What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-08-07 compared with 2020-05-22 · 162 added, 114 removed, 155 unchanged (64% of the section changed)

5 unchanged sentences

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

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

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.

4 unchanged sentences

We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise that may arise after the date of this Quarterly Report on Form 10-Q.

We develop low power, multi-core semiconductor platforms and intellectual property, or IP, for artificial intelligence, or 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 wholly owned subsidiary, SensiML Corporation, or SensiML, completes the “full stack” end-to-end solution with accurate sensor algorithms using AI technology.

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

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

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

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

3 unchanged sentences

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

Through our wholly owned subsidiary SensiML, we now have an AI software platform that includes Software-as-a-Service, or 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.

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

Our solutions typically fall into one of three categories:

2 unchanged sentences

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 Signalling, or LVDS, Mobile Industry Processor Interface, or MIPI, and Secure Digital In put Output, or SDIO.

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

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

and (ii) implements commonly used mobile

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

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

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

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

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

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

1 unchanged sentence

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.

3 unchanged sentences

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

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

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

the SymbiFlow open source FPGA toolchain, the Renode open source simulation framework for rapid prototyping, development and testing of multi-node systems, the Zephyr Real-Time Operating System (RTOS), and an open source development kit.

We also work with mobile processor and communications semiconductor device manufacturers and companies that supply sensor, algorithms and applications.

4 unchanged sentences

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.

We expect our business growth to be driven mainly by our silicon solutions, eFPGA IP, open source tools, 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.

During the first quarter of 2020, we generated total revenue of $2.2 million, which represents a decrease of 25% compared to the fourth quarter of 2019 and 32% compared to the first quarter of 2019.

Our new product revenue in the first quarter was $486,000, which represents a decrease of 32% from the prior quarter and 29% from the first quarter of 2019.

Our mature product revenue was $1.7 million in the first quarter of 2020, which represents a decrease of 23% from the prior quarter and 33% compared to the first quarter of 2019.

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

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

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

quarter and flat compared to the second quarter of 2019.

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

We devote substantially all of our development, sales and marketing efforts to our new sensor processing solutions using our EOS TM S3 platforms, derivative products based on software-driven features, development of additional new products and solution platforms, our new eFPGA IP licensing and QuickAI initiatives.

Overall, we reported a net loss of $3.2 million for the first quarter of 2020, a decrease of 9% compared with the first quarter of 2019 and an increase of 3% compared with the fourth quarter of 2019.

Overall, we reported a net loss of $3.0 million for the second quarter of 2020, a decrease of 6% compared with the prior quarter and a decrease of 36% compared with the second quarter of 2019.

COVID-19 Response

10 unchanged sentences

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

Our balance sheet is well positioned and had $19.0 million of cash and cash equivalents as of March 29, 2020, including the draw-down of $15.0 million from revolving credit facility maturing in September 2021.

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

We are in discussions with our lenders to ensure continued availability of funds in future quarters in the event of a further economic downturn.

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

On July 21, 2020, the Underwriter’s partially exercised the option to purchase 141,733 additional shares of Common Stock in connection with the Offering, resulting in additional net proceeds to the Company of approximately $461,000 after deduction of underwriting discounts.

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

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

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

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

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

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

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

8 unchanged sentences

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, val uation 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 st ock-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 consolidated financial statements and accompanying notes that fairly repre sent all periods presented.

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.

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

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

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

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

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

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

2 unchanged sentences

Three Months Ended

Six Months Ended

Cost of revenue

7 unchanged sentences

Loss before income taxes

Provision for income taxes

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

Three Months Ended March 29, 2020 Compared to Three Months Ended March 31, 2019

The table below sets forth the changes in revenue for the three months ended March 29, 2020, as compared to the three months ended March 31, 2019 (in thousands, except percentage data):

(Benefit from) provision for income taxes

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

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

Three Months Ended

March 29, 2020

March 31, 2019

June 28, 2020

June 30, 2019

Revenue by product line (1) :

2 unchanged sentences

For all periods presented:

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

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

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

The net decrease of $201,000 in the revenue of new products was primarily due to a decrease in display bridge solutions, which were not fully offset by other new products.

