The accompanying notes form an integral part of these Consolidated Financial Statements.
The accompanying notes form an integral part of these Consolidated Financial Statements.
The accompanying notes form an integral part of these Consolidated Financial Statements.
The accompanying notes form an integral part of these Consolidated Financial Statements.
NOTE 1-THE COMPANY AND BASIS OF PRESENTATION
QuickLogic Corporation, ("QuickLogic", the "Company"), was founded in 1988 and reincorporated in Delaware in 1999. The Company enables Original Equipment Manufacturers or OEMs, to maximize battery life for highly differentiated, immersive user experiences with Smartphone, Wearable, Hearable, Tablet and Internet-of-Things or IoT devices. QuickLogic delivers these benefits through industry leading ultra-low power customer programmable System on Chip or SoC semiconductor solutions, embedded software, and algorithm solutions for always-on voice and sensor processing, and enhanced visual experiences. The Company is a fabless semiconductor provider of comprehensive, flexible sensor processing solutions, ultra-low power display bridges, and ultra-low power Field Programmable Gate Arrays, or FPGAs. The Company’s wholly owned subsidiary, SensiML Corporation, or SensiML, provides Analytics Toolkit, which is used in many of the applications where the Company’s ArcticPro™, eFPGA intellectual property, or IP plays a critical role. SensiML Analytics toolkit is an end-to-end software suite that provides OEMs a straightforward process for developing pattern matching sensor algorithms using machine learning technology that are optimized for ultra-low power consumption.
QuickLogic’s fiscal year ends on the Sunday closest to December 31. Fiscal years 2019, 2018 and 2017 ended on December 29, 2019, December 30, 2018 and December 31, 2017, respectively.
Liquidity
The Company has financed its operations and capital investments through sale of common stock, capital and operating leases, a revolving line of credit and cash flows from operations. As of December 29, 2019, the Company’s principal sources of liquidity consisted of cash and cash equivalents of $21.5 million including $15.0 million drawn down from its line of credit, or Revolving Facility with Heritage Bank of Commerce, or Heritage Bank. The Company’s prior line of credit facility with Silicon Valley Bank, which matured on September 24, 2018 was fully paid off in July 2018.
On September 28, 2018, the Company entered into a Loan and Security Agreement, or the Loan Agreement with Heritage Bank. The Loan Agreement provided for, among other things, a revolving line of credit facility (the “Revolving Facility”) with aggregate commitments of $9,000,000
On December 21, 2018, the Company entered into the Amended and Restated Loan Agreement with Heritage Bank to replace in its entirety the Loan Agreement. The Amended and Restated Loan Agreement increases the Revolving Facility from $9,000,000 to $15,000,000. The Amended and Restated Loan Agreement require the Company to maintain at least $3,000,000 in unrestricted cash at Heritage Bank.
On November 6, 2019, the Company entered into a First Amendment to the Revolving Facility with Heritage Bank to extend the maturity date for one year through September 28, 2021. Under this amendment the Revolving Facility advances shall bear interest, on the outstanding daily balance thereof, at a rate per annum equal to the greater of (i) one half of one percentage point (0.50%) above the Prime Rate, or (ii) five and one half of one percentage points (5.50%). The Company was in compliance with all loan covenants as of the end of the current reporting period. As of December 29, 2019, the Company had $15.0 million of outstanding revolving line of credit with an interest rate of 5.50%.
On June 21, 2019, the Company closed its underwritten public offering of 1.3 million shares of common stock, $0.001 par value per share at a price of $7.00 per share, which included 171,429 shares issued pursuant to the underwriters’ full exercise of their over-allotment option. The Company received net proceeds of approximately $8.0 million, after deducting underwriting commissions and other offering-related expenses. See Note 11 to the Consolidated Financial Statements for the details.
In May 2018, the Company issued an aggregate of 965,251 shares of common stock, $0.001 par value and warrants to purchase up to an aggregate of 386,100 shares of common stock in an underwritten public offering. The common stock and warrants were issued in units (the “Units”), with each Unit consisting of (i) one share of common stock and (ii) a warrant to purchase 0.40 of a share of common stock, at a combined price of $16.10 per Unit. The Company received total net proceeds from the offering of $13.9 million, net of underwriting discounts and other offering expenses of $1.6 million.
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The common stock warrants are exercisable any time for a period of 60 months from the date of issuance on May 29, 2018, and are exercisable at a price of $19.32 per share. The estimated grant date fair value of the common stock warrants was $7.98 per warrant and was calculated based on the following assumptions used in the Black-Scholes model: expected term of 5 years, risk-free interest rate of 2.58%, expected volatility of 52.75% and expected dividend of zero.
The Company currently uses its cash to fund its working capital, to accelerate the development of next generation products and for general corporate purposes. Based on past performance and current expectations, the Company believes that its existing cash and cash equivalents, together with available financial resources from the Revolving Facility with Heritage Bank will be sufficient to fund its operations and capital expenditures and provide adequate working capital for the next twelve months. The Company’s Revolving Facility with Heritage Bank will expire in September 2021 and the Company would need to renew this Revolving Facility or find an alternative lender prior to the expiration date. Further, any violations of debt covenants will restrict the Company’s access to any additional cash draws from the Revolving Facility, and may require immediate repayment of the outstanding debt amounts. Management believes that it is probable that the Company will be able to either renew the Revolving Facility or obtain alternative financing on the acceptable terms.
Various factors affect the Company’s liquidity, including, among others: the level of revenue and gross profit as a result of the cyclicality of the semiconductor industry; the conversion of design opportunities into revenue; market acceptance of existing and new products including solutions based on its ArcticLink® and PolarPro® platforms, eFPGA, EOS S3 SoC, Quick AI solution, and SensiML software; 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 ability to capitalize on synergies with our newly acquired subsidiary SensiML; the issuance and exercise of stock options and participation in the Company’s employee stock purchase plan; and other factors related to the uncertainties of the industry and global economics.
Over the longer term, the Company anticipates that sales generated from its new product offerings, existing cash and cash equivalents, together with financial resources from its Revolving Facility with Heritage Bank, assuming renewal of the Revolving Facility or the Company entering into a new debt agreement with an alternative lender prior to the expiration of the revolving line of credit in September 2021, 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
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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 long-lived assets including mask sets; valuation of goodwill; capitalized internal-use software and related amortizable lives and intangibles related to the acquisition of SensiML, including the estimated useful lives of acquired intangible 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.
Contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment.
Judgment is required to determine the Stand-alone Selling Price, or SSP, for each distinct performance obligation. The Company uses a range of amounts to estimate SSP when each of the products and services are sold separately and determines the discount to be allocated based on the relative SSP of the various products and services when products and services sold are bundled. In instances where SSP is not directly observable, such as when the Company does not sell the product or service separately, it determines the SSP using information that may include market conditions and other observable inputs. The Company typically has more than one SSP for individual products and services due to the stratification of those products and services by customers. In these instances, the Company may use information such as the size of the customer, customer tier, type of the technology used, customer demographics, geographic region and other factors in determining the SSP.
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 14 for information regarding concentrations associated with accounts receivable and revenue.
Reverse Stock Split
On December 6, 2019, the Board of Directors of the Company approved a 1-for-14 reverse stock split of the Company’s outstanding common stock, which became effective on December 23, 2019. The reverse stock split was previously approved by the Company’s shareholders in a special meeting held on November 26, 2019. At the effective time of the reverse stock split, every 14 issued and outstanding shares of common stock of the Company were automatically combined into one issued and outstanding share of common stock without any change in the par value per share. Stockholders who would have otherwise been entitled to fractional shares of common stock as a result of the reverse stock split received a cash payment in lieu of receiving fractional shares. All share, equity awards, and per share amounts contained in this Form 10-K and the accompanying Consolidated Financial Statements have been adjusted to reflect the reverse stock split for all prior periods presented. Warrants issued in connection with the May 2018 stock issuance were also adjusted to reflect the reverse stock split for all periods presented.
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NOTE 2-SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents
The Company considers all short-term, highly liquid investments with an original or a remaining maturity at purchase of ninety days or less to be cash equivalents. The Company’s investment portfolio included in cash equivalents is generally comprised of investments that meet high credit quality standards. The Company’s investment portfolio consists of money market accounts and funds. Restricted cash represents amounts pledged as cash security related to the use of credit cards.
Fair Value
The guidance for the fair value option for financial assets and financial liabilities provides companies the irrevocable option to measure many financial assets and liabilities at fair value with changes in fair value recognized in earnings or equity. The Company has not elected to measure any financial assets or liabilities at fair value that were not previously required to be measured at fair value.
