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. Forward-looking statements include statements regarding our strategies as well as (1) our revenue levels, including the commercial success of our solutions and new products, (2) the conversion of our design opportunities into revenue, (3) our liquidity, (4) our gross profit and breakeven revenue level and factors that affect gross profit and the break-even revenue level, (5) our level of operating expenses, (6) our research and development efforts, (7) our partners and suppliers, (8) industry and market trends, (9) our manufacturing and product development strategies and (10) our competitive position. The following discussion should be read in conjunction with the attached unaudited condensed consolidated financial statements and notes thereto, and with our audited consolidated financial statements and notes thereto for the fiscal year ended December 29, 2019, found in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 13, 2020. Although we believe that the assumptions underlying the forward-looking statements contained in this Quarterly Report are reasonable, any of the assumptions could be inaccurate, and therefore there can be no assurance that such statements will be accurate. The risks, uncertainties and assumptions referred to above that could cause our results to differ materially from the results expressed or implied by such forward-looking statements include, but are not limited to, those discussed under the heading “Risk Factors” in Part II, Item 1A hereto and the risks, uncertainties and assumptions discussed from time to time in our other public filings and public announcements. 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 intellectual property (“IP”) for artificial intelligence (“AI”) voice and sensor processing. The solutions include an eFPGA for hardware acceleration and pre-processing, and heterogeneous multi-core System on Chip (“SoCs”) that integrate eFPGA with other processors and peripherals. The SensiML Analytics Toolkit from wholly owned subsidiary, SensiML Corporation (“SensiML”) completes the “full stack” end-to-end solution with accurate sensor algorithms using AI technology. The full range of platforms, software tools and eFPGA IP enables the practical and efficient adoption of AI, voice and sensor processing across mobile, wearable, hearable, consumer, industrial, edge and endpoint IoT applications. Our solutions are created from our new silicon platforms including our EOS™, QuickAI™, SensiML Analytics Studio, ArcticLink® III, PolarPro®3, PolarPro II, PolarPro, and Eclipse II products (which together comprise our new product category). Our mature products include primarily FPGA families named pASIC®3 and QuickRAM® as well as programming hardware and design software. In addition to delivering our own semiconductor solutions, we have an IP business that licenses our eFPGA technology for use in other semiconductor companies SoCs. We began delivering our eFPGA IP product ArcticPro™ in 2017, which is included in the new product revenue category. Through our wholly owned subsidiary SensiML, we now have an AI software platform that includes Software-as-a-Service (“SaaS”) subscriptions for development, per unit license fees when deployed in production, and proof-of-concept services, all of which are also included in the new product revenue category. Our solutions typically fall into one of three categories: Sensor Processing, Display and Visual Enhancement, and Smart Connectivity. Our solutions include a unique combination of our silicon platforms, IP cores, software drivers, and in some cases, firmware and application software. All of our silicon platforms are standard devices and must be programmed to be effective in a system. Our IP that enables always-on context-aware sensor applications includes our Flexible Fusion Engine, our Sensor Manager and Communications Manager technologies as well as IP that (i) improves multimedia content, such as our Visual Enhancement Engine technology, and Display Power Optimizer technology; and (ii) implements commonly used mobile 22 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 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. We also work with mobile processor manufacturers, sensor manufacturers, and voice recognition, sensor fusion and context awareness algorithm developers in the development of reference designs. 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. Our ArcticPro eFPGA IP is currently developed on 65nm, 40nm and 22nm process nodes. The licensable IP is generated by a compiler tool that enables licensees to create an eFPGA block that they can integrate into their SoC without significant involvement by us. We believe this flow enables a scalable support model for us. 