foreign subsidiaries, which are cost-plus entities.   Nine Months Ended October 1, 2023 Compared to Nine Months Ended October 2, 2022   Revenue   The table below sets forth the changes in revenue in the nine months ended October 1, 2023 compared to the nine months ended October 2, 2022 (in thousands, except percentage data):       Nine Months Ended                       October 1, 2023     October 2, 2022     Change               % of Total             % of Total                       Amount     Revenues     Amount     Revenues     Amount     Percentage                                                     New products   $ 11,384       83 %   $ 8,833       73 %   $ 2,551       29 % Mature products     2,335       17 %     3,263       27 %     (928 )     (28 )% Total revenue   $ 13,719       100 %   $ 12,096       100 %   $ 1,623       13 %   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) revenue. Mature products include all products produced on semiconductor processes larger than 180 nanometer.   Product revenue for the nine months ending October 1, 2023 compared to the nine months ending October 2, 2022 increased $1.6 million. The increase resulted primarily from increases in eFPGA revenues, partially offset by a decrease in revenue from devices.   New Product Revenue   The table below sets forth the changes in new product revenue in the nine months ended October 1, 2023 compared to the nine months ended October 2, 2022 (in thousands, except percentage data):         Nine Months Ended                       October 1, 2023     October 2, 2022     Change               % of Total             % of Total                       Amount     Revenues     Amount     Revenues     Amount     Percentage   Hardware products   $ 776       6 %   $ 3,607       30 %   $ (2,831 )     (78 )% eFPGA IP and professional services     10,505       77 %     4,911       41 %     5,594       114 % SaaS & Other     103       (0 )%     315       2 %     (212 )     (67 )% Total new product revenue   $ 11,384       83 %   $ 8,833       73 %   $ 2,551       29 %   eFPGA revenue for the nine months ended October 1, 2023 was $10.5 million which was comprised of approximately $10.3 million in professional services revenue and $0.2 million in eFPGA intellectual property license revenue. eFPGA revenue for the nine months ended October 2, 2022 was $4.9 million, which was comprised of approximately $4.8 million in professional services revenue and $0.1 million in eFPGA intellectual property license revenue.   20 Table of Contents   Gross Profit   The table below sets forth the changes in gross profit for the nine months ended October 1, 2023 compared to the nine months ended October 2, 2022 (in thousands, except percentage data):       Nine Months Ended                       October 1, 2023     October 2, 2022     Change               % of Total             % of Total                       Amount     Revenues     Amount     Revenues     Amount     Percentage   Revenue   $ 13,719       100 %   $ 12,096       100 %   $ 1,623       13 % Cost of revenue     4,998       36 %     5,413       45 %     (415 )     (8 )% Gross profit   $ 8,721       64 %   $ 6,683       55 %   $ 2,038       30 %   In the nine months ended October 1, 2023 , gross profit increased   $2.04 million , or 30% , as compared to the same period in the prior year. The increase in gross profit reflects an 13% increase in revenues combined with an 8% net decrease in cost of revenue. While there was a decrease in product costs resulting from lower devices volumes, the timing of certain professional services cost into the fourth quarter of 2023 had a favorable impact on year-to-date FY2023 margins. We expect the impact from the timing of these costs will result in higher costs of revenue in subsequent quarters in 2023 and 2024, with a commensurate decrease in gross margins for those quarters. Additionally, certain tooling costs for the Company's eFPGA professional services projects were determined to qualify for capitalization. As a result, the Company capitalized $3.86 million related to tooling to be utilized under its long-term professional services contracts. The tooling will be depreciated over an estimated useful life of seven years. The capitalization of this tooling also contributed to a reduced cost of revenues for the current year-to-date period as compared with prior periods, resulting in a favorable impact on gross profit for the nine months ended October 1, 2023.   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 1, 2023, compared to the nine months ended October 2, 2022 (in thousands, except percentage data):       Nine Months Ended                       October 1, 2023     October 2, 2022     Change               % of Total             % of Total                       Amount     Revenues     Amount     Revenues     Amount     Percentage   R&D expense   $ 5,067       37 %   $ 3,541       29 %   $ 1,526       43 % SG&A expense     5,700       42 %     6,018       50 %     (318 )     (5 )% Total operating expenses   $ 10,767       79 %   $ 9,559       79 %   $ 1,208       13 %   Research and Development   Our R&D expense s consist primarily of personnel, overhead and other costs associated with SoC and software development, programmable logic design, AI and eFPGA development. The $1.5 million   increase  in R&D expenses in the nine months ending October 1, 2023 , as compared to the same period in the prior year, was attributable to increases in time and effort spent by engineering personnel on internal R&D projects in the current year.   