QuickLogic Corporation

Ladies and gentlemen, good afternoon. At this time, I'd like to welcome everyone to QuickLogic Corporation's third quarter fiscal year 2020 earnings results conference call. As a reminder, today's call is being recorded for replay purposes through November 11, 2020. I would now like to turn the conference over to Mr. Jim Finucchi of Darrow Associates. Mr. Finucchi, please go ahead.

Thank you, Operator, and thanks to all of you for joining us. Our speakers today are Brian Faith, President and Chief Executive Officer, and Dr. Sue Chung, Chief Financial Officer. Following current social distancing practices, management is doing this call from different locations today. As a reminder, some of the comments QuickLogic makes today are forward-looking statements that involve risks and uncertainties, including but not limited to stated expectations relating to revenue from new and mature products, statements pertaining to QuickLogic's future stock performance, design activity, and its ability to convert new design opportunities into production shipments, timing and market acceptance of its customers' products, schedule changes and projected production start dates that could impact the timing of shipments, the company's future evaluation systems, broadening the number of our ecosystem partners and expected results, and financial expectations for revenue, gross margin, operating expenses, profitability, and cash. Actual results or trends may differ materially from those discussed today. For more detailed discussions of the risks, uncertainties, and assumptions that could result in those differences, please refer to the risk factors discussed in QuickLogic's most recent filed periodic reports with the SEC. QuickLogic assumes no obligation to update any forward-looking statements or information which speak as of the respective dates of any new information or future events. In today's call, we will be reporting non-GAAP financial measures. You may refer to the earnings release we issued today for a detailed reconciliation of our GAAP to non-GAAP results and other financial statements. We have also posted an updated financial table on our IR website that provides current and historical non-GAAP data. Please note, QuickLogic uses its website, the company blog, corporate Twitter account, Facebook page, and LinkedIn page as channels of distribution of information about its business. Such information may be deemed material information, and QuickLogic may use these channels to comply with its disclosure obligations under Regulation FD. A copy of the prepared remarks made on today's call will be posted at QuickLogic's IR webpage shortly after the conclusion of today's earnings call. And I would now like to turn the call over to Brian.

