GSI Technology, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2023 (fiscal 2024 second quarter); filed November 8, 2023. Financial statements are unaudited. Amounts below are in U.S. dollars.
Business context
GSI designs, develops and sells integrated circuits. Very Fast SRAM products remain its principal revenue source; the company is also developing in-place associative computing products, including its APU line for AI and high-performance computing applications. The filing reports that SRAM represented approximately 98% of revenue for the six months ended September 30, 2023. Nokia was the largest customer, accounting for 20% of quarterly and 27% of six-month revenue.
Financial performance
| Metric | Three months ended September 30, 2023 | Three months ended September 30, 2022 | Six months ended September 30, 2023 | Six months ended September 30, 2022 |
|---|---|---|---|---|
| Revenue | $5.71 million | $8.95 million | $11.30 million | $17.86 million |
| Gross profit | $3.12 million | $5.60 million | $6.19 million | $10.97 million |
| Gross margin | 54.7% | 62.6% | 54.8% | 61.4% |
| Operating loss | $(4.09) million | $(3.21) million | $(9.23) million | $(7.15) million |
| Net loss | $(4.06) million | $(3.23) million | $(9.17) million | $(7.20) million |
| Basic and diluted loss per share | $(0.16) | $(0.13) | $(0.37) | $(0.29) |
Quarterly revenue declined 36.2% year over year; six-month revenue declined 36.8%. Management attributed the weakness to the economic environment and customer purchases made earlier to buffer supply constraints. Units shipped fell 47.2% for the quarter and 51.4% for the six-month period, while average selling prices rose 22.0% and 30.8%, respectively, primarily due to product mix. Gross margin declined mainly because of product and customer mix, including higher-margin radiation-hardened SRAM shipments in the prior-year periods.
Quarterly R&D expense fell 26.6% to $4.69 million, while six-month R&D fell 24.0% to $9.90 million, reflecting prior cost reductions; the 2023 periods also included a $260,000 reduction to R&D expense from government-award funding. SG&A rose 4.6% for the quarter and 8.4% for six months, with professional fees and consulting increases among the offsets to lower payroll and sales commissions.
Cash flow, liquidity and capital
- At September 30, 2023, cash and cash equivalents were $24.67 million and short-term investments were $0.65 million, totaling $25.3 million, versus $30.6 million at March 31, 2023. Management stated that the company had no debt.
- For the six months, operating cash use was $6.30 million, compared with $8.37 million in the prior-year period. Investing activities provided $2.13 million, mainly from investment maturities, and financing activities provided $1.63 million, including employee stock-plan proceeds and net ATM proceeds. Cash decreased by $2.54 million to $24.67 million.
- Total liabilities were $7.74 million, including $0.99 million of operating lease liabilities and $0.73 million of contingent consideration. No borrowings are reported.
- Management believes existing cash, cash equivalents and short-term investments, together with expected operating cash flows, are sufficient for working capital and capital spending for at least 12 months. The company also disclosed $5.1 million of purchase obligations, $4.1 million payable within 12 months.
- A sales agreement permits up to $25 million of common stock sales through an agent. In the quarter, GSI sold 133,000 shares for $542,000 before $389,000 of offering costs, or $153,000 net.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management expects economic weakness, inflation, rising interest rates, energy-price volatility and customer inventory adjustments to pressure demand and results in fiscal 2024. It also expects research and development spending to remain substantial and acknowledges possible operating losses.
- The company entered a Space Development Agency prototype agreement in June 2023 to develop an APU-2 for space-based capabilities. The award is expected to provide milestone payments totaling an estimated $1.25 million; $297,000 had been received by September 30, and $260,000 was recognized as a reduction of R&D expense during the quarter and six-month period.
- GSI’s APU software team and certain sales activities are based in Israel. The filing says the impact of the conflict that began October 7, 2023 was uncertain and that worsening conditions could disrupt operations or harm the business. Manufacturing and testing rely heavily on Taiwan-based suppliers, including single-source foundry TSMC.
- Disclosure controls and procedures were deemed ineffective as of September 30, 2023 because a material weakness in internal control over financial reporting remained unremediated. It concerns controls over forecasts used in contingent-consideration valuation and goodwill and intangible-asset impairment assessments. Management is implementing enhanced review controls; remediation is not complete.
- Management reported no goodwill impairment in the latest annual test. It cautioned that failure to achieve forecast APU revenue could result in a future non-cash impairment charge on intangible assets.
- Customer and channel concentration is material: Nokia represented 27% of six-month revenue, while distributor Avnet Logistics represented 45.4% of six-month revenue. Three customers represented 45%, 19% and 14% of accounts receivable, respectively.
Important facts for investors to verify
- Whether revenue and unit shipments stabilize after the decline associated with customer inventory adjustments, and whether Nokia and distributor demand remains concentrated.
- Progress toward APU commercialization and SDA milestones, including the expected timing and conditions for the remaining award payments.
- Cash burn relative to the $25.3 million liquidity balance, purchase commitments, and any additional use of the ATM offering.
- Whether gross margins recover amid product-mix changes, wafer and outsourced manufacturing costs, and lower prior-year radiation-hardened SRAM sales comparisons.
- Remediation and testing of the material weakness, plus any future impairment indicators for goodwill or intangible assets.
- Operational effects of the Israel conflict and continued dependence on Taiwan-based and other single-source suppliers.