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,
SensiMLcompletes the "full stack" end-to-end solution with accurate sensor algorithms using AI technology. The full range of platforms, software tools and eFPGA IP enables the practical and efficient adoption of AI, voice and sensor processing across Consumer/Industrial IoT, Consumer Electronics, Military, Aerospace and Defense applications. Our new products include our EOS™, QuickAI™, SensiML Analytics Studio, ArcticLink® III, PolarPro®3, PolarPro II, PolarPro, and Eclipse II products (which together comprise our new product category). Our mature products include primarily FPGA families named pASIC®3 and QuickRAM® as well as programming hardware and design software. In addition to delivering our own semiconductor solutions, we have an IP business that licenses our eFPGA technology for use in other semiconductor companies SoCs. We began delivering our eFPGA IP product ArcticPro™ in 2017, which is included in the new product revenue category. Through the acquisition of SensiML, we now have an IoT AI software platform that includes SaaS subscriptions for development, per unit license fees when deployed in production, and proof-of-concept services - all of which are also included in the new product revenue category. Our semiconductor solutions typically fall into one of three categories: Sensor Processing, Display 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 CommunicationsManager 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. Through the acquisition of SensiML, our core IP also includes the SensiML AI Toolkit that enables OEMs to develop AI software for a broad array of resource-constrained time-series sensor endpoint applications. These include a wide range of consumer and industrial sensing applications. We also work with processor manufacturers, sensor manufacturers, and voice recognition, sensor fusion and context awareness algorithm developers in the development of reference designs. Through reference designs that incorporate our solutions, we believe 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. 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. 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. 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. 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. We are expecting revenue growth from EOS S3, SensiML AI SaaS, and eFPGA IP license in fiscal year 2021. 25
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 2021 we generated total revenue of
$12.7 million, which represents a 46.9% increase from $8.6 millionin fiscal 2020. Our new product revenue during fiscal 2021 was $7.8 million, which represents an 179% increase from fiscal 2020. Of the $7.8 millionin fiscal 2021 new product revenue, approximately $2.7 millionwas generated by professional engineering services related to our eFPGA IP. Our mature product revenue during 2021 was $4.9 million, which represents a 16% decrease from 2020. We shipped our new products into four of our targeted mobile market segments: Smartphones, Wearables, Mobile Enterprise, Tablets, and SaaS revenue from the new Artificial Intelligence or AI market beginning in 2020. Overall, with the improvements in reduced operating expenses achieved by our restructuring activities implemented in early fiscal 2020, offset partially by the impact of the COVID-19 pandemic in 2021, we reported a net loss of $6.6 millionfor 2021 compared to a net loss of $11.2 millionfor 2020 We have experienced net losses in the past years and expect to experience losses in at least some of the fiscal quarters during 2022, 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 approximately $1 millionin proceeds that we received in September 2021from the sale of our equity securities, the subsequent event of the sale of our equity securities for approximately $1.5 millionin proceeds during February 2022, and the credit line we may be able to draw down from 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. On December 6, 2019, the Board of Directors of the Company approved a 1-for-14 reverse stock split of the Company's outstanding Common Stock, which became effective on December 23, 2019, which was approved by the Company's shareholders in a special meeting held on November 26, 2019. At the effective time of the Reverse Stock Split, every 14 issued and outstanding shares of the Company Common Stock were automatically combined into one issued and outstanding share of Common Stock without any change in the par value per share. Stockholders who would have otherwise been entitled to fractional shares of Common Stock as a result of the Reverse Stock Split received a cash payment in lieu of receiving fractional shares. All share, equity award, and per share amounts contained in this Form 10-K and the accompanying Consolidated Financial Statements have been adjusted to reflect the Reverse Stock Split for all prior periods presented. COVID-19 Response The COVID-19 pandemic and its potential effects on the Company's business in fiscal 2022 and beyond remain uncertain. There have been further restrictions by the governmental authorities as a result of a surge in COVID-19 cases during the year 2021 and continuing into fiscal 2022. These restrictions and other impacts from COVID-19 could cause further disruptions or restrictions on the Company's ability to source, manufacture or distribute its products, including temporary disruptions to the facilities of its contract manufacturers in China, Taiwan, Philippinesand Singapore, or the facilities of its suppliers and their contract manufacturers globally. Additionally, multiple countries have imposed and may further impose restrictions on business operations and movement of people and products to limit the spread of COVID-19. This might cause delays in production or delivery of components or raw materials that are part of the Company's global supply chain. If COVID-19 cases surge and the Company experiences more pronounced disruptions in its operations, the Company may experience constrained supply or curtailed demand that may materially adversely impact its business and results of operations.