Thank you, Jim. Good afternoon, everyone, and thank you all for joining our third quarter fiscal 2020 financial results conference call. I want to kick off today's call by again thanking the QuickLogic team for their continued resiliency as we work through the COVID-19 restrictions. In the face of both personal and business challenges, their focus on innovation and serving our customers, despite the barriers presented by this pandemic, has been extraordinary. As we continue to chart our new course for the company, the team is going above and beyond to ensure the future success of QuickLogic. The third quarter marked another step in our ongoing transformation that started more than a year ago. We have been evolving our focus from being primarily a product company, serving only large customers in the consumer markets, to a platform company, serving a much broader set of markets and more diverse set of customers. These include consumer, IoT, industrial, and the military space. I remain confident we will see this change deliver improved financial results in fiscal 2021. Our third quarter revenue reflected the continued headwinds associated with the broad impact from the COVID-19 pandemic that we discussed in our last call. However, a favorable product mix and continued decline in our operating expenses from the proactive changes taken earlier this year resulted in higher gross margin and much better than forecasted bottom line performance. The good news is that we currently see Q3 as the revenue low point and expect sequential improvement with a better trajectory into 2021. Sue will offer our full outlook later in the call. I want to now shift the discussion to some of the initiatives we announced in the last couple of months and provide additional context around their importance to our strategy. You will remember that in June, we announced the QuickLogic Open Reconfigurable Computing, or CORQ, initiative. This project marks a milestone for the industry, with QuickLogic becoming the first programmable logic company to actively contribute to a fully open-source FPGA toolchain. Quark not only significantly leverages our IP and OpEx investments to grow a high-margin revenue stream, of equal importance is that it makes our technology more diversified and available to a larger customer base. With the strong growth in open source initiatives such as RISC-V, this is the ideal time to drive this strategy forward. Since our announcement, we've received overwhelmingly positive feedback from potential customers, our co-development partners, which include Google and Ad Micro, and the technical press that have covered open source initiatives for a very long time. We are convinced we are offering our open source solution the right way, a way that will drive our business objectives. Even more telling is the fact we have shipped more than 450 of our Quickfeather development kits to customers in just a few months. The pace is accelerating, and we remain on path to realize our goal of roughly 1,000 dev kits ordered by the end of 2020. All of these development kits should be viewed as seeding opportunities in the market with our technology that should drive EOS S3 and SunSumo revenue next year as they take those dev kits and turn them into actual real products with real volume behind them. While we have invested resources to develop our FPGA design and verification software, these software platforms are simply tools that enable us to sell our proprietary patented IP that customers can use to embed into ethics and SOCs. To take us a step further, if we think about who traditionally we sold to, it was the hardware engineers. And let's say there are approximately 100,000 of those types of hardware engineers in just the U.S. that understand our type of technology. On the other hand, there are a few million software engineers in the world, with Google alone probably having tens of thousands. What Google has helped us do in this collaboration is to understand what it takes to make hardware easier to use for the software engineer. In doing so, we're talking about an order of magnitude increase in the number of engineers we can sell our solution to, some of which have never used this technology before. By making our technology easier to use, we get broader exposure and reduce our cost of sales. Since our launch in June, we've seen the community take on numerous developments on their own, complementing our own R&D efforts by allowing solutions to develop organically, filling multiple niches and evolving more quickly towards the best fit for particular classes of problems. It also meshes well with the sensible AI and auto ML tools and our eFPGA technology, both of which have very high value for a wide range of IoT applications. In August, we joined the Open Harbor Group, furthering our commitment to open source. The most recent development being undertaken by the Open Harbor Group is a derivative of the RISC-V and QuickLogic EFPGA-based SOC completed by ETH in Zurich. And while we can't claim we knew two years ago that the ETH development would have such leverage, it does put us in a great position moving forward to accelerate our silicon and EFPGA roadmap in a cost-effective manner. Fiscal 2020 is all about laying on the groundwork for the CORQ initiative. Starting next year, we expect Quark will be one of the primary catalysts to our path to profitability before year-end. Another linchpin to our open-source initiative is the integration of Sunsimult's analytics toolkit with Google's open-source machine learning framework called TensorFlow Lite for microcontrollers. Together, they complement each other by offering a powerful neural network algorithm execution from TensorFlow Lite with the ease of use of the Sunsimult AI tool. We are excited to enable a seamless, fast, and productive workflow for developers creating and deploying Edge AI sensor algorithms for IoT devices. The openness, flexibility, and