QuickLogic Corporation — Q2 2023 Form 10-Q
Reporting period: Quarter ended July 2, 2023; comparisons are with the quarter ended July 3, 2022 unless noted. Financial amounts are in U.S. dollars.
Business context
QuickLogic develops low-power semiconductor platforms, embedded software and eFPGA intellectual property for AI, voice and sensor processing, serving consumer, industrial, military, aerospace and defense markets. Its revenue includes hardware, eFPGA licensing and professional services, and SensiML software. The company reports one business segment.
Financial performance and liquidity
- Q2 revenue: $2.921 million, down 36% year over year. New-product revenue was $2.233 million, down 29%; mature-product revenue was $0.688 million, down 51%.
- Revenue mix: Q2 eFPGA IP and professional services revenue was $1.857 million, primarily professional services. Hardware revenue fell to $0.366 million from $1.464 million a year earlier.
- Profitability: Gross profit was $1.203 million and gross margin was 41%, versus $2.544 million and 56%. Operating expenses increased 8% to $3.429 million, including R&D expense of $1.505 million. Operating loss was $2.226 million; net loss was $2.269 million, or $0.17 per diluted share, versus a $0.524 million net loss, or $0.04 per share.
- First six months: Revenue was $7.054 million, down 18%; gross margin was 51%, versus 58%. Net loss was $3.497 million, compared with $1.688 million.
- Cash flow: For the first six months, operating cash use was $0.232 million, compared with $2.063 million. Investing cash use was $0.530 million; financing provided $2.126 million, mainly from the March stock offering. Cash, cash equivalents and restricted cash ended at $20.565 million.
- Balance sheet and debt: Current assets were $28.015 million and current liabilities $21.579 million. The company had $15.0 million outstanding on its revolving credit facility at 8.75%, secured by substantially all tangible and intangible assets; the facility matures December 31, 2024. Finance lease liabilities were approximately $1.0 million. The company reported compliance with loan covenants.
- Equity financing: A March registered direct offering of 450,000 shares generated approximately $2.3 million net proceeds at $5.14 per share.
Material changes and management commentary
- Q2 revenue fell from the prior year chiefly because of lower device revenue; higher eFPGA professional-services revenue partly offset the decline. Management also said new-product revenue decreased 27% sequentially, primarily due to a $0.953 million reduction in eFPGA IP revenue, partly offset by higher hardware revenue.
- For the first six months, eFPGA IP and professional-services revenue rose to $4.667 million from $3.188 million, while hardware revenue declined to $0.528 million from $3.299 million.
- Management expects losses to continue through at least fiscal 2023 while it invests in product development. It identified anticipated growth drivers including EOS S3, SensiML AI SaaS and eFPGA licensing, but provided no specific numerical revenue or earnings guidance.
- Management believes cash, operating revenue and available revolving-facility resources will fund operations and capital expenditures for the next 12 months. Longer-term liquidity depends in part on new-product sales, access to additional capital and renewal or replacement of the credit facility before its December 2024 expiration.
Risks, contingencies and unusual items
- Subsequent contract: On August 11, 2023, QuickLogic signed an approximately $15 million extension to an existing eFPGA IP and design-services contract, with deliverables extending into 2024.
- Customer concentration: Customer A represented 47% of Q2 revenue and 51% of first-half revenue. At quarter-end, Distributor A and Customer C represented 34% and 35% of accounts receivable, respectively.
- Customer note: Approximately $1.16 million of a customer receivable was converted to a promissory note; the note receivable was $1.172 million at quarter-end and is due June 28, 2024, unless prepaid. Its stated rate is 4.69% compounded monthly; the default rate is 10%.
- Commitments: Other purchase obligations totaled $2.7 million due within 12 months. Contingent commitments were estimated at $1.4 million due in FY2023 and $8.7 million from FY2024 through FY2026; delivery timing is undefined and actual amounts may differ.
- Liquidity and operating risks: Revenue depends on semiconductor-market conditions, converting design opportunities into sales, product acceptance, customer product cycles, manufacturing capacity and financing access. Management noted that shorter product life cycles may increase inventory-obsolescence risk. Most cash was held with Heritage Bank, creating concentration and access-to-funds risk.
- Cybersecurity: A January 2023 ransomware incident affected a limited number of IT systems, including systems containing employee personal information. The investigation found no impact on financial systems; the company said it did not expect a material business or financial impact and offered credit monitoring to potentially affected individuals.
- The company reported no material changes to previously disclosed risk factors, no material litigation proceedings, and no defaults upon senior securities. It maintains a full valuation allowance against U.S. and certain foreign deferred tax assets.
Important facts for investors to verify
- Whether the approximately $15 million eFPGA contract extension converts into recognized revenue on schedule and at expected margins.
- Whether hardware revenue stabilizes and eFPGA services growth can offset device declines and support improved gross margins.
- Customer A’s continued contribution and collection of the concentrated receivables, including repayment of the customer note by its June 2024 maturity.
- Cash burn, covenant compliance and the company’s ability to renew or replace the $15 million revolving facility before December 2024.
- Timing and cash impact of purchase and contingent commitments, and any further effects from the cybersecurity incident.