QuickLogic Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 30, 2014; comparisons are to the three months ended March 31, 2013. QuickLogic develops low-power programmable semiconductor solutions, including customer-specific standard products (CSSPs) and FPGAs. The interim financial statements are unaudited.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $11.164 million | $3.017 million |
| Gross profit / margin | $4.058 million / 36% | $1.031 million / 34% |
| Operating expenses | $6.106 million | $4.545 million |
| Operating loss | $2.048 million | $3.514 million |
| Net loss | $2.110 million; $0.04 per share | $3.584 million; $0.08 per share |
| Operating cash flow | -$2.845 million | -$2.829 million |
New-product revenue was $8.916 million, versus $0.941 million; mature-product revenue was $2.248 million, versus $2.076 million. Gross margin improved by 2 percentage points, which management attributed mainly to higher revenue and manufacturing efficiency, partly offset by higher royalties and a $64,000 inventory write-down. Research and development expense rose 32% to $2.641 million; selling, general and administrative expense rose 37% to $3.465 million, with stock-based compensation among the cited drivers.
Cash and cash equivalents were $37.112 million at March 30, 2014, compared with $37.406 million at December 29, 2013. Current assets were $46.587 million and current liabilities $6.338 million. The company had $1.0 million drawn on its $6.0 million revolving credit facility, leaving $5.0 million available; the facility was scheduled to expire June 27, 2014. Total capital lease obligations were $309,000. The company reported compliance with the facility’s financial covenants.
Investing cash outflow was $10,000 and financing cash inflow was $2.561 million, primarily from employee stock-plan share issuance. Inventory increased to $5.224 million from $4.136 million. Total liabilities were $6.553 million, versus $8.528 million at year-end.
Material changes and business drivers
- Revenue increased 270% year over year, primarily due to shipments of ArcticLink III to Samsung. New products made up 80% of revenue, compared with 31% a year earlier.
- Samsung represented 70% of total revenue and 88% of new-product revenue. South Korea accounted for $7.799 million of revenue.
- Operating loss and net loss narrowed despite higher operating expenses, reflecting the substantially higher revenue and gross profit.
- Management said mature-product revenue is expected to decline over time and placed greater emphasis on developing and marketing Catalog CSSPs, including a context-aware, ultra-low-power sensor hub announced in early 2014.
Outlook, risks and unusual items
- Management provided no specific revenue or earnings forecast. It expected cash, available credit and other financial resources to fund operations and capital expenditures for the next 12 months. Capital expenditures were projected at approximately $2.1 million for the remainder of fiscal 2014.
- Key risks include dependence on Samsung, mobile-market cyclicality, pricing pressure and the possibility that customer forecasts will not become binding orders. Large-volume CSSP opportunities may increase revenue while pressuring margins.
- Wafer and finished-goods purchase commitments were $5.808 million; other purchase commitments were $830,000. Supplier lead times and reliance on limited or single-source manufacturers could lead to inventory shortfalls, excess inventory, delays or higher costs. Total contractual obligations and commercial commitments were $11.883 million.
- QuickLogic recorded an out-of-period adjustment increasing compensation expense by $281,000 and cost of sales by $105,000, relating to fiscal Q4 2013; management concluded it was not material to previously reported statements. The filing also describes inventory-obsolescence exposure and ordinary-course litigation risks, including potential costs or adverse outcomes.
- Foreign-currency operating expenses were approximately 21% of operating expenses; the company did not hedge this exposure. Management estimated that a 10% exchange-rate fluctuation would have changed Q1 operating expenses by approximately $126,000.
Important facts for investors to verify
- Whether Samsung orders and future design wins sustain the elevated new-product revenue, given the 70% customer concentration.
- Whether the revolving credit facility was renewed or replaced before its June 27, 2014 expiration.
- How wafer commitments, inventory growth and nonbinding customer forecasts affect cash use, obsolescence and gross margins.
- Whether CSSP growth can support improved margins and eventual profitability while operating expenses remain elevated.
- The treatment and period attribution of the $386,000 out-of-period adjustment, and any updates to litigation or tax contingencies.