NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — The Company and Basis of Presentation
QuickLogic Corporation ("QuickLogic" or "the Company") was founded in 1988 and reincorporated in Delaware in 1999. The Company enables Original Equipment Manufacturers ("OEMs") to maximize battery life for highly differentiated, immersive user experiences with Smartphone, Wearable, Tablet and Internet-of-Things devices. QuickLogic delivers these benefits through industry leading ultra-low power customer programmable System on Chip ("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.
The accompanying interim condensed consolidated financial statements are unaudited. In the opinion of management, these statements have been prepared in accordance with United States generally accepted accounting principles ("U.S. GAAP"), and include all adjustments, consisting only of normal recurring adjustments, necessary to provide a fair statement of results for the interim periods presented. The Company recommends that these interim condensed consolidated financial statements be read in conjunction with the Company's Form 10-K for the year ended
January 3, 2016
. Operating results for the
six
months ended
July 3, 2016
are not necessarily indicative of the results that may be expected for the full year.
QuickLogic's fiscal year ends on the Sunday closest to December 31 and the fiscal quarters each end on the Sunday closest to the end of each calendar quarter. QuickLogic's
second
fiscal quarters for
2016
and for
2015
ended on Sunday,
July 3, 2016
and
June 28, 2015
, respectively.
Liquidity
The Company has financed its operations and capital investments through sales of common stock, capital and operating leases, and bank lines of credit. As of
July 3, 2016
, the Company's principal sources of liquidity consisted of cash and cash equivalents of
$19.0 million
and
$2.0 million
in available credit under its revolving line of credit with Silicon Valley Bank, which expires on September 25, 2017.
On September 25, 2015, the Company entered into a Second Amendment to Third Amended and Restated Loan and Security Agreement with Silicon Valley Bank to extend the line of credit for
two
years through September 25, 2017. This amendment modifies some of the financial covenants. This line of credit 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
. On February 10, 2016, the Company entered into a Third Amendment to Third and Restated Loan and Security Agreement to further modify the covenants. See Note 5 for a description of the modified covenants. The Company is in compliance with all loan covenants as of the end of the current reporting period.
On March 21, 2016, the Company issued
10.0 million
shares of common stock at a price of
$1.00
per share,
$0.001
par value. The Company received net proceeds of approximately
$8.8 million
, after deducting underwriting commissions and other offering related expenses. The Company uses the net proceeds from the offering for working capital and other 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. The shares were offered pursuant to a shelf registration statement previously filed with the SEC, which was declared effective by the SEC on August 30, 2013, and as supplemented by a prospectus supplement dated March 17, 2016 filed with the Securities and Exchange Commission ("SEC") pursuant to Rule 424(b) under the Securities Act of 1933, as amended.
The Company currently uses its cash to fund its capital expenditures and operating losses. Based on past operating performance and current annual operating plans, the Company believes that its existing cash and cash equivalents, together with available financial resources from the revolving line of credit with Silicon Valley Bank and equity funding raised during March 2016 will be sufficient to fund its operations and capital expenditures and provide adequate working capital for the next twelve months.
The Company's liquidity is affected by many factors 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 EOS
TM
, ArcticLink®, and PolarPro® solution platforms;
QUICKLOGIC CORPORATION
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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 the generation of sales from its new product offerings, existing cash and cash equivalents, together with financial resources from its revolving line of credit with Silicon Valley Bank and its ability to raise additional capital in the public capital markets will be sufficient to satisfy its operations and capital expenditures requirements. 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 include the accounts of QuickLogic and its 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 and losses from the foreign currency transactions of these subsidiaries are recorded as interest income and other expense, net in the condensed unaudited consolidated statements of operations.
Uses 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 materially from those estimates, particularly in relation to revenue recognition, the allowance for doubtful accounts, sales returns, valuation of investments, valuation of long-lived assets including mask sets, 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.
For the
three
and
six
months ended
July 3, 2016
, the Company generated
31%
and
33%
of its total revenue from shipments to Samsung Electronics Co., Ltd. ("Samsung"). See Note 11 for information regarding concentrations associated with customers and distributors.
