10-Q 1 quik-10q_20190630.htm 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

[x] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2019

OR

[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From To

COMMISSION FILE NUMBER: 000-22671

QUICKLOGIC CORPORATION

(Exact name of registrant as specified in its charter)

DELAWARE |  | 77-0188504
(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)

2220 Lundy Avenue, San Jose, CA 95131-1816

(Address of principal executive offices including zip code))

(408) 990-4000

(Registrant's telephone number, including area code)

Securities registered pursuant Section 12(b) of the act:

Title of each class | Trading Symbol(s) | Name of each exchange on which registered
Common Stock, par value $.001 per share | QUIK | The Nasdaq Capital Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ]

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [x ] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer |  | [ ] |  | Accelerated Filer |  | [x]
Non-accelerated filer |  | [ ] |  | Smaller Reporting Company |  | [x]
|  |  |  | Emerging growth company |  | [ ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act). Yes [ ] No [x]

As of August 2, 2019, the registrant had outstanding 116,318,293 shares of common stock, par value $0.001

QUICKLOGIC CORPORATION

FORM 10-Q

JUNE 30, 2019

|  |  | Page
Part I - Financial Information |  | 3
Item 1. | Financial Statements (unaudited condensed) |  | 3
| Consolidated Balance Sheets |  | 3
| Consolidated Statements of Operations |  | 4
| Consolidated Statements of Cash Flows |  | 5
| Consolidated Statements of Changes in Stockholders’ Equity |  | 6
| Notes to Unaudited Condensed Consolidated Financial Statements |  | 7
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 23
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |  | 33
Item 4. | Controls and Procedures |  | 33
Part II - Other Information |  | 35
Item 1. | Legal Proceedings |  | 35
Item 1A. | Risk Factors |  | 35
Item 6. | Exhibits |  | 35
Signatures |  |  | 36

2

PART I. Financi al Information

Item 1. Financial Statements

QUICKLOGIC CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value amount)

|  | June 30, 2019 |  |  | December 30, 2018 |
ASSETS |  |  |  |  |  |  |  |
Current assets: |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 28,051 |  |  | $ | 26,363 |
Restricted cash |  |  | 100 |  |  |  | 100 |
Accounts receivable, net of allowances for doubtful accounts of $0 and $0 |  |  | 1,519 |  |  |  | 2,209 |
Inventories |  |  | 3,502 |  |  |  | 3,836 |
Other current assets |  |  | 1,717 |  |  |  | 1,775 |
Total current assets |  |  | 34,889 |  |  |  | 34,283 |
Property and equipment, net |  |  | 1,110 |  |  |  | 1,449 |
Right of use assets |  |  | 2,417 |  |  |  | - |
Intangible assets |  |  | 1,082 |  |  |  | - |
Goodwill |  |  | 282 |  |  |  | - |
Other assets |  |  | 351 |  |  |  | 354 |
TOTAL ASSETS |  | $ | 40,131 |  |  | $ | 36,086 |
LIABILITIES AND STOCKHOLDERS' EQUITY |  |  |  |  |  |  |  |
Current liabilities: |  |  |  |  |  |  |  |
Revolving line of credit |  | $ | 15,000 |  |  | $ | 15,000 |
Trade payables |  |  | 1,632 |  |  |  | 1,488 |
Accrued liabilities |  |  | 1,307 |  |  |  | 1,903 |
Lease liabilities-current |  |  | 777 |  |  |  | 316 |
Total current liabilities |  |  | 18,716 |  |  |  | 18,707 |
Long-term liabilities: |  |  |  |  |  |  |  |
Lease liabilities-non-current |  |  | 1,553 |  |  |  | 108 |
Other long-term liabilities |  |  | - |  |  |  | 16 |
Total liabilities |  |  | 20,269 |  |  |  | 18,831 |
Commitments and contingencies (see Note 15) |  |  |  |  |  |  |  |
Stockholders' equity: |  |  |  |  |  |  |  |
Preferred stock, $0.001 par value; 10,000 shares authorized; no shares issued or outstanding |  |  | — |  |  |  | — |
Common stock, $0.001 par value; 200,000 authorized; 116,121 and 95,513 shares issued and outstanding as of June 30, 2019 and December 30, 2018, respectively |  |  | 116 |  |  |  | 95 |
Additional paid-in capital |  |  | 295,670 |  |  |  | 284,974 |
Accumulated deficit |  |  | (275,924 | ) |  |  | (267,814 | )
Total stockholders' equity |  |  | 19,862 |  |  |  | 17,255 |
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY |  | $ | 40,131 |  |  | $ | 36,086 |

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

3

QUICKLOGIC CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

|  | Three Months Ended |  |  | Six Months Ended |
|  | June 30, 2019 |  |  | July 1, 2018 |  |  | June 30, 2019 |  |  | July 1, 2018 |
Revenue |  | $ | 2,087 |  |  | $ | 3,122 |  |  | $ | 5,281 |  |  | $ | 5,886 |
Cost of revenue |  |  | 1,065 |  |  |  | 1,592 |  |  |  | 2,280 |  |  |  | 2,967 |
Gross profit |  |  | 1,022 |  |  |  | 1,530 |  |  |  | 3,001 |  |  |  | 2,919 |
Operating expenses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Research and development |  |  | 3,215 |  |  |  | 2,366 |  |  |  | 6,457 |  |  |  | 5,065 |
Selling, general and administrative |  |  | 2,340 |  |  |  | 2,610 |  |  |  | 4,786 |  |  |  | 5,171 |
Total operating expenses |  |  | 5,555 |  |  |  | 4,976 |  |  |  | 11,243 |  |  |  | 10,236 |
Loss from operations |  |  | (4,533 | ) |  |  | (3,446 | ) |  |  | (8,242 | ) |  |  | (7,317 | )
Interest expense |  |  | (124 | ) |  |  | (32 | ) |  |  | (207 | ) |  |  | (56 | )
Interest income and other (expense), net |  |  | 50 |  |  |  | 23 |  |  |  | 98 |  |  |  | 9 |
Loss before income taxes |  |  | (4,607 | ) |  |  | (3,455 | ) |  |  | (8,351 | ) |  |  | (7,364 | )
Provision for (benefit from) income taxes |  |  | 27 |  |  |  | 29 |  |  |  | (241 | ) |  |  | 90 |
Net loss |  | $ | (4,634 | ) |  | $ | (3,484 | ) |  | $ | (8,110 | ) |  | $ | (7,454 | )
Net loss per share: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Basic and diluted |  | $ | (0.05 | ) |  | $ | (0.04 | ) |  | $ | (0.09 | ) |  | $ | (0.09 | )
Weighted average shares outstanding: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Basic and diluted |  |  | 99,226 |  |  |  | 85,753 |  |  |  | 98,032 |  |  |  | 83,176 |

Note: Net loss equals to comprehensive loss for all the period presented.

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

4

QUICK LOGIC CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

|  | Six Months Ended |
|  | June 30, 2019 |  |  | July 1, 2018 |
Cash flows from operating activities: |  |  |  |  |  |  |  |
Net loss |  | $ | (8,110 | ) |  | $ | (7,454 | )
Adjustments to reconcile net loss to net cash used in operating activities: |  |  |  |  |  |  |  |
Depreciation and amortization |  |  | 592 |  |  |  | 675 |
Stock-based compensation |  |  | 1,742 |  |  |  | 911 |
Write-down of inventories |  |  | 88 |  |  |  | 126 |
Write-off of equipment |  |  | 2 |  |  |  | 5 |
Tax benefit from acquisition |  |  | (282 | ) |  |  | — |
Changes in operating assets and liabilities: |  |  |  |  |  |  |  |
Accounts receivable |  |  | 690 |  |  |  | (1,266 | )
Inventories |  |  | 247 |  |  |  | (857 | )
Other assets |  |  | (150 | ) |  |  | (95 | )
Trade payables |  |  | 77 |  |  |  | 263 |
Accrued liabilities |  |  | (850 | ) |  |  | 172 |
Other long-term liabilities |  |  | (16 | ) |  |  | 47 |
Net cash used in operating activities |  |  | (5,970 | ) |  |  | (7,473 | )
Cash flows from investing activities: |  |  |  |  |  |  |  |
Capital expenditures for property and equipment |  |  | (523 | ) |  |  | (95 | )
Cash received from business acquisition |  |  | 20 |  |  |  | - |
Net cash used in investing activities |  |  | (503 | ) |  |  | (95 | )
Cash flows from financing activities: |  |  |  |  |  |  |  |
Payment of finance lease obligations |  |  | (194 | ) |  |  | (236 | )
Proceeds from line of credit |  |  | 20,000 |  |  |  | 12,000 |
Payment of line of credit |  |  | (20,000 | ) |  |  | (12,000 | )
Proceeds from issuance of common stock |  |  | 9,439 |  |  |  | 15,855 |
Stock issuance costs |  |  | (891 | ) |  |  | (1,638 | )
Taxes for net issuance of stock awards |  |  | (193 | ) |  |  | (125 | )
Net cash provided by financing activities |  |  | 8,161 |  |  |  | 13,856 |
Net increase in cash, cash equivalents and restricted cash |  |  | 1,688 |  |  |  | 6,288 |
Cash, cash equivalents and restricted cash at beginning of period |  |  | 26,463 |  |  |  | 16,527 |
Cash, cash equivalents and restricted cash at end of period |  | $ | 28,151 |  |  | $ | 22,815 |

