UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒
☐
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 30, 2018
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 000-22671
QUICKLOGIC CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
77-0188504
(I.R.S. Employer
Identification Number)
1277 Orleans Drive Sunnyvale, CA 94089
(Address of principal executive offices, including zip code)
Registrant’s telephone number, including area code:
(408) 990-4000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, $0.001 par value
Name of Exchange on which Registered
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No [x]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No [x]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [x] No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such
files). Yes [x] No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an
emerging growth company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-
2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
[ ]
[
]
Emerging growth company
[ ]
Accelerated Filer
Smaller Reporting Company
[x]
[x]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new
or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes ☐ No [X]
The aggregate market value of voting stock held by non-affiliates of the registrant as of July 1, 2018, the registrant’s most recently completed second
fiscal quarter, was $99,873,301 based upon the last sales price reported for such date on the Nasdaq Global Market. For purposes of this disclosure, shares of common
stock held by persons who hold more than 5% of the outstanding shares of common stock and shares held by executive officers and directors of the registrant have
been excluded in that such persons may be deemed to be affiliates. This determination is not necessarily conclusive.
At March 8, 2019, the registrant had 96,983,616 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Item 1 of Part 1 of this Form 10-K, Item 5 of Part II of this Form 10-K and Items 10, 11, 12, 13 and 14 of Part III of this Form 10-K incorporate information by
reference from the Proxy Statement for the registrant’s Annual Meeting of Stockholders to be held on or about April 25, 2019, the "Proxy Statement". Except with
respect to the information specifically incorporated by reference in this Form 10-K, the Proxy Statement is not deemed to be filed as part hereof.
QUICKLOGIC CORPORATION
TABLE OF CONTENTS
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Signatures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships, Related Transactions and Director Independence
Principal Accounting Fees and Services
Exhibits and Financial Statement Schedules
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FORWARD-LOOKING STATEMENT
This Annual Report on Form 10-K, including the information contained in "Management’s Discussion and Analysis of Financial
Condition and Results of Operations", as well as information contained in “Risk Factors” in Item 1A and elsewhere in this Annual Report
on Form 10-K, contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of
the Securities Exchange Act of 1934. We intend that these forward-looking statements be subject to the safe harbors 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 (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 breakeven 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 forward-looking statements contained in this Annual Report involve a number of risks and uncertainties, many of which are
outside of our control. Factors that could cause actual results to differ materially from projected results include, but are not limited to,
risks associated with (i) the conversion of our design opportunities into revenue; (ii) the commercial and technical success of our new
products and our successful introduction of products and solutions incorporating emerging technologies or standards; (iii) our dependence
on our relationships with third parties to manufacture our products and solutions; (iv) our dependence upon single suppliers to fabricate
and assemble our products; (v) the liquidity required to support our future operating and capital requirements; (vi) our ability to
accurately estimate quarterly revenue; (vii) our expectations about market and product trends; (viii) our future plans for partnerships and
collaborations; (ix) our dependence upon a few customers for a significant portion of our total revenue; (x) our ability to forecast demand
for our products; (xi) our dependence on our international business operations; (xii) our ability to attract and retain key personnel; (xiii)
our ability to remain competitive in our industry; (xiv) our ability to achieve the expected benefits from our acquisition of SensiML
Corporation and (xv) our ability to protect our intellectual property rights. Although we believe that the assumptions underlying the
forward-looking statements contained in this Annual 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 I, 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.
As used herein, "QuickLogic", the "Company", "we", "our" and similar terms include QuickLogic Corporation and its
subsidiaries, unless the context indicates otherwise.
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ITEM 1. BUSINESS
(a) General Development of Business
PART I
QuickLogic Corporation (the "Company") was founded in 1988 and reincorporated in Delaware in 1999.
(b) Financial Information About Segments
See Item 8, "Financial Statements and Supplementary Data - Note 11 - Information Concerning Product Lines, Geographic
Information, Accounts Receivable and Revenue Concentration.
Overview
QuickLogic Corporation was founded in 1988 and reincorporated in Delaware in 1999. Our vision is to transform the way people
and devices interact with each other and their surroundings. Our mission is to provide innovative silicon and software platforms to
successfully enable our customers to develop products that fundamentally change the end-user experience. Specifically, we are a fabless
semiconductor company that develops low power, multi-core semiconductor platforms and intellectual property or IP for artificial
intelligence or AI, voice and sensor processing. The solutions include embedded FPGA IP or eFPGA for hardware acceleration and pre-
processing, and heterogeneous multi-core SoCs that integrate eFPGA with other processors and peripherals. The Analytics Toolkit from our
recently acquired wholly-owned subsidiary, SensiML Corporation, or 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.
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 the acquisition of 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, or VEE, technology,
and Display Power Optimizer, or DPO, technology; and (ii) implements commonly used mobile system interfaces, such as Low Voltage
Differential Signaling, or LVDS, Mobile Industry Processor Interface, or MIPI, and Secure Digital Input 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. In many cases, we deliver software algorithms that have been optimized for
use in a QuickLogic silicon platform.
Through the acquisition of SensiML, our core IP also includes the SensiML Analytics Toolkit that enables OEMs to develop AI
software for a broad array of resource-constrained time-series sensor endpoint applications. These include a wide range of consumer and
industrial sensing applications.
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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 or ODMs, we can amortize our Research and
Development, or 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.
We have changed our manufacturing strategies to reduce the cost of our silicon solution platforms to enable their use in high
volume, mass customization products. Our PolarPro 3E, PolarPro II and PolarPro solution platforms include an innovative logic cell
architecture, which enables us to deliver twice the programmable logic in the same die size. Our EOS S3, EOS S3AI, QuickAI and
ArcticLink III silicon platforms combine mixed signal physical functions and hard-wired logic alongside programmable logic. Our EOS
S3, EOS S3AI and ArcticLink III solution platforms are manufactured on an advanced process node where we can benefit from smaller die
sizes. We typically implement sophisticated logic blocks and mixed signal functions in hard-wired logic because it is very cost-effective
and energy efficient. We use small form factor packages, which are less expensive to manufacture and include smaller pin counts. Reduced
pin counts result in lower costs for our customer’s printed circuit board space and routing. In addition, we have dramatically reduced the
time we require to program and test our devices, which has reduced our costs and lowered the capital equipment required to program and
test our devices. Furthermore, our SRAM reprogrammable silicon platforms can be programmed in-system by our customers, and therefore
we do not incur programming cost, lowering the overall cost of ownership to our customers. We expect to continue to invest in silicon
solution platforms and manufacturing technologies that make us cost and power consumption effective for high-volume, battery-powered
applications.
Our ArcticPro eFPGA IP are currently developed on 65nm, 40nm and 22nm process nodes. The licensable IP is generated by a
compiler tool that enables licensees to create an eFPGA block that they can integrate into their SoC without significant involvement by
QuickLogic. We believe this flow enables a scalable support model for QuickLogic.
In addition to working directly with our customers, we partner with other companies that are experts in certain technologies to
develop additional IP, reference platforms and system software to provide application solutions, particularly in the area of hardware
acceleration for AI-type applications. We also work with mobile processor and communications semiconductor device manufacturers and
companies that supply sensor, algorithms and applications. 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 relationships that include 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 a SoC company.
In order to grow our revenue from its current level, we depend upon increased revenue from our new products including existing
new product platforms, eFPGA IP and platforms currently in development. We expect our business growth to be driven mainly by our
silicon solutions and eFPGA IP and, 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. New products contributed 45%
of total revenue for the year ended December 30, 2018, as compared to 48% in 2017 and 49% in 2016.
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Recent Development
On January 3, 2019, we entered into an agreement with SensiML Corporation, or the SensiML Acquisition, to acquire all of its
issued and outstanding common stock. We funded the acquisition with shares of our common stock. SensiML will operate as a division of
QuickLogic and continue to develop, expand, and optimize its platform-independent software solutions to support SoCs from other
semiconductor companies as well as QuickLogic SoCs, QuickAI™ Platforms and licensees of QuickLogic's ArcticPro™ eFPGA IP.
The SensiML Analytics Toolkit, which is used in many of the applications where our ArcticPro™ eFPGA IP plays a critical role,
is an end-to-end software suite that provides OEMs a straightforward process for developing pattern matching sensor algorithms using
machine learning technology that are optimized for ultra-low power consumption. The SensiML Analytics Toolkit enables OEMs to
quickly and easily leverage the power of local AI in edge, endpoint and wearable designs without the need for significant Data Science or
Firmware Engineering resources. The SensiML Analytics Toolkit automatically optimizes AI models to minimize power consumption in
targeted SoCs and is designed specifically to leverage the inherent benefits of heterogeneous multi-core SoC architectures and eFPGA
technology.
Available Information
Our corporate headquarters are located at 1277 Orleans Drive, Sunnyvale, California 94089. We can be reached at (408) 990-
4000, and our website address is www.quicklogic.com. The information on our website is not incorporated herein by reference and is not a
part of this Form 10-K. Our common stock trades on the Nasdaq Global Market under the symbol “QUIK.” Our annual reports on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports are available, free of charge, on our
website home page as soon as reasonably practicable after we electronically file such materials with, or furnish them to, the Securities and
Exchange Commission, or SEC. Copies of the materials filed by the Company with the SEC are also available at the Public Reference
Room at 100 F Street, N.E., Washington, D.C., 20549. Information regarding the operation of the Public Reference Room is available by
calling the SEC at 1-800-SEC-0330. Reports, proxy and information statements and other information regarding issues that we file
electronically with the SEC are also available on the SEC’s website at www.sec.gov.
Fiscal Year
Our fiscal year ends on the Sunday closest to December 31. References to fiscal years 2018, 2017 and 2016 refer to the fiscal
years ended December 30, 2018, December 31, 2017 and January 1, 2017, respectively.
Industry Background
Consumer Electronics, or CE, products are a strong growth market for semiconductor products and sensor software algorithms,
and the needs of this market bring a unique set of requirements. Three important trends in this market are (i) toward mobile devices, either
handheld or worn on the body, (ii) an increasing adoption of sensors, and (iii) devices with wireless connectivity to the cloud. Important
industry trends affecting the large market for mobile devices include the need for high bandwidth that enables the same user experience
consumers are accustomed to on the personal computer, or PC, such as internet browsing, social networking and streaming video, product
miniaturization and the need to increase battery life. Increased local computing power in mobile devices, coupled with more ubiquitous
wireless access to the cloud and lower cost sensors has been enabling the development of more intelligent software applications and
consumer use cases. Many of these product requirements were, and continue to be, driven by innovations from the Smartphone, Wearables
and Hearables solutions that OEMs are launching in conjunction with Google Android and Real-Time operating systems, as well as Apple
iPhone, Apple iPad, Apple Watch and Apple Earpods.
While advances in cost-effective cloud storage and power-efficient wireless technology have enabled consumer device
manufacturers to enhance device connectivity and offload some processing to the cloud, there continues to be a trend for feature-rich mobile
devices to suffer from shorter battery lives. This challenge places a burden on the designers and manufacturers of these mobile CE products
as they try to tailor multiple products with
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limited engineering resources. Lastly, the fast pace at which consumer taste for these features changes exacerbates the development
challenges and risks in launching successful products to the marketplace.
Another important trend is shrinking product life cycles. This drives a need for faster and lower risk product development. There
is intense pressure on the bill of materials, or BOM, cost of these devices, including per unit component costs and non-recurring
development costs. As more people experience the advantages of a mobile lifestyle at home, they demand the same advantages in their
professional lives. We believe that the trend toward mobile, handheld products that have a PC-like and cloud user experience, small form
factor and maximize battery life will be prominent in the computing, industrial, medical and military markets. One such example is the
trend of Smartphone and Tablet makers to offer the new, smaller form factor Wearables.
We believe these industry trends are shifting the demand among different classes of core silicon. The following are the four
main classes of non-memory core silicon:
• Microcontrollers, or MCUs, are typically small, low-power devices on a single integrated circuit that contain a processor
core, memory and a number of peripherals. They are designed to be programmed with software for embedded applications;
•
•
•
Application Specific Standard Products, or ASSPs, other than processors, are fixed function devices designed to address a
relatively narrow set of applications. These devices typically integrate a number of common peripherals or functions and
the functionality of these devices is fixed prior to wafer fabrication;
Programmable Logic Devices, or PLDs, are general-purpose devices, which can be used by a variety of electronic systems
manufacturers and are customized after purchase for a specific application. FPGAs are a subset of PLDs and are typically
used to implement complex system functions; and
Application Specific Integrated Circuits, or ASICs, are custom devices designed and fabricated to meet the needs of one
specific application for one end-customer. Structured ASICs, a sub-category of ASICs, provide a limited amount of
custom content to broaden the applicability of a device for additional applications.
ASSPs are offered broadly to the market, making it challenging for a system designer to create differentiated products from
these devices alone. In many situations, the available ASSPs may not directly implement the desired function and the system designer is
required to use a combination of ASSPs to achieve the desired result at the expense of increased cost, product size and power consumption.
As standards evolve or new standards are developed, ASSPs may not be available to implement desired functions.
System designers can customize their products using programmable logic ASICs or MCUs. The competitive dynamic between
these classes of core silicon are well understood. High development risks, development costs and opportunity costs are incurred when using
ASICs to produce custom devices with very low unit production cost. Suppliers of programmable logic devices, which have lower
development and market risks and development costs relative to ASICs, have aggressively reduced the unit cost of their products over time,
making programmable logic devices the solution of choice for custom products unless the volume is very high. These cost reduction efforts
have significantly increased the volume required to justify the total cost of an ASIC.
Consumer devices incorporate complex, rapidly changing technology, require rapid product proliferation, and have short product
life and development cycles. Therefore, most mobile designers design their products from a base platform, or reference design, provided to
them by the vendor of the processor they have selected for their design. To differentiate their products from their competition, OEMs and
ODMs may require some level of customization at either the hardware or software level. Designers have only a few viable options to
modify the base platform for their needs. Since mobile system designers require very low power consumption to maximize battery life in
their applications, the high power consumption of conventional FPGAs is incompatible with their design goals. This effectively limits the
average mobile system designer to ASSPs, small PLDs, mobile-oriented FPGAs, and MCUs to create a virtual level playing field among
mobile system designers, and makes product proliferation
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and differentiation extremely hard to achieve. ASICs with their long development cycles, long lead times and high non-recurring
development costs are only used in very high volume mainstream consumer products.
The traditional military and industrial markets are well served by existing core silicon. Much of this market uses complex ASSPs
since price, power and size are not particularly critical design considerations. When there is a strong need for a custom solution in high
volume applications, designers turn to an ASIC and, in low to medium volume applications, they use FPGAs. QuickLogic FPGAs have a
loyal following in certain segments of these markets, particularly when instant-on, energy efficiency, high reliability or intellectual
property security is important. These markets are expected to follow a typical mature product trend, as compared with the predicted growth
in our business in the consumer market.
Markets and Product Technology
We market our solutions primarily to consumer and industrial device OEMs and ODMs. We have complete solutions
incorporating our EOS S3, EOS3 LV, EOS S3AI, ArcticLink III S2, ArcticLink III VX and BX, PolarPro 3, PolarPro II, PolarPro, and
Eclipse II solution platforms, packaging, IPs, custom logic, software drivers, SensiML Analytics Toolkit and our architecture consulting.
We partner with target customers in our focus markets to architect and design solutions and to integrate and test our solutions in our
customers’ products. A solution can be based on our programmable technology, which enables customized designs, low power, flexibility,
rapid time-to-market, longer time-in-market and lower total cost of ownership. From a mobile system designer’s perspective, a solution’s
function is known and complete, and consequently can be designed into systems with a minimum amount of effort and risk. We are capable
of providing complete solutions because of our investment in developing the low power IP and software required to implement specific
functions, along with sensor software algorithms optimized for our architecture. Because we are involved with our customers at the
definition stage of their products, we are able to architect solutions that typically have more than one IP, absorbing more functionality
traditionally implemented with multiple ASSPs. In cases where our solution has multiple IPs, significant system performance or battery life
improvements can be realized by enabling direct data transfers between the IPs, or by offloading more processing tasks from the host
processor to our solution. In some cases, we develop the IPs and either software or firmware ourselves and, in other cases, we utilize third
parties to develop the mixed signal physical layers, logic and/or software.
We market our solutions to OEMs and ODMs offering differentiated mobile products, to processor vendors wishing to expand
their served available market, and to sensor manufacturers and sensor processing software companies wishing to expand their ecosystems.
Our target mobile markets include Tablets, Wearables, Hearables, Smartphones, Consumer Electronics and Consumer/Industrial IoT. Our
solutions typically fall into one of three categories: Sensor Processing, Display and Visual Enhancement, or Smart Connectivity.
The fact that we use our programmable technology to customize these solutions provides two advantages over conventional
ASSPs that are based on ASIC technology. Foremost is the fact that our solutions can be tailored for a specific customer’s requirements.
Once we have developed IPs, it is easy to combine IPs with a platform’s fixed logic and utilize the remaining programmable logic to
provide a unique set of features to a customer/partner or to add other functions to the solution, such as a variety of interface, I/O, hardware
acceleration, and/or processor offloading. We are able to develop these solutions from a common solution platform, and partner with
system designers to implement a range of solutions, or products, that address different geographic and market requirements. By using
programmable technology instead of ASIC technology, we reduce the development time, development risk and total cost of ownership and
are able to bring solutions to market far more quickly than other custom silicon alternatives.
By using our silicon platforms, our IPs, our software, and our in-depth architecture knowledge, we can deliver energy efficient
custom solutions that blend the benefits of traditional ASSPs with the flexibility, product proliferation, differentiation and low total cost of
ownership advantages of programmable logic.
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Our product technology consists of six major elements:
First, our programmable logic allows us to hardware customize our platforms. We have two distinct types of programmable
logic. We have an SRAM-reprogrammable logic architecture that utilizes a standard CMOS-logic process to meet the specific needs of the
sensor and I/O subsystems of mobile devices: very low standby power, low dynamic power, and in-system reprogrammable technology.
Our SRAM-reprogrammable logic is the basis of our ArcticPro eFPGA IP Licensing initiative, and is the logic used in our EOS S3, EOS
S3 LV, and EOS S3AI products.
We also have our ViaLink programmable logic that uses proprietary and patented technology to meet the specific smart
connectivity needs when the characteristics of non-volatility and instant-on, very low standby power, low dynamic power, small form
factor, single chip solutions that power cycle easily and quickly are required. Hardware customization gives our devices the ability to
execute key actions faster than software implementations, and at lower power.
Second, our ArcticLink and EOS S3, EOS S3 LV, and EOS S3AI platforms combine mixed signal physical functions, hard-
wired logic and programmable logic on one device. Mixed signal capability supports the trend toward serial connectivity in mobile
applications, where designers benefit from lower pin counts, simplified printed circuit board, or PCB, layouts, simplified PCB interconnect
and reduced signal noise. Adding hard-wired IP enables us to deliver more logic at lower cost and lower power while the programmable
logic allows us to provide solutions that can be rapidly customized to differentiate products, add features and reduce system development
costs. This combination of mixed signal, hard-wired logic and programmable logic enables us to deliver low cost, small form factor
solutions that can be customized for particular customer or market requirements while lowering the total cost of ownership.
Third, we develop and integrate innovative IP cores, intelligent data processing IP cores, or standard interfaces used in mobile
products. We offer:
•
•
•
•
•
•
Sensor Processing IPs such as Flexible Fusion Engine, or FFE, Sensor Manager, or Communications Manager;
Hardware Acceleration / Processor Offloading IPs such as various digital filter and matrix multiplication functions;
Display and Visual Enhancement s such as VEE, DPO or LCD controller interfaces, LVDS and MIPI;
Network IPs such as high speed UARTs, to enable connectivity to Bluetooth devices;
Storage IPs such as Secure Digital High Capacity, or SDHC; and
Other IPs such as I2S, PCM, I2C, IRDA, PWM, and other general purpose interfaces.
Fourth, we develop and optimize a software framework for use in conjunction with our sensor processing silicon platforms.
Fifth, through SensiML, we develop and optimize an end-to-end software suite that provides developers a practical means for
developing IoT sensor algorithms using AI. Each component of the software suite handles specific steps to progress from initial raw sensor
data collection using prototype hardware to optimized firmware code generation, validation and testing, and post-ship algorithm updates
and continuous learning enhancements. SensiML Data Capture Lab is a full-featured client tool that enables rapid, efficient, and
collaborative multi-user data collection, cleansing, labeling, and metadata annotation of custom application datasets. SensiML Analytics
Studio is a cloud service component that uses labeled datasets to deliver device-optimized firmware for a chosen endpoint product.
SensiML Test App is used to quickly and efficiently validate final device firmware and test for the proper behavior, accuracy, and
performance of the algorithm empirically on actual endpoint hardware. Lastly, the SensiML Application Programmer’s Interface (API) is
a simplified interface to extend the SensiML algorithms and manage advanced features like edge model tuning and continuous learning
updates to the cloud.
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Sixth, our unique customer engagement model enables us to develop complete solutions for target customers who wish to bring
differentiated, products to market quickly and cost-effectively. We partner with customers to define solutions specific to their requirements
and combine all of the above technologies using one of our solution platforms, proven logic IP cores, custom FPGA logic, software drivers,
firmware and application software and SensiML Analytics toolkit. We then work with these customers to integrate and test solutions in
their systems. The benefit of providing complete solutions is that we effectively become a virtual extension of our customers’ engineering
organization.
Marketing, Sales and Customers
We are a sub-system integrator that monetizes solutions through silicon sales, eFPGA IP licensing and SensiML Analytics
Toolkit subscriptions and per unit royalties.. We specialize in enhancing the user experience in leading edge mobile devices and products.
For our customers, we enable hardware and sensor algorithmic differentiation quickly, cost-effectively and at low power. For our partners,
we expand their reach into new segments and new use cases thereby expanding the served available market for their existing devices.
Our vision is to transform the way people and devices interact with each other and their surroundings. Our mission is to provide
innovative platforms to successfully enable our customers to develop products that fundamentally change the end-user experience.
Specifically, we develop low power SoCs, FPGAs, embedded FPGA intellectual property and the SensiML Analytics Toolkit for AI
Software. QuickLogic’s products enable smartphone, wearable, hearbles, tablet, Consumer Electronics, and Consumer/Industrial IoT device
OEMs to deliver highly differentiated, immersive user experiences and long battery life for their customers.
Our multi-core sensor processing products such as ArcticLink 3 S1, ArcticLink 3 S2, EOS 3, EOS S3 LV, and EOS S3AI
accomplish this result with general purpose and targeted cores, which provide an extremely power-efficient approach for real-time multi-
modal (vision, motion, voice, location, biometric and environmental) sensor processing independently of the cloud. Our embedded FPGA
technology gives SoC developers targeting IoT endpoint applications the flexibility to make design changes post production while keeping
power consumption low. Our SensiML Analytics Toolkit is cutting-edge software that enables ultra-low power IoT endpoints that
implement AI to transform raw sensor data into meaningful insight at the device itself. The Toolkit also provides an end-to-end
development platform spanning data collection, labeling, algorithm and firmware auto generation, and testing.
Market leading companies need to deliver new products quickly and cost-effectively. We believe our programmable technology
allows us to deliver customizable solutions with low power consumption and high IP security, while meeting system performance and BOM
cost requirements. We believe our solutions allow OEMs and ODMs to rapidly bring new and differentiated products to market quickly and
cost-effectively. Our solutions enable energy and cost-efficient solutions on design platforms from which a range of products can be
introduced.
We recognize that our markets require a range of solutions, and we intend to work with market leading companies to combine
silicon solution platforms, packaging technology, sensor software algorithms, software drivers and firmware, to meet the product
proliferation, high bandwidth, time-to-market, time-in-market and form factor requirements of mobile device manufacturers. We expect
solutions to range from devices that include mixed signal and visual enhancement capability to devices that provide off-load engines from
the host processor to save power and extend system battery life. We intend to continue to define and implement compelling solutions for our
target customers and partners.
Our business model is two-fold. For the consumer market, it includes a focused customer strategy in which we target market-
leading customers, who primarily serve the market for differentiated mobile products. Our belief is that a large majority of our revenue will
continue to come from less than 100 consumer customers as we transition to this business model. For the consumer customers, we have
identified and plan to continue to identify the customers we want to serve with our solutions, and are currently in different stages of
engagement with a number of these customers. The other half of the business model is targeted at the IoT customers that are deploying AI
solutions. This go-to-market strategy focuses on a broader sales and marketing approach. Unlike the consumer market, the IoT market for
AI solutions is made up of hundreds, if not thousands, of individual customers. We have identified reference designs, evaluation systems
and evaluation software kits that we can enable our channel sales partners to
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sell to these customers. We believe our solutions are resonating with our target customers who value the differentiated user experience,
lower power consumption, platform design capability, rapid time-to-market, longer time-in-market and low total cost of ownership available
through the use of our solutions.
We sell our products through a network of sales managers in North America, Europe and Asia. In addition to our corporate
headquarters in Sunnyvale, California, we have international sales operations in China, Japan, Taiwan, South Korea and the United
Kingdom. Our sales personnel and independent sales representatives are responsible for sales and application support for a given region,
focusing on major strategic accounts, and managing our channel sales partners such as distributors.
Our customers typically order our products through our distributors. Currently, we have two distributors in North America and a
network of sixteen distributors throughout Europe and Asia to support our international business.
We also have a military, industrial and mobile product customer base that purchases our mature silicon products. We expect to
continue to offer silicon devices to these customers.
Three of our customers represented 12%, 10%, 10% of our total revenue for the year ended December 30, 2018 and 11% and
19% for the year ended December 31, 2017, respectively. In addition, a significant portion of our revenue comes from sales to customers
located outside of the United States. See Note 11 to the Consolidated Financial Statements for information on our revenue by geography,
market segment and key customers.
In the past, there has not been a predictable seasonal pattern to our business. However, we may experience seasonal patterns in
the future due to global economic conditions, the overall volatility of the semiconductor industry and the inherent seasonality of the mobile
and consumer markets.
Backlog
We do not believe that backlog as of any particular date is indicative of future results. A majority of our quarterly shipments
typically are booked during the quarter. Our sales are made primarily pursuant to standard purchase orders issued by OEM customers and
distributors.
Competition
A number of companies offer products that compete with one or more of our semiconductor products and solutions. Our
semiconductor competitors include: (i) suppliers of ASSPs such as DSP Group; (ii) suppliers of mobile and/or application processors; (iii)
suppliers of ASICs; (iv) suppliers of mobile-oriented FPGAs such as Lattice; and (v) suppliers of low power microcontrollers such as Atmel
(a subsidiary of Microchip Technology), ST Microelectronics and NXP. Our existing competitors for conventional FPGAs
include suppliers of low power CPLDs and FPGAs such as Lattice, Xilinx, Intel and MicroSemi.
ASSPs offer proven functionality which reduces development time, risk and cost, but it is difficult to offer a differentiated
product using standard devices, and ASSPs that meet the system design objectives are not always available. Conventional programmable
logic may be used to create custom functions that provide product differentiation or make up for deficiencies in available ASSPs. PLDs
require more designer input since the designer has to develop and integrate the IP and may have to develop the software to drive the IP.
PLDs are more expensive and consume more power than ASSPs or ASICs, but they offer fast time-to-market and are typically
reprogrammable. OEMs have adopted mobile-oriented FPGAs in the mobile product market, but offer very little in terms of hard logic
blocks that may decrease power consumption or selling price to the OEM. ASICs have a large development cost and risk and a long time to
market. As a result, ASICs are generally only used for single designs with very high volumes. MCUs offer extensive software flexibility,
but often do not offer sensor software algorithms, the lowest power, nor any hardware flexibility. Our solutions enable custom functions
and system designs with fast time-to-market and longer time-in-market since they are customized by us using our solution platforms that
contain programmable logic. In addition, because they are complete solutions, they reduce the system development cost and risk.
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Since the AI software market is nascent, particularly for the edge and endpoint applications, there are no direct competitors to
the SensiML analytics software platform at this point.
Competitors for our eFPGA IP licensing product include a few of startup companies.
Research and Development
We are focused on developing our solutions and platforms. Our solutions combine our silicon platforms with our IPs, software
drivers, and other system software, and may include SensiML software for AI applications. Our future success will depend largely on our
ability to rapidly develop, enhance and introduce our solutions that meet emerging industry standards and satisfy changing customer
requirements. We have made and expect to continue to make substantial investments in research and development. Our research and
development expenses for the years ended December 30, 2018, December 31, 2017, and January 1, 2017 were $9.9 million (79% of
revenue), $9.6 million (79% of revenue), and $12.3 million (107% of revenue), respectively.
As of March, 15, 2019, our research and development staff consists of 48 employees located in California, India, and Oregon.
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Our system software group creates the drivers and other system code required to connect our silicon devices to Application
Processors, drivers and microcode to support our sensor hubs.
Our platform engineering group develops low power programmable devices and system IP that can be used in standalone
solution platforms such as PolarPro 3E, or combined in solution platforms such as EOS S3.
Our EDA software group develops the design libraries, interface routines and place and route software that allow our
engineers to use third party design environments to develop designs that are incorporated into our programmable devices,
and develops the design tools that support algorithm development for our sensor hubs.
Our hardware group develops and verifies IP Blocks that can be programmed into our programmable logic and develops
reference designs to showcase and verify our solutions.
Our product engineering group oversees product manufacturing and process development with our third party foundries,
and is involved in ongoing process improvements to increase yields and optimize device characteristics.
The Office of the CTO investigates future trends and requirements in order to define the next generation of solutions and
platforms.
Our SensiML group develops and maintains all software with respect to the SensiML Analytics Software Suite.
Manufacturing
We have close relationships with third-party manufacturers for our wafer fabrication, package assembly, and testing
requirements to help us ensure stability in the supply of our products and to allow us to focus our internal efforts on product and solution
design and sales.
We currently outsource our wafer manufacturing, primarily to GLOBALFOUNDRIES and Taiwan Semiconductor
Manufacturing Company Limited, or TSMC. We outsource our product packaging primarily to Amkor Technology, Inc. and STATS-
ChipPAC. GLOBALFOUNDRIES manufactures our EOS S3, EOS S3 LV, and EOS S3AI Sensor Platform in a 40 nm CMOS process, and
PolarPro 3E, ArcticLink III VX and BX, and ArcticLink 3 S2 Sensor Hub, in a 65 nm CMOS process. TSMC manufactures our pASIC 3,
QuickRAM and certain QuickPCI products, using a 0.35 micron complementary metal oxide semiconductor, or CMOS, process. TSMC
also manufactures our Eclipse and other mature products, PolarPro III, ArcticLink 3 S1 Sensor Hub products, using a
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65nm CMOS process on twelve-inch wafers. We purchase products from GLOBALFOUNDRIES, and TSMC on a purchase order basis.