QUICKLOGIC CORPORATION
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 2 — Significant Accounting Policies
During the
six
months ended
July 3, 2016
, there were no changes in the Company's significant accounting policies from its disclosure in the Annual Report on Form 10-K for the year ended
January 3, 2016
. For a discussion of the significant accounting policies, please see the Annual Report on Form 10-K for the fiscal year ended
January 3, 2016
, filed with the SEC, on
March 18, 2016
.
New Accounting Pronouncements
In May 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU"), No. 2016-12,
Revenue from contracts with customers (Topic 606): Narrow Scope Improvements and Practical Expedients
. This update among other things: (1) clarify the object of the collectibility criterion for applying paragraph 606-10-25-7; (2) permit an entity to exclude amounts collected from customers for all sales (and other similar) taxes from transaction price; (3) specify that the measurement date for noncash consideration is contract inception; (4) provide a practical expedient that permits an entity to reflect the aggregate effect of all modifications that occur before the beginning of the earliest period presented when identifying the satisfied and unsatisfied performance obligations, determining the transaction price, and allocating the transaction price to the satisfied and unsatisfied performance obligations; (5) clarify that a completed contract for purposes of transition is a contract for which all (or substantially all) of the revenue was recognized under legacy GAAP before the date of initial application, and (6) clarify that an entity that retrospectively applies the guidance in Topic 606 to each prior period reporting is not required to disclose the effect of the accounting change for the period of adoption. This amendment is effective for public entities for annual reports beginning after December 15, 2017, including interim periods therein. For nonpublic entities one year later. We are currently evaluating the impact of our pending adoption of the new standard on our consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
. This update was issued as part of the FASB’s simplification initiative and affects all entities that issue share-based payment awards to their employees. The amendments in this update cover such areas as the recognition of excess tax benefits and deficiencies, the classification of those excess tax benefits on the statement of cash flows, an accounting policy election for forfeitures, the amount an employer can withhold to cover income taxes and still qualify for equity classification and the classification of those taxes paid on the statement of cash flows. This update is effective for annual and interim periods beginning after December 15, 2016, which will require us to adopt these provisions in the first quarter of fiscal year 2017. This guidance can be applied either prospectively, retrospectively or using a modified retrospective transition method, depending on the area covered in this update. Early adoption is permitted. We are currently evaluating the impact of our pending adoption of the new standard on our consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-08,
Revenue from contracts with customers (Topic 606): Principal versus Agent Considerations
Reporting Revenue Gross versus Net.
The amendments are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations by amending certain existing illustrative examples and adding additional illustrative examples to assist in the application of the guidance. The effective date and transition of these amendments is the same as the effective date and transition of ASU 2014-09. Public entities should apply the amendments in ASU 2014-09 for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein (i.e., January 1, 2018, for a calendar year entity). Private entities must apply the amendments one year later. We are currently evaluating the impact of our pending adoption of the new standard on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02,
Leases.
The new standard establishes a right-of-use (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. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. We are currently evaluating the impact of our pending adoption of the new standard on our consolidated financial statements
In July 2015, the FASB issued ASU 2015-11,
Inventory (Topic 330):
Simplifying the measurement of Inventory,
which amends the accounting guidance on the valuation of inventory. The guidance requires an entity to measure in scope inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course
QUICKLOGIC CORPORATION
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
of business, less reasonably predictable costs of completion, disposal, and transportation. The amendment applies to inventory valued at first-in, first-out or average cost. This guidance is effective for reporting periods beginning after December 15, 2016, including interim periods within those fiscal years. The Company is currently evaluating the impact of ASU 2015-11 on its consolidated financial statements and footnote disclosures.
Other new accounting pronouncements are disclosed on the Annual Report on Form 10-K for the fiscal year ended
January 3, 2016
filed with the SEC on
March 18, 2016
.
Note 3 — Net Loss Per Share
Basic 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 income (loss) per share was computed using the weighted average number of common shares outstanding during the period plus potentially dilutive common shares outstanding during the period under the treasury stock method. In computing diluted net income (loss) per share, the weighted average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options and warrants.
