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| QUIK > SEC Filings for QUIK > Form 10-Q on 3-Aug-2012 | All Recent SEC Filings |
3-Aug-2012
Quarterly Report
The following Management's Discussion and Analysis of Financial Condition and Results of Operations, as well as information contained in "Risk Factors" in Part II, Item 1A and elsewhere in this Quarterly Report on Form 10-Q, contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We intend that these forward-looking statements be subject to the safe harbor 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 our strategies as well as (1) our revenue levels, including the commercial success of our Customer Specific Standard Products, or CSSPs, and new products, (2) the conversion of our design opportunities into revenue, (3) our liquidity, (4) our research and development efforts, (5) our gross profit and factors that affect gross profit, (6) our level of operating expenses, (7) our partners and suppliers and (8) industry trends. The following discussion should be read in conjunction with the attached condensed unaudited consolidated financial statements and notes thereto, and with our audited consolidated financial statements and notes thereto for the fiscal year ended January 1, 2012, found in our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on March 9, 2012. Although we believe that the assumptions underlying the forward-looking statements contained in this Quarterly 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 II, 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
We develop and market low power customizable semiconductor solutions that enable
customers to add new differentiated features to, extend battery life in, and
improve the visual experience with their mobile, consumer and enterprise
products. Our targeted mobile market segments include Tablets, Smartphones,
Broadband Access Data cards, Secure Access Data cards and Mobile Enterprise. We
are a fabless semiconductor company designing Customer Specific Standard
Products, or CSSPs, which are complete, customer-specific solutions that include
a combination of silicon solution platforms; Proven System Blocks, or PSBs;
customer-specific logic; software drivers; and firmware. Our main platform
families, ArcticLink and PolarPro, are standard silicon products. PSBs are
developed in numerous categories including Video and Imaging, Storage,
Intelligence, Networking and Security. Currently developed and available PSBs
include our Visual Enhancement Engine, or VEE, Display Power Optimizer, or DPO,
Intelligent Brightness Control, or IBC, and Background Color Compensator (BCC)
technologies; SDHD/eMMC Host Controllers; USB 2.0 On-The-Go with PHY; MIPI
Host/Device with DPHY, LVDS, MDDI Client with PHY; High Speed UARTs; Pulse Width
Modulators; SPI and I2C hosts, display-specific functions such as RGB-split and
Frame Recyclers; and Data Performance Manager, or DPM, for accelerated
sideloading times.
The variety of PSBs offered by us allows system designers to combine multiple
discrete chips onto a single CSSP, simplifying design and board layout, lowering
bill of material, or BOM, cost and accelerating time-to-market. The programmable
fabric of the platforms is used for adding differentiated features and provides
flexibility to address hardware-based product requirements quickly.
Utilizing a focused customer engagement model, we market CSSPs to Original
Equipment Manufacturers, or OEMs, and Original Design Manufacturers, or ODMs,
that offer differentiated mobile products. Our solutions enable OEMs and ODMs to
add new features, extend battery life and improve the visual experience of their
handheld mobile devices. In addition to working directly with our customers, we
partner with other companies with expertise in certain technologies to develop
additional intellectual property, reference platforms and system software to
provide application solutions. We also work with mobile processor manufacturers
and companies that supply storage, networking or graphics components for
embedded systems.