The extent of the impact of COVID-19 on our operational and financial performance will depend on future developments, including the duration and spread of the pandemic, restrictions on travel, transportation and other containment measures, the success and the availability of the recent vaccine, our compliance with these measures and the impact on our employees, customers, contractors and supply chain, all of which are uncertain and unpredictable.
January 2020, the Company implemented a restructuring plan to lower annual operating expenses. The restructuring plan was approved by the Company's Board of Directors on January 24, 2020. Pursuant to the restructuring plan, the Company recorded $753,000of restructuring charges during the twelve months of fiscal year 2020, consisting primarily of employee severance related costs and facilities costs. See Note 1to the Consolidated Financial Statements for additional information. Our employees and customers Our top priority during the ongoing COVID-19 pandemic remains the health and safety of our employees and their families, as well as our customers. As global governments institute restrictions on commercial operations, we are working to ensure our compliance while also maintaining business continuity for operations. Most of our personnel continue to work from home except few personnel, who are required for minimum operations. We only allow employees in our facilities who are essential to the facilities' operations under best practices guidelines on maintaining physical distancing, utilizing enhanced cleaning protocols and usage of personal protective equipment. We are committed to our customers to enable the support they need to continue providing vital services and tools. Our global offices remain operational to meet customer needs during the pandemic in compliance with the orders and restrictions imposed by local authorities in each of our locations, and we are working with our customers to meet their specific shipment needs. While the pandemic has created delays on the inbound supply chain at our partners and our own facilities and both inbound and outbound logistical challenges, we have been able to identify alternative solutions such that none of the issues have had a material impact on our ability to fulfill demand. 26
Significant 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
SEChas defined critical accounting policies as those that are most important to the portrayal of our financial condition and results of operations and require us to make 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 and determination of the Stand-Alone Selling Price ("SSP") for certain distinct performance obligations (such as for IP licensing and professional services contracts), goodwill and intangible assets, valuation of inventories including identification of excess quantities and product obsolescence, allowance for doubtful accounts, valuation of long-lived assets, leases, 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 recognize revenue in accordance with ASC 606 and related ASUs, which provide supplementary guidance, and clarifications. The results for reporting periods beginning after January 1, 2018within this Form 10-K, are presented in accordance with ASC 606, although comparative information for the reporting periods prior to January 1, 2018have not been restated and continue to be reported under the accounting standards and policies in effect for those periods. Under ASC 606 and related ASUs, revenue is recognized as follows:
We provide 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. Moreover, we provide professional engineering services to our customers.
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. Revenue arrangements with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. The Company uses a range of amounts to estimate SSP when each of the products and services are sold separately and determines the discount to be allocated based on the relative SSP of the various products and services when products and services sold are bundled. In instances where SSP is not directly observable, such as when the Company does not sell the product or service separately, it determines the SSP using information that may include market conditions and other observable inputs. The Company typically has more than one SSP for individual products and services due to the stratification of those products and services by customers. In these instances, the Company may use information such as the size of the customer, customer tier, type of the technology used, customer demographics, geographic region and other factors in determining the SSP
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 revenue from hardware products when control of the products is transferred to customers, when the Company’s performance obligation is satisfied, which typically occurs upon shipment from the Company’s manufacturing site. or its head office.