The following shares were not included in the calculation of diluted net loss per share for the
three
and
six
months ended
July 3, 2016
and
June 28, 2015
: (i)
7.3 million
and
7.1 million
of common shares 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, respectively, and (ii) warrants to purchase up to
2.3 million
shares of common stock as of
July 3, 2016
and
June 28, 2015
, respectively. These shares were not included as they were considered antidilutive due to the net loss the Company experienced during these periods.
QUICKLOGIC CORPORATION
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 4 — Balance Sheet Components
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
July 3,
2016
|
|
January 3,
2016
|
|
|
(in thousands)
|
|
Inventories:
|
|
|
|
|
Raw materials
|
$
|
—
|
|
|
$
|
—
|
|
|
Work-in-process
|
989
|
|
|
1,720
|
|
|
Finished goods
|
1,329
|
|
|
1,158
|
|
|
|
$
|
2,318
|
|
|
$
|
2,878
|
|
|
Other current assets:
|
|
|
|
|
Prepaid expenses
|
$
|
864
|
|
|
$
|
1,184
|
|
|
Other
|
119
|
|
|
128
|
|
|
|
$
|
983
|
|
|
$
|
1,312
|
|
|
Property and equipment:
|
|
|
|
|
Equipment
|
$
|
14,189
|
|
|
$
|
14,531
|
|
|
Software
|
3,162
|
|
|
3,114
|
|
|
Furniture and fixtures
|
129
|
|
|
131
|
|
|
Leasehold improvements
|
714
|
|
|
714
|
|
|
|
18,194
|
|
|
18,490
|
|
|
Accumulated depreciation and amortization
|
(15,104
|
)
|
|
(15,175
|
)
|
|
|
$
|
3,090
|
|
|
$
|
3,315
|
|
|
|
|
|
|
|
Accrued liabilities:
|
|
|
|
|
Employee related accruals
|
$
|
1,134
|
|
|
$
|
1,237
|
|
|
Other
|
300
|
|
|
245
|
|
|
|
$
|
1,434
|
|
|
$
|
1,482
|
|
QUICKLOGIC CORPORATION
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 5 — Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
July 3,
2016
|
|
January 3,
2016
|
|
|
(in thousands)
|
|
Debt and capital lease obligations:
|
|
|
|
|
|
|
Revolving line of credit
|
$
|
4,000
|
|
|
$
|
2,000
|
|
|
Capital leases
|
251
|
|
|
489
|
|
|
|
4,251
|
|
|
2,489
|
|
|
Current portion of debt and capital lease obligations
|
(142
|
)
|
|
(281
|
)
|
|
Long term portion of debt and capital lease obligations
|
$
|
4,109
|
|
|
$
|
2,208
|
|
Revolving Line of Credit
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 Loan Agreement") with Silicon Valley Bank (the "Bank"). The terms of the Loan Agreement include a
$6.0 million
revolving line of credit available through
September 25, 2017
, subject to increases at the Company's election of up to
$12 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 advance, which is LIBOR rate plus the LIBOR rate margin. As of the
second
quarter ended
July 3, 2016
, the Company had
$4.0 million
of revolving debt outstanding with an interest rate of
3.44%
.
On February 10, 2016, the Company entered into a Third Amendment to the Third Amended and Restated Loan and Security Agreement with the Bank to amend certain covenants contained in the Loan Agreement. As amended, the Company is required to maintain, beginning in the quarter ending March 31, 2016, (i) a tangible net worth of at least
$12.0 million
, plus (a)
50%
of the proceeds from any equity issuance, plus (b)
50%
of the proceeds from any investments, tested as of the last day of each month; (ii) unrestricted cash or cash equivalents at the Bank or Bank's affiliates at all times in an amount of at least
$6.0 million
; and (iii) 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
2.00
to 1.00, tested as of the last day of each month. Beginning with the second fiscal quarter of 2016, the tangible net worth requirement, is reduced as follows: For the quarter ending June 30, 2016, at least
$10.0 million
; for the quarter ending September 30, 2016, at least
$8.0 million
; for the quarter ending December 31, 2016, at least
$6.0 million
; for the quarter ending March 31, 2017, at least
$4.0 million
; for the quarter ending June 30, 2017, at least
$8.0 million
. Beginning with the third fiscal quarter of 2016, the Company is required to maintain 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
1.50
to 1.00 in the fiscal quarters ended September 30, 2016 and December 31, 2016 and of at least
1.25
to 1.00 in the fiscal quarters ended March 31, 2017 and June 30, 2017.
