QUIK QuickLogic Corporation

Note 1 — The Company and Basis of Presentation

QuickLogic Corporation was founded in 1988 and reincorporated in Delaware in 1999. The Company provides innovative, programmable silicon and software platforms to enable its customers to develop custom hardware products in a fast time-to-market and cost-effective way. Specifically, QuickLogic is a fabless semiconductor company with a variety of products: embedded FPGA ("eFPGA") intellectual property ("IP"), low power, multi-core semiconductor system-on-chips ("SoCs"), discrete FPGAs, and AI software. QuickLogic's customers can use its eFPGA IP for hardware acceleration and pre-processing in their Application Specific Integrated Circuit ("ASIC") products, the Company's SoCs to run its customers' software and build their hardware around, and the Company's discrete FPGAs to implement their custom functionality. The Analytics Toolkit from SensiML Corporation ("SensiML"), the Company's wholly-owned subsidiary, provides an end-to-end Artificial Intelligence / Machine Learning 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 Aerospace and Defense, Consumer/Industrial IoT, and Consumer Electronics markets.

The accompanying interim condensed consolidated financial statements are unaudited. In the opinion of the Company’s management, these statements have been prepared in accordance with the United States generally accepted accounting principles (“U.S. GAAP”), and include all adjustments, consisting only of normal recurring adjustments, necessary to provide a fair statement of results for the interim periods presented. The Company recommends that these interim unaudited condensed consolidated financial statements be read in conjunction with the Company's Form 10-K for the year ended December 31, 2023, which was filed with the Securities and Exchange Commission (“SEC”) on March 27, 2024. Operating results for the three and nine months ended September 29, 2024 are not necessarily indicative of the results that may be expected for the full fiscal year.

QuickLogic's fiscal year ends on the Sunday closest to December 31 and each fiscal quarter ends on the Sunday closest to the end of each calendar quarter. QuickLogic's third fiscal quarter for 2024 and 2023 ended on September 29, 2024 and October 1, 2023, respectively.

The Company has one reportable business segment based on how its Chief Operating Decision Maker ("CODM") manages the business and in a manner consistent with the internal reporting provided to the CODM. The CODM, the Company's Chief Executive Officer ("CEO"), reviews detailed income statements, balance sheets, and sales reports in order to assess performance of the Company. Sales and operating income are some of the key variables monitored by the CODM and management when determining the Company's consolidated financial condition and operating performance.

Liquidity 

The Company has financed its operations and capital investments through the sale of common stock, financing arrangements, operating leases, a revolving line of credit with Heritage Bank (the "Revolving Facility"), and cash flows from operations. As of September 29, 2024, the Company's principal sources of liquidity consisted of cash, cash equivalents and restricted cash of $22.4 million, inclusive of a $20.0 million advance from its Revolving Facility and $3.5 million in net proceeds from the Company's sale of common stock in the nine months ended September 29, 2024. The Company's restricted cash balance as of  September 29, 2024 was $0.1 million and relates to amounts pledged as cash security for the use of credit cards.

The Company was in compliance with all the Revolving Facility loan covenants as of  September 29, 2024. As of September 29, 2024, the Company had $20.0 million outstanding on the Revolving Facility with an interest rate of 8.50%.

On March 13, 2024, the Company entered into common stock purchase agreements with certain institutional investors and their affiliated entities for the sale of an aggregate of 223 thousand shares of common stock, par value $0.001, in a registered direct offering, resulting in net cash proceeds of approximately $3.5 million. Issuance costs related to the offering were negligible. The purchase price for each share of common stock was $16.00. See Note 9 for additional information.

On March 21, 2023, the Company entered into common stock purchase agreements with certain investors for the sale of an aggregate of 450 thousand shares of its common stock, in a registered direct offering pursuant to an effective shelf registration statement on Form S-3, resulting in net cash proceeds of approximately $2.3 million. Issuance costs related to the offering were immaterial. The purchase price for each share of common stock in the Share Placement was $5.14.