performance enabled by this effort is important and valued by our MCU partners and IoT device customers. It will be a key enabler for our SaaS revenue growth in the coming quarters. In August, we announced the Sensible Analytics Toolkit now running on the sensor tile box IoT kit from STMicroelectronics. This combination enables up to five times faster development of even the most complex AI-based pattern recognition algorithms for time series sensors than what could be done using more traditional methods. We are really excited about the growing relationship with STMicro. Sensible participated with a speaking spot at the recent ST Developers Conference two weeks ago, providing yet another example of the large-scale opportunities possible through our partnership and membership in the STMicroelectronics Partner Program. Now let's move to our collaboration with a consortium of companies that include ARC, Skywater, Linear Asics, and others for the COVID-19 testing solution that I discussed last quarter. Phase 1 of the product is part of a research study at a prominent U.S.-based university. We expect the study to conclude within Q4 and go before an institutional review board for approval. And while this is the first medical solution built using the sensible AI software platform, we hope that there are several others to follow. If you are interested in this testing solution, please go to arc.health for more information. Where things are getting even more interesting is how our work with TensorFlow Lite is converging with our open source FPGA initiative. we recently delivered several evaluation systems to a maker of home computing devices. If the program is successful, the platform could be included in devices targeted for late 2021 shipments. Further supporting our IP focus, last week we announced some exciting developments with Samsung Foundry. First, we announced that the third generation of our Arctic Pro embedded FPGA technology, Arctic Pro 3, is now available on Samsung's 28 nanometer SDSOI process. This achievement was the culmination of more than a year of development with Samsung. Arctic Pro 3 was designed from the ground up on their 28 SDS process, delivers a significant boost in performance with ultra-low standby current leakage. Second, with the IP development completed, QuickLogic was accepted into the Samsung Advanced Foundry ecosystem as a member of their IT partner program. As a result, we have started engagements immediately. This is an exciting development that we believe will lead to future IT licenses and royalties. I wanted to share this context on the key events from the last few months to help everyone understand their importance to QuickLogic as we transform our business. Turning to the current environment and what we expect to see in the fourth quarter, after a difficult first three quarters of 2020, several existing parts of our business are finally seeing some improvement. Let's start with our smartphone business. Our momentum is accelerating, and the phone market is definitely a highlight for 2020. We have locked up several phone wins during the second half of 2020, including our first 5G smartphone production win. We currently expect the total number of phones using QuickLogix technology to reach at least 10 by year end, up from three at the start of the year. These new phone launches should lead to much stronger smartphone revenue this quarter. In the hearables market, yesterday we formally submitted our developer kit for official Amazon certification. If all goes well, and we expect it will, we will achieve certification and launch these kits to the market before the end of the quarter. In our eFPGA IP business, one of our early engagements has recently taped out their test chip. Barring any geopolitical-related risks, we could see a full eFPGA IP license in the first half next year from this customer. Within our voice-activated products program, as discussed on prior calls, we realigned our efforts with one of the largest providers of microphone technology to leverage our previous developments and launch an always-on voice-activated remote control solution. Our ESS3-based low-power platform will enable voice-activated remote controls to operate with almost one year of battery life, more than twice that of current remote controls in the market. We are moving quickly to work with several OEMs and expect incremental revenue starting in Q1 of next year. In our mature segment, the COVID-19-related issues remain a challenge, particularly for the civilian aerospace sector. Q3 was certainly impacted as revenues declined again due to certain projects being delayed. The positive news is that in Q4, we expect to see a temporary snapback in sales with mature revenue nearly doubling. In particular, we expect military-related sales to exceed even our typical seasonal strength in Q4. On the other hand, the civilian aerospace market is expected to remain sluggish for the coming quarters until the consumer air travel market begins to rebound. While forecasting beyond a couple of quarters is difficult, with the continued uncertainty in several markets we serve, it is our current belief that mature sales in 2021 will at best be flat compared with 2020. Before handing the call to Sue, I want to reiterate that the pathway for better financial performance in 2021 is in place, and our future is bright. We are beginning to see accelerated traction around our open source initiatives and with some of the largest platform companies in the world. When combined with the feedback our new product customers are providing related to improvements in their business, as well as expected growth in our software-related programs, I remain confident we will deliver improved financial performance in the fourth quarter and into fiscal 2021. I would now like to turn the call over to Sue for a discussion of our recent financial performance and full Q4 outlook. Sue?

