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| QUIK > SEC Filings for QUIK > Form 10-Q on 2-Nov-2012 | All Recent SEC Filings |
2-Nov-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 third quarter of 2012, we generated total revenue of $3.7 million which represents a 10% sequential decrease and a 32% decrease from the third quarter of 2011. Our new product revenue was $1.6 million which represents a 9% sequential decrease and a 27% increase year over year. Our mature product revenue was $2.1 million which represents a 11% sequential decrease and a 49% decrease year over year. We shipped our new products into four out of our five target mobile market segments: Smartphones, Broadband Access Data Cards, Secure Access Data Cards and Mobile Enterprise. Demand for our mature products declined in fiscal 2011 and remained flat through the third 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. We expect our revenue from mature products to continue to decline over time. Overall, we reported a net loss of $2.8 million and $9.8 million for the third quarter and the first nine 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.
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
September 30, October 2,
2012 2011
Revenue 100.0 % 100.0 %
Cost of revenue 52.4 % 42.8 %
Gross profit 47.6 % 57.2 %
Operating expenses:
Research and development 51.0 % 42.5 %
Selling, general and administrative 72.7 % 42.5 %
Income (loss) from operations (76.1 )% (27.8 )%
Interest expense (0.3 )% (0.1 )%
Interest income and other, net 0.5 % (0.9 )%
Income (loss) before income taxes (75.9 )% (28.8 )%
Provision for (benefit from) income taxes 0.6 % 0.2 %
Net Income (loss) (76.5 )% (29.0 )%
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - (Continued)
Three Months Ended September 30, 2012 and October 2, 2011
Revenue
The table below sets forth the changes in revenue for the three months ended
September 30, 2012, as compared to the three months ended October 2, 2011 (in
thousands, except percentage data):
Three Months Ended
September 30, 2012 October 2, 2011 Change
% of Total % of Total
Amount Revenues Amount Revenues Amount Percentage
Revenue by product line (1):
New products $ 1,558 43 % $ 1,222 23 % $ 336 27 %
Mature products 2,099 57 % 4,117 77 % (2,018 ) (49 )%
Total revenue $ 3,657 100 % $ 5,339 100 % $ (1,682 ) (32 )%
_________________
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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 continued shipment of our ArcticLink II VX device to a Smartphone customer and the shipment of our ArcticLink device to a Secure 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.
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 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, AES or other security standards, or industry standard interfaces such as USB 2.0 OTG, SDIO and control interfaces such as PS2, I2C, SPI, low voltage differential signaling, or LVDS, mobile industry processor interface, or MIPI, display serial interface, or DSI, 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, 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 September 30, 2012 as compared to the three months ended October 2, 2011
(in thousands, except percentage data):
Three Months Ended
September 30, 2012 October 2, 2011 Change
% of Total % of Total
Amount Revenues Amount Revenues Amount Percentage
Revenue $ 3,657 100 % $ 5,339 100 % $ (1,682 ) (32 )%
Cost of revenue 1,916 52 % 2,283 43 % (367 ) (16 )%
Gross Profit $ 1,741 48 % $ 3,056 57 % $ (1,315 ) (43 )%
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The $1.3 million decrease in gross profit in the third quarter of 2012 as compared to the third quarter of 2011 was mainly due to lower revenue from our mature products and higher unabsorbed overhead. The inventory reserve was zero and $386,000 in the third quarters of 2012 and 2011, respectively. In addition, the decrease in gross profit was partially offset by the sale of
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued)
previously reserved inventories of $100,000 and $159,000 in the third 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 September 30, 2012, as compared to the three months ended
October 2, 2011 (in thousands, except percentage data):
Three Months Ended
September 30, 2012 October 2, 2011 Change
% of Total % of Total
Amount Revenues Amount Revenues Amount Percentage
R&D expense $ 1,865 51 % $ 2,271 43 % $ (406 ) (18 )%
SG&A expense 2,658 73 % 2,267 43 % 391 17 %
Total operating expenses $ 4,523 124 % $ 4,538 86 % $ (15 ) - %
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Research and Development
Our research and development, or R&D, expenses consist primarily of personnel, overhead and other costs associated with engineering process improvements, programmable logic design, CSSP design and software development. The $406,000 decrease in R&D expenses in the third quarter of 2012 as compared to the third quarter of 2011 was attributable primarily to a $491,000 decrease in third party chip design costs; a $129,000 decrease in equipment and supplies; and a $109,000 decrease in depreciation expenses. These expenses were partially offset by a $272,000 increase in compensation expenses due to an increase in headcount; and a $65,000 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 $391,000 increase in SG&A expenses in the third quarter of 2012 as compared to the third quarter of 2011 was primarily due to a $214,000 increase in stock-based compensation expenses; a $169,000 increase in compensation expenses due to increased headcount; and a $26,000 increase in outside services.