On April 28, 2023, the Company converted accounts receivable for a customer in the amount of approximately $1.16 million to notes receivable (the "Original Note"). At the time, the Original Note bore an interest rate of 3.0% compounded monthly. On June 28, 2023, the Company cancelled the Original Note and entered into a revised promissory note ("Second Revised Note") with the customer, where the interest rate changed to 4.69% compounded monthly, or a 4.8% effective annual interest rate, accruing from the date of the Original Note. On June 27, 2024, the Company cancelled the Second Revised Note and entered into a revised promissory note ("Current Note") with the customer, where the interest rate changed to 10.0% per annum. Accrued but unpaid interest will be compounded monthly, accruing from the date of the Current Note. Additionally, if not prepaid prior to the Current Note maturity date of the earlier of (i) 24 months from June 28, 2024 or (ii) the closing of the customer's Series B financing, the principal and all accrued and unpaid interest will be due and payable to the Company. If an event of default occurs, the interest rate will increase to 15.31%. All other terms of the Note remained the same. As of September 29, 2024, the related note receivable balance was $1.26 million, including $97 thousand in accrued interest.

The Company currently uses its cash to fund its working capital, to accelerate the development of next generation products, and for general corporate purposes. Based on past performance and current expectations, the Company believes that its existing cash and cash equivalents, together with $3.5 million gross cash proceeds from the  March 13, 2024 financing, its revenues from operations, and the available financial resources from the Revolving Facility with Heritage Bank will be sufficient to fund its operations and capital expenditures and provide adequate working capital for the next twelve months. 

Various factors affect the Company’s liquidity, including, among others: the level of revenue and gross profit as a result of the cyclicality of the semiconductor industry; the conversion of design opportunities into revenue; market acceptance of existing and new products including solutions based on the Company's ArcticLink® and PolarPro® platforms, ArcticPro™, EOS S3 SoC, Quick AI solution, QuickAI™, SensiML Analytics Toolkit, Eclipse II products, and eFPGA IP license and professional services; the timing, milestones, and payments related to our government contracts; fluctuations in revenue as a result of product end-of-life; fluctuations in revenue as a result of the stage in the product life cycle of its customers’ products; costs of securing access to and availability of adequate manufacturing capacity; levels of inventories; wafer purchase commitments; customer credit terms; the amount and timing of research and development expenditures; the timing of new product introductions; production volumes; product quality; sales and marketing efforts; the value and liquidity of its investment portfolio; changes in operating assets and liabilities; the ability to obtain or renew debt financing and to remain in compliance with the terms of existing credit facilities; the ability to raise funds from the sale of equity in the Company; the issuance and exercise of stock options and participation in the Company’s employee stock purchase plan; and other factors related to the uncertainties of the industry and global economics. 

Over the longer term, the Company anticipates that sales generated from its new product offerings, existing cash and cash equivalents, together with financial resources from its Revolving Facility with Heritage Bank, assuming renewal of the Revolving Facility or the Company entering into a new debt agreement with an alternative lender prior to the expiration of the revolving line of credit on December 31, 2025, and its ability to raise additional capital in the public capital markets will be sufficient to satisfy its operations and capital expenditures. However, the Company cannot provide any assurance that it will be able to raise additional capital, if required, or that such capital will be available on terms acceptable to the Company. The inability of the Company to generate sufficient sales from its new product offerings and/or raise additional capital if needed could have a material adverse effect on the Company’s operations and financial condition, including its ability to maintain compliance with its lender’s financial covenants.

Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of QuickLogic and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

Foreign Currency

The functional currency of the Company's non-U.S. operations is the U.S. dollar. Accordingly, all monetary assets and liabilities of these foreign operations are translated into U.S. dollars at current period-end exchange rates and non-monetary assets and related elements of expense are translated using historical exchange rates. Income and expense elements are translated to U.S. dollars using the average exchange rates in effect during the period. Gains and losses from the foreign currency transactions of these subsidiaries are recorded as interest income and other expense, net in the unaudited condensed consolidated statements of operations, and are insignificant for all periods presented.

Uses of Estimates

The preparation of these unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of commitments and contingencies at the date of the condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting periods.

The methods, estimates, and judgments the Company uses in applying its most critical accounting policies have a significant impact on the results it reports in its consolidated financial statements. The SEC has defined critical accounting policies as those that are most important to the portrayal of the Company's financial condition and results of operations and requires it to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain.

Although these estimates are based on the Company’s knowledge of current events and actions it may undertake in the future, actual results may ultimately materially differ from these estimates and assumptions. Areas where management uses subjective judgment include, but are not limited to, revenue recognition, inventory valuation, including the identification of excess quantities, market value, and obsolescence, and valuation of goodwill and long-lived and intangible assets. The Company believes that it applies judgments and estimates in a consistent manner and that such 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 the Company's consolidated financial statements. For additional information, please refer to the Company's most recent Annual Report on Form 10-K, which was filed with the SEC on March 27, 2024.

