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| QUIK > SEC Filings for QUIK > Form 10-K on 11-Mar-2009 | All Recent SEC Filings |
11-Mar-2009
Annual Report
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations, as well as information contained in "Risk Factors" in
Item 1A and elsewhere in this Annual Report on Form 10-K, contains
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We intend
that these forward-looking statements be subject to the safe harbors created by
those provisions. Forward-looking statements are generally written in the future
tense and/or are preceded by words such as "will," "may," "should," "forecast,"
"could," "expect," "suggest," "believe," "anticipate," "intend," "plan," or
other similar words. Forward-looking statements include statements regarding
(1) the conversion of our design opportunities into revenue, (2) our revenue
levels, including the commercial success of our Customer Specific Standard
Products, or CSSPs, and new products, and the effect of our end-of-life
products, (3) our liquidity, (4) our gross profit and breakeven revenue level
and factors that affect gross profit and the breakeven revenue level, (5) our
level of operating expenses, (6) our research and development efforts, (7) our
partners and suppliers and (8) industry trends.
The forward-looking statements contained in this Annual Report involve a number of risks and uncertainties, many of which are outside of our control. Factors that could cause actual results to differ materially from projected results include, but are not limited to, risks associated with (i) the conversion of CSSP design opportunities into revenue, (ii) the adverse affects of the current financial crisis, (iii) the commercial and technical success of our CSSPs and new products such as ArcticLink® and PolarPro®, (iv) our ability to accurately estimate quarterly revenue, (v) the liquidity required to support our future operating and capital requirements, (vi) our dependence upon single suppliers to fabricate and assemble our products, (vii) our dependence on our relationship with Tower, and (viii) our successful introduction of products and CSSPs incorporating emerging technologies or standards. Although we believe that the assumptions underlying the forward-looking statements contained in this Annual Report are reasonable, any of the assumptions could be inaccurate, and therefore there can be no assurance that such statements will be accurate. The risks, uncertainties and assumptions referred to above that could cause our results to differ materially from the results expressed or implied by such forward-looking statements include, but are not limited to, those discussed under the heading "Risk Factors" in Part I, Item 1A hereto and the risks, uncertainties and assumptions discussed from time to time in our other public filings and public announcements. All forward-looking statements included in this document are based on information available to us as of the date hereof. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements or our objectives and plans will be achieved. Furthermore, past performance in operations and share price is not necessarily indicative of future performance. We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Overview
QuickLogic Corporation was founded in 1988 and reincorporated in Delaware in 1999. We develop and market low power customizable semiconductor solutions that enable customers to add features to their mobile, prosumer, consumer and industrial products. We are a fabless semiconductor company that operates in a single industry segment where we design, market and support primarily Customer Specific Standard Products, or CSSPs, secondarily, Field Programmable Gate Arrays, or FPGAs, associated design software and programming hardware. Our CSSPs are customized from our new solution platforms including ArcticLink® II, ArcticLink, PolarPro® II, PolarPro, Eclipse™ II and QuickPCI® II (all of which fall into our new product category); our mature product family includes pASIC® 3, QuickRAM®, Eclipse, and EclipsePlus, as well as royalty revenue, programming hardware
and design software; our end-of-life product family includes pASIC 1, pASIC 2, V3, QuickMIPS, QuickPCI and QuickFC.
CSSPs are complete, customer-specific solutions that include a unique combination of our silicon solution platform, proven system blocks, or PSBs, custom logic and software drivers. All of our solution platforms are standard silicon products and must be programmed to be effective in a system. Our PSBs range from intellectual property, or IP, which improves video streams to IP which implement commonly used mobile system interfaces, such as Secure Digital Input Output, or SDIO, or Universal Serial Bus 2.0 On-The-Go, or USB 2.0 OTG, to IP that accelerates sideloading speeds in mobile devices. We provide complete solutions by first architecting the solution jointly with our customer's engineering group, selecting the appropriate solution platform and PSBs, providing custom logic, integrating the logic, programming the device and providing software drivers required for the customers' application.