We continue to transition from being a broad-based supplier of FPGA devices to
being a supplier of CSSPs. In order to grow our revenue from its current level,
we are dependent upon increased revenue from our new products including existing
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued)
new product platforms and platforms still in development. We expect our business growth to be driven by CSSPs and our CSSP revenue growth needs to be strong enough to enable us to sustain profitability while we continue to invest in the development, sales, and marketing of our new solution platforms, PSBs and CSSPs. The gross margin associated with our CSSPs is generally lower than the gross margin of our FPGA products, due primarily to the price sensitive nature of the higher volume mobile consumer opportunities that we are pursuing with CSSPs. During the second quarter of 2012, we generated total revenue of $4.1 million which represents a 29% decrease from the second quarter of 2011. Our new product revenue was $1.7 million which represents a 44% increase while our mature product revenue was $2.4 million which represents a 48% decrease year over year. We shipped our new products into three out of our five target mobile market segments: Smartphones, Broadband Access Data Cards and Mobile Enterprise. Demand for our mature products declined in fiscal 2011 and remained flat in the second quarter of 2012. Since we introduced CSSPs to the market in early 2007, we have devoted substantially all of our development, sales, and marketing efforts on our new solution platforms, PSBs and CSSPs. Therefore, we anticipate that our revenue from mature products will not increase to former levels, but will continue to decline over time. Overall, we reported a net loss of $3.2 million and $7.0 million for the second quarter and the first six months of 2012. Critical Accounting 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 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, valuation of inventories including identification of excess quantities and product obsolescence, valuation of investments, valuation of long-lived assets, measurement of stock-based compensation and estimating accrued liabilities. We believe that we apply judgments and estimates in a consistent manner and that this 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 financial statements. For a discussion of critical accounting policies and estimates, please see Item 7 in our Annual Report on Form 10-K for the fiscal year ended January 1, 2012, filed with the SEC on March 9, 2012.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - (Continued)
Results of Operations
The following table sets forth the percentage of revenue for certain items in
our statements of operations for the periods indicated:
Three Months Ended
July 1, July 3,
2012 2011
Revenue 100.0 % 100.0 %
Cost of revenue 49.8 % 34.3 %
Gross profit 50.2 % 65.7 %
Operating expenses:
Research and development 60.2 % 57.7 %
Selling, general and administrative 67.5 % 44.3 %
Income (loss) from operations (77.5 )% (36.3 )%
Interest expense (0.6 )% (0.3 )%
Interest income and other, net (1.2 )% (0.2 )%
Income (loss) before income taxes (79.3 )% (36.8 )%
Provision for (benefit from) income taxes 0.1 % (1.0 )%
Net Income (loss) (79.4 )% (35.8 )%
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Three Months Ended July 1, 2012 and July 3, 2011
Revenue
The table below sets forth the changes in revenue for the three months ended
July 1, 2012, as compared to the three months ended July 3, 2011 (in thousands,
except percentage data):
Three Months Ended
July 1, 2012 July 3, 2011 Change
% of Total % of Total
Amount Revenues Amount Revenues Amount Percentage
Revenue by product line (1):
New products $ 1,718 42 % $ 1,190 21 % $ 528 44 %
Mature products 2,353 58 % 4,547 79 % (2,194 ) (48 )%
Total revenue $ 4,071 100 % $ 5,737 100 % $ (1,666 ) (29 )%
_________________
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(1) For all periods presented: New products represent products introduced since 2005, and include ArcticLink®, ArcticLink II, ArcticLink III, Eclipse™ II, PolarPro®, PolarPro II, and QuickPCI II. Mature products include Eclipse, EclipsePlus, pASIC® 1, pASIC 2, pASIC 3, QuickFC, QuickMIPS, QuickPCI, QuickRAM, and V3, as well as royalty revenue, programming hardware and software.
The increase in new product revenue was primarily driven by the shipment of our ArcticLink II VX device to a Smartphone customer and the shipment of our PolarPro II device to a Broadband Access Data Card customer. The decrease in mature product revenue is due primarily to low bookings from our customers in the aerospace, test and instrumentation sectors. One of our U.S. customers, purchasing primarily pASIC 3 devices, accounted for 11% and 21% of total revenue in the second quarters of 2012 and 2011, respectively.
In order to grow our revenue, we are dependent upon increased revenue from our new products, especially revenue from CSSPs designed using our ArcticLink, ArcticLink II, ArcticLink III, PolarPro and PolarPro II solution platforms and the
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued)
development of additional new products and CSSPs.
We continue to seek to expand our revenue through the pursuit of high volume sales opportunities in our target market segments and the sale of CSSPs incorporating intellectual property such as our VEE/DPO technologies, boot from managed NAND or industry standard interfaces such as USB 2.0 OTG, SDIO and integrated drive electronics, or IDE, PS2, I2C, SPI, PWM and keyboard controllers. Our industry is characterized by intense price competition and by lower margins as order volumes increase. While winning large volume sales opportunities will increase our revenue, due to the pricing negotiation leverage of large companies, these opportunities may decrease our gross profit as a percentage of revenue.
Gross Profit
The table below sets forth the changes in gross profit for the three months
ended July 1, 2012 as compared to the three months ended July 3, 2011 (in
thousands, except percentage data):
Three Months Ended
July 1, 2012 July 3, 2011 Change
% of Total % of Total
Amount Revenues Amount Revenues Amount Percentage
Revenue $ 4,071 100 % $ 5,737 100 % $ (1,666 ) (29 )%
Cost of revenue 2,026 50 % 1,966 34 % 60 3 %
Gross Profit $ 2,045 50 % $ 3,771 66 % $ (1,726 ) (46 )%
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The $1.7 million decrease in gross profit in the second quarter of 2012 as compared to the second quarter of 2011 was mainly due to lower revenue from our mature products, higher inventory reserve and higher unabsorbed overhead. The inventory reserve was $99,000 and $58,000 in the second quarter of 2012 and 2011, respectively. The increase in inventory reserve was primarily due to decreased demand for our pASIC 3 devices in our mature product family. In addition, the decrease in gross profit was partially offset by the sale of previously reserved inventories of $223,000 and $42,000 in the second quarter of 2012 and 2011, respectively.