Foreign Currency Transactions
All of the Company’s sales and cost of manufacturing are transacted in U.S. dollars. The Company conducts a portion of its research and development activities in India and has sales and marketing activities in various countries outside of the United States. Most of these international expenses are incurred in local currency. Foreign currency transaction gains and losses, which are not significant, are included in interest income and other expense, net, as they occur. Operating expenses denominated in foreign currencies were approximately 19%, 27% and 25% of total operating expenses in 2019, 2018 and 2017 respectively. The Company incurred a majority of these foreign currency expenses in India, the United Kingdom, China, Taiwan and Korea in 2019, 2018 and 2017. The Company has not used derivative financial instruments to hedge its exposure to fluctuations in foreign currency and, therefore, is susceptible to fluctuations in foreign exchange gains or losses in its results of operations in future reporting periods.
Inventories
In accordance with the Financial Accounting Standards Board, or FASB Accounting Standards Update, or ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory, which was adopted by the Company in the first quarter of 2017, inventories are stated at the lower of standard cost or net realizable value. Standard cost approximates actual cost on a first-in, first-out basis. The Company routinely evaluates quantities and values of its inventories in light of current market conditions and market trends and records reserves for quantities in excess of demand and product obsolescence. The evaluation, which inherently involves judgments as to assumptions about expected future demand and the impact of market conditions on these assumptions, takes into consideration historic usage, expected demand, anticipated sales price, the stage in the product life cycle of its customers’ products, new product development schedules, the effect new products might have on the sale of existing products, product obsolescence, customer design activity, customer concentrations, product merchantability and other factors. Market conditions are subject to change. Actual consumption of inventories could differ from forecast demand, and this difference could have a material impact on the Company’s gross margin and inventory balances based on additional provisions for excess or obsolete inventories or a benefit from inventories previously written down. The Company also regularly reviews the cost of inventories against estimated net realizable value and records a lower of cost or net realizable value reserve for inventories that have a cost in excess of estimated net realizable value (previously market value), which could have a material impact on the Company’s gross margin and inventory balances based on additional write-downs to net realizable value or a benefit from inventories previously written down.
The Company’s semiconductor products have historically had an unusually long product life cycle and obsolescence has not been a significant factor in the valuation of inventories. However, as the Company pursues opportunities in the mobile market and continues to develop new solutions and products, the Company believes its product life cycle will be shorter which could increase the potential for obsolescence. A significant decrease in demand could result in an increase in excess inventory on hand. Although the Company makes every effort to ensure
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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 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.
Capitalized Internal-Use Software
The Company capitalizes costs related to development of hosted services that the Company provides to its customers and internal use of enterprise-level business and finance software in support of the Company’s operational needs. Costs incurred in the application development phase are capitalized and amortized on a straight-line basis over their useful lives, which are generally three to five years. Costs related to planning and other preliminary project activities and post-implementation activities are expensed as incurred. The Company tests these assets for impairment whenever events or changes in circumstances occur that could impact their recoverability.
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 2019, 2018 and 2017 the Company wrote-off equipment with a net book value of $4,000, $5,000 and $12,000, 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 after adoption of Accounting Standards Codification (“ASC”) Topic No. 606
The Company adopted ASC Topic No. 606 and related ASUs, which provide supplementary guidance, and clarifications, effective January 1, 2018. The Company adopted using the modified retrospective approach. As a result, the Company is required to disclose the accounting policies in effect prior to January 1, 2018, as well as the policies it has applied starting January 1, 2018. The results for the reporting period beginning after January 1, 2018 are presented in accordance with the new standard, although comparative information for the prior year has not been restated and continues to be reported under the accounting standards and policies in effect for those periods. Adoption of the new standard did not have a significant impact on the current period revenues or on the prior year Consolidated Financial Statements. No transition adjustment was required to be recorded as of January 1, 2018. Under the new standard revenue is recognized as follows:
Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services.
The Company determines revenue recognition through the following steps:
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Allocation of the transaction price to the performance obligations in the contract; and
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Recognition of revenue when, or as, the Company satisfies a performance obligation.
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As part of its assessment of each contract, the Company evaluates certain factors including the customer’s ability to pay, or credit risk. For each contract, the Company considers the promise to transfer products, each of which is distinct, to be the identified performance obligations. In determining the transaction price, the price stated on the purchase order is typically fixed and represents the net consideration to which the Company expects to be entitled, and therefore there is no variable consideration. As the Company’s standard payment terms are less than one year, the Company has elected, as a practical expedient, to not assess whether a contract has a significant financing component. The Company allocates the transaction price to each distinct product based on its relative standalone selling price. The product price as specified on the purchase order is considered the standalone selling price as it is an observable source that depicts the price as if sold to a similar customer in similar circumstances.
Product Revenue
The Company generates most of its revenue by supplying standard hardware products, which must be programmed before they can be used in an application. The Company’s contracts with customers are generally for product only, and do not include other performance obligations such as services, extended warranties or other material rights.
The Company recognizes hardware product revenue at the point of time when control of products is transferred to the customers, when the Company’s performance obligation is satisfied, which typically occurs upon shipment from the Company’s manufacturing site or its headquarters.
Intellectual Property and Software License Revenue
The Company also generates revenue from licensing their intellectual property or IP, software tools and royalty from licensing its technology.
The Company recognizes IP and Software License revenue at the point of time when the control of IP or software license has been transferred.
Some of the IP and Software Licensing contracts with customers contain multiple performance obligations. For these contracts, the Company accounts for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. We determine the standalone selling prices based on our overall pricing objectives, taking into consideration market conditions and other factors, including the value of our contracts, type of the customer, customer tier, type of the technology used, customer demographics, geographic locations, and other factors.
Software as a Service Revenue, or SaaS Revenue
Software products that are offered to customers with a right to use the hosted software over the contract period without taking the possession of it are billed on a subscription basis. Revenue that are billed on a subscription basis is recognized ratably over the contract period.
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Maintenance Revenue
The Company recognizes revenue from maintenance ratably over the term of the underlying maintenance contract term. Renewals of maintenance contracts create new performance obligations that are satisfied over the term with the revenues recognized ratably over the term.
Royalty Revenue
The Company recognizes royalty revenue when the later of the following events occurs: (a) The subsequent sale or usage occurs. (b) The performance obligation to which some or all of the sales-based royalty has been allocated has been satisfied.
Deferred Revenue
Receivables are recognized in the period the Company ships the product. Payment terms on invoiced amounts are based on contractual terms with each customer. When the Company receives consideration, or such consideration is unconditionally due, prior to transferring goods or services to the customer under the terms of a sales contract, the Company records deferred revenue, which represents a contract liability. The Company recognizes deferred revenue as net sales once control of goods and/or services have been transferred to the customer and all revenue recognition criteria have been met and any constraints have been resolved. The Company defers the product costs until recognition of the related revenue occurs.
Assets Recognized from Costs to Obtain a Contract with a Customer
The Company recognizes an asset for the incremental costs of obtaining a contract with a customer, if it expects the benefit of those costs to be longer than one year. The Company has concluded that none of the costs it has incurred to obtain and fulfill its ASC 606 contracts meet the capitalization criteria, and as such, there are no costs deferred and recognized as assets on the consolidated balance sheet at December 29, 2019.
Practical expedients and exemptions
(i) Taxes collected from customers and remitted to government authorities and that are related to the sales of the Company’s products are excluded from revenues.
(ii) Sales commissions are expensed when incurred because the amortization period would have been one year or less. These costs are recorded in Selling, general and administrative expense in the Condensed Consolidated Statements of Income.
(iii) The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with original expected lengths of one year or less or (ii) contracts for which the Company recognizes revenue at the amount to which it has the right to invoice for the services performed.
The Company records allowance for sales returns. Amounts recorded for sales returns for the year ended December 29, 2019 and December 30, 2018 were $60,000 and $156,000 respectively.
Revenue Recognition Prior to the Adoption of ASC Topic No. 606 on January 1, 2018
The Company supplies standard products which must be programmed before they can be used in an application. The Company’s products may be programmed by us, distributors, end-customers or third parties.
The Company recognizes revenue as products are shipped if evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, collection of the resulting receivable is reasonably assured and product returns are reasonably estimable. Revenue is recognized upon shipment of programmed and unprogrammed parts to both OEM customers and distributors, provided that legal title and risk of ownership have transferred. Parts held by distributors may be returned for quality reasons only under its standard warranty policy. The Company records allowance for sales returns. Amounts recorded for sales returns were not material for the year ended December 31, 2017.