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 Third Loan Agreement.
Capital Leases
In December 2015, the Company leased design software under a
two
-year capital lease at an imputed interest rate of
4.88%
per annum. Terms of the agreement require the Company to make quarterly payments of approximately
$22,750
through November 2017, for a total of
$182,000
. As of
July 3, 2016
,
$131,000
was outstanding under the capital lease,
$86,000
of which was classified as a current liability.
In July 2015, the Company leased design software under a
three
-year capital lease at an imputed interest rate of
4.91%
per annum. Terms of the agreement require the Company to make annual payments of approximately
$67,300
through July 2017, for a total of
$202,000
. As of
July 3, 2016
,
$64,000
was outstanding under the capital lease, all of which was classified as a long-term liability.
In July 2014, the Company leased design software under a
41
-month capital lease at an imputed interest rate of
3.15%
per annum. Terms of the agreement require the Company to make payments of principal and interest of
$42,000
in August 2014,
$16,000
in December 2014,
$58,000
in January 2016 and
$58,000
in January 2017. The total payments for the
QUICKLOGIC CORPORATION
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
lease will be
$174,000
. As of
July 3, 2016
,
$56,000
was outstanding under this capital lease, all of which was classified as a current liability.
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 assumptions 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.
|
The following table presents the Company's financial assets that are measured at fair value on a recurring basis as of
July 3, 2016
and
January 3, 2016
, consistent with the fair value hierarchy provisions of the authoritative guidance (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 3, 2016
|
|
January 3, 2016
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
(1)
|
$
|
18,249
|
|
|
$
|
1,146
|
|
|
$
|
17,103
|
|
|
$
|
—
|
|
|
$
|
18,021
|
|
|
$
|
2,137
|
|
|
$
|
15,884
|
|
|
$
|
—
|
|
|
Total assets
|
$
|
18,249
|
|
|
$
|
1,146
|
|
|
$
|
17,103
|
|
|
$
|
—
|
|
|
$
|
18,021
|
|
|
$
|
2,137
|
|
|
$
|
15,884
|
|
|
$
|
—
|
|
_________________
(1)
Money market funds are presented as a part of cash and cash equivalents on the accompanying consolidated balance sheets as of
July 3, 2016
and
January 3, 2016
.
Note 7 - Stockholders' Equity
Common Stock and Preferred Stock
The Company is authorized to issue
100 million
shares of common stock and has
10 million
shares of authorized but unissued shares of 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.
Issuance of Common Stock and Warrants
On July 31, 2013, the Company filed a shelf registration statement on Form S-3 under which the Company may, from time to time, sell securities in one or more offerings up to a total dollar amount of
$40.0 million
. The Company's shelf registration statement was declared effective on August 30, 2013 and will expire on August 30, 2016.
In November 2013, the Company issued an aggregate of
8,740,000
shares of common stock,
$0.001
par value, in an underwritten public offering at a price of
$2.90
per share. The Company received net proceeds from the offering of approximately
$23.1 million
, net of underwriter's commission and other offering expenses of
$2.2 million
.
In March 2016, the Company issued an aggregate of
10,000,000
shares of common stock,
$0.001
par value, in an underwritten public offering at a price of
$1.00
per share. The Company received net proceeds from the offering of approximately
$8.8 million
, net of underwriter's commission and other offering expenses of
$1.2 million
.
