QuickLogic Corporation — Q2 2015 Form 10-Q
Business context and period: QuickLogic designs and markets low-power programmable semiconductor solutions, including customer-specific standard products (CSSPs), sensor hubs, display and connectivity products, and FPGAs. This unaudited report covers the quarter and six months ended June 28, 2015; comparisons are with the periods ended June 29, 2014.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $4.973m | $6.836m | $11.132m | $18.000m |
| Gross profit / margin | $2.143m / 43% | $3.016m / 44% | $5.022m / 45% | $7.074m / 39% |
| Operating loss | $4.209m | $2.888m | $7.767m | $4.936m |
| Net loss | $4.278m | $2.897m | $7.916m | $5.007m |
| Loss per share, diluted | $0.08 | $0.05 | $0.14 | $0.09 |
| Operating cash flow | Not presented by quarter | $(3.723)m | $(6.650)m |
Balance sheet at June 28, 2015: Cash and equivalents were $26.415m, down from $30.050m at year-end 2014. Current assets were $31.886m and current liabilities $5.537m. Total assets were $34.804m; total liabilities were $5.748m. Debt comprised $1.0m drawn on the revolving credit line and $258,000 in capital leases. The company reported $5.0m of available credit, subject to covenants, and was in compliance with those covenants.
Six-month investing cash outflow was $163,000 and financing cash inflow was $251,000. Cash declined by $3.635m in the first half. Gross margin improved year over year for the six-month period, while quarterly gross margin edged down.
Material changes and management commentary
- Q2 revenue fell 27% year over year; first-half revenue fell 38%. New-product revenue declined 34% in Q2 and 47% in the first half, primarily from lower ArcticLink III shipments to Samsung and weaker Eclipse II sales. Mature-product revenue also declined.
- Samsung accounted for 41% of Q2 revenue and 40% of first-half revenue. Samsung shipments represented 69% of Q2 new-product revenue. Management cited reduced demand in the Android tablet market and said display-product revenue may continue to fluctuate with that market.
- First-half gross margin rose to 45% from 39%, which management attributed primarily to product mix and lower sales into the low-cost Android tablet market. Q2 gross margin was 43%, versus 44% a year earlier.
- R&D expense rose to $3.493m in Q2 and $6.970m for the first half, driven principally by compensation and third-party design costs. Management expects R&D spending to continue increasing with new-product development. SG&A declined year over year.
- The company recorded $169,000 of restructuring expense after reducing its workforce by nine employees, or 9%, to realign around its sensor-processing strategy.
Liquidity, outlook, risks and contingencies
Management believed cash, cash equivalents and available credit would fund operations, capital expenditures and working capital for the next 12 months. It said longer-term needs depend on revenue, gross profit, product acceptance, inventory, development spending and other factors; additional debt or equity financing may be needed. The company projected approximately $300,000 of capital expenditures for the remainder of fiscal 2015. No specific revenue or earnings guidance was provided.
- Customer concentration and mobile-market cyclicality expose revenue to Samsung and Android tablet demand. Large-volume business may carry lower margins, and customer forecasts are nonbinding.
- Inventory obsolescence risk is elevated because manufacturing lead times exceed binding customer forecasts; management specifically cited ArcticLink III exposure. Wafer and finished-goods commitments were $913,000, and other purchase obligations totaled $1.873m.
- The company depends on a limited number of contract manufacturers and suppliers, often a single supplier for a device; supply disruptions, capacity constraints, quality issues or cost increases could affect results.
- A licensor dispute over alleged back royalties on ArcticLink III VX sales remained unresolved. The company disputed liability; the possible loss was estimated at $0–$250,000.
- Management maintained a full valuation allowance against U.S. deferred tax assets. Foreign-currency operating expenses were 16% of first-half operating expenses; a 10% exchange-rate fluctuation would have changed those expenses by approximately $206,000.
Important facts for investors to verify
- Whether Samsung demand and the Android tablet market stabilize, and how customer concentration affects upcoming revenue.
- Progress converting CSSP design opportunities and new products into recurring revenue, alongside the expected increase in R&D spending.
- Cash burn, available borrowing capacity, covenant compliance, and the timing or need for additional financing.
- Inventory levels, purchase commitments, and any resulting obsolescence charges or gross-margin effects.
- Resolution and financial impact, if any, of the licensor royalty dispute, as well as reliance on concentrated suppliers.