The $835,000 decrease in the revenue of mature pro ducts was primarily due to lower shipments to our aerospace and avionics customers .

The table below sets forth the changes in gross profit for the three months ended March 29, 2020 as compared to the three months ended March 31, 2019 (in thousands, except percentage data):

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

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

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

Three Months Ended

March 29, 2020

March 31, 2019

June 28, 2020

June 30, 2019

Cost of revenue

In the first quarter of 2020, gross profit margin percentage was lower by 10% as compared to the same quarter in the prior year.

This was primarily due to a decrease of higher gross margin mature products shipments.

The sale of previously reserved inventory was $17,000 and $32,000 in the first quarters of 2020 and 2019, respectively.

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

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

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

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

2 unchanged sentences

Operating Expenses

The table below sets forth the changes in operating expenses for the three months ended March 29, 2020, as compared to the three months ended March 31, 2019 (in thousands, except percentage data):

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

Three Months Ended

March 29, 2020

March 31, 2019

June 28, 2020

June 30, 2019

Restructuring Expense

1 unchanged sentence

Research and Development

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

The $1.4 million decrease in R&D expenses in the first quarter of 2020, as compared to the first quarter of 2019, was primarily attributable to the decrease of stock based compensation due to cancellation of performance based restricted stock units and the restructuring plan implemented in January 2020.

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

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

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

Selling, General and Administrative Expense

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

The $567,000 decrease in SG&A expenses in the first quarter of 2020, as compared to the first quarter of 2019 was primarily attributable to lower compensation costs, including stock-based compensation, due to the restructuring plan implemented in January 2020 and lower outside services costs.

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

Restructuring

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

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

Pursuant to the restructuring plan, the Company recorded $479,000 of restructuring charges in the first quarter of fiscal year 2020, consisting primarily of employee severance related costs.

The restructuring liabilities are included in the " Ac c rued Liabilities" line item in the consolidated balance sheet.

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

Pursuant to the restructuring plan, the Company recorded $513,000 of restructuring charges during the first half of fiscal year 2020, including $34,000 in the second quarter,

consisting primarily of employee severance related costs.

See Note 17 to the Condensed Consolidated Financial Statements for details.

Interest Expense and Interest Income and Other Expense, Net

The table below sets forth the changes in interest expense and interest income and other (expense), net for the three months ended March 29, 2020 as compared to the three months ended March 31, 2019 (in thousands, except percentage data):

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

Three Months Ended

1 unchanged sentence

Interest income and other expense, net

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

Interest income and other (expenses) relates to the interest earned on our money market accounts and exchange (gain) or losses.

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

Interest income and other expenses, net, relates to the interest earned on our money market accounts and foreign exchange gain or losses recorded.

Provision for Income Taxes

The table below sets forth the changes in the provisions for income tax for the three months ended March 29, 2020 as compared to the three months ended March 31, 2019 (in thousands, except percentage data):

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

Three Months Ended

Provision for income taxes

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

A majority of the income tax benefit for the quarter ended March 31, 2019 relates to the deferred tax benefit arising from Intangible assets acquired from the acquisition of SensiML, which was offset by the income taxes from the Company's foreign subsidiaries, which are cost-plus entities

(Benefit from) / provision for income taxes

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

The Company is subject to U.S.

2 unchanged sentences

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

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

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

Six Months Ended

June 28, 2020

June 30, 2019

Revenue by product line (1) :

Mature products

Total revenue

_________________

For all periods presented:

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

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

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

The $835,000 decrease in the revenue of mature products was primarily due to decreased orders from our customers in the aerospace, military and industrial sectors.