Our semiconductor products have historically had a 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 CSSPs and 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. This 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.
Operating Expenses
The table below sets forth the changes in operating expenses for the three
months ended July 1, 2012, as compared to the three months ended July 3, 2011
(in thousands, except percentage data):
Three Months Ended
July 1, 2012 July 3, 2011 Change
% of Total % of Total
Amount Revenues Amount Revenues Amount Percentage
R&D expense $ 2,452 60 % $ 3,312 58 % $ (860 ) (26 )%
SG&A expense 2,749 68 % 2,543 44 % 206 8 %
Total operating expenses $ 5,201 128 % $ 5,855 102 % $ (654 ) (11 )%
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Our research and development, or R&D, expenses consist primarily of personnel, overhead and other costs associated
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued)
with engineering process improvements, programmable logic design, CSSP design and software development. The $860,000 decrease in R&D expenses in the second quarter of 2012 as compared to the second quarter of 2011 was attributable primarily to a $468,000 decrease in third party chip design costs and a $475,000 decrease in purchased intellectual property. These expenses were partially offset by a $59,000 increase in compensation expenses due to an increase in headcount and a $24,000 increase in stock-based compensation expenses.
Selling, General and Administrative Expense
Our selling, general and administrative, or SG&A, expenses consist primarily of personnel and related overhead costs for sales, marketing, finance, administration, human resources and general management. The $206,000 increase in SG&A expenses in the second quarter of 2012 as compared to the second quarter of 2011 was primarily due to a $145,000 increase in stock-based compensation and a $66,000 increase in compensation expenses due to an increase in headcount.
Interest Expense and Interest Income and Other, net
The table below sets forth the changes in interest expense and interest income
and other, net, for the three months ended July 1, 2012 as compared to the three
months ended July 3, 2011 (in thousands, except percentage data):
Three Months Ended Change
July 1, July 3,
2012 2011 Amount Percentage
Interest expense $ (24 ) $ (18 ) $ (6 ) 33 %
Interest income and other, net (50 ) (13 ) (37 ) 285 %
$ (74 ) $ (31 ) $ (43 ) 139 %
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The increase in interest expense was due primarily to the increase in our average debt obligation to $837,000 in the second quarter of 2012 from $225,000 in the second quarter of 2011. The change in interest income and other, net, was due primarily to foreign exchange fluctuations in the second quarter of 2012 as compared to the second quarter of 2011.
We conduct a portion of our research and development activities in Canada and India and we have sales and marketing activities in various countries outside of the United States. Most of these international expenses are incurred in local currency. Foreign currency transaction gains and losses are included in interest and other income (expense), net, as they occur. We do not use derivative financial instruments to hedge our exposure to fluctuations in foreign currency and, therefore, our results of operations are, and will continue to be, susceptible to fluctuations in foreign exchange gains or losses.
Provision for (Benefit from) Income Taxes
The table below sets forth the changes in provision for income taxes for the
three months ended July 1, 2012 as compared to the three months ended July 3,
2011 (in thousands, except percentage data):
Three Months Ended Change
July 1, July 3,
2012 2011 Amount Percentage
Provision for (benefit from) income taxes $ 6 $ (55 ) $ 61 (111 )%
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The provision for (benefit from) income taxes for the second quarters of 2012 and 2011 were primarily from our foreign operations which are cost-plus entities.
As of the end of the second quarter of 2012, our ability to utilize our income tax loss carryforwards in future periods is uncertain and, accordingly, we recorded a full valuation allowance against the related US tax provision. We will continue to assess the realizability of deferred tax assets in future periods.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - (Continued)
Six Months Ended July 1, 2012 and July 3, 2011
Revenue
The table below sets forth the changes in revenue for the six months ended
July 1, 2012 as compared to the six months ended July 3, 2011 (in thousands,
except percentage data):
Six Months Ended
July 1, 2012 July 3, 2011 Change
% of Total % of Total
Amount Revenues Amount Revenues Amount Percentage
Revenue by product line (1):
New products $ 3,357 41 % $ 2,410 21 % $ 947 39 %
Legacy products 4,844 59 % 8,874 79 % (4,030 ) (45 )%
Total revenue $ 8,201 100 % $ 11,284 100 % $ (3,083 ) (27 )%
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(1) For all periods presented: New products represent products introduced since 2005, and include ArcticLink®, ArcticLink II, ArcticLink III, Eclipse™ II, PolarPro®, PolarPro II, and QuickPCI II. Mature products include Eclipse, EclipsePlus, pASIC® 1, pASIC 2, pASIC 3, QuickFC, QuickMIPS, QuickPCI, QuickRAM, and V3, as well as royalty revenue, programming hardware and software.