CSSPs, which we pioneered and introduced in the first quarter of 2007, are developed for specific power sensitive applications that have differentiated features in terms of IP, intelligent data processing or connectivity requirements. Target customers value CSSPs for the ability to provide a range of products from a single platform and the flexibility to address specific product requirements or changes. Market leading original equipment manufacturers, or OEMs, and original design manufacturers, or ODMs, seek to develop product platforms from which several products, or SKUs, can be introduced. For example, Mobile Internet Device (MID) companies may plan to introduce products offering mobile TV, WiMAX, HSxPA, Bluetooth 2.x + EDR and USB 2.0 OTG. These customers value our ability to provide a range of CSSPs from a single platform design by incorporating different features in the programmable fabric of our solution platforms. Other customers value the flexibility of programmable fabric to address specific product requirements. By providing customized solutions for these customers we increase their ability to meet the time-to-market and time-in-market pressures associated with their markets.
Although the semiconductor industry as a whole is expected to decline in 2009 with modest growth in 2010, consumer products are a strong driver for semiconductor sales, and the needs of the consumer market have a unique set of requirements. One important trend in the consumer market is towards mobile, handheld devices. The market for mobile, handheld devices is large. In 2008, more than 1.2 billion cellular phones, ranging from multimedia to ultra low cost phones, were sold (according to iSuppli, a market intelligence company). More importantly, iSuppli predicts that the smartphone segment of the overall cellular phone segment will increase 62% over the next three years, from 219 million units in 2008 to 356 million units, by the end of 2011. In fact, the smartphone segment is predicted to be one of the higher growth segments during the current economic downturn.
Important industry trends affecting the large market for mobile devices include the use of platforms to enable rapid product proliferation, the need for high bandwidth solutions enabling mobile Internet and streaming video, miniaturization and the need to increase battery life. Another important trend is shrinking product life cycles, which drives a need for faster, lower risk product development. There is intense pressure on the total product cost of these devices, including per unit component costs and non-recurring development costs. As more people experience the advantages of a mobile lifestyle at home, they demand the same advantages in their professional lives, and while they are "on the go", or mobile. Therefore, we believe that these trends toward mobile, handheld products which have a small form factor and maximize battery life will also be evident in other segments such as industrial, medical and military.
In addition to CSSPs, we sell products to industrial, military and other customers who do their own selection and integration of IP cores and add software drivers to their application. We market FPGAs, IP cores and software drivers to these customers, who value the low power consumption, reduced development risk through the use of proven IP cores, fast time-to-market, high IP security, instant-on and reliability of our devices.
This range of offerings allows customers to acquire a solution tailored for their needs. Mobile product original equipment manufacturers, or OEMs, and original design manufacturers, or ODMs, tend to prefer a complete solution, and purchase CSSPs. Other customers in the industrial or military segments with proprietary IP requirements choose to purchase our FPGAs or ArcticLink II / ArcticLink / PolarPro II / PolarPro solution platforms and utilize our IP cores as appropriate. Whether a customer uses our CSSPs as a complete solution, or proven IP cores with our FPGAs, we believe our solutions and products enable system manufacturers to improve their time-to-market, lower total system power consumption, reduce their development risk and total cost of ownership, and add features or performance to their embedded applications.
Our CSSPs, and the rest of our product offerings, are based on our patented ViaLink® metal-to-metal programmable technology. ViaLink is the foundation of our competitive advantage in providing flexible energy efficient devices and solutions that deliver the high performance, high reliability, IP security and instant-on features that our customers value. In 1991, we introduced our first FPGA products based upon our ViaLink technology. Our ViaLink technology allows us to create devices smaller than our competitors' products on comparable technology, thereby minimizing silicon area and cost. In addition, our ViaLink technology has lower electrical resistance and capacitance than other programmable technologies and therefore supports low power consumption and higher signal speed. Our architecture uses our ViaLink technology to maximize interconnects at every routing wire intersection, which allows more paths between logic cells, and between the hard-wired logic and logic cell portions of our platforms.