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. The depth of these relationships vary depending on the partner and the dynamics of the end market being targeted, but they are typically a co-marketing relationship that includes joint account calls, promotional activities and/or engineering collaboration and developments, such as reference designs. 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. For our eFPGA strategy, we work with semiconductor manufacturing partners to ensure our eFPGA IP is proven for a given foundry and process node before it is licensed to an 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, 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 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 23 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 $3.0 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 Our top priority during the ongoing COVID-19 pandemic remains the health and safety of our employees and their families. As global governments institute restrictions on commercial operations, we are working to ensure our compliance while also maintaining business continuity for operations. Our Employees We are in the midst of what is a historic deployment of remote work and digital access to services. Most of our personnel continue to work from home except few personnel, who are required for minimum operations. We only allow employees in our facilities who are essential to the facilities’ operations under best practices guidelines on maintaining physical distancing, utilizing enhanced cleaning protocols and usage of personal protective equipment. Our Customers We are committed to our customers to enable the support they need to continue providing vital services and tools. Our global offices remain operational to meet customer needs during the pandemic in compliance with the orders and restrictions imposed by local authorities in each of our locations, and we are working with our customers to meet their specific shipment needs. While the pandemic has created delays on the inbound supply chain at our partners and our own facilities and both inbound and outbound logistical challenges, we have been able to identify alternative solutions such that none of the issues have had a material impact on our ability to fulfil demand. Liquidity In anticipation of further COVID-19 related disruptions to our business, we have undertaken a comprehensive review of our spending plans and expect to reduce discretionary spending in future periods while maintaining an ongoing focus on key initiatives . Our balance sheet is well positioned and had $26.4 million of cash, cash equivalents and restricted cash as of June 28, 2020, including the draw-down of $15.0 million from revolving credit facility maturing in September 2021 and net proceeds of $7.9 million received after deducting the commissions and other expenses from the equity offering closed on June 22, 2020. On July 21, 2020, the Underwriter’s partially exercised the option to purchase 141,733 additional shares of Common Stock in connection with the Offering, resulting in additional net proceeds to the Company of approximately $461,000 after deduction of underwriting discounts. On May 6, 2020 we entered into a loan agreement with Heritage Bank for a loan of $1.2 million pursuant to the Paycheck Protection Program (“PPP Loan”) under the Coronavirus Aid, Relief, and Economic Security Act enacted on March 27 (“CARES Act”) . On June 5, 2020, the President of the United States of America signed into law the Paycheck Protection Flexibility Act (“PPPFA”) to address many concerns expressed by the small business community around the Paycheck Protection Program. PPPFA among other changes (i) reduces the amount of the loan required to be spent on payroll from 75% to 60%, thus increasing the amount of funds available for other expenses from 25% to 40%, (ii) extends the period to spend the loans to 24 weeks from 8 weeks, (iii) amends the June 30 deadline to rehire workers to December 31, 2020, (iv) eases rehire requirements, and (v) extends the repayment term of the PPP Loan from 2 years to 5 years. 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. 24 The COVID-19 pandemic and its potential effects on the Company’s business in its fiscal 2020 remain dynamic, and the broader implications for its business and results of operations remain uncertain. These implications could include further disruptions or restrictions on the Company’s ability to source, manufacture or distribute its products, including temporary disruptions to the facilities of its contract manufacturers in China, Taiwan, Philippines and Singapore, or the facilities of its suppliers and their contract manufacturers globally. Additionally, multiple countries have imposed and may further impose restrictions on business operations and movement of people and products to limit the spread of COVID-19. Delays in production or delivery of components or raw materials that are part of the Company’s global