QUIK

QuickLogic Corp. 10-Q Summary: Period Ended July 1, 2007

Business Context and Reporting Period

This filing is a Quarterly Report on Form 10-Q for QuickLogic Corporation, a fabless semiconductor company specializing in low-power programmable solutions (CSSPs, ESPs, and FPGAs). The report covers the three and six-month periods ended July 1, 2007. The company operates in a single industry segment and relies on third-party manufacturers, primarily Tower Semiconductor Ltd., for fabrication.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Revenue decreased 9.1% year-over-year for the quarter and 21.2% for the six-month period. This was driven by a significant drop in new product revenue (down $1.1M for the quarter) due to the end-of-life cycle of a major customer's product, and lower demand for mature products.
• Gross Margin Compression: Gross margin for the six months ended July 1, 2007, dropped to 36.0% from 57.0% in the prior year. This was primarily caused by a $3.2 million inventory write-down (compared to $470,000 in the prior year) related to excess quantities and changes in forecasted product mix.
• Increased Losses: Net loss widened significantly to $8.0 million for the six-month period compared to $2.9 million in the prior year, reflecting the revenue decline and inventory charges.
• Sequential Improvement: Despite year-over-year declines, revenue increased 34.7% sequentially from the first quarter of 2007, driven by end-of-life buy orders for V3 products and increased demand for mature products.

Outlook, Risks, and Management Commentary

• Liquidity: Management anticipates existing cash resources ($19.8 million) and available credit ($7.5 million total) will fund operations for the next twelve months. However, the company has an accumulated deficit of $135.5 million and expects capital expenditures of up to $5.5 million in the coming year.
• Product Strategy: Future growth is dependent on the commercial success of new products (ArcticLink, PolarPro, Eclipse II, QuickPCI II) targeting the mobile and consumer markets. Management notes these new products currently generate lower gross margins than historical products.
• End-of-Life Programs: The company announced end-of-life for pASIC 1, pASIC 2, and V3 products due to supplier capacity constraints. Revenue from these products is expected to contribute less than 5% of quarterly revenue after 2007.
• Risks: Key risks include dependence on single suppliers (Tower Semiconductor), inability to accurately forecast demand leading to inventory write-downs, and the need to generate significantly higher revenue to achieve positive cash flow.
• Legal Proceedings: A securities class action regarding the IPO was terminated in June 2007, though plaintiffs may file amended complaints. Shareholder derivative suits regarding stock options were dismissed without prejudice in August 2007.

Investor Verification Checklist

• Inventory Valuation: Verify the rationale and magnitude of the $3.2 million inventory write-down and assess the risk of future write-downs given the shift to mobile markets with shorter product life cycles.
• Supplier Concentration: Confirm the status of the relationship with Tower Semiconductor Ltd., the sole manufacturer for new products, and the impact of the $3.5 million wafer purchase commitment.
• New Product Traction: Monitor revenue contribution from ArcticLink and PolarPro to determine if they can offset the decline in end-of-life and mature product revenue.
• Cash Burn Rate: Track operating cash flow usage against the $19.8 million cash balance to assess the runway before additional capital raising may be required.
• Customer Concentration: Review the impact of the loss of the single customer that drove $1.7 million in new product revenue in the prior year quarter.