As of
July 3, 2016
,
2.3 million
warrants were outstanding. Approximately
1.9 million
warrants with a strike price of
$2.15
were issued in conjunction with a November 2009 financing. These warrants expired in May 2015. Approximately
2.3 million
warrants with a strike price of
$2.98
were issued in conjunction with a June 2012 financing. These warrants will expire in June 2017. After August 2016, the warrants can only be exercised on a cashless basis.
Note 8 — Employee Stock Plans
1999 Stock Plan
The 1999 Stock Plan, or 1999 Plan, provided for the issuance of incentive and non-qualified options, restricted stock units ("RSUs") and restricted stock. Equity awards granted under the 1999 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. In March 2009, the Board adopted the 2009 Stock Plan, which was approved by the Company's stockholders on April 22, 2009. Effective April 22, 2009,
no
further stock options may be granted under the 1999 Plan.
2009 Stock Plan
The 2009 Stock Plan, or 2009 Plan, was amended and restated by the Board of Directors in January 2015 and approved by the Company's stockholders on April 23, 2015 to, among other things, reserve an additional
2.5 million
shares of common stock for issuance under the 2009 Plan. As of
July 3, 2016
, approximately
9.8 million
shares were reserved for issuance under the 2009 Plan. Equity awards that are cancelled, forfeited or repurchased under the 1999 Plan become available for grant under the 2009 Plan, up to a maximum of an additional
10 million
shares. 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. In January 2015, the 2009 ESPP was amended by the Board of Directors and approved by the Company's stockholders on April 23, 2015 to reserve an additional
1.0 million
shares of common stock for issuance under the 2009 ESPP. As of
July 3, 2016
, approximately
3.3 million
shares were reserved for issuance under the 2009 ESPP Plan. 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.
Note 9 — 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 cash settlement of stock appreciation rights, or SARs. 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.
QUICKLOGIC CORPORATION
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The stock-based compensation expense included in the Company's consolidated financial statements for the
three
and
six
months ended
July 3, 2016
and
June 28, 2015
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
July 3,
2016
|
|
June 28,
2015
|
|
July 3,
2016
|
|
June 28,
2015
|
|
Cost of revenue
|
$
|
47
|
|
|
$
|
27
|
|
|
$
|
85
|
|
|
$
|
66
|
|
|
Research and development
|
175
|
|
|
212
|
|
|
466
|
|
|
403
|
|
|
Selling, general and administrative
|
217
|
|
|
252
|
|
|
450
|
|
|
519
|
|
|
Total costs and expenses
|
$
|
439
|
|
|
$
|
491
|
|
|
$
|
1,001
|
|
|
$
|
988
|
|
No stock-based compensation was capitalized during any period presented above.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
July 3,
2016
|
|
June 28,
2015
|
|
July 3,
2016
|
|
June 28,
2015
|
|
Expected term (years)
|
0
|
|
|
0
|
|
|
0
|
|
|
4.78
|
|
|
Risk-free interest rate
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
1.40
|
%
|
|
Expected volatility
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
52.11
|
%
|
|
Expected dividend yield
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
No stock options were granted during the first six months of 2016 and second quarter of 2015. The weighted average estimated fair value for options granted during the
six months
of
2015
was
$0.90
per option. As of
July 3, 2016
and
June 28, 2015
, the fair value of unvested stock options, net of expected forfeitures, was approximately
$2.0 million
and
$2.7 million
, respectively. This unrecognized stock-based compensation expense is expected to be recorded over a weighted average period of
1.94
years.