Outsourcing of wafer manufacturing enables us to take advantage of the high volume economies of scale offered by these
suppliers. We may establish additional foundry relationships as such arrangements become economically useful or technically necessary.
Employees
As of December 30, 2018, we had 82 employees worldwide. We believe our future success depends in part on our continued
ability to attract, hire and retain qualified personnel. None of our employees are represented by a labor union and we believe our employee
relations are favorable.
Intellectual Property
We believe that it is important to maintain a large patent portfolio to protect our innovations. We currently hold twenty four
active U.S. patents and have three pending applications for additional U.S. patents. Our patents contain claims covering various aspects of
programmable integrated circuits, programmable interconnect structures and programmable metal devices. In Europe and Asia, we have
been granted eleven patents and have five pending applications. Our issued patents expire between 2019 and 2037.
In most cases, revenue will decline from a decrease in demand for our mature products long before the expiration of pending or
issued patents relating to the underlying technology in such products. The decision to cease maintaining a patent is made based on the
importance of the patent in our current or future product offerings.
We have seven trademarks registered with the U.S. Patent and Trademark Office.
Executive Officers and Directors
Our executive officers are appointed by, and serve at the discretion of, our Board of Directors. There are no family relationships
among our directors and officers.
The following table sets forth certain information concerning our current executive officers and directors as of March 8, 2019:
Name
Brian C. Faith
Suping (Sue) Cheung
Rajiv Jain
Timothy Saxe
E. Thomas Hart
Andrew J. Pease
Michael R. Farese
Arturo Krueger
Daniel A. Rabinovitsj
Christine Russell
Gary H. Tauss
Position
Age
44 President and Chief Executive Officer; Director
55 Chief Financial Officer and Vice President, Finance
58 Vice President, Worldwide Operations
63 Senior Vice President Engineering and Chief Technology Officer
77 Chairman of the Board
68 Director
72 Director
79 Director
54 Director
68 Director
64 Director
Brian C. Faith joined QuickLogic in June 1996. Mr. Faith was promoted to CEO in June 2016 after having served as Vice
President of Worldwide Marketing and Vice President of Worldwide Sales & Marketing between 2008 and 2016. Mr. Faith during the last
21 years has held a variety of managerial and executive leadership positions in engineering, product line management, marketing and sales.
Mr. Faith has also served as the Chairman of the Marketing Committee for the CE-ATA Organization. He holds a B.S. degree in Computer
Engineering from Santa Clara University and was an Adjunct Lecturer at Santa Clara University for Programmable Logic courses.
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Suping (Sue) Cheung (Ph.D.) joined QuickLogic in May 2007. Dr. Cheung was promoted to Chief Financial Officer in February
2017 after having served as Vice President of Finance and Chief Accounting Officer since August 2016. Prior to this role, Dr. Cheung
served as QuickLogic’s Principal Accounting Officer in addition to Corporate Controller since May 2015, Corporate Controller from 2008
to April 2015 and Assistant Controller from 2007 to 2008. Prior to joining QuickLogic, Dr. Cheung was a Senior Manager of SEC
Reporting and Technical Accounting at Dell SonicWALL from 2006 to 2007 and was the Senior Accounting Manager at VeriFone System,
Inc. from 2005 to 2006. Prior to 2005, Dr. Cheung held various senior accounting and financial management roles in both publicly traded
and privately held companies. Dr. Cheung began her career with PricewaterhouseCoopers (PWC) where she served as an auditor and as a
tax consultant. Dr. Cheung holds a Ph.D. in Business Administration and a Masters in Accounting from the Florida International University
in Miami. She is a Certified Public Accountant.
Rajiv Jain joined QuickLogic in August 1992. Mr. Jain has served as our Vice President of Worldwide Operations since April
2014. Prior to this role, Mr. Jain served as QuickLogic’s Senior Director of Operations and Development Engineering from 2011 to 2014,
Senior Director of System Solutions and Process Technology from 2009 to 2011, Director of Process Technology from 1997 to 2009, and
Senior Process Technologist from 1992 to 1997. Prior to joining QuickLogic, Mr. Jain was a Senior Yield Engineer at National
Semiconductor from 1991 to 1992, where he focused on BiCMOS product yield improvements, and at Monolithic Memories from 1985 to
1988, where he focused on BiPolar product yield and engineering wafer sort improvements. Mr. Jain holds a Master’s degree in Chemical
Engineering from the University of California, Berkeley and a B.S. degree in Chemical Engineering from the University of Illinois,
Champaign/Urbana.
Timothy Saxe (Ph.D.) joined QuickLogic in May 2001. Dr. Saxe has served as our Senior Vice President of Engineering and
Chief Technology Officer since August 2016 and Senior Vice President and Chief Technology Officer since November 2008. Previously,
Dr. Saxe has held a variety of executive leadership positions in QuickLogic including Vice President of Engineering and Vice President of
Software Engineering. Dr. Saxe was Vice President of FLASH Engineering at Actel Corporation, a semiconductor manufacturing
company, from November 2000 to February 2001. Dr. Saxe joined GateField Corporation, a design verification tools and services company
formerly known as Zycad, in June 1983 and was a founder of their semiconductor manufacturing division in 1993. Dr. Saxe became
GateField’s Chief Executive Officer in February 1999 and served in that capacity until Actel Corporation acquired GateField in November
2000. Dr. Saxe holds a B.S.E.E. degree from North Carolina State University, and an M.S.E.E. degree and a Ph.D. in Electrical Engineering
from Stanford University.
Information regarding the backgrounds of our directors is set forth under the caption “Proposal One, Election of Directors” in our
Proxy Statement, which information is incorporated herein by reference.
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ITEM 1A. RISK FACTORS
In addition to other information in this Annual Report on Form 10-K and in other filings we make with the Securities and
Exchange Commission, the following risk factors should be carefully considered in evaluating our business as they may have a significant
impact on our business, operating results and financial condition. If any of the following risks actually occurs, our business, financial
condition, results of operations and future prospects could be materially and adversely affected. Because of the following factors, as well as
other variables affecting our operating results, past financial performance should not be considered as a reliable indicator of future
performance and investors should not use historical trends to anticipate results or trends in future periods.
If we fail to successfully develop, introduce and sell new products, eFPGA IP Product, SensiML Software subscriptions/licenses, and other
new solutions or if our design opportunities do not generate the revenue we expect, we may be unable to compete effectively in the future
and our future gross margins and operating results will be lower.
The market for differentiated consumer devices is highly competitive and dynamic, with short end market product life cycles and
rapid obsolescence of existing products. To compete successfully, we must obtain access to advanced fabrication capacity and dedicate
significant resources to specify, design, develop, manufacture and sell new or enhanced solutions that provide increasingly higher levels of
performance, low power consumption, new features, meeting current and emerging industry standards, reliability and/or cost savings to our
customers. Due to the short product life cycle of these devices, our revenue is subject to fluctuation in a short period of time and our ability
to grow our business depends on accelerating our design win activity. We often make significant investments in solutions, sensor algorithm
software and silicon platform development, selling and marketing, long before we generate revenue, if any, from our efforts. The markets
we are targeting typically have higher volumes and greater price pressure than our traditional business. In addition, we quote opportunities
in anticipation of future cost reductions and may aggressively price products to gain market share. In order to react quickly to opportunities
or to obtain favorable wafer prices, we make significant investments in and commitments to purchase inventories and capital equipment
before we have firm commitments from customers.
We expect our business growth to be driven by new products, which currently include EOS™, Quick AI, SensiML, ArcticLink®
III, PolarPro®3, PolarPro II, PolarPro, Eclipse II products. We also launched a business that licenses our FPGA technology for use in other
semiconductor companies’ SoCs and delivered our first eFPGA IP product ArcticPro™ in 2017. The new product revenue growth of our
new products and eFPGA IP product needs to be strong enough to achieve profitability. The gross margin associated with our new products
is generally lower than the gross margin of our mature products, due primarily to the price-sensitive nature of the higher volume mobile
consumer opportunities that we are pursuing with new products and eFPGA IP product. Because the product life cycle of mobile products
is short, we must replace revenue at the end of a product life cycle with sales from new design opportunities. While we expect revenue and
gross profit growth from new products and eFPGA IP product will offset the expected decline in revenue and gross profit from our mature
products, there is no assurance whether or when this will occur. In order to increase our revenue from its current level, we depend upon
increased revenue from our existing new products, especially solutions based on our EOS S3, ArcticLink and PolarPro solution platforms,
the eFPGA IP product and the development of additional new products and solutions.
If (i) we are unable to design, produce and sell new products, eFPGA IP, SensiML and other products and solutions that meet
design specifications, address customer requirements and generate sufficient revenue and gross profit; (ii) market demand for our new
products, eFPGA IP product and other products fails to materialize; (iii) we are unable to obtain adequate fabrication capacity on a timely
basis; (iv) we are unable to develop new silicon platforms or solutions in a timely manner; or (v) our customers do not successfully
introduce products incorporating our devices, or choose a competing offering, our revenue and gross margin of the new products and
eFPGA IP product will be materially harmed, which could have an overall adverse and potentially disproportionate effect on our business,
results of operations and financial condition.
Two of our products target new unproven markets, and if these markets do not develop, or if our products do not meet their needs, the loss
of or reduction in orders could adversely affect our revenue and harm our business financial condition, operating results and cash flows.
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eFPGA: We have history and experience in developing, selling and supporting FPGA products and incorporating FPGA IP
developed by us into our platform solutions. The eFPGA market is a developing market with unknown requirements and demand. Our
current FPGA architectures and their performance may not be a good fit for the eFPGA Market. eFPGA IP is designed for specific
foundry/process node combinations, and the ones we have chosen to target may be different from what our customers require. The software
developed by us for eFPGA may be delayed or may not meet the needs of the eFPGA Market. The support required by a customer to
incorporate the eFPGA may be much higher than expected which may delay new engagements or lead to high costs. The incorporated
eFPGA IP may have an unexpected result in the customer’s chip leading to compensation demands. The expected NRE and royalty rates
we expect to charge for the eFPGA may not be competitive, which may have a material adverse effect on our business, results of operations
and financial condition.
SensiML: Mainstream AI runs on powerful processors and large FPGAs. SensiML’s AI solution targets end point solutions that
use low power processors. The end point AI market is a developing market with unknown requirements and demand. The current SensiML
solution may not be a good fit to the evolving needs of the end-point AI market. The support required for customer evaluations and
implementation may be higher than expected which may delay engagements and lead to higher costs. The expected SaaS licensing fees and
royalty rates we expect to charge for the SensiML solutions may not be competitive, which may have a material adverse effect on our
business, results of operations and financial condition.
If our AI products are not low touch, the cost of addressing the fragmented AI market will be high which will delay market penetration,
result in reduced revenues or require increased expenses, any of which could adversely affect our revenue and harm our business financial
condition, operating results and cash flows.
The end point AI market consists of many different use cases, with each individual use case having a modest volume even
though the aggregate volume is large. This is quite different from the mobile consumer market which consists of a few large customers and
use cases. In order to scale in the fragmented AI end point market, our products will have to be extremely low touch so that the cost of
support is low and scalable across many customers. The current EOS S3AI solution and SensiML solutions may not be sufficiently low
touch to address this market in a cost-effective manner, or in the volume required. Higher than expected costs, or lower than expected
volume may have a material adverse effect on our business, results of operations and financial condition.
We have incurred losses in the past years since 2011 and anticipate that we will incur continued losses through at least the next year, we
may not be able to generate sufficient revenue or raise additional financing to fund future losses, and we may not be able to sustain
sufficient liquidity to continue to operate as a going concern.
We have experienced net losses in the past years and expect such losses to continue through at least the year ending December
29, 2019 as we continue to develop new products, applications and technologies. Our new products and products currently under
development have been generating lower gross margin as a percentage of revenue than our mature products due to the markets that we have
targeted and the larger order quantities associated with these applications. Whether we can achieve cash flow levels sufficient to support
our operations cannot be accurately predicted, and our investment portfolio is subject to a degree of interest rate and liquidity risk. Unless
such cash flow levels are achieved, in addition to the proceeds that we received on May 29, 2018 from the sale of our equity securities, and
the credit line we may be able to draw down from Heritage Bank of Commerce under the Loan and Security Agreement dated as of
September 28, 2018 and the Amended and Restated Loan and Security Agreement dated December 21, 2018, by and between our company
and Heritage Bank of Commerce, we may need to obtain additional funds through strategic divestiture, or sell debt or equity securities, or
some combination thereof, to provide funding for our operations. Such additional funding may not be available on commercially reasonable
terms, or at all.
If we are unable to generate sufficient sales from its new products or adequate funds are not available when needed, our
liquidity, financial condition and operating results would be materially and adversely affected, and we may not be able to operate our
business without significant changes in our operations or at all.
Our products are subject to a lengthy sales cycle and our customers may cancel or change their product plans after we have expended
substantial time and resources in the design of their products.
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Our customers often evaluate our products for six months or more before designing them into their systems, a nd they may not
commence volume shipments for up to an additional six to twelve months, if at all. During this lengthy sales cycle, our potential customers
may cancel or change their product plans. Customers may also discontinue products incorporating our devices at any time or they may
choose to replace our products with lower cost semiconductors. In addition, we are working with leading customers in our target markets to
define our future products. If customers cancel, reduce or delay product orders from us, or choose not to release products that incorporate
our devices after we have spent substantial time and resources developing products or assisting customers with their product design, our
revenue levels may be less than anticipated and our business, results of operations and financial condition may be materially adversely
affected.
We currently depend on a limited number of significant customers, for a significant portion of our revenue and the loss of or reduction in
orders from such significant customers could adversely affect our revenue and harm our business financial condition, operating results
and cash flows.
A small number of end-customers represented a significant portion our total revenue in our fiscal year ended December 30,
2018. During our fiscal year ended December 30, 2018, three customers, including Samsung, accounted for 12%, 10% and 10%,
respectively, of our total revenue. We expect to maintain this high level of customer concentration as we continue to market our solutions to
leading manufacturers of high-volume mobile applications. As in the past, future demand from these customers may fluctuate significantly
from quarter to quarter. These customers typically order products with short requested delivery lead times, and do not provide a
commitment to purchase product past the period covered by purchase orders, which may be rescheduled or canceled. In addition, our
manufacturing lead times are longer than the delivery lead times requested by these customers, and we make significant purchases of
inventory and capital expenditures in anticipation of future demand. If revenue from any significant customer were to decline substantially,
we may be unable to offset this decline with increased revenue and gross margin from other customers and we may purchase excess
inventories. These factors could have a material adverse impact on our business, results of operations and financial condition.
We may make a significant investment in long-lived assets for the production of our products based upon historical and expected
demand. If demand for our products or gross margin generated from our products does not meet our expectations or if we are unable to
collect amounts due from significant customers, we may be required to write-off inventories, provide for uncollectible accounts receivable
or incur charges against long-lived assets, which may have a material adverse effect on our business, results of operations and financial
condition.
We depend upon partnering with other companies to offer voice, motion, and other solutions into our platform.
In addition to working directly with our customers, we partner with other companies that are experts in certain technologies to
create more complete solutions. The depth of these relationships varies depending on the partner and the dynamics of the end market being
targeted, but these relationships are typically a co-marketing relationship that includes joint account calls, promotional activities and/or
engineering collaboration and developments. The propriety code provided by these partners may be an integral part of the solutions that we
offer our customers. If we are unable to obtain competitive pricing (NRE, royalty) and prompt quality support by our partner, our solution
may not be competitive. In addition, if the quality of our partner’s solution does not meet our customer’s requirements, it may delay or
prevent the incorporation of our product by the customer. There may also be delays and additional expenses to improve or update the
partner’s solution to meet current market needs. If we are unable to maintain a close working relationship with our partners it would hinder
our ability to continue to develop and introduce leading solutions effectively in the future, which may have a material adverse effect on our
business, results of operations and financial condition.
We depend on our relationships with third parties to manufacture our new products.
We depend upon GLOBALFOUNDRIES, TSMC, Amkor and STAT-chipPAC to manufacture our new products. The inability
of any one of these companies to continue manufacture of our new products for any reason would require us to identify and qualify a new
foundry to manufacture our new products. This would be time consuming, difficult and result in unforeseen operational problems. Alternate
foundries might not be available to
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fabricate our new products, or if available, might be unwilling or unable to offer services on acceptable terms and our ability to operate our
business or deliver our products to our customers could be severely impaired.
We depend upon third parties for silicon IP, detailed registered-transfer level, or RTL, design, physical design, verification and assembly of
our silicon platforms and any failure to meet our requirements in a timely fashion may adversely affect our time to market and revenue.
Our move to a variable cost or outsourced engineering development model allows us access to the best design resources for
developing new silicon platforms. This includes access to leading edge silicon IP as well as RTL design and physical design expertise.
However, outsourcing the design of a complex silicon platform typically involves multiple companies in multiple locations, which may
increase the risk of costly design errors. Any delays or errors in the design of our new silicon platforms could significantly increase the cost
of development as well as adversely affect our time to market, which may have a material adverse effect on our business, results of
operations and financial condition.
We depend upon partnering with other companies to develop IP, reference platforms, algorithm and system software.
In addition to working directly with our customers, we partner with other companies that are experts in certain technologies to
develop additional intellectual property, reference platforms, algorithms and system software to provide application solutions. We also
work with mobile processor manufacturers and companies that supply sensor, storage, networking or graphics components for embedded
systems. The depth of these relationships varies depending on the partner and the dynamics of the end market being targeted, but is
typically a co-marketing relationship that includes joint account calls, promotional activities and/or engineering collaboration and
developments, such as reference designs. If we are unable to license new technologies, maintain a close working relationship with our
partners, fail to continue to develop and introduce leading technologies or if these technologies fail to generate the revenue we expect, we
may not be able to compete effectively in the future, which may have a material adverse effect on our business, results of operations and
financial condition.
We depend upon third parties to fabricate, assemble, test and program our products, and to provide logistics services. Any problems at
these third parties could adversely affect our business, results of operations and financial condition.
We contract with third parties to fabricate, assemble, test and program our devices, and vendors for logistics. In general, each of
our devices is fabricated, assembled and programmed by a single supplier, and the loss of a supplier, transfer of manufacturing to a new
location, expiration of a supply agreement or the inability of our suppliers to manufacture our products to meet volume, performance,
quality and cost targets could have a material adverse effect on our business. Our relationship with our suppliers could change as a result of
a merger or acquisition. If for any reason these suppliers or any other vendor becomes unable or unwilling to continue to provide services of
acceptable quality, at acceptable costs and in a timely manner, our ability to operate our business or deliver our products to our customers
could be severely impaired. We would have to identify and qualify substitute suppliers, which could be time consuming, difficult and result
in unforeseen operational problems, or we could announce an end-of-life program for these products. Alternate suppliers might not be
available to fabricate, assemble, test and program our devices or, if available, might be unwilling or unable to offer services on acceptable
terms. In addition, if competition for wafer manufacturing capacity increases, if we need to migrate to more advanced wafer manufacturing
technology, or if competition for assembly services increases, we may be required to pay or invest significant amounts to secure access to
this capacity. The number of companies that provide these services is limited and some of them have limited operating histories and
financial resources. In the event our current suppliers refuse or are unable to continue to provide these services to us, or if we are unable to
secure sufficient capacity from our current suppliers on commercially reasonable terms, we may be unable to procure services from
alternate suppliers in a timely manner, if at all. Moreover, our reliance on a limited number of suppliers subjects us to reduced control over
delivery schedules, quality assurance and costs. This lack of control may cause unforeseen product shortages or may increase our cost to
manufacture and test our products.
We utilize third party logistics services, including transportation, warehouse and shipping services. These service providers are
subject to interruptions that affect their ability to service us, including the availability of
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transportation services, disruptions related to work stoppages, volatility in fuel prices and security incidents or natural events at
manufacturing, shipping or receiving points or along transportation routes.
In the event any of our third party suppliers or vendors were to experience financial, operational, production or quality assurance
difficulties resulting in a reduction or interruption in supply or providing services to us, our business, results of operations and financial
condition may be materially adversely affected.
If we fail to adequately forecast demand for our products, we may incur product shortages or excess product inventories.
Our agreements with certain suppliers require us to provide forecasts of our anticipated manufacturing orders, and place binding
manufacturing commitments in advance of receiving purchase orders from our customers. We are limited in our ability to increase or
decrease our forecasts under such agreements. Other manufacturers supply us with product on a purchase order basis. The allocation of
capacity is determined solely by our suppliers, over which we have no direct control. Additionally, we may place orders with our suppliers
in advance of customer orders to allow us to quickly respond to changing customer demand or to obtain favorable product costs.
Furthermore, we provide our suppliers with equipment that is used to program our products to customer specifications. The programming
equipment is manufactured to our specifications and has significant order lead times. These factors may result in product shortages or
excess product inventories. Obtaining additional supply in the face of product, programming equipment or capacity shortages may be
costly, or not possible, especially in the short-term since most of our products and programming equipment are supplied by a single
supplier. If we fail to adequately forecast demand for our products, our business, the relationship with our customers, our results of
operations and financial condition could be materially adversely affected.
We entered into informal partnerships with certain third parties for the development of solutions. Our business could be adversely affected
if such informal partnerships fail to grow as we expected.
Our approach to developing solutions for potential customers involves developing solutions for and aligning our roadmap with
application processor, sensor, and flash memory vendors. We have entered into informal partnerships with other parties that involve the
development of solutions that interface with their devices or standards. These informal partnerships also may involve joint marketing
campaigns and sales calls. If the informal partnerships do not grow as expected or if they are significantly reduced or terminated by
acquisition or other means, our business, results of operations and financial condition could be materially adversely effected and we may be
required to write-off related inventories and long-lived assets.
Our business could be advisedly affected by undetected errors or defect in our products.
Difficulties encountered during the complex semiconductor manufacturing process can render a substantial percentage of
semiconductor devices nonfunctional. New manufacturing techniques or fluctuations in the manufacturing process may change the
performance distribution and yield of our products. We have, in the past, experienced manufacturing runs that have contained substantially
reduced or no functioning devices, or that generated devices with below normal performance characteristics. Our reliance on third party
suppliers may extend the period of time required to analyze and correct these problems. Once corrected, our customers may be required to
redesign or re-qualify their products. As a result, we may incur substantially higher manufacturing costs, shortages of inventories or
reduced customer demand.
Yield fluctuations frequently occur in connection with the manufacture of newly introduced products, with changes in product
architecture, with manufacturing at new facilities, on new fabrication processes or in conjunction with new backend manufacturing
processes. Newly introduced solutions and products are often more complex and more difficult to produce, increasing the risk of
manufacturing related defects. New manufacturing facilities or processes are often more complex and take a period of time to achieve
expected quality levels and manufacturing efficiencies. While we test our products, including our software development tools, they may
still contain errors or defects that are found after we have commenced commercial production. Undetected errors or defects may also result
from new manufacturing processes or when new intellectual property is incorporated into our products. If our products or software
development tools contain undetected or unresolved defects, we may lose market share,
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experience delays in or loss of market acceptance, reserve or scrap inventories or be required to issue a product recall. In addition, we
would be at risk of product liability litigation if defects in our products were discovered. Although we attempt to limit our liability to end
users through disclaimers of special, consequential and indirect damages and similar provisions, we cannot assure you that such limitations
of liability will be legally enforceable.
We may be unable to accurately estimate quarterly revenue, which could adversely affect the trading price of our stock.
Due to our relatively long product delivery cycle and the inability of our customers in the rapidly evolving mobile market to
confirm product requirements on a timely basis, we may have low visibility to product demand or estimated revenue in any given quarter.
If our customers cannot provide us with accurate delivery lead times, we may not be able to deliver product to our customers in a timely
fashion. Furthermore, our ability to respond to increased demand is limited to inventories on hand or on order, the capacity available at our
contract manufacturers and our capacity to program products to customer specifications. If we fail to accurately estimate customer demand,
or if our available capacity is less than needed to meet customer demand, we may not be able to accurately estimate our quarterly revenue,
which may have a material adverse effect on our results of operations and financial condition, and our stock price could be materially
fluctuate as a result.
We will be unable to compete effectively if we fail to anticipate product opportunities based upon emerging technologies and standards or
fail to develop products and solutions that incorporate these technologies and standards in a timely manner.
We spend significant resources designing and developing silicon solution platforms, IP and software and reference designs, and
adopting emerging technologies. We intend to develop additional products and solutions and to adopt new technologies in the future. If
system manufacturers adopt alternative standards or technologies, if an industry standard or emerging technology that we have targeted
fails to achieve broad market acceptance, if customers choose low power offerings from our competitors, or if we are unable to bring the
technologies or solutions to market in a timely and cost-effective manner, we may be unable to generate significant revenue from our
research and development efforts. As a result, our business, results of operations and financial condition could be materially adversely
affected, and we may be required to write-off related inventories and long-lived assets.
The semiconductor business is subject to downward price pressure.
The market for our products has been characterized by declining selling prices, and we anticipate that our average selling prices
will decrease in future periods, although the timing and amount of these decreases cannot be predicted with any certainty. The pricing
pressure in the semiconductor industry in past years has been due to a large number of factors, many of which were not easily foreseeable,
such as currency crisis, industry-wide excess manufacturing capacity, weak economic growth, the slowdown in capital spending that
followed the "dot-com" collapse, the reduction in capital spending by telecom companies and satellite companies, and the effects of the
terrorism since September 11, 2001. Similar to past years, recent unfavorable economic conditions have resulted in a tightening of the credit
markets. If signs of improvement in the global economy do not progress as expected and global economic conditions worsen, we may
experience a decline in our average selling prices. In addition, our competitors have in the past, and may again in the future, lower prices in
order to increase their market share. Continued downward price pressure in the industry may harm our competitive position and materially
and adversely affect our financial condition, cash flows, and results of operations.
Our future operating results are likely to fluctuate and therefore may fail to meet expectations, which could cause our stock price to
decline.
Our operating results have varied widely in the past and are likely to do so in the future. In addition, our past operating results
may not be an indicator of future operating results.
Factors that could cause our operating results to fluctuate include, without limitation: (i) successful development and market
acceptance of our products and solutions; (ii) our ability to accurately forecast product volumes and mix, and to respond to rapid changes in
customer demand; (iii) changes in sales volume or expected
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sales volume, product mix, average selling prices or production variances that affect gross profit; (iv) the effect of end-of-life programs;
(v) a significant change in sales to, or the collectability of accounts receivable from, our largest customers; (vi) our ability to adjust our
product features, manufacturing capacity and costs in response to economic and competitive pressures; (vii) our reliance on subcontract
manufacturers for product capacity, yield and quality; (viii) our competitors’ product portfolio and product pricing policies; (ix) timely
implementation of efficient manufacturing technologies; (x) errors in applying or changes in accounting and corporate governance rules;
(xi) the issuance of equity compensation awards or changes in the terms of our stock plan or employee stock purchase plan; (xii) mergers
or acquisitions; (xiii) the impact of import and export laws and regulations; (xiv) the cyclical nature of the semiconductor industry and
general economic, market, political and social conditions in the countries where we sell our products and the related effect on our
customers, distributors and suppliers; and (xv) our ability to obtain capital, debt financing and insurance on commercially reasonable terms.
Although certain of these factors are out of our immediate control, unless we can antic ipate and be prepared with contingency plans that
respond to these factors, our business, results of operations and financial condition could be materially adversely affected, which could
cause our stock price to significantly fluctuate or decline.
In particular, since we derived in 2018 and expect to continue to derive a significant portion of our revenue from China, our
business development plans, results of operations and financial condition may be materially adversely affected by significant political,
social and economic developments in China. A slowdown in economic growth in China could adversely impact our customers, prospective
customers, suppliers, distributors and partners in China, which could have a material adverse effect on our results of the operations and
financial condition. There is no guarantee that economic downturns, whether actual or perceived, any further decrease in economic growth
rates or an otherwise uncertain economic outlook in China will not occur or persist in the future, that they will not be protracted or that
governments will respond adequately to control and reverse such conditions, any of which could materially and adversely affect our
business, financial condition and results of operations.
We may also encounter periods of industry wide semiconductor oversupply, resulting in pricing pressure, as well as undersupply,
resulting in a risk that we could be unable to fulfill our customers' requirements. The semiconductor industry has historically been
characterized by wide fluctuations in the demand for, and supply of, its products. These fluctuations have resulted in circumstances when
supply of and demand for semiconductors has been widely out of balance. An industry wide semiconductor oversupply could result in
severe downward pricing pressure from customers. In a market with undersupply of manufacturing capacity, we would have to compete
with larger foundry and assembly customers for limited manufacturing resources. In such an environment, we may be unable to have our
products manufactured in a timely manner, at a cost that generates adequate gross profit or in sufficient quantities. Since we outsource all of
our manufacturing and generally have a single source of wafer supply, test, assembly and programming for our products, we are
particularly vulnerable to such supply shortages and capacity limitations. As a result, we may be unable to fulfill orders and may lose
customers. Any future industry wide oversupply or undersupply of semiconductors could therefore have a material adverse effect on our
business, results of operations and financial condition.
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We may be unable to successfully grow our business if we fail to compete effectively with others to attract and retain our executive officers,
and other key management or technical personnel.
We believe our future success depends upon our ability to attract and retain highly competent personnel. Our employees are at-
will and not subject to employment contracts. We could potentially lose the services of any of our senior management personnel at any time
due to a variety of factors that could include, without limitation, death, incapacity, military service, personal issues, retirement, resignation
or competing employers. Our ability to execute current plans could be adversely affected by such a loss. We may fail to attract and retain
qualified technical, sales, marketing and managerial personnel required to continue to operate our business successfully. Personnel with the
expertise necessary for our business are scarce and competition for personnel with proper skills is intense.
In addition, new hires frequently require extensive training before they achieve desired levels of productivity. Additionally,
attrition in personnel can result from, among other things, changes related to acquisitions, retirement and disability. We may not be able to
retain existing key technical, sales, marketing and managerial employees or be successful in attracting, developing or retaining other highly-
qualified technical, sales, marketing and managerial personnel, particularly at such times in the future as we may need to fill a key position.
If we are unable to continue to develop and retain existing executive officers or other key employees or are unsuccessful in attracting new
highly-qualified employees, our financial condition, cash flows, and results of operations could be materially and adversely affected.
We may have increasing difficulty attracting and retaining qualified outside board members.