supply chain due to restrictions imposed to limit the spread of COVID-19 could delay or inhibit its ability to obtain the supply of components and finished goods. If COVID-19 becomes more prevalent in the locations where the Company, its customers or suppliers conduct business, or the Company experiences more pronounced disruptions in its operations, the Company may experience constrained supply or curtailed demand that may materially adversely impact its business and results of operations. In addition, any other widespread health crisis that could adversely affect global and regional economies, financial markets and overall demand environment for the Company's products could have a material adverse effect on the Company’s business, cash flows or results of operations. Critical Accounting Estimates The methods, estimates and judgments we use in applying our most critical accounting policies have a significant impact on the results we report in our consolidated financial statements. The SEC has defined critical accounting policies as those that are most important to the portrayal of our financial condition and results of operations and require us to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, our critical policies include revenue recognition, valuation of inventories, including identification of excess quantities and product obsolescence, valuation of investments, valuation of long-lived assets, valuation of goodwill, capitalized internal-use software and related amortizable lives and intangibles related to the acquisition of SensiML, including the estimated useful lives of acquired intangible assets, measurement of stock-based compensation and estimation of accrued liabilities. We believe that we apply judgments and estimates in a consistent manner and that this consistent application results in consolidated financial statements and accompanying notes that fairly represent all periods presented. However, any factual errors or errors in these judgments and estimates may have a material impact on our financial statements. During the three and six months ended 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. 25 Results of Operations The following table sets forth the percentage of revenue for certain items in our condensed consolidated statements of operations for the periods indicated: Three Months Ended Six Months Ended June 28, 2020 June 30, 2019 June 28, 2020 June 30, 2019 Revenue 100 % 100 % 100 % 100 % Cost of revenue 54 % 51 % 51 % 43 % Gross profit 46 % 49 % 49 % 57 % Operating expenses: Research and development 100 % 154 % 92 % 122 % Selling, general and administrative 76 % 112 % 81 % 91 % Restructuring 2 % — 12 % 82 % Loss from operations (132 )% (217 )% (136 )% (156 )% Interest expense (8 )% (6 )% (6 )% (4 )% Interest income and other (expense), net (1) 3 % 2 % 2 % 2 % Loss before income taxes (137 )% (221 )% (140 )% (158 )% (Benefit from) provision for income taxes (1 )% 1 % — (5 )% Net loss (136 )% (222 )% (140 )% (153 )% Three Months Ended June 28, 2020 Compared to Three Months Ended June 30, 2019 Revenue 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 June 28, 2020 June 30, 2019 Change Amount % of Total Revenues Amount % of Total Revenues Amount Percentage Revenue by product line (1) : New products $ 820 37 % $ 711 34 % $ 109 15 % Mature products 1,376 63 % 1,376 66 % - — Total revenue $ 2,196 100 % $ 2,087 100 % $ 109 5 % (1) For all periods presented: New products include all products manufactured on 180 nanometer or smaller semiconductor processes, eFPGA IP license, QuickAI and SensiML AI SaaS revenues. Mature products include all products produced on semiconductor processes larger than 180 nanometer. The net increase of $109,000 in the revenue of new products was primarily due to an increase of EOS S3 product revenue, which was partially offset by decrease in other new products. Mature product revenue was flat compared to the second quarter of 2019. 26 Gross Profit 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 June 28, 2020 June 30, 2019 Change Amount % of Total Revenues Amount % of Total Revenues Amount Percentage Revenue $ 2,196 100 % $ 2,087 100 % $ 109 5 % Cost of revenue 1,192 54 % 1,065 51 % 127 12 % Gross profit $ 1,004 46 % $ 1,022 49 % $ (18 ) (2 )% 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. However, as we continue to pursue opportunities in the mobile market and develop new solutions and products, our product life cycle will be shorter and the risk of obsolescence will increase. In general, our standard manufacturing lead times are longer than the binding forecasts we receive from customers. Operating Expenses The table below sets forth the changes in operating expenses for the three months ended June 28, 2020, as compared to the three months ended June 30, 2019 (in thousands, except percentage data): Three Months Ended June 28, 2020 June 30, 2019 Change