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

5

QUICK LOGIC CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands)

| Common Stock |  |  | Additional |  |  |  |  |  |  | Total |
| Shares |  |  | Amount |  |  | Paid-In Capital |  |  | Retained Earnings |  |  | Stockholders' Equity |
Balance at December 30, 2018 |  | 95,513 |  |  | $ | 95 |  |  | $ | 284,974 |  |  | $ | (267,814 | ) |  | $ | 17,255 |
Common stock issued under stock plans and employee stock purchase plan |  | 1,676 |  |  |  | 2 |  |  |  | 738 |  |  |  |  |  |  |  | 740 |
Stock-based compensation |  | — |  |  |  | — |  |  |  | 951 |  |  |  | — |  |  |  | 951 |
Net loss |  | — |  |  |  | — |  |  |  | — |  |  |  | (3,476 | ) |  |  | (3,476 | )
Balance at March 31, 2019 |  | 97,189 |  |  | $ | 97 |  |  | $ | 286,663 |  |  | $ | (271,290 | ) |  | $ | 15,470 |
Common stock issued under stock plans and employee stock purchase plan |  | 532 |  |  |  | 1 |  |  |  | 209 |  |  |  |  |  |  |  | 210 |
Common stock offering, net of issuance costs |  | 18,400 |  |  |  | 18 |  |  |  | 8,007 |  |  |  | — |  |  |  | 8,025 |
Stock-based compensation |  | — |  |  |  | — |  |  |  | 791 |  |  |  | — |  |  |  | 791 |
Net loss |  | — |  |  |  | — |  |  |  | — |  |  |  | (4,634 | ) |  |  | (4,634 | )
Balance at June 30, 2019 |  | 116,121 |  |  | $ | 116 |  |  | $ | 295,670 |  |  | $ | (275,924 | ) |  | $ | 19,862 |
| Common Stock |  |  | Additional |  |  |  |  |  |  |  |  |
| Shares |  |  | Amount |  |  | Paid-In Capital |  |  | Retained Earnings |  |  | Total |
Balance at December 31, 2017 |  | 80,536 |  |  | $ | 80 |  |  | $ | 268,833 |  |  | $ | (254,035 | ) |  | $ | 14,878 |
Common stock issued under stock plans and employee stock purchase plan |  | 91 |  |  |  | — |  |  |  | (47 | ) |  |  | — |  |  |  | (47 | )
Stock-based compensation |  | — |  |  |  | — |  |  |  | 432 |  |  |  | — |  |  |  | 432 |
Net loss |  | — |  |  |  | — |  |  |  | — |  |  |  | (3,970 | ) |  |  | (3,970 | )
Balance at April 1, 2018 |  | 80,627 |  |  | $ | 80 |  |  | $ | 269,218 |  |  | $ | (258,005 | ) |  | $ | 11,293 |
Common stock issued under stock plans and employee stock purchase plan |  | 434 |  |  |  |  |  |  |  | 233 |  |  |  | — |  |  |  | 233 |
Common stock offering, net of issuance costs |  | 13,514 |  |  |  | 14 |  |  |  | 13,889 |  |  |  | — |  |  |  | 13,903 |
Stock-based compensation |  | — |  |  |  | — |  |  |  | 479 |  |  |  | — |  |  |  | 479 |
Net loss |  | — |  |  |  | — |  |  |  | — |  |  |  | (3,484 | ) |  |  | (3,484 | )
Balance at July 1, 2018 |  | 94,575 |  |  | $ | 94 |  |  | $ | 283,819 |  |  | $ | (261,489 | ) |  | $ | 22,424 |

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements

6

QUICKLOGIC CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

QUICKLOGIC CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — The Company and Basis of Presentation

QuickLogic Corporation, or QuickLogic or 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.

The accompanying interim condensed consolidated financial statements are unaudited. In the opinion of the Company’s management, these statements have been prepared in accordance with the United States generally accepted accounting principles, or U.S. GAAP, and include all adjustments, consisting only of normal recurring adjustments, necessary to provide a fair statement of results for the interim periods presented. The Company recommends that these interim condensed consolidated financial statements be read in conjunction with the Company's Form 10-K for the year ended December 30, 2018, which was filed with the Securities and Exchange Commission, or SEC, on March 15, 2019, as amended. Operating results for the three and six months ended June 30, 2019 are not necessarily indicative of the results that may be expected for the full year.

QuickLogic's fiscal year ends on the Sunday closest to December 31 and each fiscal quarter ends on the Sunday closest to the end of each calendar quarter. QuickLogic's second fiscal quarters for 2019 and for 2018 ended on June 30, 2019 and July 1, 2018, respectively.

Liquidity

The Company has financed its operations and capital investments through sales of common stock, finance leases, bank lines of credit and cash flows from operations. As of June 30, 2019, the Company's principal sources of liquidity consisted of cash and cash equivalents and restricted cash of $28.2 million, including $15.0 million drawn down from its revolving line of credit with Heritage Bank of Commerce, or Heritage Bank. The maturity date for loans under this revolving facility, or the Revolving Facility, is September 28, 2020.

On June 21, 2019, the Company issued an aggregate of 18.4 million shares of common stock, $0.001 par value, including the exercise of option for overallotment of 2.4 million shares by the underwriters, in an underwritten public offering at a price of $ 0.50 per share. The company received net proceeds of approximately $8.3 million, after deducting underwriting commissions and other offering-related expenses paid in the second quarter of 2019.

Various factors can 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®, PolarPro® platforms, eFPGA, EOS S3 SoC, Quick AI solution, SensiML software and Freedom Aware SoC Templates; 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.

7

QUICKLOGIC CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

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 Revo lving Facility with the Heritage Bank, assuming renewal of the Revolving Facility or the Company entering into a new debt agreement with an alternative lender prior to the expiration of the revolving line of credit in September 2020, and its ability to rai se 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 f inancial condition, including its ability to maintain compliance with its lender’s financial covenants.

Principles of Consolidation

The consolidated financial statements include the accounts of QuickLogic and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated.

Foreign Currency

The functional currency of the Company's non-U.S. operations is the U.S. dollar. Accordingly, all monetary assets and liabilities of these foreign operations are translated into U.S. dollars at current period-end exchange rates and non-monetary assets and related elements of expense are translated using historical exchange rates. Income and expense elements are translated to U.S. dollars using the average exchange rates in effect during the period. Gains and losses from the foreign currency transactions of these subsidiaries are recorded as interest income and other expense, net in the unaudited condensed consolidated statements of operations.

Uses of Estimates

The preparation of these consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities and the reported amounts of revenue and expenses during the period. Actual results could differ materially from those estimates, particularly in relation to revenue recognition, the allowance for doubtful accounts, sales returns, valuation of investments, valuation of long-lived assets including mask sets, valuation of goodwill 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.

8

QUICKLOGIC CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

Note 2 — Significant Ac counting Policies

During the six-month period ended June 30, 2019, there were no changes in the Company's significant accounting policies from its disclosures in the Annual Report on Form 10-K for the year ended December 30, 2018 except the new accounting standards adopted during the first six months of 2019. For a discussion of the significant accounting policies, please see the Annual Report on Form 10-K for the fiscal year ended December 30, 2018, filed with the SEC on March 15, 2019, as amended.

Revenue Recognition

The Company applies Accounting Standards Codification, or ASC, Topic 606, Revenue from Contracts with Customers, to recognize revenue. The guidance states that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

Under the new standard revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration it expects to receive in exchange for those products or services.

The Company determines revenue recognition through the following steps:

| • | Identification of the contract, or contracts, with a customer

| • | Identification of the performance obligations in the contract

| • | Determination of the transaction price

| • | Allocation of the transaction price to the performance obligations in the contract; and

| • | Recognition of revenue when, or as, a performance obligation is satisfied

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 stand-alone selling price. The product price as specified on the purchase order is considered the stand-alone selling price as it is an observable source that depicts the price as if sold to a similar customer in similar circumstances.

Leases

The Company adopted Accounting Standards Update, or 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 through a cumulative-effect adjustment at the beginning of the first quarter of 2019. 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 our right to use an underlying asset during the reasonably certain lease terms and lease liabilities represent our obligation to make lease payments arising from the lease. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The Company primarily uses its incremental borrowing rate, based on the information available at commencement date, in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments related to initial direct cost and prepayments and excludes lease incentives. Lease expense is recognized on a straight-line basis over the

9

QUICKLOGIC CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

lease term. The Company has lease agreements with lease and non-lease components, which are generally accounted for separately. Upon adoption of ASU No. 2016-02, the Company recognized right-of-use asse ts 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 June 30, 2019, the Company recognized right-of-use assets of approximately $2.4 million and lease liability of approximately $2.3 million on the Company’s Consolidated Balance Sheet. See Note 8 and 15 to the Unaudited 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.

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.

Restricted cash

Restricted cash represents amounts pledged as cash security related to the Silicon Valley Bank credit cards.

New Accounting Pronouncements

Recently adopted 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 goodwill impairment test, which will be performed during the fourth quarter of fiscal 2019. The adoption of this guidance did not have a material impact on our 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.

10

QUICKLOGIC CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

In March 2018, FASB issued ASU No. 201 8-05, 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 amoun ts 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 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.

Recently issued 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 our pending adoption of the new standard on the consolidated financial statements.

Note 3 — Net Loss Per Share

Basic loss per share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net 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 the three and six months ended June 30, 2019 and July 1, 2018, 8.0 million and 7.3 million of common shares associated with equity awards and the estimated number of shares to be purchased under the current offering period of the 2009 Employee Stock Purchase Plan were outstanding, respectively. These shares were not included in the computation of diluted net loss per share as they were considered anti-dilutive due to the net losses the Company experienced during these periods. Warrants to purchase up to 5.4 million shares were issued in connection with May 29, 2018 stock offering were also not included in the diluted loss per share calculation of the three and six months ended June 30, 2019 as they were also considered anti-dilutive due to the net loss the Company experienced during these periods.

11

QUICKLOGIC CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

Note 4 — Balance Sheet Components

The following table provides details relating to certain balance sheet line items as of June 30, 2019, and December 30, 2018 (in thousands):

|  | June 30, 2019 |  |  | December 30, 2018 |
Inventories: |  |  |  |  |  |  |  |
Raw materials |  | $ | 196 |  |  | $ | - |
Work-in-process |  |  | 2,481 |  |  |  | 3,120 |
Finished goods |  |  | 825 |  |  |  | 716 |
|  | $ | 3,502 |  |  | $ | 3,836 |
Other current assets: |  |  |  |  |  |  |  |
Prepaid expenses |  | $ | 1,360 |  |  | $ | 1,483 |
Other |  |  | 357 |  |  |  | 292 |
|  | $ | 1,717 |  |  | $ | 1,775 |
Property and equipment: |  |  |  |  |  |  |  |
Equipment |  | $ | 10,729 |  |  | $ | 10,607 |
Software |  |  | 1,823 |  |  |  | 2,788 |
Furniture and fixtures |  |  | 55 |  |  |  | 42 |
Leasehold improvements |  |  | 489 |  |  |  | 712 |
|  |  | 13,096 |  |  |  | 14,149 |
Less: Accumulated depreciation and amortization |  |  | (11,986 | ) |  |  | (12,700 | )
|  | $ | 1,110 |  |  | $ | 1,449 |
Accrued liabilities: |  |  |  |  |  |  |  |
Employee related accruals |  | $ | 739 |  |  | $ | 1,154 |
Other |  |  | 568 |  |  |  | 749 |
|  | $ | 1,307 |  |  | $ | 1,903 |

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 three and six months ended June 30, 2019 include operating activity for SensiML since its acquisition date of January 3, 2019. For the six months ended June 30, 2019, revenues attributable to SensiML included in the condensed consolidated statement of operations were not significant. For the three and six months ended June 30, 2019, charges of $38,000 and $74,000, respectively, were attributable to the amortization of purchased intangible assets were included in the statements of operations for respective periods. Deal costs associated with the acquisition were $104,000 for the six months period ended June 30, 2019. Deal costs were included in general and administrative expenses in the Company’s consolidated results of operations.

12

QUICKLOGIC CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

Purchase Price Allocation

Under the purchase accounting method, the total preliminary 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 expects to continue to obtain information to determine the final fair value of the net assets acquired at the acquisition date during the measurement period. Assets acquired and liabilities assumed are recorded based on valuations derived from estimated fair value assessments and assumptions used by the Company. Thus, the provisional measurements of fair value discussed above are subject to change. The Company expects to finalize the valuation as soon as practicable, but not later than one year from the acquisition date. While the Company believes that its estimates and assumptions underlying the valuations are reasonable, different estimates and assumptions could result in different valuations assigned to the individual assets acquired and liabilities assumed, and the resulting amount of goodwill.

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. Although goodwill is not amortized for financial accounting purposes, it is amortized in its entirely for tax purposes over fifteen years. Goodwill recognized upon acquisition 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.

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 six months of 2019 (in thousands):

|  | June 30, 2019 |
|  | Gross Carrying Amount |  |  | Accumulated Amortization |  |  | Net Carrying Amount |
Developed technology |  | $ | 959 |  |  | $ | (48 | ) |  | $ | 911 |
Customer relationships |  |  | 81 |  |  |  | (20 | ) |  |  | 61 |
Trade names and trade marks |  |  | 116 |  |  |  | (6 | ) |  |  | 110 |
Total acquired identifiable intangible assets |  | $ | 1,156 |  |  | $ | (74 | ) |  | $ | 1,082 |

The following table provides the details of annual amortization of intangible assets, based upon the current useful lives as of June 30, 2019 (in thousands):

|  | Amount |
Annual Fiscal Years |  |  |  |
2019 (remaining period) |  | $ | 75 |
2020 |  |  | 148 |
2021 |  |  | 107 |
2022 |  |  | 107 |
2023 |  |  | 107 |
Thereafter |  |  | 538 |
Total |  | $ | 1,082 |

13

QUICKLOGIC CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

Note 7 — Debt Obligations

Revolving Line of credit

On September 28, 2018, the Company entered into a Loan Agreement with Heritage Bank. The Loan Agreement provided for, among other things, a Revolving Facility with aggregate commitments of $9,000,000, which was increased to $15,000,000 by an amended and restated agreement dated December 21, 2018. The maturity date for loans under the Revolving Facility is September 28, 2020.

On December 21, 2018, the Company entered into an Amended and Restated Loan and Security Agreement, or the Amended and Restated Loan Agreement with Heritage Bank to replace in its entirety the Loan and Security Agreement entered on September 28, 2018. The Amended and Restated Loan Agreement increases the Revolving Facility from $9,000,000 to $15,000,000. 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.

Loans under the Revolving Facility bear interest at a rate equal to one half of one percentage point (0.50%) above the variable rate of interest, per annum, that appears in The Wall Street Journal from time to time, whether or not such announced rate is the lowest rate available from Heritage Bank. As of June 30, 2019 and December 30, 2018, the Company had $15.0 million of revolving debt outstanding with an interest rate of 6.0% per annum.

Note 8 — Leases

The Company entered into operating leases for office space for its headquarter, domestic and foreign subsidiaries and sales offices. Finance leases are primarily 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 second quarter of 2019, the Company recognized right-of-use assets of approximately $1.7 million and lease liability of approximately $1.7 million relating to the new operating leases signed for the premises of its headquarters in San Jose and its subsidiary SensiML in Oregon.

The following table provides the details of operating and finance lease costs (in thousands):

| Three Months Ended |  |  | Six Months Ended |
| June 30, 2019 |  |  | June 30, 2019 |
Operating lease costs: |  |  |  |  |  |  |
Fixed | $ | 259 |  |  | $ | 411 |
Variable |  | - |  |  |  | - |
Short term |  | 9 |  |  |  | 27 |
Total |  | 268 |  |  |  | 438 |
Finance lease costs: |  |  |  |  |  |  |
Amortization of ROU asset |  | 91 |  |  |  | 182 |
Interest |  | 5 |  |  |  | 11 |
Total | $ | 96 |  |  | $ | 193 |

14

QUICKLOGIC CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

The following table provides the details of supplemental cash flow information (in thousands):

|  | Six Months Ended |
|  | June 30, 2019 |
Cash paid for amounts included in the measurement of lease liabilities: |  |  |  |
Operating cash flows used for operating leases |  | $ | 451 |
Operating cash flows used for finance leases |  |  | 10 |
Financing cash flows used for financing leases |  |  | 194 |
Total |  | $ | 655 |
Right-of-use assets obtained in exchange for obligations: |  |  |  |
Operating leases |  | $ | 2,076 |
Finance leases |  |  | 341 |
Total |  | $ | 2,417 |

The following table provides the details of right-of-use assets and lease liabilities as of June 30, 2019 (in thousands):

|  | June 30, 2019 |
Right-of-use assets: |  |  |  |
Operating leases |  | $ | 2,076 |
Finance leases |  |  | 341 |
Total |  | $ | 2,417 |
Lease liabilities: |  |  |  |
Operating leases |  |  | 2,100 |
Finance leases |  |  | 230 |
Total |  | $ | 2,330 |

The following table provided the details of future lease payments for operating and finance leases as of June 30, 2019 (in thousands):

.

Annual Fiscal Years |  | Operating |  |  | Finance |
2019 (Remaining period) |  | $ | 339 |  |  | $ | 183 |
2020 |  |  | 613 |  |  |  | 64 |
2021 |  |  | 494 |  |  |  | - |
2022 |  |  | 409 |  |  |  | - |
2023 |  |  | 421 |  |  |  | - |
Thereafter |  |  | 106 |  |  |  | - |
Total lease payments |  |  | 2,382 |  |  |  | 247 |
Less: Interest |  |  | (282 | ) |  |  | (17 | )
Present value of lease liabilities |  | $ | 2,100 |  |  | $ | 230 |

The following table provides the details of lease terms and discount rates as of June 30, 2019:

|  | June 30, 2019 |
Right-of-use assets: |  |  |  |
Weighted-average remaining lease term (years) |  |  |  |
Operating leases |  | 4.17 |
Finance leases |  |  | 0.76 |
Weighted-average discount rates: |  |  |  |
Operating leases |  |  | 5.99 | %
Finance leases |  |  | 7.00 | %

15

QUICKLOGIC CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

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 assumptions that market participants would use when pricing the asset or liability.

Our cash and cash equivalents include money market account balance of $26.7 million and money market funds of $262,000 as of June 30, 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.

Note 10 — Stockholders' Equity

Common Stock and Preferred Stock

As of June 30, 2019, the Company was authorized to issue 200 million shares of common stock and had 10 million shares of authorized but unissued shares of preferred stock. Without any further vote or action by the Company's stockholders, the Board of Directors has the authority to determine the powers, preferences, rights, qualifications, limitations or restrictions granted to or imposed upon any wholly unissued shares of undesignated preferred stock.

Issuance of Common Stock

On June 21, 2019, the Company issued an aggregate of 18.4 million shares of common stock, including the exercise of option for overallotment of 2.4 million shares by the underwriters, $0.001 par value, in an underwritten public offering at a price of $ 0.50 per share. The company received net proceeds from the offering of approximately $8.3 million, net of underwriter’s commission and other offering expenses paid in the second 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 on 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 aggregated of 13.5 million shares of common stock, and warrants to purchase up to an aggregate of 5.4 million shares of common stock in a confidentially marketed underwritten offering. The common stock and warrants were issued in units, or 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 price of $1.15 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 a price of $1.38 per share. The Company allocated the proceeds between the common stock and the warrants based on the relative fair value of each on the date of issuance. The estimated grant date fair value was $0.57 per warrant and was calculated based on the following assumptions used in the Black-Scholes model: expected term of 5 years, risk-free interest rate of 2.58%, expected volatility of 52.75% and expected dividend of zero.

16

QUICKLOGIC CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

Note 11 — Employee Stock Plans

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, 5,000,000 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 Stock 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. The remaining balance of available shares under the 2009 Plan of 4,186,979 were cancelled as of April 24, 2019.

Employee Stock Purchase Plan

The 2009 Employee Stock Purchase Plan, or the 2009 ESPP, was adopted in March 2009. The 2009 ESPP was amended by the Board of Directors in January 2015 and in February 2017, and was approved by the Company's stockholders on April 23, 2015 and April 26, 2017, to reserve an additional 1.0 million and 1.5 million shares of common stock, respectively, for issuance under the 2009 ESPP.

As of June 30, 2019, approximately 4.8 million shares of the Company’s common stock were reserved for issuance under the 2009 ESPP. On May 6, 2019, the Board of Directors approved the extension of the term of the 2009 ESSP 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 ESSP for our stockholders to ratify in the next annual general meeting, if not sooner.

Note 12 — Stock-Based Compensation

Stock-based compensation expense included in the Company's consolidated financial statements for the three and six months ended June 30, 2019 and July 1, 2018 was as follows (in thousands):

|  | Three Months Ended |  |  | Six Months Ended |
|  | June 30, 2019 |  |  | July 1, 2018 |  |  | June 30, 2019 |  |  | July 1, 2018 |
Cost of revenue |  | $ | 18 |  |  | $ | 35 |  |  | $ | 44 |  |  | $ | 69 |
Research and development |  |  | 532 |  |  |  | 207 |  |  |  | 1,187 |  |  |  | 390 |
Selling, general and administrative |  |  | 241 |  |  |  | 237 |  |  |  | 511 |  |  |  | 452 |
Total costs and expenses |  | $ | 791 |  |  | $ | 479 |  |  | $ | 1,742 |  |  | $ | 911 |

No stock-based compensation was capitalized during any period presented above.

No stock options were granted during the three and six-month periods ended June 30, 2019 and July 1, 2018. As of June 30, 2019 and July 1, 2018, the fair value of unvested stock options, net of expected forfeitures, was approximately $102,000 and $200,000, respectively. The remaining unrecognized stock-based compensation expense relating to stock options is expected to be recognized over a weighted average period of 2.59 years as of June 30, 2019.