Concentration of Risk

The Company's accounts receivable and note receivable are denominated in U.S. dollars and are derived primarily from sales to customers located in North America, Asia Pacific, and Europe. The Company performs ongoing credit evaluations of its customers and does not require collateral. See Note 12, Information Concerning Product Lines, Geographic Information and Revenue Concentration, for information regarding concentrations associated with accounts receivable.

As of  September 29, 2024 and December 31, 2023, the Company had $20.0 million of revolving debt outstanding with Heritage Bank; the revolving debt carried an interest rate of 8.50% per annum and 9.00% per annum, respectively. Heritage Bank has a first priority security interest in substantially all of the Company's tangible and intangible assets to secure any outstanding amounts under the agreement. The Company was in compliance with all loan covenants under the agreement as of the end of the current reporting period. The maturity date for advances under the revolving debt agreement is December 31, 2025. At September 29, 2024, the Company had utilized a significant portion of the revolving debt, and as a result, it maintains a substantial amount of cash deposits with Heritage Bank. The concentration of cash with one financial institution poses certain risks.

For instance, adverse developments affecting financial institutions, companies in the financial services industry, or the financial services industry, such as actual events or concerns involving liquidity, defaults, or non-performance, could adversely impact the stability of Heritage Bank, leading to additional financial risks for the Company.

Any material decline in available funding or the Company's ability to access its cash, cash equivalents, and liquidity resources, inclusive of those at Heritage Bank, could adversely impact its ability to meet its operating expenses, financial and contractual obligations, or result in breaches of its contractual obligations. Any of these impacts could have material adverse impacts on the Company's operations and liquidity.

Note 2 — Significant Accounting Policies

During the three and nine months ended September 29, 2024, there were no changes to the Company's significant accounting policies from its disclosures in the Annual Report on Form 10-K for the year ended December 31, 2023. For a discussion of the significant accounting policies, please see the Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed with the SEC on March 27, 2024.

Certain prior period amounts in the consolidated financial statements and accompanying notes have been reclassified to conform to current period presentation. Further, certain prior period disclosures in the footnotes to the consolidated financial statements have been modified to conform with current period presentation.

In the nine months ended September 29, 2024, there we no observable indicators of impairment for the non-marketable equity investment. Furthermore, utilizing the probability-of-default method to determine the current expected credit loss for the Company's note receivable, the Company determined the associated current expected credit loss to be de minimis as of September 29, 2024.

Note 3 — Net Income (Loss) Per Share

Basic net income (loss) per share was computed by dividing net income (loss) available by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share was computed using the weighted average number of common shares outstanding during the period plus potentially dilutive common shares outstanding during the period under the treasury stock method. In computing diluted net income (loss) per share, the weighted average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options and warrants. For periods in which the Company has reported a net loss, diluted net loss per share attributable to common stockholders is the same as basic net loss per share attributable to common stockholders as dilutive common shares are not assumed to have been issued if their effect is anti-dilutive. For periods in which the Company has reported a net income, diluted net income per share attributable to common stockholders is different from basic net income per share attributable to common stockholders as dilutive common shares would increase the amount of shares outstanding reduced by the amounts of treasury shares repurchased from the proceeds at the average market price for the period.

For the three and nine months ended September 29, 2024 and the nine months ended October 1, 2023, 892 thousand and 925 thousand shares of common stock, respectively, associated with equity awards and the estimated number of shares to be purchased under the current offering period of the 2009 Employee Stock Purchase Plan were outstanding. These shares were not included in the computation of diluted net loss per share, as they were considered anti-dilutive due to the net losses the Company experienced during this period. Warrants to purchase up to 386 thousand shares that were issued in connection with the May 29, 2018, stock offering were not included in the diluted loss per share calculation of the periods presented as they were also considered anti-dilutive due to the net loss the Company experienced during these periods. The warrants were exercisable through  May 29, 2023 at a price of $19.32 per share. The warrants expired unexercised on May 29, 2023.

For the three months ended October 1, 2023, 925 thousand shares of common stock associated with equity awards and the estimated number of shares to be purchased under the current offering period of the 2009 Employee Stock Purchase Plan were outstanding. Of these, a 276 thousand share equivalent was determined to be dilutive and included in the computation of diluted net income per share for the period. Estimated proceeds for the dilutive shares were determined to be $147 thousand, which resulted in a reduction of dilutive shares by 4,672 using the treasury stock method at an average market price of $8.41.