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The Company accounts for its Intellectual Property or IP license revenues and related services in accordance with Financial Accounting Standard Board or FASB Accounting Standards Codification or ASC No. 985-605, Software Revenue Recognition. Revenues are recognized when persuasive evidence of an arrangement exists and no further obligation exists, delivery has occurred, the license fee is fixed or determinable, and collection is reasonably assured. A license may be perpetual or time limited in its application. The Company’s IP license agreement contains multiple elements including post-contract customer support. For multiple element arrangements involving software and other software-related deliverables, vendor-specific objective evidence of fair value (“VSOE”) must exist to allocate the total fee among all delivered and non-essential undelivered elements of the arrangement. If undelivered elements of the arrangement are essential to the functionality of the product, revenue is deferred until the essential elements are delivered. If VSOE does not exist for one or more non-essential undelivered elements, revenue is deferred until such evidence exists for the undelivered elements, or until all elements are delivered, whichever is earlier. VSOE of each element is based on historical evidence of stand-alone sales of these elements to third parties including substantive renewal rate as stated in the agreement. When VSOE does not exist for undelivered items, the entire arrangement fee is recognized ratably over the performance period.
Cost of Revenue
The Company records all costs associated with its product sales in cost of revenue. These costs include the cost of materials, contract manufacturing fees, shipping costs and quality assurance. Cost of revenue also includes indirect costs such as warranty, excess and obsolete inventory charges, general overhead costs and depreciation.
Accounts Receivable Allowance
The Company estimates the amount of uncollectible accounts receivable at the end of each reporting period based on the aging of the receivable balance, current and historical customer trends, and communications with its customers. Amounts are written off only after considerable collection efforts have been made and the amounts are determined to be uncollectible.
Warranty Costs
The Company warrants finished goods against defects in material and workmanship under normal use for twelve months from the date of shipment. The Company’s liability is limited to the cost of repair or replacement of the defective part. The Company does not consider activities related to such warranties to be a separate performance obligation under ASC 606. The terms and conditions of sale generally do not allow for refunds or product returns other than for warranty repairs. The Company does not have significant product warranty related costs or liabilities.
Leases
The Company adopted ASU No. 2016-02, Leases (Topic 842) and related ASUs, which provide supplementary guidance and clarifications on December 31, 2018, utilizing the modified retrospective transition method. There was no cumulative-effect adjustment required upon adoption. Additionally, the Company elected the practical expedient approach and did not reassess whether any contracts that existed prior to adoption have or contain leases or the classification of our existing leases.
Under Topic 842, all significant lease arrangements are generally recognized at lease commencement. Operating lease right-of-use, or ROU, assets and lease liabilities are recognized at the commencement date. A ROU asset and corresponding lease liability is not recorded for leases with an initial term of 12 months or less (short term leases) and the Company recognizes lease expense for these leases as incurred over the lease term.
ROU assets represent the Company’s right to use an underlying asset during the reasonably certain lease terms and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The Company primarily uses its incremental borrowing rate, based on the information available at commencement date, in determining the present value of lease payments. The
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operating lease ROU asset also includes any lease payments related to initial direct cost and prepayments and excludes lease incentives. Lease expense is recognized on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components, which are generally accounted for separately.
In accordance with ASU No. 2016-02, the Company recognized right-of-use assets of approximately $975,000 and lease liabilities of approximately $939,000 on the Company’s Consolidated Balance Sheet as of March 31, 2019, with no material impact to its Consolidated Statements of Operations. As of December 29, 2019, the Company’s right-of-use assets was approximately $2.4 million and lease liability was approximately $2.3 million as presented on the Company’s Consolidated Balance Sheet. See Note 8 to the Consolidated Financial Statements for more details.
Business Combinations
The Company recognizes assets acquired (including goodwill and identifiable intangible assets) and liabilities assumed at fair value on the acquisition date. Subsequent changes to the fair value of such assets acquired and liabilities assumed are recognized in earnings, after the expiration of the measurement period, a period not to exceed 12 months from the acquisition date. Acquisition-related expenses and acquisition-related restructuring costs are recognized in earnings in the period in which they are incurred.
Goodwill and Intangible Assets
Goodwill represents the excess fair value of consideration transferred over the fair value of net assets acquired in business combinations. The carrying value of goodwill and indefinite lived intangible assets are not amortized but are annually tested for impairment and more often if there is an indicator of impairment. In the first quarter of 2019, the Company recognized Goodwill of $282,000 due to tax benefits that arised from intangible assets acquired in the SensiML acquisition. Goodwill was trued-up to $185,000 during the measurement period, which is 12 months from the date of acquisition and therefore the change was accounted for as acquisition accounting.
Intangible assets with finite useful lives are amortized on a straight-line basis over the periods benefited. The Company reviews the recoverability of its long-lived assets when events or changes in circumstances occur that indicate that the carrying value of the asset or asset group may not be recoverable. The assessment of possible impairment is based on the Company's ability to recover the carrying value of the asset or asset group from the expected future pre-tax cash flows (undiscounted and without interest charges) of the related operations. If these cash flows are less than the carrying value of such asset, an impairment loss is recognized for the difference between estimated fair value and carrying value. The measurement of impairment requires management to estimate future cash flows and the fair value of long-lived assets. No impairment has been recognized to-date.
Restricted cash
Restricted cash represents amounts pledged as cash security related to the Company’s credit cards.
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 $146,000 in 2019, $93,000 in 2018, and $95,000 in 2017.
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
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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 13 to the Consolidated Financial Statements 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 $58 million tax effected as of the end of 2019. The Company has also recorded a valuation allowance of $58 million, tax effected, as of the end of 2019 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.
Concentrations of Credit and Suppliers
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and cash equivalents and accounts receivable. Cash and cash equivalents are maintained with high quality institutions. The Company’s accounts receivables are denominated in U.S. dollars and are derived primarily from sales to customers located in North America, Europe and Asia Pacific. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. See Note 14 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
65
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.
Recently Adopted New Accounting Pronouncements:
In January 2017, the FASB issued Accounting Standards Update ASU No. 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill. Goodwill impairment will equal the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Furthermore, the ASU eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform step 2 of the goodwill impairment test. The guidance will be applied prospectively, and is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for any impairment tests performed on testing dates after January 1, 2017. The Company has elected to early adopt this guidance effective December 31, 2018 for the goodwill impairment test, which will be performed annually on December 1st . The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
In February 2018, FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income. The new standard provides companies with an option to reclassify stranded tax effects resulting from enactment of the Tax Cuts and Jobs Act, or TCJA, from accumulated other comprehensive income to retained earnings. The guidance will be effective for the Company beginning in the first quarter of 2019 with early adoption permitted, and would be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the tax rate as a result of TCJA is recognized. The Company adopted this ASU on December 31, 2018 with no material impact on its results of operations, financial position and cash flows.
In March 2018, FASB issued ASU No. 2018-05, Income Taxes (Topic 740). The new standard allows to insert the SEC’s interpretive guidance from Staff Accounting Bulletin, or SAB, No.118, into the income tax accounting codification under U.S. GAAP. The ASU permits companies to use provisional amounts for certain income tax effects of the Tax Act during a one-year measurement period. The provisional accounting impacts for the Company may change in future reporting periods until the accounting analysis is finalized, which will occur no later than the first quarter of fiscal 2019. The Company completed its SAB No.118 analysis with no material impact to the consolidated financial statements.
In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting. Currently, share-based payments to nonemployees are accounted for under Subtopic 505-50, which significantly differs from the guidance for share-based payments to employees under Topic 718. This ASU supersedes Subtopic 505-50 by expanding the scope of Topic 718 to include nonemployee awards and generally aligning the accounting for nonemployee awards with the accounting for employee awards. The effective date for public companies is for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the effective date is fiscal years beginning after December 15, 2019. The Company adopted this ASU on December 31, 2018 with no material impact on its results of operations, financial position and cash flows.
New Accounting Pronouncements Not Yet Adopted:
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This new standard modifies certain disclosure requirements on fair value measurements. This new standard will be effective for public companies on January 1, 2020. The Company is currently evaluating the impact of the pending adoption of the new standard on the consolidated financial statements.
66
In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementations Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. Under the new standard, implementations costs related to a cloud computing arrangement will be deferred or expensed as incurred, in accordance with the existing internal-use software guidance for similar costs. The new standard also prescribes the balance sheet, income statement and cash flow classification of the capitalized implementation costs and related amortizations expenses. The effective date for public companies is for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The amendments may be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is currently evaluating the impact of the pending adoption of the new standard on the consolidated financial statements.
NOTE 3-NET LOSS PER SHARE
Basic net loss per share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net loss per share was computed using the weighted average number of common shares outstanding during the period plus potentially dilutive common shares outstanding during the period under the treasury stock method. In computing diluted net loss per share, the weighted average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options and warrants.
For 2019, 2018 and 2017, 563,000 shares, 435,000 shares, and 476,000 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. Warrants to purchase up to 386,000 shares were issued in connection with May 29, 2018 stock offering were also not included in the diluted loss per share calculation for the year ended December 29, 2019 and December 30, 2018 as they were also considered anti-dilutive due to the net loss the Company experienced during these periods.