The directors and management of publicly traded corporations are increasingly concerned with the extent of their personal
exposure to lawsuits and shareholder claims, as well as governmental and creditor claims that may be made against them in connection with
their positions with publicly held companies. Outside directors are becoming increasingly concerned with the availability of directors’ and
officers’ liability insurance to pay on a timely basis the costs incurred in defending shareholder claims. Directors’ and officers’ liability
insurance is expensive and difficult to obtain. The SEC and the NASDAQ Stock Market have also imposed higher independence standards
and certain special requirements on directors of public companies. Accordingly, it may become increasingly difficult to attract and retain
qualified outside directors to serve on our board of directors.
Our company’s global operations are subject to risks and uncertainties.
Most of our products are manufactured outside of the United States at manufacturing facilities operated by our suppliers in Asia
and South Asia.
A significant portion of our total revenue comes from sales to customers located outside the United States. We anticipate that
sales to customers located outside the United States will continue to represent a significant portion of our total revenue in future periods. In
addition, most of our domestic customers sell their products outside of North America, thereby indirectly exposing us to risks associated
with foreign commerce and economic instability. In addition to overseas sales offices, we have significant research and development
activities in India.
International operations are subject to certain risks inherent in conducting business outside the U.S., such as changes in currency
exchange rates, tax laws, price and currency exchange controls, export and import restrictions, environmental regulations, protection of
intellectual property rights, nationalization, expropriation and other governmental action. Accordingly, our operations and revenue are
subject to a number of risks associated with foreign commerce, including the following: (i) staffing and managing foreign offices;
(ii) managing foreign distributors; (iii) collecting amounts due; (iv) political and economic instability; (v) foreign currency exchange
fluctuations; (vi) changes in tax laws, import and export regulations, tariffs and freight rates; (vii) timing and availability of export licenses;
(viii) supplying products that meet local environmental regulations; and (ix) inadequate protection of intellectual property rights. In
addition, we incur costs in foreign countries that may be difficult to reduce quickly because of employee related laws and practices in those
foreign countries. Our global operations also may be adversely affected by political events and domestic or international terrorist events
and hostilities. Current events, including the United Kingdom’s expected exit from the European Union, potential changes in immigration
policies and tax reform proposals, create a level of uncertainty for multi-national companies.
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As U.S. companies continue to expand globally, increased complexity exists due to the possibility of renegotiated trade deals, revised
international tax law treaties, and changes to the U.S. corporate tax code. These uncertainties could have a material adverse effect on our
business and our results of operations and financial condition. As we continue to expand our business globally, our success will depend, in
part, on our ability to anticipate and effectively manage these and other risks.
Rising concern of international tariffs, including tariffs applied to goods traded between the United States and China, could materially and
adversely affect our business and results of operations.
Since the beginning of 2018, there has been increasing rhetoric, in some cases coupled with legislative or executive action, from
several U.S. and foreign leaders regarding tariffs against foreign imports of certain materials. More specifically, there have been three
rounds of U.S. tariffs on Chinese goods taking effect in July, August and September 2018 (some of which prompted retaliatory Chinese
tariffs on U.S. goods). The institution of trade tariffs both globally and between the U.S. and China specifically carries the risk of
negatively affecting China’s overall economic condition, which could have a negative impact on us as we derived and expect to continue to
derive a significant amount of revenue from China. Imposition of tariffs could cause a decrease in the sales of our products to customers
located in China or other customers selling to Chinese end users, which would directly impact our business and operating results.
Exchange rate fluctuations could adversely affect our company’s results of operations and financial condition.
We denominate sales of our products to foreign countries exclusively in U.S. dollars. As a result, any increase in the value of the
U.S. dollar relative to the local currency of a foreign country will increase the price of our products in that country so that our products
become relatively more expensive to customers in their local currency which may cause sales of our products in that foreign country to
decline. If the local currency of a foreign country in which we conduct business strengthens against the U.S. dollar, our payroll and other
local expenses will be higher, and since sales are transacted in U.S. dollars, would not be offset by any increase in revenue. To the extent
any such risks materialize, our business, results of operations and financial condition could be materially adversely affected.
Our solutions face competition from suppliers of ASSPs, suppliers of integrated application processors, low power FPGAs, low power
MCUs, suppliers of ASICs, suppliers of eFPGA IP, and suppliers of sensor algorithm software whose software is running on competitors’
devices.
We face competition from companies that offer ASSPs. While it is difficult to provide a unique solution through the use of
ASSPs, ASSPs generally are cost-effective standard products with short lead times. In certain design opportunities, ASSPs can be combined
to achieve system design objectives. Manufacturers of integrated application processors often integrate new features when they introduce
new products. A system designer could elect the use of an integrated processor that includes the features offered in our solutions and/or a
widely accepted feature of our solutions could be integrated into a competitor’s ASSP. Some vendors offer low power FPGAs that can be
adopted by a mobile device for hardware differentiation that is similar in functionality, physical size, power consumption and price to what
we offer with our programmable logic-based solutions. We also face competition from low power MCU companies. While MCUs cannot be
customized at the hardware level for product differentiation, they do have the ability to run custom software algorithms written in standard
C code, which may yield similar functionality as what we can provide with our products. Companies that supply ASICs, which may be
purchased for a lower price at higher volumes and typically have greater logic capacity, additional features and higher performance than
our products. In addition, we face competition from companies that provide sensor algorithm software, which may be licensed directly by
an OEM, or licensed for use through an MCU company. If we are unable to successfully compete with companies that supply ASSPs, lower
power FPGAs, MCUs, ASICs, eFPGA IP, or sensor algorithm software in any of the following areas, our business, results of operations
and financial condition will be materially adversely affected: (i) the development of new products, solutions and advanced manufacturing
technologies; (ii) the quality, power characteristics, performance characteristics, price and availability of devices, programming hardware
and software development tools; (iii) the ability to engage with companies that provide synergistic products and services, including
algorithms that may be preloaded into our device at configuration; (iv) the incorporation of industry standards in our products and solutions;
(v) the diversity of
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product offerings available to customers; and (vi) the quality and cost-effectiveness of design, development, manufacturing and marketing
efforts.
Our industry is in the midst of a consolidation phase which could result in stronger and better resourced competitors in the markets in
which the company competes.
Mergers and acquisitions activity is at a high level in the semiconductor industry, as large companies have perceived attractive
opportunities in today’s market to acquire new technologies and product lines by buying smaller companies. If our small and mid-sized
competitors become targets of M&A activity and some of them are actually acquired by larger companies with much greater resources than
us, we would face heightened competition that could result in lost sales and eroded margins.
We may not be able to achieve the anticipated synergies and benefits from business acquisitions, including our recent acquisition of
SensiML Corporation.
Part of our business strategy is to acquire businesses that we believe can complement our current business activities, both
financially and strategically. Acquisitions, including the SensiML Acquisition, involve many complexities, including, but not limited to,
risks associated with the acquired business’ past activities, difficulties in integrating personnel and human resource programs, integrating
technology systems and other infrastructures under the Company’s control, unanticipated expenses and liabilities, and the impact on our
internal controls and compliance with the regulatory requirements under the Sarbanes-Oxley Act of 2002. There is no guarantee that our
acquisitions will increase the profitability and cash flow of the Company, and our efforts could cause unforeseen complexities and
additional cash outflows, including financial losses. As a result, the realization of anticipated synergies or benefits from acquisitions may be
delayed or substantially reduced.
Litigation could adversely impact our consolidated financial position.
We have been and may be in the future involved in various litigation matters arising in the ordinary course of business,
including, but not limited to, litigation relating to employment matters, commercial transactions, intellectual property matters, contracts,
environmental matters and matters related to compliance with governmental regulations. Litigation is inherently uncertain and
unpredictable. The potential risks and uncertainties include, but are not limited to, such factors as the costs and expenses of litigation and
the time and attention required of management to attend to litigation. An unfavorable resolution of any particular legal claim or proceeding,
and/or the costs and expenses incurred in connection with a legal claim or proceeding, could have a material and adverse effect on our
results of operations and financial condition.
We may be unable to adequately protect our intellectual property rights and may face significant expenses as a result of future litigation.
Protection of intellectual property rights is crucial to our business, since that is how we keep others from copying our
innovations and those of third parties that are central to our existing and future products. From time to time, we receive letters alleging
patent infringement or inviting us to license other parties’ patents. We evaluate these requests on a case-by-case basis. These situations may
lead to litigation if we reject the offer to obtain the license.
In the past, we have been involved in litigation relating to our alleged infringement of third party patents or other intellectual
property rights. This type of litigation is expensive and consumes large amounts of management time and attention.
Because it is critical to our success that we continue to prevent competitors from copying our innovations, we intend to continue
to seek patent and trade secret protection for our products. The process of seeking patent protection can be long and expensive, and we
cannot be certain that any currently pending or future applications will actually result in issued patents or that, even if patents are issued,
they will be of sufficient scope or strength to provide meaningful protection or any commercial advantage to us. Furthermore, others may
develop technologies that are similar or superior to our technology or design around the patents we own. We also rely on trade secret
protection for our technology, in part through confidentiality agreements with our employees, consultants and other
24
third parties. However, these parties may breach these agreements and we may not have adequate remedies for any breach. In any case,
others may come to know about or determine our trade secrets through a variety of methods. In addition, the laws of certain territories in
which we develop, manufacture or sell our products may not protect our intellectual property rights to the same extent as the laws of the
United States.
The market price of our common stock may fluctuate significantly and could lead to securities litigation.
Stock prices for many companies in the technology and emerging growth sectors have experienced wide fluctuations that have
often been unrelated to the operating performance of such companies. In the past, securities class action litigation has often been brought
against companies following periods of volatility in the market price of its securities. In the future, we may be the subject of similar
litigation. Securities litigation could result in substantial costs and divert management’s attention.
We may engage in manufacturing, distribution or technology agreements that involve numerous risks, including the use of cash, erosion of
margins due to royalty obligations or revenue sharing and diversion of resources.
We have entered into and, in the future, intend to enter into agreements that involve numerous risks, including the use of
significant amounts of our cash; royalty obligations or revenue sharing; diversion of resources from other development projects or market
opportunities; our ability to collect amounts due under these contracts; and market acceptance of related products and solutions. If we fail to
recover the cost of these or other assets from the cash flow generated by the related products, our assets will become impaired and our
results of operations and financial condition could be materially adversely affected.
Our business is subject to the risks of earthquakes, other catastrophic events and business interruptions for which we may maintain limited
insurance.
Our operations and the operations of our suppliers are vulnerable to interruption by fire, earthquake, power loss, flood, terrorist
acts and other catastrophic events beyond our control. In particular, our headquarters are located near earthquake fault lines in the San
Francisco Bay Area. In addition, we rely on certain suppliers to manufacture our products and would not be able to qualify an alternate
supplier of our products for several quarters. Our suppliers often hold significant quantities of our inventories, which, in the event of a
disaster, could be destroyed. In addition, our business processes and systems are vulnerable to computer viruses, break-ins and similar
disruptions from unauthorized tampering. Any catastrophic event, such as an earthquake or other natural disaster, the failure of our
computer systems or networks, including due to computer viruses, security breaches, war or acts of terrorism, could significantly impair our
ability to maintain our records, pay our suppliers, or design, manufacture or ship our products and could subject us to third party liabilities.
The occurrence of any of these events could also affect our customers, distributors and suppliers and produce similar disruptive effects
upon their business. If there is an earthquake or other catastrophic event near our headquarters, our customers’ facilities, our distributors'
facilities or our suppliers’ facilities, our business could be seriously harmed.
We do not maintain sufficient business interruption and other insurance policies to compensate us for all losses that may occur.
Any losses or damages incurred by us as a result of a catastrophic event or any other significant uninsured loss could have a material
adverse effect on our business.
There may be some potential effects of system outages or data security breaches, which could adversely affect our operations, financial
results or reputation.
We face risks from electrical or telecommunications outages, computer hacking or other general system failure. We rely heavily
on our internal information and communications systems and on systems or support services from third parties to manage our operations
efficiently and effectively. Any of these are subject to failure. System-wide or local failures that affect our information processing could
have a material adverse effect on our business, financial condition, results of operations and cash flows. In addition, a system failure or data
security breach could also result in the unintentional disclosure of confidential information about us, our customers or our employees,
which could result in our incurring costs for remedial or preventative actions, damage our reputation with customers and reduce demand for
our products and services. Further, insurance coverage does not generally protect from
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normal wear and tear, which can affect system performance. Any applicable insurance coverage for an occurrence could prove to be
inadequate. Coverage may be or become unavailable or inapplicable to any risks then prevalent.
Our Certificate of Incorporation, Bylaws and Delaware law contain provisions that could discourage a takeover that is beneficial to
stockholders.
Provisions of our Certificate of Incorporation, our Bylaws and Delaware law could have the effect of
discouraging takeover attempts that certain stockholders might deem to be in their interest. These anti-takeover provisions may make us a
less attractive target for a takeover bid or merger, potentially depriving shareholders of an opportunity to sell their shares of common stock
at a premium over prevailing market prices as a result of a takeover bid or merger.
If we do not maintain compliance with the listing requirements of the Nasdaq Global Market, our common stock could be delisted, which
could, among other things, reduce the price of our common stock and the levels of liquidity available to our stockholders.
Our common stock is currently listed on the Nasdaq Global Market. In order to maintain that listing, we must satisfy minimum
financial and other continued listing requirements and standards, including those regarding director independence and independent
committee requirements, minimum stockholders' equity, minimum share price, and certain corporate governance requirements. There can
be no assurances that we will be able to comply with the applicable listing standards.
On January 18, 2019, we received a letter, or Notice, from the Listing Qualifications staff of The Nasdaq Stock Market LLC, or
Nasdaq, indicating that, based upon the closing bid price of our common stock for the last 30 consecutive business days, we no longer meet
the requirement of the Nasdaq Global Market to maintain a minimum bid price of $1 per share, as set forth in Nasdaq Listing Rule 5450(a)
(1).
In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we have been provided a period of 180 calendar days, or until July 17,
2019, in which to regain compliance. In order to regain compliance with the minimum bid price requirement, the closing bid price of our
stock must be at least $1 per share for a minimum of ten consecutive business days during this 180-day period. In the event that we do not
regain compliance within this 180-day period, we may be eligible to seek an additional compliance period of 180 calendar days if it meets
the continued listing requirement for market value of publicly held shares and all other initial listing standards for the Nasdaq Capital
Market, with the exception of the bid price requirement, and provides written notice to Nasdaq of its intent to cure the deficiency during this
second compliance period, by effecting a reverse stock split, if necessary. However, if it appears to the Nasdaq Staff that we will not be
able to cure the deficiency, or if we are otherwise not eligible, Nasdaq will provide notice to us that our common stock will be subject to
delisting.
Although the Notice does not result in the immediate delisting our common stock from the Nasdaq Global Market and we intend
to monitor the closing bid price of our common stock to allow a reasonable period for the price to rebound from its recent decline while
considering its available options to regain compliance, there can be no assurance that we will be able to regain compliance with the
minimum bid price requirement or maintain compliance with the other listing requirements.
Changes to existing accounting pronouncements or taxation rules or practices may cause adverse revenue fluctuations, affect our reported
financial results or how we conduct our business.
Generally accepted accounting principles in the United States, or GAAP, are promulgated by, and are subject to the
interpretation of the Financial Accounting Standards Board, or FASB, and the SEC. New accounting pronouncements or taxation rules and
varying interpretations of accounting pronouncements or taxation practices have occurred and may occur in the future. Any future changes
in accounting pronouncements or taxation rules or practices may have a significant effect on how we report our results and may even affect
our reporting of transactions completed before the change is effective. In addition, a review of existing or prior accounting practices may
result in a change in previously reported amounts. This change to existing rules, future changes, if any, or the
26
questioning of current practices may adversely affect our reported financial results, our ability to remain listed on the Nasdaq Global
Market, or the way we conduct our business and subject us to regulatory inquiries or litigation.
If, in the future, we conclude our internal control over financial reporting is not effective, investors could lose confidence in the reliability
of our financial statements, which could result in a decrease in the value of our common stock.
As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring public companies to include a
report of management on the companies’ internal control over financial reporting in their annual reports on Form 10-K, including an
assessment by management of the effectiveness of the filing company’s internal control over financial reporting. In addition, the
independent registered public accounting firm auditing a public company’s financial statements must attest to the effectiveness of the
company's internal control over financial reporting. There is a risk that in the future we may identify internal control deficiencies that
suggest that our controls are no longer effective. This could result in an adverse reaction in the financial markets due to a loss of confidence
in the reliability of our financial statements, which could cause the market price of our common stock to decline and make it more difficult
for us to finance our operations.
Both our customers and we are subject to laws, regulations and similar requirements, changes to which may adversely affect our business,
results of operations and financial condition.
Both our customers and we are subject to laws, regulations and similar requirements that affect our business, results of
operations and financial condition, including, but not limited to, the areas of commerce, import and export control, financial disclosures,
intellectual property, income and other taxes, anti-trust, anti-corruption, labor, environmental, health and safety. Our compliance in these
areas may be costly, especially in areas where there are inconsistencies between the various jurisdictions in which we operate. While we
have implemented policies and procedures to comply with laws and regulations, there can be no assurance that our employees, contractors,
suppliers or agents will not violate such laws and regulations or our policies. Any such violation or alleged violation could materially and
adversely affect our business, financial condition, cash flows and results of operations. Any changes or potential changes to laws,
regulations or similar requirements, or our ability to respond to these changes, may significantly increase our costs to maintain compliance
or result in our decision to limit our business, products or jurisdictions in which we operate, any of which could materially and adversely
affect our results of operations and financial condition. Federal and state regulatory agencies, including the United States Federal
Communications Commission and the various state public utility commissions and public service commissions, regulate most of our
domestic telecommunications customers. Similar government oversight also exists in the international market. While we may not be
directly affected by this legislation, such regulation of our customers may negatively impact our business. For instance, the sale of our
products may be affected by the imposition upon certain of our customers of common carrier tariffs and the taxation of telecommunications
services. These regulations are continuously reviewed and changed by the various governmental agencies. Changes in current or future
laws or regulations, in the United States or elsewhere, could materially and adversely affect our results of operations and financial
condition.
27
The Dodd-Frank Wall Street Reform and Consumer Protection Act includes provisions regarding certain minerals and metals,
known as conflict minerals, mined from the Democratic Republic of Congo and adjoining countries. These provisions require companies to
undertake due diligence procedures and report on the use of conflict minerals in its products, including products manufactured by third
parties. Compliance with these provisions has caused and will continue to cause us to incur costs to determine whether our supply chain is
conflict free and we may face difficulties if our suppliers are unwilling or unable to verify the source of their materials. Our ability to
source these minerals and metals may also be adversely impacted. In addition, our customers may require that we provide them with a
certification and our inability to do so may disqualify us as a supplier.
We have implemented import and export control procedures to comply with United States regulations but we are still exposed to potential
risks from import and export activity.
Our products, solutions, technology and software are subject to import and export control laws and regulations, which, in some
instances, may impose restrictions on business activities, or otherwise require licenses or other authorizations from agencies such as the
U.S. Department of State, U.S. Department of Commerce and U.S. Department of the Treasury. These restrictions may impact deliveries to
customers or limit development and manufacturing alternatives. We have import and export licensing and compliance procedures in place
for purposes of conducting our business consistent with U.S. and applicable international laws and regulations, and we periodically review
these procedures to maintain compliance with the requirements relating to import and export regulations. If we are not able to remain in
compliance with import and export regulations, we might be subject to investigation, sanctions or penalties by regulatory authorities. Such
penalties can include civil, criminal or administrative remedies such as loss of export privileges. We cannot be certain as to the outcome of
an evaluation, investigation, inquiry or other action or the impact of these items on our operations. Any such action could adversely affect
our financial results and the market price of our common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our principal administrative, sales, marketing, research and development and final testing facility is located in a building of
approximately 34,000 square feet in Sunnyvale, California. This facility is leased through March 2020. In October 2018, we submitted a
nine-month termination notice to the landlord to end the lease in July 2019. On February 13, 2019, we entered into an agreement to lease
approximately 24,164 square feet of premises located at 2220 Lundy Avenue, San Jose, California for a period of five years, effective April
15, 2019 to use as its new headquarters. In October 2018, the Company leased a facility for Research and Development in San Diego,
California, the lease of which expires in July 2020. On February 28, 2019, SensiML Corporation, our newly acquired subsidiary, entered
into an agreement to lease approximately 925 square feet of facility space in Beaverton, Oregon, which expires in March 2021. We lease a
9,400 square foot facility in Bangalore, India for the purpose of software development. This facility is leased through June 2021. We also
lease office space in Shanghai, China; in London, England; in Taipei, Taiwan; and in Seongnam City, South Korea. We believe that our
existing facilities are adequate for our current needs.
28
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are involved in legal actions arising in the ordinary course of business, including but not limited to
intellectual property infringement and collection matters. Absolute assurance cannot be given that third-party assertions will be resolved
without costly litigation in a manner that is not adverse to our financial position, results of operations or cash flows or without requiring
royalty or other payments in the future, which may adversely impact gross profit. We are not currently a party to any material pending legal
proceedings.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
29
PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock has been traded on the Nasdaq Global Market under the symbol “QUIK” since October 15, 1999, the date of
our initial public offering. The following table sets forth, for the periods indicated, the high and low closing sales prices for our common
stock, as reported on the Nasdaq Global Market:
Fiscal Year Ended December 30, 2018:
Fourth Quarter (through December 30, 2018)
Third Quarter (through September 30, 2018)
Second Quarter (through July 1, 2018)
First Quarter (through April 1, 2018)
Fiscal Year Ended December 31, 2017:
Fourth Quarter (through December 31, 2017)
Third Quarter (through October 1, 2017)
Second Quarter (through July 2, 2017)
First Quarter (through April 2, 2017)
Stockholders
High
Low
$
$
$
$
$
$
$
$
1.09 $
1.19 $
1.75 $
2.19 $
1.87 $
1.75 $
1.72 $
2.34 $
0.56
1.00
1.08
1.48
1.48
1.25
1.16
1.15
The closing price of our common stock on the Nasdaq Global Market was $0.78 per share on February 25, 2019. As of
February 25, 2019 there were 96,970,351 shares of common stock outstanding that were held of record by 164 stockholders. The actual
number of stockholders is greater than this number of holders of record since this number does not include stockholders whose shares are
held in trust by other entities.
Dividend Policy
We have never declared or paid any dividends on our capital stock. We currently expect to retain future earnings, if any, for use
in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future.
Equity Compensation Plan Information
The information required by this item regarding equity compensation plans is set forth under the caption "Equity Compensation
Plan Summary" in our Proxy Statement which information is incorporated by reference herein.
Stock Performance Graph
The following graph compares the cumulative total return to stockholders of our common stock from December 29, 2013 to
December 30, 2018 to the cumulative total return over such period of (i) the S&P 500 Index and (ii) the S&P Semiconductors Index. The
graph assumes that $100 was invested on December 29, 2013 in QuickLogic’s common stock and in each of the other two indices and the
reinvestment of all dividends, if any, through December 30, 2018
The information contained in the Performance Graph shall not be deemed to be “soliciting material” or to be “filed” with the
SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, except to the extent that QuickLogic specifically incorporates it by reference into any such
filing. The graph is presented in accordance with
30
SEC requirements. Stockholders are cautioned against drawing any conclusions from the data contained therein, as past results are not
necessarily indicative of future performance.
QuickLogic Corporation
S&P 500
S&P Semiconductor
12/29/2013 12/28/2014
1/3/2016
1/1/2017 12/31/2017
12/30/2018
100.00
100.00
100.00
82.90
113.69
134.87
29.27
115.26
136.05
36.01
129.05
174.08
45.08
157.22
237.31
19.71
150.33
222.16
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
31
ITEM 6. SELECTED FINANCIAL DATA
Statements of Operations:
Revenue
Cost of revenue
Gross profit
Operating expenses:
Research and development
Selling, general and administrative
Restructuring costs(1)
Loss from operations
Interest expense
Interest income and other expense, net
Loss before income taxes
Provision for income taxes
Net loss
Net loss per share:
Basic and diluted
Weighted average shares:
Basic and diluted
2018
Fiscal Years
2015
2016
2017
(in thousands, except per share amount)
2014
$
12,629 $
6,295
6,334
12,149 $
6,627
5,522
11,421 $
7,648
3,773
18,956 $
11,411
7,545
27,845
16,796
11,049
9,948
9,982
—
(13,596 )
(108 )
77
(13,627 )
152
(13,779 ) $
9,572
9,900
—
(13,950 )
(115 )
21
(14,044 )
87
(14,131 ) $
12,265
10,310
—
(18,802 )
(175 )
(106 )
(19,083 )
65
(19,148 ) $
14,144
10,619
295
(17,513 )
(82 )
(107 )
(17,702 )
146
(17,848 ) $
12,186
11,663
—
(12,800 )
(85 )
(126 )
(13,011 )
68
(13,079 )
(0.15 ) $
(0.18 ) $
(0.29 ) $
(0.32 ) $
(0.23 )
$
$
89,110
77,291
65,377
56,472
55,401
December 30,
2018
December 31,
2017
January 1,
2017
(in thousands)
January 3,
2016
December 28,
2014
Balance Sheet Data:
Cash and cash equivalents
Working capital
Total assets
Long-term obligations, excluding current portion
Total stockholders' equity
____________________
(1) We incurred restructuring costs of $295,000 and $181,000 in 2015. In 2015, we implemented a restructuring plan to re-align the
26,463 $
15,576 $
36,086 $
124 $
17,255 $
16,527 $
12,619 $
24,636 $
369 $
14,878 $
19,136 $
19,132 $
28,461 $
2,341 $
20,325 $
14,870 $
9,042 $
21,844 $
49 $
11,988 $
$
$
$
$
$
30,050
33,395
41,139
1,267
35,567
organization to support our sensor processing provider business model and growth strategy.
32
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations should be read in conjunction with the financial
statements and related notes included in this Annual Report on Form 10-K. This discussion may contain forward-looking statements based
upon current expectations that involve risks and uncertainties including those discussed under Part I, Item 1A, “Risk Factors.” These risks
and uncertainties may cause actual results to differ materially from those discussed in the forward-looking statements.
Overview
We develop low power, multi-core semiconductor platforms and IP for AI, voice and sensor processing. The solutions include
an eFPGA for hardware acceleration and pre-processing, and heterogeneous multi-core SoCs that integrate eFPGA with other processors
and peripherals. The SensiML Analytics Toolkit from our recently acquired wholly owned subsidiary, SensiM 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 the acquisition of SensiML, we now have an IoT AI software platform that includes SaaS subscriptions
for development, per unit license fees when deployed in production, and proof-of-concept services – all of which are also included in the
new product revenue category.
Our semiconductor 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, or
VEE, technology, and Display Power Optimizer, or DPO, technology; and (ii) implements commonly used mobile system interfaces, such
as Low Voltage Differential Signaling, or LVDS, Mobile Industry Processor Interface, or MIPI, and Secure Digital Input 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. In many cases, we deliver software algorithms
that have been optimized for use in a QuickLogic silicon platform.
Through the acquisition of SensiML, our core IP also includes the SensiML AI Toolkit that enables OEMs to develop AI
software for a broad array of resource-constrained time-series sensor endpoint applications. These include a wide range of consumer and
industrial sensing applications.
We also work with 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, or ODMs, we can amortize our Research and
Development, or R&D, investment over that set of OEMs or ODMs. There may also be cases when platform providers that intend to
33
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 are currently developed on 65nm, 40nm and 22nm process nodes. The licensable IP is generated by a
compiler tool that enables licensees to create an eFPGA block that they can integrate into their SoC without significant involvement by
QuickLogic. We believe this flow enables a scalable support model for QuickLogic.
In addition to working directly with our customers, we partner with other companies that are experts in certain technologies to
develop additional IP, reference platforms and system software to provide application solutions, particularly in the area of hardware
acceleration for AI-type applications. We also work with mobile processor and communications semiconductor device manufacturers and
companies that supply sensor, algorithms and applications. 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 a SoC company.
In order to grow our revenue from its current level, we depend upon increased revenue from our new products including existing
new product platforms, eFPGA IP and platforms currently in development. We expect our business growth to be driven mainly by our
silicon solutions, eFPGA IP and SensiML AI Software. Therefore, our revenue growth needs to be strong enough to enable us to sustain
profitability while we continue to invest in the development, sales and marketing of our new solution platforms, IP and software. New
products contributed 45% of total revenue for 2018, as compared to 48% in 2017 and 49% in 2016. We are expecting revenue growth from
eFPGA IP licensing and Quick AI starting in fiscal year 2019.
We continue to seek to expand our revenue, including pursuing high-volume sales opportunities in our target market segments,
by providing solutions incorporating IP, or industry standard interfaces. Our industry is characterized by intense price competition and by
lower margins as order volumes increase. While winning large volume sales opportunities will increase our revenue, we believe these
opportunities may decrease our gross profit as a percentage of revenue.
During 2018, we generated total revenue of $12.6 million, which represents a 4% increase from 2017. Our new product revenue
during 2018 was $5.7 million, which represents a 2% decrease from 2017, while our mature product revenue during 2018 was $6.9 million,
which represents a 9% increase from 2017. We shipped our new products into four of our targeted mobile market segments: Smartphones,
Wearables, Mobile Enterprise, and Tablets. We also started generating revenue from the new Artificial Intelligence or AI market in 2018.
Overall, we reported a net loss of $13.8 million for 2018 compared to a net loss of $14.1 million for 2017.
We have experienced net losses in the recent years and expect such losses to continue through at least the year ending December
29, 2019 as we continue to develop new products, applications and technologies. Whether we can achieve cash flow levels sufficient to
support our operations cannot be accurately predicted. Unless such cash flow levels are achieved in addition to the proceeds we received
from our recent sale of our equity securities, we may need to borrow additional funds or sell debt or equity securities, or some combination
thereof, to provide funding for our operations, and such additional funding may not be available on commercially reasonable terms, or at
all.
Critical Accounting Policies and 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
34
accounting policies as those that are most important to the portrayal of our financial condition and results of operations and require us to
make our most 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 including determination of the Stand-Alone Selling Price, or SSP,
for each distinct performance obligation, sales returns and allowances, valuation of inventories including identification of excess quantities
and product obsolescence, allowance for doubtful accounts, valuation of long-lived assets, measurement of stock-based compensation and
accounting for income taxes. We believe that we apply 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 our financial statements.
Revenue Recognition
We supply standard products that must be programmed before they can be used in an application. Our products may be
programmed by us, distributors, end-customers or third parties.