Amount % of Total Revenues Amount % of Total Revenues Amount Percentage R&D expense $ 2,200 100 % $ 3,215 154 % $ (1,015 ) (32 )% SG&A expense 1,665 76 % 2,340 112 % (675 ) (29 )% Restructuring Expense 34 2 % - 0 % 34 100 % Total operating expenses $ 3,899 178 % $ 5,555 266 % $ (1,656 ) (30 )% 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 $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 (“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 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, 27 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 June 28, 2020 as compared to the three months ended June 30, 2019 (in thousands, except percentage data): Three Months Ended Change June 28, 2020 June 30, 2019 Amount Percentage Interest expense $ (183 ) $ (124 ) $ (59 ) 48 % Interest income and other expense, net 72 50 22 44 % $ (111 ) $ (74 ) $ (37 ) 50 % 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 June 28, 2020 as compared to the three months ended June 30, 2019 (in thousands, except percentage data): Three Months Ended Change June 28, 2020 June 30, 2019 Amount Percentage (Benefit from) / provision for income taxes $ (27 ) $ 27 $ (54 ) (200 )% 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. federal income tax as well as income taxes in many U.S. states and foreign jurisdictions in which the Company operates. The U.S. 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 Revenue 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 Change Amount % of Total Revenues Amount % of Total Revenues Amount Percentage Revenue by product line (1) : New products $ 1,306 30 % $ 1,398 26 % $ (92 ) (7 )% Mature products 3,048 70 % 3,883 74 % (835 ) (22 )% Total revenue $ 4,354 100 % $ 5,281 100 % $ (927 ) (18 )% _________________ (1) 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. 28 Gross Profit 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 Change Amount % of Total Revenues Amount % of Total Revenues Amount Percentage Revenue $ 4,354 100 % $ 5,281 100 % $ (927 ) (18 )% Cost of revenue 2,235 51 % 2,280 43 % (45 ) (2 )% Gross profit $ 2,119 49 % $ 3,001 57 % $ (882 ) (29 )% 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 Change Amount % of Total Revenues Amount % of Total Revenues Amount Percentage R&D expense $ 4,019 92 % $ 6,457 122 % $ (2,438 ) (38 )% SG&A expense 3,544 81 % 4,786 91 % $ (1,242 ) (26 )% Restructuring expenses 513 12 % - 0 % $ 513 100 % Total Operating Expenses $ 8,076 185 % $ 11,243 213 % $ (3,167 ) (28 )% 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 Change June 28, 2020 June 30, 2019 Amount Percentage Interest expense $ (263 ) $ (207 ) $ (56 ) 27 % Interest income and other expense, net 67 98 (31 ) (32 )% $ (196 ) $ (109 ) $ (87 ) 80 % 29 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 Change June 28, 2020 June 30, 2019 Amount Percentage Benefit from income taxes $ (9 ) $ (241 ) $ 232 (96 )% 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 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 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 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. 30 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. See Note 10 to the Unaudited Condensed Consolidated Financial Statements for the details. On December 21, 2018, we entered into an Amended and Restated Loan and Security Agreement (“Amended and Restated Loan Agreement”) with Heritage Bank to replace in its entirety the Loan and Security Agreement entered into with Heritage Bank on September 28, 2018. The Amended and Restated Loan Agreement increased the Revolving Facility from $9,000,000 to $15,000,000. The Amended and Restated Loan Agreement requires us to maintain at least $3,000,000 in unrestricted cash at Heritage Bank. As of June 28, 2020, we had $15.0 million of outstanding revolving line of credit with an interest rate of 5.5%. 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. Over the longer term, we anticipate that the generation of sales from our new and mature product offerings, existing cash and cash equivalents, together with financial resources from our Revolving Facility with Heritage Bank and our ability to raise additional capital in the public capital markets will be sufficient to satisfy our operations and capital expenditures. Our Revolving Facility with Heritage Bank matures in September 2021, which we plan to renew or find an alternative lender prior to the maturity date. Further, any violations of debt covenants may restrict our access to any additional cash draws from the revolving line of credit, and may require our immediate repayment of the outstanding debt amounts. We believe that we will be able to either renew the Revolving Facility or obtain alternative financing on the acceptable terms. However, we cannot provide any assurance that PPP loan will be forgiven or we cannot provide any assurance that we will