On December 6, 2019, the Board of Directors of the Company approved a 1-for-14 reverse stock split of the Company’s outstanding common stock, which became effective on December 23, 2019. The reverse stock split was previously approved by the Company’s shareholders in a special meeting held on November 26, 2019. Accordingly, all share, equity award, and per share amounts have been adjusted to reflect the reverse stock split for all periods presented.
67
NOTE 4-BALANCE SHEET COMPONENTS
|
|
December 29,
2019
|
|
|
December 30,
2018
|
|
|
|
(in thousands)
|
|
Inventories:
|
|
|
|
|
|
|
|
|
Raw material
|
|
$
|
222
|
|
|
$
|
191
|
|
Work-in-process
|
|
|
2,370
|
|
|
|
2,929
|
|
Finished goods
|
|
|
668
|
|
|
|
716
|
|
|
|
$
|
3,260
|
|
|
$
|
3,836
|
|
Other current assets:
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
$
|
1,296
|
|
|
$
|
1,483
|
|
Other
|
|
|
269
|
|
|
|
292
|
|
|
|
$
|
1,565
|
|
|
$
|
1,775
|
|
Property and equipment:
|
|
|
|
|
|
|
|
|
Equipment
|
|
$
|
10,694
|
|
|
$
|
10,607
|
|
Software
|
|
|
1,789
|
|
|
|
2,788
|
|
Furniture and fixtures
|
|
|
36
|
|
|
|
42
|
|
Leasehold improvements
|
|
|
474
|
|
|
|
712
|
|
|
|
|
12,993
|
|
|
|
14,149
|
|
Accumulated depreciation and amortization
|
|
|
(12,163
|
)
|
|
|
(12,700
|
)
|
|
|
$
|
830
|
|
|
$
|
1,449
|
|
Capitalized internal-use software:
|
|
|
|
|
|
|
|
|
Capitalized during the year
|
|
$
|
365
|
|
|
|
—
|
|
Accumulated amortization
|
|
|
(32
|
)
|
|
|
—
|
|
|
|
$
|
333
|
|
|
|
—
|
|
Accrued liabilities:
|
|
|
|
|
|
|
|
|
Employee compensation related accruals
|
|
|
713
|
|
|
|
1,154
|
|
Other
|
|
|
420
|
|
|
|
749
|
|
|
|
$
|
1,133
|
|
|
$
|
1,903
|
|
The Company recorded depreciation and amortization expense of $1.2 million, $1.3 million and $1.4 million for the fiscal years 2019, 2018 and 2017, respectively. No interest was capitalized for any period presented. Fiscal year 2019 depreciation and amortization of $1.2 million includes $32,000 of amortization of capitalized internal-use software.
NOTE 5-BUSINESS ACQUISITION
SensiML Acquisition
On January 3, 2019, the Company entered into a stock purchase agreement, or the Stock Purchase Agreement, with SensiML for the purchase of all of its issued and outstanding common stock in exchange for the Company’s common stock, or the SensiML Acquisition.
SensiML has a software toolkit enabling IoT developers to quickly and easily create smart devices, transforming rich sensors into actionable event detectors.
SensiML’s Analytics Toolkit is an end-to-end software suite that provides OEMs a straightforward process for developing pattern matching sensor algorithms using machine learning technology that are optimized for ultra-low power consumption. The SensiML Analytics Toolkit enables OEMs to quickly and easily leverage the power of local AI in edge, endpoint and wearable designs without the need for significant Data Science or Firmware Engineering resources.
The results of operations for the Company for the fiscal year ended December 29, 2019 include operating activity for SensiML since its acquisition date of January 3, 2019. For the fiscal year ended December 29, 2019, revenues attributable to SensiML included in the condensed consolidated statement of operations were $126,000. For the year ended December 29, 2019, charges of $148,000 were attributable to the amortization of purchased
68
intangible assets, were included in the statements of operations for respective periods. Deal costs associated with the acquisition were $104,000 for the fiscal year ended December 29, 2019. Deal costs were included in general and administrative expenses in the Company’s consolidated results of operations.
Purchase Price Allocation
Under the purchase accounting method, the total purchase price was allocated to SensiML’s net tangible and intangible assets based upon their estimated fair values as of the acquisition date. The excess purchase price over the value of the net tangible and identified intangible assets was recorded as goodwill. During the measurement period, which can be no more than one year from the date of acquisition, the Company obtained information to determine the final fair value of the net assets acquired at the acquisition date. Assets acquired and liabilities assumed are recorded based on valuations derived from estimated fair value assessments and assumptions used by the Company. The Company finalized the valuation with no change of acquired assets and liabilities as of December 29, 2019. In the first quarter of 2019, the Company recognized a Goodwill of $282,000 due to recording a deferred tax liability that arose from intangible assets acquired in the SensiML acquisition. Goodwill was trued-up at $185,000 during the measurement period, which is 12 months from the date of acquisition and therefore the change was accounted for in acquisition accounting.
Intangible assets associated with the acquisition is primarily attributable to the future technology, market presence and knowledgeable and experienced workforce. The fair value assigned to identifiable intangible assets acquired was determined using the income approach taking into account the Company’s consideration of a number of inputs, including an independent third-party analysis that was based upon estimates and assumptions provided by the Company. These estimates and assumptions were determined through established and generally accepted valuation techniques. The estimated fair value of the tangible and intangible assets acquired was allocated at SensiML’s acquisition date. Goodwill is not amortized for financial accounting purposes and is not expected to be deductible for income tax purposes.
The Stock Purchase Agreement contains customary representations and warranties between the Company and SensiML, who agreed to indemnify each other for certain breaches of representations, warranties, covenants and other specified matters. Approximately $200,000 in value of the Company’s common stock of the purchase price was placed in escrow as security for post-closing working capital adjustments, which expired on January 2, 2020.
NOTE 6-INTANGIBLE ASSETS
The following table provides the details of the carrying value of intangible assets recorded from the acquisition of SensiML during the year ended December 29, 2019 (in thousands):
|
|
December 29, 2019
|
|
|
|
Gross Carrying Amount
|
|
|
Accumulated Amortization
|
|
|
Net Carrying Amount
|
|
Developed technology
|
|
$
|
959
|
|
|
$
|
(96
|
)
|
|
$
|
863
|
|
Customer relationships
|
|
|
81
|
|
|
|
(40
|
)
|
|
|
41
|
|
Trade names and trade marks
|
|
|
116
|
|
|
|
(12
|
)
|
|
|
104
|
|
Total acquired identifiable intangible assets
|
|
$
|
1,156
|
|
|
$
|
(148
|
)
|
|
$
|
1,008
|
|
The following table provides the details of future annual amortization of intangible assets, based upon the current useful lives as of December 29, 2019 (in thousands):
|
|
Amount
|
|
Annual Fiscal Years
|
|
|
|
|
2020
|
|
|
149
|
|
2021
|
|
|
107
|
|
2022
|
|
|
107
|
|
2023
|
|
|
107
|
|
2024
|
|
|
107
|
|
Thereafter
|
|
|
431
|
|
Total
|
|
$
|
1,008
|
|
69
NOTE 7-OBLIGATIONS
Revolving Line of Credit
On September 28, 2018, the Company entered into a Loan and Security Agreement, or the Loan Agreement with Heritage Bank. The Loan Agreement provided for, among other things, the Revolving Facility with aggregate commitments of $9,000,000.
On December 21, 2018, the Company entered into an Amended and Restated Loan and Security Agreement, or the Amended and Restated Loan Agreement with Heritage Bank to replace in its entirety the Loan Agreement. The Amended and Restated Loan Agreement increased the Revolving Facility from $9,000,000 to $15,000,000. The Amended and Restated Loan Agreement requires the Company to maintain at least $3,000,000 in unrestricted cash at Heritage Bank. The Company was in compliance with all loan covenants under the Amended and Restated Loan Agreement as of the end of the current reporting period.
On November 6, 2019 the Company entered into a First Amendment to the Amended and Restated Loan Agreement to extend the maturity date of the Revolving Facility for one year through September 28, 2021. Under this amendment, the Revolving Facility advances shall bear interest, on the outstanding daily balance thereof, at a rate per annum equal to the greater of (i) one half of one percentage point (0.50%) above the Prime Rate, or (ii) five and one half of one percentage points (5.50%).
As of December 29, 2019 and December 30, 2018, the Company had $15.0 million of revolving debt outstanding with an interest rates of 5.50% and 6.0% per annum, respectively. On January 2, 2020 and January 6, 2020, the Company repaid $10.0 million and $2.0 million respectively, of its outstanding debt under the Revolving Facility with Heritage Bank.