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

Six Months Ended

June 28, 2020

June 30, 2019

Cost of revenue

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

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

Operating Expenses

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

Six Months Ended

June 28, 2020

June 30, 2019

Restructuring expenses

Total Operating Expenses

Research and Development

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

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

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

Selling, General and Administrative Expense

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

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

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

Interest Expense and Interest Income and Other Expense, Net

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

Six Months Ended

Interest expense

Interest income and other expense, net

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

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

Provision for Income Taxes

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

Six Months Ended

Benefit from income taxes

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

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

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

tax provision.

We will continue to assess the realizability of deferred tax assets in future periods.

Liquidity and Capital Resources

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

As of March 29, 2020, the Company's principal sources of liquidity consisted of cash, cash equivalents and restricted cash of $19.0 million, including $15.0 million line of credit with Heritage Bank.

On September 28, 2018, we entered into a Loan and Security Agreement, or Loan Agreement, with Heritage Bank.

The Loan Agreement provided for, among other things, the Revolving Facility with aggregate commitments of $9,000,000.

Pursuant to the Loan Agreement, the Revolving Facility will bear interest at a rate equal to half percentage point (0.50%) above the variable rate of interest, per annum, that appears in The Wall Street Journal from time to time, whether or not such announced rate is the lowest rate available from Heritage Bank.

On December 21, 2018, we entered into an Amended and Restated Loan and Security Agreement, or the Amended and Restated Loan Agreement with Heritage Bank to replace in its entirety the Loan Agreement.

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

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

As of March 29, 2020, we had $15.0 million of outstanding revolving line of credit with an interest rate of 5.5%.

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

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

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

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

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

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

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

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

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

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

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

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

The principal and interest of the PPP Loan are repayable in 18 monthly equal installments of $67,065.21 each starting in December 2020.

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

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

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

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

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

In May 2018, we issued an aggregate of 965,251 shares of common stock and warrants to purchase up to an aggregate of 386,100 shares of common stock in an underwritten public offering at a combined price of $16.10 per unit of common stock and warrant.

We received total net proceeds of $13.9 million from the offering.

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

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

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

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

See Note 10 to the Unaudited Condensed Consolidated Financial Statements for the details.

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

We are in discussions with our lenders to ensure continued availability of funds in future quarters given the prospect of further economic downturn.

The PPP loan helps to fund payroll related expenses, utilities and rent for two months during Covid-19 pandemic.

We believe that our existing cash and cash equivalents, together with available financial resources from the Revolving Facility with Heritage Bank will be sufficient to fund our operations and capital expenditure and provide adequate working capital for the next twelve months.

The PPP loan obtained in May 2020 can help us to remain in compliance with our debt covenants.

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

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

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

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

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

The PPP loan obtained in May 2020, and the proceeds from our equity offering in June and July 2020 helped us to remain in compliance with our debt covenants.

See Note 7 to the Unaudited Condensed Consolidated Financial Statements for details.

5 unchanged sentences

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

As of March 29, 2020, most of our cash and cash equivalents were invested in the money market account of Heritage Bank.

As of March 29, 2020, our interest-bearing debt consisted of $772,000 outstanding under finance leases and $15.0 million outstanding under our Revolving Facility.

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

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

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

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

Cash balances held at our foreign subsidiaries were approximately $381,000 and $548,000 as of March 29, 2020 and December 29, 2019, respectively.

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

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

2 unchanged sentences

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

Three Months Ended

Six Months Ended

Net cash used in operating activities

Net cash used in investing activities

Net cash used in financing activities

Net cash provided by financing activities

Net cash used in operating activities

For the three months ended March 29, 2020, net cash used in operating activities was $2.2 million, which was primarily due to the net loss of $3.2 million, adjusted for negative non-cash charges of $112,000.

Non-cash charges consisted primarily of $398,000 net gain from reversal of stock-based compensation and depreciation and amortization expenses of $265,000.

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 $1.1 million, primarily due to decrease of accounts receivable, decrease of inventory and decrease of prepaid assets.

For the three months ended March 31, 2019, net cash used in operating activities was $2.9 million, which was primarily due to the net loss of $3.5 million, adjusted for non-cash charges of $1.3 million and cash outflows from changes in operating assets and liabilities of $481,000.