Income from intellectual property and software licenses
The Company generates revenue from licensing their intellectual property or IP, software tools and royalties from licensing its technology. The Company also recognized approximately
$1.1 millionof IP and software licensing revenue during fiscal 2021 and diminimis amounts in fiscal 2020 respectively Additionally, 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 License 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. The Company determines 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. ASC 606 provides for three methods to establishing SSP: Adjusted market assessment, Cost-plus-margin, and the Residual method. For IP license revenue, the Company utilized a market assessment approach based on discounted, expected future net cash flows to determine the value of the IP in order to establish SSP. This method was chosen as QuickLogichad cash flow information available from historical commercialization of similar IP. The discount rate utilized was 12%, equal to the company's estimated weighted average cost of capital. There are no variable consideration estimates associated with either combined development and IP arrangements or for standalone arrangements involving either the sale or licensing of IP.
Professional services income
Professional services revenue consists of professional engineering fees associated with the custom integration of the Company’s technology solutions into its customers’ products. Customization professional engineering services contract revenue, including eFPGA customization, was approximately
An initial revenue arrangement may consist of significant software customization services and support and maintenance services that include post-implementation customer support on a time-and-materials basis as-needed.
Revenue from the company’s personalization services based on the duration of the project and the specific terms and deliverables of each contract:
? a pattern over time, measured using the input method such as work units
? an over time model measured using the output method such as specific deliverables produced Due to the nature of the work performed in these arrangements, the estimation of the over-time model is complex and involves significant judgment. In the case of the input methods, the key factors reviewed by management to estimate costs to complete each contract is the estimated labor days-effort necessary to complete the project, budgeted hours, hourly cost to the Company, profit margins, and engineering hours at cut-off when projects extend beyond a reporting period. In relation to the output method, key factors reviewed by the Company are the specific deliverables specified in the contracts with customers.
Significant judgments and estimates
Except as noted below, no significant judgment has generally been required in determining the amount and timing of revenue from the Company’s contracts with customers.
• The Company has implemented methods and controls to monitor the days of work committed
in completing customization and other professional services as well as quantifying changes in estimates.
• For revenue derived from time and materials, the Company estimates a
overhead for labor and materials needed
• In 2021, the Company entered into a revenue contract with an unaffiliated company
customer, where the customer provided cash in addition to common stock
stock as payment in exchange for an IP license, know-how and professional
engineering services. The client is a private company and, as such,
its common shares are not traded on the stock exchange. This contract obliges the Company
apply significant judgment in the inputs for estimating the fair value of
common shares of a private company for the purpose of determining the
all consideration received under the contract with the customer. Submissions
involved in estimating the fair value of private company common stock
include the selection of a group of peer companies, the estimated volatility of
equity, based on a basket of common shares of public companies of peers, the
discount rate, discount for lack of commercialization and release time
materially affect the estimated fair value of the non-monetary consideration
has received. Consequently, to
an investment in a private, unaffiliated company on its consolidated balance sheet
balance sheet and the same corresponding amount in deferred revenue. See Note 9 and
Note 14 to the consolidated financial statements for more information.
• The Company does not currently have any revenue contracts with
Table of Contents Contract Balances Timing of revenue recognition may differ from the timing of invoicing to the Company's customers due to contractual terms. The Company records contract assets when revenue is recognized prior to invoicing, and a contract liability when revenue is recognized subsequent to invoicing. The contract assets are transferred to receivables when billing occurs and contract liabilities are transferred to revenue once the related performance obligation is satisfied.
Software as a Service Revenue, or SaaS Revenue
Software products that are offered to customers with a right to use the hosted software over the contract period without taking the possession of it are billed on a subscription basis. Revenue that are billed on a subscription basis is recognized ratably over the contract period.
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.
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 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 the costs of obtaining a contract with a customer
We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect 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 ASC, 606 contracts meet the capitalization criteria, and as such, there are no costs deferred and recognized as assets on the consolidated balance sheets at
January 2, 2022and January 3, 2021.
Practical expedients and exemptions
(i) Taxes collected from customers and remitted to government authorities and
related to the sales of our products are excluded from income.
(ii) Sales commissions are expensed as incurred because the amortization
period would have been one year or less. These costs are accounted for in
Selling, general and administrative expenses in the Consolidated Consolidated
(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
January 2, 2022, January 3, 2021, and December 29, 2019were approximately ( $13,000), $30,000, and $60,000respectively on the Company's Consolidated Statement of Operations. The allowance for sales returns is based on a historical returns analysis performed on a quarterly basis.