The Bank has a first priority security interest in substantially all of the Company’s tangible and intangible assets to secure any outstanding amounts under the Loan Agreement.
NOTE 8-LEASES
The Company entered into operating leases for office space for its headquarters, domestic and foreign subsidiaries and sales offices. Finance leases are primarily for engineering design software. Operating leases generally have lease terms of 1 year to 5 years. Finance leases are generally 2 years to 3 years. During the fiscal year ended December 29, 2019, the Company recognized right-of-use assets of approximately $2.4 million and lease liability of approximately $2.3 million relating to the operating leases signed for the premises of its headquarters in San Jose, its San Diego office and its subsidiary SensiML in Oregon. The Company exited Sunnyvale premises lease in July 2019.
During 2018, the Company leased its primary facility under a non-cancelable operating lease that expires in March 2020. In October 2018, the Company submitted a nine months termination notice to the landlord to end the lease in July 2019. On February 13, 2019, the Company entered into an agreement to lease approximately 24,164 square feet of premises located at 2220 Lundy Avenue, San Jose, CA 95131 for a period of five years, effective April 15, 2019 to relocate its headquarters.
In October 2018, the Company leased a facility for research and development in San Diego, California, the lease of which expires in July 2020.
In April 2019, the Company leased a facility for its SensiML subsidiary in Beaverton, Oregon, the lease of which expires in March 2021.
In addition, the Company rents development facilities in India as well as sales offices in Europe and Asia. Total rent expense during 2019, 2018 and 2017 was approximately $798,000, $881,000 and $866,000 respectively.
70
The following table provides the activity related to operating and finance leases (in thousands:
|
|
Fiscal Year Ended
|
|
|
|
December 29, 2019
|
|
Operating lease costs:
|
|
|
|
|
Fixed
|
|
$
|
757
|
|
Variable
|
|
|
-
|
|
Short term
|
|
|
40
|
|
Total
|
|
|
797
|
|
Finance lease costs:
|
|
|
|
|
Amortization of ROU asset
|
|
|
388
|
|
Interest
|
|
|
18
|
|
Total
|
|
$
|
406
|
|
The following table provides the details of supplemental cash flow information (in thousands):
|
|
Fiscal Year Ended
|
|
|
|
December 29, 2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash flows used for operating leases
|
|
$
|
791
|
|
Operating cash flows used for finance leases
|
|
|
24
|
|
Financing cash flows used for financing leases
|
|
|
365
|
|
Total
|
|
$
|
1,180
|
|
Right-of-use assets obtained in exchange for obligations:
|
|
|
|
|
Operating leases
|
|
$
|
2,200
|
|
Finance leases
|
|
|
170
|
|
Total
|
|
$
|
2,370
|
|
The following table provides the details of right-of-use assets and lease liabilities as of December 29, 2019 (in thousands):
|
|
December 29, 2019
|
|
Right-of-use assets:
|
|
|
|
|
Operating leases
|
|
$
|
2,200
|
|
Finance leases
|
|
|
170
|
|
Total
|
|
$
|
2,370
|
|
Lease liabilities:
|
|
|
|
|
Operating leases
|
|
|
1,816
|
|
Finance leases
|
|
|
471
|
|
Total
|
|
$
|
2,287
|
|
The following table provides the details of future lease payments for operating and finance leases as of December 29, 2019 (in thousands):
Annual Fiscal Years
|
|
Operating
|
|
|
Finance
|
|
2020
|
|
$
|
611
|
|
|
$
|
214
|
|
2021
|
|
|
493
|
|
|
|
150
|
|
2022
|
|
|
409
|
|
|
|
150
|
|
2023
|
|
|
421
|
|
|
|
—
|
|
2024
|
|
|
106
|
|
|
|
—
|
|
Total lease payments
|
|
|
2,040
|
|
|
|
514
|
|
Less: Interest
|
|
|
(224
|
)
|
|
|
(43
|
)
|
Present value of lease liabilities
|
|
$
|
1,816
|
|
|
$
|
471
|
|
The following table provides the details of lease terms and discount rates as of December 29, 2019:
71
|
|
December 29, 2019
|
|
Right-of-use assets:
|
|
|
|
|
Weighted-average remaining lease term (years)
|
|
|
|
|
Operating leases
|
|
|
3.81
|
|
Finance leases
|
|
|
2.65
|
|
Weighted-average discount rates:
|
|
|
|
|
Operating leases
|
|
|
6.00
|
%
|
Finance leases
|
|
|
5.81
|
%
|
NOTE 9-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.
|
Our cash and cash equivalents include money market account balance of $20.9 million and money market funds of $262,000 as of December 29, 2019 and December 30, 2018, respectively. Investment in money market funds was classified within level 1 of the fair value hierarchy because they were valued using quoted market prices for identical assets. Fair value of the money market account balance with Heritage Bank equals to book value.
72
NOTE 10-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
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Income (loss) before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
(15,813
|
)
|
|
$
|
(13,982
|
)
|
|
$
|
(14,253
|
)
|
Foreign
|
|
|
289
|
|
|
|
355
|
|
|
|
209
|
|
Loss before income taxes
|
|
$
|
(15,524
|
)
|
|
$
|
(13,627
|
)
|
|
$
|
(14,044
|
)
|
Provision for (benefit from) income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
(19
|
)
|
|
$
|
—
|
|
State
|
|
|
3
|
|
|
|
2
|
|
|
|
2
|
|
Foreign
|
|
|
108
|
|
|
|
169
|
|
|
|
85
|
|
Subtotal
|
|
|
111
|
|
|
|
152
|
|
|
|
87
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(141
|
)
|
|
|
—
|
|
|
|
—
|
|
State
|
|
|
(44
|
)
|
|
|
—
|
|
|
|
—
|
|
Foreign
|
|
|
(6
|
)
|
|
|
—
|
|
|
|
—
|
|
Subtotal
|
|
|
(191
|
)
|
|
|
—
|
|
|
|
—
|
|
Provision for income taxes
|
|
$
|
(80
|
)
|
|
$
|
152
|
|
|
$
|
87
|
|
The following table presents the rate reconciliation between income tax provisions at the U.S. federal statutory rate and the effective rate reflected in the consolidated statements of operations:
|
|
Fiscal Years
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Income tax (benefit) at statutory rate
|
|
$
|
(3,260
|
)
|
|
$
|
(2,862
|
)
|
|
$
|
(4,775
|
)
|
State taxes
|
|
|
(42
|
)
|
|
|
2
|
|
|
|
2
|
|
Stock compensation and other permanent differences
|
|
|
187
|
|
|
|
252
|
|
|
|
75
|
|
Foreign taxes
|
|
|
42
|
|
|
|
95
|
|
|
|
(30
|
)
|
Future benefit of deferred tax assets not recognized
|
|
|
3,133
|
|
|
|
2,684
|
|
|
|
4,815
|
|
Other
|
|
|
(140
|
)
|
|
|
(19
|
)
|
|
|
—
|
|
Provision for income taxes
|
|
$
|
(80
|
)
|
|
$
|
152
|
|
|
$
|
87
|
|
Based on the available objective evidence, management believes it is more likely than not that the U.S. net deferred tax assets will not be fully realizable. Accordingly, the Company has provided a full valuation allowance against its U.S. federal and state deferred tax assets at December 29, 2019. Any future release of the valuation allowance may be recorded as a tax benefit increasing net income. The Company believes it is more likely than not it will be able to realize its foreign deferred tax assets. Deferred tax balances are comprised of the following (in thousands):
|
|
December 29,
2019
|
|
|
December 30,
2018
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating losses
|
|
$
|
40,717
|
|
|
$
|
37,527
|
|
Capital losses
|
|
|
—
|
|
|
|
—
|
|
Accruals and reserves
|
|
|
1,345
|
|
|
|
1,370
|
|
Credits carryforward
|
|
|
5,765
|
|
|
|
5,836
|
|
Depreciation and amortization
|
|
|
9,760
|
|
|
|
9,887
|
|
Stock-based compensation
|
|
|
637
|
|
|
|
347
|
|
Gross deferred tax assets
|
|
|
58,224
|
|
|
|
54,967
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Net lease asset/ (liability)
|
|
|
(23
|
)
|
|
|
—
|
|
Gross deferred tax liabilities
|
|
|
(23
|
)
|
|
|
—
|
|
Net deferred tax assets/ (liabilities)
|
|
|
58,201
|
|
|
|
54,967
|
|
Valuation allowance
|
|
|
(58,140
|
)
|
|
|
(54,913
|
)
|
Total deferred tax asset/ (liability)
|
|
$
|
61
|
|
|
$
|
54
|
|
73
As of December 29, 2019, the Company had net operating loss carryforwards of approximately $168.7 million for federal and $75.4 million for state income tax purposes. If not utilized, the federal net operating loss for years beginning before January 1, 2018 of $141.6 million will expire beginning in 2020 through 2038, and federal net operating losses beginning after January 1, 2018 of $27.1 million will be carried forward indefinitely (subject to certain limitations). If not utilized, the state net operating losses will expire beginning in 2020 through 2038.