17

QUICKLOGIC CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

Stock-Based Compensation Award Activity

The following table summarizes the activity in the shares available for grant under the 2019 Plan and 2009 Plan during the six months ended June 30, 2019 (in thousands):

| Shares available for grants |
| 2019 Plan |  |  | 2009 Plan |
Balance at December 30, 2018 |  | - |  |  |  | 6,760 |
Authorized |  | 5,000 |  |  |  | - |
RSUs granted |  | (794 | ) |  |  | (3,355 | )
RSUs forfeited or expired |  | 184 |  |  |  | 762 |
Options forfeited |  | 15 |  |  |  | 20 |
Plan shares expired |  | - |  |  |  | (4,187 | )
Balance at June 30, 2019 |  | 4,405 |  |  |  | - |

Stock Options

The following table summarizes stock options outstanding and stock option activity under the 2009 Plan and the 2019 Plan, and the related weighted average exercise price, for the six months ended June 30, 2019:

|  | Number of Shares |  |  | Weighted Average Exercise Price |  |  | Weighted Average Remaining Term |  |  | Aggregate Intrinsic Value |
|  | (in thousands) |  |  |  |  |  |  | (in years) |  |  | (in thousands) |
Balance outstanding at December 30, 2018 |  |  | 3,201 |  |  | $ | 2.18 |  |  |  |  |  |  |  |  |
Forfeited or expired |  |  | (580 | ) |  |  |  |  |  |  |  |  |  |  |  |
Exercised |  |  | (4 | ) |  |  |  |  |  |  |  |  |  |  |  |
Balance outstanding at June 30, 2019 |  |  | 2,617 |  |  | $ | 2.29 |  |  |  | 3.97 |  |  | $ | - |
Exercisable at June 30, 2019 |  |  | 2,383 |  |  | $ | 2.43 |  |  |  | 3.65 |  |  | $ | - |
Vested and expected to vest at June 30, 2019 |  |  | 2,594 |  |  | $ | 2.31 |  |  |  | 3.94 |  |  | $ | - |

The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on the Company's closing stock price of $0.58 as of June 30, 2019, which would have been received by the option holders had all option holders exercised their options as of that date.

The total intrinsic value of options exercised during the six months ended June 30, 2019 and July 1, 2018 was $0 as the stock price was lower than exercise price. Total cash received from employees as a result of employee stock option exercises during the six months ended June 30, 2019 and July 1, 2018 was approximately $3,600 and $0, respectively. The Company settles employee stock option exercises with newly issued common shares. In connection with these exercises, there was no tax benefit realized by the Company due to the Company's current loss position. Total stock-based compensation related to stock options was $24,000 and $34,000 for the three months ended June 30, 2019 and July 1, 2018, respectively, and $49,000 and $72,000 for the six months ended June 30, 2019 and July 1, 2018, respectively.

Restricted Stock Units

The Company grants restricted stock units or RSUs, to employees and directors with various vesting terms. RSUs entitle the holder to receive, at no cost, one common share for each RSU as it vests. In general, the Company's policy is to withhold shares in settlement of employee tax withholding obligations upon the vesting of RSUs. The stock-based compensation related to RSUs was $756,000 and $382,000 for the three months ended and $1.6 million and $722,000 for six months ended June 30, 2019 and July 1, 2018, respectively. As of June 30, 2019 and July 1, 2018, there was approximately $3.1 million and $2.3 million, respectively, in unrecognized compensation expense related to RSUs. The remaining unrecognized stock-based compensation expense is expected to be recorded over a weighted average period of 1.76 years.

18

QUICKLOGIC CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

A summary of activity for the Company's RSUs for the six months ended June 30, 2019 is as follows:

|  | RSUs & PRSUs Outstanding |
|  | Number of Shares |  |  | Weighted Average Grant Date Fair Value |
|  | (in thousands) |  |  |  |  |
Nonvested at December 30, 2018 |  |  | 2,570 |  |  | $ | 1.23 |
Granted |  |  | 4,148 |  |  |  | 0.85 |
Vested |  |  | (926 | ) |  |  | 1.08 |
Forfeited |  |  | (401 | ) |  |  | 0.96 |
Nonvested at June 30, 2019 |  |  | 5,391 |  |  | $ | 1.04 |

Employee Stock Purchase Plan

As of June 30, 2019, 873,000 shares remained available for issuance under the 2009 ESPP. For the three months ended June 30, 2019 and July 1, 2018, the Company recorded stock-based compensation expense related to the 2009 ESPP of $11,000 and $63,000, respectively. For the six months ended June 30, 2019 and July 1, 2018, the Company recorded stock-based compensation expense related to the 2009 ESPP of $60,000 and $117,000, respectively. The weighted average estimated fair value, as defined by the amended authoritative guidance, of rights issued pursuant to the Company's 2009 ESPP during the second quarter ended June 30, 2019 and July 1, 2018, was $0.31 and $0.47, respectively, per right, respectively.

The fair value of rights issued pursuant to the Company's 2009 ESPP was estimated on the commencement date of each offering period using the following weighted average assumptions:

|  | Three Months Ended |  |  | Six Months Ended |
|  | June 30, 2019 |  |  | July 1, 2018 |  |  | June 30, 2019 |  |  | July 1, 2018 |
Expected term (months) |  |  | 6.00 |  |  |  | 6.0 |  |  |  | 6.00 |  |  |  | 6.00 |
Risk-free interest rate |  |  | 2.40 | % |  |  | 2.09 | % |  |  | 2.40 | % |  |  | 2.09 | %
Volatility |  |  | 53.77 | % |  |  | 44.76 | % |  |  | 53.77 | % |  |  | 44.76 | %
Dividend yield |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |

As of June 30, 2019, there was no unrecognized stock-based compensation expense relating to the Company's 2009 ESPP.

Note 13 — Income Taxes

The Company recorded a net income tax expense of $27,000 and $29,000 for the three months ended June 30, 2019 and July 1, 2018, respectively. For the six months ended June 30, 2019 and July 1, 2018 the Company recorded a net income tax benefit of $241,000 and tax expense of $90,000 respectively. A majority of the income tax expense for the second quarters of 2019 and 2018 and six months ended July 1, 2018 relates to the Company's foreign subsidiaries, which are cost-plus entities. Income tax benefit for the six months ended June 30, 2019 relates to the deferred tax benefit arising from Intangible assets acquired from the acquisition of SensiML, which was offset by the income taxes from the Company's foreign subsidiaries.

The Company believes it is more likely than not that federal and state net deferred tax assets will not be fully realized. In assessing the realizability of deferred tax assets, the Company’s management considers whether it is more likely than not that some portion or all of our deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. A valuation allowance is recorded for loss carryforwards and other deferred tax assets where it is more likely than not that such deferred tax assets will not be realized. Accordingly, the Company continues to maintain a valuation allowance against all of U.S. and certain foreign net deferred tax assets as of June 30, 2019. The Company continues to maintain a full valuation allowance against net federal, state and certain foreign deferred tax assets until there is sufficient evidence to support recoverability of the Company’s deferred tax assets.

19

QUICKLOGIC CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

The Company had no unrecognized tax benefits as of June 30, 2019 and December 30, 201 8, which would affect the Company's effective tax rate. The Company does not anticipate any material changes to its unrecognized tax benefits during the next 12 months.

Accrued interest and penalties related to unrecognized tax benefits are recognized as part of the income tax provision in the condensed consolidated statements of operations.

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.

Under the Tax Reform Act of 1986, the amount of and the benefit from net operating loss carryforwards and credit carryforwards may be impaired or limited in certain circumstances. Events which may restrict utilization of a company's net operating loss and credit carryforwards include, but are not limited to, certain ownership change limitations as defined in Internal Revenue Code Section 382 and similar state provisions. In the event the Company has had a change of ownership, utilization of carryforwards could be restricted to an annual limitation. The annual limitation may result in the expiration of net operating loss carryforwards and credit carryforwards before utilization.

The Company has not undertaken a study to determine if its net operating losses are limited. In the event the Company previously experienced an ownership change, or should experience an ownership change in the future, the amount of net operating losses and research and development credit carryovers available in any taxable year could be limited and may expire unutilized.

Note 14 — Information Concerning Product Lines, Geographic Information and Revenue Concentration

The Company identifies its business segment based on business activities, management responsibility and geographic location. For all periods presented, the Company operated in a single reportable business segment.

The following is a breakdown of revenue by product line (in thousands):

|  | Three Months Ended |  |  | Six Months Ended |
|  | June 30, 2019 |  |  | July 1, 2018 |  |  | June 30, 2019 |  |  | July 1, 2018 |
Revenue by product line (1): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
New products |  | $ | 711 |  |  | $ | 1,581 |  |  | $ | 1,398 |  |  | $ | 2,881 |
Mature products |  |  | 1,376 |  |  |  | 1,541 |  |  |  | 3,883 |  |  |  | 3,005 |
Total revenue |  | $ | 2,087 |  |  | $ | 3,122 |  |  | $ | 5,281 |  |  | $ | 5,886 |

(1) | For all periods presented: New products include all products manufactured on 180 nanometer or smaller semiconductor processes, eFPGA IP license, Quick AI and Software 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):

|  | Three Months Ended |  |  | Six Months Ended |
|  | June 30, 2019 |  |  | July 1, 2018 |  |  | June 30, 2019 |  |  | July 1, 2018 |
Revenue by geography: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Asia Pacific (1) |  | $ | 537 |  |  | $ | 1,372 |  |  | $ | 1,968 |  |  | $ | 2,293 |
North America (2) |  |  | 1,066 |  |  |  | 1,474 |  |  |  | 2,229 |  |  |  | 3,039 |
Europe |  |  | 484 |  |  |  | 276 |  |  |  | 1,084 |  |  |  | 554 |
Total revenue |  | $ | 2,087 |  |  | $ | 3,122 |  |  | $ | 5,281 |  |  | $ | 5,886 |

20

QUICKLOGIC CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

(1) | Asia Pacific includes revenue from Japan of $330,000, or 16% of total revenue, and $632,000, or 20% of total revenue, for the quarters ended June 30, 2019 and July 1, 2018, respectively. For the six months ended June 30, 2019 and July 1, 2018, revenue from Japan was $764,000, or 14% of total revenue, and $1.0 million, or 17% of total revenue for the quarters ended June 30, 2019 and July 1, 2018, respectively. For the three months ended June 30, 2019 and July 1, 2018, revenue from China was $119,000 or 6% and $466,000 or 15% of total revenue, respectively. For the six months ended June 30, 2019 and July 1, 2108, revenue from China was $1.1 million, or 20% of total revenue, and $602,000 million, or 10% of total revenue, respectively.

(2) | North America includes revenue from the United States of $1.1 million, or 51% of total revenue, and $1.4 million, or 46% of total revenue, for the three months ended June 30, 2019 and July 1, 2018, respectively. For the six months ended June 30, 2019 and July 1, 2018 revenue from the United States was $2.2 million, or 42% of total revenue, and $3.0 million, or 50% of total revenue, respectively.