The Company regularly assesses the creditworthiness of its new and returning customers. The Company has never had collectability issues from its customers and has had no amounts, or immaterial amounts, of allowances for doubtful accounts in accounts receivable, net of allowances for doubtful accounts on its consolidated balance sheets. for all years presented in this Form 10K.
Cost of Revenue We record all costs associated with product sales and professional services 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, depreciation and amortization of certain capitalized software. Cost of revenue related to professional services primarily comprise the cost of labor was approximately
$0.4 millionfor fiscal 2021 and was de minimis for each of fiscal 2020 and fiscal 2019.
Allowance for doubtful accounts
The Company regularly assesses the creditworthiness of its new and returning customers. Historically, the Company has not had collection issues from its customers and has not had insignificant amounts or amounts in accounts receivable, net of allowances for doubtful accounts on its consolidated balance sheets for all years presented. in this 10K form.
Table of Contents 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. 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 IoT market and continue to develop new products, we believe our new product life cycle may 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. Leases We account for operating and finance leases in accordance with ASU, No. 2016-02, Leases (Topic 842), or ASC 842, Leases. Under ASC 842, all significant lease arrangements are generally recognized at lease commencement. Operating lease right-of-use, or ROU, assets and lease liabilities are recognized at the commencement date. A ROU asset and corresponding lease liability is not recorded for leases with an initial term of 12 months or less (short term leases) and the Company recognizes lease expense for these leases as incurred over the lease term. ROU assets represent the Company's right to use an underlying asset during the reasonably certain lease terms and lease liabilities represent the Company's obligation to make lease payments arising from the lease. The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The Company primarily uses its incremental borrowing rate, based on the information available at commencement date, in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments related to initial direct cost and prepayments and excludes lease incentives. Lease expense is recognized on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components, which are generally accounted for separately. Upon adoption of the ASU No. 2016-02, the Company recognized right-of-use assets of approximately
$975,000and lease liabilities of approximately $939,000on the Company's Consolidated Balance Sheet as of March 31, 2019with no material impact to its Consolidated Statements of Operations. The Company utilized weighted average discount rates of 5.88% and 6.36% for estimation of its ROU assets and ROU liabilities respectively.
Goodwillrepresents the excess fair value of consideration transferred over the fair value of net assets acquired in business combinations. The carrying value of goodwill and indefinite lived intangible assets are not amortized, but are annually tested for impairment and more often if there is an indicator of impairment. Intangible assets with finite useful lives are amortized on a straight-line basis over the periods benefited. The Company reviews the recoverability of its long-lived assets when events or changes in circumstances occur that indicate that the carrying value of the asset or asset group may not be recoverable. Key estimates utilized are the useful lives applied and assessment for impairment. 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 such asset, an impairment loss is recognized for the difference between estimated fair value and carrying value. The measurement of impairment requires management to estimate future cash flows and the fair value of long-lived assets.
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. Key estimates are the useful lives applied and impairment assessment. 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.
Stock-Based Compensation Valuation
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 2019 Stock Plan, 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. 30
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, which is estimated by management. We regularly review the assumptions used to compute the fair value of our stock-based awards and we revise our assumptions as appropriate. See Note 13 to the Consolidated Financial Statements for additional information. 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 net of deferred tax liabilities relating to an ROU asset of
$0.4 million, consisted primarily of net operating loss carryforwards, depreciation and amortization, amounted to approximately $61 million, tax effected, as of the end of 2021. 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 January 2, 2022, we had federal and state income tax net operating loss, or NOL, carryforwards of approximately $183.9 millionand $94.4 million, respectively, which will expire at various dates from 2022 through 2041. Federal net operating losses generated in 2019 and forward of $55.3 millioncan be carried forward indefinitely. We had research credit carryforwards of approximately $3.7 millionfor federal and $4.7 millionfor state income tax purposes as of January 2, 2022. If not utilized, the federal carryforwards will expire at various dates from 2022. The Californiacredit 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 $60 million, tax-effected, as of the end of fiscal year 2021, due to uncertainties related to our ability to utilize our U.S.deferred tax assets before they expire. Results of Operations
The following table shows the percentage of revenue for certain items in our statements of income for the periods indicated:
Fiscal Years 2021 2020 2019 Statements of Operations: Revenue 100 % 100 % 100 % Cost of revenue 42 % 51 % 43 % Gross profit 58 % 49 % 57 % Operating expenses: Research and development 55 % 87 % 120 % Selling, general and administrative 63 % 79 % 86 % Restructuring costs - % 9 % - % Loss from operations (59 )% (126 )% (149 )% Interest expense (1 )% (4 )% (3 )% Gain on forgiveness of PPP Loan 9 % - % - %
Interest income and other charges, net – % 1% 2% Loss before income taxes
(51 )% (129 )% (151
Provision for (benefit from) income taxes 1 % 1 % (1 )% Net loss (52 )% (130 )% (150 )%
The impact of inflation and product price changes on our revenue and revenue was negligible in 2021, 2020 and 2019.