The Company has research credit carryforwards of approximately $4.0 million for federal and $4.4 million for state income tax purposes as of December 29, 2019. If not utilized, the federal carryforwards will expire in various amounts beginning in 2020. The California credit can be carried forward indefinitely.
The Tax Cuts and Jobs Act (the "TCJA") was enacted on December 22, 2017. The Act reduces the US federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. In December 2017, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the income tax effects of the TCJA. SAB 118 provides a measurement period that should not extend beyond one year from the TCJA enactment date for companies to complete the accounting relating to the TCJA under Accounting Standards Codification Topic 740, “Income Taxes” (“ASC 740”). In accordance with SAB 118, the TCJA-related income tax effects that we initially reported as provisional estimates were refined as additional analysis was performed. There was no material impact to the balance sheet and income statement recorded when the analysis was completed in the 2018 fourth quarter. The TCJA also includes a provision to tax global intangible low-taxed income ("GILTI") of foreign subsidiaries. In accordance with U.S. GAAP, the Company has made an accounting policy election to treat taxes due under the GILTI provision as a current period expense.
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.
Foreign withholding taxes associated with the repatriation of earnings of foreign subsidiaries were not provided for on the undistributed earnings of certain foreign subsidiaries as of the end of fiscal 2019. The Company intends to reinvest these earnings indefinitely in the Company’s foreign subsidiaries. The Company believes that future domestic cash generation will be sufficient to meet future domestic cash needs. The Company has not recorded a deferred tax liability on the undistributed earnings of non-U.S. subsidiaries. The foreign withholding taxes would not have a material impact on the Company’s financial position and results of operation.
Uncertain Tax Positions
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
|
|
December 29,
2019
|
|
|
December 30,
2018
|
|
|
December 31,
2017
|
|
Beginning balance of unrecognized tax benefits
|
|
$
|
2,161
|
|
|
$
|
2,107
|
|
|
$
|
2,014
|
|
Additions for tax positions related to the prior year
|
|
|
(46
|
)
|
|
|
(2
|
)
|
|
|
16
|
|
Additions for tax positions related to the current year
|
|
|
88
|
|
|
|
125
|
|
|
|
77
|
|
Lapse of statutes of limitations
|
|
|
(86
|
)
|
|
|
(69
|
)
|
|
|
—
|
|
Ending balance of unrecognized tax benefits
|
|
$
|
2,117
|
|
|
$
|
2,161
|
|
|
$
|
2,107
|
|
Out of $2.1 million of unrecognized tax benefits, there are no unrecognized tax benefits that would result in a change in the Company's effective tax rate if recognized in future years. The accrued interest and penalties related to uncertain tax positions was not significant for December 29, 2019, December 30, 2018 and December 31, 2017.
74
The Company is not currently under tax examination and the Company’s historical net operating loss and credit carryforwards may be adjusted by the Internal Revenue Service, and other tax authorities until the statute closes on the year in which such tax attributes are utilized. The Company estimates that its unrecognized tax benefits will not change significantly within the next twelve months.
The Company is subject to U.S. federal income tax as well as income taxes in many U.S. states and foreign jurisdictions in which the Company operates. The U.S. tax years from 1999 forward remain effectively open to examination due to the carryover of unused net operating losses and tax credits.
NOTE 11-STOCKHOLDERS’ EQUITY
Common and Preferred Stock
As of December 29, 2019, the Company is authorized to issue 200 million shares of common stock and has 10 million shares of authorized but unissued undesignated preferred stock. Without any further vote or action by the Company’s stockholders, the Board of Directors has the authority to determine the powers, preferences, rights, qualifications, limitations or restrictions granted to or imposed upon any wholly unissued shares of undesignated preferred stock.
Reverse Stock Split
On December 6, 2019, the Board of Directors of the Company approved a 1-for-14 reverse stock split of the Company’s outstanding common stock, which became effective on December 23, 2019. The reverse stock split was previously approved by the Company’s shareholders in a special meeting held on November 26, 2019. At the effective time of the reverse stock split, every 14 issued and outstanding shares of common stock of the Company were automatically combined into one issued and outstanding share of common stock without any change in the par value per share. Stockholders who would have otherwise been entitled to fractional shares of common stock as a result of the reverse stock split received a cash payment in lieu of receiving fractional shares. All share, equity awards, and per share amounts contained in this Form 10-K and the accompanying Consolidated Financial Statements have been adjusted to reflect the reverse stock split for all prior periods presented. Warrants issued in connection with the May 2018 stock issuance were also adjusted to reflect the reverse stock split for all the periods presented.
Issuance of Common Stock
On June 21, 2019, the Company closed an underwritten public offering of 1.3 million shares of common stock, $0.001 par value per share at a price of $ 7.00 per share, which included 171,429 shares issued pursuant to the underwriters’ full exercise of their over-allotment option. The Company received net proceeds from the offering of approximately $8.0 million, net of underwriter’s commission and other offering expenses paid as of the third quarter of 2019.
On March 15, 2019, 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 amount of $75 million. The Company’s shelf registration statement was declared effective on March 29, 2019.
In May 2018, the Company issued an aggregate of 965,251 shares of common stock, $0.001 par value and warrants to purchase up to an aggregate of 386,100 shares of common stock in an underwritten public offering. The common stock and warrants were issued in units, with each unit consisting of (i) one share of common stock and (ii) a warrant to purchase 0.40 of a share of common stock, at a price of $16.10 per Unit. The Company received total net proceeds from the offering of $13.9 million.
The warrants are exercisable any time for a period of 60 months from the date of issuance on May 29, 2018, and are exercisable at an exercisable price of $19.32 per share. The estimated grant date fair value was $7.98 per warrant and was calculated based on the following assumptions used in the Black-Scholes model: expected term of 5 years, risk-free interest rate of 2.58%, expected volatility of 52.75% and expected dividend of zero.
75
NOTE 12-EMPLOYEE STOCK PLANS
2009 Stock Plan
The 2009 Stock Plan, or 2009 Plan, was amended and restated by the Board of Directors in January 2015, in February 2017, and in March 15, 2018 and approved by the Company’s stockholders on April 23, 2015, on April 26, 2017 and on April 25, 2018 to, among other things, reserve an additional 178,571, 107,143 and 285,714 shares of common stock, respectively, for issuance under the 2009 Plan. On April 24, 2019, 2009 Plan was replaced by 2019 Stock Plan with an extended term of ten years through March 15, 2028. The remaining balance of available shares under the 2009 Plan of 299,070 were cancelled as of April 24, 2019.
2019 Stock Plan
On April 24, 2019, the Company’s Board of Directors and shareholders approved the 2019 Stock Plan, or 2019 Plan, to replace the 2009 stock Plan, or the 2009 Plan. Under the 2019 Plan, 357,143 shares of common stock are available for grants, plus any shares subject to any outstanding options or other awards granted under the Company’s 2009 Plan that expire, are forfeited, cancelled, returned to the Company for failure to satisfy vesting requirements, settled for cash or otherwise terminated without payment being made thereunder. As of December 29, 2019, approximately 271,507 shares of the Company’s common stock were reserved for issuance under the 2019 Plan.
Options typically vest at a rate of 25% one year after the vesting commencement date, and one forty-eighth for each month of service thereafter. RSUs typically vest at a rate of 25% one year after the vesting commencement date, and one eighth every six months thereafter. The Company may implement different vesting schedules in the future with respect to any new equity awards.
Employee Stock Purchase Plan
The 2009 Employee Stock Purchase Plan, or 2009 ESPP, was adopted in March 2009. The 2009 ESPP was amended by the Board of Directors in January 2015 and in February 2017, and was approved by the Company’s stockholders on April 23, 2015 and April 26, 2017, to reserve an additional 71,429 and 107,143 shares of common stock, respectively, for issuance under the 2009 ESPP.
On May 6, 2019, the Board of Directors approved the extension of the term of the 2009 ESPP to March 5, 2029, which also requires the stockholders’ ratification within 12 months of the approval by the Board of Directors. The Company plans to submit the extension of the term of the 2009 ESPP for our stockholders to ratify in the next annual general meeting.
As of December 29, 2019, 62,335 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 1,429 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 13-STOCK-BASED COMPENSATION
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.