Thank you, Brian. Good afternoon, and thanks to everyone for joining us. For the third quarter of fiscal 2020, revenue was 1.8 million. This compares with revenue of 2.2 million in both the second quarter of 2020 and third quarter of 2019. Q3 revenue reflected that broad impact in the civilian aerospace market from the global pandemic. Within our Q3 revenue, sales of new products or $639,000. This compares with $820,000 in Q2 and $1 million in the third quarter of 2019. Our mature product revenue was $1.1 million compared with $1.4 million last quarter and $1.1 million of Q3 2019. In the third quarter, we had four customers who each accounted for 10% or greater of our sales. Non-GAAP gross margin in Q3 improved to 53.9% compared with 47.1% in the prior quarter and 48.9% in the same quarter of 2019. Improvement in gross margin compared with the two other periods was mainly due to the restructuring and the continued cost control effort. Non-GAAP operating expenses for Q3 were approximately 2.6 million, representing an improvement from 3.2 million in Q2 and 4.5 million in the third quarter of last year. The lower operating expenses in Q3 were primarily due to two factors. One, updates to estimated non-recurring restructuring charges and asset write-offs. And two, greater than expected ongoing capitalization of fast software development costs related to milestones achieved in the quarter. Even when factoring out these non-recurring adjustments, our operating expenses in Q3 were still about $1.5 million lower than the same period last year. We believe operating expenses will remain in the low $3 million range for the foreseeable future. Within our Q3 operating expenses, R&D and SG&A were both approximately $1.3 million. This compares with the R&D and SG&A of $1.7 million and $1.4 million in Q2 this year, and $2.6 million and $1.9 million in Q3 last year. The net total for other income expenses and taxes in Q3 was a charge of $19,000 compared with $84,000 in Q2 and 79,000 in the third quarter last year. Non-GAAP net loss in Q3 improved to 1.7 million, or a loss of 15 cents per share. This compares with a net loss of 2.2 million, or 26 cents per share in Q2, and a net loss of 3.5 million, or 42 cents per share in the third quarter of last year. The per-year calculation for both periods reflects that reverse stock split that was effective last December. The total cash at the end of Q3 was $24.7 million compared with $26.4 million at the end of last quarter. The Q3 cash balance includes the $461,000 in net proceeds from the exercise of the overall allotment that closed in July and the 1.2 million from the PPP loan we received in Q2. On the PPP loan, we are in the process of applying for the forgiveness provision and should complete this process before year end. The cash balances also include the $15 million draw from the revolving line of credit. Now, moving to our forecast for the fourth quarter of fiscal 2020, which will end on January 3rd, 2021. The revenue guidance for Q4 is $2.7 million plus or minus 15%. At this point, This represents an approximately 50% increase from Q3. We believe total revenue will be comprised of roughly 800,000 of new products and 1.9 million of mature products. Based on the expected revenue mix, non-GAAP gross margin the fourth quarter will be approximately 60%, plus or minus 5%. In Q4, our non-GAAP operating expenses will be approximately 3.1 million plus or minus 300,000. As I mentioned earlier, we expect this to be a normalized level for the next few quarters. At midpoint of the Q4 range, R&D should be 1.6 million and SG&A 1.5 million. After interest expense under income and taxes, at this point, we currently forecast non-GAAP net loss will improve to approximately 1.4 million, or net loss of 12 cents per share, based on roughly 11.5 million shares outstanding. Most of the difference between our GAAP and non-GAAP results is our stock-based compensation expense. We expect the stock-based comp to be in the range of $700,000 for the next few quarters. Finally, in Q4, we expect the cash usage to decline from Q3 and be in the range of $1.3 to $1.8 million. Cash usage should decline further over the course of 2021 with expected improvements to revenue and the gross margin. With the strength in our balance sheet, we believe we are well positioned to achieve our growth objectives. With that, let me now turn the call back over to Brian for his closing remarks.