Non-cash charges consisted primarily of stock-based compensation expense of $951,000, which includes $514,000 related to new employees as a result of the acquisition of SensiML, depreciation and amortization of $292,000 and inventory write-down of $80,000.

Cash outflows from changes in operating assets and liabilities were $993,000, which were offset by cash inflows of $512,000.

During the first quarter of 2019, we received a tax benefit of $282,000 arising from the intangible assets due to the acquisition of SensiML.

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

Non-cash charges consisted primarily of $343,000 of stock-based compensation and depreciation and amortization expenses of $490,000.

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

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

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

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

Net cash used in investing activities

For the three months ended March 29, 2020 cash used in investing activities was $290,000, which was primarily attributable to the capitalized internal-use software and capital expenditure relating to leasehold improvements and computer equipment.

For the three months ended March 31, 2019 cash used in investing activities was $91,000, which was primarily due to cash used to pay for computer and test equipment associated with software development of $111,000, which was partially offset by cash received as a result of the SensiML acquisition of $20,000.

Net cash used in financing activities

For the three months ended March 29, 2020 cash used in financing activities was $85,000, which was primarily derived from the proceeds of $12.0 million from the Revolving Facility with the Heritage Bank, which was offset by repayments of $12.0 million, scheduled repayments of $60,000 for finance lease obligations and tax payments related to net settlement of stock awards of $25,000.

For the three months ended March 31, 2019, cash used in financing activities was $237,000, which was primarily derived from the proceeds of $12.0 million from the Revolving Facility with the Heritage Bank, which was offset by repayments of $12.0 million, scheduled repayments of $74,000 for finance lease obligations and tax payments related to net settlement of stock awards of $167,000.

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

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

Net cash provided by financing activities

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

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

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

Contractual Obligations and Commercial Commitments

The following table summarizes our contractual obligations and commercial commitments as of March 29, 2020 including the PPP Loan received in May 2020 and the effect such obligations and commitments are expected to have on our liquidity and cash flows in future fiscal periods (in thousands):

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

Payments Due by Period

18 unchanged sentences

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

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

The decision not to provide these services to us or the inability to supply these services to us, such as in the case of a natural or

financial disaster, would have a significant impact on our business.

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

6 unchanged sentences

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 Qualitati ve Disclosures about Market Risk

Interest Rate Risk

Our exposure to market rate risk for changes in interest rates relates primarily to our investment portfolio and variable rate debt.

We do not use derivative financial instruments to manage our interest rate risk.

We are averse to principal loss and ensure the safety and preservation of invested funds by limiting default, market risk and reinvestment risk.

Our investment portfolio is generally comprised of investments that meet high credit quality standards and have active secondary and resale markets.

Since these securities are subject to interest rate risk, they could decline in value if interest rates fluctuate or if the liquidity of the investment portfolio were to change.

Due to the short duration and conservative nature of our investment portfolio, we do not anticipate any material loss with respect to our investment portfolio.

A 10% move in interest rates as of the end of the first quarter of 2020 would have had an immaterial effect on our financial position, results of operations and cash flows.

Foreign Currency Exchange Rate Risk

All of our sales and costs of manufacturing are transacted in U.S.

We conduct a portion of our research and development activities in India and have sales and marketing offices in several locations outside of the United States.

We use the U.S.

dollar as our functional currency.

Most of the costs incurred at these international locations are in local currency.

If these local currencies strengthen against the U.S.

dollar, our payroll and other local expenses will be higher than we currently anticipate.

Since our sales are transacted in U.S.

dollars, this negative impact on expenses would not be offset by any positive effect on revenue.

Operating expenses denominated in foreign currencies were approximately 24% and 24% of total operating expenses for the first three months of 2020 and 2019, respectively.

A currency exchange rate fluctuation of 10% would have caused our operating expenses to change by approximately $101,000 in the first three months of 2020.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis