NOTE 1-THE COMPANY AND BASIS OF PRESENTATION
QuickLogic Corporation, ("QuickLogic", the "Company"), was founded in 1988 and reincorporated in Delaware in 1999. The Company enables Original Equipment Manufacturers or OEMs to maximize battery life for highly differentiated, immersive user experiences with Smartphone, Wearable, Tablet and Internet-of-Things or IoT devices. QuickLogic delivers these benefits through industry leading ultra-low power customer programmable System on Chip or SoC semiconductor solutions, embedded software, and algorithm solutions for always-on voice and sensor processing, and enhanced visual experiences. The Company is a fabless semiconductor provider of comprehensive, flexible sensor processing solutions, ultra-low power display bridges, and ultra-low power Field Programmable Gate Arrays, or FPGAs.
QuickLogic's fiscal year ends on the Sunday closest to December 31. Fiscal years
2016
,
2015
and
2014
ended on
January 1, 2017
,
January 3, 2016
and
December 28, 2014
, 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
January 1, 2017
, the Company's principal sources of liquidity consisted of its cash and cash equivalents of
$14.9 million
and an additional
$6.0 million
credit line is available for draw at the Company's election upon credit approval under its revolving line of credit arrangement with Silicon Valley Bank. The revolving line of credit will expire in September 2017 and the Company would need to renew this line of credit or find an alternative lender prior to the expiration date. Further, any violations of debt covenants during 2017 will restrict the Company’s access to any additional cash draws from the revolving line of credit, and may require immediate repayment of the outstanding debt amounts. Additionally, the Company has an accumulated deficit of approximately
$240 million
, has experienced net losses in the past years and expects such losses to continue through at least the end of fiscal year 2017 as the Company continues to develop new products, applications and technologies.
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
if the Company meets certain requirements in the debt agreement. 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 or SEC pursuant to Rule 424(b) under the Securities Act of 1933, as amended.
On December 9, 2016, the Company filed a new 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 earlier shelf registration statement filed on July 31, 2013 expired on August 30, 2016.
The Company currently uses its cash to fund its capital expenditures and operating losses. Based on past performance and current expectations, the Company believes that its existing cash and cash equivalents, together with available financial resources from the revolving line of credit with Silicon Valley Bank will be sufficient to fund its operations and capital expenditures and provide adequate working capital for the next twelve months. The Company’s revolving line of credit with Silicon Valley Bank will expire in September 2017 and the Company would need to renew this line of credit or find an alternative lender prior to the expiration date. Further, any violations of debt covenants during 2017 will restrict the Company’s access to any additional cash draws from the revolving line of credit, and may require immediate repayment of the outstanding debt amounts. Management believes that it is probable that the Company will be able to either renew the revolving line of credit or obtain alternative financing on the acceptable terms.
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 ArcticLink
®
and PolarPro
®
solution platforms; fluctuations in revenue as a result of product end-of-life; fluctuations in revenue as a result of the stage in the product life cycle of its customers' products; costs of securing access to and availability of adequate manufacturing capacity; levels of inventories; wafer purchase commitments; customer credit terms; the amount and timing of research and development expenditures; the timing of new product introductions; production volumes; product quality; sales and marketing efforts; the value and liquidity of its investment portfolio; changes in operating assets and liabilities; the ability to obtain or renew debt financing and to remain in compliance with the terms of existing credit facilities; the ability to raise funds from the sale of equity in the Company; the issuance and exercise of stock options and participation in the Company's employee stock purchase plan; and other factors related to the uncertainties of the industry and global economics.
Over the longer term, the Company anticipates that 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, assuming renewal of the line of credit or the Company entering into a new debt agreement with an alternative lender prior to the expiration of the revolving line of credit in September 2017, and its ability to raise additional capital in the public capital markets will be sufficient to satisfy its operations and capital expenditures. However, the Company cannot provide any assurance that it will be able to raise additional capital, if required, or that such capital will be available on terms acceptable to the Company. The inability of the Company to generate sufficient sales from its new product offerings and/or raise additional capital if needed could have a material adverse effect on the Company’s operations and financial condition, including its ability to maintain compliance with its lender’s financial covenants.
Principles of Consolidation
The consolidated financial statements have been prepared in accordance with Generally Accepted Accounting Principles, in the United States of America or US GAAP and the applicable rules and regulations of the Securities and Exchange Commission, or SEC, and include the accounts of QuickLogic and its wholly-owned subsidiaries. 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 statements of operations.
Use of Estimates
The preparation of these consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities and the reported amounts of revenue and expenses during the period. Actual results could differ from those estimates, particularly in relation to revenue recognition; the allowance for doubtful accounts; sales returns; valuation of investments; valuation of long-lived assets; valuation of inventories including identification of excess quantities, market value and obsolescence; measurement of stock-based compensation awards; accounting for income taxes and estimating accrued liabilities.
Concentration of Risk
The Company's accounts receivable are denominated in U.S. dollars and are derived primarily from sales to customers located in North America, Asia Pacific, and Europe. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. See Note 11 for information regarding concentrations associated with accounts receivable.
For the twelve months ended
January 1, 2017
, the Company generated
33%
of its total revenue from shipments to a tier one customer, Samsung Electronics Co., Ltd. ("Samsung"). See Note 11 for information regarding revenue concentrations associated with our customers and distributors.
NOTE 2-SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents
The Company considers all short-term, highly liquid investments with an original or a remaining maturity at purchase of ninety days or less to be cash equivalents. The Company's investment portfolio included in cash equivalents is generally comprised of investments that meet high credit quality standards. The Company's investment portfolio consists of money market funds.
Fair Value
The guidance for the fair value option for financial assets and financial liabilities provides companies the irrevocable option to measure many financial assets and liabilities at fair value with changes in fair value recognized in earnings or equity. The Company has not elected to measure any financial assets or liabilities at fair value that were not previously required to be measured at fair value.
Foreign Currency Transactions
All of the Company's sales and cost of manufacturing are transacted in U.S. dollars. The Company conducts a portion of its research and development activities in India and has sales and marketing activities in various countries outside of the United States. Most of these international expenses are incurred in local currency. Foreign currency transaction gains and losses, which are not significant, are included in interest income and other expense, net, as they occur. Operating expenses denominated in foreign currencies were approximately
18%
,
17%
and
18%
of total operating expenses in
2016
,
2015
and
2014
respectively. The Company incurred a majority of these foreign currency expenses in India, the United Kingdom and Korea in 2016, 2015 and 2014. The Company has not used derivative financial instruments to hedge its exposure to fluctuations in foreign currency and, therefore, is susceptible to fluctuations in foreign exchange gains or losses in its results of operations in future reporting periods.
Inventories
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. The Company routinely evaluates quantities and values of its inventories in light of current market conditions and market trends and records reserves for quantities in excess of demand and product obsolescence. The evaluation, which inherently involves judgments as to assumptions about expected future demand and the impact of market conditions on these assumptions, takes into consideration historic usage, expected demand, anticipated sales price, the stage in the product life cycle of its customers' products, new product development schedules, the effect new products might have on the sale of existing products, product obsolescence, customer design activity, customer concentrations, product merchantability and other factors. Market conditions are subject to change. Actual consumption of inventories could differ from forecast demand, and this difference could have a material impact on the Company's gross margin and inventory balances based on additional provisions for excess or obsolete inventories or a benefit from inventories previously written down. The Company also regularly reviews the cost of inventories against estimated market value and records 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 the Company's gross margin and inventory balances based on additional write-downs to net realizable value or a benefit from inventories previously written down.
The Company's semiconductor products have historically had an unusually long product life cycle and obsolescence has not been a significant factor in the valuation of inventories. However, as the Company pursues opportunities in the mobile market and continues to develop new solutions and products, the Company believes its product life cycle will be shorter which could increase the potential for obsolescence. A significant decrease in demand could result in an increase in excess inventory on hand. Although the Company makes every effort to ensure the accuracy of its forecasts of future product demand, any significant unanticipated changes in demand or frequent new product developments could have a significant impact on the value of its inventory and its results of operations.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets, generally
one
to
seven
years. Amortization of leasehold improvements and capital leases is computed on a straight-line basis over the shorter of the lease term or the estimated useful lives of the assets, generally
one
to
seven
years.
Long-Lived Assets
The Company reviews the recoverability of its long-lived assets, such as property and equipment, annually and when events or changes in circumstances occur that indicate that the carrying value of the asset or asset group may not be recoverable. The assessment of possible impairment is based on the Company's ability to recover the carrying value of the asset or asset group from the expected future pre-tax cash flows, undiscounted and without interest charges, of the related operations. If these cash flows are less than the carrying value of the asset or asset group, an impairment loss is recognized for the difference between the estimated fair value and the carrying value, and the carrying value of the related assets is reduced by this difference. The measurement of impairment requires management to estimate future cash flows and the fair value of long-lived assets. During
2016
,
2015
and
2014
the Company wrote-off equipment with a net book value of
$368,000
,
$8,000
and
$5,000
, respectively.
Licensed Intellectual Property
The Company licenses intellectual property that is incorporated into its products. Costs incurred under license agreements prior to the establishment of technological feasibility are included in research and development expense as incurred. Costs incurred for intellectual property once technological feasibility has been established and that can be used in multiple products are capitalized as a long-term asset. Once a product incorporating licensed intellectual property has production sales, the amount is amortized over the estimated useful life of the asset, generally up to
five
years.
Revenue Recognition
The Company supplies standard products which must be programmed before they can be used in an application. The Company's products may be programmed by us, distributors, end-customers or third parties.
The Company recognizes revenue as products are shipped if evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, collection of the resulting receivable is reasonably assured and product returns are reasonably estimable. Revenue is recognized upon shipment of programmed and unprogrammed parts to both OEM customers and distributors, provided that legal title and risk of ownership have transferred. Parts held by distributors may be returned for quality reasons only under its standard warranty policy. The Company records allowance for sales returns. Amounts recorded for sales returns were
$93,000
and
$19,000
for the years ended January 1, 2017 and January 3, 2016, respectively
Warranty Costs
The Company warrants finished goods against defects in material and workmanship under normal use for twelve months from the date of shipment. The Company does not have significant product warranty related costs or liabilities.
Advertising
Costs related to advertising and promotion expenditures are charged to “Selling, general and administrative” expense in the consolidated statements of operations as incurred. Costs related to advertising and promotion expenditures were
$51,000
in 2016,
$60,000
in 2015, and were not material in 2014.
Stock-Based Compensation
The Company accounts for stock-based compensation under the provisions of the amended authoritative guidance, and related interpretations which require the measurement and recognition of expense related to the fair value of stock-based compensation awards. The fair value of stock-based compensation awards is measured at the grant date and re-measured upon modification, as appropriate. The Company uses the Black-Scholes option pricing model to estimate the fair value of employee stock options and rights to purchase shares under the Company's 1999 Employee Stock Purchase Plan, or ESPP, consistent with the provisions of the amended authoritative guidance. The fair value of restricted stock awards, or RSAs, and restricted stock units, or RSUs, is based on the closing price of the Company's common stock on the date of grant. Equity compensation awards which vest with service are expensed on a straight-line basis over the requisite service period. Service based Performance awards are expensed on a straight-line basis over the vesting period. If performance conditions are other than service, an accelerated method of amortization is used, which treats each vesting tranche as a separate award over the expected life of the unit. The Company regularly reviews the assumptions used to compute the fair value of its stock-based awards and it will revise its assumptions as appropriate. In the event that assumptions used to compute the fair value of its stock-based awards are later determined to be inaccurate or if the Company changes its assumptions significantly in future periods, stock-based compensation expense and the results of operations could be materially impacted. See Note 10 for further details.
Accounting for Income Taxes
The Company is required to estimate its income taxes in each of the jurisdictions in which the Company operates. This process involves estimating the Company's actual current tax exposure together with assessing temporary differences resulting from different tax and accounting treatment of items, such as deferred revenue, allowance for doubtful accounts, the impact of equity awards, depreciation and amortization and employee related accruals. These differences result in deferred tax assets and liabilities, which are included on the Company's balance sheets. The Company must then assess the likelihood that its deferred tax assets will be recovered from future taxable income and to the extent the Company believes that recovery is not likely, it must establish a valuation allowance.
Significant management judgment is required in determining the Company's provision for income taxes, the Company's deferred tax assets and liabilities and any valuation allowance recorded against the Company's net deferred tax assets. The Company's deferred tax assets, consisting primarily of net operating loss carryforwards, amounted to
$79.2 million
tax effected as of the end of
2016
. The Company has also recorded a valuation allowance of
$79.2 million
, tax effected, as of the end of
2016
due to uncertainties related to the Company's ability to utilize its U.S. deferred tax assets before they expire. In making such determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, ability to project future taxable income, and results of recent operations. If the Company determines that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, the Company would make an adjustment to the deferred tax assets valuation allowance, which would reduce its provision for income taxes.
The Company accounts for uncertainty in income taxes using a two-step approach for recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. The Company classifies the liability for unrecognized tax benefits as current to the extent that it anticipates payment (or receipt) of cash within one year. Interest and penalties related to uncertain tax positions are recognized in the provision for income taxes. Accrued interest and penalties are included within the related tax liability line in the Consolidated Balance Sheet.
Concentration of Credit and Suppliers
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and cash equivalents and accounts receivable. Cash and cash equivalents are maintained with high quality institutions. The Company's accounts receivable are denominated in U.S. dollars and are derived primarily from sales to customers located in North America, Europe and Asia Pacific. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. See Note 11 for information regarding concentrations associated with accounts receivable.
The Company depends on a limited number of contract manufacturers, subcontractors, and suppliers for wafer fabrication, assembly, programming and test of its devices, and for the supply of programming equipment, and these services are typically provided by one supplier for each of the Company's devices. The Company generally purchases these single or limited source services through standard purchase orders. Because the Company relies on independent subcontractors to perform these services, it cannot directly control its product delivery schedules, costs or quality levels. The Company's future success also depends on the financial viability of its independent subcontractors.
Comprehensive Income (Loss)
Comprehensive income (loss) includes all temporary changes in equity (net assets) during a period from non-owner sources. The Company's comprehensive loss equaled to net loss for all periods presented.
New Accounting Pronouncements
Recently adopted accounting pronouncements:
In August 2014, the Financial Accounting Standards Board or FASB issued Accounting Standards Update or ASU No. 2014-15, Presentation of Financial Statements -
Going Concern (Sub Topic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
. This ASU 2014-15 provides guidance to an entity’s management with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that are currently
commonly provided by entities in the financial statement footnotes. This ASU 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. The Company adopted this guidance prospectively with no material effect on the 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. The Company has decided to early adopt ASU 2016-09 in Q4 2016 and has elected to continue to estimate their forfeiture rate rather than recognizing forfeitures as they occur. The ASU 2016-09 is considered to be effective from the beginning of the year of adoption. In the year of adoption, ASU 2016-09 requires that the cumulative effect adjustment be recorded to retained earnings. Due to the full valuation allowance, there is no cumulative effect adjustment to record. Excess windfall net operating loss carryforwards are converted into deferred tax net operating losses with a corresponding increase in valuation allowance as of the beginning of 2016; the year of adoption.
Recently issued accounting pronouncements not yet adopted:
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
, which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP. In July 2015, the FASB approved a one-year delay in the effective date by issuing ASU 2015-09, Revenue from Contracts with customers. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. The Company is currently evaluating the impact of the adoption of ASU 2014-09 on its 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 of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. The amendments do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) 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 the consolidated financial statements and footnote disclosures.
In February 2016, the FASB issued Accounting Standards Update 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. The Company is currently evaluating the impact of our pending adoption of the new standard on the 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). The Company is currently evaluating the impact of our pending adoption of the new standard on the consolidated financial statements.
In May 2016, the FASB issued 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 collectability 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. The Company is currently evaluating the impact of our pending adoption of the new standard on the consolidated financial statements.
In August 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-15,
Statement of Cash Flows (Topic 230)
:
Classification of Certain Cash Receipts and Cash Payments
. This update clarifies how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This ASU is effective for public business entities for fiscal years beginning after December 15, 2017, and for interim periods therein with early adoption permitted and must be applied retrospectively to all periods presented. The Company is currently evaluating the impact of our pending adoption of the new standard on the consolidated financial statements.
In October 2016, the FASB issued ASU No. 2016-16,
Income Taxes (Topic 740): Intra-Entity transfers of assets other than inventory.
This update removes the requirement under which the income tax consequences of intra-entity transfers are deferred until the assets are ultimately sold to an outside party, except for transfers of inventory. The tax consequences of such transfers would be recognized in tax expense when the transfers occur. The standard is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted. The Company is currently evaluating the impact of adopting this guidance on the consolidated financial statements.
NOTE 3-NET LOSS PER SHARE
Basic net loss per share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net loss per share was computed using the weighted average number of common shares outstanding during the period plus potentially dilutive common shares outstanding during the period under the treasury stock method. In computing diluted net loss per share, the weighted average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options and warrants.
For
2016
,
2015
and
2014
,
7.4 million
shares,
7.6 million
shares, and
7.0 million
shares, respectively, associated with equity awards outstanding and the estimated number of shares to be purchased under the current offering period of the 2009 Employee Stock Purchase Plan were not included in the calculation of diluted net loss per share, as they were considered antidilutive due to the net loss the Company experienced during those years.
NOTE 4-BALANCE SHEET COMPONENTS
|
|
|
|
|
|
|
|
|
|
January 1,
2017
|
|
January 3,
2016
|
|
(in thousands)
|
Inventories:
|
|
|
|
Raw materials
|
$
|
—
|
|
|
$
|
—
|
|
Work-in-process
|
1,538
|
|
|
1,720
|
|
Finished goods
|
479
|
|
|
1,158
|
|
|
$
|
2,017
|
|
|
$
|
2,878
|
|
Other current assets:
|
|
|
|
Prepaid expenses
|
$
|
960
|
|
|
$
|
1,184
|
|
Other
|
163
|
|
|
128
|
|
|
$
|
1,123
|
|
|
$
|
1,312
|
|
Property and equipment:
|
|
|
|
Equipment
|
$
|
11,524
|
|
|
$
|
14,531
|
|
Software
|
2,624
|
|
|
3,114
|
|
Furniture and fixtures
|
41
|
|
|
131
|
|
Leasehold improvements
|
708
|
|
|
714
|
|
|
14,897
|
|
|
18,490
|
|
Accumulated depreciation and amortization
|
(12,132
|
)
|
|
(15,175
|
)
|
|
$
|
2,765
|
|
|
$
|
3,315
|
|
Accrued liabilities:
|
|
|
|
Employee compensation related accruals
|
$
|
1,222
|
|
|
$
|
1,237
|
|
Other
|
358
|
|
|
245
|
|
|
$
|
1,580
|
|
|
$
|
1,482
|
|
The Company recorded depreciation and amortization expense of
$1.3 million
,
$1.4 million
and
$1.5 million
for
2016
,
2015
and
2014
, respectively. Assets acquired under capital leases and included in property and equipment were
$772,000
and
$1.0 million
at the end of
2016
and
2015
, respectively. The Company recorded accumulated depreciation on leased assets of
$515,000
and
$503,000
as of the end of
2016
and
2015
, respectively. As of
January 1, 2017
and
January 3, 2016
,the capital lease obligation relating to these assets was
$209,000
and
$489,000
respectively.
NOTE 5-OBLIGATIONS
|
|
|
|
|
|
|
|
|
|
January 1,
2017
|
|
January 3,
2016
|
|
(in thousands)
|
Debt and capital software lease obligations:
|
|
|
|
Revolving line of credit
|
$
|
6,000
|
|
|
$
|
2,000
|
|
Capital software leases
|
209
|
|
|
489
|
|
|
6,209
|
|
|
2,489
|
|
Current portion of debt and capital software lease obligations
|
(6,209
|
)
|
|
(281
|
)
|
Long term portion of debt and capital software lease obligations
|
$
|
—
|
|
|
$
|
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") to extend the line of credit for
two
years through September 25, 2017. The Second Amendment to the Loan Agreement provides for committed loan advances of up to
$6.0 million
, subject to increases at the Company's election of up to
$12.0 million
. Upon each advance, the Company can elect a prime rate advance, which is the prime rate plus the prime rate margin, or a LIBOR rate advance, which is LIBOR plus the LIBOR rate margin. As of
January 1, 2017
, the Company has $
6.0 million
of revolving debt outstanding with an interest rate of
3.75%
.
On February 10, 2016, the Company entered into a Third Amendment to the Loan and Security Agreement with the Bank to amend certain covenants. As amended, the Company is required to maintain, beginning in the quarter ending March 31, 2016, (i) a tangible net worth of at least
$12,000,000
, 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
$6,000,000
; 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
$10,000,000
; for the quarter ending September 30, 2016, at least
$8,000,000
; for the quarter ending December 31, 2016, at least
$6,000,000
; for the quarter ending March 31, 2017, at least
$4,000,000
; for the quarter ending June 30, 2017, at least
$8,000,000
. 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. Under the terms of the Loan Agreement, the Company must maintain (i) a tangible net worth of at least
$12 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 fiscal quarter; (ii) unrestricted cash or cash equivalents at the Bank or Bank's affiliates at all times in an amount of at least
$6 million
; (iii) a ratio of quick assets to the results of (a) current liabilities minus (b) the current portion of deferred revenue, plus (c) the long-term portion of the obligations of at least
1.1
-to-1 tested as of the last day of each month. These covenants were modified in the second and third amendments as explained above. The Loan Agreement also has certain restrictions including, among others, restrictions on the incurrence of other indebtedness, the maintenance of depository accounts, the disposition of assets, mergers, acquisitions, investments, the granting of liens, cash balances with subsidiaries and the payment of dividends. The Company was in compliance with the financial covenants of the Loan Agreement as of the end of the current reporting period.
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
January 1, 2017
,
$89,000
was outstanding under the capital lease, all 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
January 1, 2017
,
$64,000
was outstanding under the capital lease, all of which was classified as a current 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 lease will be
$174,000
. As of
January 1, 2017
,
$56,000
was outstanding under this capital lease, all of which was classified as a current liability.
In May 2014, the Company leased design software under a
three
-year capital lease at an imputed interest rate of
4.8%
per annum. Terms of the agreement require the Company to make annual payments of approximately
$84,000
through April 2016, for a total of
$252,000
. As of January 3, 2016,
$80,000
was outstanding under the capital lease, all of which was fully paid off in May 2016.
NOTE 6-FAIR VALUE MEASUREMENTS
Pursuant to the accounting guidance for fair value measurements and its subsequent updates, fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market and it considers assumptions that market participants would use when pricing the asset or liability.
The accounting guidance for fair value measurement also specifies a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions other market participants would use based upon market data obtained from independent sources (observable inputs) or reflect the company's own assumption of market participant valuation (unobservable inputs). The fair value hierarchy consists of the following three levels:
|
|
•
|
Level 1
– Inputs are quoted prices in active markets for identical assets or liabilities.
|
|
|
•
|
Level 2
– Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data.
|
|
|
•
|
Level 3
– Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.
|
Money market funds classified within Level 2 because they are not actively traded, have been valued using quoted market prices or alternative pricing sources and models utilizing observable market inputs. The following table presents the Company's financial assets that are measured at fair value on a recurring basis as of
January 1, 2017
and
January 3, 2016
consistent with the fair value hierarchy provisions of the authoritative guidance (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of January 1, 2017
|
|
As of January 3, 2016
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
(1)
|
$
|
14,692
|
|
|
$
|
1,338
|
|
|
$
|
13,354
|
|
|
$
|
—
|
|
|
$
|
18,021
|
|
|
$
|
2,137
|
|
|
$
|
15,884
|
|
|
$
|
—
|
|
Total assets
|
$
|
14,692
|
|
|
$
|
1,338
|
|
|
$
|
13,354
|
|
|
$
|
—
|
|
|
$
|
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
January 1, 2017
and
January 3, 2016
.
|
NOTE 7-INCOME TAXES
The following table presents the U.S. and foreign components of consolidated income (loss) before income taxes and the provision for (benefit from) income taxes (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Income (loss) before income taxes:
|
|
|
|
|
|
U.S.
|
$
|
(19,340
|
)
|
|
$
|
(17,897
|
)
|
|
$
|
(13,172
|
)
|
Foreign
|
257
|
|
|
195
|
|
|
161
|
|
Income (loss) before income taxes
|
$
|
(19,083
|
)
|
|
$
|
(17,702
|
)
|
|
$
|
(13,011
|
)
|
Provision for (benefit from) income taxes:
|
|
|
|
|
|
Current:
|
|
|
|
|
|
Federal
|
$
|
—
|
|
|
$
|
37
|
|
|
$
|
—
|
|
State
|
(3
|
)
|
|
2
|
|
|
—
|
|
Foreign
|
75
|
|
|
99
|
|
|
95
|
|
Subtotal
|
72
|
|
|
138
|
|
|
95
|
|
Deferred:
|
|
|
|
|
|
Federal
|
—
|
|
|
—
|
|
|
—
|
|
State
|
—
|
|
|
—
|
|
|
—
|
|
Foreign
|
(7
|
)
|
|
8
|
|
|
(27
|
)
|
Subtotal
|
(7
|
)
|
|
8
|
|
|
(27
|
)
|
Provision for income taxes
|
$
|
65
|
|
|
$
|
146
|
|
|
$
|
68
|
|
Based on the available objective evidence, management believes it is more likely than not that the U.S. net deferred tax assets will not be fully realizable. Accordingly, the Company has provided a full valuation allowance against its U.S. federal and state deferred tax assets at
January 1, 2017
. Any future release of the valuation allowance may be recorded as a tax benefit increasing net income or as an adjustment to paid-in capital, based on tax ordering requirements. The Company believes it is more likely than not it will be able to realize its foreign deferred tax assets. Deferred tax balances are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
January 1, 2017
|
|
January 3, 2016
|
Deferred tax assets:
|
|
|
|
Net operating losses
|
$
|
53,924
|
|
|
$
|
45,148
|
|
Capital losses
|
2,938
|
|
|
2,938
|
|
Accruals and reserves
|
1,875
|
|
|
1,732
|
|
Credits carryforward
|
5,080
|
|
|
5,831
|
|
Depreciation and amortization
|
14,415
|
|
|
12,738
|
|
Stock-based compensation
|
968
|
|
|
1,012
|
|
|
79,200
|
|
|
69,399
|
|
Valuation allowances
|
(79,150
|
)
|
|
(69,349
|
)
|
Deferred tax asset
|
$
|
50
|
|
|
$
|
50
|
|
Deferred tax liability
|
—
|
|
|
—
|
|
A rate reconciliation between income tax provisions at the U.S. federal statutory rate and the effective rate reflected in the consolidated statements of operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years
|
|
2016
|
|
2015
|
|
2014
|
Income tax (benefit) at statutory rate
|
$
|
(6,489
|
)
|
|
$
|
(5,962
|
)
|
|
$
|
(4,423
|
)
|
State taxes
|
(3
|
)
|
|
2
|
|
|
—
|
|
Stock compensation and other permanent differences
|
211
|
|
|
286
|
|
|
6
|
|
Foreign taxes
|
(19
|
)
|
|
41
|
|
|
22
|
|
Benefit allocated from other comprehensive income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
Future benefit of deferred tax assets not recognized
|
6,365
|
|
|
5,779
|
|
|
4,463
|
|
Provision for income taxes
|
$
|
65
|
|
|
$
|
146
|
|
|
$
|
68
|
|
As of
January 1, 2017
, the Company had net operating loss carryforwards of approximately
$148.7 million
for federal and
$57.4 million
for state income tax purposes. If not utilized, these carryforwards will expire beginning in 2017 for federal and state purposes. The Company has decided to early adopt ASU 2016-09 in Q4 2016 and has elected to continue to estimate their forfeiture rate rather than recognizing forfeitures as they occur. The ASU 2016-09 is considered to be effective from the beginning of the year of adoption. In the year of adoption, ASU 2016-09 requires that the cumulative effect adjustment be recorded to retained earnings. Due to the full valuation allowance, there is no cumulative effect adjustment to record. Excess windfall net operating loss carryforwards are converted into deferred tax net operating losses with a corresponding increase in valuation allowance as of the beginning of 2016; the year of adoption.
The Company has research credit carryforwards of approximately
$4.0 million
for federal and
$4.1 million
for state income tax purposes as of January 1, 2017. If not utilized, the federal carryforwards will expire in various amounts beginning in 2018. The California credit can be carried forward indefinitely.
Under the Tax Reform Act of 1986, the amount of and the benefit from net operating loss carryforwards and credit carryforwards may be impaired or limited in certain circumstances. Events which may restrict utilization of a company's net operating loss and credit carryforwards include, but are not limited to, certain ownership change limitations as defined in Internal Revenue Code Section 382 and similar state provisions. In the event the Company has had a change of ownership, utilization of carryforwards could be restricted to an annual limitation. The annual limitation may result in the expiration of net operating loss carryforwards and credit carryforwards before utilization. The Company has not undertaken a study to determine if its net operating losses are limited. In the event the Company previously experienced an ownership change, or should experience an ownership change in the future, the amount of net operating losses and research and development credit carryovers available in any taxable year could be limited and may expire unutilized.
U.S. income taxes and foreign withholding taxes associated with the repatriation of earnings of foreign subsidiaries were not provided for on a cumulative total of
$500,000
of undistributed earnings for certain foreign subsidiaries as of the end of fiscal
2016
. The Company intends to reinvest these earnings indefinitely in the Company's foreign subsidiaries. The Company believes that future domestic cash generation will be sufficient to meet future domestic cash needs. The Company has not recorded a deferred tax liability on the undistributed earnings of non-U.S. subsidiaries. If these earnings were distributed to the United States in the form of dividends or otherwise, or if the shares of the relevant foreign subsidiaries were sold or otherwise transferred, the Company would be subject to additional U.S. income taxes (subject to an adjustment for foreign tax credits) and foreign withholding taxes. The additional net taxes due would be immaterial or would not have a material impact on the Company’s financial position and results of operation. If the Company decides to repatriate foreign earnings, the Company would need to adjust its income tax provision in the period in which it is determined that the earnings will no longer be indefinitely reinvested outside the United States.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2017
|
|
January 3, 2016
|
|
December 28, 2014
|
Beginning balance of unrecognized tax benefits
|
$
|
696
|
|
|
$
|
516
|
|
|
$
|
79
|
|
Additions for tax positions related to the prior year
|
1,204
|
|
|
(3
|
)
|
|
330
|
|
Additions for tax positions related to the current year
|
150
|
|
|
199
|
|
|
162
|
|
Lapse of statues of limitations
|
(36
|
)
|
|
(16
|
)
|
|
(55
|
)
|
Ending balance of unrecognized tax benefits
|
$
|
2,014
|
|
|
$
|
696
|
|
|
$
|
516
|
|
Out of
$2.0 million
of unrecognized tax benefits, there were no unrecognized tax benefits that would result in a change in the Company's effective tax rate if recognized in future years. For the twelve month period ended January 1, 2017, the Company does not have any interest accrued related to uncertain tax positions. As of
January 1, 2017
and
January 3, 2016
the Company had approximately
$0
and
$17,000
, respectively, of accrued interest and penalties related to uncertain tax positions.
The Company is not currently under exam and the Company's historical net operating loss and credit carryforwards may be adjusted by the Internal Revenue Service, or IRS, and other tax authorities until the statute closes on the year in which such attributes are utilized. The Company estimates that its unrecognized tax benefits will not change significantly within the next twelve months.
The Company is subject to U.S. federal income tax as well as income taxes in many U.S. states and foreign jurisdictions in which the Company operates. As of
January 1, 2017
, fiscal years 2012 onward remain open to examination by the U.S. taxing authorities. The U.S. tax years from 1990 forward remain effectively open to examination due to the carryover of unused net operating losses and tax credits.
NOTE 8-STOCKHOLDERS' EQUITY
Common and Preferred Stock
The Company is authorized to issue
100 million
shares of common stock and has
10 million
shares of authorized but unissued undesignated preferred stock. Without any further vote or action by the Company's stockholders, the Board of Directors has the authority to determine the powers, preferences, rights, qualifications, limitations or restrictions granted to or imposed upon any wholly unissued shares of undesignated preferred stock.
Issuance of Common Stock
On December 9, 2016, 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 earlier shelf registration statement filed on July 31, 2013 expired on August 30, 2016. See below for the details of the previous shelf registration.
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 expired on August 30, 2016. Under this shelf registration the Company issued Common stock in March 2016 and November 2016 as follows:
a) 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
.
b) 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
.
As of January 1, 2017,
2.3 million
warrants to purchase the Company's common stock were outstanding. The
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 9-EMPLOYEE STOCK PLANS
2009 Stock Plan
The 2009 Stock Plan, or 2009 Plan, was amended and restated by the Board of Directors in January 2015 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 Plan. As of
January 1, 2017
approximately
10.2 million
shares were reserved for issuance under the 2009 Plan. 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
January 1, 2017
, approximately
3.3 million
shares were reserved for issuance under the 2009 ESPP. The 2009 ESPP provides for
six
month offering periods. Participants purchase shares through payroll deductions of up to
20%
of an employee's total compensation (maximum of
20,000
shares per offering period). The 2009 ESPP permits the Board of Directors to determine, prior to each offering period, whether participants purchase shares at: (i)
85%
of the fair market value of the common stock at the end of the offering period; or (ii)
85%
of the lower of the fair market value of the common stock at the beginning or the end of an offering period. The Board of Directors has determined that, until further notice, future offering periods will be made at
85%
of the lower of the fair market value of the common stock at the beginning or the end of an offering period.
NOTE 10-STOCK-BASED COMPENSATION
The Company's equity incentive program is a broad-based, long-term retention program intended to attract, motivate, and retain talented employees as well as align stockholder and employee interests. The Company provides stock-based incentive compensation, or awards, to eligible employees and non-employee directors. Awards that may be granted under the program include non-qualified and incentive stock options, restricted stock units, or RSUs, performance-based restricted stock units, or PRSUs, and stock bonus units. To date, awards granted under the program consist of stock options, RSUs and PRSUs. The majority of stock-based awards granted under the program vest over
four
years. Stock options granted under the program have a maximum contractual term of
ten
years.
Stock-based compensation expense is recognized in the Company's consolidated statements of operations and includes compensation expense for the stock-based compensation awards granted or modified subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of the amended authoritative guidance. The impact on the Company's results of operations of recording stock-based compensation expense for fiscal years
2016
,
2015
, and
2014
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years
|
|
2016
|
|
2015
|
|
2014
|
Cost of revenue
|
$
|
132
|
|
|
$
|
109
|
|
|
$
|
137
|
|
Research and development
|
658
|
|
|
826
|
|
|
924
|
|
Selling, general and administrative
|
794
|
|
|
1,064
|
|
|
1,181
|
|
Restructuring costs
(1)
|
—
|
|
|
29
|
|
|
—
|
|
Total costs and expenses
|
$
|
1,584
|
|
|
$
|
2,028
|
|
|
$
|
2,242
|
|
(1)
Stock-based compensation related to restructuring plan initiated in the second quarter of fiscal year 2015.
No stock-based compensation was capitalized during any period presented above.
In
2016
, the Company granted restricted stock units, or RSUs, to employees with various vesting terms. Total stock-based compensation related to RSUs was
$953,000
in
2016
. The Company issued net shares for the vested RSUs, withholding shares in settlement of employee tax withholding obligations. In
2016
, the Company granted PRSUs to certain officers and cancelled PRSUs granted to certain employees in the prior year. Net credit received to stock-based compensation in 2016 due to the cancellation of PRSUs was
$113,000
.
The amount of stock-based compensation included in inventories at the end of
2016
,
2015
and
2014
was not significant.
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:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years
|
|
2016
|
|
2015
|
|
2014
|
Expected term (years)
|
7.1
|
|
|
6.3
|
|
|
6.6
|
|
Risk-free interest rate
|
1.40
|
%
|
|
1.75
|
%
|
|
1.98
|
%
|
Expected volatility
|
52
|
%
|
|
56
|
%
|
|
58
|
%
|
Expected dividend
|
—
|
|
|
—
|
|
|
—
|
|
The methodologies for determining the above values were as follows:
|
|
•
|
Expected term: The expected term represents the period that the Company's stock-based awards are expected to be outstanding and is estimated based on historical experience.
|
|
|
•
|
Risk-free interest rate: The risk-free interest rate assumption is based upon the risk-free rate of a Treasury Constant Maturity bond with a maturity appropriate for the expected term of the Company's employee stock options.
|
|
|
•
|
Expected volatility: The Company determines expected volatility based on historical volatility of the Company's common stock according to the expected term of the options.
|
|
|
•
|
Expected dividend: The expected dividend assumption is based on the Company's intent not to issue a dividend under its dividend policy.
|
The weighted average estimated fair value for options granted during
2016
,
2015
and
2014
was
$0.46
,
$0.87
, and
$1.99
per option, respectively. As of the end of
2016
, the fair value of unvested stock options, net of expected forfeitures, was approximately
$1.6 million
. This unrecognized stock-based compensation expense is expected to be recorded over a weighted average period of
3.10
years.
Stock-Based Compensation Award Activity
The following table summarizes the shares available for grant under the 2009 Plan :
|
|
|
|
|
Shares
Available for Grant
|
|
(in thousands)
|
Balance at January 3, 2016
|
2,929
|
|
Authorized
|
—
|
|
Options granted
|
(842
|
)
|
Options forfeited or expired
|
1,129
|
|
RSUs granted
|
(1,629
|
)
|
RSUs forfeited
|
789
|
|
PRSUs granted
|
(193
|
)
|
PRSU's forfeited or expired
|
449
|
|
Balance at January 1, 2017
|
2,632
|
|
Stock Options
The following table summarizes stock options outstanding and stock option activity under the 2009 Plan, and the related weighted average exercise price, for
2016
,
2015
and
2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted Average
Exercise Price
|
|
Weighted Average
Remaining Term
|
|
Aggregate Intrinsic
Value
|
|
(in thousands)
|
|
|
|
(in years)
|
|
(in thousands)
|
Balance outstanding at December 29, 2013
|
7,242
|
|
|
$
|
2.62
|
|
|
|
|
|
Granted
|
428
|
|
|
3.51
|
|
|
|
|
|
Forfeited or expired
|
(219
|
)
|
|
3.56
|
|
|
|
|
|
Exercised
|
(1,769
|
)
|
|
2.57
|
|
|
|
|
|
Balance outstanding at December 28, 2014
|
5,682
|
|
|
2.67
|
|
|
|
|
|
Granted
|
225
|
|
|
1.64
|
|
|
|
|
|
Forfeited or expired
|
(521
|
)
|
|
2.87
|
|
|
|
|
|
Exercised
|
(120
|
)
|
|
0.98
|
|
|
|
|
|
Balance outstanding at January 3, 2016
|
5,266
|
|
|
2.64
|
|
|
|
|
|
Granted
|
842
|
|
|
0.86
|
|
|
|
|
|
Forfeited or expired
|
(1,129
|
)
|
|
2.61
|
|
|
|
|
|
Exercised
|
—
|
|
|
—
|
|
|
|
|
|
Balance outstanding at January 1, 2017
|
4,979
|
|
|
$
|
2.35
|
|
|
4.06
|
|
$
|
586
|
|
Exercisable at January 1, 2017
|
4,078
|
|
|
$
|
2.59
|
|
|
2.90
|
|
$
|
199
|
|
Vested and expected to vest at January 1, 2017
|
4,740
|
|
|
$
|
2.41
|
|
|
3.78
|
|
$
|
473
|
|
The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on the Company's closing stock price of
$1.39
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
2016
,
2015
and
2014
was
$0
,
$83,000
and
$3.7 million
, respectively. Total cash received from employees as a result of employee stock option exercises during
2016
,
2015
and
2014
was approximately
$0
,
$117,000
and
$4.5 million
, 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
$486,000
,
$861,000
, and
$1.1 million
for
2016
,
2015
, and
2014
, respectively.
Significant exercise price ranges of options outstanding, related weighted average exercise prices and contractual life information at the end of
2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
Range of Exercise Prices
|
Options
Outstanding
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Weighted Average
Exercise Price
|
|
Options Vested and
Exercisable
|
|
Weighted Average
Exercise Price
|
|
(in thousands)
|
|
(in years)
|
|
|
|
(in thousands)
|
|
|
$0.78 - $0.78
|
4
|
|
|
2.17
|
|
$
|
0.78
|
|
|
5
|
|
|
$
|
0.78
|
|
0.86 - 0.86
|
726
|
|
|
9.68
|
|
0.86
|
|
|
—
|
|
|
—
|
|
0.90 - 1.32
|
463
|
|
|
2.62
|
|
0.96
|
|
|
414
|
|
|
0.92
|
|
1.63 - 1.63
|
731
|
|
|
1.92
|
|
1.63
|
|
|
731
|
|
|
1.63
|
|
2.17 - 2.76
|
446
|
|
|
4.04
|
|
2.29
|
|
|
446
|
|
|
2.29
|
|
2.78 - 2.78
|
1,299
|
|
|
3.08
|
|
2.78
|
|
|
1,299
|
|
|
2.78
|
|
2.82 - 3.39
|
635
|
|
|
5.20
|
|
3.29
|
|
|
530
|
|
|
3.28
|
|
3.48 - 3.82
|
185
|
|
|
5.63
|
|
3.60
|
|
|
164
|
|
|
3.57
|
|
3.92 - 3.92
|
2
|
|
|
4.28
|
|
3.92
|
|
|
1
|
|
|
3.92
|
|
4.17 - 4.17
|
488
|
|
|
0.79
|
|
4.17
|
|
|
488
|
|
|
4.17
|
|
$0.78 - $4.17
|
4,979
|
|
|
4.06
|
|
$
|
2.35
|
|
|
4,078
|
|
|
$
|
2.59
|
|
Restricted Stock Units
RSUs entitle the holder to receive, at no cost, one common share for each restricted stock unit on the vesting date as it vests. The Company withholds shares in settlement of employee tax withholding obligations upon the vesting of restricted stock units. The stock-based compensation related to grants of vested RSUs was
$953,000
,
$834,000
,
$854,000
in
2016
,
2015
and
2014
, respectively. In
2016
, the Company cancelled PSU's issued to certain officers, which resulted in a credit of
$113,000
to the stock-based compensation.
|
|
|
|
|
|
|
|
|
RSUs & PRSUs Outstanding
|
|
Number of Shares
|
|
Weighted Average
Grant Date Fair Value
|
|
(in thousands)
|
|
|
Nonvested at December 29, 2013
|
225
|
|
|
$
|
3.17
|
|
Granted
|
947
|
|
|
3.74
|
|
Vested
|
(480
|
)
|
|
3.86
|
|
Forfeited
|
(42
|
)
|
|
—
|
|
Nonvested at December 28, 2014
|
650
|
|
|
3.47
|
|
Granted
|
1,128
|
|
|
1.46
|
|
Vested
|
(221
|
)
|
|
1.42
|
|
Forfeited
|
(122
|
)
|
|
—
|
|
Nonvested at January 3, 2016
|
1,435
|
|
|
2.30
|
|
Granted
|
1,822
|
|
|
0.97
|
|
Vested
|
(649
|
)
|
|
1.07
|
|
Forfeited
|
(1,238
|
)
|
|
—
|
|
Nonvested at January 1, 2017
|
1,370
|
|
|
$
|
1.68
|
|
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 ESPP during
2016
,
2015
and
2014
was
$0.62
, $
0.42
and $
0.96
, respectively. Sales under the ESPP were
732,000
shares of common stock at an average price of
$0.81
for
2016
,
458,000
shares of common stock at an average price of
$1.26
for
2015
, and
278,000
shares of common stock at an average price of
$2.76
for
2014
.
Under the 2009 ESPP, the Company issued
732,000
shares at an average price of
$0.81
per share during
2016
. As of
January 1, 2017
,
687,000
shares under the 2009 ESPP remained available for issuance. For
2016
, the Company recorded compensation expenses related to the ESPP of
$258,000
,
$232,000
and
$255,000
in 2016, 2015 and 2014, respectively.
The fair value of rights issued pursuant to the Company's ESPP was estimated on the commencement date of each offering period using the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years
|
|
2016
|
|
2015
|
|
2014
|
Expected life (months)
|
6.1
|
|
|
6.0
|
|
|
6.0
|
|
Risk-free interest rate
|
0.97
|
%
|
|
0.21
|
%
|
|
0.07
|
%
|
Volatility
|
59.3
|
%
|
|
55
|
%
|
|
49
|
%
|
Dividend yield
|
—
|
|
|
—
|
|
|
—
|
|
The methodologies for determining the above values were as follows:
|
|
•
|
Expected term: The expected term represents the length of the purchase period contained in the ESPP.
|
|
|
•
|
Risk-free interest rate: The risk-free interest rate assumption is based upon the risk-free rate of a Treasury Constant Maturity bond with a maturity appropriate for the term of the purchase period.
|
|
|
•
|
Volatility: The Company determines expected volatility based on historical volatility of the Company's common stock for the term of the purchase period.
|
|
|
•
|
Dividend Yield: The expected dividend assumption is based on the Company's intent not to issue a
|
dividend under its dividend policy.
As of the end of
2016
, the unrecognized stock-based compensation expense relating to the Company's ESPP was
$97,000
and was expected to be recognized over a weighted average period of approximately
4.5
months.
NOTE 11-INFORMATION CONCERNING PRODUCT LINES, GEOGRAPHIC INFORMATION, ACCOUNTS RECEIVABLE AND REVENUE CONCENTRATION
The Company identifies its business segments based on business activities, management responsibility and geographic location. For all periods presented, the Company operated in a single reportable business segment.
The following is a breakdown of revenue by product family (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years
|
|
2016
|
|
2015
|
|
2014
|
Revenue by product line
(1)
:
|
|
|
|
|
|
New products
|
$
|
5,622
|
|
|
$
|
12,020
|
|
|
$
|
19,311
|
|
Mature products
|
5,799
|
|
|
6,936
|
|
|
8,534
|
|
Total revenue
|
$
|
11,421
|
|
|
$
|
18,956
|
|
|
$
|
27,845
|
|
___________________________
|
|
(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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years
|
|
2016
|
|
2015
|
|
2014
|
Revenue by geography:
|
|
|
|
|
|
Asia Pacific
(1)
|
$
|
7,131
|
|
|
$
|
12,650
|
|
|
$
|
20,157
|
|
Europe
|
1,386
|
|
|
1,859
|
|
|
3,371
|
|
North America
(2)
|
2,904
|
|
|
4,447
|
|
|
4,317
|
|
Total revenue
|
$
|
11,421
|
|
|
$
|
18,956
|
|
|
$
|
27,845
|
|
__________________________
(1)
Asia Pacific includes revenue from South Korea of
$3.6 million
or
31%
of total revenue in 2016 and
8.3 million
or
44%
of total revenue in 2015.
|
|
(2)
|
North America includes revenue from the United States of
$2.8 million
or
25%
of total revenue in 2016 and
4.3 million
or
22%
of total revenue in 2015.
|
The following distributors and customers accounted for 10% or more of the Company's revenue for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years
|
|
2016
|
|
2015
|
|
2014
|
Distributor “A”
|
26
|
%
|
|
23
|
%
|
|
16
|
%
|
Customer “B”
|
14
|
%
|
|
13
|
%
|
|
*
|
|
Customer "G"
|
33
|
%
|
|
43
|
%
|
|
52
|
%
|
___________________________
* Represents less than 10% of revenue for the period presented.