QUICKLOGIC CORPORATION
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Stock-Based Compensation Award Activity
The following table summarizes the activity in the shares available for grant under the 2009 Plan during the
six
months ended
July 3, 2016
:
|
|
|
|
|
|
|
|
Shares
Available for Grant
|
|
|
(in thousands)
|
|
Balance at January 03, 2016
|
2,929
|
|
|
Options forfeited or expired
|
373
|
|
|
RSUs granted
|
(612
|
)
|
|
PRSUs granted
|
(193
|
)
|
|
RSUs forfeited or expired
|
159
|
|
|
PRSUs forfeited or expired
|
201
|
|
|
Balance at July 3, 2016
|
2,857
|
|
Stock Options
The following table summarizes stock options outstanding and stock option activity under the 1999 Plan and the 2009 Plan, and the related weighted average exercise price, for the first
six
months of
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted
Average Exercise
Price
|
|
Weighted
Average
Remaining Term
|
|
Aggregate
Intrinsic Value
|
|
|
(in thousands)
|
|
|
|
(in years)
|
|
(in thousands)
|
|
Balance outstanding at January 3, 2016
|
5,266
|
|
|
$
|
2.64
|
|
|
|
|
|
|
Forfeited or expired
|
(373
|
)
|
|
$
|
2.74
|
|
|
|
|
|
|
Balance outstanding at July 3, 2016
|
4,893
|
|
|
$
|
2.63
|
|
|
3.82
|
|
$
|
17
|
|
|
Exercisable at July 3, 2016
|
4,542
|
|
|
$
|
2.62
|
|
|
3.50
|
|
$
|
17
|
|
|
Vested and expected to vest at July 3, 2016
|
4,838
|
|
|
$
|
2.63
|
|
|
3.77
|
|
$
|
17
|
|
The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on the Company's closing stock price of
$0.94
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 the first
six
months of
2016
and
2015
was
$0
and
$81,000
, respectively. Total cash received from employees as a result of employee stock option exercises during the first
six months
of
2016
and
2015
was approximately
$0
and
$114,000
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 loss position. Total stock-based compensation related to stock options was
$100,000
and
$214,000
for the
three
months and
six
months ended
July 3, 2016
.
Restricted Stock Units and Performance-based Restricted Stock Units
The Company began issuing RSUs and PRSUs in the third quarter of 2007. RSUs entitle the holder to receive, at no cost, one common share for each RSU as it vests. In general, the Company's policy is to withhold shares in settlement of employee tax withholding obligations upon the vesting of RSUs. The stock-based compensation related to RSUs and PRSUs was
$235,000
and
$14,000
for the
three
months and
$539,000
and
$88,000
for the
six
months ended
July 3, 2016
, respectively. As of
July 3, 2016
, there was
$1.6 million
in unrecognized compensation expense related to RSUs and PRSUs.
QUICKLOGIC CORPORATION
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
A summary of activity for the Company's RSUs and PRSUs for the
six months
ended
July 3, 2016
and information regarding RSUs and PRSUs outstanding and expected to vest as of
July 3, 2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
RSUs & PRSUs Outstanding
|
|
|
Number of Shares
|
|
Weighted Average
Grant Date Fair Value
|
|
|
(in thousands)
|
|
|
|
Nonvested at January 3, 2016
|
1,435
|
|
|
$
|
2.30
|
|
|
Granted
|
805
|
|
|
1.11
|
|
|
Vested
|
(442
|
)
|
|
1.04
|
|
|
Forfeited
|
(360
|
)
|
|
—
|
|
|
Nonvested at July 3, 2016
|
1,438
|
|
|
$
|
2.08
|
|
Employee Stock Purchase Plan
The weighted average estimated fair value, as defined by the amended authoritative guidance, of rights issued pursuant to the Company's 2009 ESPP during the
second
quarters of
2016
and
2015
was
$0.31
and
$0.48
per right, respectively.
As of
July 3, 2016
,
917,000
shares remained available for issuance under the 2009 ESPP. For the
three
and
six months
ended
July 3, 2016
, the Company recorded stock-based compensation expense related to the 2009 ESPP of
$90,000
and
$160,000
, respectively.
The fair value of rights issued pursuant to the Company's 2009 ESPP was estimated on the commencement date of each offering period using the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
July 3,
2016
|
|
June 28,
2015
|
|
July 3,
2016
|
|
June 28,
2015
|
|
Expected term (months)
|
6.08
|
|
|
6.08
|
|
|
6.08
|
|
|
6.08
|
|
|
Risk-free interest rate
|
0.40
|
%
|
|
0.08
|
%
|
|
1.04
|
%
|
|
0.08
|
%
|
|
Volatility
|
54.31
|
%
|
|
51.54
|
%
|
|
61.06
|
%
|
|
51.54
|
%
|
|
Dividend yield
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
As of
July 3, 2016
, the unrecognized stock-based compensation expense relating to the Company's 2009 ESPP was
$96,000
and is expected to be recognized over a weighted average period of approximately
4.5
months.