Comparison of fiscal years 2021 and 2020
Revenue. The table below sets forth the changes in revenue for fiscal year ended
January 2, 2022, as compared to fiscal year ended January 3, 2021(in thousands, except percentage data): Fiscal Years 2021 2020 % of Total % of Total Amount Revenues Amount Revenues Year-Over-Year Change Revenue by product family (1): New products $ 7,76161 % $ 2,78232 % $ 4,979179 % Mature products 4,924 39 % 5,852 68 % (928 ) (16 )% Total revenue $ 12,685100 % $ 8,634100 % $ 4,05147 %
(1) New products include all products made to 180 nanometers or less
semiconductor processes, eFPGA IP license, professional services, QuickAI
and SensiML AI software as a service (SaaS) revenue. Mature products include all products produced on semiconductor processes larger than 180 nanometer. 31
The 179% increase in new product revenue in 2021 compared to 2020 was primarily due to professional services revenue growth of approximately
$1.5 millionand growth in all product lines within this category. In 2021, mature product revenue was 39% of total revenue compared to 68% in the prior year. Mature product revenue decreased by 16% compared to 2020. The decrease in mature product revenue was due primarily to decreases in most mature product categories, offset by QuickPCI product orders. Gross Profit. The table below sets forth the changes in gross profit for fiscal year ended January 2, 2022, as compared to fiscal year ended January 3, 2021(in thousands, except percentage data): Fiscal Years 2021 2020 % of Total % of Total Amount Revenues Amount Revenues Year-Over-Year Change Revenue $ 12,685100 % $ 8,634100 % $ 4,05147 % Cost of revenue 5,266 42 % 4,386 51 % 880 20 % Gross profit $ 7,41958 % $ 4,24849 % $ 3,17175 % The increase in gross profit and gross profit percentage was substantially due to strong revenue growth in new products, primarily in eFPGA IP license, connectivity, and sensors combined with higher margin professional engineering services in fiscal 2021. The sale of inventories that were previously written-off was approximately $123,000and $65,000in fiscal 2021 and fiscal 2020, respectively. Inventory written-down in 2021 was approximately $225,000compared to $199,000in 2020. In 2021 and 2020, the Company capitalized costs of approximately $533 thousandand $801 thousand, respectively, associated with internal-use software. For fiscal years 2021 and 2020 the Company recognized $278 thousandand $148 thousand, respectively, for amortization of internal-use software in cost of goods sold on its Consolidated Statements of Operations. 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 IoT market and continue to develop new CSSPs and products, we believe our product life cycle may 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. Operating Expenses. The table below sets forth the changes in operating expenses for fiscal year ended January 2, 2022, as compared to fiscal year ended January 3, 2021(in thousands, except percentage data): Fiscal Years 2021 2020 % of Total % of Total Amount Revenues Amount Revenues Year-Over-Year Change R&D expenses $ 6,92755 % $ 7,54487 % $ (617 )(8 )% SG&A expenses $ 8,00863 % $ 6,82079 % $ 1,18817 % Restructuring costs $ - - % $ 7539 % $ (753 )100 % Total operating expenses $ 14,935(118 )% $ 15,117(175 )% $ (182 )(1 )% Research and Development Expenses. Our research and development, or R&D, expenses consist primarily of personnel, overhead and other costs associated with System on Chip (SoC) and software development, programmable logic design, AI and eFPGA development. R&D expenses were $6.9 millionand $7.5 millionin 2021 and 2020, respectively, which represented 55% and 87%, respectively, of