QuickLogic Corporation (NASDAQ: QUIK) — Q3 2019 Form 10-Q
Reporting period: Third quarter ended September 29, 2019; comparisons are with the quarter ended September 30, 2018 unless noted. QuickLogic develops low-power semiconductor platforms, eFPGA intellectual property and software for sensor, voice and AI processing. Its SensiML subsidiary, acquired in January 2019, provides machine-learning software tools.
Financial results
| Metric | Q3 2019 | Q3 2018 | Change |
|---|---|---|---|
| Revenue | $2.16 million | $3.51 million | Down 39% |
| Gross profit / margin | $1.04 million / 48% | $1.74 million / 50% | Margin down about 2 percentage points |
| Operating expenses | $5.23 million | $4.97 million | Up 5% |
| Operating loss | $(4.19) million | $(3.23) million | Loss widened |
| Net loss / diluted loss per share | $(4.27) million / $(0.04) | $(3.26) million / $(0.03) | Loss widened |
For the first nine months of 2019, revenue was $7.44 million, down 21%; gross profit was $4.04 million, with a 54% margin versus 50%; operating loss was $12.44 million versus $10.54 million; and net loss was $12.38 million versus $10.71 million. Nine-month diluted loss per share was $(0.12) in both periods.
- Revenue mix: Q3 new-product revenue was $1.02 million, down 33%; mature-product revenue was $1.14 million, down 42%. Management attributed declines to lower display-bridge shipments and reduced mature-product shipments to military and aviation sectors. Nine-month new-product revenue declined 45%, while mature-product revenue was approximately flat.
- Expenses: Q3 research and development rose 28% to $3.14 million, primarily due to SensiML-related expansion. Selling, general and administrative expense fell 17% to $2.10 million.
- Cash flow: Nine-month operating cash use was $8.75 million, compared with $8.83 million in 2018. Investing cash use was $0.58 million; financing provided $7.69 million. Cash, cash equivalents and restricted cash decreased $1.64 million to $24.82 million.
- Liquidity and debt: At quarter-end, cash and cash equivalents were $24.72 million, restricted cash $0.10 million, and the $15.0 million revolving facility was fully drawn. The company reported compliance with loan covenants and a requirement to maintain at least $3.0 million of unrestricted cash at Heritage Bank. Total liabilities were $19.56 million; stockholders’ equity was $16.24 million. Operating and finance lease liabilities totaled $2.09 million.
Material changes and notable items
- QuickLogic acquired SensiML on January 3, 2019 in exchange for company shares. SensiML revenue was not significant in the nine-month period; its operating expenses were $2.1 million for the period and $0.73 million in Q3. Acquired intangible assets were $1.05 million net, and goodwill was $0.28 million; purchase-price allocation remained preliminary.
- A June 2019 public offering of 18.4 million shares at $0.50 per share generated approximately $8.0 million net. Shares outstanding increased to 116.56 million at September 29, from 95.51 million at December 30, 2018.
- After quarter-end, QuickLogic repaid $9.0 million of its revolving debt on October 1; the repaid amount became available to draw again. On November 6, the company amended the facility to extend maturity through September 28, 2021, with interest at the greater of 0.5 percentage point above prime or 5.5%.
- Adoption of lease accounting resulted in $2.17 million of right-of-use assets and $2.09 million of lease liabilities at quarter-end.
Outlook, risks and contingencies
The company provided no specific revenue or earnings guidance. Management said existing cash, anticipated sales and the revolving facility should fund operations and capital expenditures for the next 12 months. Longer-term funding depends on sales growth, continued access to financing and/or raising additional capital; management cautioned that it cannot assure capital will be available on acceptable terms. It expects growth to depend chiefly on silicon solutions, eFPGA IP and SensiML software, while continuing investment in product development.
- Revenue and liquidity are exposed to semiconductor cyclicality, product transitions and end-of-life, customer acceptance, design wins converting to revenue, inventory exposure and the timing and cost of manufacturing capacity.
- Customer and channel concentration is notable: Distributor A accounted for 55% of Q3 revenue and 42% of accounts receivable at quarter-end. China sales and potential U.S.-China tariffs are identified as risks.
- The company relies on a limited number of contract manufacturers and suppliers; supply allocation, delays, quality issues or supplier disruption could affect sales and costs. Wafer and finished-goods commitments were $74,000, with another $795,000 of purchase obligations for other goods and services.
- Management cited risks around strategic collaborations, including the possibility that expected benefits do not materialize, development is delayed, or products fail commercially. The company reported no litigation as of quarter-end.
- The company maintained a full valuation allowance against U.S. and certain foreign deferred tax assets. Tax years from 1999 onward remain effectively open to examination due to tax carryforwards.
Key facts for investors to verify
- Whether new-product revenue and design opportunities convert into sustained growth, and whether revenue can recover from the Q3 decline.
- Cash burn, available liquidity, covenant compliance and the effect of the October debt repayment and November facility amendment.
- How dilution from the 2019 offering and stock-based compensation affects per-share performance.
- Whether SensiML, eFPGA licensing and other new offerings generate material revenue and justify ongoing development costs.
- Exposure to major distributors and customers, China-related demand and tariffs, and reliance on limited-source suppliers.