We adopted Accounting Standards Update, or ASU, No. 2014-09, Revenue from Contracts with Customers (Topic 606) and
related ASU No. 2016-08, ASU No. 2016-10, ASU No. 2016-12 and ASU No. 2016-20, which provide supplementary guidance, and
clarifications, effective January 1, 2018. We adopted ASC 606 using the modified retrospective method. The results for the reporting
period beginning after January 1, 2018, are presented in accordance with the new standard, although comparative information for the prior
year has not been restated and continues to be reported under the accounting standards and policies in effect for those periods. Adoption of
the new standard did not have a significant impact on the current period revenues or on the prior year Consolidated Financial Statements.
No transition adjustment was required to our retained earnings as of January 1, 2018. Under the new standard revenue is recognized as
follows:
Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the
consideration we expect to receive in exchange for those products or services.
We determine revenue recognition through the following steps:
•
•
•
•
•
Identification of the contract, or contracts, with a customer,
Identification of the performance obligations in the contract,
Determination of the transaction price,
Allocation of the transaction price to the performance obligations in the contract, and
Recognition of revenue when, or as, we satisfy a performance obligation.
As part of its assessment of each contract, the Company evaluates certain factors including the customer’s ability to pay, or
credit risk. For each contract, the Company considers the promise to transfer products, each of which is distinct, to be the identified
performance obligations. In determining the transaction price, the price stated on the purchase order is typically fixed and represents the
net consideration to which the Company expects to be entitled, and therefore there is no variable consideration. As the Company’s standard
payment terms are less than one year, the Company has elected, as a practical expedient, to not assess whether a contract has a significant
financing component. The Company allocates the transaction price to each distinct product based on its relative standalone selling price.
The product price as specified on the purchase order is considered the standalone selling price as it is an observable source that depicts the
price as if sold to a similar customer in similar circumstances.
Product Revenue
We generate most of our revenue by supplying standard hardware products, which must be programmed before they can be used
in an application. Our contracts with customers are generally for products only, and do not include other performance obligations such as
services, extended warranties or other material rights.
35
We recognize hardware product revenue at the point of time when control of products is transferred to the customers, when our
performance obligation is satisfied, which typically occurs upon shipment from our manufacturing site or our headquarters.
Intellectual Property and Software License Revenue
We also generate revenue from licensing IP, software tools and royalty from licensing our technology.
We recognize IP and Software License revenue at the point of time when the control of IP or software license has been
transferred.
Some of the IP and Software Licensing contracts with customers contain multiple performance obligations. For these contracts,
we account for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate
performance obligations on a relative standalone selling price basis. We determine the standalone selling prices based on our overall pricing
objectives, taking into consideration market conditions and other factors, including the value of our contracts, type of the customer,
customer tier, type of the technology used, customer demographics, geographic locations, and other factors.
Maintenance Revenue
We recognize revenue from maintenance ratably over the term of the underlying maintenance contract term. Renewals of
maintenance contracts create new performance obligations that are satisfied over the term with the revenues recognized ratably over the
term.
Royalty Revenue
We recognize royalty revenue when the later of the following events occurs: a) The subsequent sale or usage occurs; b) The
performance obligation to which some or all of the sales-based royalty has been allocated has been satisfied.
Deferred Revenue
Receivables are recognized in the period we ship the product. Payment terms on invoiced amounts are based on contractual
terms with each customer. When we receive consideration, or such consideration is unconditionally due, prior to transferring goods or
services to the customer under the terms of a sales contract, we record deferred revenue, which represents a contract liability. We recognize
deferred revenue as net sales once control of goods and/or services have been transferred to the customer and all revenue recognition
criteria have been met and any constraints have been resolved. We defer the product costs until recognition of the related revenue occurs.
Assets Recognized from Costs to Obtain a Contract with a Customer
We recognize an asset for the incremental costs of obtaining a contract with a customer if it expects the benefit of those costs to
be longer than one year. We have concluded that none of the costs we have incurred to obtain and fulfill our FASB Accounting Standards
Codification, or ASC, 606 contracts meet the capitalization criteria, and as such, there are no costs deferred and recognized as assets on the
consolidated balance sheet at December 30, 2018.
Practical Expedients and Exemptions
(i) Taxes collected from customers and remitted to government authorities and that are related to the sales of our products are
excluded from revenues.
(ii) Sales commissions are expensed when incurred because the amortization period would have been one year or less. These
costs are recorded in Selling, general and administrative expense in the Condensed Consolidated Statements of Income.
36
(iii) We do not disclose the value of unsatisfied performance obligations for (i) contracts with original expected lengths of one
year or less or (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for the
services performed.
We record allowance for sales returns. Amounts recorded for sales returns for the year ended December 30, 2018 were
$156,000.
Revenue Recognition Prior to the Adoption of ASC Topic No. 606 on January 1, 2018
We supply standard products which must be programmed before they can be used in an application. The Company's products
may be programmed by us, distributors, end-customers or third parties.
We recognize revenue as products are shipped if evidence of an arrangement exists, delivery has occurred, the sales price is
fixed or determinable, collection of the resulting receivable is reasonably assured and product returns are reasonably estimable. Revenue is
recognized upon shipment of programmed and unprogrammed parts to both OEM customers and distributors, provided that legal title and
risk of ownership have transferred. Parts held by distributors may be returned for quality reasons only under its standard warranty policy.
We record allowance for sales returns. Amounts recorded for sales returns were not material for the years ended December 30, 2018 and
December 31, 2017, and $93,000 for the year ended and January 1, 2017.
We account for our IP license revenues and related services in accordance with ASC No. 985-605, Software Revenue
Recognition. Revenues are recognized when persuasive evidence of an arrangement exists and no further obligation exists, delivery has
occurred, the license fee is fixed or determinable, and collection is reasonably assured. A license may be perpetual or time limited in its
application. Our IP license agreement contains multiple elements including post-contract customer support. For multiple element
arrangements involving software and other software-related deliverables, vendor-specific objective evidence of fair value, or VSOE, must
exist to allocate the total fee among all delivered and non-essential undelivered elements of the arrangement. If undelivered elements of the
arrangement are essential to the functionality of the product, revenue is deferred until the essential elements are delivered. If VSOE does
not exist for one or more non-essential undelivered elements, revenue is deferred until such evidence exists for the undelivered elements, or
until all elements are delivered, whichever is earlier. VSOE of each element is based on historical evidence of stand-alone sales of these
elements to third parties including substantive renewal rate as stated in the agreement. When VSOE does not exist for undelivered items,
the entire arrangement fee is recognized ratably over the performance period.
Cost of Revenue
We record all costs associated with its product sales in cost of revenue. These costs include the cost of materials, contract
manufacturing fees, shipping costs and quality assurance. Cost of revenue also includes indirect costs such as warranty, excess and obsolete
inventory charges, general overhead costs and depreciation.
Valuation of Inventories
Inventories are stated at the lower of standard cost or net realizable value. Standard cost approximates actual cost on a first-in,
first-out basis. We routinely evaluate quantities and values of our inventories in light of current market conditions and market trends and
record reserves for quantities in excess of demand and product obsolescence. The evaluation may take into consideration historic usage,
expected demand, anticipated sales price, the stage in the product life cycle of our customers’ products, new product development
schedules, the effect new products might have on the sale of existing products, product obsolescence, customer design activity, customer
concentrations, product merchantability and other factors. Market conditions are subject to change. Actual consumption of inventories
could differ from forecasted demand and this difference could have a material impact on our gross margin and inventory balances based on
additional provisions for excess or obsolete inventories or a benefit from inventories previously written down. We also regularly review the
cost of inventories against estimated market value and record a lower of cost or market reserve for inventories that have a cost in excess of
estimated market value, which could have a material impact on our gross margin and inventory balances based on additional write-downs to
net realizable value or a benefit from inventories previously written down.
37
Our semiconductor products have historically had an unusually long product life cycle and obsolescence has not been a
significant factor in the valuation of inventories. However, as we pursue opportunities in the mobile market and continue to develop new
products, we believe our new product life cycle will be shorter, which could increase the potential for obsolescence. A significant decrease
in demand could result in an increase in excess inventory on hand. Although we make every effort to ensure the accuracy of our forecasts of
future product demand, any significant unanticipated changes in demand or frequent new product developments could have a significant
impact on the value of our inventory and our results of operations.
Valuation of Long-Lived Assets
We assess annually whether the value of identifiable long-lived assets, including property and equipment, have been impaired
and when events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable. Our
assessment of possible impairment is based on our ability to recover the carrying value of an asset or asset group from their expected future
pre-tax cash flows, undiscounted and without interest charges, of the related operations. If these cash flows are less than the carrying value
of the asset or asset group, we recognize an impairment loss for the difference between estimated fair value and carrying value, and the
carrying value of the related assets is reduced by this difference. The measurement of impairment requires management to estimate future
cash flows and the fair value of long-lived assets. Based on this analysis, there are no significant impairments to our long-lived assets.
Measurement of Stock-Based Compensation
We account for stock-based compensation under the provisions of the amended authoritative guidance and related
interpretations, which require the measurement and recognition of expense related to the fair value of stock-based compensation awards.
The fair value of stock-based compensation awards is measured at the grant date and re-measured upon modification, as appropriate.
Determining the appropriate fair value model and calculating the fair value of stock-based awards at the date of grant require judgment.
We use the Black-Scholes option pricing model to estimate the fair value of employee stock options and rights to purchase
shares under our 2009 Stock Plan and 2009 Employee Stock Purchase Plan, or ESPP, consistent with the provisions of the amended
authoritative guidance. This fair value is expensed on a straight-line basis over the requisite service period of the award. Using the Black-
Scholes pricing model requires us to develop highly subjective assumptions, including the expected term of awards, expected volatility of
our stock, expected risk-free interest rate and expected dividend rate over the term of the award. Our expected term of awards is based
primarily on our historical experience with similar grants. Our expected stock price volatility for both stock options and ESPP shares is
based on the historic volatility of our stock, using the daily average of the opening and closing prices and measured using historical data
appropriate for the expected term. The risk-free interest rate assumption approximates the risk-free interest rate of a Treasury Constant
Maturity bond with a maturity approximately equal to the expected term of the stock option or ESPP shares.
In addition to the assumptions used in the Black-Scholes pricing model, the amended authoritative guidance requires that we
recognize compensation expense only for awards ultimately expected to vest; therefore, we are required to develop an estimate of the
historical pre-vest forfeiture experience and apply this to all stock-based awards. The fair value of restricted stock awards, or RSAs, and
restricted stock units, or RSUs, is based on the closing price of our common stock on the date of grant. RSA and RSU awards which vest
with service are expensed over the requisite service period. RSAs and RSU awards that are expected to vest based on the achievement of a
performance goal are expensed over the estimated vesting period. We regularly review the assumptions used to compute the fair value of
our stock-based awards and we revise our assumptions as appropriate. In the event that assumptions used to compute the fair value of our
stock-based awards are later determined to be inaccurate or if we change our assumptions significantly in future periods, stock-based
compensation expense and our results of operations could be materially impacted. See Note 11 to the Consolidated Financial Statements.
38
Accounting for Income Taxes
As part of the process of preparing our financial statements, we are required to estimate our income taxes in each of the
jurisdictions in which we operate. This process involves estimating our actual current tax exposure together with assessing temporary
differences resulting from different tax and accounting treatment of items, such as deferred revenue, allowance for doubtful accounts, the
impact of equity awards, depreciation and amortization, and employee-related accruals. These differences result in deferred tax assets and
liabilities, which are included on our balance sheets. We must then assess the likelihood that our deferred tax assets will be recovered from
future taxable income. To the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we
establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the
statements of operations.
Significant management judgment is required in determining our provision for income taxes, deferred tax assets, liabilities and
any valuation allowance recorded against our net deferred tax assets. Our deferred tax assets, consisting primarily of net operating loss
carryforwards, depreciation and amortization, amounted to $55.0 million, tax effected, as of the end of 2018. In evaluating our ability to
recover our deferred tax assets within the jurisdiction from which they arise, we consider all available positive and negative evidence,
including scheduled reversals of deferred tax liabilities, uncertainty of projecting future taxable income and results of recent operations. As
of December 30, 2018, we had federal and state income tax net operating loss, or NOL, carryforwards of approximately $157.4 million and
$63.6 million, respectively, which will expire at various dates from 2019 through 2038. Federal NOL generated in 2018 can be carried
forward indefinitely. We had research credit carryforwards of approximately $4.1 million for federal and $4.6 million for state income tax
purposes as of December 30, 2018. If not utilized, the federal carryforwards will expire at various dates from 2019. The California credit
can be carried forward indefinitely. We believe that it is more likely than not that the deferred tax assets and benefits from these federal and
state NOL and credit carryforwards will not be realized. In recognition of this risk, we have recorded a valuation allowance of $55.0
million, tax-effected, as of the end of 2018, due to uncertainties related to our ability to utilize our U.S. deferred tax assets before they
expire.
Results of Operations
The following table sets forth the percentage of revenue for certain items in our statements of operations for the periods
indicated:
Statements of Operations:
Revenue
Cost of revenue
Gross profit
Operating expenses:
Research and development
Selling, general and administrative
Loss from operations
Interest expense
Interest income and other expense, net
Loss before income taxes
Provision for income taxes
Net loss
2018
Fiscal Years
2017
2016
100 %
50 %
50 %
79 %
79 %
(108 )%
(1 )%
1 %
(108 )%
1 %
(109 )%
100 %
55 %
45 %
79 %
81 %
(115 )%
(1 )%
— %
(116 )%
1 %
(117 )%
100 %
67 %
33 %
107 %
90 %
(164 )%
(2 )%
(1 )%
(167 )%
1 %
(168 )%
39
Impact of inflation and product price chnages on our revenue and on income from continuing operations was immaterial in 2018,
2017 and 2016.
Comparison of Fiscal Years 2018 and 2017
Revenue. The table below sets forth the changes in revenue for fiscal year ended December 30, 2018, as compared to fiscal year
ended December 31, 2017 (in thousands, except percentage data):
Revenue by product family (1):
New products
Mature products
Total revenue
Fiscal Years
2018
2017
Amount
% of Total
Revenues
Amount
% of Total
Revenues
Year-Over-Year
Change
$
5,735
6,894
$ 12,629
45 % $
55 %
5,853
6,296
100 % $ 12,149
48 % $
52 %
100 % $
(118 )
598
480
(2 )%
9 %
4 %
(1)
For all periods presented: New products include all products manufactured on 180 nanometer or smaller semiconductor processes.
eFPGA IP license revenue is also included in new product revenue. Mature products include all products produced on semiconductor
processes larger than 180 nanometers.
The 2% decrease in new product revenue in 2018 was primarily due to lower display bridge and connectivity product revenue,
which was partially offset by an increase in sensor processing solutions revenue and Quick AI revenue. We started generating revenue from
Quick AI in the fourth quarter of 2018. The increase in mature product revenue was due primarily to increased orders from our customers in
the defense, aerospace, test and instrumentation sectors.
Gross Profit. The table below sets forth the changes in gross profit for fiscal year 2018 as compared to fiscal year 2017 (in
thousands, except percentage data):
Revenue
Cost of revenue
Gross Profit
Fiscal Years
2018
2017
% of Total
Revenues
Amount
% of Total
Revenues
100 % $
50 %
50 % $
12,149
6,627
5,522
100 % $
55 %
45 % $
Amount
$
12,629
6,295
6,334
$
Year-Over-Year
Change
480
(332 )
812
4 %
(5 )%
15 %
The increase in gross profit and gross profit percentage was primarily due to (i) the increase of revenue from new sensor
processing, Quick AI, and high margin matured product revenue, and (ii) the decrease of low margin display bridge solution revenue. The
sale of inventories that were previously written-off was $218,000 and $112,000 in 2018 and 2017, respectively. Inventory written-down in
2018 was $386,000 compared to $232,000 in 2017.
Our semiconductor products have historically had a long product life cycle and obsolescence has not been a significant factor in
the valuation of inventories. However, as we pursue opportunities in the mobile market and continue to develop new CSSPs and products,
we believe our product life cycle will be shorter, which will increase the potential for obsolescence. In general, our standard manufacturing
lead times are longer than the binding forecasts we receive from customers.
40
Operating Expenses. The table below sets forth the changes in operating expenses for fiscal year 2018 as compared to fiscal year
2017 (in thousands, except percentage data):
R&D expenses
SG&A expenses
Total operating expenses
$
Fiscal Years
2018
2017
% of Total
Revenues
Amount
% of Total
Revenues
79 % $
79 %
158 % $
9,572
9,900
19,472
79 % $
81 %
160 % $
Amount
$
9,948
9,982
19,930
Year-Over-Year
Change
376
82
458
4 %
1 %
2 %
Research and Development Expenses. Our research and development, or R&D, expenses consist primarily of personnel,
overhead and other costs associated with sensor hub and algorithm development, programmable logic design, CSSP design, SoC software,
AI and eFPGA development. R&D expenses were $9.9 million and $9.6 million in 2018 and 2017, respectively, which represented 79% of
revenue for those periods. The $376,000 increase in R&D expenses in 2018 as compared to 2017 is attributable to costs associated with
eFPGA and Quick AI product development.
Selling, General and Administrative Expenses. 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. SG&A
expenses were $10.0 million and $9.9 million in 2018 and 2017, respectively, which represented 79% and 81% of revenue for those periods.
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 2018 as compared to
2017 (in thousands, except percentage data):
Interest expense
Interest income and other expense, net
Fiscal Years
Year-Over-Year
Change
2018
2017
Amount
Percentage
$
$
(108 ) $
77
(31 ) $
(115 ) $
21
(94 ) $
7
56
63
(6 )%
267 %
(67 )%
The change in interest income and other expense, net was due primarily to gain on sale of old equipment.
Provision for Income Taxes. The table below sets forth the changes in provision for income taxes in 2018 as compared to 2017
(in thousands, except percentage data):
Income tax provision
Fiscal Years
Year-Over-Year
Change
2018
2017
Amount
Percentage
$
152 $
87 $
65
75 %
The income tax expense for 2018 and 2017 primarily relates to our foreign operations which are cost-plus entities.
As of the end of 2018, our ability to utilize our U.S. deferred tax assets in future periods is uncertain and, accordingly, we have
recorded a full valuation allowance against the related U.S. deferred tax assets. We will continue to assess the realizability of deferred tax
assets in future periods.
Comparison of Fiscal Years 2017 and 2016
Revenue. The table below sets forth the changes in revenue for fiscal year ended December 31, 2017 as compared to fiscal year
ended January 1, 2017 (in thousands, except percentage data):
41
Revenue by product family (1):
New products
Mature products
Total revenue
Fiscal Years
2017
2016
Amount
% of Total
Revenues
Amount
% of Total
Revenues
Year-Over-Year
Change
$
$
5,853
6,296
12,149
48 % $
52 %
100 % $
5,622
5,799
11,421
49 % $
51 %
100 % $
231
497
728
4 %
9 %
6 %
(1)
For all periods presented: New products include all products manufactured on 180 nanometer or smaller semiconductor processes.
eFPGA IP license revenue is also included in new product revenue. Mature products include all products produced on
semiconductor processes larger than 180 nanometers.
The 4% increase in new product revenue in 2017 was primarily due to eFPGA license revenue and revenue from sensor
processing solutions and Connectivity products, offset by a decrease in revenue from Display Bridge Solutions. In 2017, shipments of
ArcticLink III were $3.8 million compared to $4.4 million in 2016. Revenue from connectivity products was $1.4 million in 2017 compared
to $1.0 million in 2016. Revenue generated from Samsung accounted for 40% of our new product revenue and 19% of our total revenue in
2017. The increase in mature product revenue is due primarily to increased orders from our customers in the defense, aerospace, test and
instrumentation sectors. We anticipate that our revenue from tablets and mature products will be likely to decline over time.
Gross Profit. The table below sets forth the changes in gross profit for fiscal year 2017 as compared to fiscal year 2016 (in
thousands, except percentage data):
Revenue
Cost of revenue
Gross Profit
Fiscal Years
2017
2016
% of Total
Revenues
Amount
% of Total
Revenues
100 % $
55 %
45 % $
11,421
7,648
3,773
100 % $
67 %
33 % $
Amount
$
12,149
6,627
5,522
$
Year-Over-Year
Change
728
(1,021 )
1,749
6 %
(13 )%
46 %
The increase in gross profit and gross profit percentage was primarily due to the increase of (i) high margin mature product
revenue by $497,000 and (ii) new eFPGA license revenue of $475,000. The sale of inventories that were previously written-off was
$112,000 and $106,000in 2017 and 2016, respectively. Inventory written-down in 2017 was $232,000 compared to $296,000 in 2016.
Operating Expenses. The table below sets forth the changes in operating expenses for fiscal year 2017 as compared to fiscal year
2016 (in thousands, except percentage data):
R&D expenses
SG&A expenses
Total operating expenses
$
Fiscal Years
2017
2016
% of Total
Revenues
Amount
% of Total
Revenues
79 % $
81 %
160 % $
12,265
10,310
22,575
107 % $
90 %
197 % $
Amount
$
9,572
9,900
19,472
Year-Over-Year
Change
(2,693 )
(410 )
(3,103 )
(22 )%
(4 )%
(14 )%
Research and Development Expenses. Our R&D expenses consist primarily of personnel, overhead and other costs associated
with engineering process improvements, programmable logic design, CSSP design and software development. R&D expenses were $9.6
million and $12.3 million in 2017 and 2016, respectively, which represented 79% and 107% of revenue for those periods. The $2.7 million
decrease in R&D expenses in 2017 as compared to 2016 is attributable to operational realignment measures implemented in the second half
of 2016, which resulted in a decrease of compensation related cost by $1.8 million, and engineering prototype equipment cost by $630,000.
42
Selling, General and Administrative Expenses. Our SG&A expenses consist primarily of personnel and related overhead costs
for sales, marketing, finance, administration, human resources and legal functions. SG&A expenses were $9.9 million and $10.3 million in
2017 and 2016, respectively, which represented 81% and 90% of revenue for those periods. The $410,000 decrease in SG&A expenses in
2017 as compared to 2016 is attributable primarily to the decrease in compensation related cost of $751,000, attributable to cost reduction
measures implemented in 2016, which was partially offset by higher consulting costs.
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 2017 as compared to 2016 (in thousands, except percentage data):
Interest expense
Interest income and other expense, net
Fiscal Years
Year-Over-Year
Change
2017
2016
Amount
Percentage
$
$
(115 ) $
21
(94 ) $
(175 ) $
(106 )
(281 ) $
60
127
187
(34 )%
(120 )%
(67 )%
The decrease in interest expense by $60,000 in 2017 compared to 2016 was due to lower line of credit balances during 2017. The
change in interest income and other expense, net was due primarily to higher interest income from short-term investments and also due to
foreign exchange fluctuations.
Provision for Income Taxes. The table below sets forth the changes in provision for (benefit from) income taxes for 2017 as
compared to 2016 (in thousands, except percentage data):
Income tax provision
Fiscal Years
Year-Over-Year
Change
2017
2016
Amount
Percentage
$
87 $
65 $
22
34 %
The income tax expense for 2017 and 2016 primarily relates to our foreign operations which are cost-plus entities.
As of the end of 2017, our ability to utilize our U.S. deferred tax assets in future periods is uncertain and, accordingly, we have
recorded a full valuation allowance against the related U.S. deferred tax assets. 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, capital and operating leases, a
revolving line of credit and cash flows from operations. The line of credit facility with Silicon Valley Bank, which matured on September
24, 2018 was fully paid off in July 2018.
On September 28, 2018, we entered into a Loan and Security Agreement, or Loan Agreement, with Heritage Bank of Commerce
or Heritage Bank. The Loan Agreement provided for, among other things, a revolving line of credit facility, or Revolving Facility, with
aggregate commitments of $9,000,000. The maturity date for loans under the Revolving Facility is September 28, 2020. Loans under the
Revolving Facility will bear interest at a rate equal to one half of one 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 the Heritage Bank to replace in its entirety the Loan and Security Agreement entered on September 28, 2018. The
Amended and Restated Loan Agreement increases the Revolving Facility from $9,000,000 to $15,000,000. Further, the Amended and
Restated Loan Agreement eliminates the requirement of maintaining at all times Remaining Months Liquidity of nine months and replaces
with simpler covenant of maintaining at least $3,000,000 in unrestricted cash at Heritage Bank. We were in compliance with all
43
loan covenants under the Amended and Restated Loan Agreement as of the end of the current reporting period. As of December 30, 2018,
we had $15.0 million of outstanding revolving line of credit with an interest rate of 6%.
In May 2018, we issued an aggregate of 13.5 million shares of common stock,. and warrants to purchase up to an aggregate of
5.4 million shares of common stock in an underwritten public offering at a combined price of $1.15 per Unit. We received total net
proceeds of $13.9 million from the offering. The common warrants are exercisable any time for a period of 60 months from the date of
issuance on May 29, 2018, and are exercisable at a price of $1.38 per share.
In March 2017, we issued 11.3 million shares of common stock at a price of $1.50 per share, $0.001 par value. We received net
proceeds of approximately $15.2 million, after deducting underwriting commissions and other offering-related expenses.
We used the net proceeds from these public offerings for working capital, to accelerate the development of next generation
products and for general corporate purposes.
Over the longer term, we anticipate that the generation of sales from our new product offerings, existing cash and cash
equivalents, together with financial resources from our revolving line of credit 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 line of credit will expire in
September 2020 and we would need to renew this line of credit or find an alternative lender prior to the expiration 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 line of credit or obtain
alternative financing on the acceptable terms. 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.
We were in compliance with all loan covenants as of the end of the current reporting period. As of December 30, 2018, we had
$15.0 million of outstanding revolving line of credit with an interest rate of 6%.
As of December 30, 2018, there was no material difference between the fair value and the carrying amount of capital software
leasing arrangements.
As of December 30, 2018, most of our cash and cash equivalents were invested in Heritage Bank Money Market account. As of
December 30, 2018, our interest-bearing debt consisted of $424,000 outstanding under capital leases and $15.0 million outstanding under
our revolving line of credit. See Note 5 to the Consolidated Financial Statements for details.
Cash balances held at our foreign subsidiaries were approximately $656,000 and $950,000 at December 30, 2018 and
December 31, 2017, 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 which affect our liquidity, capital resources and 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):
Net cash (used in) operating activities
Net cash (used in) investing activities
Net cash provided by financing activities
2018
Fiscal Year
2017
$
(12,638 ) $
(288 )
22,862
(12,938 ) $
(642 )
15,237
2016
(15,259 )
(1,954 )
12,947
44
Net Cash from Operating Activities
In 2018, net cash used in operating activities was $12.6 million, and resulted primarily from a net loss of $13.8 million, which
was offset by $3.6 million in non-cash charges. These non-cash charges included write-downs of inventories in the amount of $386,000 to
reflect excess quantities, depreciation and amortization of our long-lived assets of $1.3 million and stock-based compensation of $1.9
million. In addition, changes in working capital accounts used cash of $2.4 million as a result of an increase in accounts receivable of $1.3
million, an increase in gross inventory of $662,000, and an increase in other assets of $879,000, partially offset by an increase in accrued
liabilities of $235,000 and an increase in trade payables of $223,000.
In 2017, net cash used in operating activities was $12.9 million, and resulted primarily from a net loss of $14.1 million, which
was offset by $3.1 million in non-cash charges. These non-cash charges included write-downs of inventories in the amount of $232,000 to
reflect excess quantities, depreciation and amortization of our long-lived assets of $1.4 million and stock-based compensation of $1.4
million. In addition, changes in working capital accounts used cash of $1.9 million as a result of an increase in accounts receivable of
$86,000, an increase in gross inventory of $1.8 million, and a decrease of accounts payable of $145,000, partially offset by an increase in
accrued liabilities of $72,000.
In 2016, net cash used in operating activities was $15.3 million, and resulted primarily from a net loss of $19.1 million, which
was offset by $3.6 million in non-cash charges. These non-cash charges included write-downs of inventories in the amount of $296,000 to
reflect excess quantities, depreciation and amortization of our long-lived assets of $1.3 million and stock-based compensation of $1.6
million. In addition, changes in working capital accounts provided cash of $88,000 as a result of a decrease in accounts receivable of
$762,000, a decrease of gross inventory $565,000, and an increase of accrued liabilities of $124,000, partially offset by a decrease of
accounts payable of $1.3 million and a decrease of deferred revenue of $26,000.
Net Cash from Investing Activities
Net cash used for investing activities in 2018 was $288,000, primarily for capital expenditures to acquire manufacturing
equipment and software, which was partially offset by proceeds from the sale of old equipment.
Net cash used for investing activities in 2017 was $642,000, primarily for capital expenditures to acquire manufacturing
equipment and software.
Net cash used for investing activities in 2016 was $2 million, primarily for capital expenditures to acquire mask sets for our new
products and other manufacturing equipment and software.
Net Cash from Financing Activities
In 2018, net cash provided by financing activities was $22.9 million, resulting from the additional borrowing of $9.0 million
under the line of credit, net cash proceeds of $13.9 million from our common stock offering in May 2018 and proceeds of $676,000 from
the issuance of common shares to employees under our equity plans, net of taxes paid related to net settlement of equity awards of
$308,000. These proceeds were partially offset by payments of $407,000 under the terms of our capital software lease obligations.
In 2017, net cash provided by financing activities was $15.2 million, resulting from the proceeds of $15.2 million from our stock
offering in March 2017 and proceeds of $352,000 from the issuance of common shares to employees under our equity plans, net of taxes
paid related to net settlement of equity awards of $198,000. These proceeds were partially offset by payments of $344,000 under the terms
of our capital software lease obligations.
In 2016, net cash provided by financing activities was $12.9 million, resulting from the additional borrowing of $4.0 million
under the line of credit, proceeds of $8.8 million from our stock offering in March 2016 and proceeds of $424,000 from the issuance of
common shares to employees under our equity plans, net of taxes paid related to net settlement of equity awards of $179,000. These
proceeds were partially offset by payments of $280,000 under the terms of our capital software lease obligations.
45
We require substantial cash to fund our business. However, we believe that our existing cash and cash equivalents, together with
available financial resources from the revolving line of credit facility will be sufficient to satisfy our operations and capital expenditures
over the next twelve months. Our revolving line of credit will expire in September 2020, and we would need to renew this line of credit or
find an alternative lender prior to the expiration 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. After the next
twelve months, our cash requirements will depend on many factors, including our level of revenue and gross profit, the market acceptance
of our existing and new products, the levels at which we maintain inventories and accounts receivable, costs of securing access to adequate
manufacturing capacity, new product development efforts, capital expenditures and the level of our operating expenses. In order to satisfy
our longer term liquidity requirements, we may be required to raise additional equity or debt financing. There can be no assurance that
financing will be available at commercially acceptable terms or at all.
