QuickLogic Corporation — Q2 2014 Form 10-Q
Business and period: QuickLogic develops low-power programmable semiconductor solutions, including customer-specific standard products (CSSPs) and FPGAs. This unaudited filing covers the quarter ended June 29, 2014, and the six months then ended; comparisons are with the corresponding 2013 periods unless noted.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $6.836 million | $5.126 million | $18.000 million | $8.143 million |
| Gross profit / margin | $3.016 million / 44% | $1.939 million / 38% | $7.074 million / 39% | $2.970 million / 36% |
| Operating loss | $2.888 million | $3.020 million | $4.936 million | $6.534 million |
| Net loss | $2.897 million | $3.241 million | $5.007 million | $6.825 million |
| Basic and diluted loss per share | $0.05 | $0.07 | $0.09 | $0.15 |
- Q2 revenue rose 33% year over year but fell 39% sequentially. New-product revenue was $4.482 million, up 45% year over year and down 50% sequentially; mature-product revenue was $2.354 million, up 16% year over year.
- Six-month revenue increased 121%, driven chiefly by ArcticLink III VX shipments to Samsung. New products supplied $13.398 million, or 74%, of six-month revenue.
- Q2 gross margin improved year over year, partly from favorable purchase-price adjustments and sales of previously reserved inventory, offset in part by higher royalties. Q2 operating expenses increased 19% to $5.904 million, including higher R&D spending; R&D was $3.056 million, up 66%.
- Cash used in operations was $6.650 million for the first six months, versus $5.275 million in 2013. Investing used $0.520 million; financing provided $4.094 million, including $4.208 million from employee share issuance. Cash declined $3.076 million to $34.330 million.
Financial position and liquidity
- At June 29, 2014, total assets were $48.307 million, total liabilities $6.169 million, and stockholders’ equity $42.138 million. Current assets were $44.986 million and current liabilities $5.960 million.
- Debt comprised $1.000 million drawn on the revolving credit line and $0.435 million in capital leases. The company reported covenant compliance at quarter-end.
- Cash and cash equivalents were $34.330 million, with $5.0 million of additional available credit reported under the then-existing facility. A June 30 agreement extended the credit line through June 27, 2016, with committed advances up to $6 million and an option to increase to $10 million, subject to covenants.
- Inventory rose to $7.651 million from $4.136 million at fiscal year-end, primarily due to finished goods. Management cited inventory build in anticipation of potential future revenue.
Outlook, risks, and unusual items
- Management believed available cash and credit would fund operations and capital expenditures for at least the next 12 months. It projected approximately $0.880 million of capital expenditures for the remainder of fiscal 2014.
- Management expected Display & Visual Enhancement new-product revenue to continue declining due to reduced demand in the Android tablet market. R&D spending was expected to increase with planned engineering hires. No numerical revenue or earnings guidance was provided.
- Customer concentration is substantial: Samsung accounted for 40% of Q2 total revenue according to MD&A and 60% of Q2 new-product revenue; for the first six months, MD&A attributes 59% of total revenue to Samsung. The company warned that reduced Samsung orders could hurt revenue, profitability, and inventory levels.
- Other risks include semiconductor-market cyclicality, price pressure and potentially lower margins on high-volume business, inventory obsolescence, reliance on a limited number of suppliers, and foreign-exchange exposure. A 10% currency move was estimated to change first-half operating expenses by about $231,000.
- Wafer and finished-goods purchase commitments were $0.202 million at quarter-end, down from $10.8 million at December 29, 2013; other purchase obligations were $0.960 million. The filing also reports $3.712 million of future operating lease commitments.
- On July 25, 2014, the company entered a three-year software license agreement requiring annual payments of about $233,333, totaling $0.700 million. No material litigation outcome or quantified legal contingency was disclosed.
Most important facts to verify
- Reconcile the Samsung concentration disclosure: the financial-statement note states 59% of Q2 revenue and 40% of six-month revenue, while MD&A states 40% and 59%, respectively.
- Assess the outlook and inventory implications of weaker Android tablet demand and the expected decline in display-solution revenue.
- Review the inventory build, remaining wafer commitments, and the risk that supplier lead times or lower customer orders could result in excess or obsolete stock.
- Confirm liquidity assumptions against continuing operating cash use, planned capital spending, credit-line covenants, and the terms of the renewed bank facility.
- Evaluate whether rising R&D and other operating costs can be supported by future revenue and gross profit, particularly given customer concentration and pricing pressure.