Thank you, Sue. As we look back on what we have accomplished to transition QuickLogic, particularly in the context of the COVID-19 pandemic, I could not be prouder of what our team has achieved. We have realigned the company, not just in terms of having the right resources to execute on the open source initiative, but also significantly reducing our cost structure, making profitability before the end of 2021 much more attainable. With what we have in place and the opportunities that are opening up for new business, it is clear we have made tremendous progress on the continued evolution of QuickLogic. In closing, I would like to thank, again, our many stakeholders for their continued support during these extraordinary and challenging times. That completes our prepared remarks. Hector, I would now like to open the call for questions.

Thank you. At this time, we'll be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Your first question is from the line of Suji De Silva with Roth. Please proceed with your question.

Hi, Brian. Hi, Su. First question, Brian, on the smartphones, you said 10 models by the end of the year. Are those all sold to a single customer, or have you now branched out? And for the 5G phones, is there any higher content opportunity for you?

We haven't disclosed if it's one or more customers, but if it was another one, we probably would announce it so you could assume it's probably with the same guy. And what was the question on 5G?

Is there any higher content opportunity as you go to 5G phones?

In the current model, no. It's more or less one of the current combinations, and we do actually sell different variants of functionality to them already, but it's not materially different from what we've already been selling to them. Okay.

And then switching over to the Cork QRC product initiative, can you talk about the revenue model there and the timing of contribution for you, perhaps the percent of the revenue it can contribute to calendar 21 since you talked about being a a big driver in getting to profitability at the end of the year, how big can it get for you in 2021?

Yeah, I think the impact to next year can't be understated, actually. So if we just think about the revenue contribution from now until the end of next year, in this current quarter, and in fact this whole second half, it's all about death kits, getting hopefully that $1,000 or 1,000 death kits out, which would be thousands of dollars in terms of death kits. What we're looking at for next year is, Some percentage of those deficits are going to turn into actual product designs with S3 that go to volume. I think we're modeling somewhere in the few million dollar range for those transitioning over to real production wins and shipments next year. That's on the device side. On the IP licensing side, there are certain things related to the open source initiative that we have not enumerated in detail yet that should trigger IP licenses next year, driven from the fact that we are supporting a fully open source tool chain. layering throughout next year, probably starting from the Q2 onwards timeframe. And then the other thing that can start this year is Sensible. So Sensible runs natively on Quickfeather, the dev kit that we talked about, all in open source. We've already started to ship dev kits with the bundle of Sensible this year that we're hoping to transition to the SaaS licenses or subscription, and we anticipate that growing throughout next year as well. not just on normal death kit sales, but we have some very specific initiatives planned that we haven't talked publicly about yet that should really get a good pop in terms of awareness of the death kit and Sensible. And, again, the idea there is to start with the free version of Sensible on the quick feather death kit, and then once they get the value of the tool, the use cases, transition them over to a more expensive SAS version, somewhere in the few to $20,000 a quarter range. And then I think your last question was how did the impact to next year in total from Quark?

Right, to help get the profitability.

So without giving a specific number, I'd say it's several million dollars worth that we have a fairly good line of sight.

Okay. And then just one last follow-up on Quark. The 400 dev kits going to 1,000, I'm just trying to understand, is it a portion of those that are internal to Google or are they third-party guys who are building Google Android-based devices, and also geographically? Is it U.S.-Europe-centric, or are you getting Asia penetration with these as well? I guess you have AntMicro also, so that would help.

Yeah, I'd say that, for the most part, the DevKit sales are to North America. We do have our distribution network that is stocking and selling them in Asia and in Europe, but for the most part, the uptake has been domestically here in the U.S. As far as end customers that it goes to – Without saying specific names, there are dev kits, lots of them, in fact, going into very large compute-oriented customer, spreading around there for different projects. That will hopefully be a revenue driver for us for next year, but not totally dependent on that. One of the points I tried to make in the beginning was that this new strategy is really about diversifying where we take the products in terms of marketing customers, and I think this is a good example of hitting that. It's, in fact, getting into many different IoT projects, customers, industrial customers, and consumer customers.

Okay. That's helpful, Collin. Thanks, Brian. Thanks, Steve.

Thanks, AJ.

Thank you, Steve.

As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. One moment, please, while we poll for more questions. Your next question comes from the line of Martin Yang with Oppenheimer. Please proceed with your question.

Hi, Brian. Hi, Sue. Good afternoon. My first question is about the report on country capacity constraints in the semi-supply chain. So are you affected by the capacity constraints in the third quarter? And do you foresee yourself getting seeing the constraints in the next six months?

That's a good question. So the only capacity constraints we really saw on the supply chain side was earlier in the year when COVID first hit and places were getting shut down, Morten. We got through that. And I think fortunately we do try to have a buffer stock, both in terms of wafers and packaged goods. And we're using that now. I don't foresee the need – to do anything different in that area. And we are looking with matching our lead times we set with our customers with the lead times from the fabs and the assembly houses. So I don't foresee an issue. And I think part of that is because we have really good relationships with the supply chain. The part is that we pretty carefully manage to make sure that we do have wafer inventory on hand. Where we have had to start new wafers, we haven't had any issues. So perhaps the ones that are constrained are on process nodes that we're not on.