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 $0.3 million decrease in SG&A expenses in the nine months ending October 1, 2023, as compared to the same period in the prior year, was primarily attributable to decreases in legal, insurance, and accounting and audit expenses. These were partially offset by increases in compensation.   Interest Expense, 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 1, 2023, compared to the nine months ended October 2, 2022 (in thousands, except percentage data):       Nine Months Ended     Change       October 1,     October 2,                       2023     2022     Amount     Percentage   Interest expense   $ (156 )   $ (98 )   $ 58       59 % Interest income and other expense, net     (99 )     (42 )     57       136 % Total interest (expense), interest income and other income (expense), net   $ (255 )   $ (140 )   $ 115       82 %   21 Table of Contents   Interest expense relates primarily to our revolving line of credit facility and finance lease liabilities. Interest income and other income (expense), net, relates to net foreign exchange losses recorded, partially offset by interest earned in our money market accounts. Changes in interest expense are related to our revolving loan's interest rate variability. Interest expense for the nine months ending October 1, 2023 , as compared to the same period in the prior year , increased approximately $58 thousand, which was comprised of a $36 thousand increase in interest expense related to software leases, a $18 thousand increase in interest expense related to our revolving line of credit facility, and a $7 thousand increase in interest expense related to IT hardware financing costs. This was partially offset by a $3 thousand decrease in the annual facility fee associated with the revolving line of credit. The change in interest income and other income (expense), net reflected increased foreign exchange losses over the prior period.   Provision for Income Taxes   The table below sets forth the changes in the provisions for income taxes in the nine months ended October 1, 2023, compared to the nine months ended October 2, 2022 (in thousands, except percentage data):       Nine Months Ended     Change       October 1,     October 2,                       2023     2022     Amount     Percentage   Provision for income taxes   $ 4     $ 19     $ (15 )     (79 )%   The majority of the income tax expenses for the nine months ended October 2, 2022 are related to our foreign subsidiaries, which are cost-plus entities.   Balance Sheet Activities   Balance sheet amounts at October 1, 2023 compared to January 1, 2023 resulted from typical and usual activities in the normal course of business.     Total assets increased by approximately $4.0 million primarily due to the capitalization of $3.86 million in semiconductor tooling, an increase of $2.0 million in contract assets (due to the $14.9 million professional services contract signed later in the quarter), a $2.0 million decrease in accounts receivable due to an offsetting reclassification of $1.2 million in trade accounts receivable to a note receivable in other current assets with the remainder $0.8 million decrease due to collections activity, a $0.6 million decrease in cash, a decrease in device inventories of $0.4 million due to write-downs, and amortization of ROU assets in the amount of $0.3 million.   Liabilities increased by approximately $1.8 million due to an increase of $1.5 million in trade payables resulting from fulfilling revenue contracts with customers, and similarly for the $0.5 million increase in accrued liabilities offset by a net collective decrease of $0.2 million in lease liabilities and other non-current liabilities. Equity increased $2.1 million due to a $4.4 million increase in additional paid in capital arising from the sale of shares of common stock and recognition of stock-based compensation, offset by $2.3 million increase in its accumulated deficit from recurring losses.   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 borrowings 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 $18.6 million, as of October 1, 2023, 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 $2.3 million in net proceeds from the Company's sale of common stock on March 21, 2023. Costs related to the offering were immaterial. The Company's restricted cash balance as of October 1, 2023 was $0.1 million and relates to amounts pledged as cash security for the use of credit cards.   On April 28, 2023, the Company converted accounts receivable for a customer in the amount of approximately $1.16 million to notes receivable (the "Note"). At the time, the Note bore an interest rate of 3.0% compounded monthly. On June 28, 2023, the Company cancelled the original note and entered into a revised promissory note with the customer, where the interest rate changed to 4.69% compounded monthly, or a 4.8% effective annual interest rate, accruing from the date of the prior note. If not prepaid prior to the Note maturity date of June 28, 2024, the principal and all accrued and unpaid interest will be due and payable to the Company. If an event of default occurs, the interest rate will increase to 10.0%. All other terms of the note remained the same.   