revenue for those periods. The $0.6 milliondecrease in R&D expenses in 2021 as compared to 2020 was primarily attributable to lower compensation costs, including stock-based compensation resulting from the reduced head-count given effect by the restructuring plan implemented in January 2020. Lower outside service costs and lower travel expenses due to COVID-19 also contributed to the decrease of R&D expenses. In 2021, 2020, and 2019, the Company capitalized costs of approximately $533 thousand, $801 thousand, and $365 thousand, respectively, associated with internal-use software. 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 $8.0 millionand $6.8 millionin 2021 and 2020, respectively, which represented 63% and 79% of revenue for those periods. The $1.2 millionincrease in SG&A expenses in 2021 as compared to 2020 was primarily attributable to outside services of $1.2 million, inclusive of consulting and small increases in other minor spend offset by decreases in salaries of $0.3million. Restructuring. In January 2020, the Company implemented a restructuring plan to lower annual operating expenses. The restructuring plan was approved by the Company's Board of Directors on January 24, 2020. Pursuant to the restructuring plan, the Company recorded $753,000of restructuring charges during fiscal year 2020, consisting primarily of employee severance related costs and facilities costs. See Note 1 to the Consolidated Financial Statements for additional information. Interest Expense and Interest Income and Other Expense, net. The table below sets forth the changes in interest expense and interest income and other expense, net, for the fiscal year ended January 2, 2022, as compared to fiscal year ended January 3, 2021(in thousands, except percentage data): Fiscal Years Year-Over-Year Change 2021 2020 Amount Percentage Interest income (expense) $ (130 ) $ (328 ) $ 198(60 )% Gain on forgiveness of PPP Loan 1,190 - 1,190 100 %
Interest income and other (expenses), net (43 ) 97
(140 ) (144 )%
$ 1,017 $ (231 ) $ 1,248(540 )% 32
Interest expense relates primarily to our line of credit facility and our PPP Loan. Interest income and other expenses, net, relates to the interest earned on our money market accounts and foreign exchange gain or losses recorded. In fiscal 2021, the Company's PPP loan was forgiven under the Federal Government's CARES act. As a result, the Company subsequently recognized a gain of approximately
$1.2 millionon its Consolidated Statement of Operations for fiscal 2021. Provision for Income Taxes. The table below sets forth the changes in provision for income taxes in the fiscal year ended January 2, 2022, as compared to the fiscal year ended January 3, 2021(in thousands, except percentage data): Fiscal Years Year-Over-Year Change 2021 2020 Amount Percentage Provision for income taxes $ 119 $ 51 $ 68133 % Income tax expense for 2021 relates primarily to foreign income tax provision on our foreign entities, primarily Indiaand the UK. The income tax expense for 2020 primarily relates to the deferred tax liability arising from intangible assets acquired from the acquisition of SensiMLwhich offsets a released a portion of the Company's valuation allowance outside of acquisition accounting. As of the end of 2021, 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 2020 and 2019
For discussion related to the results of operations and changes in financial condition for fiscal 2020 compared to fiscal 2019, please refer to "Part II, Item 7. Management's Discussion and Analysis of Financial Conditions and Results of Operations" in our fiscal 2020 Form 10-K, which was originally filed with the
SECon March 23, 2021.