Got it. And so to follow up on that, can you maybe remind us the typical lead time for your mature and new products?

Excuse me. So the lead time that we give customers is typically in the eight-week range. Sometimes if we have forecasts from customers that go out further and we decide to do a buffer stock, we can take that in to a lesser number. Excuse me. But typically it's about eight weeks.

Got it. Last question for me. So looking at our 4Q guidance, can you maybe walk us through the bigger drivers that will help us to reach the higher end or things that could, you know, push us towards lowering the range?

Sure. So for context, at this point in time, we have more shipped and booked orders for this quarter than we did all of last quarter. So that's just the frame to view this through, okay? On top of that, now, how do we get to the guidance? So Mature is a big driver this quarter, obviously, with Millero. They typically have larger orders, and we see, for the most part, those are laying in nicely. We do see the EOS S3 for the smartphone. As I mentioned earlier, we're seeing shipping into more smartphones in this quarter, and so that's a driver for that. So we need to keep that going in this quarter. And then also this quarter, we start to see a little bit higher pop in terms of the sensible SaaS software, as well as revenue associated with the IP EFPGA initiative coming into play. Not quite to the point where we'd have to start breaking it up separately, but enough that it is meaningfully contributing to that midpoint. Outside of those main drivers, there's just the ongoing business that we have at smaller levels, but I think I captured the big ones there for you.

Got it. Thank you so much.

You're welcome. Your next question comes from the line of Richard Shannon with Craig Hallam. Please proceed with your question.

Well, hi, Brian and Sue. Thanks for taking my questions as well. Maybe a couple follow-ups on some of the prior questions here. Maybe let's delve into the phone customer here and the new wins here. Any sense of, you know, aggregate volumes from these wins versus the ones you've been in? And how does this help you think about, you know, forecast out in the future? Do you see this going more than a couple quarters, or can this fill up most of next year?

First of all, I'll answer your last one first. We see this going well through next year. We're getting visibility now into their phone roadmap for next year and the phone models we would intercept with our devices, so. I'm feeling really good about next year being larger in terms of revenue than this year was with that same customer force, especially as the attach rate starts to go up. As far as the individual phone volumes, I think this customer is looking at, you know, both how can they do fairly good volume phones for the Japanese market, and then how can they also address niches as well. So the more niche phones are going to be like 100,000 units probably each The bigger volume ones are closer to a million. So in aggregate, how do you, you know, weight that average? Probably it's several hundred thousand units of phone, I would guess, in that area, if you average everything out.

Okay, that is helpful. Let's see here. In the fourth quarter, you're looking for a big step on mature product here, and it sounds like you're calling out Millero. How do we think about that revenue stream as you go past this quarter? How sustainable is it? Obviously, Millero, as you see with QuickLogic and other companies, can be lumpy. So how do we think about sustainability of revenues at this level?

So I think we're no different than other companies in the sense that there is lumpiness in the orders. One quarter it's here, the next quarter it's not. Fortunately, we have probably around five or six different military programs that we're in that are pretty sizable, and so they're not all lumpy in the same quarter, which is good. So that's why we were saying earlier, I think for next year, 2021, the mature business, which Millero is part of, is probably about flat for this year, if you look at it from an annual point of view. There probably is a little lumpiness like in Q3 of next year. Q3 is typically a soft quarter on the mature side because some of our Millero businesses in Europe, they take longer vacations. They don't buy as much product in that quarter. But outside of that, it's fairly steady. This quarter is a little bit of an anomaly because last quarter was a little lighter than we thought. And there's a little bit extra purchasing in this fiscal year because of a very specific military program they're trying to stock up on. But outside of that, it's fairly normal for us. Okay.