The following distributors and customers accounted for 10% or more of the Company's accounts receivable as of the dates presented:
|
|
|
|
|
|
|
|
January 1,
2017
|
|
January 3,
2016
|
Distributor “A”
|
32
|
%
|
|
24
|
%
|
Distributor “B”
|
*
|
|
|
11
|
%
|
Distributor "G"
|
11
|
%
|
|
11
|
%
|
Distributor "H"
|
13
|
%
|
|
*
|
|
Distributor "I"
|
15
|
%
|
|
*
|
|
Customer "G"
|
*
|
|
|
20
|
%
|
Customer "H"
|
*
|
|
|
11
|
%
|
Customer "I"
|
12
|
%
|
|
*
|
|
___________________________
* Represents less than 10% of accounts receivable as of the date presented.
As of
January 1, 2017
, 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
Certain wafer manufacturers require the Company to forecast wafer starts several months in advance. The Company is committed to take delivery of and pay for a portion of forecasted wafer volume. As of the end of
2016
and
2015
, the Company had
$1.6 million
and
$1.4 million
respectively, of outstanding commitments for the purchase of wafer inventory.
The Company has purchase obligations with certain suppliers for the purchase of goods and services entered into in the ordinary course of business. As of
January 1, 2017
, total outstanding purchase obligations due within the next 12 months were
$1.2 million
.
The Company leases its primary facility under a non-cancelable operating lease that expires on December 31, 2018. In addition, the Company rents development facilities in India as well as sales offices in Europe and Asia. Total rent expense, net of sublease income, during
2016
,
2015
and
2014
was approximately
$834,000
,
$878,000
and
$947,000
respectively.
Future minimum lease commitments under the Company's operating leases, net of sublease income and excluding property taxes and insurance are as follows:
|
|
|
|
|
|
Operating Leases
|
|
(in thousands)
|
Fiscal Years
|
|
2017
|
$
|
800
|
|
2018
|
803
|
|
2019 and after
|
415
|
|
|
$
|
2,018
|
|
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 without costly litigation; in a manner that is not adverse to the Company's financial position, results of operations or cash flows; or without requiring royalty or other payments which may adversely impact gross profit.
NOTE 14-RESTRUCTURING CHARGES
In June 2015, the Company implemented a restructuring plan to re-align the organization to support the Company's sensor processing provider business model and growth strategy. The Company paid out the outstanding balance of
$121,000
of restructuring charges in 2016. There were
no
new charges in 2016. The activities affecting the restructuring liabilities for the year ended January 1, 2017 and January 3, 2016 are summarized as follows:
|
|
|
|
|
|
Restructuring Liabilities
|
|
In Thousands
|
Balance at December 28, 2014
|
$
|
—
|
|
Accruals
|
295
|
|
Payments and non-cash items adjustments
|
(166
|
)
|
FX translation adjustment
|
(8
|
)
|
Balance at January 3, 2016
|
121
|
|
Payments and non-cash items adjustments
|
(121
|
)
|
Balance at January 1, 2017
|
$
|
—
|
|
SUPPLEMENTARY FINANCIAL DATA
QUARTERLY DATA (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
January 1,
2017
|
|
October 2, 2016
|
|
July 3, 2016
|
|
April 3,
2016
|
|
January 3,
2016
|
|
September 27,
2015
|
|
June 28, 2015
|
|
|
March 29,
2015
|
|
(in thousands, except per share amount)
|
Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
2,945
|
|
|
$
|
2,809
|
|
|
$
|
2,717
|
|
|
$
|
2,950
|
|
|
$
|
3,630
|
|
|
$
|
4,194
|
|
|
$
|
4,973
|
|
|
$
|
6,159
|
|
Cost of revenue
|
1,995
|
|
|
1,918
|
|
|
1,941
|
|
|
1,794
|
|
|
2,349
|
|
|
2,952
|
|
|
2,830
|
|
|
3,280
|
|
Gross profit
(1)
|
950
|
|
|
891
|
|
|
776
|
|
|
1,156
|
|
|
1,281
|
|
|
1,242
|
|
|
2,143
|
|
|
2,879
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
2,380
|
|
|
2,755
|
|
|
3,683
|
|
|
3,447
|
|
|
3,490
|
|
|
3,684
|
|
|
3,493
|
|
|
3,477
|
|
Selling, general and administrative
|
2,322
|
|
|
2,704
|
|
|
2,591
|
|
|
2,693
|
|
|
2,461
|
|
|
2,508
|
|
|
2,690
|
|
|
2,960
|
|
Restructuring Costs
(2)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
49
|
|
|
77
|
|
|
169
|
|
|
—
|
|
Loss from operations
|
(3,752
|
)
|
|
(4,568
|
)
|
|
(5,498
|
)
|
|
(4,984
|
)
|
|
(4,719
|
)
|
|
(5,027
|
)
|
|
(4,209
|
)
|
|
(3,558
|
)
|
Interest expense
|
(66
|
)
|
|
(37
|
)
|
|
(34
|
)
|
|
(38
|
)
|
|
(18
|
)
|
|
(35
|
)
|
|
(15
|
)
|
|
(14
|
)
|
Interest income and other expense, net
|
(43
|
)
|
|
(41
|
)
|
|
(15
|
)
|
|
(7
|
)
|
|
(9
|
)
|
|
(39
|
)
|
|
(33
|
)
|
|
(26
|
)
|
Loss before taxes
|
(3,861
|
)
|
|
(4,646
|
)
|
|
(5,547
|
)
|
|
(5,029
|
)
|
|
(4,746
|
)
|
|
(5,101
|
)
|
|
(4,257
|
)
|
|
(3,598
|
)
|
Provision for (benefit from) income taxes
|
(3
|
)
|
|
(23
|
)
|
|
27
|
|
|
64
|
|
|
100
|
|
|
(15
|
)
|
|
21
|
|
|
40
|
|
Net loss
|
$
|
(3,858
|
)
|
|
$
|
(4,623
|
)
|
|
$
|
(5,574
|
)
|
|
$
|
(5,093
|
)
|
|
$
|
(4,846
|
)
|
|
$
|
(5,086
|
)
|
|
$
|
(4,278
|
)
|
|
$
|
(3,638
|
)
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
$
|
(0.05
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.06
|
)
|
Weighted average shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
67,941
|
|
|
67,781
|
|
|
67,415
|
|
|
58,371
|
|
|
56,729
|
|
|
56,588
|
|
|
56,359
|
|
|
56,190
|
|
___________________________
|
|
(1)
|
Gross profit percentage ranged between 30% to 47% in the last 8 quarters primarily as a result of changes in customer and product mix, favorable purchase price adjustments, and favorable standard cost variances during these quarters.
|
|
|
(2)
|
Restructuring costs in 2015 were related to the Company's effort to re-align the organization to support the Company's sensor processing provider business model and growth strategy.
|