Cash 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. As of
January 2, 2022, the Company's principal sources of liquidity consisted of cash, cash equivalents and restricted cash of $19.6million, including $15.0 milliondrawn down from its revolving line of credit ("Revolving Facility") with Heritage Bank of Commerce(" Heritage Bank"). Subsequent to 2021, in February 2022, the Company sold 310,000 shares of its common stock in a registered direct offering. The February 2022share placement resulted in gross cash proceeds of approximately $1.5 million. See Note 16 to the Consolidated Financial Statements for additional information. Credit Agreement
November 6, 2019, we Company entered into a First Amendment to the Amended and Restated Loan Agreement with Heritage Bankto extend the maturity date of the Revolving Facility for one year through September 28, 2021. Under this amendment, the Revolving Facility advances shall bear interest, on the outstanding daily balance thereof, at a rate per annum equal to the greater of (i) one half of one percentage point (0.50%) above the prime rate, or (ii) five and one half of one percentage points (5.50%). On December 11, 2020, we entered into a Second Amendment (the "Second Amendment") to the Amended and Restated Loan Agreement with Heritage Bank. The Second Amendment extended the loan maturity date for one year through September 28, 2022and amended the interest rate to a rate per annum equal to one half of one percentage point (0.50%) above the prime rate. On August 16, 2021, the Company entered into a Third Amendment to the Amended and Restated Loan Agreement with Heritage Bank(the "Third Amendment"). The Third Amendment (a) waived the Company's non-compliance with the minimum cash covenant which obligated the Company to maintain at least $3.0 millionof unrestricted cash at all times and (b) amended this obligation such that the Company shall now be required to maintain unrestricted cash in its accounts at the Bank in an amount of at least $3.0 millionmeasured i) immediately prior to the funding of any credit extension, and ii) at all times that any advance is outstanding. On November 16, 2021, the Company entered into a Fourth Amendment (the "Fourth Amendment") to the Amended and Restated Loan Agreement with Heritage Bank. The Fourth Amendment extended the loan maturity date through December 31, 2023, and amended and restated an annual, non-refundable Facility Fees of Forty-Five Thousand Dollars( $45,000)- due, prorated to approximately $11 thousand, on December 31, 2021and in full on each anniversary of the Closing Date of November 16, for so long as the Revolving Facility is in place. On January 2, 2022and January 3, 2021, the Company had $15.0 millionof outstanding revolving line of credit with interest rates of 3.75% and 3.75%, respectively. We were in compliance with all loan covenants under the Amended and Restated Loan Agreement, as amended, as of the end of the current reporting period. See Note 1 and Note 7 to the Consolidated Financial Statements for additional information. 33
Table of Contents Common Stock Offerings On
June 22, 2020, we closed an underwritten public offering of 2.5 million shares of common stock, $0.001par value per share at a price of $3.50per share, which included 141,733 additional shares pursuant to the underwriters' exercise of their over-allotment option. We received net proceeds from the offering of approximately $8.1 million, net of underwriter's commission and other offering expenses. See Note 11 to the Consolidated Financial Statements for additional information. On September 22, 2021, the Company entered into a Share Subscription Agreement for the sale of 125,000 shares of our common stock (the "Private Placement"). On September 30, 2021, the Company entered into a Common Stock Purchase Agreement for the sale of 73,664 shares of our common stock, in a registered direct offering pursuant to our effective shelf registration statement on Form S-3 (File No. 333-230352) (the "Registered Direct Offering," and together with the Private Placement, the "Share Placements"). The net proceeds to the Company from the Share Placements in aggregate, after deducting equity issuance costs of approximately $45,000, was approximately $1.0 million. See Note 11 to the Consolidated Financial Statements for additional information. Subsequent to 2021, in February 2022, the Company sold 310,000 shares of its common stock in a registered direct offering. These February 2022financing resulted in gross cash proceeds of approximately $1.5 million. See Note 16 to the Consolidated Financial Statements for additional information. Paycheck Protection Program On May 6, 2020, we entered into a loan agreement with Heritage Bankfor a loan of $1.2 millionpursuant to the Paycheck Protection Program, or PPP Loan under the Coronavirus Aid, Relief, and Economic Security Act enacted on March 27, 2020, or CARES Act. On June 5, 2020, the President of the United States of Americasigned into law the Paycheck Protection Flexibility Act ("PPPFA") to address many concerns expressed by the small business community. As of September 27, 2020, we fully utilized the loan proceeds in compliance with PPPFA guidelines. We applied for the full loan forgiveness in the fourth quarter of 2020. On January 26, 2021we received a notice from Heritage Bankthat amounts under the PPP Loan had been forgiven. See Note 7 to the Consolidated Financial Statements for additional information. Cash Flows As of January 2, 2022, most of our cash and cash equivalents were invested in a Heritage Bank Money Marketaccount. As of January 2, 2022, our interest-bearing debt consisted of $0.7 millionoutstanding under finance leases and $15.0 millionoutstanding under our Revolving Facility. See Note 7 to the Consolidated Financial Statements for additional information. Cash balances held at our foreign subsidiaries were approximately $401,000and $342,000at January 2, 2022and January 3, 2021, 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):