We offer a range of CSSPs built on our ArcticLink II VX, ArcticLink, PolarPro II and PolarPro solution platform families. Our PolarPro programmable architecture builds on our low power Eclipse II architecture to provide lower power consumption and a cost effective platform for pure digital applications. During 2008, we introduced the latest addition to the PolarPro solution platform family, called PolarPro II. The PolarPro II solution platform augments the PolarPro family by providing a platform that increases our logic capacity for building CSSPs, and at the same time, further reduces our standby power consumption, reduces our package size, and reduces our manufacturing costs. CSSPs developed using our PolarPro II and PolarPro solution platforms implement PSBs and custom logic in programmable fabric. Based on our engineering analysis of portable, battery powered applications, we believe designers using either PolarPro II or PolarPro can extend battery life by as much as four times as compared to a standard product implementation, setting a new standard for low power consumption through the use of programmable logic.
We started shipping CSSPs based on our ArcticLink solution platform in 2007, and announced a new ArcticLink II VX solution platform in 2008. ArcticLink and ArcticLink II VX solution platforms combine mixed signal physical layers, hard-wired logic and programmable fabric on one device. Mixed signal capability supports the trend toward high-speed serial connectivity in mobile applications, where designers benefit from lower pin counts, simplified printed circuit board, or PCB, layout, simplified PCB interconnect and reduced signal noise. Adding hard-wired intellectual property enables us to deliver more logic per die area, while the programmable fabric allows us to provide CSSPs that can be rapidly customized to differentiate customer products, add features and reduce system development costs. For example, smartphone companies may plan to introduce products offering mobile TV, WiMAX, HSxPA, Bluetooth 2.x + EDR and USB 2.0 OTG. These manufacturers value our solution platforms, since the programmable fabric can be used to implement various combinations of these features into a range of their products from a single platform design.
Our CSSPs provide:
º •
º Complete Flexible Solutions-we partner with customers to bring their
differentiated products to market quickly and to adapt these products
to meet quickly changing market conditions;
º •
º Reduced Design Expense and Risk-we provide PSBs addressing a range of
video, network, storage, intelligent processing and custom logic
requirements, along with software drivers, thereby reducing the time
and cost of product development;
º •
º Low Total Cost of Ownership-CSSPs reduce time-to-market and lower the
risk and expense associated with new product development. In platform
designs these savings are leveraged over several products. The
flexible nature of CSSPs enables new features in existing designs,
which can be used to extend time-in-market and delay the cost of new
product development. In addition, CSSPs often reduce bill of
materials, or BOM, costs by combining the function of several ASSPs
into one cost effective device; a simplified BOM also leads to lower
PCB costs;
º •
º Energy Efficiency-our ViaLink technology is the lowest power
consumption full featured programmable logic technology on the market
today, allowing the time-to-market and time-in-market advantages of
programmable logic for differentiated mobile products;
º •
º Small Form Factor-we manufacture single chip solutions in packages as
small as 5x5 millimeters, wafer level, chip scale packaging, or WLCSP,
and known good die configurations; and
º •
º Platform Design Capability-we partner with customers to develop a
range of solutions from a single hardware platform, enabling these
manufacturers to bring several products to market quickly and cost
effectively through the use of our programmable fabric.
We are marketing CSSPs to OEMs and ODMs offering differentiated mobile products. Our target mobile markets include:
º •
º Cellular -including multimedia and smartphones;
º •
º Computing-including Mobile Internet Devices, or MIDs, Netbooks, Ultra
Mobile PCs, or UMPCs, industrial personal digital assistants, or PDAs,
handheld point-of-sales, or POS, terminals and broadband 3G data
cards; and
º •
º Consumer Electronics-including portable media players, or PMPs,
personal navigation devices, or PNDs, and wireless hard disk drives or
wireless storage devices;
Examples of how existing and potential customers benefit from CSSPs are:
º •
º Multimedia Phones-we have been marketing our recently announced VEE, a
PSB built upon an IP core we licensed, to enable improved user
experience when viewing video and Mobile TV, still images, and high
resolution graphics. VEE drastically improves the perceived color,
contrast and resolution with longer battery life;
º •
º Smartphones-in addition to the benefits outlined for Multimedia
Phones, we have several PSBs targeted at enabling additional, smart
connectivity such as BlueTooth 2.x EDR and USB 2.0 OTG, and more power
and cost-efficient methods of connecting application processors and
cellular baseband devices inside Smartphones;
º •
º Broadband Data Cards-our solutions provide the lowest power interface
between a cellular modem and a laptop card slot or USB connector, as
well as high performance data transfers between the laptop and the
internal memory in the data card;
º •
º Personal Navigation Devices-our solutions allow the incorporation of
the latest storage technology, managed NAND flash memory, and access
to the latest high capacity SD cards and SDIO based peripherals;
º •
º Portable Media Players-our solutions allow a processor to access and
efficiently control a micro hard disk drive, as well as enhancing the
consumers viewing experience of the multimedia content with the
VEE PSB;
º •
º Wireless Hard Disk Drives-our solutions allow for the intelligent
transfer of data, which improves the data transfer rate, virtually
eliminates the CPU cycles associated with data transfer and improves
battery life; and
º •
º Handheld POS Terminals-our solutions enable high speed connectivity to
Wi-Fi and BlueTooth chipsets, storage connectivity, as well as
aggregation of multiple Secure Access Modules (SAMs) to the
application processor.
