QuickLogic Corporation — Q2 2012 Form 10-Q
Business and period: QuickLogic develops low-power programmable semiconductor products, including customer-specific standard products (CSSPs) and FPGAs. This unaudited filing covers the three and six months ended July 1, 2012; comparatives are the periods ended July 3, 2011.
Financial results
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Revenue | $4.1 million | $5.7 million | $8.2 million | $11.3 million |
| Gross profit / margin | $2.0 million / 50.2% | $3.8 million / 65.7% | $3.8 million / 46.4% | $7.4 million / 65.4% |
| Operating expenses | $5.2 million | $5.9 million | $10.7 million | $10.3 million |
| Operating loss | $3.2 million | $2.1 million | $6.9 million | $2.9 million |
| Net loss | $3.2 million | $2.1 million | $7.0 million | $2.9 million |
| Loss per share, diluted | $0.08 | $0.05 | $0.18 | $0.07 |
| Operating cash flow | Not separately stated for the quarter | $(5.1) million | $(1.5) million |
Q2 revenue fell 29% year over year; first-half revenue declined 27%. New-product revenue rose 44% in Q2 to $1.7 million, led by ArcticLink II VX shipments to a smartphone customer and PolarPro II shipments to a broadband data-card customer. Mature-product revenue fell 48% to $2.4 million, principally due to weak aerospace, test and instrumentation bookings. New products represented 42% of Q2 revenue, compared with 21% a year earlier.
Gross margin deterioration reflected lower mature-product revenue, higher inventory reserves and unabsorbed overhead. First-half inventory write-downs were $428,000 versus $176,000 in the prior-year period. R&D fell 26% in Q2, mainly due to lower third-party design and purchased-IP costs; SG&A rose 8%, principally on compensation and stock-based compensation.
Liquidity, debt and capital
At July 1, 2012, cash and cash equivalents were $26.9 million, versus $20.2 million at January 1. Current assets were $32.5 million and current liabilities $3.9 million. Total liabilities were $4.5 million; stockholders’ equity was $30.9 million. Cash increased by $6.7 million in the first half, despite $5.1 million of operating cash use and $265,000 of capital expenditures, primarily because financing generated $12.0 million.
QuickLogic had $756,000 in capital lease obligations and no borrowings on its $6.0 million revolving credit line, available through June 28, 2013 subject to covenants. The company reported covenant compliance. In June it issued 5.122 million common shares and warrants for up to 2.305 million shares at $2.50 per unit, raising net proceeds of $11.9 million; warrants are exercisable at $2.98 per share for five years. Management said existing cash resources were expected to fund operations, capital purchases and working capital for at least the next 12 months.
Outlook, risks and notable items
- No specific revenue or earnings guidance was provided. Management said growth depends on converting design opportunities and increasing sales of CSSPs and other new products; it expects mature-product revenue to continue declining over time.
- Management cautioned that large-volume opportunities may bring lower gross margins because of price competition and customer negotiating leverage. CSSPs generally carry lower margins than FPGA products.
- Key risks include revenue cyclicality and product life cycles, customer and distributor concentration, inventory obsolescence, dependence on limited-source foundries and suppliers, and the ability to secure manufacturing capacity. Three distributors represented 60% of Q2 revenue; several customers and distributors also exceeded 10% individually.
- Wafer purchase commitments were $487,000 and other purchase obligations were approximately $1.6 million, primarily due within 12 months. General-course legal matters include intellectual-property and collection disputes; the filing does not quantify a specific probable loss.
- On July 16, 2012, QuickLogic extended its Sunnyvale facility lease through December 31, 2015, with stated monthly base rent of $57,542 in 2013, $59,246 in 2014 and $60,952 in 2015.
- Foreign-exchange movements affected net other expense; the company does not hedge foreign-currency exposure. U.S. deferred tax assets were subject to a full valuation allowance, reflecting uncertainty about future utilization of tax loss carryforwards.
Investor verification points
- Whether new-product and CSSP growth can offset the continuing decline in mature-product revenue, and whether design wins convert into sustained shipments.
- Drivers of the sharp gross-margin decline, including inventory reserves, overhead absorption and product mix.
- Operating cash burn and the adequacy of liquidity beyond management’s 12-month estimate, particularly given purchase commitments and planned capital expenditures.
- Potential dilution from the June share issuance, warrants and employee equity awards.
- Customer, distributor and supplier concentration, and any developments in litigation or contingencies that could materially affect results.