The following distributors and customers accounted for 10% or more of the Company's revenue for the periods presented:

|  | Three Months Ended |  |  | Six Months Ended |
|  | June 30, 2019 |  |  | July 1, 2018 |  |  | June 30, 2019 |  |  | July 1, 2018 |
Distributor "A" |  |  | 40 | % |  |  | 32 | % |  |  | 38 | % |  |  | 36 | %
Distributor "C" |  | * |  |  | * |  |  |  | 12 | % |  | * |
Distributor "E" |  | * |  |  |  | 15 | % |  | * |  |  | * |
Distributor "G" |  | * |  |  |  | 10 | % |  |  | 16 | % |  | * |
Customer "B" |  |  | 18 | % |  |  | 14 | % |  |  | 13 | % |  |  | 12 | %
Customer "E" |  |  | 18 | % |  | * |  |  | * |  |  | * |
Customer "H" |  | * |  |  |  | 16 | % |  | * |  |  |  | 13 | %
Customer "I" |  | * |  |  |  | 10 | % |  |  | 16 | % |  | ` |
Customer "J" |  | * |  |  |  | 15 | % |  | * |  |  |  | 16 | %

The following distributors and customers accounted for 10% or more of the Company's accounts receivable as of the dates presented:

|  | June 30, 2019 |  |  | December 30, 2018 |
Distributor "A" |  |  | 31 | % |  |  | 35 | %
Distributor “J” |  |  | 23 | % |  | * |
Distributor "G" |  | * |  |  |  | 10 | %
Customer "L" |  |  | 13 | % |  | * |
Customer "M" |  |  | 10 | % |  |  | 23 | %

* | Represents less than 10% of revenue and accounts receivable as of the date presented.

As of June 30, 2019, 11% of the Company's long-lived assets, including property and equipment and other assets, were located outside the United States.

Note 15 — Commitments and Contingencies

Commitments

The Company's manufacturing suppliers require the forecast of wafer starts several months in advance. The Company is required to take delivery of and pay for a portion of forecasted wafer volume. As of June 30, 2019, and December 30, 2018, the Company had $74,000 and $22,000, respectively, of outstanding commitments for the purchase of wafer and finished goods inventory.

The Company has obligations with certain suppliers for the purchase of other goods and services entered into in the ordinary course of business. As of June 30, 2019, total outstanding purchase obligations for other goods and services were $1.2 million, all of which, except for $12,000 were due within the next twelve months.

21

QUICKLOGIC CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

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. As of June 30, 2019, the Company was not involved in any litigation.

Note 17 — Subsequent event

Loan Repayment

On July 1, 2019, the Company repaid $12.0 of its outstanding debt under the Revolving Facility with Heritage Bank at an interest rate of 6.0%.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

The following Management's Discussion and Analysis of Financial Condition and Results of Operations, as well as information contained in “Risk Factors” in Part II, Item 1A and elsewhere in this Quarterly Report on Form 10-Q, contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We intend that these forward-looking statements be subject to the safe harbor created by those provisions. Forward-looking statements are generally written in the future tense and/or are preceded by words such as “will,” “may,” “should,” “forecast,” “could,” “expect,” “suggest,” “believe,” “anticipate,” “intend,” “plan,” "future," "potential," "target," "seek," "continue," "if" or other similar words. Forward-looking statements include statements regarding our strategies as well as (1) our revenue levels, including the commercial success of our solutions and new products, (2) the conversion of our design opportunities into revenue, (3) our liquidity, (4) our gross profit and breakeven revenue level and factors that affect gross profit and the break-even revenue level, (5) our level of operating expenses, (6) our research and development efforts, (7) our partners and suppliers, (8) industry and market trends, (9) our manufacturing and product development strategies and (10) our competitive position.

The following discussion should be read in conjunction with the attached unaudited condensed consolidated financial statements and notes thereto, and with our audited consolidated financial statements and notes thereto for the fiscal year ended December 30, 2018, found in our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on March 15, 2019, as amended. Although we believe that the assumptions underlying the forward-looking statements contained in this Quarterly Report are reasonable, any of the assumptions could be inaccurate, and therefore there can be no assurance that such statements will be accurate. The risks, uncertainties and assumptions referred to above that could cause our results to differ materially from the results expressed or implied by such forward-looking statements include, but are not limited to, those discussed under the heading “Risk Factors” in Part II, Item 1A hereto and the risks, uncertainties and assumptions discussed from time to time in our other public filings and public announcements. All forward-looking statements included in this document are based on information available to us as of the date hereof. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements or our objectives and plans will be achieved. Furthermore, past performance in operations and share price is not necessarily indicative of future performance. We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise that may arise after the date of this Quarterly Report on Form 10-Q.

Overview

We develop low power, multi-core semiconductor platforms and intellectual property, or IP, for artificial intelligence, or AI, voice and sensor processing. The solutions include an eFPGA for hardware acceleration and pre-processing, and heterogeneous multi-core SoCs that integrate eFPGA with other processors and peripherals. The SensiML Analytics Toolkit from our recently acquired wholly owned subsidiary, SensiML Corporation, or SensiML, completes the “full stack” end-to-end solution with accurate sensor algorithms using AI technology. The full range of platforms, software tools and eFPGA IP enables the practical and efficient adoption of AI, voice and sensor processing across mobile, wearable, hearable, consumer, industrial, edge and endpoint IoT applications.

Our solutions are created from our new silicon platforms including our EOS™, QuickAI™, SensiML Analytics Studio, ArcticLink® III, PolarPro®3, PolarPro II, PolarPro, and Eclipse II products (which together comprise our new product category). Our mature products include primarily FPGA families named pASIC®3 and QuickRAM® as well as programming hardware and design software. In addition to delivering our own semiconductor solutions, we have an IP business that licenses our eFPGA technology for use in other semiconductor companies SoCs. We began delivering our eFPGA IP product ArcticPro™ in 2017, which is included in the new product revenue category. Through the acquisition of SensiML, we now have an AI software platform that includes Software-as-a-Service, or SaaS, subscriptions for development, per unit license fees when deployed in production, and proof-of-concept services, all of which are also included in the new product revenue category.

Our solutions typically fall into one of three categories: Sensor Processing, Display and Visual Enhancement, and Smart Connectivity. Our solutions include a unique combination of our silicon platforms, IP cores, software drivers, and in some cases, firmware and application software. All of our silicon platforms are standard devices and must be programmed to be effective in a system. Our IP that enables always-on context-aware sensor applications includes our Flexible Fusion Engine, our

23

Sensor Manager and Communications Manager technologies as well as IP that (i) improves multimedia content, such as our Visual Enhancement Engine, or VEE, technology, and Display Power Optimizer, or DPO, technology; and (ii) imp lements commonly used mobile system interfaces, such as Low Voltage Differential Signalling, or LVDS, Mobile Industry Processor Interface, or MIPI, and Secure Digital Input Output, or SDIO. We provide complete solutions by first architecting the solution j ointly with our customer’s or ecosystem partner’s engineering group, selecting the appropriate solution platform and Proven System Blocks, or PSBs, providing custom logic, integrating the logic, programming the device with the PSBs and/or firmware, providi ng software drivers or application software required for the customer’s application, and supporting the customer on-site during integration, verification and testing. In many cases, we deliver software algorithms that have been optimized for use in a Quick Logic silicon platform.

Through the acquisition of SensiML, our core IP also includes the SensiML AI Toolkit that enables OEMs to develop AI software for a broad array of resource-constrained time-series sensor endpoint applications. These include a wide range of consumer and industrial sensing applications.

We also work with mobile processor manufacturers, sensor manufacturers, and voice recognition, sensor fusion and context awareness algorithm developers in the development of reference designs. Through reference designs that incorporate our solutions, we believe mobile processor manufacturers, sensor manufacturers, and sensor and voice algorithm companies can expand the available market for their respective products. Furthermore, should a solution developed for a processor manufacturer or sensor and/or sensor algorithm company be applicable to a set of common OEMs or Original Design Manufacturers, or ODMs, we can amortize our Research and Development, or R&D, investment over that set of OEMs or ODMs. There may also be cases when platform providers that intend to use always-on voice recognition will dictate certain performance requirements for the combined software/hardware solution before the platform provider certifies and/or qualifies our product for use by end customers.

Our ArcticPro eFPGA IP are currently developed on 65nm, 40nm and 22nm process nodes. The licensable IP is generated by a compiler tool that enables licensees to create an eFPGA block that they can integrate into their SoC without significant involvement by us. We believe this flow enables a scalable support model for us.

In addition to working directly with our customers, we partner with other companies that are experts in certain technologies to develop additional IP, reference platforms and system software to provide application solutions, particularly in the area of hardware acceleration for AI-type applications. We also work with mobile processor and communications semiconductor device manufacturers and companies that supply sensor, algorithms and applications. The depth of these relationships vary depending on the partner and the dynamics of the end market being targeted, but they are typically a co-marketing relationship that includes joint account calls, promotional activities and/or engineering collaboration and developments, such as reference designs. For our sensor processing solutions, we collaborate with sensor manufacturers to ensure interface compatibility. We also collaborate with sensor and voice/audio software companies, helping them optimize their software technology on our silicon platforms in terms of performance, power consumption and user experience.

For our eFPGA strategy, we work with semiconductor manufacturing partners to ensure our eFPGA IP is proven for a given foundry and process node before it is licensed to an SoC company.

In order to grow our revenue from its current level, we depend upon increased revenue from our new products including existing new product platforms, eFPGA IP and platforms currently in development. We expect our business growth to be driven mainly by our silicon solutions, eFPGA IP and SensiML AI Software. Therefore, our revenue growth needs to be strong enough to enable us to sustain profitability while we continue to invest in the development, sales and marketing of our new solution platforms, IP and software.

On January 3, 2019, we acquired all of SensiML’s issued and outstanding common stock in exchange for the Company’s Common Stock. SensiML will operate as one of our divisions, and continue to develop, expand, and optimize its platform-independent software solutions to support SoCs from other semiconductor companies as well as our SoCs, QuickAI™ Platforms and licensees of our ArcticPro™ eFPGA IP.

During the second quarter of 2019, we generated total revenue of $2.1 million, which represents a decrease of 35% compared to the first quarter of 2019 and represents a decrease of 33% compared to the second quarter of 2018. Our new product revenue in the second quarter was $711,000, an increase of 3% from the prior quarter and a decrease of 55% from the second quarter of 2018. Our mature product revenue was $1.4 million in the second quarter of 2019, which represents a

24

decrease of 45% from the prior quarter and 11% compared to the second quarter of 2018. We expect our mature product revenue to continue to fluctuate over time.