Note 4 — Balance Sheet Components

The following table provides details relating to certain balance sheet line items as of September 29, 2024, and December 31, 2023 (in thousands):

As of September 29, 2024 and December 31, 2023, work-in-process ("WIP") inventories, net consist primarily of $0.4 million and $0.5 million, respectively, of die wafers and $1.0 million and $1.1 million, respectively, of tested, unmarked devices held for sale, which are completed upon customer orders.

The Company capitalized $5.35 million in pre-production design and development costs as tooling to be utilized under its long-term professional services contracts for the nine months ended September 29, 2024. $3.6 million in pre-production design and development costs were capitalized as tooling for the nine months ended October 1, 2023. The capitalized assets recognized in the period are owned by the Company.

The Company recorded depreciation and amortization expense of $2.6 million and $1.2 million for the nine months ended September 29, 2024 and October 1, 2023, respectively. No interest was capitalized for any period presented.

Depreciation and amortization expense included approximately $0.5 million and $0.4 million of amortization expense related to capitalized internal-use software for the nine months ended September 29, 2024 and October 1, 2023, respectively.

Note 5 — Property, Plant, and Equipment

Property, plant, and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation begins at the time the asset is placed in service. Maintenance and repairs are charged to operations as incurred. Depreciation is computed using the straight-line method over the following estimated useful lives of the assets:

The amortization period of leasehold improvements made at the inception of the lease is directly related to the initial lease term, while the amortization period for subsequent leasehold improvements is directly related to the initial lease term adjusted for extensions.

Note 6 — Intangible Assets

The following table provides the details of the carrying value of intangible assets recorded from the 2019 acquisition of SensiML at  September 29, 2024 (in thousands):

The following table provides the details of future annual amortization of intangible assets, based upon the current useful lives at  September 29, 2024 (in thousands):

Note 7 — Debt Obligations

Revolving Line of Credit

As of September 29, 2024 and December 31, 2023, the Company had $20.0 million of revolving debt outstanding with an interest rate of 8.50% per annum and 9.00% per annum, respectively. Heritage Bank has a first priority security interest in substantially all of the Company's tangible and intangible assets to secure any outstanding amounts under the agreement. The Company was in compliance with all loan covenants under the agreement as of the end of the current reporting period. Related interest expenses and annual facility fees recognized were $149 thousand and $205 thousand for the three and nine months ended September 29, 2024, respectively and $30 thousand and $92 thousand for the three and nine months ended October 1, 2023, respectively.

Financing Arrangements

The amount of assets, net purchased through financing arrangements on the condensed consolidated balance sheet were $3.2 million and $1.0 million as of  September 29, 2024 and October 1, 2023, respectively. The financed assets consist primarily of tooling for performance under revenue contracts with customers, with smaller amounts related to IT infrastructure components. The corresponding note payable amount for these financing arrangements was $3.1 million and $1.0 million as of September 29, 2024 and October 1, 2023, respectively. Payments related to financing arrangements were $0.4 million and $0.9 million for the three and nine months ended September 29, 2024, respectively, and $0.2 million and $0.5 million for the three and nine months ended October 1, 2023, respectively. The Company's outstanding financing arrangements as of  September 29, 2024 have remaining terms of 0.27 years to 2.57 years, with a weighted average remaining term of 1.91 years. Stated interest rates for its financing arrangements outstanding as of  September 29, 2024 range from 6.75% to 9.89%, with a weighted average interest rate of 8.89%. The Company's outstanding financing arrangements as of  October 1, 2023 had remaining terms of 0.92 years to 2.46 years, with a weighted average remaining term of 1.70 years. Stated interest rates for its financing arrangements outstanding as of  October 1, 2023 ranged from 3.75% to 9.89%, with a weighted average interest rate of 6.93%.

The following table provides the details of future payments for assets purchased through financing arrangements as of  September 29, 2024 (in thousands):

Note 8 — Leases

The Company's principal research and development and corporate facilities are leased office buildings located in the United States. These lease facilities are classified as operating leases and have lease terms of one to three years. The Company maintains sales offices out of which it conducts sales and marketing activities in various countries outside of the United States which are rented under short-term leases. The Company has elected the practical expedient to apply to recognition requirements to short-term leases and recognizes rent payments on short-term leases on a straight-line basis over the lease term. Total rent expenses were $0.1 million for the three months ended September 29, 2024 and October 1, 2023 and $0.3 million for the nine months ended September 29, 2024 and October 1, 2023.