76
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 2019, 2018, and 2017 was as follows (in thousands):
|
|
Fiscal Years
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Cost of revenue
|
|
$
|
78
|
|
|
$
|
129
|
|
|
$
|
121
|
|
Research and development
|
|
|
2,242
|
|
|
|
760
|
|
|
|
614
|
|
Selling, general and administrative
|
|
|
824
|
|
|
|
1,012
|
|
|
|
706
|
|
Total costs and expenses
|
|
$
|
3,144
|
|
|
$
|
1,901
|
|
|
$
|
1,441
|
|
No stock-based compensation was capitalized or included in inventories at the end of 2019, 2018 and 2017.
Stock-Based Compensation Award Activity
The following table summarizes the shares available for grant under the 2019 Plan and 2009 Plan (in thousands):
|
|
Shares Available for Grant
|
|
|
|
2019 Plan
|
|
|
2009 Plan
|
|
Balance at December 30, 2018
|
|
|
—
|
|
|
|
483
|
|
Authorized
|
|
|
357
|
|
|
|
—
|
|
Options granted
|
|
|
—
|
|
|
|
—
|
|
Options forfeited or expired
|
|
|
26
|
|
|
|
2
|
|
RSUs granted
|
|
|
(113
|
)
|
|
|
(240
|
)
|
RSUs forfeited
|
|
|
2
|
|
|
|
54
|
|
Plan Shares expired
|
|
|
—
|
|
|
|
(299
|
)
|
Balance at December 29, 2019
|
|
|
272
|
|
|
|
—
|
|
Stock Options
The following table summarizes stock options outstanding and stock option activity under the 2019 Plan and 2009 Plan, and the related weighted average exercise price, for 2019, 2018 and 2017:
|
|
Number
of Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining Term
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
(in years)
|
|
|
(in thousands)
|
|
Balance outstanding at January 1, 2017
|
|
|
356
|
|
|
$
|
32.90
|
|
|
|
4.06
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(97
|
)
|
|
|
42.98
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(5
|
)
|
|
|
18.34
|
|
|
|
|
|
|
|
|
|
Balance outstanding at December 31, 2017
|
|
|
254
|
|
|
|
29.26
|
|
|
|
4.34
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(10
|
)
|
|
|
25.20
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(15
|
)
|
|
|
12.60
|
|
|
|
|
|
|
|
|
|
Balance outstanding at December 30, 2018
|
|
|
229
|
|
|
|
30.52
|
|
|
|
3.70
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(42
|
)
|
|
|
24.14
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1
|
)
|
|
|
10.92
|
|
|
|
|
|
|
|
|
|
Balance outstanding at December 29, 2019
|
|
|
186
|
|
|
$
|
32.09
|
|
|
|
3.32
|
|
|
$
|
-
|
|
Exercisable at December 29, 2019
|
|
|
176
|
|
|
$
|
33.20
|
|
|
|
3.13
|
|
|
$
|
-
|
|
Vested and expected to vest at December 29, 2019
|
|
|
185
|
|
|
$
|
32.15
|
|
|
|
3.31
|
|
|
$
|
-
|
|
There was no intrinsic value for the stock options, based on the Company’s closing stock price of $4.58 per share as of the end of the Company’s current reporting period, which would have been received by the option holders had all option holders exercised their options as of that date.
77
The total intrinsic value of options exercised during 2019, 2018 and 2017 was not significant. Total cash received from employees as a result of employee stock option exercises during 2019, 2018 and 2017 was approximately $3,600, $195,000 and $85,000, 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 net loss position.
Total stock-based compensation expense recognized related to stock options was $117,000, $131,000, and $239,000 for 2019, 2018, and 2017, respectively. No stock options were granted during the fiscal year 2019, 2018 and 2017. As of the end of 2019, the fair value of unvested stock options, net of expected forfeitures, was approximately $37,000. This unrecognized stock-based compensation expense is expected to be recorded over a weighted average period of 0.69 year.
Significant exercise price ranges of options outstanding, related weighted average exercise prices and contractual life information at the end of 2019 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)
|
|
|
|
|
|
$12.05
|
|
|
|
52
|
|
|
|
6.69
|
|
|
$
|
12.05
|
|
|
|
42
|
|
|
$
|
12.05
|
|
$18.48 - $31.50
|
|
|
|
20
|
|
|
|
2.89
|
|
|
|
28.24
|
|
|
|
20
|
|
|
|
28.24
|
|
$32.20 - $37.10
|
|
|
|
3
|
|
|
|
3.31
|
|
|
|
32.57
|
|
|
|
3
|
|
|
|
32.57
|
|
$
|
38.92
|
|
|
|
67
|
|
|
|
0.80
|
|
|
|
38.92
|
|
|
|
67
|
|
|
|
38.92
|
|
$39.48 - $44.94
|
|
|
|
9
|
|
|
|
3.78
|
|
|
|
42.94
|
|
|
|
9
|
|
|
|
42.94
|
|
$46.62
|
|
|
|
5
|
|
|
|
2.64
|
|
|
|
46.62
|
|
|
|
5
|
|
|
|
46.62
|
|
$47.04
|
|
|
|
1
|
|
|
|
0.62
|
|
|
|
47.04
|
|
|
|
1
|
|
|
|
47.04
|
|
$47.46
|
|
|
|
16
|
|
|
|
3.77
|
|
|
|
47.46
|
|
|
|
16
|
|
|
|
47.46
|
|
$48.72
|
|
|
|
8
|
|
|
|
2.36
|
|
|
|
48.72
|
|
|
|
8
|
|
|
|
48.72
|
|
$53.48
|
|
|
|
5
|
|
|
|
4.08
|
|
|
|
53.48
|
|
|
|
5
|
|
|
|
53.48
|
|
$12.05- $53.48
|
|
|
|
186
|
|
|
|
3.32
|
|
|
$
|
32.09
|
|
|
|
176
|
|
|
$
|
33.20
|
|
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.
No stock options were granted during the years 2019, 2018 and 2017.
78
Restricted Stock Units
The Company grants restricted stock units, or RSUs, to employees with various vesting terms. RSUs entitle the holder to receive, at no cost, one common share for each restricted stock unit on the vesting date as it vests. The Company withholds shares in settlement of employee tax withholding obligations upon the vesting of restricted stock units. Stock-based compensation related to grants of vested RSUs and PSUs was $3.0 million, $1.6, million and $1.0 million in 2019, 2018 and 2017, respectively.
The following table summarizes RSU’s activity under the 2019 Plan and 2009 Plan, and the related weighted average grant date fair value, for 2019, 2018 and 2017:
|
|
RSUs & PRSUs Outstanding
|
|
|
|
Number of Shares
|
|
|
Weighted Average
Grant Date Fair Value
|
|
|
|
(in thousands)
|
|
|
|
|
|
Nonvested at January 1, 2017
|
|
|
98
|
|
|
$
|
23.52
|
|
Granted
|
|
|
132
|
|
|
|
19.74
|
|
Vested
|
|
|
(43
|
)
|
|
|
20.44
|
|
Forfeited
|
|
|
(19
|
)
|
|
|
—
|
|
Nonvested at January 1, 2017
|
|
|
168
|
|
|
|
21.56
|
|
Granted
|
|
|
110
|
|
|
|
11.90
|
|
Vested
|
|
|
(77
|
)
|
|
|
19.18
|
|
Forfeited
|
|
|
(18
|
)
|
|
|
—
|
|
Nonvested at December 30, 2018
|
|
|
183
|
|
|
|
17.22
|
|
Granted
|
|
|
353
|
|
|
|
10.77
|
|
Vested
|
|
|
(118
|
)
|
|
|
14.48
|
|
Forfeited
|
|
|
(41
|
)
|
|
|
—
|
|
Nonvested at December 29, 2019
|
|
|
377
|
|
|
$
|
12.55
|
|
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 2019, 2018 and 2017 was $4.28, $5.18 and $6.02, respectively. Sales under the ESPP were 24,131 shares of common stock at an average price per share of $9.76 for 2019, 31,306 shares of common stock at an average price per share of $15.40 for 2018, and 38,449 shares of common stock at an average price per share of $12.04 for 2017.