Note 10 — Income Taxes
In the
second
quarters of
2016
and
2015
, the Company recorded net income tax expense of
$27,000
and
$21,000
, respectively. For the six months ended July 3, 2016 and June 28, 2015, the Company recorded net income tax expense of
$91,000
and
$61,000
, respectively. The income tax expense for the second quarters and the first six months of 2016 and 2015 relates to income taxes from the Company's foreign operations, which are cost-plus entities.
Based on the available objective evidence, management believes it is more likely than not that the Company's net deferred tax assets will not be fully realizable. Accordingly, with the exception of its foreign subsidiaries, the Company has provided a full valuation allowance against the associated deferred tax assets. The Company will continue to assess the realizability of the deferred tax assets in future periods.
As of July 3, 2016 and at January 3, 2016, the amount of unrecognized tax benefits that would affect the effective tax rate if recognized was approximated
$36,000
. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. For the
six
month period ended
July 3, 2016
, the Company accrued
$2,000
of interest and penalties. As of
July 3, 2016
, the Company had approximately
$19,000
of accrued interest and penalties related to uncertain tax positions.
QUICKLOGIC CORPORATION
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Included in the balance of unrecognized tax benefits at
July 3, 2016
was
$20,000
related to tax positions, interest, and penalties for which it is reasonably possible that the statute of limitations for these items will expire in various jurisdictions 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. As of July 3, 2016, fiscal years 2011 onward remain open to examination by the U.S. taxing authorities and fiscal years 2007 onward remain open to examination in Canada. The U.S. federal and U.S. state taxing authorities may choose to audit tax returns for tax years beyond the statute of limitation period due to significant tax attribute carryforwards from prior years, making adjustments only to carryforward attributes.
Note 11 — Information Concerning Product Lines, Geographic Information and Revenue Concentration
The Company identifies its business segment 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 line (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
July 3,
2016
|
|
June 28,
2015
|
|
July 3, 2016
|
|
June 28,
2015
|
|
Revenue by product line
(1)
:
|
|
|
|
|
|
|
|
|
|
|
New products
|
$
|
1,197
|
|
|
$
|
2,953
|
|
|
$
|
2,689
|
|
|
$
|
7,097
|
|
|
Mature products
|
1,520
|
|
|
2,020
|
|
|
2,978
|
|
|
4,035
|
|
|
Total revenue
|
$
|
2,717
|
|
|
$
|
4,973
|
|
|
$
|
5,667
|
|
|
$
|
11,132
|
|
_________________
(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.
The following is a breakdown of revenue by shipment destination (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
July 3,
2016
|
|
June 28,
2015
|
|
July 3, 2016
|
|
June 28, 2015
|
|
Revenue by geography:
|
|
|
|
|
|
|
|
|
|
|
Asia Pacific
(1)
|
$
|
1,779
|
|
|
$
|
3,482
|
|
|
$
|
3,506
|
|
|
$
|
7,290
|
|
|
North America
(2)
|
638
|
|
|
1,087
|
|
|
1,457
|
|
|
2,929
|
|
|
Europe
|
300
|
|
|
404
|
|
|
704
|
|
|
913
|
|
|
Total revenue
|
$
|
2,717
|
|
|
$
|
4,973
|
|
|
$
|
5,667
|
|
|
$
|
11,132
|
|
___________
(1)
Asia Pacific includes revenue from South Korea of
$875,000
, or
32%
, of total revenue and
$2.1 million
, or
42%
, of total revenue for the quarters ended July 3, 2016 and June 28, 2015, respectively. For the six months ended July 3, 2016 and June 28, 2015, revenue from South Korea was
$2.0 million
, or
35%
, of total revenue and
$4.5 million
or
40%
, respectively.