That's helpful for perspective. Thanks, Brian. One of the earlier questions regarding Cork, you said you had several million dollars worth of business that you have good line of sight on. Can you help us understand what you mean by good line of sight? Do you have good understanding of product development and introduction cycles and other things that helps you make that comment? Can you give us a little more color there, please?

Yeah, without giving away too much, the line of sight I was referring to is we're in the process of – negotiating different contracts that show that there's that value there to be had, both in terms of the IP software side as well as the device side. So we're going through that, but we're engaged deeply with those people, and we're at the contract level, and that's why I said that I see a line of sight. Okay.

That's fair enough. Maybe one last question for me, Brian, on Sensible. You said you're seeing a higher pop from Sentinel in this quarter. Again, does that sustain? And maybe if you can help characterize kind of the underlying, you know, level of SaaS licenses you have and your thoughts on how you grow that, how fast it can grow.

Yeah, I think in our investor deck we talk about dozens of users that's continuing to grow. We have some initiatives that we actually are, I think, going to supercharge that growth pretty soon here. that we're launching with partners, one of which being STMicro, a couple other ones that we haven't talked about yet that I think are going to give access to a really broad set of users in a very short period of time. So we're hopeful that those will transition first into the lower cost tier, which is only a few hundred dollars a quarter. But that is a fairly limited functionality version of the tool. As they get accustomed to it, we plan to upsell them into the higher capability version of the SaaS. So the ones that are on the spouse already, they're continuing to use it. We're in the midst of negotiating a few larger deals right now for this quarter, and in use cases like consumer wearables, where they're looking at creating different types of gestures or contextual classifiers to IoT and more of a predictive maintenance type application. So I think that those are going to continue well into next year, and I am hopeful that we're actually going to start increasing the slope of the on-ramping to higher cost tiers because of these initiatives with partners. And I also can't understate the importance that we have now where we have the integrated workflow with Google's TensorFlow Lite. Google's TensorFlow Lite is a very well-used in the data science community tool for creating neural nets. And the fact that we can now plug into that flow I think gives us access to a host of people that we didn't have access to before from a customer point of view. And so we're going to be benefiting from that shortly, just in terms of onboarding with the staff. So a lot of groundwork was laid, actually, in Q3 for Sensible that I think is going to bear some fruit starting in this quarter, but really accelerating from Q1 as we get these initiatives out more broadly.

Okay. That's helpful. One last question for me, probably for Sue here on the break-even last quarter. I think you called out break-even roughly $5 million to $6 million per quarter. I haven't heard anything that would tell me different, but I just want to confirm with you that you still view that as an appropriate break-even level per quarter.

Yeah. Hi, Richard. Thanks for the question. A break-even point, that's a lowered to mid-$5 million revenue from before 6 to 8. So it can be even lower. then $5 million can be even lower to $4.5 million if we have our gross margin increase to mid-60s level with more of the IP license revenue and the SAS revenue come in that carries very high margin. With our OPEX at a level close to $3 million per quarter, easily we could even achieve a break even at $4.5 million. revenue level.

Okay. I think that is all from me, guys. Thank you very much.

Great. Thank you.

Your next question comes from the line of Rick Neaton with Rivershore. Please proceed with your question.

Thanks. Hi, Brian, and hi, Sue. With your Samsung collaboration How were the costs paid in this? You once announced an EFPGA license with another foundry, SMIC, and they paid you some fees. So I'm wondering how the cost of this collaboration was covered. Did you cover it? Did they cover it? Was it joint?

We covered it, Rick, which is all part of the OPEX that we've been reporting. for the better part of the year. That's on the silicon side. The other key element of our FPGA initiative, the FPGA cork, all of that is the open source software tools. And I want to emphasize this point here for everybody. By us moving into the open source software domain, we are leveraging a lot of the R&D that we have because we're using a lot of the product of other folks' R&D to create these open source software tools. We're simply adapting them and then including our proprietary mix into that so that they can target our tools. So because we did that, we were actually able to do this whole development at a much lower optics than had we had to do everything from a proprietary point of view ourself. But the short answer to your question is we did the silicon porting cost by ourself. We did not do that with Samsung. Like, they didn't show the cost, if that's the question.