We devote substantially all of our development, sales and marketing efforts to our new sensor processing solutions using our EOSTM S3 platforms, derivative products based on software-driven features, development of additional new products and solution platforms, our new eFPGA IP licensing and QuickAI initiatives. Overall, we reported a net loss of $4.6 million for the second quarter of 2019, an increase of 33% compared to the second quarter of 2018 and first quarter of 2019, primarily due to the SensML acquisition and decrease in overall revenue. Net loss includes operating expenses relating to the new subsidiary, SensiML, of $629,000 and $1.4 million for the three and six months ended June 30, 2019, respectively.

Critical Accounting Estimates

The methods, estimates and judgments we use in applying our most critical accounting policies have a significant impact on the results we report in our consolidated financial statements. The SEC has defined critical accounting policies as those that are most important to the portrayal of our financial condition and results of operations and require us to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, our critical policies include revenue recognition, valuation of inventories, including identification of excess quantities and product obsolescence, valuation of investments, valuation of long-lived assets, valuation of goodwill and intangible assets, including the estimate of related useful lives, measurement of stock-based compensation and estimation of accrued liabilities. We believe that we apply judgments and estimates in a consistent manner and that this consistent application results in consolidated financial statements and accompanying notes that fairly represent all periods presented. However, any factual errors or errors in these judgments and estimates may have a material impact on our financial statements. During the three and six months ended June 30, 2019, there were no changes in our critical accounting policies from our disclosure in our Annual Report on Form 10-K for the fiscal year ended December 30, 2018, filed with the SEC on March 15, 2019, as amended, except for the new accounting standards adopted in the first quarter of 2019 as described in Note 2 to the condensed consolidated financial statements as of and for the three and six months ended June 30, 2019, and except for our estimates relating to goodwill and intangible assets associated with the acquisition of SensiML on January 3,2019, as described in Note 5 to the condensed consolidated financial statements as of and for the three and six months ended June 30, 2019. For a discussion of critical accounting policies and estimates, please see Item 7 in our Annual Report on Form 10-K for the fiscal year ended December 30, 2018, filed with the SEC on March 15, 2018, as amended. See also Note 2 and 5 to the Unaudited Condensed Consolidated Financial Statements as of and for three and six months ended June 30, 2019 for the details of the newly adopted accounting standards and acquisition of SensiML.

The Company adopted Accounting Standards Update, or 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 through a cumulative-effect adjustment at the beginning of the first quarter of 2019. 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. Upon adoption of ASU 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 Sheets as of and for the three months ended March 31, 2019, with no material impact to its Consolidated Statements of operations. As of June 30, 2019, the Company recognized right-of-use assets of approximately $2.4 million and lease liability of approximately $2.3 million on the Company’s Consolidated Balance Sheet. See Note 2 and 8 to the Unaudited Consolidated Financial Statements as of and for the three and six months ended June 30, 2019 for the details.

The Company adopted ASU No. 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill by removing the requirement to perform a hypothetical purchase price allocation to compute the implied fair value of goodwill to measure impairment. Instead, any 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. As permitted by the ASU, the Company has elected to early adopt this guidance effective December 31, 2018 for goodwill impairment test, which was performed during the fourth quarter of fiscal 2019. The adoption of this guidance did not have a material impact on our consolidated financial statements.

25

Results of Operations

The following table sets forth the percentage of revenue for certain items in our condensed consolidated statements of operations for the periods indicated:

|  | Three Months Ended |  |  | Six Months Ended |
|  | June 30, 2019 |  |  | July 1, 2018 |  |  | June 30, 2019 |  |  | July 1, 2018 |
Revenue |  |  | 100 | % |  |  | 100 | % |  |  | 100 | % |  |  | 100 | %
Cost of revenue |  |  | 51 | % |  |  | 51 | % |  |  | 43 | % |  |  | 50 | %
Gross profit |  |  | 49 | % |  |  | 49 | % |  |  | 57 | % |  |  | 50 | %
Operating expenses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Research and development |  |  | 154 | % |  |  | 76 | % |  |  | 122 | % |  |  | 86 | %
Selling, general and administrative |  |  | 112 | % |  |  | 84 | % |  |  | 91 | % |  |  | 88 | %
Loss from operations |  |  | (217 | )% |  |  | (111 | )% |  |  | (156 | )% |  |  | (124 | )%
Interest expense |  |  | (6 | )% |  |  | (1 | )% |  |  | (4 | )% |  |  | (1 | )%
Interest income and other (expense), net (1) |  |  | 2 | % |  |  | 1 | % |  |  | 2 | % |  |  | — | %
Loss before income taxes |  |  | (221 | )% |  |  | (111 | )% |  |  | (158 | )% |  |  | (125 | )%
Provision for income taxes |  |  | 1 | % |  |  | 1 | % |  |  | (5 | )% |  |  | 2 | %
Net loss |  |  | (222 | )% |  |  | (112 | )% |  |  | (153 | )% |  |  | (127 | )%

| (1) | Insignificant percentages are rounded to zero percentage (-%) for disclosure.

Three Months Ended June 30, 2019 and July 1, 2018

Revenue

The table below sets forth the changes in revenue for the three months ended June 30, 2019, as compared to the three months ended July 1, 2018 (in thousands, except percentage data):

|  | Three Months Ended |  |  |  |  |  |  |  |  |
|  | June 30, 2019 |  |  | July 1, 2018 |  |  | Change |
|  | Amount |  |  | % of Total Revenues |  |  | Amount |  |  | % of Total Revenues |  |  | Amount |  |  | Percentage |
Revenue by product line (1): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
New products |  | $ | 711 |  |  |  | 34 | % |  | $ | 1,581 |  |  |  | 51 | % |  | $ | (870 | ) |  |  | (55 | )%
Mature products |  |  | 1,376 |  |  |  | 66 | % |  |  | 1,541 |  |  |  | 49 | % |  |  | (165 | ) |  |  | (11 | )%
Total revenue |  | $ | 2,087 |  |  |  | 100 | % |  | $ | 3,122 |  |  |  | 100 | % |  | $ | (1,035 | ) |  |  | (33 | )%

(1) | For all periods presented: New products include all products manufactured on 180 nanometer or smaller semiconductor processes, eFPGA IP license, QuickAI and Software revenues. Mature products include all products produced on semiconductor processes larger than 180 nanometer.

The net decrease of $870,000 in the revenue of new products was primarily due to a decrease in connectivity and display product revenue, which was partially offset by eFPGA IP license revenue. The $165,000 decrease in the revenue of mature products was primarily due to lower shipments to military, aviation and industrial products.

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Gross Profit

The table below sets forth the changes in gross profit for the three months ended June 30, 2019 as compared to the three months ended July 1, 2018 (in thousands, except percentage data):

|  | Three Months Ended |  |  |  |  |  |  |  |  |
|  | June 30, 2019 |  |  | July 1, 2018 |  |  | Change |
|  | Amount |  |  | % of Total Revenues |  |  | Amount |  |  | % of Total Revenues |  |  | Amount |  |  | Percentage |
Revenue |  | $ | 2,087 |  |  |  | 100 | % |  | $ | 3,122 |  |  |  | 100 | % |  | $ | (1,035 | ) |  |  | (33 | )%
Cost of revenue |  |  | 1,065 |  |  |  | 51 | % |  |  | 1,592 |  |  |  | 51 | % |  |  | (527 | ) |  |  | (33 | )%
Gross Profit |  | $ | 1,022 |  |  |  | 49 | % |  | $ | 1,530 |  |  |  | 49 | % |  | $ | (508 | ) |  |  | (33 | )%

In the second quarter of 2019, gross profit margin percentage was flat compared to the same quarter in the prior year. The sale of previously reserved inventory was $32,000 and $54,000 in the second quarters of 2019 and 2018, respectively.

Our semiconductor products have historically had long product life cycles and obsolescence has not been a significant factor in the valuation of inventories. However, as we continue to pursue opportunities in the mobile market and develop new solutions and products, our product life cycle will be shorter and the risk of obsolescence will increase. In general, our standard manufacturing lead times are longer than the binding forecasts we receive from customers.

Operating Expenses

The table below sets forth the changes in operating expenses for the three months ended June 30, 2019, as compared to the three months ended July 1, 2018 (in thousands, except percentage data):

|  | Three Months Ended |  |  |  |  |  |  |  |  |
|  | June 30, 2019 |  |  | July 1, 2018 |  |  | Change |
|  | Amount |  |  | % of Total Revenues |  |  | Amount |  |  | % of Total Revenues |  |  | Amount |  |  | Percentage |
R&D expense |  | $ | 3,215 |  |  |  | 154 | % |  | $ | 2,366 |  |  |  | 76 | % |  | $ | 849 |  |  |  | 36 | %
SG&A expense |  |  | 2,340 |  |  |  | 112 | % |  |  | 2,610 |  |  |  | 84 | % |  |  | (270 | ) |  |  | (10 | )%
Total operating expenses |  | $ | 5,555 |  |  |  | 266 | % |  | $ | 4,976 |  |  |  | 160 | % |  | $ | 579 |  |  |  | 12 | %

Research and Development

Our Research and Development, or R&D, expenses consist primarily of personnel, overhead and other costs associated with SoC software, QuickAI, and eFPGA development. The $849,000 increase in R&D expenses in the second quarter of 2019, as compared to the second quarter of 2018, was primarily attributable to the additional operating expenses including stock-based compensation costs associated with the acquisition of SensiML.

Selling, General and Administrative Expense

Our selling, general and administrative, or SG&A, expenses consist primarily of personnel and related overhead costs for sales, marketing, finance, administration, human resources and general management. The $270,000 decrease in SG&A expenses in the second quarter of 2019, as compared to the second quarter of 2018 was primarily attributable to lower compensation expenses as a result of reduced headcount and lower costs of outside services. Acquisition costs relating to the acquisition of SensiML are not material.

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Interest Expense and Interest Income and Other (Expense), Net

The table below sets forth the changes in interest expense and interest income and other (expense), net for the three months ended June 30, 2019 as compared to the three months ended July 1, 2018 (in thousands, except percentage data):

|  | Three Months Ended |  |  | Change |
|  | June 30, 2019 |  |  | July 1, 2018 |  |  | Amount |  |  | Percentage |
Interest expense |  | $ | (124 | ) |  | $ | (32 | ) |  | $ | (92 | ) |  |  | 288 | %
Interest income and other (expense), net |  |  | 50 |  |  |  | 23 |  |  |  | 27 |  |  |  | 117 | %
|  | $ | (74 | ) |  | $ | (9 | ) |  | $ | (65 | ) |  |  | 722 | %

Interest expense relates primarily to the Company's line of credit facility. Interest income relates to the interest earned on our money market account and short-term investments on surplus cash in the Money Market Funds.