Contractual Obligations and Commercial Commitments
The following table summarizes our non-cancelable contractual obligations and commercial commitments as of the end of 2018
and the effect such obligations and commitments are expected to have on our liquidity and cash flows in future fiscal periods (in
thousands):
Contractual cash obligations:
Operating leases
Wafer purchases(1)
Other purchase commitments
Total contractual cash obligations
Other commercial commitments(2):
Revolving line of credit
Capital software lease obligations
Total commercial commitments
Total contractual obligations and commercial
commitments(3)
Payments Due by Period
Total
Less than 1 year
1-3 Years
4-5 Years
More than
5 Years
$
2,814 $
22
978
3,814
816 $
22
931
1,769
15,000
424
15,424
15,000
316
15,316
1,061 $
—
47
1,108
—
108
108
831 $
—
—
831
—
—
—
106
106
—
$
19,238 $
17,085 $
1,216 $
831 $
106
(1) Certain of our wafer manufacturers require us to forecast wafer starts several months in advance. We are committed to take delivery
of and pay for a portion of forecasted wafer volume.
(2) Other commercial commitments are included as liabilities on our consolidated balance sheets as of the end of 2018.
(3) Does not include unrecognized tax benefits of $2.2 million as of the end of 2018. See Note 7 of the Consolidated Financial
Statements.
Concentration of Suppliers
We depend on a limited number of contract manufacturers, subcontractors, and suppliers for wafer fabrication, assembly,
programming and testing of our devices, 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. These subcontract manufacturers
produce products for other companies and we must place orders in advance of expected delivery. 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, and our ability to respond to changes in demand is limited by these suppliers’ ability to provide products with the quantity, quality,
cost and timeliness that we require. 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. Increased demand from other companies could
result in these subcontract manufacturers allocating available capacity to customers that are larger or have long-term
46
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. 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 Consolidated Financial Statements for a full description of recent accounting pronouncements, including the
expected dates of adoption and estimated effects on financial condition and results of operations, which is incorporated herein by reference.
47
ITEM 7A. QUANTITATIVE AND QUALITATIVE 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% change in interest rates during 2018 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 cost of manufacturing are transacted in U.S. dollars. 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 27%, 25% and 18% of total operating expenses in 2018, 2017 and 2016, respectively. A majority of
these foreign expenses were incurred in India, the United Kingdom, Taiwan and Korea. A currency exchange rate fluctuation of 10% would
have caused our operating expenses to change by approximately $528,000 in 2018, $486,000 in 2017 and $398,000 in 2016.
48
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm-Moss Adams LLP
Consolidated Balance Sheets as of December 30, 2018 and December 31,2017
Consolidated Statements of Operations for the Fiscal Years 2018, 2017 and 2016
Consolidated Statements of Cash Flows for the Fiscal Years 2018, 2017 and 2016
Consolidated Statements of Stockholders’ Equity for the Fiscal Years 2018, 2017 and 2016
Notes to Consolidated Financial Statements
Page
50
52
53
54
55
56
49
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of
QuickLogic Corporation:
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Quicklogic Corporation (the “Company”) as of December 30, 2018 and
December 31, 2017, the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in
the period ended December 30, 2018, and the related notes and schedules (collectively referred to as the “consolidated financial
statements”). We also have audited the Company’s internal control over financial reporting as of December 30, 2018, based on criteria
established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial
position of the Company as of December 30, 2018 and December 31, 2017, and the consolidated results of its operations and its cash flows
for each of the three years in the period ended December 30, 2018, in conformity with accounting principles generally accepted in the
United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of December 30, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for revenue recognition in
the year ended December 30, 2018 due to the adoption of Accounting Standards Codification Topic No. 606.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management Report on Internal Control over Financial Reporting included in Item 9A. Our responsibility is to express an opinion on the
Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our
audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and
are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or
fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the
consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits
also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on the assessed risk. Our
50
audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide
a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Moss Adams LLP
San Francisco, California
March 15, 2019
We have served as the Company’s auditor since 2016.
51
QUICKLOGIC CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value amount)
ASSETS
Current assets:
Cash and cash equivalents
Restricted cash
Accounts receivable, net of allowances for doubtful accounts of $0
Inventories
Other current assets
Total current assets
Property and equipment, net
Other assets
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving line of credit
Trade payables
Accrued liabilities
Current portion of capital software lease obligations
Total current liabilities
Long-term liabilities:
Capital software lease obligations, less current portion
Other long-term liabilities
Total liabilities
Commitments (Note 12)
Stockholders' equity:
December 30,
2018
December 31,
2017
$
$
$
26,363 $
100
2,209
3,836
1,775
34,283
1,449
354
36,086 $
15,000 $
1,488
1,903
316
18,707
108
16
18,831
16,527
—
925
3,559
997
22,008
2,375
253
24,636
6,000
1,437
1,653
299
9,389
355
14
9,758
Preferred stock, $0.001 par value; 10,000 shares authorized; no shares
issued or outstanding
Common stock, $0.001 par value; 200,000 and 100,000 shares authorized;
95,513 and 80,536 shares issued and outstanding as of December 30,
2018 and December 31, 2017, respectively
Additional paid-in capital
Accumulated deficit
Total stockholders' equity
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
—
—
95
284,974
(267,814 )
17,255
36,086 $
80
268,833
(254,035 )
14,878
24,636
The accompanying notes form an integral part of these Consolidated Financial Statements.
52
QUICKLOGIC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Statements of Operations:
Revenue
Cost of revenue
Gross profit
Operating expenses:
Research and development
Selling, general and administrative
Loss from operations
Interest expense
Interest income and other expense, net
Loss before income taxes
Provision for income taxes
Net loss
Net loss per share:
Basic and diluted
Weighted average shares:
Basic and diluted
$
$
$
2018
Fiscal Years
2017
2016
12,629 $
6,295
6,334
9,948
9,982
(13,596 )
(108 )
77
(13,627 )
152
(13,779 ) $
12,149 $
6,627
5,522
9,572
9,900
(13,950 )
(115 )
21
(14,044 )
87
(14,131 ) $
11,421
7,648
3,773
12,265
10,310
(18,802 )
(175 )
(106 )
(19,083 )
65
(19,148 )
(0.15 ) $
(0.18 ) $
(0.29 )
89,110
77,291
65,377
Note: Net Loss equals to comprehensive loss for the fiscal years 2018, 2017 and 2016
The accompanying notes form an integral part of these Consolidated Financial Statements.
53
QUICKLOGIC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash used in operating
activities:
2018
Fiscal Years
2017
2016
$
(13,779 ) $
(14,131 ) $
(19,148 )
Depreciation and amortization
Stock-based compensation
Write-down of inventories
Write-off of equipment
Gain on disposal of assets
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Other assets
Trade payables
Accrued liabilities
Deferred income
Other long-term liabilities
Net cash used in operating activities
Cash flows from investing activities:
Capital expenditures for property and equipment
Proceeds on sale of assets
Net cash used in investing activities
Cash flows from financing activities:
Payment of capital software lease obligations
Proceeds from line of credit
Repayment of line of credit
Proceeds from issuance of common stock
Stock issuance costs
Taxes paid related to net settlement of equity awards
Net cash provided by financing activities
Net increase (decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at the beginning of the period
Cash, cash equivalents, and restricted cash at the end of the period
Supplemental disclosures of cash flow information:
Interest paid
Income taxes paid
Supplemental schedule of non-cash investing and financing
activities :
Capital software lease obligation to finance capital
expenditures
Purchase of equipment included in accounts payable
1,276
1,901
386
5
(62 )
(1,284 )
(662 )
(879 )
223
235
—
2
(12,638 )
(351 )
63
(288 )
(407 )
36,000
(27,000 )
16,215
1,373
1,441
232
12
-
(86 )
(1,774 )
103
(145 )
72
—
(35 )
(12,938 )
(642 )
-
(642 )
(344 )
18,000
(18,000 )
17,550
(1,638 )
(308 )
22,862
9,936
16,527
26,463 $
(1,771 )
(198 )
15,237
1,657
14,870
16,527 $
89 $
171 $
106 $
157 $
424 $
5 $
654 $
436 $
$
$
$
$
$
1,332
1,584
296
368
-
762
565
305
(1,337 )
124
(26 )
(84 )
(15,259 )
(1,954 )
-
(1,954 )
(280 )
4,000
—
10,603
(1,197 )
(179 )
12,947
(4,266 )
19,136
14,870
183
128
209
—
The accompanying notes form an integral part of these Consolidated Financial Statements.
54
QUICKLOGIC CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Balance at January 3, 2016
Common stock issued under stock plans and
employee stock purchase plans
Common stock offering, net of issuance costs
Stock-based compensation
Net loss
Balance at January 1, 2017
Common stock issued under stock plans and
employee stock purchase plans
Common stock offering, net of issuance costs
Stock-based compensation
Net loss
Balance at December 31, 2017
Common stock issued under stock plans and
employee stock purchase plans
Common stock offering, net of issuance costs
Stock-based compensation
Net loss
Balance at December 30, 2018
Common Stock at
Par Value
Shares
Amount
56,904 $
57 $
Additional
Paid-In
Capital
241,024 $ (220,756 ) $
Accumulated
Deficit
Total
Stockholders'
Equity
1,230
10,000
—
—
68,134
1,069
11,333
—
—
80,536
1,463
13,514
—
—
95,513 $
1
10
—
—
68
1
11
—
—
80
423
8,793
1,584
—
251,824
—
—
(19,148 )
(239,904 )
350
15,218
1,441
—
268,833
—
—
—
(14,131 )
(254,035 )
1
14
—
—
95 $
352
13,888
1,901
—
—
—
—
(13,779 )
284,974 $ (267,814 ) $
20,325
424
8,803
1,584
(19,148 )
11,988
351
15,229
1,441
(14,131 )
14,878
353
13,902
1,901
(13,779 )
17,255
The accompanying notes form an integral part of these Consolidated Financial Statements.
55
NOTE 1-THE COMPANY AND BASIS OF PRESENTATION
QuickLogic Corporation, ("QuickLogic", the "Company"), was founded in 1988 and reincorporated in Delaware in 1999. The
Company enables Original Equipment Manufacturers or OEMs, to maximize battery life for highly differentiated, immersive user
experiences with Smartphone, Wearable, Hearable, Tablet and Internet-of-Things or IoT devices. QuickLogic delivers these benefits
through industry leading ultra-low power customer programmable System on Chip or SoC semiconductor solutions, embedded software,
and algorithm solutions for always-on voice and sensor processing, and enhanced visual experiences. The Company is a fabless
semiconductor provider of comprehensive, flexible sensor processing solutions, ultra-low power display bridges, and ultra-low power Field
Programmable Gate Arrays, or FPGAs.
QuickLogic’s fiscal year ends on the Sunday closest to December 31. Fiscal years 2018, 2017 and 2016 ended on December 30,
2018, December 31, 2017 and January 1, 2017, respectively.
Liquidity
The Company has financed its operations and capital investments through sale of common stock, capital and operating leases, a
revolving line of credit and cash flows from operations. As of December 30, 2018, the Company’s principal sources of liquidity consisted
of cash and cash equivalents of $26.5 million and $15.0 million line of credit with Heritage Bank of Commerce (“Heritage Bank”). The
Line of credit facility with Silicon Valley Bank, which matured on September 24, 2018 was fully paid off in July 2018.
On September 28, 2018, the Company entered into a Loan and Security Agreement (the "Loan Agreement") with Heritage Bank.
The Loan Agreement provided for, among other things, a revolving line of credit facility (the “Revolving Facility”) with aggregate
commitments of $9,000,000 . The maturity date for loans under the Revolving Facility is September 28, 2020. Loans under the Revolving
Facility will bear interest at a rate equal to one half of one 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, the Company entered into the Amended and Restated Loan Agreement with Heritage Bank to replace in
its entirety the Loan Agreement entered on September 28, 2018. The Amended and Restated Loan Agreement increases the Revolving
Facility from $9,000,000 to $15,000,000. Further, the Amended and Restated Loan Agreement eliminates the requirement of maintaining at
all times Remaining Months Liquidity of nine months and replaces with a new covenant of maintaining at least $3,000,000 in unrestricted
cash at Heritage Bank. The Company was in compliance with all loan covenants as of the end of the current reporting period. As of
December 30, 2018, the Company had $15.0 million of outstanding revolving line of credit with an interest rate of 6%.
In May 2018, the Company issued an aggregate of 13,513,510 shares of common stock, $0.001 par value and warrants to
purchase up to an aggregate of 5,405,404 shares of common stock in an underwritten public offering. The common stock and warrants were
issued in units (the “Units”), with each Unit consisting of (i) one share of common stock and (ii) a warrant to purchase 0.40 of a share of
common stock, at a combined price of $1.15 per Unit. We received total net proceeds from the offering of $13.9 million, net of
underwriting discounts and other offering expenses of $1.6 million. The Company uses the net proceeds for working capital, to accelerate
the development of next generation products and for general corporate purposes. The Company may also use a portion of the net proceeds
to acquire and/or license technologies and acquire and/or invest in businesses when the opportunity arises. See Note 8 to the Consolidated
Financial Statements for more details.
The common stock warrants are exercisable any time for a period of 60 months from the date of issuance on May 29, 2018,
and are exercisable at a price of $1.38 per share. The estimated grant date fair value of the common stock warrants was $0.57 per warrant
and was calculated based on the following assumptions used in the Black-Scholes model: expected term of 5 years, risk-free interest rate of
2.58%, expected volatility of 52.75% and expected dividend of zero.
56
In March 2017, the Company issued 11.3 million shares of common stock at a price of $1.50 per share, $0.001 par value. The
Company received net proceeds of approximately $15.2 million, after deducting underwriting commissions and other offering-related
expenses. The Company used the net proceeds for working capital, to accelerate the development of next generation products and for
general corporate purpose.
The Company currently uses its cash to fund its capital expenditures and operating losses. Based on past performance and current
expectations, the Company believes that its existing cash and cash equivalents, together with available financial resources from the
Revolving Facility with Heritage Bank will be sufficient to fund its operations and capital expenditures and provide adequate working
capital for the next twelve months. The Company’s Revolving Facility with Heritage Bank will expire in September 2020 and the Company
would need to renew this line of credit or find an alternative lender prior to the expiration date. Further, any violations of debt covenants
during 2019 will restrict the Company’s access to any additional cash draws from the Revolving Facility, and may require immediate
repayment of the outstanding debt amounts. Management believes that it is probable that the Company will be able to either renew the
Revolving Facility or obtain alternative financing on the acceptable terms.
Various factors affect the Company’s liquidity, including, among others: the level of revenue and gross profit as a result of the
cyclicality of the semiconductor industry; the conversion of design opportunities into revenue; market acceptance of existing and new
products including solutions based on its ArcticLink® and PolarPro® solution platforms; fluctuations in revenue as a result of product end-
of-life; fluctuations in revenue as a result of the stage in the product life cycle of its customers’ products; costs of securing access to and
availability of adequate manufacturing capacity; levels of inventories; wafer purchase commitments; customer credit terms; the amount and
timing of research and development expenditures; the timing of new product introductions; production volumes; product quality; sales and
marketing efforts; the value and liquidity of its investment portfolio; changes in operating assets and liabilities; the ability to obtain or
renew debt financing and to remain in compliance with the terms of existing credit facilities; the ability to raise funds from the sale of
equity in the Company; the issuance and exercise of stock options and participation in the Company’s employee stock purchase plan; and
other factors related to the uncertainties of the industry and global economics.
Over the longer term, the Company anticipates that sales generated from its new product offerings, existing cash and cash
equivalents, together with financial resources from its Revolving Facility with Heritage Bank, assuming renewal of the Revolving Facility
or the Company entering into a new debt agreement with an alternative lender prior to the expiration of the revolving line of credit in
September 2020, 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 consolidated financial statements have been prepared in accordance with Generally Accepted Accounting Principles, in the
United States of America or US GAAP, and the applicable rules and regulations of the Securities and Exchange Commission, or SEC, and
include the accounts of QuickLogic and its wholly-owned subsidiaries. See Exhibit 21 for the listing of wholly-owned subsidiaries. All
intercompany accounts and transactions have been eliminated.
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
57
and losses from the foreign currency transactions of these subsidiaries are recorded as interest income and other expense, net in the
statements of operations.
Use of Estimates
The preparation of these 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 contingent assets and liabilities and
the reported amounts of revenue and expenses during the period. Actual results could differ from those estimates, particularly in relation to
revenue recognition; determination of the Stand Alone Selling Price, or SSP, for each distinct performance obligation; the allowance for
doubtful accounts; sales returns; valuation of investments; valuation of long-lived assets; valuation of inventories including identification of
excess quantities, market value and obsolescence; measurement of stock-based compensation awards; accounting for income taxes and
estimating accrued liabilities.
Concentration of Risk
The Company’s accounts 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 generally does not
require collateral. See Note 11 for information regarding concentrations associated with accounts receivable and revenue.
NOTE 2-SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents
The Company considers all short-term, highly liquid investments with an original or a remaining maturity at purchase of ninety
days or less to be cash equivalents. The Company’s investment portfolio included in cash equivalents is generally comprised of investments
that meet high credit quality standards. The Company’s investment portfolio consists of money market accounts and funds. Restricted cash
represents amounts pledged as cash security related to the Silicon Valley Bank credit cards.
Fair Value
The guidance for the fair value option for financial assets and financial liabilities provides companies the irrevocable option to
measure many financial assets and liabilities at fair value with changes in fair value recognized in earnings or equity. The Company has not
elected to measure any financial assets or liabilities at fair value that were not previously required to be measured at fair value.
Foreign Currency Transactions
All of the Company’s sales and cost of manufacturing are transacted in U.S. dollars. The Company conducts a portion of its
research and development activities in India and has sales and marketing activities in various countries outside of the United States. Most of
these international expenses are incurred in local currency. Foreign currency transaction gains and losses, which are not significant, are
included in interest income and other expense, net, as they occur. Operating expenses denominated in foreign currencies were
approximately 27%, 25% and 18% of total operating expenses in 2018, 2017 and 2016 respectively. The Company incurred a majority of
these foreign currency expenses in India, the United Kingdom, Taiwan and Korea in 2018, 2017 and 2016. The Company has not used
derivative financial instruments to hedge its exposure to fluctuations in foreign currency and, therefore, is susceptible to fluctuations in
foreign exchange gains or losses in its results of operations in future reporting periods.
Inventories
In accordance with the Financial Accounting Standards Board, or FASB Accounting Standards Update, or ASU No. 2015-11,
Inventory (Topic 330): Simplifying the Measurement of Inventory, which was adopted by the Company in the first quarter of 2017,
inventories are stated at the lower of standard cost or net realizable value.
58
Standard cost approximates actual cost on a first-in, first-out basis. The Company routinely evaluates quantities and values of its inventories
in light of current market conditions and market trends and records reserves for quantities in excess of demand and product obsolescence.
The evaluation, which inherently involves judgments as to assumptions about expected future demand and the impact of market conditions
on these assumptions, takes into consideration historic usage, expected demand, anticipated sales price, the stage in the product life cycle
of its customers’ products, new product development schedules, the effect new products might have on the sale of existing products,
product obsolescence, customer design activity, customer concentrations, product merchantability and other factors. Market conditions are
subject to change. Actual consumption of inventories could differ from forecast demand, and this difference could have a material impact
on the Company’s gross margin and inventory balances based on additional provisions for excess or obsolete inventories or a benefit from
inventories previously written down. The Company also regularly reviews the cost of inventories against estimated net realizable value and
records a lower of cost or net realizable value reserve for inventories that have a cost in excess of estimated net realizable value (previously
market value), which could have a material impact on the Company’s gross margin and inventory balances based on additional write-downs
to net realizable value or a benefit from inventories previously written down.
The Company’s semiconductor products have historically had an unusually long product life cycle and obsolescence has not
been a significant factor in the valuation of inventories. However, as the Company pursues opportunities in the mobile market and
continues to develop new solutions and products, the Company believes its product life cycle will be shorter which could increase the
potential for obsolescence. A significant decrease in demand could result in an increase in excess inventory on hand. Although the
Company makes every effort to ensure the accuracy of its forecasts of future product demand, any significant unanticipated changes in
demand or frequent new product developments could have a significant impact on the value of its inventory and its results of operations.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is calculated on a
straight-line basis over the estimated useful lives of the assets, generally one to seven years. Amortization of leasehold improvements and
capital leases is computed on a straight-line basis over the shorter of the lease term or the estimated useful lives of the assets, generally one
to seven years.
Long-Lived Assets
The Company reviews the recoverability of its long-lived assets, such as property and equipment, annually and when events or
changes in circumstances occur that indicate that the carrying value of the asset or asset group may not be recoverable. The assessment of
possible impairment is based on the Company’s ability to recover the carrying value of the asset or asset group from the expected future
pre-tax cash flows, undiscounted and without interest charges, of the related operations. If these cash flows are less than the carrying value
of the asset or asset group, an impairment loss is recognized for the difference between the estimated fair value and the carrying value, and
the carrying value of the related assets is reduced by this difference. The measurement of impairment requires management to estimate
future cash flows and the fair value of long-lived assets. During 2018, 2017 and 2016 the Company wrote-off equipment with a net book
value of $5,000, $12,000 and $368,000, respectively.
Licensed Intellectual Property
The Company licenses intellectual property that is incorporated into its products. Costs incurred under license agreements prior
to the establishment of technological feasibility are included in research and development expense as incurred. Costs incurred for
intellectual property once technological feasibility has been established and that can be used in multiple products are capitalized as a long-
term asset. Once a product incorporating licensed intellectual property has production sales, the amount is amortized over the estimated
useful life of the asset, generally up to five years.
59
Revenue Recognition after adoption of Accounting Standards Codification (“ASC”) Topic N0. 606
The Company adopted ASC Topic No. 606 and related ASUs, which provide supplementary guidance, and clarifications,
effective January 1, 2018. The Company adopted using the modified retrospective approach. As a result, the Company is required to
disclose the accounting policies in effect prior to January 1, 2018, as well as the policies it has applied starting January 1, 2018. The results
for the reporting period beginning after January 1, 2018 are presented in accordance with the new standard, although comparative
information for the prior year has not been restated and continues to be reported under the accounting standards and policies in effect for
those periods. Adoption of the new standard did not have a significant impact on the current period revenues or on the prior year
Consolidated Financial Statements. No transition adjustment was required to be recorded as of January 1, 2018. Under the new standard
revenue is recognized as follows:
Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the
consideration the Company expects to receive in exchange for those products or services.
The Company determines revenue recognition through the following steps:
•
•
•
•
•
Identification of the contract, or contracts, with a customer,
Identification of the performance obligations in the contract,
Determination of the transaction price,
Allocation of the transaction price to the performance obligations in the contract and
Recognition of revenue when, or as, the Company satisfies a performance obligation.
As part of its assessment of each contract, the Company evaluates certain factors including the customer’s ability to pay, or
credit risk. For each contract, the Company considers the promise to transfer products, each of which is distinct, to be the identified
performance obligations. In determining the transaction price, the price stated on the purchase order is typically fixed and represents the
net consideration to which the Company expects to be entitled, and therefore there is no variable consideration. As the Company’s standard
payment terms are less than one year, the Company has elected, as a practical expedient, to not assess whether a contract has a significant
financing component. The Company allocates the transaction price to each distinct product based on its relative standalone selling price.
The product price as specified on the purchase order is considered the standalone selling price as it is an observable source that depicts the
price as if sold to a similar customer in similar circumstances.
Product Revenue
The Company generates most of its revenue by supplying standard hardware products, which must be programmed before they
can be used in an application. The Company’s contracts with customers are generally for product only, and do not include other
performance obligations such as services, extended warranties or other material rights.
The Company recognizes hardware product revenue at the point of time when control of products is transferred to the
customers, when the Company’s performance obligation is satisfied, which typically occurs upon shipment from the Company’s
manufacturing site or its headquarters.
60
Intellectual Property and Software License Revenue
The Company also generates revenue from licensing their intellectual property or IP, software tools and royalty from licensing its
technology.
The Company recognizes IP and Software License revenue at the point of time when the control of IP or software license has
been transferred.
Some of the IP and Software Licensing contracts with customers contain multiple performance obligations. For these contracts,
the Company accounts for individual performance obligations separately if they are distinct. The transaction price is allocated to the
separate performance obligations on a relative standalone selling price basis. We determine the standalone selling prices based on our
overall pricing objectives, taking into consideration market conditions and other factors, including the value of our contracts, type of the
customer, customer tier, type of the technology used, customer demographics, geographic locations, and other factors.
Maintenance Revenue
The Company recognizes revenue from maintenance ratably over the term of the underlying maintenance contract term.
Renewals of maintenance contracts create new performance obligations that are satisfied over the term with the revenues recognized
ratably over the term.
Royalty Revenue
The Company recognizes royalty revenue when the later of the following events occurs: (a) The subsequent sale or usage
occurs. (b) The performance obligation to which some or all of the sales-based royalty has been allocated has been satisfied.
Deferred Revenue
Receivables are recognized in the period the Company ships the product. Payment terms on invoiced amounts are based on
contractual terms with each customer. When the Company receives consideration, or such consideration is unconditionally due, prior to
transferring goods or services to the customer under the terms of a sales contract, the Company records deferred revenue, which represents
a contract liability. The Company recognizes deferred revenue as net sales once control of goods and/or services have been transferred to
the customer and all revenue recognition criteria have been met and any constraints have been resolved. The Company defers the product
costs until recognition of the related revenue occurs.
Assets Recognized from Costs to Obtain a Contract with a Customer
The Company recognizes an asset for the incremental costs of obtaining a contract with a customer if it expects the benefit of
those costs to be longer than one year. The Company has concluded that none of the costs it has incurred to obtain and fulfill its ASC 606
contracts meet the capitalization criteria, and as such, there are no costs deferred and recognized as assets on the consolidated balance sheet
at December 30, 2018.
Practical expedients and exemptions
(i) Taxes collected from customers and remitted to government authorities and that are related to the sales of the Company’s
products are excluded from revenues.
(ii) Sales commissions are expensed when incurred because the amortization period would have been one year or less. These
costs are recorded in Selling, general and administrative expense in the Condensed Consolidated Statements of Income.
(iii) The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with original expected
lengths of one year or less or (ii) contracts for which the Company recognizes revenue at the amount to which it has the right to invoice for
the services performed.
61
The Company records allowance for sales returns. Amounts recorded for sales returns for the year ended December 30, 2018
were $156,000.
Revenue Recognition Prior to the Adoption of ASC Topic No. 606 on January 1, 2018
The Company supplies standard products which must be programmed before they can be used in an application. The Company’s
products may be programmed by us, distributors, end-customers or third parties.
The Company recognizes revenue as products are shipped if evidence of an arrangement exists, delivery has occurred, the sales
price is fixed or determinable, collection of the resulting receivable is reasonably assured and product returns are reasonably estimable.
Revenue is recognized upon shipment of programmed and unprogrammed parts to both OEM customers and distributors, provided that
legal title and risk of ownership have transferred. Parts held by distributors may be returned for quality reasons only under its standard
warranty policy. The Company records allowance for sales returns. Amounts recorded for sales returns were not material for the year ended
December 31, 2017, and $93,000 for the year ended and January 1, 2017.
The Company accounts for its Intellectual Property or IP license revenues and related services in accordance with Financial
Accounting Standard Board or FASB Accounting Standards Codification or ASC No. 985-605, Software Revenue Recognition. Revenues
are recognized when persuasive evidence of an arrangement exists and no further obligation exists, delivery has occurred, the license fee is
fixed or determinable, and collection is reasonably assured. A license may be perpetual or time limited in its application. The Company’s IP
license agreement contains multiple elements including post-contract customer support. For multiple element arrangements involving
software and other software-related deliverables, vendor-specific objective evidence of fair value (“VSOE”) must exist to allocate the total
fee among all delivered and non-essential undelivered elements of the arrangement. If undelivered elements of the arrangement are
essential to the functionality of the product, revenue is deferred until the essential elements are delivered. If VSOE does not exist for one or
more non-essential undelivered elements, revenue is deferred until such evidence exists for the undelivered elements, or until all elements
are delivered, whichever is earlier. VSOE of each element is based on historical evidence of stand-alone sales of these elements to third
parties including substantive renewal rate as stated in the agreement. When VSOE does not exist for undelivered items, the entire
arrangement fee is recognized ratably over the performance period.
Cost of Revenue
The Company records all costs associated with its product sales in cost of revenue. These costs include the cost of materials,
contract manufacturing fees, shipping costs and quality assurance. Cost of revenue also includes indirect costs such as warranty, excess and
obsolete inventory charges, general overhead costs and depreciation.
Warranty Costs
The Company warrants finished goods against defects in material and workmanship under normal use for twelve months from
the date of shipment. The Company’s liability is limited to the cost of repair or replacement of the defective part. The Company does not
consider activities related to such warranties to be a separate performance obligation under ASC 606. The terms and conditions of sale
generally do not allow for refunds or product returns other than for warranty repairs. The Company does not have significant product
warranty related costs or liabilities.
Advertising
Costs related to advertising and promotion expenditures are charged to “Selling, general and administrative” expense in the
consolidated statements of operations as incurred. Costs related to advertising and promotion expenditures were $93,000 in 2018, $95,000
in 2017, and $51,000 in 2016.
Stock-Based Compensation
The Company accounts for stock-based compensation under the provisions of the amended authoritative guidance, and related
interpretations which require the measurement and recognition of expense related to the fair
62
value of stock-based compensation awards. The fair value of stock-based compensation awards is measured at the grant date and re-
measured upon modification, as appropriate. The Company uses the Black-Scholes option pricing model to estimate the fair value of
employee stock options and rights to purchase shares under the Company’s 1999 Employee Stock Purchase Plan, or ESPP, consistent with
the provisions of the amended authoritative guidance. The fair value of restricted stock awards, or RSAs, and restricted stock units, or
RSUs, is based on the closing price of the Company’s common stock on the date of grant. Equity compensation awards which vest with
service are expensed on a straight-line basis over the requisite service period. Service based Performance awards are expensed on a
straight-line basis over the vesting period. If performance conditions are other than service, an accelerated method of amortization is used,
which treats each vesting tranche as a separate award over the expected life of the unit. The Company regularly reviews the assumptions
used to compute the fair value of its stock-based awards and it will revise its assumptions as appropriate. In the event that assumptions used
to compute the fair value of its stock-based awards are later determined to be inaccurate or if the Company changes its assumptions
significantly in future periods, stock-based compensation expense and the results of operations could be materially impacted. See Note 10
for further details.