Right. And any licenses that you would sell off of this collaboration, would that be direct with their customers?

Yes, it would be directly with the customers. So basically we had this big launch last week at their developer conference, and so we got in touch with certain folks there inbound just by attending. We've had other folks that have been interested since we did the press release. We would do direct license deals with them, with those customers. the wafers would run in Samsung Foundry, and then we would get royalties directly from the customers as well, which is a typical operating model of these foundries. If you're not a standard cell IP provider, which is somebody like a Cadence or a Synopsys, typically this is the type of arrangement you have with IP providers and foundries.

Okay. With a plus or minus 15% on your Q4 guidance, That works out to around a $400,000 opportunity there. Where's that opportunity located to get to 3.1?

To get to 3.1? Well, like I said earlier when one of the other guys was asking about the Cork initiatives into next year, There's other things that we're talking about that could hit in this quarter as well for that, that I've not baked into the midpoint. But that could certainly get us to the high end if it does come in.

During your last conference call, you spoke about the possibility of an EFPGA or an Arctic Pro 3 license in the fourth quarter of this year. Is that what you were talking about as something in Q1 or Q2 of next year?

Yeah, the one large one I'm thinking about would be in the first half of next year at some point.

The hearable kit that you're submitting to AVS for approval for use of AVS services, is that being submitted in QuickLogic's name or under one of your customers?

It's a dev kit, so it's under our name, because ultimately we would be the one that is associated with it on the Amazon webpage. And just for clarity, it has been submitted, past tense. It was submitted yesterday into their labs in Shenzhen for certification testing.

Okay. In the past, you had been talking about a customer submitting a design or a kit, a dev kit, so this is – A change in that? Could something else be submitted using the S3?

It's not a change. It's just part of the story, Rick. So we do have another customer that is awaiting for that to finish before they can make sure that that software they use is good enough for them to put their own product in. It's the difference between an ODM dev kit and an OEM, like a semiconductor company's dev kit. And in the past I've talked about both, and that's still the plan, but we'll be the first to go through the gauntlet of the testing.

You said you had good line of sight into some of your customers even for next year. How does that line of sight look for the first half of next year?

Well, better than the second half, obviously, because it's near a term. Right.

So most of the opportunities you're talking about converting, are they first half opportunities? Yes.

Yes, and that is my focus, actually, first half. I want to start the year strong.

Okay. Do you have any bookings right now for first quarter shipments?

We do have bookings already, yes, both for mature and for smartphone customer.

And are they above what your third quarter bookings were?

I don't think I'm going to go that far on the call, Rick, but I'm talking bookings.

Okay. One last question. How is your sensible conversion rate going at present? Earlier in the year, you spoke about a number of opportunities where licenses were shipped at smaller trial fees, and you were hopeful of converting a number of those into full-service license arrangements. Is that what you're talking about in Q4?

Some of those are converting the existing funnel over to the higher tier SaaS. Some of those are pretty material in nature to the enterprise SaaS level. I'm not satisfied yet with our conversion rate, and I think that we can and will do better. And we've gone through a pretty deep analysis on what we can do actually to start improving that, and we're in the process of implementing that now, in fact. So some of the new marketing initiatives you'll undoubtedly see come out from us later this quarter will be towards contributing to that. So it's going okay, but I think we can and will do better.

Okay.

Thanks a lot, Brian.

I appreciate it.

Thank you, Rick, as always.

Ladies and gentlemen, we have reached the end of the question and answer session, and I would like to turn the call back to Mr. Brian Faith for closing remarks.

Yeah, so I'd like to thank everybody for joining us on the call today. Our next call, I believe, is scheduled for February, and we'll be putting releases out on the exact time. Again, thank you for your support, and talk to you later. Thank you. Bye-bye.

This concludes today's conference. We may disconnect the lines at this time. Thank you for your participation.