The following table provides the expenses related to operating leases (in thousands):

The following table provides the details of supplemental cash flow information (in thousands):

Non-cash ROU assets related to operating leases included in the operating cash flows for the nine months ended September 29, 2024 and October 1, 2023 were $199 thousand and $274 thousand, respectively.

The following table provides the details of right-of-use assets and lease liabilities as of September 29, 2024 and December 31, 2023 (in thousands):

The following table provides the details of future lease payments for operating leases as of September 29, 2024 (in thousands):

The following table provides the details of lease terms and discount rates as of September 29, 2024 and December 31, 2023:

⁽¹⁾ The operating lease relates to the Company's headquarters in San Jose, CA. The lease term expires on June 14, 2027.

Note 9 — Capital Stock

 Issuance of Common Stock

On March 13, 2024, the Company entered into common stock purchase agreements with certain institutional investors and their affiliated entities for the sale of an aggregate of 222,500 shares of common stock, par value $0.001, in a registered direct offering, resulting in net cash proceeds of approximately $3.5 million. The purchase price for each share of common stock was $16.00. The per share purchase price reflects a zero discount based upon the 10-day volume weighted average price on the day the pricing was agreed. Issuance costs related to the offering were immaterial.

On March 21, 2023, the Company entered into common stock purchase agreements with certain investors for the sale of an aggregate of 450 thousand shares of its common stock, in a registered direct offering pursuant to an effective shelf registration statement on Form S-3, resulting in net cash proceeds of approximately $2.3 million. Issuance costs related to the offering were immaterial. The purchase price for each share of common stock in the Share Placement was $5.14.

On August 17, 2022, the Company filed a Registration Statement on Form S-3 (File No. 333-266942) with the SEC, under which it may sell, from time-to-time common stock, preferred stock, depositary shares, warrants, debt securities, and units, individually or as units comprised of one or more of the other securities or a combination thereof. The Company's registration statement became effective on August 26, 2022.

Note 10 — Stock-Based Compensation

Stock-based compensation expense included in the Company's consolidated financial statements for the three and nine months ended September 29, 2024 and October 1, 2023 was as follows (in thousands):

The Company capitalized certain stock-based compensation amounts to capitalized internal-use software and tooling, net of ($27 thousand) and $124 thousand for the three and nine months ended September 29, 2024, respectively and $48 thousand and $109 thousand for the three and nine months ended October 1, 2023, respectively. The capitalized stock-based compensation amounts relate to compensation for employees involved in the development of capitalized internal-use software and tooling.

Stock-Based Compensation Award Activity

The following table summarizes the activity in the shares available for grant under the 2019 Plan during the nine months ended September 29, 2024 (in thousands):

Stock Options

The following table summarizes stock options outstanding and stock option activity under the 2009 Plan and the 2019 Plan, and the related weighted average exercise price for the nine months ended September 29, 2024:

No stock options were granted or exercised during the nine months ended September 29, 2024 and October 1, 2023. Stock options equivalent to 6 thousand and 2 thousand shares expired during the nine months ended September 29, 2024 and October 1, 2023.

Total stock-based compensation related to stock options was $0 during the nine months ended September 29, 2024 and October 1, 2023.

Restricted Stock Units

The Company grants restricted stock units (“RSUs”) and performance restricted stock units ("PRSUs") to employees and directors with various vesting terms. RSUs entitle the holder to receive, at no cost, one common share for each RSU as it vests. In general, the Company's policy is to withhold shares in settlement of employee tax withholding obligations upon the vesting of RSUs. The stock-based compensation expense related to RSUs and PRSUs were approximately $1.1 million and $3.4 million for the three and nine months ended September 29, 2024, respectively and $0.6 million and $1.8 million, for the three and nine months ended October 1, 2023, respectively.

As of  September 29, 2024 and October 1, 2023, there was approximately $3.8 million and $3.7 million, respectively, in unrecognized stock-based compensation expense related to RSUs. The remaining unrecognized stock-based compensation expense as of September 29, 2024 is expected to be recorded over a weighted average period of 1.19 years.

A summary of activity for the Company's RSUs and PRSUs for the nine months ended September 29, 2024 is as follows:

Employee Stock Purchase Plan

Total stock-based compensation related to the Company's Employee Stock Purchase Plan was approximately $32 thousand and $73 thousand for the three and nine months ended September 29, 2024, respectively and $25 thousand and $100 thousand, for the three and nine months ended October 1, 2023, respectively.