Accounting for Income Taxes
The Company is required to estimate its income taxes in each of the jurisdictions in which the Company operates. This process
involves estimating the Company’s actual current tax exposure together with assessing temporary differences resulting from different tax
and accounting treatment of items, such as deferred revenue, allowance for doubtful accounts, the impact of equity awards, depreciation
and amortization and employee related accruals. These differences result in deferred tax assets and liabilities, which are included on the
Company’s balance sheets. The Company must then assess the likelihood that its deferred tax assets will be recovered from future taxable
income and to the extent the Company believes that recovery is not likely, it must establish a valuation allowance.
Significant management judgment is required in determining the Company’s provision for income taxes, the Company’s
deferred tax assets and liabilities and any valuation allowance recorded against the Company's net deferred tax assets. The Company’s
deferred tax assets, consisting primarily of net operating loss carryforwards, amounted to $55.0 million tax effected as of the end of 2018.
The Company has also recorded a valuation allowance of $54.9 million, tax effected, as of the end of 2018 due to uncertainties related to
the Company’s ability to utilize its U.S. deferred tax assets before they expire. In making such determination, the Company considers all
available positive and negative evidence, including future reversals of existing taxable temporary differences, ability to project future
taxable income, and results of recent operations. If the Company determines that it would be able to realize its deferred tax assets in the
future in excess of its net recorded amount, the Company would make an adjustment to the deferred tax assets valuation allowance, which
would reduce its provision for income taxes.
The Company accounts for uncertainty in income taxes using a two-step approach for
recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight
of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related
appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of
being realized upon settlement. The Company classifies the liability for unrecognized tax benefits as current to the extent that it anticipates
payment (or receipt) of cash within one year. Interest and penalties related to uncertain tax positions are recognized in the provision for
income taxes. Accrued interest and penalties are included within the related tax liability line in the Consolidated Balance Sheet.
63
Concentration of Credit and Suppliers
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and
cash equivalents and accounts receivable. Cash and cash equivalents are maintained with high quality institutions. The Company’s accounts
receivables are denominated in U.S. dollars and are derived primarily from sales to customers located in North America, Europe and Asia
Pacific. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. See Note 12 for
information regarding concentrations associated with accounts receivable.
The Company depends on a limited number of contract manufacturers, subcontractors, and suppliers for wafer fabrication,
assembly, programming and test of its devices, and for the supply of programming equipment, and these services are typically provided by
one supplier for each of the Company’s devices. The Company generally purchases these single or limited source services through standard
purchase orders. Because the Company relies on independent subcontractors to perform these services, it cannot directly control its product
delivery schedules, costs or quality levels. The Company’s future success also depends on the financial viability of its independent
subcontractors.
Comprehensive Income (Loss)
Comprehensive income (loss) includes all temporary changes in equity (net assets) during a period from non-owner sources. The
Company’s comprehensive loss equaled to net loss for all periods presented.
New Accounting Pronouncements
Recently Adopted Accounting Pronouncements:
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash
Receipts and Cash Payments. This update clarifies how certain cash receipts and cash payments are presented and classified in the
statement of cash flows. This ASU is effective for public business entities for fiscal years beginning after December 15, 2017, and for
interim periods therein with early adoption permitted and must be applied retrospectively to all periods presented. The Company adopted
this Accounting Standard effective January 1, 2018. The Company has complied with all presentation and classification requirements
relating to the adoption of this ASU.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity transfers of assets other than
inventory. This update removes the requirement under which the income tax consequences of intra-entity transfers are deferred until the
assets are ultimately sold to an outside party, except for transfers of inventory. The tax consequences of such transfers would be recognized
in tax expense when the transfers occur. The standard is effective for annual reporting periods beginning after December 15, 2017, and
interim periods within those annual periods. The Company adopted this Accounting Standard effective January 1, 2018 and determined that
the adoption of ASU No. 2016-16 had no impact on the consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18 , Statement of Cash Flows (Topic 230), which provides guidance on how
restricted cash or restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period
and end-of-period total amounts shown on the statement of cash flows. The amendments in this Update are effective for public business
entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the
amendments are effective for fiscal years beginning after December 15, 2018, and has complied with all presentation and classification
requirements relating to the restricted cash in accordance with the new standard.
In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718). ASU No. 2017-09 provides
clarification on when modification accounting should be used for changes to the terms or conditions of a share-based payment award. This
ASU does not change the accounting for modifications but clarifies that modification accounting guidance should only be applied if there is
a change to the value, vesting conditions or award classification and would not be required if the changes are considered non-substantive.
The amendments of
64
this ASU are effective for reporting periods beginning after December 15, 2017. The Company adopted this Accounting Standard effective
January 1, 2018 and determined that the adoption of ASU No. 2017-09 had no impact on the consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted:
In February 2016, the FASB issued ASU No. 2016-02, Leases. The new standard establishes a right-of-use or ROU model that
requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases
will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The
new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.
The FASB subsequently issued the following amendments to ASU No. 2016-02, which have the same effective date and
transition date of ASU No. 2016-02, Leases and which we collectively refer to as the new leasing standards:
•
•
ASU No. 2018-10, Codification Improvements to Topic 842, Leases, which amends certain narrow aspects of the guidance
issued in ASU N0. 2016-02.
ASU No. 2018-11, Leases (Topic 842): Targeted improvements, which allows for a transition approach to initially apply
ASU No. 2016-02 at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained
earnings in the period of adoption as well as an additional practical expedient for lessors to not separate non-lease
components from the associated lease components.
The Company will adopt ASU 2016-02 on December 31, 2018 utilizing the modified retrospective transition method through a
cumulative-effect adjustment at the beginning of the first quarter of 2019. Additionally, the Company will elect the practical expedient
approach and will not reassess whether any contracts that existed prior to adoption have or contain leases or the classification of our
existing leases. While the Company is continuing to assess the potential impacts of ASU 2016-02, the Company estimates that the adoption
of ASU 2016-02 will result in the recognition of right-of-use assets of approximately $683,000 and lease liabilities of approximately
$749,000 on its Consolidated Balance Sheets as of December 31, 2018, with no material impact to its Consolidated Statements of
Operations.
In February 2018, FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income. The new standard
provides companies with an option to reclassify stranded tax effects resulting from enactment of the Tax Cuts and Jobs Act, or TCJA, from
accumulated other comprehensive income to retained earnings. The guidance will be effective for the Company beginning in the first
quarter of 2019 with early adoption permitted, and would be applied either in the period of adoption or retrospectively to each period (or
periods) in which the effect of the change in the tax rate as a result of TCJA is recognized. The Company does not expect the adoption of
this ASU to have a material impact on its results of operations, financial position and cash flows.
In March 2018, FASB issued ASU No. 2018-05, Income Taxes (Topic 740). The new standard allows to insert the SEC’s
interpretive guidance from Staff Accounting Bulletin No. 118 into the income tax accounting codification under U.S. GAAP. The ASU
permits companies to use provisional amounts for certain income tax effects of the Tax Act during a one-year measurement period. See
Note 7 to the consolidated financial statements for the impact of implementing this standard on financial statements.
In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting. Currently,
share-based payments to nonemployees are accounted for under Subtopic 505-50, which significantly differs from the guidance for share-
based payments to employees under Topic 718. This ASU supersedes Subtopic 505-50 by expanding the scope of Topic 718 to include
nonemployee awards and generally aligning the accounting for nonemployee awards with the accounting for employee awards. The
effective date for public companies is for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For
all other entities, the effective date is fiscal years beginning after December 15, 2019. The Company does
65
not expect the adoption of this ASU to have a material impact on its results of operations, financial position and cash flows.
In August 2018 the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to
the Disclosure Requirements for Fair Value Measurement. This new standard modifies certain disclosure requirements on fair value
measurements. This new standard will be effective for public companies on January 1, 2020. The Company is currently evaluating the
impact of our pending adoption of the new standard on the consolidated financial statements.
NOTE 3-NET LOSS PER SHARE
Basic net loss per share is computed by dividing net loss available to common stockholders by the weighted average number of
common shares outstanding during the period. Diluted net 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 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 2018, 2017 and 2016, 6.1 million shares, 6.7 million shares, and 7.4 million shares, respectively, associated with equity
awards outstanding and the estimated number of shares to be purchased under the current offering period of the 2009 Employee Stock
Purchase Plan were not included in the calculation of diluted net loss per share, as they were considered antidilutive due to the net loss the
Company experienced during those years.
NOTE 4-BALANCE SHEET COMPONENTS
Inventories:
Work-in-process
Finished goods
Other current assets:
Prepaid expenses
Other
Property and equipment:
Equipment
Software
Furniture and fixtures
Leasehold improvements
Accumulated depreciation and amortization
Accrued liabilities:
Employee compensation related accruals
Other
December 30,
2018
December 31,
2017
(in thousands)
$
$
$
$
$
$
$
3,120 $
716
3,836 $
1,483 $
292
1,775 $
10,607 $
2,788
42
712
14,149
(12,700 )
1,449 $
1,154 $
749
1,903 $
2,894
665
3,559
836
161
997
10,996
3,139
46
674
14,855
(12,480 )
2,375
1,143
510
1,653
The Company recorded depreciation and amortization expense of $1.3 million, $1.4 million and $1.3 million for 2018, 2017 and
2016, respectively. Assets acquired under capital leases and included in property and equipment were $966,000 and $1.3 million at the end
of 2018 and 2017, respectively. Accumulated depreciation on leased assets was $442,000 and $607,000 as of the end of 2018 and 2017,
respectively. As of December 30, 2018 and December 31, 2017, the capital lease obligation relating to these assets was $424,000 and
$654,000 respectively.
66
NOTE 5-OBLIGATIONS
Debt and capital software lease obligations:
Revolving line of credit
Capital software leases
Current portion of debt and capital software lease obligations
Long term portion of debt and capital software lease obligations
December 30,
2018
December 31,
2017
(in thousands)
$
$
15,000 $
424
15,424
(15,316 )
108 $
6,000
654
6,654
(6,299 )
355
Revolving Line of Credit
On September 28, 2018, the Company entered into a Loan and Security Agreement (the "Loan Agreement") with Heritage
Bank. The Loan Agreement provided for, among other things, a revolving credit facility with aggregate commitments of $9,000,000 (the
“Revolving Facility”). The maturity date for loans under the Revolving Facility is September 28, 2020.
On December 21, 2018, the Company entered into an Amended and Restated Loan and Security Agreement (the "Amended and
Restated Loan Agreement") with Heritage Bank to replace in its entirety the Loan Agreement entered on September 28, 2018. The
Amended and Restated Loan Agreement increases the revolving credit facility from $9,000,000 to $15,000,000. Further, the Amended and
Restated Loan Agreement eliminates the requirement of maintaining at all times Remaining Months Liquidity of nine months and replaces
with a new covenant of maintaining at least $3,000,000 in unrestricted cash at Heritage Bank. The Company is in compliance with all loan
covenants as of December 30, 2018.
The 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 Loan Agreement.
On September 25, 2015, the Company entered into the Second Amendment to the Third Amended and Restated Loan and
Security Agreement dated September 25, 2015 ("the SVB Loan Agreement") with Silicon Valley Bank ("the Bank") to extend the line of
credit for two years through September 25, 2017. The Second Amendment to the SVB Loan Agreement provides for committed loan
advances of up to $6.0 million, subject to increases at the Company’s election of up to $12.0 million. Upon each advance, the Company can
elect a prime rate advance, which is the prime rate plus the prime rate margin, or a LIBOR rate advance, which is LIBOR plus the LIBOR
rate margin. On February 10, 2016, the Company entered into a Third Amendment to Third and Restated Loan and Security Agreement to
further modify the covenants. On August 31, 2017, the Company entered into a Fourth Amendment to the Third Amended and Restated
Loan and Security Agreement with the Bank to extend the line of credit for one year through September 24, 2018 and replaces the financial
covenants of third amendment with new financial covenants. This amendment requires the Company to maintain (i) unrestricted cash or
cash equivalents at the Bank or at any of its affiliates at all times in an amount of at least $6,000,000; and (ii) a ratio of quick assets to the
results of (i) current liabilities minus (ii) the current portion of deferred revenue plus (iii) the long-term portion of the obligations of at
least 1.40 to 1.00, tested as of the last day of each month.
The 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 SVB Loan Agreement. The SVB Loan Agreement also has certain restrictions including, among others,
restrictions on the incurrence of other indebtedness, the maintenance of depository accounts, the disposition of assets, mergers,
acquisitions, investments, the granting of liens, cash balances with subsidiaries and the payment of dividends. The Company complied with
all the financial covenants of the SVB Loan Agreement as of the loan maturity date. The Line of Credit facility with Silicon Valley Bank,
which matured on September 24, 2018, was fully paid off in July 2018.
67
Capital Leases
Following table summarizes the capital lease liabilities as of December 30, 2018 and December 31, 2017:
Three-year design software lease dated July 2018 at an interest of 7.64%
Three-year design software lease dated December 2017 at an interest of
6.48%
Two-year design software lease dated December 2017 at an interest of 6.30%
Three-year design software lease dated May 2017 at an interest of 5.48%
Three-year design software lease dated February 2017 at an interest of
5.57%
Less: current portion
Future minimum lease commitments under the Company’s capital leases are as follows:
Fiscal Years
2019
2020
$
$
$
2018
2017
(In thousands)
115 $
49
131
87
42
424 $
316
108 $
Capital leases
(in thousands)
$
$
—
146
256
170
82
654
299
355
316
108
424
NOTE 6-FAIR VALUE MEASUREMENTS
Pursuant to the accounting guidance for fair value measurements and its subsequent updates, fair value is defined as the price
that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair
value, the Company considers the principal or most advantageous market and it considers assumptions that market participants would use
when pricing the asset or liability.
The accounting guidance for fair value measurement also specifies a hierarchy of valuation techniques based upon whether the
inputs to those valuation techniques reflect assumptions other market participants would use based upon market data obtained from
independent sources (observable inputs) or reflect the company’s own assumption of market participant valuation (unobservable inputs).
The fair value hierarchy consists of the following three levels:
•
•
•
Level 1 – Inputs are quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar
assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-
corroborated inputs which are derived principally from or corroborated by observable market data.
Level 3 – Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are
unobservable.
Money market funds classified within Level 2 because they are not actively traded, have been valued using quoted market prices
or alternative pricing sources and models utilizing observable market inputs. Carrying value of collateral money market account with
Heritage Bank equals to fair value, hence not included in the below table.
68
The following table presents the Company’s financial assets that are measured at fair value on a recurring basis as of
December 30, 2018 and December 31, 2017 consistent with the fair value hierarchy provisions of the authoritative guidance (in thousands):
Assets:
Money market funds(1)
Total assets
As of December 30, 2018
As of December 31, 2017
Total
Level 1 Level 2 Level 3 Total
Level 1 Level 2 Level 3
$
$
262
262
262 $
262 $
— $
— $
— $ 15,635 $ 7,176 $ 8,459 $ —
— $ 15,635 $ 7,176 $ 8,459 $ —
(1) Money market funds are presented as a part of cash and cash equivalents on the accompanying consolidated balance sheets as of
December 30, 2018 and December 31, 2017.
NOTE 7-INCOME TAXES
The following table presents the U.S. and foreign components of consolidated income (loss) before income taxes and the
provision for (benefit from) income taxes (in thousands):
Income (loss) before income taxes:
U.S.
Foreign
Loss before income taxes
Provision for (benefit from) income taxes:
Current:
Federal
State
Foreign
Subtotal
Deferred:
Federal
State
Foreign
Subtotal
Provision for income taxes
2018
Fiscal Years
2017
2016
(13,982 ) $
355
(13,627 ) $
(14,253 ) $
209
(14,044 ) $
(19,340 )
257
(19,083 )
(19 ) $
2
169
152
—
—
—
—
152 $
— $
2
85
87
—
—
—
—
87 $
—
(3 )
75
72
—
—
(7 )
(7 )
65
$
$
$
$
The following table presents the rate reconciliation between income tax provisions at the U.S. federal statutory rate and the
effective rate reflected in the consolidated statements of operations:
Income tax (benefit) at statutory rate
State taxes
Stock compensation and other permanent differences
Foreign taxes
Future benefit of deferred tax assets not recognized
Others
Provision for income taxes
2018
Fiscal Years
2017
2016
$
(2,862 ) $
(4,775 ) $
2
252
95
2,684
(19 )
152 $
2
75
(30 )
4,815
—
87 $
$
(6,489 )
(3 )
211
(19 )
6,365
—
65
Based on the available objective evidence, management believes it is more likely than not that the U.S. net deferred tax assets
will not be fully realizable. Accordingly, the Company has provided a full valuation allowance against its U.S. federal and state deferred
tax assets at December 30, 2018. Any future release of the valuation allowance may be recorded as a tax benefit increasing net income. The
Company believes it is more likely than not it will be able to realize its foreign deferred tax assets. Deferred tax balances are comprised of
the following (in thousands):
69
Deferred tax assets:
Net operating losses
Capital losses
Accruals and reserves
Credits carryforward
Depreciation and amortization
Stock-based compensation
Valuation allowances
Deferred tax asset
Deferred tax liability
December 30,
2018
December 31,
2017
$
37,527 $
-
1,370
5,836
9,887
347
54,967
(54,913 )
$
$
54 $
— $
37,631
1,726
1,487
5,743
9,056
343
55,986
(55,931 )
55
—
As of December 30, 2018, the Company had net operating loss carryforwards of approximately $157.4 million for federal and
$63.6 million for state income tax purposes. If not utilized, these carryforwards will expire beginning 2019 for federal and state purposes.
The Company has research credit carryforwards of approximately $4.1 million for federal and $4.6 million for state income tax
purposes as of December 30, 2018. If not utilized, the federal carryforwards will expire in various amounts beginning in 2019. The
California credit can be carried forward indefinitely.
The Tax Cuts and Jobs Act (the "TCJA") was enacted on December 22, 2017. The Act reduces the US federal corporate tax rate
from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax
deferred and creates new taxes on certain foreign sourced earnings. In December 2017, the SEC issued Staff Accounting Bulletin No. 118
(“SAB 118”), which provides guidance on accounting for the income tax effects of the TCJA. SAB 118 provides a measurement period that
should not extend beyond one year from the TCJA enactment date for companies to complete the accounting relating to the TCJA under
Accounting Standards Codification Topic 740, “Income Taxes” (“ASC 740”). In accordance with SAB 118, a company must reflect the
income tax effects of those aspects of the TCJA for which the accounting under ASC 740 is complete. To the extent that a company’s
accounting for TCJA-related income tax effects is incomplete, but the company is able to determine a reasonable estimate, it must record a
provisional estimate in its financial statements. If a company cannot determine a provisional estimate to be included in its financial
statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the
enactment of the TCJA. The Company completed the analysis of the TCJA’s income tax effects. In accordance with SAB 118, the TCJA-
related income tax effects that we initially reported as provisional estimates were refined as additional analysis was performed. There was
no material impact to the balance sheet and income statement recorded when the analysis was completed in the 2018 fourth quarter. The
TCJA also includes a provision to tax global intangible low-taxed income ("GILTI") of foreign subsidiaries. In accordance with U.S.
GAAP, the Company has made an accounting policy election to treat taxes due under the GILTI provision as a current period expense.
Under the Tax Reform Act of 1986, the amount of and the benefit from net operating loss carryforwards and credit
carryforwards may be impaired or limited in certain circumstances. Events which may restrict utilization of a company’s net operating loss
and credit carryforwards include, but are not limited to, certain ownership change limitations as defined in Internal Revenue Code
Section 382 and similar state provisions. In the event the Company has had a change of ownership, utilization of carryforwards could be
restricted to an annual limitation. The annual limitation may result in the expiration of net operating loss carryforwards and credit
carryforwards before utilization.
70
The Company has not undertaken a study to determine if its net operating losses are limited. In the event the Company
previously experienced an ownership change, or should experience an ownership change in the future, the amount of net operating losses
and research and development credit carryovers available in any taxable year could be limited and may expire unutilized.
Foreign withholding taxes associated with the repatriation of earnings of foreign subsidiaries were not provided for on the
undistributed earnings of certain foreign subsidiaries as of the end of fiscal 2018. The Company intends to reinvest these earnings
indefinitely in the Company’s foreign subsidiaries. The Company believes that future domestic cash generation will be sufficient to meet
future domestic cash needs. The Company has not recorded a deferred tax liability on the undistributed earnings of non-U.S. subsidiaries.
The foreign withholding taxes would not have a material impact on the Company’s financial position and results of operation.
Uncertain Tax Positions
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
Beginning balance of unrecognized tax benefits
Additions for tax positions related to the prior year
Additions for tax positions related to the current year
Lapse of statues of limitations
Ending balance of unrecognized tax benefits
December 30,
2018
December 31,
2017
January 1,
2017
$
$
2,107 $
(2 )
125
(69 )
2,161 $
2,014 $
16
77
—
2,107 $
696
1,204
150
(36 )
2,014
Out of $2.2 million of unrecognized tax benefits, there are no unrecognized tax benefits that would result in a change in the
Company's effective tax rate if recognized in future years. The accrued interest and penalties related to uncertain tax positions was not
significant for December 30, 2018, December 31, 2017 and January 1, 2017.
The Company is not currently under tax examination and the Company’s historical net operating loss and credit carryforwards
may be adjusted by the Internal Revenue Service, and other tax authorities until the statute closes on the year in which such tax attributes
are utilized. The Company estimates that its unrecognized tax benefits will not change significantly within the next twelve months.
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.
NOTE 8-STOCKHOLDERS’ EQUITY
Common and Preferred Stock
As of December 30, 2018, the Company is authorized to issue 200 million shares of common stock and has 10 million shares of
authorized but unissued undesignated preferred stock. Without any further vote or action by the Company’s stockholders, the Board of
Directors has the authority to determine the powers, preferences, rights, qualifications, limitations or restrictions granted to or imposed
upon any wholly unissued shares of undesignated preferred stock.
On April 26, 2017, the Company filed an Amended and Restated Certificate of Incorporation with the Secretary of State of the
State of Delaware to increase the number of authorized shares of common stock from 100 million to 200 million. The proposal for the
amendment was approved by the Company’s stockholders at its 2017 Annual Meeting of Stockholders held on April 26, 2017.
71
Issuance of Common Stock
On December 6, 2016, the Company filed a shelf registration statement on Form S-3 as amended on March, 2017, under which
the Company may, from time to time, sell securities in one or more offerings up to a total dollar amount of $40 million. The Company’s
shelf registration statement was declared effective on March 16, 2017.
Under the shelf registration, in May 2018, the Company issued an aggregate of 13,513,510 shares of common stock, $0.001 par
value and warrants to purchase up to an aggregate of 5,405,404 shares of common stock in an underwritten public offering. The common
stock and warrants were issued in units, with each unit consisting of (i) one share of common stock and (ii) a warrant to purchase 0.40 of a
share of common stock, at a price of $1.15 per Unit. The Company received total net proceeds from the offering of $13.9 million, net of
underwriting discounts and other offering expenses of $1.6 million.
The warrants are exercisable any time for a period of 60 months from the date of issuance on May 29, 2018, and are exercisable
at an exercisable price of $1.38 per share. The estimated grant date fair value was $0.57 per warrant and was calculated based on the
following assumptions used in the Black-Scholes model: expected term of 5 years, risk-free interest rate of 2.58%, expected volatility of
52.75% and expected dividend of zero.
In March 2017, the Company issued an aggregate of 11.3 million shares of common stock, $0.001 par value, in an underwritten
public offering at a price of $1.50 per share. The Company received net proceeds from this offering of approximately $15.2 million, net of
underwriter’s commission and other offering expenses.
The Company previously issued 2.3 million warrants exercisable for the Company’s common stock with a strike price of $2.98
in conjunction with a June 2012 financing. These warrants expired in June 2017.
NOTE 9-EMPLOYEE STOCK PLANS
2009 Stock Plan
The 2009 Stock Plan, or 2009 Plan, was amended and restated by the Board of Directors in January 2015, in February 2017, and
in March 15, 2018 and approved by the Company’s stockholders on April 23, 2015, on April 26, 2017 and on April 25, 2018 to, among
other things, reserve an additional 2.5 million, 1.5 million and 4.0 million shares of common stock, respectively, for issuance under the
2009 Plan. As of December 30, 2018, approximately 16.5 million shares were reserved for issuance under the 2009 Plan. On March 15,
2018, Board of directors extended the term of the Stock Plan until March 15, 2028. Equity awards granted under the 2009 Plan have a term
of up to ten years. Options typically vest at a rate of 25% one year after the vesting commencement date, and one forty-eighth for each
month of service thereafter. RSUs typically vest at a rate of 25% one year after the vesting commencement date, and one eighth every six
months thereafter. The Company may implement different vesting schedules in the future with respect to any new equity awards.
Employee Stock Purchase Plan
The 2009 Employee Stock Purchase Plan, or 2009 ESPP, was adopted in March 2009. The 2009 ESPP was amended by the
Board of Directors in January 2015 and in February 2017, and was approved by the Company’s stockholders on April 23, 2015 and April
26, 2017, to reserve an additional 1.0 million and 1.5 million shares of common stock, respectively, for issuance under the 2009 ESPP. As
of December 30, 2018, approximately 4.8 million shares were reserved for issuance under the 2009 ESPP. The 2009 ESPP provides for six
month offering periods. Participants purchase shares through payroll deductions of up to 20% of an employee’s total compensation
(maximum of 20,000 shares per offering period). The 2009 ESPP permits the Board of Directors to determine, prior to each offering
period, whether participants purchase shares at: (i) 85% of the fair market value of the common stock at the end of the offering period; or
(ii) 85% of the lower of the fair market value of the common stock at the beginning or the end of an offering period. The Board of
Directors has determined that, until further notice, future offering periods will be made at 85% of the lower of the fair market value of the
common stock at the beginning or the end of an offering period.
72
NOTE 10-STOCK-BASED COMPENSATION
The Company’s equity incentive program is a broad-based, long-term retention program intended to attract, motivate, and retain
talented employees as well as align stockholder and employee interests. The Company provides stock-based incentive compensation, or
awards, to eligible employees and non-employee directors. Awards that may be granted under the program include non-qualified and
incentive stock options, restricted stock units, or RSUs, performance-based restricted stock units, or PRSUs, and stock bonus units. To date,
awards granted under the program consist of stock options, RSUs and PRSUs. The majority of stock-based awards granted under the
program vest over four years. Stock options granted under the program have a maximum contractual term of ten years.
Stock-based compensation expense is recognized in the Company’s consolidated statements of operations and
includes compensation expense for the stock-based compensation awards granted or modified subsequent to January 1, 2006, based on the
grant date fair value estimated in accordance with the provisions of the amended authoritative guidance. The impact on the Company’s
results of operations of recording stock-based compensation expense for fiscal years 2018, 2017, and 2016 was as follows (in thousands):
Cost of revenue
Research and development
Selling, general and administrative
Total costs and expenses
2018
Fiscal Years
2017
2016
$
$
129 $
760
1,012
1,901 $
121 $
614
706
1,441 $
132
658
794
1,584
No stock-based compensation was capitalized during any period presented above.
The amount of stock-based compensation included in inventories at the end of 2018, 2017 and 2016 was not significant.
Stock-Based Compensation Award Activity
The following table summarizes the shares available for grant under the 2009 Plan:
Balance at December 31, 2017
Authorized
Options granted
Options forfeited or expired
RSUs granted
RSUs forfeited
Balance at December 30, 2018
Stock Options
Shares
Available
for Grant
(in thousands)
3,899
4,000
—
141
(1,539 )
259
6,760
The following table summarizes stock options outstanding and stock option activity under the 2009 Plan, and the related
weighted average exercise price, for 2018, 2017 and 2016:
73
Balance outstanding at January 3, 2016
Granted
Forfeited or expired
Exercised
Balance outstanding at January 1, 2017
Granted
Forfeited or expired
Exercised
Balance outstanding at December 31, 2017
Granted
Forfeited or expired
Exercised
Balance outstanding at December 30, 2018
Exercisable at December 30, 2018
Vested and expected to vest at December 30, 2018
5,266 $
842
(1,129 )
-
4,979
—
(1,356 )
(65 )
3,558
—
(141 )
(216 )
3,201 $
2,868 $
3,153 $
Number
of Shares
(in thousands)
Weighted
Average
Weighted
Average
Exercise Price
Remaining Term
2.64
0.86
2.61
-
2.35
—
3.07
1.31
2.09
—
1.80
0.90
2.18
2.33
2.20
(in years)
4.56
4.06
4.34
3.70 $
3.24 $
3.64 $
Aggregate
Intrinsic
Value
(in thousands)
-
-
-
There was no intrinsic value for the stock options, based on the Company’s closing stock price of $0.76 per share as of the end of
the Company’s current reporting period, which would have been received by the option holders had all option holders exercised their
options as of that date.
The total intrinsic value of options exercised during 2018, 2017 and 2016 was not significant. Total cash received from
employees as a result of employee stock option exercises during 2018, 2017 and 2016 was approximately $195,000, $85,000 and $0,
respectively. The Company settles employee stock option exercises with newly issued common shares. In connection with these exercises,
there was no tax benefit realized by the Company due to the Company’s current net loss position.
Total stock-based compensation expense recognized related to stock options was $131,000, $239,000, and $486,000 for 2018,
2017, and 2016, respectively. No stock options were granted during the fiscal year 2018. As of the end of 2018, the fair value of unvested
stock options, net of expected forfeitures, was approximately $145,000. This unrecognized stock-based compensation expense is expected
to be recorded over a weighted average period of 1.59 years.
