QuickLogic Corporation — Q3 2017 Form 10-Q
Business and period: QuickLogic is a fabless semiconductor company providing low-power programmable SoCs, embedded software and eFPGA intellectual-property licensing for mobile, wearable and IoT applications. This unaudited quarterly report covers the three and nine months ended October 1, 2017; comparisons are with periods ended October 2, 2016.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $2.972m | $2.809m | $9.168m | $8.476m |
| Gross profit / margin | $1.266m / 43% | $0.891m / 32% | $4.019m / 44% | $2.823m / 33% |
| Operating expenses | $4.721m | $5.459m | $14.495m | $17.873m |
| Operating loss | $(3.455)m | $(4.568)m | $(10.476)m | $(15.050)m |
| Net loss | $(3.550)m | $(4.623)m | $(10.722)m | $(15.290)m |
| Loss per share, diluted | $(0.04) | $(0.07) | $(0.14) | $(0.24) |
Cash flow, nine months: Operating activities used $10.831m; investing activities used $0.146m; financing activities provided $15.136m. Cash increased $4.159m to $19.029m, with financing largely reflecting the March equity offering.
Balance sheet at October 1, 2017: Cash and equivalents were $19.029m; current assets $25.021m; current liabilities $9.573m; total assets $27.521m; and stockholders’ equity $17.794m. Debt comprised $6.0m drawn on the revolving credit line and $0.274m in capital leases.
Changes and operating drivers
- Q3 revenue rose 6% year over year. New-product revenue increased 10% to $1.478m, primarily on higher PolarPro connectivity shipments; mature-product revenue was essentially flat at $1.494m.
- Nine-month revenue increased 8%. New-product revenue rose 21% to $4.881m, supported by connectivity products and newly recognized eFPGA IP license revenue; mature-product revenue fell 4% to $4.287m.
- Gross margin improved in both periods. Management attributed the improvement mainly to high-margin eFPGA IP licensing, product mix and, year to date, more efficient manufacturing-overhead absorption.
- Operating expenses declined 14% in Q3 and 19% year to date, principally reflecting strategic realignment and reduced compensation-related costs. Year-to-date R&D also fell because of lower consulting, qualification and certain fixed-asset write-off costs.
- Samsung accounted for 24% of Q3 revenue and 22% year-to-date, compared with 39% and 35% in the prior-year periods. One distributor represented 36% of Q3 revenue and 33% year to date.
Outlook, liquidity and risks
- No numeric revenue or earnings guidance is provided. Management expects losses to continue through at least fiscal 2017 while it develops products and technologies. It believes cash, the credit facility and offering proceeds will fund operations and capital expenditures for the next 12 months, but notes that this depends on execution and financing conditions.
- The $6.0m Silicon Valley Bank revolver was fully drawn at quarter-end. It was extended through September 24, 2018; the agreement permits increases at the company’s election up to $12.0m. Covenants include maintaining at least $6.0m of unrestricted cash at the bank or an affiliate and a monthly quick-assets ratio of at least 1.40:1. The company reported covenant compliance at quarter-end.
- In March 2017, QuickLogic issued 11.3m shares at $1.50 per share and received approximately $15.2m net proceeds. The accumulated deficit was approximately $250.6m; management cautions that inadequate new-product sales or inability to raise capital could harm operations and covenant compliance.
- Key business risks include customer and distributor concentration, dependence on a limited number of manufacturing suppliers, long lead times and wafer commitments, potential inventory obsolescence, competitive pricing and product acceptance. Q3 Samsung revenue was $0.706m; Samsung represented 48% of new-product revenue.
- At quarter-end, wafer and finished-goods commitments were $0.746m and other purchase commitments were $0.982m. The filing describes possible ordinary-course legal claims, including intellectual-property matters, but does not identify a specific material litigation outcome.
- U.S. deferred tax assets carry a full valuation allowance. The company expected adoption of ASC 606 in fiscal 2018 to affect the timing of eFPGA IP licensing and related-services revenue recognition, while not expecting a material overall impact.
Important facts for investors to verify
- Whether new-product and eFPGA IP growth can increase revenue enough to offset continuing losses and operating cash burn.
- Current revolver availability, covenant headroom and cash requirements, given the fully drawn $6.0m facility and $6.0m minimum-cash covenant.
- Exposure to major distributors, Samsung and single-source suppliers, and the potential effects of shipment changes or supply disruption.
- Inventory quality and the impact of product life cycles, wafer commitments and future write-downs on margins and cash flow.
- The realized revenue-recognition effects of ASC 606 for IP licensing and related services.