Our new products are also being designed into applications in our traditional markets, such as data communications, instrumentation and test and military-aerospace, where customers value the low power consumption, instant-on, IP security, reliability and fast time-to-market of our products.
In addition to working directly with our customers, we partner with other technology companies to develop additional intellectual property, reference platforms and system software to provide application solutions. We partner with companies that are experts in certain technologies. For instance, we licensed elements of VEE from Apical Limited, a U.K. company that sells enhanced video image capability. We also work with mobile processor manufacturers and companies that supply storage, networking or graphics components for embedded systems. The depth of these relationships varies depending on the partner and the dynamics of the end market being targeted, but is typically a co-marketing program that includes joint account calls, promotional activities and/or engineering collaboration and developments, such as reference designs.
Critical Accounting Policies and Estimates
The methods, estimates and judgments we use in applying our most critical accounting policies have a significant impact on the results we report in our consolidated financial statements. The SEC has defined critical accounting policies as those that are most important to the portrayal of our financial condition and results of operations and require us to make our most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, our critical policies include revenue recognition including sales returns and allowances, valuation of inventories including identification of excess quantities and product obsolescence, allowance for doubtful accounts, valuation of investments, valuation of long-lived assets, measurement of stock-based compensation, accounting for income taxes, and estimating accrued liabilities. We believe that we apply judgments and estimates in a consistent manner and that such consistent application results in consolidated financial statements and accompanying notes that fairly represent all periods presented. However, any factual errors or errors in these judgments and estimates may have a material impact on our statement of operations and financial condition.
Revenue Recognition
We supply standard products which must be programmed before they can be used in an application. Our products may be programmed by us, distributors, end-customers or third parties. Once programmed, our parts cannot be erased and, therefore, programmed parts are only useful to a specific customer.
We generally recognize revenue as products are shipped if evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, collection of the resulting receivable is reasonably assured and product returns are reasonably estimable.
Revenue is recognized upon shipment of both programmed and unprogrammed parts to OEM customers, provided that legal title and risk of ownership have transferred.
We also sell to distributors under agreements that allow for price adjustments and, in the case of unprogrammed parts, certain rights of return on unsold inventories.
Because programmed parts can only be used by a specific customer, it is our practice to agree upon any price adjustments with a distributor prior to shipment. Furthermore, distributors are not allowed any future price adjustments and have no rights of return on programmed parts. We also sell certain unprogrammed end-of-life products to distributors at a fixed price, and distributors are not allowed any future price adjustments and have no rights of return on these unprogrammed end-of-life parts. Accordingly, revenue is recognized upon shipment to a distributor since title and risk of ownership have transferred to the distributor, the price is fixed, no right of return exists and collection of the resulting receivable is reasonably assured.
Unprogrammed parts shipped to distributors may be used by multiple end-customers and distributors may have certain return and price adjustment privileges on unsold inventories. Accordingly, revenue associated with unprogrammed parts, other than the end-of-life products described above, is deferred until resale to the end-customer. Deferred income on shipments to distributors reflects the amount of gross margin expected to be realized when distributors sell through these products purchased from us.