Significant exercise price ranges of options outstanding, related weighted average exercise prices and contractual life
information at the end of 2018 were as follows:
Range of Exercise Prices
$0.78
$0.86
$ 1.32
$1.63
$2.17 - $2.65
$2.78
$2.82 - $3.36
$3.39
$3.48
$3.82
$0.78 - $3.82
Options Outstanding
Weighted
Average
Remaining
Contractual
Life
(in years)
Options
Outstanding
(in thousands)
0.18 $
7.69
6.90
0.27
3.66
1.93
4.43
4.73
3.36
5.08
3.70 $
4
726
66
545
287
944
222
237
105
65
3,201
74
Options Exercisable
Weighted
Average
Exercise
Price
Options
Vested and
Exercisable
Weighted
Average
Exercise
Price
(in thousands)
4 $
408
51
545
287
944
222
237
105
65
2,868 $
0.78
0.86
1.32
1.63
2.25
2.78
3.16
3.39
3.48
3.82
2.18
0.78
0.86
1.32
1.63
2.25
2.78
3.16
3.39
3.48
3.82
2.33
Valuation Assumptions
The Company uses the Black-Scholes option pricing model to estimate the fair value of employee stock options and rights to
purchase shares under the Company’s 2009 ESPP. Using the Black-Scholes pricing model requires the Company to develop highly
subjective assumptions including the expected term of awards, expected volatility of its stock, expected risk-free interest rate and expected
dividend rate over the term of the award. The Company’s expected term of awards assumption is based primarily on its historical
experience with similar grants. The Company’s expected stock price volatility assumption for both stock options and ESPP shares is based
on the historical volatility of the Company’s stock, using the daily average of the opening and closing prices and measured using historical
data appropriate for the expected term. The risk-free interest rate assumption approximates the risk-free interest rate of a Treasury Constant
Maturity bond with a maturity approximately equal to the expected term of the stock option or ESPP shares. This fair value is expensed
over the requisite service period of the award. The fair value of RSUs and PRSUs is based on the closing price of the Company’s common
stock on the date of grant. Equity compensation awards which vest with service are expensed using the straight-line attribution method over
the requisite service period.
In addition to the assumptions used in the Black-Scholes pricing model, the amended authoritative guidance requires that the
Company recognize expense for awards ultimately expected to vest; therefore, the Company is required to develop an estimate of the
number of awards expected to be forfeited prior to vesting, or forfeiture rate. The forfeiture rate is estimated based on historical pre-vest
cancellation experience and is applied to all share-based awards.
The following weighted average assumptions are included in the estimated fair value calculations for stock option grants:
Expected term (years)
Risk-free interest rate
Expected volatility
Expected dividend
2018
Fiscal Years
2017
2016
—
—
—
—
—
—
—
—
7.1
1.40 %
52 %
—
The methodologies for determining the above values were as follows:
•
•
•
•
Expected term: The expected term represents the period that the Company’s stock-based awards are expected to be
outstanding and is estimated based on historical experience.
Risk-free interest rate: The risk-free interest rate assumption is based upon the risk-free rate of a Treasury Constant
Maturity bond with a maturity appropriate for the expected term of the Company’s employee stock options.
Expected volatility: The Company determines expected volatility based on historical volatility of the Company’s common
stock according to the expected term of the options.
Expected dividend: The expected dividend assumption is based on the Company’s intent not to issue a dividend under its
dividend policy.
Restricted Stock Units
The Company grants restricted stock units, or RSUs, to employees with various vesting terms. RSUs entitle the holder to
receive, at no cost, one common share for each restricted stock unit on the vesting date as it vests. The Company withholds shares in
settlement of employee tax withholding obligations upon the vesting of restricted stock units. Stock-based compensation related to grants of
vested RSUs was $1.6 million, $1.0, million and $953,000 in 2018, 2017 and 2016, respectively.
The following table summarizes RSU’s activity under the 2009 Plan, and the related weighted average grant date fair value, for
2018, 2017 and 2016:
75
Nonvested at January 3, 2016
Granted
Vested
Forfeited
Nonvested at January 1, 2017
Granted
Vested
Forfeited
Nonvested at December 31, 2017
Granted
Vested
Forfeited
Nonvested at December 30, 2018
Employee Stock Purchase Plan
RSUs & PRSUs Outstanding
Number of Shares
(in thousands)
Weighted Average
Grant Date Fair
Value
1,435 $
1,822
(649 )
(1,238 )
1,370
1,852
(596 )
(263 )
2,363
1,539
(1,073 )
(259 )
2,570 $
2.30
0.97
1.07
—
1.68
1.41
1.46
—
1.54
0.85
1.37
—
1.23
The weighted average estimated fair value, as defined by the amended authoritative guidance, of rights issued pursuant to the
Company’s ESPP during 2018, 2017 and 2016 was $0.37, $0.43 and $0.62, respectively. Sales under the ESPP were 438,000 shares of
common stock at an average price of $1.1 for 2018, 538,000 shares of common stock at an average price of $0.86 for 2017, and 732,000
shares of common stock at an average price of $0.81 for 2016.
As of December 30, 2018, 1.2 million shares under the 2009 ESPP remained available for issuance. For 2018, the Company
recorded compensation expenses related to the ESPP of $205,000, $153,000 and $258,000 in 2018, 2017 and 2016, respectively.
The fair value of rights issued pursuant to the Company’s ESPP was estimated on the commencement date of each offering
period using the following weighted average assumptions:
Expected life (months)
Risk-free interest rate
Volatility
Dividend yield
2018
Fiscal Years
2017
2016
6.0
2.26 %
50 %
—
6.1
1.22 %
53 %
—
6.1
0.97 %
59 %
—
The methodologies for determining the above values were as follows:
•
•
•
•
Expected term: The expected term represents the length of the purchase period contained in the ESPP.
Risk-free interest rate: The risk-free interest rate assumption is based upon the risk-free rate of a Treasury Constant
Maturity bond with a maturity appropriate for the term of the purchase period.
Volatility: The Company determines expected volatility based on historical volatility of the Company’s common stock for
the term of the purchase period.
Dividend Yield: The expected dividend assumption is based on the Company’s intent not to issue a dividend under its
dividend policy.
As of the end of 2018, the unrecognized stock-based compensation expense relating to the Company’s ESPP was $73,000 and
was expected to be recognized over a weighted average period of approximately 4.5 months.
76
NOTE 11-INFORMATION CONCERNING PRODUCT LINES, GEOGRAPHIC INFORMATION, ACCOUNTS RECEIVABLE
AND REVENUE CONCENTRATION
The Company identifies its business segments based on business activities, management responsibility and geographic location.
For all periods presented, the Company operated in a single reportable business segment.
The following is a breakdown of revenue by product family (in thousands):
Revenue by product line (1) :
New products
Mature products
Total revenue
2018
Fiscal Years
2017
2016
$
$
5,735 $
6,894
12,629 $
5,853 $
6,296
12,149 $
5,622
5,799
11,421
(1)
For all periods presented: New products include all products manufactured on 180 nanometer or smaller semiconductor processes.
Mature products include all products produced on semiconductor processes larger than 180 nanometers. eFPGA IP license revenue is
also included in new product revenue.
The following is a breakdown of revenue by shipment destination (in thousands):
Revenue by geography:
Asia Pacific (1)
Europe
North America (2)
Total revenue
2018
Fiscal Years
2017
2016
$
$
4,905 $
1,280
6,444
12,629 $
5,810 $
2,015
4,324
12,149 $
7,131
1,386
2,904
11,421
(1) Asia Pacific includes revenue from China $1.8 million or 15% and Japan of $1.6 million or 12% of total revenue in 2018 and $1.3
million or 11% and $1.5 million or 12% of total revenue in 2017, respectively.
(2) North America includes revenue from the United States of $6.4 million or 50% of total revenue in 2018 and $4.2 million or 34% of
total revenue in 2017.
The following distributors and customers accounted for 10% or more of the Company’s revenue for the periods presented:
Distributor "A"
Customer "B"
Customer "G"
Customer "J"
2018
Fiscal Years
2017
2016
34 %
12 %
10 %
10 %
33 %
11 %
19 %
— %
The following distributors and customers accounted for 10% or more of the Company's accounts receivable as of the dates
presented:
Distributor "A"
Distributor "G"
Customer "G"
Customer "M"
December 30,
2018
December 31,
2017
35 %
10 %
*
23 %
26 %
14 %
33 %
— %
45 %
—
12 %
*
*
Represents less than 10% of accounts receivable as of the date presented.
As of December 30, 2018 and December 31, 2017, approximately 15% of the Company’s long-lived assets, including property
and equipment and other assets were located outside the United States.
77
NOTE 12-COMMITMENTS
Commitments
Certain wafer manufacturers require the Company to forecast wafer starts several months in advance. The Company is
committed to take delivery of and pay for a portion of forecasted wafer volume. As of the end of 2018 and 2017, the Company had $22,000
and $1.1 million respectively, of outstanding commitments for the purchase of wafer inventory.
The Company has purchase obligations with certain suppliers for the purchase of goods and services entered into in the ordinary
course of business. As of December 30, 2018, total outstanding purchase obligations due within the next 12 months were $931,000.
The Company leases its primary facility under a non-cancelable operating lease that expires in March 2020. In October 2018, the
Company submitted a nine months termination notice to the landlord to end the lease in July 2019. On February 13, 2019, the Company
entered into an agreement to lease approximately 24,164 square feet of premises located at 2220 Lundy Avenue, San Jose, CA 95131 for a
period of five years, effective April 15, 2019 to relocate its headquarters.
In October 2018, the Company leased a facility for research and development in San Diego, California, the lease of which
expires in July 2020. In addition, the Company rents development facilities in India as well as sales offices in Europe and Asia. Total rent
expense during 2018, 2017 and 2016 was approximately $881,000, $866,000 and $834,000 respectively.
Future minimum lease commitments under the Company’s operating leases excluding property taxes and insurance are as
follows:
Fiscal Years
2019
2020
2021
2022
2023 and after
NOTE 13-LITIGATION
Operating Leases
(in thousands)
$
$
816
584
477
409
528
2,814
From time to time, the Company may become involved in legal actions arising in the ordinary course of business including, but
not limited to, intellectual property infringement and collection matters. Absolute assurance cannot be given that any such third party
assertions will be resolved without costly litigation; in a manner that is not adverse to the Company’s financial position, results of
operations or cash flows; or without requiring royalty or other payments which may adversely impact gross profit.
NOTE 14-SUBSEQUENT EVENTS
Loan Repayment
The Company repaid $7.0 million on January 4, 2019 and $5 million on January 8, 2019 of revolving debt at an interest rate of
6.0%.
Business Acquisition
On January 3, 2019, the Company entered into an agreement with SensiML Corporation to acquire all of its issued and
outstanding common stock in an all stock deal. The total aggregate purchase price was $1,169,752, and
78
$200,000 worth of shares were deposited into escrow to be held for twelve months as security against indemnity claims made by the
Company after the closing date.
79
SUPPLEMENTARY FINANCIAL DATA
QUARTERLY DATA (UNAUDITED)
December 30,
2018
September 30,
2018
Quarter Ended
April 1,
2018
July 1,
2018
(in thousands, except per share amount)
December 31,
2017
October 1,
2017
July 2,
2017
April 2,
2017
$
3,233 $
1,561
1,672
3,510 $ 3,122 $ 2,764 $
1,767 1,592 1,375
1,743 1,530 1,389
2,981 $ 2,972 $ 3,026 $ 3,170
1,706 1,646 1,797
1,478
1,266 1,380 1,373
1,503
2,422
2,461 2,366 2,699
2,458
2,368 2,319 2,427
2,302
(3,052 )
(31 )
51
(3,032 )
33
(3,065 ) $
2,509 2,610 2,561
(3,227 ) (3,446 ) (3,871 )
(24 )
(32 )
(21 )
17
(14 )
(3,231 ) (3,455 ) (3,909 )
23
2,519
(3,474 )
(18 )
23
(3,469 )
2,353 2,614 2,414
(3,455 ) (3,553 ) (3,468 )
(61 )
(21 )
(15 )
(3 )
-
(3,473 ) (3,573 ) (3,529 )
1
29
61
(3,260 ) $ (3,484 ) $ (3,970 ) $
29
(60 )
36
(3,409 ) $ (3,550 ) $ (3,607 ) $ (3,565 )
34
77
(0.03 ) $
(0.03 ) $ (0.04 ) $ (0.05 ) $
(0.04 ) $
(0.04 ) $ (0.05 ) $ (0.05 )
95,296
94,725 85,753 80,571
80,353 80,125 79,799 68,794
$
$
Statements of Operations:
Revenue
Cost of revenue
Gross profit (1)
Operating expenses:
Research and
development
Selling, general and
administrative
Loss from operations
Interest expense
Interest income and other
expense, net
Loss before taxes
Provision for (benefit from)
income taxes
Net loss
Net loss per share:
Basic and diluted
Weighted average shares:
Basic and diluted
(1) Gross profit percentage ranged between 42.6% to 51.7% in the last 8 quarters primarily as a result of changes in customer and
product mix, favorable purchase price adjustments, and favorable standard cost variances during these quarters.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in the reports we
file or submit pursuant to the Securities and Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized
and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure.
Management, with the participation of the Chief Executive Officer and Chief Financial Officer, has performed an evaluation of
our disclosure controls and procedures as required by the applicable rules of the Exchange Act. Based on this evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that, as of December 30, 2018 our disclosure controls and procedures were
effective.
80
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Internal control over financial reporting is the
process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our board of
directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles, and
includes those policies and procedures that: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect
our transactions and dispositions of assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that
could have a material effect on the financial statements.
Because of its inherent limitations, cost-effective internal control over financial reporting cannot provide absolute assurance of
achieving financial reporting objectives. Internal control over financial reporting is a process that involves human diligence and compliance
and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be
circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may
not be prevented or detected on a timely basis by internal control over financial reporting. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the
degree of compliance with established policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial
Officer, we conducted an assessment of the effectiveness of our internal control over financial reporting as of the end of the period covered
by this Annual Report on Form 10-K. In making this assessment, we used the criteria based on the framework set forth by the Committee of
Sponsoring Organizations of the Treadway Commission in “Internal Control - Integrated Framework (2013).” Based on the results of this
assessment, management (including our Chief Executive Officer and Chief Financial Officer) has concluded that, as of December 30, 2018
our internal control over financial reporting was effective.
The effectiveness of the Company’s internal control over financial reporting as of December 30, 2018 has been audited by Moss
Adams LLP, an independent registered public accounting firm, as stated in their report appearing in this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that
have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
81
PART III
Certain information required by Part III is incorporated by reference from the definitive Proxy Statement regarding our 2019
Annual Meeting of Stockholders and will be filed not later than 120 days after the end of the fiscal year covered by this Report.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information regarding the backgrounds of our officers is contained herein under Item 1, “Executive Officers and Directors.”
Information regarding the backgrounds of our directors is set forth under the caption “Proposal One, Election of Directors” in our
Proxy Statement, which information is incorporated herein by reference.
There are no family relationships between any of our directors, executive officers, or persons nominated or chosen to be a
director or officer, and no such persons have been involved during the last ten years, in any legal proceedings material to their abilities or
integrity.
Information regarding our Audit Committee, our Audit Committee financial expert, the procedures by which security holders
may recommend nominees to our Board and our Code of Conduct and Ethics is hereby incorporated herein by reference from the section
entitled “Board Meetings, Committees and Corporate Governance” in the Proxy Statement. A copy of our Code of Conduct and Ethics is
posted on our website at http://www.quicklogic.com/corporate/about-us/management. We intend to satisfy the disclosure requirement under
Item 5.05 of Form 8-K regarding an amendment to, or a waiver from, this Code of Conduct and Ethics by posting such information on our
website http://www.quicklogic.com/corporate/about-us/management.
Information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, is incorporated herein
by reference from the section entitled “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is set forth under the captions “Compensation Committee Interlocks and Insider
Participation,” and “Executive Compensation, Compensation Discussion and Analysis” in our Proxy Statement, which information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The information required by Item 12 is set forth under the captions “Equity Compensation Plan Summary”, "Post-Employment
and Change of Control Compensation" and “Security Ownership” in our Proxy Statement, which information is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by Item 13 is set forth under the captions “Board Meetings, Committees and Corporate Governance”
and “Transactions with Related Persons” in our Proxy Statement, which information is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by Item 14 is set forth under the caption “Fees Billed to QuickLogic by Moss Adams LLP during
Fiscal Years 2018 and 2017" in our Proxy Statement, which information is incorporated herein by reference.
82
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
1. Financial Statements
PART IV
Reference is made to Item 8 for a list of all financial statements and schedules filed as a part of this Report.
2. Financial Statement Schedules
QuickLogic Corporation
Valuation and Qualifying Accounts
(in thousands)
Allowance for Doubtful Accounts:
Fiscal Year 2018
Fiscal Year 2017
Fiscal Year 2016
Allowance for Deferred Tax Assets:
Fiscal Year 2018
Fiscal Year 2017
Fiscal Year 2016
Balance at
Beginning
of Period
Charged to
Costs and
Expenses
Deductions/
Write-offs
Balance at
End of Period
— $
— $
— $
— $
— $
— $
— $
— $
— $
—
—
—
55,931 $
79,150 $
69,349 $
— $
— $
9,801 $
(1,018 ) $
(23,219 ) $
— $
54,913
55,931
79,150
$
$
$
$
$
$
All other schedules not listed above have been omitted because the information required to be set forth therein is not applicable
or is shown in the financial statements or notes hereto.
3. Exhibits
The exhibits listed under Item 15(b) hereof are filed as part of this Annual Report on Form 10-K.
(b) Exhibits
The following exhibits are filed with or incorporated by reference into this Report:
Exhibit
Number
Description
3.1(18)
Fourth Amended and Restated Certificate of Incorporation of the Registrant.
3.2(3)
3.3(4)
4.1(2)
4.2(14)
10.1(5)
10.2(1)
10.2.1(5)
10.2.2 (6)
10.2.3 (7)
10.2.4 (8)
Bylaws of the Registrant.
Certificate of Elimination of the Series A Junior Participating Preferred Stock.
Specimen Common Stock certificate of the Registrant.
Form of Common Stock Warrant.
Form of Indemnification Agreement for directors and executive officers.
Lease dated June 17, 1996, as amended, between Kairos, LLC and Orchard Moffet Investors as Landlord and the
Registrant for the Registrant’s facility located in Sunnyvale, California.
First Amendment to Lease Agreement between Orchard Moffett Investors (as successor-in-interest to Kairos, LLC)
and QuickLogic Corporation dated July 31, 2002.
Second Amendment to Lease Agreement between NetApp, Inc. (as successor-in-interest to Orchard Moffett
Investors and Kairos, LLC,) and QuickLogic Corporation effective September 25, 2008.
Third Amendment to Lease between NetApp, Inc. and QuickLogic Corporation dated August 3, 2012.
Fourth Amendment to Lease between NetApp, Inc. and QuickLogic Corporation dated April 4, 2014.
83
10.2.5 (19)
Fifth Amendment to Lease between NetApp, Inc. and QuickLogic Corporation dated May 22, 2015.
10.2.6 (17)
Sixth Amendment to Lease between Google, Inc.(as successor to NetApp Inc.) and QuickLogic Corporation dated
February 8, 2018.
10.3 (15)
Patent Cross License Agreement dated August 25, 1998 between the Registrant and Actel Corporation.
10.4 (9)
10.5 (9)
Form of Change of Control Severance Agreement.
Form of Change of Control Severance Agreement for Chief Executive Officer.
10.6 (10)
2005 Executive Bonus Plan, as restated.
10.7
QuickLogic Corporation 2009 Stock Plan, as amended.
10.8 (13)
10.9(11)
10.10(11)
10.11(11)
QuickLogic Corporation 2009 Employee Stock Purchase Plan.
Form of Notice of Grant and Stock Option Agreement under the 2009 Stock Plan.
Form of Notice of Grant of Stock Purchase Rights and Restricted Stock Purchase Agreement under the 2009 Stock
Plan.
Form of Notice of Grant of Restricted Stock Unit and Restricted Stock Unit Agreement under the 2009 Stock Plan.
10.12(12)
Form of Subscription Agreement.
10.13(14)
10.14(16)
21
23.1
31.1
31.2
32
Underwriting agreement between QuickLogic Corporation and Craig-Hallum Capital Group LLC, as representative
of the several underwriters named therein, dated May 24, 2018.
Amended and Restated Loan and Security Agreement between Heritage Bank of Commerce and QuickLogic
Corporation, dated as of December 21, 2018.
Subsidiaries of the registrant.
Consent of Moss Adams LLP, Independent Registered Public Accounting Firm.
CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
CEO and CFO Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
(1)
(2)
(3)
(4)
(5)
Incorporated by reference to QuickLogic’s Registration Statement on Form S-1 filed June 9, 1997 (Commission File No. 333-
28833).
Incorporated by reference to QuickLogic’s Registration Statement on Form S-1/A filed October 12, 1999 (Commission File
No. 333-28833).
Incorporated by reference to QuickLogic’s Current Report on Form 8-K (Item 5.03) filed on May 2, 2005) (Commission File
No. 000-22671).
Incorporated by reference to QuickLogic’s Current Report on Form 8-K (Item 5.03) filed on November 26, 2013 (Commission
File No. 000-22671).
Incorporated by reference to QuickLogic’s Quarterly Report on Form 10-Q filed on November 13, 2002 (Commission File
No. 000-22671).
84
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
(17)
(18)
(19)
Incorporated by reference to QuickLogic’s Quarterly Report on Form 10-Q filed on November 6, 2008 (Commission File No.
000-22671).
Incorporated by reference to QuickLogic’s Quarterly Report on Form 10-Q filed on August 3, 2012 (Commission File No. 000-
22671).
Incorporated by reference to QuickLogic’s Current Report on Form 8-K (Item 1.01) filed on April 8, 2014.
Incorporated by reference to QuickLogic’s Annual Report on Form 10-K filed on March 11, 2008 (Commission File No. 000-
22671).
Incorporated by reference to QuickLogic’s Current Report on Form 8-K (Item 1.01) filed on April 28, 2008 (Commission File
No. 000-22671).
Incorporated by reference to QuickLogic’s Current Report on Form 8-K (Item 1.01 and Item 5.02) filed on August 4, 2009
(Commission File No. 000-22671).
Incorporated by reference to QuickLogic’s Current Report on Form 8-K/A (Item 1.01) filed on November 17, 2009
(Commission File No. 000-22671).
Incorporated by reference to QuickLogic’s Quarterly Report on Form 10-Q filed on May 11, 2017 (Commission File No. 000-
22671).
Incorporated by reference to QuickLogic’s Quarterly Report on Form 8-K (Item 1.01) filed on May 29, 2018 (Commission File
No. 000-22671).
Incorporated by reference to QuickLogic’s Registration Statement on Form S-1/A filed August 10, 1999 (Commission File No.
333-28833).
Incorporated by reference to QuickLogic’s Current Report on Form 8-K (Item 1.01 and Item 2.03) filed on December 28, 2018
(Commission File No. 000-22671).
Incorporated by reference to QuickLogic’s Annual Report on Form 10-K Exhibit 10.2.5 filed on March 9, 2018 (Commission
File No. 000-22671).
Incorporated by reference to QuickLogic’s Current Report on Form 8-K (Item 5.03) filed on April 28, 2017 (Commission file
No. 000-22671).
Incorporated by reference to QuickLogic’s Quarterly Report on Form 10-Q filed on November 3, 2015 (Commission File No.
000-22671).
(1)
85
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on this March 15, 2019.
SIGNATURES
QUICKLOGIC CORPORATION
By:
/S/ Brian C. Faith
Brian C. Faith
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints
Brian C. Faith and Suping (Sue) Cheung and each of them singly, as true and lawful attorneys-in-fact and agents with full power of
substitution and resubstitution, for him and in his name, place and stead, in any and all capacities to sign this Annual Report on Form 10-K
filed herewith and any or all amendments to said report, and to file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission granting unto said attorneys-in-fact and agents the full power and authority to do
and perform each and every act and the thing requisite and necessary to be done in and about the foregoing, as to all intents and purposes as
he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or his
substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed by the following
persons on behalf of the registrant and in the capacities and on the dates indicated below.
Signature
Title
Date
/s/ BRIAN C. FAITH
Brian C. Faith
President and Chief Executive Officer; Director
(Principal Executive Officer)
/S/ SUPING (SUE) CHEUNG
Suping (Sue) Cheung
Vice President, Finance and Chief Financial Officer (Principal
Financial Officer and Principal Accounting Officer)
/S/ E. THOMAS HART
E. Thomas Hart
/s/ ANDREW J. PEASE
Andrew J. Pease
/S/ MICHAEL R. FARESE
Michael R. Farese
/S/ ARTURO KRUEGER
Arturo Krueger
/s/ DANIEL A. RABINOVITSJ
Daniel A. Rabinovitsj
/S/ CHRISTINE RUSSELL
Christine Russell
/S/ GARY H. TAUSS
Gary H. Tauss
Chairman of the Board
Director
Director
Director
Director
Director
Director
86
March 15, 2019
March 15, 2019
March 15, 2019
March 15, 2019
March 15, 2019
March 15, 2019
March 15, 2019
March 15, 2019
March 15, 2019
QUICKLOGIC CORPORATION
2019 STOCK PLAN
EXHIBIT 10.7
1.
Purposes of the Plan. The purposes of this 2019 Stock Plan are:
•
•
•
to attract and retain the best available personnel for positions of substantial responsibility;
to provide additional incentive to Employees, Directors and Consultants; and
to promote the success of the Company’s business.
Options granted under the Plan may be Incentive Stock Options or Nonstatutory Stock Options, as determined by the
Administrator at the time of grant. Stock Appreciation Rights, Restricted Stock and Restricted Stock Units may also be granted under the
Plan.
2.
Definitions. As used herein, the following definitions shall apply:
(a)
of the Plan.
“Administrator” means the Board or any Committee as shall be administering the Plan, in accordance with Section 4
(b)
“Applicable Laws” means the requirements relating to the administration of equity-based awards under U. S. state
corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is
listed or quoted and the applicable laws of any foreign country or jurisdiction where Awards are, or will be, granted under the Plan.
(c)
“Award” means, individually or collectively, a grant under the Plan of Options, Stock Appreciation Rights,
Restricted Stock or Restricted Stock Units.
(d)
“Award Agreement” means the written or electronic agreement setting forth the terms and provisions applicable to
each Award granted under the Plan. The Award Agreement is subject to the terms and conditions of the Plan and the Notice of Grant.
(e)
(f)
“Board” means the Board of Directors of the Company.
“Code” means the Internal Revenue Code of 1986, as amended. Any reference to a section of the Code herein shall
be a reference to any successor or amended section of the Code.
(g)
“Committee” means a committee of Directors or other individuals satisfying Applicable Laws appointed by the
Board in accordance with Section 4 of the Plan.
(h)
(i)
“Common Stock” means the common stock of the Company.
(i) “Company” means QuickLogic Corporation, a Delaware corporation.
(j)
services to such entity.
“Consultant” means any person, including an advisor, engaged by the Company or a Parent or Subsidiary to render
(k)
“Director” means a member of the Board.
A-1
(l)
“Disability” means total and permanent disability as defined in Section 22(e)(3) of the Code.
(m)
“Employee” means any person, including Officers and Directors, employed by the Company or any Parent or
Subsidiary of the Company. A Service Provider shall not cease to be an Employee in the case of (i) any leave of absence approved by the
Company or (ii) transfers between locations of the Company or between the Company, its Parent, any Subsidiary, or any successor. For
purposes of Incentive Stock Options, no such leave may exceed three (3) months, unless reemployment upon expiration of such leave is
guaranteed by statute or contract. If reemployment upon expiration of a leave of absence approved by the Company is not so guaranteed,
then six (6) months following the first (1st) day of such leave, any Incentive Stock Option held by the Optionee shall cease to be treated as
an Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory Stock Option. Neither service as a Director nor payment
of a director’s fee by the Company shall be sufficient to constitute “employment” by the Company.
(n)
(o)
“Exchange Act” means the Securities Exchange Act of 1934, as amended.
“Fair Market Value” means, as of any date, the value of Common Stock determined as follows:
(i)
If the Common Stock is listed on any established stock exchange or a national market system, including
without limitation the Nasdaq Global Market, the Nasdaq Global Select Market or the Nasdaq Capital Market, its Fair Market
Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or
system for the last market trading day on or before the day of determination, as reported in The Wall Street Journal or such other
source as the Administrator deems reliable;
(ii)
If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not
reported, the Fair Market Value of a Share of Common Stock shall be the mean between the high bid and low asked prices for the
Common Stock on the last market trading day on or before the day of determination, as reported in The Wall Street Journal or
such other source as the Administrator deems reliable; or
(iii)
In the absence of an established market for the Common Stock, the Fair Market Value shall be determined
in good faith by the Administrator.
(p)
“Incentive Stock Option” means an Option that by its terms qualifies and is otherwise intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder.
(q)
Incentive Stock Option.
“Nonstatutory Stock Option” means an Option that by its terms does not qualify or is not intended to qualify as an
(r)
“Notice of Grant” means a written or electronic notice evidencing certain terms and conditions of an individual
Award. The Notice of Grant is part of the Award Agreement.
(s)
“Officer” means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act
and the rules and regulations promulgated thereunder.
(t)
“Option” means a stock option granted pursuant to the Plan.
“Option Agreement” means an agreement between the Company and an Optionee evidencing the terms and
conditions of an individual Option grant. The Option Agreement is subject to the terms and conditions of the Plan and the Notice of Grant.
(u)
A-2
(v)
“Option Exchange Program” means a program whereby outstanding Options are surrendered in exchange for
Options with a lower exercise price.
(w)
(x)
(y)
(z)
(aa)
“Optioned Stock” means the Common Stock subject to an Award.
“Optionee” means the holder of an outstanding Option granted under the Plan.
“Parent” means a “parent corporation,” whether now or hereafter existing, as defined in Section 424(e) of the Code.
“Participant” means the holder of an outstanding Award granted under the Plan.
“Performance Goals” means the goal(s) (or combined goal(s)) determined by the Administrator (in its discretion) to
be applicable to a Participant with respect to an Award.
(bb)
(cc)
“Plan” means this QuickLogic Corporation 2019 Stock Plan.
“Restricted Stock” means Shares issued pursuant to an Award of Restricted Stock under Section 12 of the Plan, or
issued pursuant to the early exercise of an Option.
(dd)
“Restricted Stock Purchase Agreement” means a written or electronic agreement between the Company and the
Participant evidencing the terms and restrictions applying to Shares purchased under a Restricted Stock award. The Restricted Stock
Purchase Agreement is subject to the terms and conditions of the Plan and the Notice of Grant.
(ee)
“Restricted Stock Unit” means a bookkeeping entry representing an amount equal to the Fair Market Value of one
Share, granted pursuant to Section 13. Each Restricted Stock Unit represents an unfunded and unsecured obligation of the Company.
(ff)
“Restricted Stock Unit Agreement” means a written or electronic agreement between the Company and the
Participant evidencing the terms and restrictions applying to an individual grant of Restricted Stock Units. The Restricted Stock Unit
Agreement is subject to the terms and conditions of the Plan and the Notice of Grant.
(gg)
“Rule 16b-3” means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect when discretion
is being exercised with respect to the Plan.