The increase in new product revenue was primarily driven by the shipment of our ArcticLink II VX device to a smartphone customer and the shipment of PolarPro II device to a broadband access datacard customer. The decrease in mature product revenue is due primarily to low bookings from our customers in the aerospace, test and instrumentation sectors. One of our U.S. customers, purchasing primarily pASIC 3 devices, accounted for 15% and 18% of total revenue in the first six months of 2012 and 2011, respectively.
In order to grow our revenue , we are dependent upon increased revenue from our existing new products, especially revenue from CSSPs designed using our ArcticLink, ArcticLink II, PolarPro and PolarPro II solution platforms and the development of additional new products.
We continue to seek to expand our revenue, through the pursuit of high volume sales opportunities in the consumer market segment and the sale of CSSPs incorporating intellectual property such as VEE, DPO, AES or other security standards, or industry standard interfaces such as USB 2.0 OTG, SDIO and control interfaces such as PS2, I2C, SPI, and PWM. Our industry is characterized by intense price competition and by lower margins as order volumes increase. While winning large volume sales opportunities will increase our revenue, we believe these opportunities may decrease our gross profit as a percentage of revenue.
Gross Profit
The table below sets forth the changes in gross profit for the six months ended
July 1, 2012 as compared to the six months ended July 3, 2011 (in thousands,
except percentage data):
Six Months Ended
July 1, 2012 July 3, 2011 Change
% of Total % of Total
Amount Revenues Amount Revenues Amount Percentage
Revenue $ 8,201 100 % $ 11,284 100 % $ (3,083 ) (27 )%
Cost of revenue 4,397 54 % 3,905 35 % 492 13 %
Gross Profit $ 3,804 46 % $ 7,379 65 % $ (3,575 ) (48 )%
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The $3.6 million decrease in gross profit in the first six months of 2012 as compared to the first six months of 2011 was
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued)
mainly due to lower revenue from our mature products, higher inventory reserve and higher unabsorbed overhead. The inventory reserve was $428,000 and $176,000 in the first six months of 2012 and 2011, respectively. The increase in inventory reserve was primarily due to decreased demand for our Eclipse and pASIC 3 devices in our mature product family. In addition, the decrease in gross profit was partially offset by the sale of previously reserved inventories of $321,000 and $123,000 in the first six months of 2012 and 2011, respectively.
Operating Expenses
The table below sets forth the changes in operating expenses for the six months
ended July 1, 2012 as compared to the six months ended July 3, 2011 (in
thousands, except percentage data):
Six Months Ended
July 1, 2012 July 3, 2011 Change
% of Total % of Total
Amount Revenues Amount Revenues Amount Percentage
R&D expense $ 5,254 64 % $ 5,115 45 % $ 139 3 %
SG&A expense 5,446 66 % 5,150 46 % 296 6 %
Total operating expenses $ 10,700 130 % $ 10,265 91 % $ 435 4 %
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Research and Development
The $139,000 increase in R&D expenses in the first six months of 2012 as compared to the first six months of 2011 was attributable primarily to a $207,000 increase in equipment and supplies; a $164,000 increase in third party chip design costs; a $155,000 increase in compensation expenses; and a $39,000 increase in stock-based compensation expenses. These costs were partially offset by a decrease of $475,000 in intellectual property expenses.
Selling, General and Administrative Expense
The $296,000 increase in SG&A expenses in the first six months of 2012 as compared to the first six months of 2011 was primarily due to a $243,000 increase in stock-based compensation expenses; a $84,000 increase in compensation expenses; and a $50,000 increase in travel and entertainment expenses. These costs were partially offset by a $52,000 decrease in equipment and supplies; a $20,000 decrease in outside services; and a $16,000 decrease in occupancy costs.
Interest Expense and Interest Income and Other, net The table below sets forth the changes in interest expense and interest income and other, net, for the six months ended July 1, 2012, as compared to the six months ended July 3, 2011 (in thousands, except percentage data): . . . |
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