be able to raise additional capital, if required, or that such capital will be available on terms acceptable to us. Our inability to generate sufficient sales from our new product offerings and/or raise additional capital if needed could have a material adverse effect on our operations and financial condition, including our ability to maintain compliance with our lender’s financial covenants. As of June 28, 2020, most of our cash, cash equivalents and restricted cash were invested in the money market account of Heritage Bank. As of June 28, 2020, our interest-bearing debt consisted of $712,000 outstanding under finance leases, $1.2 million of PPP loan and $15.0 million outstanding under our Revolving Facility. We repaid the $15.0 million outstanding under our Revolving Facility in July 2020. See Note 7 and 8 to the Unaudited Consolidated Financial Statements for more details. Cash balances held at our foreign subsidiaries were approximately $239,000 and $548,000 as of June 28, 2020 and December 29, 2019, respectively. 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): Six Months Ended June 28, 2020 June 30, 2019 Net cash used in operating activities $ (3,578 ) $ (5,970 ) Net cash used in investing activities (436 ) (503 ) Net cash provided by financing activities 8,864 8,161 Net cash used in operating activities For the six months ended June 28, 2020, net cash used in operating activities was $3.6 million, which was primarily due to the net loss of $6.1 million, adjusted for non-cash charges of $880,000. 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. 31 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 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 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 Total Less than 1 Year 1-3 Years 4-5 Years Contractual obligations: Operating leases $ 1,677 $ 287 $ 862 $ 528 Finance and software lease obligations 762 200 562 — Wafer purchases (1) 35 35 — — Other purchase commitments 817 817 — — Total contractual cash obligations $ 3,291 $ 1,339 $ 1,424 $ 528 Other commercial commitments: Revolving line of credit 15,000 15,000 — — PPP Loan 1,204 468 736 — Total commercial commitments 16,204 15,468 736 — Total contractual cash obligations $ 19,495 $ 16,807 $ 2,160 $ 528 ________________________ (1) Certain of our wafer manufacturers require us to forecast wafer starts several months in advance. We are committed to accept the delivery of and pay for a portion of forecasted wafer volume. Concentration of Suppliers We depend on a limited number of contract manufacturers, subcontractors, and suppliers for wafer fabrication, assembly, programming and testing, and for the supply of programming equipment. These services are typically provided by one supplier for each of our devices. We generally purchase these single or limited source services through standard purchase orders. Because we rely on independent subcontractors to perform these services, we cannot directly control product delivery schedules, costs or quality levels. Our future success also depends on the financial viability of our independent subcontractors. The decision not to provide these services to us or the inability to supply these services to us, such as in the case of a natural or 32 financial disaster, would have a significant impact on our business. In addition, these subcontracted manufacturers produce products for other companies and we must place orders up to several months in advance of expected delivery. Increased demand from other companies could result in these subcontract manufacturers allocating available capacity to customers that are larger or have long-term supply contracts in place and we may be unable to obtain adequate foundry and other capacity at acceptable prices, or we may experience delays or interruption in supply. As a result, we have only a limited ability to react to fluctuations in demand for our products, which could cause us to have an excess or a shortage of inventories of a particular product. Additionally, volatility of economic, market, social and political conditions in countries where these suppliers operate may be unpredictable and could result in a reduction in product revenue or increase our cost of revenue and could adversely affect our business, financial condition and results of operations. Off-Balance Sheet Arrangements We do not maintain any off-balance sheet partnerships, arrangements or other relationships with unconsolidated entities or others, often referred to as structured finance or special purpose entities, which are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Recently Issued Accounting Pronouncements See Note 2 to the Unaudited Condensed Consolidated Financial Statements for a description of recent accounting pronouncements, including the respective dates of adoption and expected effects on the results of our operations and financial condition.