(hh)
(ii)
(jj)
(kk)
“Section 16(b)” means Section 16(b) of the Exchange Act.
“Service Provider” means an Employee, Director or Consultant.
“Share” means a share of the Common Stock, as adjusted in accordance with Section 15 of the Plan.
“Stock Appreciation Right” or “SAR” means an Award, granted alone or in connection with a related Option, that
pursuant to Section 11 is designated as a SAR.
A-3
(ll)
“Stock Appreciation Right Agreement ” means a written or electronic agreement between the Company and the
Participant evidencing the terms and restrictions applying to Shares purchased under a SAR. The Stock Appreciation Right Agreement is
subject to the terms and conditions of the Plan and the Notice of Grant.
(mm)
the Code.
“Subsidiary” means a “subsidiary corporation”, whether now or hereafter existing, as defined in Section 424(f) of
3.
Stock Subject to the Plan.
(a)
Subject to the provisions of Section 15 of the Plan, the maximum aggregate number of Shares which may be
awarded and sold under the Plan is 5,000,000 Shares plus any Shares subject to any outstanding options or other awards granted under the
Company’s 2009 Stock Plan (the “2009 Plan”) that expire, are forfeited, cancelled, returned to the Company for failure to satisfy vesting
requirements, settled for cash or otherwise terminated without payment being made thereunder. Any Shares that again become available
for grant will be added back as one share to the Plan share reserve. The Shares may be authorized, but unissued, or reacquired Common
Stock. Following approval of this Plan by the Company’s stockholders, no further awards will be granted pursuant to the Company’s 2009
Plan.
(b)
Lapsed Awards . If an Award expires or becomes unexercisable without having been exercised in full, or with
respect to Restricted Stock or Restricted Stock Units, is forfeited to or repurchased by the Company due to failure to vest, the unpurchased
or unissued Shares (or for Awards other than Options or SARs, the forfeited or repurchased Shares) which were subject thereto shall
become available for future grant or sale under the Plan (unless the Plan has terminated). Upon exercise of a SAR settled in Shares, the
gross number of Shares covered by the portion of the Award so exercised will cease to be available under the Plan. Shares that have
actually been issued under the Plan shall not be returned to the Plan and shall not become available for future distribution under the Plan;
provided, however, that if unvested Shares issued pursuant to Awards of Restricted Stock or Restricted Stock Units are repurchased by the
Company at their original purchase price or are forfeited to the Company due to the failure to vest, such Shares will become available for
future grant under the Plan. Shares used to pay the exercise price of an Award or to satisfy the tax withholding obligations related to an
Award will not become available for future grant or sale under the Plan. To the extent an Award under the Plan is paid out in cash rather
than Shares, such cash payment will not result in reducing the number of Shares available for issuance under the Plan. Notwithstanding the
foregoing and, subject to adjustment as provided in Section 15, the maximum number of Shares that may be issued upon the exercise of
Incentive Stock Options will equal the aggregate Share number stated in the immediately preceding paragraph above, plus, to the extent
allowable under Code Section 422 and the Treasury Regulations promulgated thereunder, any Shares that become available for issuance
under the Plan pursuant to this paragraph.
4.
Administration of the Plan.
(a)
Procedure.
(i)
Multiple Administrative Bodies. The Plan may be administered by different Committees with respect to
different groups of Service Providers.
(ii)
Rule 16b-3. To the extent desirable to qualify transactions hereunder as exempt under Rule 16b-3, the
transactions contemplated hereunder shall be structured to satisfy the requirements for exemption under Rule 16b-3.
(iii)
Other Administration. Other than as provided above, the Plan shall be administered by (A) the Board or
(B) a Committee, which committee shall be constituted to satisfy Applicable Laws.
(iv)
Delegation of Authority for Day-to-Day Administration . Except to the extent prohibited by Applicable
Laws, the Administrator may delegate to one or more individuals the day-to-day
A-4
administration of the Plan and any of the functions assigned to it in this Plan. Such delegation may be revoked at any time.
(b)
Powers of the Administrator. Subject to the provisions of the Plan, and in the case of a Committee, subject to the
specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion:
(i)
(ii)
(iii)
(iv)
to determine the Fair Market Value;
to select the Service Providers to whom Awards may be granted hereunder;
to determine the number of shares of Common Stock to be covered by each Award granted hereunder;
to approve forms of agreement for use under the Plan;
(v)
to determine the terms and conditions, not inconsistent with the terms of the Plan, of any Award relating
thereto granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when
Options or SARs may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture
or repurchase restrictions, and any restriction or limitation regarding any Award or the shares of Common Stock relating thereto,
based in each case on such factors as the Administrator, in its sole discretion, shall determine;
(vi)
to construe and interpret the terms of the Plan and Awards granted pursuant to the Plan;
(vii)
to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations
relating to sub-plans established for the purpose of qualifying for preferred tax treatment under foreign tax laws or satisfying
applicable foreign laws;
(viii)
to modify or amend each Award (subject to Section 17(c) of the Plan), including the discretionary
authority to extend the post-termination exercisability period of Options or SARs longer than is otherwise provided for in the
Plan;
(ix)
to allow, in the Administrator’s discretion, Participants to satisfy withholding tax, fringe benefits tax or
national insurance contributions tax obligations by having the Company withhold from the Shares or cash to be issued upon
exercise or vesting of an Award that number of Shares or cash having a Fair Market Value equal to the amount required to be
withheld. The Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be
withheld is to be determined. Any decisions to have Shares or cash withheld for this purpose shall be made in such form and
under such conditions as the Administrator may deem necessary or advisable;
(x)
to authorize any person to execute on behalf of the Company any instrument required to effect the grant of
an Award previously granted by the Administrator; and
(xi)
to make all other determinations deemed necessary or advisable for administering the Plan.
(c)
Effect of Administrator’s Decision . The Administrator’s decisions, determinations and interpretations shall be final
and binding on all Participants and any other holders of an Award.
5.
to Service Providers. Incentive Stock Options may be granted only to Employees.
Eligibility. Nonstatutory Stock Options, Stock Appreciation Rights, Restricted Stock and Restricted Stock Units may be granted
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6.
Limitations.
(a)
ISO $100,000 Rule. Each Option shall be designated in the Option Agreement as either an Incentive Stock Option
or a Nonstatutory Stock Option. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of the
Shares with respect to which Incentive Stock Options are exercisable for the first time by the Optionee during any calendar year (under all
plans of the Company and any Parent or Subsidiary) exceeds $100,000, such Options shall be treated as Nonstatutory Stock Options. For
purposes of this Section 6(a), Incentive Stock Options shall be taken into account in the order in which they were granted. The Fair Market
Value of the Shares shall be determined as of the time the Option with respect to such Shares is granted.
(b)
No Rights as a Service Provider. Neither the Plan nor any Award shall confer upon a Participant any right with
respect to continuing the Participant’s relationship as a Service Provider with the Company, nor shall they interfere in any way with the
right of the Participant or the right of the Company or its Parent or Subsidiaries to terminate such relationship at any time, with or without
cause.
(3)
Individual Director Limits. Notwithstanding anything in this Plan to the contrary, no non-employee Director will be
granted, in any period of one calendar year, awards under the Plan (excluding awards made at the election of the Director in lieu of all or a
portion of annual and committee cash retainers) having an aggregate maximum value at the Date of Grant (calculating the value of any
such awards based on the grant date fair value for financial reporting purposes), taken together with any cash fees payable to such non-
employee Director during the fiscal year, in excess of $200,000. Notwithstanding the foregoing, in the event of extraordinary
circumstances (as determined by the Board), the amount set forth in the preceding sentence shall be increased to $300,000, provided that
such increase may apply only if any non-employee Director receiving additional compensation as a result of such extraordinary
circumstances does not participate in the determination that extraordinary circumstances exist, in the decision to award such compensation
or in other contemporaneous compensation decisions involving non-employee Directors.
7.
Company’s stockholders. It will continue in effect until April 24, 2029, unless sooner terminated under Section 17 of the Plan.
Term of Plan. Subject to Section 21 of the Plan, the Plan shall become effective upon its adoption by the Board and the
8.
Term of Option. The term of each Option shall be stated in the Option Agreement. In the case of an Incentive Stock Option, the
term shall be ten (10) years from the date of grant or such shorter term as may be provided in the Option Agreement. Moreover, in the case
of an Incentive Stock Option granted to an Optionee who, at the time the Incentive Stock Option is granted, owns stock representing more
than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of
the Incentive Stock Option shall be five (5) years from the date of grant or such shorter term as may be provided in the Option Agreement.
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9.
Option Exercise Price and Consideration.
(a)
Exercise Price. The per share exercise price for the Shares to be issued pursuant to exercise of an Option shall be
determined by the Administrator, subject to the following:
(i)
In the case of an Incentive Stock Option
(A)
(B)
granted to an Employee who, at the time the Incentive Stock Option is granted, owns stock
representing more than ten percent (10%) of the voting power of all classes of stock of the
Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110%
of the Fair Market Value per Share on the date of grant.
granted to any Employee other than an Employee described in paragraph (A) immediately
above, the per Share exercise price shall be no less than 100% of the Fair Market Value per
Share on the date of grant.
(ii)
In the case of a Nonstatutory Stock Option, the per Share exercise price shall be no less than 100% of the
Fair Market Value per Share on the date of grant.
(iii)
Notwithstanding the foregoing, Options may be granted with a per Share exercise price of less than 100%
of the Fair Market Value per Share on the date of grant pursuant to a merger or other corporate transaction described in, and in a
manner consistent with, Section 424(a) of the Code.
(b)
Waiting Period and Exercise Dates. At the time an Option is granted, the Administrator shall fix the period within
which the Option may be exercised and shall determine any conditions which must be satisfied before the Option may be exercised.
(c)
Form of Consideration. The Administrator shall determine the acceptable form of consideration for exercising an
Option, including the method of payment. In the case of an Incentive Stock Option, the Administrator shall determine the acceptable form
of consideration at the time of grant. Such consideration, to the extent permitted by Applicable Laws, may consist entirely of:
(i)
(ii)
(iii)
cash;
check;
other Shares which have a Fair Market Value on the date of surrender equal to the aggregate exercise
price of the Shares as to which said Option shall be exercised;
(iv)
in connection with the Plan;
consideration received by the Company under a cashless exercise program implemented by the Company
(v)
(vi)
Applicable Laws.
any combination of the foregoing methods of payment; or
such other consideration and method of payment for the issuance of Shares to the extent permitted by
(4)
No Dividend Equivalents. No Option shall provide for the payment or accrual of dividend equivalents.
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10.
Exercise of Option.
(a)
Procedure for Exercise; Rights as a Shareholder. Any Option granted hereunder shall be exercisable according to
the terms of the Plan and at such times and under such conditions as determined by the Administrator and set forth in the Option
Agreement. An Option may not be exercised for a fraction of a Share.
An Option shall be deemed exercised when the Company receives: (i) written or electronic notice of exercise (in accordance with
the Option Agreement) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option
is exercised. Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the
Option Agreement and the Plan. Shares issued upon exercise of an Option shall be issued in the name of the Optionee or, if requested by
the Optionee, in the name of the Optionee and his or her spouse. Until the Shares are issued (as evidenced by the appropriate entry on the
books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a
shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause
to be issued) such Shares promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the
record date is prior to the date the Shares are issued, except as provided in Section 15 of the Plan.
Exercising an Option in any manner shall decrease the number of Shares thereafter available, both for purposes of the Plan and
for sale under the Option, by the number of Shares as to which the Option is exercised.
(b)
Termination of Relationship as a Service Provider or Provision of Notice of Employment Termination . If an
Optionee (i) ceases to provide ongoing service as a Service Provider (for any reason and regardless of any appropriate court finding such
termination unfair or irregular on any basis whatsoever), other than upon the Optionee’s death or Disability, or (ii) is provided with notice
of termination of employment (for any reason and regardless of any appropriate court finding the related termination unfair or irregular on
any basis whatsoever) and ceases to provide ongoing service during the notice period, the Optionee may exercise his or her Option within
such period of time as is specified in the Option Agreement to the extent that the Option is vested on the earlier of the date of such
cessation as a Service Provider or the last date of ongoing service after receiving a notice of termination of employment or such later date as
required by Applicable Laws (the earlier of these dates or such later date required by Applicable Laws is referred to herein as the “Vesting
Cessation Date”, as reasonably fixed and determined by the Administrator), but in no event later than the expiration of the term of such
Option as set forth in the Option Agreement. In the absence of a specified time in the Option Agreement, the Option shall remain
exercisable for three (3) months following the Vesting Cessation Date, but in no event later than the expiration of the term of such Option
as set forth in the Option Agreement. If, on the Vesting Cessation Date, the Optionee is not vested as to his or her entire Option, the Shares
covered by the unvested portion of the Option shall revert to the Plan (unless the Administrator determines otherwise). At the sole
discretion of Company, subject to Applicable Laws, Grantee may be paid a lump sum for their cash compensation in lieu of notice. If, after
the Vesting Cessation Date, the Optionee does not exercise his or her Option within the time specified by the Administrator, the Option
shall terminate, and the Shares covered by such Option shall revert to the Plan.
(c)
Disability of Optionee. If an Optionee ceases to be a Service Provider as a result of the Optionee’s Disability, the
Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement to the extent the Option is
vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option
Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months
following the Optionee’s termination, but in no event later than the expiration of the term of such Option as set forth in the Option
Agreement. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested
portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time
specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan.
(d)
Death of Optionee. If an Optionee dies while a Service Provider, the Option may be exercised within such period of
time as is specified in the Option Agreement (but in no event later than the expiration of the term of such Option as set forth in the Option
Agreement), by the Optionee’s estate or by a person who acquires the right to exercise the Option by bequest or inheritance, but only to the
extent that the Option is vested on the date of
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death. In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following
the Optionee’s termination, but in no event later than the expiration of the term of such Option as set forth in the Option Agreement. If, at
the time of death, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall
immediately revert to the Plan. The Option may be exercised by the executor or administrator of the Optionee’s estate or, if none, by the
person(s) entitled to exercise the Option under the Optionee’s will or the laws of descent or distribution. If the Option is not so exercised
within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan.
11.
Stock Appreciation Rights.
(a)
Grant of SARs. Subject to the terms and conditions of the Plan, SARs may be granted to Service Providers at any
time and from time to time as shall be determined by the Administrator, in its sole discretion. The Administrator shall have complete
discretion to determine the number of SARs granted to any Participant.
(b)
Exercise Price and other Terms . The Administrator, subject to the provisions of the Plan, shall have complete
discretion to determine the terms and conditions of SARs granted under the Plan; provided, however, that no SAR may have a term of more
than ten (10) years from the date of grant; provided, further that SARs may not have an exercise price below 100% of the Fair Market
Value of the underlying shares on the grant date.
(c)
Payment of SAR Amount. Upon exercise of a SAR, a Participant shall be entitled to receive payment from the
Company in an amount determined by multiplying.
times
(i)
(ii)
The difference between the Fair Market Value of a Share on the date of exercise over the exercise price;
the number of Shares with respect to which the SAR is exercised.
(d)
or a combination thereof.
Payment upon Exercise of SAR. At the discretion of the Administrator, payment for a SAR may be in cash, Shares
(e)
SAR Agreement. Each SAR grant shall be evidenced by a Stock Appreciation Right Agreement that shall specify
the exercise price, the term of the SAR, the conditions of exercise, and such other terms and conditions as the Administrator, in its sole
discretion, shall determine.
(f)
Expiration of SARs. A SAR granted under the Plan shall expire upon the date determined by the Administrator, in
its sole discretion, and set forth in the Stock Appreciation Right Agreement; provided, however, that the term will be no more than ten (10)
years from the date of grant thereof. Notwithstanding the foregoing, the rules of Section 10 will also apply to SARs.
(7)
No Dividend Equivalents. No SAR shall provide for the payment or accrual of dividend equivalents.
12.
Restricted Stock.
(a)
Grant of Restricted Stock. Subject to the terms and conditions of the Plan, Restricted Stock may be granted either
alone, in addition to, or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. After the
Administrator determines that it will offer Restricted Stock under the Plan, it shall advise the offeree in writing or electronically, by means
of a Notice of Grant, of the terms, conditions and restrictions related to the grant, including the number of Shares of Restricted Stock
granted to the Participant and the conditions that must be satisfied, which typically will be based principally or solely on continued
provision of services but may include a performance-based component, upon which is conditioned the grant or vesting of
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Restricted Stock. The offer shall be accepted by execution of a Restricted Stock Purchase Agreement in the form determined by the
Administrator.
(b)
Repurchase Option. Unless the Administrator determines otherwise, the Restricted Stock Purchase Agreement shall
grant the Company a repurchase option exercisable upon and after the Vesting Cessation Date or upon termination of the purchaser’s
service with the Company due to death or Disability. Unless the Administrator provides otherwise, the purchase price for Shares
repurchased pursuant to the Restricted Stock Purchase Agreement shall be the original price paid by the purchaser and may be paid by
cancellation of any indebtedness of the purchaser to the Company. The repurchase option shall lapse at a rate determined by the
Administrator.
(c)
Other Provisions. The Restricted Stock Purchase Agreement shall contain such other terms, provisions and
conditions not inconsistent with the Plan as may be determined by the Administrator in its sole discretion.
(d)
Rights as a Shareholder. Once the Restricted Stock is granted, the Participant shall have the rights equivalent to
those of a shareholder, and shall be a shareholder when the grant is entered upon the records of the duly authorized transfer agent of the
Company.
(5)
Dividends. No adjustment will be made for a dividend or other right for which the record date is prior to the date
the Restricted Stock is granted, except as provided in Section 15 of the Plan. Restricted Stock may provide for the payment or accrual of
dividends, provided that any dividends accrued by the Company with respect to the Restricted Stock shall be paid to the Participant only if
and when such Restricted Stock becomes free from the restrictions on transferability and forfeitability that apply to such Restricted Stock
and, if so payable, shall be paid at the time as provided in the Restricted Stock Purchase Agreement.
13.
Restricted Stock Units.
(a)
Grant. Restricted Stock Units may be granted at any time and from time to time as determined by the
Administrator. After the Administrator determines that it will grant Restricted Stock Units under the Plan, it shall advise the Participant in
a Restricted Stock Unit Agreement of the terms, conditions, and restrictions related to the grant, including the number of Restricted Stock
Units.
(b)
Vesting Criteria and Other Terms. The Administrator shall set vesting criteria in its discretion, which, depending on
the extent to which the criteria are met, will determine the number of Restricted Stock Units that will be paid out to the Participant. The
Administrator may set vesting criteria based upon the achievement of Company-wide, business unit, or individual goals (including, but not
limited to, continued employment), or any other basis determined by the Administrator in its discretion.
(c)
Earning Restricted Stock Units. Upon meeting the applicable vesting criteria, the Participant shall be entitled to
receive a payout as determined by the Administrator. Notwithstanding the foregoing, at any time after the grant of Restricted Stock Units,
the Administrator, in its sole discretion, may reduce or waive any vesting criteria that must be met to receive a payout.
(d)
Form and Timing of Payment. Payment of earned Restricted Stock Units shall be made as soon as practicable after
the date(s) determined by the Administrator and set forth in the Restricted Stock Unit Agreement. The Administrator, in its sole discretion,
may only settle earned Restricted Stock Units in cash, Shares, or a combination of both.
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(e)
Cancellation. On the date set forth in the Restricted Stock Unit Agreement, all unearned Restricted Stock Units
shall be forfeited to the Company.
(6)
Dividend Equivalents. Restricted Stock Units may provide for the payment or accrual of dividend equivalents,
provided that any dividend equivalents accrued by the Company with respect to the Restricted Stock Unit shall be paid to the Participant
only if and when such Restricted Stock Unit becomes free from the restrictions on transferability and forfeitability that apply to such
Restricted Stock Unit and, if so payable, shall be paid at the time as provided in the Restricted Stock Unit Agreement.
14.
Non-Transferability of Awards . Unless determined otherwise by the Administrator, an Award may not be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Participant, only by the Participant. If the Administrator makes an Award transferable, such Award
shall contain such additional terms and conditions as the Administrator deems appropriate. In no event may an Award granted hereunder
be transferred in exchange for consideration.
15.
Adjustments Upon Changes in Capitalization, Dissolution, Merger or Asset Sale.
(a)
Changes in Capitalization. Subject to any required action by the shareholders of the Company, the number of shares
of Common Stock covered by each outstanding Award, and the number of shares of Common Stock which have been authorized for
issuance under the Plan but as to which no Awards have yet been granted or which have been returned to the Plan upon cancellation,
expiration, repurchase or forfeiture of an Award, as well as the price per share of Common Stock covered by each such outstanding
Award shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a
stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in
the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that
conversion of any convertible securities of the Company shall not be deemed to have been “effected without receipt of consideration.”
Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as
expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any
class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock
subject to an Award.
(b)
Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the
Administrator shall notify each Participant as soon as practicable prior to the effective date of such proposed transaction. The
Administrator in its discretion may provide for a Participant to have the right to exercise his or her Option or SAR until ten (10) days prior
to such transaction as to all of the Optioned Stock covered thereby, including Shares as to which the Option would not otherwise be
exercisable. In addition, the Administrator may provide that any Company repurchase option or forfeiture rights applicable to any Award
shall lapse 100% , and that any Award vesting shall accelerate 100%, provided the proposed dissolution or liquidation takes place at the
time and in the manner contemplated. To the extent it has not been previously exercised, or, with respect to Restricted Stock, all
restrictions have not lapsed, or, with respect to a Restricted Stock Unit, all units have not vested, an Award will terminate immediately prior
to the consummation of such proposed action.
(c)
Merger or Asset Sale.
(i)
Stock Options and SARs. In the event of a merger of the Company with or into another corporation, or the
sale of substantially all of the assets of the Company, each outstanding Option and SAR shall be assumed or an equivalent option
or SAR substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the
successor corporation refuses to assume or substitute for the Option or SAR, the Participant shall fully vest in and have the right to
exercise the Option or SAR as to all of the Optioned Stock, including Shares as to which it would not otherwise be vested or
exercisable. If an Option or SAR becomes fully vested and exercisable in lieu of assumption or substitution in the event of a
merger or sale of assets, the Administrator shall notify the Participant in writing or electronically that the Option or SAR shall be
fully vested and exercisable for a period of fifteen
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(15) days from the date of such notice, and the Option or SAR shall terminate upon the expiration of such period, or such earlier
date as specified in the Award Agreement. For the purposes of this paragraph, the Option or SAR shall be considered assumed if,
following the merger or sale of assets, the option or stock appreciation right confers the right to purchase or receive, for each
Share of Optioned Stock subject to the Option or SAR immediately prior to the merger or sale of assets, the consideration
(whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each
Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration
chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the
merger or sale of assets is not solely common stock of the successor corporation or its Parent, the Administrator may, with the
consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option or SAR, for
each Share of Optioned Stock subject to the Option or SAR, to be solely common stock of the successor corporation or its Parent
equal in fair market value to the per share consideration received by holders of Common Stock in the merger or sale of assets.
(ii)
Restricted Stock and Restricted Stock Units. In the event of a merger of the Company with or into another
corporation, or the sale of substantially all of the assets of the Company, each outstanding Restricted Stock and Restricted Stock
Unit award shall be assumed or an equivalent Restricted Stock or Restricted Stock Unit award substituted by the successor
corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or
substitute for the Restricted Stock or Restricted Stock Unit award, the Participant shall fully vest in the Restricted Stock Unit,
including shares which would not otherwise be vested, and all restrictions on Restricted Stock will lapse immediately prior to the
closing date of the transaction. For the purposes of this paragraph, a Restricted Stock or Restricted Stock Unit award shall be
considered assumed if, following the merger or sale of assets, the award confers the right to purchase or receive, for each Share
subject to the Restricted Stock or Restricted Stock Unit award immediately prior to the merger or sale of assets, the consideration
(whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each
Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration
chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the
merger or sale of assets is not solely common stock of the successor corporation or its Parent, the Administrator may, with the
consent of the successor corporation, provide for the consideration to be received, for each Share subject to the Restricted Stock
or Restricted Stock Unit award, to be solely common stock of the successor corporation or its Parent equal in fair market value to
the per share consideration received by holders of Common Stock in the merger or sale of assets.
16.
Date of Grant. The date of grant of an Award shall be, for all purposes, the date on which the Administrator makes the
determination granting such Award, or such other later date as is determined by the Administrator. Notice of the determination shall be
provided to each Participant within a reasonable time after the date of such grant.
17.
Amendment and Termination of the Plan.
(a)
(b)
Amendment and Termination. The Board may at any time amend, alter, suspend or terminate the Plan.
Shareholder Approval. The Company shall obtain shareholder approval of any Plan amendment to the extent
necessary and desirable to comply with Applicable Laws.
(c)
Effect of Amendment or Termination. No amendment, alteration, suspension or termination of the Plan shall impair
the rights of any Participant, unless mutually agreed otherwise between the Participant and the Administrator, which agreement must be in
writing and signed by the Participant and the Company. Termination of the Plan shall not affect the Administrator’s ability to exercise the
powers granted to it hereunder with respect to Awards granted under the Plan prior to the date of such termination or Shares issued under
the Plan.
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The Company will administer the Plan from the United States of America, and any disputes will be settled in the U.S. according
to U.S. law. This Plan and all awards are governed by the internal substantive laws, but not the choice of law principles, of the State of
California, United States of America.
18.
Conditions Upon Issuance of Shares.
(a)
Legal Compliance. Shares shall not be issued pursuant to the exercise of an Option or Stock Appreciation Right or
pursuant to the vesting of a Restricted Stock or Restricted Stock Unit award unless the exercise of such Option or Stock Appreciation Right
or the vesting of a Restricted Stock or Restricted Stock Unit award and the issuance and delivery of such Shares shall comply with
Applicable Laws and shall be further subject to the approval of counsel for the Company with respect to such compliance.
(b)
Investment Representations. As a condition to the exercise or receipt of an Award, the Company may require the
person exercising or receiving such Award to represent and warrant at the time of any such exercise or receipt that the Shares are being
purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the
Company, such a representation is required.
19.
Inability to Obtain Authority . The inability of the Company to obtain authority from any regulatory body having jurisdiction,
which authority is deemed by the Company’s counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve
the Company of any liability in respect of the failure to issue, sell or release from escrow such Shares as to which such requisite authority
shall not have been obtained.
20.
Shares as shall be sufficient to satisfy the requirements of the Plan.
Reservation of Shares. The Company, during the term of this Plan, will at all times reserve and keep available such number of
21.
Shareholder Approval. The Plan shall be subject to approval by the shareholders of the Company within twelve (12) months
after the date the Plan is adopted. Such shareholder approval shall be obtained in the manner and to the degree required under Applicable
Laws.
22.
No Repricing. Other than pursuant to an adjustment in connection with a change in capitalization as described in Section 15,
the exercise price for an Option or SAR may not be reduced without the prior consent of the Company’s stockholders. This shall include,
without limitation, a repricing of the Option or SAR as well as an Option or SAR exchange program whereby the Participant agrees to
cancel an existing Option in exchange for an Option, SAR or other Award or cash payment. Moreover, if the exercise price of an Option or
SAR is reduced (other than pursuant to Section 15), the transaction will be treated as a cancellation of the Option or SAR and the grant of a
new Option or SAR.
23.
Section 409A Compliance . Awards granted hereunder are intended to comply with or be exempt from the requirements of
Section 409A of the Code to the extent Section 409A of the Code applies to such Awards and the terms of the Plan and any Award granted
under the Plan shall be interpreted, operated and administered in a manner consistent with this intention to the extent the Administrator
deems necessary or advisable in its sole discretion. Notwithstanding any other provision in the Plan, the Administrator, to the extent it
unilaterally deems necessary or advisable in its sole discretion, reserves the right, but shall not be required, to amend or modify the Plan and
any Award granted under the Plan so that the Award qualifies for exemption from or complies with Section 409A of the Code; provided,
however, that the Company makes no representation that the Awards granted under the Plan shall be exempt from or comply with
Section 409A of the Code and makes no undertaking to preclude Section 409A of the Code from applying to Awards granted under the
Plan.
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Subsidiaries of QuickLogic Corporation
EXHIBIT 21
Name
Jurisdiction
QuickLogic International, Inc.
QuickLogic Kabushiki Kaisha
QuickLogic (India) Private Limited
QuickLogic (Shanghai) Trading Limited
Delaware
Japan
India
China
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
EXHIBIT 23.1
We consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-215030) and Form S-8 (Nos. 333-
34898, 333-34900, 333-34902, 333-76022, 333-123515, 333-159498, and 333-208060), of our report dated March 15, 2019, relating to the
consolidated financial statements and schedule of QuickLogic Corporation, which report expresses an unqualified opinion and includes an
explanatory paragraph relating to the adoption of new accounting standards, and the effectiveness of internal control over financial
reporting of QuickLogic Corporation, appearing in this Annual Report on Form 10-K for the year ended December 30, 2018.
/s/ Moss Adams LLP
San Francisco, California
March 15, 2019
I, Brian C. Faith, certify that:
EXHIBIT 31.1
1.
I have reviewed this annual report on Form 10-K of QuickLogic Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant’s internal control over financial reporting.
Date: March 15, 2019
/s/ Brian C. Faith
Brian C. Faith
President and Chief Executive Officer
I, Suping (Sue) Cheung, certify that:
EXHIBIT 31.2
1.
I have reviewed this annual report on Form 10-K of QuickLogic Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant’s internal control over financial reporting.
Date: March 15, 2019
/s/ Suping (Sue) Cheung
Suping (Sue) Cheung
Vice President, Finance and Chief Financial Officer
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Brian C. Faith, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that the Annual Report of QuickLogic Corporation on Form 10-K for the fiscal year ended December 30, 2018 fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Annual Report on
Form 10-K fairly presents in all material respects the financial condition and results of operations of QuickLogic Corporation.
EXHIBIT 32
By:
Date:
Name:
Title:
/s/ Brian C. Faith
March 15, 2019
Brian C. Faith
President and Chief Executive Officer
I, Suping (Sue) Cheung, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes_Oxley Act
of 2002, that the Annual Report of QuickLogic Corporation on Form 10-K for the fiscal year ended December 30, 2018, fully complies
with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Annual
Report on Form 10-K fairly presents in all material respects the financial condition and results of operations of QuickLogic Corporation.
By:
Date:
Name:
Title:
/s/ Suping (Sue) Cheung
March 15, 2019
Suping (Sue) Cheung
Vice President, Finance and Chief Financial Officer