On September 14, 2022 and February 9, 2022, the Company entered into common stock purchase agreements with certain investors for the sale of an aggregate of 487,279 and 310,000 shares of common stock, respectively, par value $0.001, in registered direct offerings, resulting in net cash proceeds of approximately $3.2 million and $1.5 million, respectively. Issuance costs related to the September 14, 2022 and the February 9, 2022 offerings were immaterial. The purchase price for each share of common stock in the September 14, 2022 and in the February 9, 2022 placements were $6.57 and $4.78, respectively.    We were in compliance with all the Heritage Bank Revolving Facility loan covenants as of October 1, 2023. As of October 1, 2023, we had $15.0 million outstanding on the Revolving Facility with an interest rate of 9.00%.   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.   22 Table of Contents   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 2024, and its ability to raise additional capital in the public capital markets will be sufficient to satisfy its operations and capital expenditures. However, the Company cannot provide any assurance that it will be able to raise additional capital, if required, or that such capital will be available on terms acceptable to the Company. The inability of the Company to generate sufficient sales from its new product offerings and/or raise additional capital if needed could have a material adverse effect on the Company’s operations and financial condition, including its ability to maintain compliance with its lender’s financial covenants.   As of October 1, 2023 , most of our cash, cash equivalents and restricted cash were invested in a money market account at Heritage Bank. As of  October 1, 2023 , our interest-bearing debt consisted of $0.9 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 were approximately $0.15 million and $0.2 million  as of October 1, 2023 and January 1, 2023, 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.   In summary, our cash flows were as follows (in thousands):        Nine Months Ended       October 1,     October 2,       2023     2022   Net cash used in operating activities   $ (118 )   $ (3,423 ) Net cash used in investing activities     (2,437 )     (634 ) Net cash provided by financing activities     1,979       4,488     Net cash used in operating activities   For the nine months ended October 1, 2023, net cash used in  operating acti vities was $0.1 million, whic h was primarily due to the net loss of $2.3 million, adjus ted for net non-cash charges of $4 million, which included $1.9 million of stock-based compensation, $0.7 million in depreciation and amortization expenses, $0.8 million in ROU asset amortization expenses, and $0.6 million in write-downs of inventories. Cash outflow from changes in operating assets and liabilities was approximately $1.0 million and was primarily due to a reclassification of a trade payable to a note payable, increases in contract assets, offset by increases in accrued liabilities and trade payables.   For the nine months ended October 2, 2022, net cash used in operating activities was $3.4 million, was was primarily due to the net loss of $3.0 million and a $27 thousand loss on the disposal of equipment, adjusted for net non-cash charges of $2.5 million, which included $1.3 million of stock-based compensation, $0.6 million in ROU asset amortization expenses, $0.5 million in depreciation and amortization expenses, and $0.1 million in write-downs of inventories. Cash outflow from changes in operating assets and liabilities was approximately $2.9 million and were primarily due to an increase in accounts receivable, reflecting an increase in revenues during the period, increases in inventory and other assets and a decrease in deferred revenue, partially offset by an increase in trade payables, which are subject to variability of the timing of payments.   Net cash used in investing activities   For the nine months ended October 1, 2023, and October 2, 2022 cash used in  investing activities was  $2.4 million and $0.6 million, respectively, which were primarily attributable to the capital expenditures relating to licensed software, capitalized internal-use software, and purchase of specialized semiconductor tooling.   Net cash provided by financing activities   Cash flows from financing activities include the draw-downs and repayments of our line of credit.  For the quarters ended October 1, 2023 and October 2, 2022, these draw-downs and repayments netted to zero.   For the nine months ended October 1, 2023,  cash  provided by  financing activities was  $2 million , which was primarily derived from the net proceeds of $2.3 million from the stock issuance, partially offset by finance lease obligation payments. We continue to use and repay our revolving line of credit as our cash needs requi re.   For the nine months ended October 2, 2022, cash  provided by financing activities was  $4.5 million  and was primarily derived from the net proceeds of $4.8 million from the stock issuances, partially offset by finance lease obligation payments.   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.