Revenue from sales to distributors represents a significant portion of our revenue. The percentage of sales derived through distributors was 50%, 57% and 52% in 2008, 2007 and 2006, respectively. Two distributors accounted for more than 10% of our revenue in 2008, 2007 and 2006. Our largest distributor accounted for 14%, 23% and 26% of our revenue in 2008, 2007 and 2006, respectively. Our second largest distributor accounted for 12%, 15% and 11% of our revenue in 2008, 2007 and 2006, respectively.
Revenue recognition depends on notification from the distributor that product has been sold to the distributor's end-customer Also reported by the distributor are product resale price, quantity and end-customer shipment information, as well as inventories on hand. Reported distributor inventories on hand are reconciled to deferred revenue balances monthly.
During the fourth quarter of 2008, we renegotiated our agreements with our distributors. Under the new agreements, post shipment price adjustments such as Ship from Stock and Debits (SSD) will be eliminated and parts held by the distributor may be returned for quality reasons only under our standard warranty policy. Revenue will be recognized upon shipment of both programmed and unprogrammed parts to distributors. During the fourth quarter of 2008, a majority of our distributors have signed the new agreements.
Software revenue from sales of design tools is recognized when persuasive evidence of an agreement exists, delivery of the software has occurred, no significant Company obligations with regard to implementation or integration remain, the fee is fixed or determinable and collection is reasonably assured. Software revenue amounted to less than one percent of the Company's revenue for fiscal years 2008, 2007 and 2006.
Valuation of Inventories
Inventories are stated at the lower of standard cost or net realizable value. Standard cost approximates actual cost on a first-in, first-out basis. We routinely evaluate quantities and values of our inventories in light of current market conditions and market trends and record reserves for quantities in excess of demand and product obsolescence. The evaluation may take into consideration historic usage, expected demand, anticipated sales price, the stage in the product life cycle of our customers' products, new product development schedules, the effect new products might have on the sale of existing products, product obsolescence, customer design activity, customer concentrations, product merchantability and other factors. Market conditions are subject to change. Actual consumption of inventories could differ from forecasted demand and this difference could have a material impact on our gross margin and inventory balances based on additional provisions for excess or obsolete inventories or a benefit from inventories previously written down.
Our semiconductor products have historically had an unusually long product life cycle and obsolescence has not been a significant factor in the valuation of inventories. However, as we pursue opportunities in the mobile market and continue to develop new products, we believe our product life cycle will be shorter and increase the potential for obsolescence. We also regularly review the cost of inventories against estimated market value and record a lower of cost or market reserve for inventories that have a cost in excess of estimated market value, which could have a material impact on our gross margin and inventory balances based on additional write-downs to net realizable value or a benefit from inventories previously written down.
Estimating Allowance for Doubtful Accounts
We estimate uncollectible accounts receivable at each reporting period, which could have a material effect on our reported accounts receivable balance and operating expenses. Specifically, we analyze our aging of accounts receivable taking into consideration our bad debt history, customer payment history, customer concentration, customer credit-worthiness and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. Our accounts receivable balance was $1.7 million, net of the allowance for doubtful accounts of $10,000, as of the end of 2008.
Valuation of Investments
At December 28, 2008, we held 1,344,543 available-for-sale Tower ordinary shares valued at approximately $175,000, of which approximately $116,000 was recorded as a short-term investment. Our investment is marked to market on our balance sheet at the end of each reporting period with the change in unrealized market value reflected in our consolidated statement of comprehensive income. If the market value of the available-for-sale shares changes during a reporting period, we increase or decrease the value of the shares and record a corresponding accumulated other comprehensive gain or loss in the equity section of the balance sheets. If the market value of the shares were to decline below the carrying value and if the decline is determined to be "other than temporary," we would record a write-down of marketable securities as a charge to our statement of operations and reduce the carrying value of the shares. During 2008, the Company wrote down the value of its investment in Tower shares by $1.4 million due to "other than temporary" declines in market value, resulting in a carrying value of $0.13 per share for the period ended December 28, 2008. The determination that the decline in market value was "other than temporary" included factors such as the then current market value and the period of time that the market value had been below the carrying value in each of the . . .
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