Provision for Income Taxes

The table below sets forth the changes in the provisions for income tax for the three months ended June 30, 2019 as compared to the three months ended July 1, 2018 (in thousands, except percentage data):

|  | Three Months Ended |  |  | Change |
|  | June 30, 2019 |  |  | July 1, 2018 |  |  | Amount |  |  | Percentage |
Provision for income taxes |  | $ | 27 |  |  | $ | 29 |  |  | $ | (2 | ) |  |  | (7 | )%

The majority of the income tax expense relates to the Company's foreign subsidiaries, which are cost-plus entities.

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.

Six Months Ended June 30, 2019 and July 1, 2018

Revenue

The table below sets forth the changes in revenue for the six months ended June 30, 2019, as compared to the six months ended July 1, 2018 (in thousands, except percentage data):

|  | Six Months Ended |  |  |  |  |  |  |  |  |
|  | June 30, 2019 |  |  | July 1, 2018 |  |  | Change |
|  | Amount |  |  | % of Total Revenues |  |  | Amount |  |  | % of Total Revenues |  |  | Amount |  |  | Percentage |
Revenue by product line (1): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
New products |  | $ | 1,398 |  |  |  | 26 | % |  | $ | 2,881 |  |  |  | 49 | % |  | $ | (1,483 | ) |  |  | (51 | )%
Mature products |  |  | 3,883 |  |  |  | 74 | % |  |  | 3,005 |  |  |  | 51 | % |  |  | 878 |  |  |  | 29 | %
Total revenue |  | $ | 5,281 |  |  |  | 100 | % |  | $ | 5,886 |  |  |  | 100 | % |  | $ | (605 | ) |  |  | (10 | )%

________________________

(1) | For all periods presented: New products include all products manufactured on 180 nanometer or smaller semiconductor processes, eFPGA IP license, QuickAI and Software revenues. Mature products include all products produced on semiconductor processes larger than 180 nanometers.

The $1.5 million decrease in the revenue of new products was primarily due to decreased shipment of connectivity and display products, which was partially offset by eFPGA IP license revenue recognized in the first six months of 2019. The $878,000 increase in the revenue of mature products was primarily due to increased orders from our customers in the aerospace, test and instrumentation sectors.

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Gross Profit

The table below sets forth the changes in gross profit for the six months ended June 30, 2019, as compared to the six months ended July 1, 2018 (in thousands, except percentage data):

|  | Six Months Ended |  |  |  |  |  |  |  |  |
|  | June 30, 2019 |  |  | July 1, 2018 |  |  | Change |
|  | Amount |  |  | % of Total Revenues |  |  | Amount |  |  | % of Total Revenues |  |  | Amount |  |  | Percentage |
Revenue |  | $ | 5,281 |  |  |  | 100 | % |  | $ | 5,886 |  |  |  | 100 | % |  | $ | (605 | ) |  |  | (10 | )%
Cost of revenue |  |  | 2,280 |  |  |  | 43 | % |  |  | 2,967 |  |  |  | 50 | % |  |  | (687 | ) |  |  | (23 | )%
Gross Profit |  | $ | 3,001 |  |  |  | 57 | % |  | $ | 2,919 |  |  |  | 50 | % |  | $ | 82 |  |  |  | 3 | %

The 7% increase in gross margin percentage was primarily due to higher revenue of matured products in the first six months of 2019 compared to the first six months of 2018, as well as a more favorable new product mix including SensML SaaS and eFPGA license revenue. The sale of previously reserved inventory was $64,000 and $102,000 in the first six months of 2019 and 2018, respectively.

Operating Expenses

The table below sets forth the changes in operating expenses for the six months ended June 30, 2019, as compared to the six months ended July 1, 2018 (in thousands, except percentage data):

|  | Six Months Ended |  |  |  |  |  |  |  |  |
|  | June 30, 2019 |  |  | July 1, 2018 |  |  | Change |
|  | Amount |  |  | % of Total Revenues |  |  | Amount |  |  | % of Total Revenues |  |  | Amount |  |  | Percentage |
R&D Expense |  | $ | 6,457 |  |  |  | 122 | % |  | $ | 5,065 |  |  |  | 86 | % |  | $ | 1,392 |  |  |  | 27 | %
SG&A Expense |  |  | 4,786 |  |  |  | 91 | % |  |  | 5,171 |  |  |  | 88 | % |  | $ | (385 | ) |  |  | (7 | )%
Total Operating Expenses |  | $ | 11,243 |  |  |  | 213 | % |  | $ | 10,236 |  |  |  | 174 | % |  | $ | 1,007 |  |  |  | 10 | %

Research and Development

Our R&D expenses consist primarily of personnel, overhead and other costs associated with, sensor processing and algorithm development, programmable logic design, SoC software and eFPGA development. The $1.4 million increase in R&D expenses in the first six months of 2019, as compared to the first six months of 2018 was primarily attributable to the addition of personnel acquired as a result of the acquisition of SensiML as well as additional expenses associated with QuickAI and SoC roadmap development.

Selling, General and Administrative Expense

Our SG&A expenses consist primarily of personnel and related overhead costs for sales, marketing, finance, administration, human resources and general management. The $385,000 decrease in SG&A expenses in the first six months of 2019, as compared to the first six months of 2018, was primarily due to a decrease of compensation-related costs, including stock-based compensation expenses and lower outside services expenses.

Interest Expense and Interest Income and Other (Expense), Net

The table below sets forth the changes in interest expense and interest income and other (expense), net for the six months ended June 30, 2019 as compared to the six months ended July 1, 2018 (in thousands, except percentage data):

|  | Six Months Ended |  |  | Change |
|  | June 30, 2019 |  |  | July 1, 2018 |  |  | Amount |  |  | Percentage |
Interest expense |  | $ | (207 | ) |  | $ | (56 | ) |  | $ | (151 | ) |  |  | 270 | %
Interest income and other (expense), net |  |  | 98 |  |  |  | 9 |  |  |  | 89 |  |  |  | 989 | %
|  | $ | (109 | ) |  | $ | (47 | ) |  | $ | (62 | ) |  |  | 132 | %

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Interest expense relates primarily to the Company's lin e of credit facility. Interest income relates to the interest earned on our money market account and short-term investments on surplus cash in the Money Market Funds.

Provision for Income Taxes

The table below sets forth the changes in the income tax provisions for the six months ended June 30, 2019 as compared to the six months ended July 1, 2018 (in thousands, except percentage data):

|  | Six Months Ended |  |  | Change |
|  | June 30, 2019 |  |  | July 1, 2018 |  |  | Amount |  |  | Percentage |
(Benefit from) / provision for income taxes |  | $ | (241 | ) |  | $ | 90 |  |  | $ | (331 | ) |  |  | (368 | )%

Income tax benefit for the six months ended June 30, 2019 relates to the deferred tax benefit arising from Intangible assets acquired from the acquisition of SensiML, which was offset by the income taxes from the Company's foreign subsidiaries. A majority of the income tax expense for the six months ended July 1, 2018 relates to the Company's foreign subsidiaries, which are cost-plus entities.

As of June 30, 2019, our ability to utilize our income tax loss carryforwards in future periods is uncertain, and accordingly, we recorded a full valuation allowance against the related U.S. tax provision. We will continue to assess the realizability of deferred tax assets in future periods.

Liquidity and Capital Resources

We have financed our operating losses and capital investments through sales of common stock, finance leases, a revolving line of credit and cash flows from operations. As of June 30, 2019, the Company's principal sources of liquidity consisted of cash, cash equivalents and restricted cash of $28.2 million, including $15.0 million line of credit with Heritage Bank. The previous line of credit facility with Silicon Valley Bank, which matured on September 24, 2018 was fully paid off in July 2018. We repaid $12.0 million of Heritage line of credit in July 2019, which will be available for draw down when required.

On September 28, 2018, we entered into a Loan and Security Agreement, or Loan Agreement, with Heritage Bank. The Loan Agreement provided for, among other things, the Revolving Facility with aggregate commitments of $9,000,000. The maturity date for loans under the Revolving Facility is September 28, 2020. Loans under the Revolving Facility will bear interest at a rate equal to one half of one percentage point (0.50%) above the variable rate of interest, per annum, that appears in The Wall Street Journal from time to time, whether or not such announced rate is the lowest rate available from Heritage Bank.

On December 21, 2018, we 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 and Security Agreement entered into on September 28, 2018. The Amended and Restated Loan Agreement increases the Revolving Facility from $9,000,000 to $15,000,000. The Amended and Restated Loan Agreement requires us to maintain at least $3,000,000 in unrestricted cash at Heritage Bank. We were in compliance with all loan covenants under the Amended and Restated Loan Agreement as of the end of the current reporting period. As of June 30, 2019, we had $15.0 million of outstanding revolving line of credit with an interest rate of 6%.

On June 21, 2019, the Company issued an aggregate of 18.4 million shares of common stock, including the exercise of option for overallotment of 2.4 million shares by the underwriters, in an underwritten public offering at a price of $ 0.50 per share. The company received net proceeds from the offering of approximately $8.3 million, net of underwriter’s commission and other offering expenses paid in the second quarter of 2019. See Note 10 to the Condensed Consolidated Financial Statements for the details.

In May 2018, we issued an aggregate of 13.5 million shares of common stock and warrants to purchase up to an aggregate of 5.4 million shares of common stock in an underwritten public offering at a combined price of $1.15 per Unit. We received total net proceeds of $13.9 million from the offering.

We expect to use the net proceeds from these offerings for working capital, the development of next generation new products and general corporate purposes. The Company may also use a portion of the net proceeds to acquire and/or license

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technologies and acqu ire and/or invest in businesses when the opportunity arises. However, we currently have no commitments or agreements and are not involved in any negotiations with respect to any such transactions.

We believe that our existing cash and cash equivalents, together with available financial resources from the Revolving Facility with Heritage Bank will be sufficient to fund our operations and capital expenditure and provide adequate working capital for the next twelve months.