(2)
North America includes revenue from the United States of
$604,000
, or
22%
, of total revenue and
$1.0 million
, or
20%
, for the quarters ended July 3 2016 and June 28, 2015, respectively. For the six months ended July 3, 2016 and June 28, 2015, revenue from United States was
$1.4 million
, or
25%
, of total revenue and
$2.8 million
or
25%
, respectively.
QUICKLOGIC CORPORATION
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The following distributors and customers accounted for 10% or more of the Company's revenue for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
July 3,
2016
|
|
June 28,
2015
|
|
July 3, 2016
|
|
June 28, 2015
|
|
Distributor "A"
|
31
|
%
|
|
24
|
%
|
|
30
|
%
|
|
27
|
%
|
|
Customer "B"
|
17
|
%
|
|
14
|
%
|
|
18
|
%
|
|
15
|
%
|
|
Customer "G"
|
31
|
%
|
|
41
|
%
|
|
33
|
%
|
|
40
|
%
|
The following distributors and customers accounted for 10% or more of the Company's accounts receivable as of the dates presented:
|
|
|
|
|
|
|
|
|
|
|
July 3,
2016
|
|
January 3,
2016
|
|
Distributor "A"
|
44
|
%
|
|
24
|
%
|
|
Distributor “B”
|
*
|
|
|
11
|
%
|
|
Distributor "G"
|
13
|
%
|
|
11
|
%
|
|
Customer "G"
|
20
|
%
|
|
20
|
%
|
|
Customer "H"
|
*
|
|
|
11
|
%
|
|
|
|
|
*
|
Represents less than 10% of accounts receivable as of the date presented.
|
As of
July 3, 2016
, less than 10% of the Company's long-lived assets, including property and equipment and other assets, were located outside the United States.
Note 12 — Commitments and Contingencies
Commitments
The Company's manufacturing suppliers require us to forecast wafer starts several months in advance. The Company is required to take delivery of and pay for a portion of forecasted wafer volume. As of
July 3, 2016
, and
January 3, 2016
, the Company had
$357,000
and
$1.4 million
, respectively, of outstanding commitments for the purchase of wafer and finished goods inventory.
The Company has obligations with certain suppliers for the purchase of other goods and services entered into in the ordinary course of business. As of
July 3, 2016
, total outstanding purchase obligations were
$1.2 million
, all of which are due within the next twelve months.
The Company leases its primary facility under a non-cancelable operating lease that expires at the end of 2018. In addition, the Company rents development facilities in India as well as sales offices in Europe and Asia. Total rent expense for the
second
quarters of
2016
and
2015
was approximately
$206,000
and
238,000
, respectively. Total rent expense for the
six months
of
2016
and
2015
was
$404,000
and
$477,000
, respectively.
QUICKLOGIC CORPORATION
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
As of
July 3, 2016
, future minimum lease commitments under the Company's operating leases, excluding property taxes and insurance are as follows:
|
|
|
|
|
|
|
|
|
Operating
Leases
|
|
|
(in thousands)
|
|
Fiscal Years
|
|
|
|
2016 (Remaining 6 months)
|
$
|
424
|
|
|
2017
|
793
|
|
|
2018
|
798
|
|
|
2019
|
164
|
|
|
2020
|
169
|
|
|
2021
|
84
|
|
|
|
$
|
2,432
|
|
Contingencies
One of the Company's licensors contends that the Company owes back royalties on sales of the Company's ArcticLink III VX devices. After mediation in June 2016, the parties agreed upon a settlement of
$40,000
to be paid by the Company and are finalizing the terms for such settlement. The Company accrued for this liability in the quarter ended July 3, 2016.
Note 13 — Litigation
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: (i) without costly litigation; (ii) in a manner that is not adverse to the Company's financial position, results of operations or cash flows; or (iii) without requiring royalty or other payments which may adversely impact gross profit.
Note 14 - Subsequent Event
In July 2016, the Company implemented strategic re-alignment measures that resulted in a reduction of
eight
employees. The Company expects to incur a one-time severance charge of approximately
$170,000
in the third quarter of 2016 associated with this reduction.