As of December 29, 2019, 62,335 shares under the 2009 ESPP remained available for issuance. The Company recorded compensation expenses related to the ESPP of $60,000, $205,000 and $153,000 in 2019, 2018 and 2017, 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
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Expected life (months)
|
|
6.0
|
|
|
6.0
|
|
|
|
6.1
|
|
Risk-free interest rate
|
|
|
2.37
|
%
|
|
|
2.26
|
%
|
|
|
1.22
|
%
|
Volatility
|
|
|
54
|
%
|
|
|
50
|
%
|
|
|
53
|
%
|
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.
|
79
|
•
|
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.
|
NOTE 14-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
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Revenue by product line (1) :
|
|
|
|
|
|
|
|
|
|
|
|
|
New products
|
|
$
|
3,123
|
|
|
$
|
5,735
|
|
|
$
|
5,853
|
|
Mature products
|
|
|
7,187
|
|
|
|
6,894
|
|
|
|
6,296
|
|
Total revenue
|
|
$
|
10,310
|
|
|
$
|
12,629
|
|
|
$
|
12,149
|
|
(1)
|
New products include all products manufactured on 180 nanometer or smaller semiconductor processes, eFPGA IP license, QuickAI and SensiML AI software as a service (SaaS) revenues. Mature products include all products produced on semiconductor processes larger than 180 nanometer.
|
The following is a breakdown of revenue by shipment destination (in thousands):
|
|
Fiscal Years
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Revenue by geography:
|
|
|
|
|
|
|
|
|
|
|
|
|
Asia Pacific (1)
|
|
$
|
3,049
|
|
|
$
|
4,905
|
|
|
$
|
5,810
|
|
Europe
|
|
|
2,459
|
|
|
|
1,280
|
|
|
|
2,015
|
|
North America (2)
|
|
|
4,802
|
|
|
|
6,444
|
|
|
|
4,324
|
|
Total revenue
|
|
$
|
10,310
|
|
|
$
|
12,629
|
|
|
$
|
12,149
|
|
(1)
|
Asia Pacific includes revenue from China $1.1 million or 11% and Japan of $1.8 million or 17% of total revenue in 2019 and $1.8 million or 15% and $1.6 million or 12% of total revenue in 2018, respectively. In 2017, revenue from China and Japan were $1.3 million or 11% and $1.5 million or 12%, respectively.
|
(2)
|
North America includes revenue from the United States of $4.7 million or 46% of total revenue in 2019, $6.4 million or 50% of total revenue in 2018 and $4.2 million or 34% of total revenue in 2017.
|
The following distributors and customers accounted for 10% or more of the Company’s revenue for the periods presented:
|
|
Fiscal Years
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Distributor "A"
|
|
|
40
|
%
|
|
|
34
|
%
|
|
|
33
|
%
|
Distributor "C"
|
|
|
13
|
%
|
|
|
—
|
|
|
|
—
|
|
Customer "B"
|
|
|
13
|
%
|
|
|
12
|
%
|
|
|
11
|
%
|
Customer "E"
|
|
|
10
|
%
|
|
|
—
|
|
|
|
—
|
|
Customer "G"
|
|
|
—
|
|
|
|
10
|
%
|
|
|
19
|
%
|
Customer "J"
|
|
|
—
|
|
|
|
10
|
%
|
|
|
—
|
|
80
The following distributors and customers accounted for 10% or more of the Company's accounts receivable as of the dates presented:
|
|
December 29,
2019
|
|
|
December 30,
2018
|
|
Distributor "A"
|
|
|
20
|
%
|
|
|
35
|
%
|
Distributor "C"
|
|
|
23
|
%
|
|
|
—
|
|
Distributor "E"
|
|
|
12
|
%
|
|
|
—
|
|
Distributor "G"
|
|
|
—
|
|
|
|
10
|
%
|
Distributor "J"
|
|
31
|
|
|
|
—
|
|
Customer "M"
|
|
|
—
|
|
|
|
23
|
%
|
As of December 29, 2019 and December 30, 2018, approximately 7% of the Company’s long-lived assets, including property and equipment and other assets were located outside the United States.
NOTE 15-COMMITMENTS
Commitments
Certain wafer manufacturers require the Company to forecast wafer starts several months in advance. The Company is committed to take delivery of and pay for a portion of forecasted wafer volume. As of the end of 2019 and 2018, the Company had $57,000 and $22,000 respectively, of outstanding commitments for the purchase of wafer inventory.
The Company has purchase obligations with certain suppliers for the purchase of goods and services entered into in the ordinary course of business. As of December 29, 2019, total outstanding purchase obligations were $413,000 of which $386,000 were due within next twelve months.
NOTE 16-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 17-SUBSEQUENT EVENTS
Restructuring
In January 2020, the Company announced a restructuring plan to lower annual operating expenses. The restructuring plan was approved by the Company’s Board of Directors on January 24, 2020. The majority of the cost savings will come from personnel reductions, which were implemented across all parts of the Company and geographies. This plan resulted in a reduction of workforce of about 33% of the Company's global workforce.
In conjunction with this restructuring plan, the Company estimates it will incur approximately $500,000 to $600,000 of restructuring expenses, which will result in total cash expenditures of approximately $500,000, with the majority coming in the first quarter of fiscal 2020.
81
SUPPLEMENTARY FINANCIAL DATA
QUARTERLY DATA (UNAUDITED)
|
|
Quarter Ended
|
|
|
|
December 29,
2019
|
|
|
September 29,
2019
|
|
|
June 30,
2019
|
|
|
March 31,
2019
|
|
|
December 30,
2018
|
|
|
September 30,
2018
|
|
|
July 1,
2018
|
|
|
April 1,
2018
|
|
|
|
(in thousands, except per share amount)
|
|
Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
2,871
|
|
|
$
|
2,158
|
|
|
$
|
2,087
|
|
|
$
|
3,194
|
|
|
$
|
3,233
|
|
|
$
|
3,510
|
|
|
$
|
3,122
|
|
|
$
|
2,764
|
|
Cost of revenue
|
|
|
1,008
|
|
|
|
1,117
|
|
|
|
1,065
|
|
|
|
1,215
|
|
|
|
1,561
|
|
|
|
1,767
|
|
|
|
1,592
|
|
|
|
1,375
|
|
Gross profit (1)
|
|
|
1,863
|
|
|
|
1,041
|
|
|
|
1,022
|
|
|
|
1,979
|
|
|
|
1,672
|
|
|
|
1,743
|
|
|
|
1,530
|
|
|
|
1,389
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and
development
|
|
|
2,754
|
|
|
|
3,139
|
|
|
|
3,215
|
|
|
|
3,242
|
|
|
|
2,422
|
|
|
|
2,461
|
|
|
|
2,366
|
|
|
|
2,699
|
|
Selling, general and
administrative
|
|
|
2,037
|
|
|
|
2,095
|
|
|
|
2,340
|
|
|
|
2,446
|
|
|
|
2,302
|
|
|
|
2,509
|
|
|
|
2,610
|
|
|
|
2,561
|
|
Loss from operations
|
|
|
(2,928
|
)
|
|
|
(4,193
|
)
|
|
|
(4,533
|
)
|
|
|
(3,709
|
)
|
|
|
(3,052
|
)
|
|
|
(3,227
|
)
|
|
|
(3,446
|
)
|
|
|
(3,871
|
)
|
Interest expense
|
|
|
(80
|
)
|
|
|
(63
|
)
|
|
|
(124
|
)
|
|
|
(83
|
)
|
|
|
(31
|
)
|
|
|
(21
|
)
|
|
|
(32
|
)
|
|
|
(24
|
)
|
Interest income and other
expense, net
|
|
|
36
|
|
|
|
55
|
|
|
|
50
|
|
|
|
48
|
|
|
|
51
|
|
|
|
17
|
|
|
|
23
|
|
|
|
(14
|
)
|
Loss before taxes
|
|
|
(2,972
|
)
|
|
|
(4,201
|
)
|
|
|
(4,607
|
)
|
|
|
(3,744
|
)
|
|
|
(3,032
|
)
|
|
|
(3,231
|
)
|
|
|
(3,455
|
)
|
|
|
(3,909
|
)
|
Provision for (benefit from)
income taxes
|
|
|
91
|
|
|
|
70
|
|
|
|
27
|
|
|
|
(268
|
)
|
|
|
33
|
|
|
|
29
|
|
|
|
29
|
|
|
|
61
|
|
Net loss
|
|
$
|
(3,063
|
)
|
|
$
|
(4,271
|
)
|
|
$
|
(4,634
|
)
|
|
$
|
(3,476
|
)
|
|
$
|
(3,065
|
)
|
|
$
|
(3,260
|
)
|
|
$
|
(3,484
|
)
|
|
$
|
(3,970
|
)
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.37
|
)
|
|
$
|
(0.51
|
)
|
|
$
|
(0.65
|
)
|
|
$
|
(0.50
|
)
|
|
$
|
(0.45
|
)
|
|
$
|
(0.48
|
)
|
|
$
|
(0.57
|
)
|
|
$
|
(0.69
|
)
|
Weighted average shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
8,328
|
|
|
|
8,313
|
|
|
|
7,088
|
|
|
|
6,916
|
|
|
|
6,807
|
|
|
|
6,766
|
|
|
|
6,125
|
|
|
|
5,755
|
|
(1)
|
Gross profit percentage ranged between 48.2% to 64.9% 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.
|