Fiscal Year 2021 2020 2019 Net cash (used in) operating activities
$ (2,859 ) $ (11,594 ) $ (12,638 )Net cash (used in) investing activities (718 ) (921 ) (288 ) Net cash provided by financing activities 434 7,600 22,862
In 2021, net cash used in operating activities was
$2.9 million, which was primarily due to a net loss of $6.6 million, adjusted for non-cash charges of $2.2 million. Non-cash charges consisted primarily stock-based compensation expense of $2.5 millionand depreciation and amortization of long-lived assets and certain definite-lived intangible assets of $0.6 million. In addition, changes in working capital accounts provided cash of $3.1 millionas a result of decreases in accounts receivable $0.3 million, inventory of $0.4 millionand other assets of $0.4 million, and increases in accounts payable of $0.4 millionand accrued liabilities of $0.3 million, partially offset by cash inflow from a decrease in deferred revenue of $0.4 million. In 2020, net cash used in operating activities was $6.7 million, which was primarily due to a net loss of $11.2 million, adjusted for non-cash charges of $2.8 million. Non-cash charges consisted primarily stock-based compensation expense of $1.7 millionand depreciation and amortization of long-lived assets and certain definite lived intangible assets of $0.8 million. In addition, changes in working capital accounts provided cash of $1.6 millionas a result of decreases in accounts receivable $0.3 million, inventory of $0.4 millionand other assets of $0.5 million, and increases in accounts payable of $0.3 millionand accrued liabilities of $0.2 million, partially offset by cash inflow from a decrease in deferred revenue of $0.1 million. 34
Net cash used for investing activities in 2021 was approximately
$0.7 million, which was primarily attributable to the capitalization of internal use software of $533and capital expenditures primarily related to computer equipment of $185,000. Net cash used for investing activities in 2020 was $1.1 million, which was primarily attributable to the leasehold improvements and computer equipment at the new office premises of $253,000and capitalization of internal use software of $801 thousand.
In 2021, net cash provided by financing activities was
$0.4 million, primarily attributable to the collective net proceeds of approximately $1.0 millionrelated to the issuance of 198,664 shares of common stock sold on September 30, 2021. The proceeds from the share issuances were partially offset by $0.6 millionin payments related to financing leases. In 2020, net cash provided by financing activities was $9.0 million, primarily attributable to the net proceeds of $8.1 millionfrom the issuance of 2.5 million shares of common stock in June 2020and over allotment of 141,733 share to underwriters in July 2020, and proceeds from the PPP Loan of $1.2 million, partially offset by $0.3 millionfor scheduled repayments of finance lease obligations and tax payments related to net settlement of stock awards. 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 Facility will be sufficient to satisfy our operations and capital expenditures over the next twelve months. Our Revolving Facility will expire in December 2023. 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 2021 and the effect such obligations and commitments are expected to have on our liquidity and cash flows in future fiscal periods (in thousands): Payments Due by Period Less than 1 More than 5 Total year 1-3 Years 4-5 Years Years
Contractual cash obligations: Operating leases
$ 937 $ 409 $ 528$ - $ - Finance software lease obligations 689 452 237 - - Wafer purchases (1) 972 972 - - - Other purchase commitments 939 878 61 - - Total contractual cash obligations 3,537 2,711 826 - - Other commercial commitments Revolving line of credit (2) 15,000 15,000 - - - Total commercial commitments 15,000 15,000 - - - Total contractual obligations and commercial commitments $ 18,537 $ 17,711 $ 826$ - $ -
(1) Some of our wafer manufacturers ask us to predict wafer starts
several months in advance. We undertake to receive and pay
part of the expected platelet volume. (2) The current maturity date of our revolving line of credit is
2023. However, we include this amount in the less than one year due category
the revolving nature of the balance and our intended use of the credit line
credit. See note 7 of the consolidated financial statements for additional information
Table of Contents 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 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.
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