Over the longer term, we anticipate that the generation of sales from our new product offerings, existing cash and cash equivalents, together with financial resources from our Revolving Facility with Heritage Bank and our ability to raise additional capital in the public capital markets will be sufficient to satisfy our operations and capital expenditures. Our Revolving Facility with Heritage Bank will expire in September 2020 and we would need to renew this line of credit or find an alternative lender prior to the expiration date. Further, any violations of debt covenants may restrict our access to any additional cash draws from the revolving line of credit, and may require our immediate repayment of the outstanding debt amounts. We believe that we will be able to either renew the Revolving Facility or obtain alternative financing on the acceptable terms. We cannot provide any assurance that we will be able to raise additional capital, if required, or that such capital will be available on terms acceptable to us. Our inability to generate sufficient sales from our new product offerings and/or raise additional capital if needed could have a material adverse effect on our operations and financial condition, including our ability to maintain compliance with our lender’s financial covenants.

As of June 30, 2019, most of our cash and cash equivalents were invested in the money market account of Heritage Bank. As of June 30, 2019, our interest-bearing debt consisted of $230,000 outstanding under finance leases and $15.0 million outstanding under our Revolving Facility. See Note 7 and 8 to the Consolidated Financial Statements for more details.

Cash balances held at our foreign subsidiaries were approximately $1.1 million and $656,000 as of June 30, 2019 and December 30, 2018, respectively. Earnings from our foreign subsidiaries are currently deemed to be indefinitely reinvested. We do not expect such reinvestment to affect our liquidity and capital resources, and we continually evaluate our liquidity needs and ability to meet global cash requirements as a part of our overall capital deployment strategy. Factors that affect our global capital deployment strategy include anticipated cash flows, the ability to repatriate cash in a tax-efficient manner, funding requirements for operations and investment activities, acquisitions and divestitures and capital market conditions.

In summary, our cash flows were as follows (in thousands):

|  | Six Months Ended |
|  | June 30, 2019 |  |  | July 1, 2018 |
Net cash used in operating activities |  | $ | (5,970 | ) |  | $ | (7,473 | )
Net cash used in investing activities |  |  | (503 | ) |  |  | (95 | )
Net cash provided by financing activities |  |  | 8,161 |  |  |  | 13,856 |

Net cash used in operating activities

For the six months ended June 30, 2019, net cash used in operating activities was $6.0 million, which was primarily due to the net loss of $8.1 million, adjusted for non-cash charges of $2.1 million. Non-cash charges consisted primarily of stock-based compensation of $1.7 million, depreciation, amortization of property, equipment, intangible assets, and right of use lease assets, and a write-down of inventory. Cash outflows from changes in operating assets and liabilities were offset by an equal amount of cash inflows from the operating assets and liabilities.

For the six months ended July 1, 2018, net cash used in operating activities was $7.5 million, which was primarily due to the net loss of $7.5 million, adjusted for non-cash charges of $1.7 million and cash outflows from changes in operating assets and liabilities of $1.7 million. Non-cash charges consisted primarily of stock-based compensation of $911,000, depreciation, amortization of property, equipment, and intangible assets, and write-down of inventory. The primary drivers of outflows in operating assets and liabilities relates to an increase of accounts receivable, inventory and other assets of $2.2 million, which was partially offset by an increase of trade payable and accrued liabilities.

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Net cash used in investing activities

For the six months ended June 30, 2019 cash used in investing activities was $503,000, which was primarily attributable to the leasehold improvements and computer equipment at the new office premises.

For the six months ended July 1, 2018 cash used in investing activities was $95,000, which was primarily attributable to purchase of computers for employees and IT department.

Net cash provided by financing activities

For the six months ended June 30, 2019 cash provided by financing activities was $8.2 million, primarily attributable to the net proceeds from the issuance of 18.4 million shares of common stock issued in June 2019, and net proceeds from the issuance of common stock under our equity plans. These inflows were partially offset by scheduled repayments of finance lease obligations and tax payments related to net settlement of stock awards.

For the six months ended July 1, 2018, cash provided by financing activities was $13.9 million, primarily attributable to the net proceeds from the issuance of 13.5 million shares of common stock and 5.4 million stock warrants in May 2018. These inflows were partially offset by the scheduled repayments of finance lease obligations and tax payments related to net settlement of stock awards.

We currently use our cash to fund capital expenditures and operations. Based on past operating performance and current annual operating plans, we believe that the generation of sales from our new product offerings, existing cash and cash equivalents, together with financial resources from our Revolving Facility with Heritage Bank and our ability to raise additional capital in the public capital markets will be sufficient to satisfy our operations and capital expenditures, and provide adequate working capital for the next twelve months from the date the unaudited condensed consolidated financial statements as of and for the three and six-month period ended June 30, 2019. Our Revolving Facility will expire in September 2020 and we would need to renew this line of credit or find an alternative lender prior to the expiration date. Further, any violations of debt covenants before the expiration of the Revolving Facility may restrict our access to any additional cash draws from the Revolving Facility and may require our immediate repayment of the outstanding debt amounts. We believe that we will be able to either renew the Revolving Facility or obtain alternative financing on acceptable terms. We cannot provide any assurance that we will be able to raise additional capital, if required, or that such capital will be available on terms acceptable to us. Our inability to generate sufficient sales from our new product offerings and/or raise additional capital if needed could have a material adverse effect on our operations and financial condition, including our ability to maintain compliance with our lender’s financial covenants.

Contractual Obligations and Commercial Commitments

There were no material changes in our contractual obligations from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 30, 2018.

As of June 30, 2019, the Company had purchase obligations of $1.3 million for the purchase of wafer and finished goods inventory and other goods and services. the Company recognized right-of-use assets of approximately $1.7 million and lease liability of approximately $1.7 million relating to the new operating leases signed for the premises of its headquarters in San Jose and its subsidiary SensiML in Oregon.

Refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K, as amended for the fiscal year ended December 30, 2018 for a description of our contractual obligations.

Concentration of Suppliers

We depend on a limited number of contract manufacturers, subcontractors, and suppliers for wafer fabrication, assembly, programming and testing, and for the supply of programming equipment. These services are typically provided by one supplier for each of our devices. We generally purchase these single or limited source services through standard purchase orders. Because we rely on independent subcontractors to perform these services, we cannot directly control product delivery schedules, costs or quality levels. Our future success also depends on the financial viability of our independent subcontractors.

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The decision not to provide these services to us or the inability to supply these services to us, such as in the case of a natural or financia l disaster, would have a significant impact on our business. In addition, these subcontracted manufacturers produce products for other companies and we must place orders up to several months in advance of expected delivery. Increased demand from other comp anies could result in these subcontract manufacturers allocating available capacity to customers that are larger or have long-term supply contracts in place and we may be unable to obtain adequate foundry and other capacity at acceptable prices, or we may experience delays or interruption in supply. As a result, we have only a limited ability to react to fluctuations in demand for our products, which could cause us to have an excess or a shortage of inventories of a particular product. Additionally, volatil ity of economic, market, social and political conditions in countries where these suppliers operate may be unpredictable and could result in a reduction in product revenue or increase our cost of revenue and could adversely affect our business, financial c ondition and results of operations.

Off-Balance Sheet Arrangements

We do not maintain any off-balance sheet partnerships, arrangements or other relationships with unconsolidated entities or others, often referred to as structured finance or special purpose entities, which are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Recently Issued Accounting Pronouncements

See Note 2 to the Unaudited Condensed Consolidated Financial Statements for a description of recent accounting pronouncements, including the respective dates of adoption and expected effects on the results of our operations and financial condition.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

Our exposure to market rate risk for changes in interest rates relates primarily to our investment portfolio and variable rate debt. We do not use derivative financial instruments to manage our interest rate risk. We are averse to principal loss and ensure the safety and preservation of invested funds by limiting default, market risk and reinvestment risk. Our investment portfolio is generally comprised of investments that meet high credit quality standards and have active secondary and resale markets. Since these securities are subject to interest rate risk, they could decline in value if interest rates fluctuate or if the liquidity of the investment portfolio were to change. Due to the short duration and conservative nature of our investment portfolio, we do not anticipate any material loss with respect to our investment portfolio. A 10% move in interest rates as of the end of the second quarter of 2019 would have had an immaterial effect on our financial position, results of operations and cash flows.

Foreign Currency Exchange Rate Risk

All of our sales and costs of manufacturing are transacted in U.S. dollars. We conduct a portion of our research and development activities in India and have sales and marketing offices in several locations outside of the United States. We use the U.S. dollar as our functional currency. Most of the costs incurred at these international locations are in local currency. If these local currencies strengthen against the U.S. dollar, our payroll and other local expenses will be higher than we currently anticipate. Since our sales are transacted in U.S. dollars, this negative impact on expenses would not be offset by any positive effect on revenue. Operating expenses denominated in foreign currencies were approximately 19% and 27% of total operating expenses for the first six months of 2019 and 2018, respectively. A currency exchange rate fluctuation of 10% would have caused our operating expenses to change by approximately $214,000 in the first six months of 2019.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Based on management's evaluation as of June 30, 2019, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective at the reasonable assurance level to ensure that the information required to be disclosed by us in this Quarterly Report on Form 10-Q was (i) recorded, processed, summarized and reported within the

33

time periods specified in the SEC's rules and regulations and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls over financial reporting will prevent all errors and frauds. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Part II. Other Information

Item 1. Legal Proceedings

None. See Note 16 of the Unaudited Condensed Consolidated Financial Statements for a description of legal proceedings.

Item 1A. Risk Factors

Our 2018 Annual Report on Form 10-K for the year ended December 30, 2018, filed with the SEC on March 15, 2019, as amended, includes a detailed discussion of our risk factors at Part I, Item 1A, Risk Factors, which discussion is hereby incorporated by reference into this Part II, Item 1A.

The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks not currently known to us or that we currently deem to be immaterial may also adversely affect our business and results from operations.

Item 6. Exhibits

a. Exhibits

The following Exhibits are filed or incorporated by reference into this report:

Exhibit Number |  | Description
31.1 |  | Certification of Brian C. Faith, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 |  | Certification of Suping (Sue) Cheung, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 |  | Certification of Brian C. Faith, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 |  | Certification of Suping (Sue) Cheung, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS |  | XBRL Instance Document
101.SCH |  | XBRL Taxonomy Extension Schema Document
101.CAL |  | XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF |  | XBRL Taxonomy Extension Definition Linkbase Document
101.LAB |  | XBRL Taxonomy Extension Label Linkbase Document
101.PRE |  | XBRL Taxonomy Extension Presentation Linkbase Document

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Signa tures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

|  | QUICKLOGIC CORPORATION
|  | /s/ Suping (Sue) Cheung
Date: | August 9, 2019 | Suping (Sue) Cheung
|  | Chief Financial Officer (as Principal Accounting and Financial Officer and on behalf of the Registrant)

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