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 September 30, 2012 as compared to the
three months ended October 2, 2011 (in thousands, except percentage data):
Three Months Ended Change
September 30, October 2,
2012 2011 Amount Percentage
Interest expense $ (12 ) $ (5 ) $ (7 ) 140 %
Interest income and other, net 18 (49 ) 67 (137 )%
$ 6 $ (54 ) $ 60 (111 )%
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The increase in interest expense was due primarily to the increase in our average debt obligation to $739,000 in the third quarter of 2012 from $122,000 in the third quarter of 2011. The change in interest income and other, net, was due primarily to foreign exchange fluctuations in the third quarter of 2012 as compared to the third quarter of 2011.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued)
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 September 30, 2012 as compared to the three months ended
October 2, 2011 (in thousands, except percentage data):
Three Months Ended Change
September 30, October 2,
2012 2011 Amount Percentage
Provision for income taxes $ 22 $ 10 $ 12 120 %
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The provision for income taxes for the third quarters of 2012 and 2011 were primarily from our foreign operations which are cost-plus entities.
As of the end of the third 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)
Nine Months Ended September 30, 2012 and October 2, 2011
Revenue
The table below sets forth the changes in revenue for the nine months ended
September 30, 2012 as compared to the nine months ended October 2, 2011 (in
thousands, except percentage data):
Nine Months Ended
September 30, 2012 October 2, 2011 Change
% of Total % of Total
Amount Revenues Amount Revenues Amount Percentage
Revenue by product line (1):
New products $ 4,915 41 % $ 3,632 22 % $ 1,283 35 %
Legacy products 6,943 59 % 12,991 78 % (6,048 ) (47 )%
Total revenue $ 11,858 100 % $ 16,623 100 % $ (4,765 ) (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 ArcticLink device to a secure 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 14% and 17% of total revenue in the first nine 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, low voltage differential signaling, or LVDS, mobile industry processor interface, or MIPI, display serial interface, or DSI, 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 nine months ended September 30, 2012 as compared to the nine months ended October 2, 2011 (in thousands, except percentage data):
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - (Continued)
Nine Months Ended
September 30, 2012 October 2, 2011 Change
% of Total % of Total
Amount Revenues Amount Revenues Amount Percentage
Revenue $ 11,858 100 % $ 16,623 100 % $ (4,765 ) (29 )%
Cost of revenue 6,313 53 % 6,188 37 % 125 2 %
Gross Profit $ 5,545 47 % $ 10,435 63 % $ (4,890 ) (47 )%
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The $4.9 million decrease in gross profit in the first nine months of 2012 as compared to the first nine months of 2011 was mainly due to lower revenue from our mature products, higher inventory reserve and higher unabsorbed overhead. The inventory reserve was $428,000 and $562,000 in the first nine 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 $421,000 and $282,000 in the first nine months of 2012 and 2011, respectively.
Operating Expenses
The table below sets forth the changes in operating expenses for the nine months
ended September 30, 2012 as compared to the nine months ended October 2, 2011
(in thousands, except percentage data):
Nine Months Ended
September 30, 2012 October 2, 2011 Change
% of Total % of Total
Amount Revenues Amount Revenues Amount Percentage
R&D expense $ 7,119 60 % $ 7,386 44 % $ (267 ) (4 )%
SG&A expense 8,104 68 % 7,417 45 % 687 9 %
Total operating expenses $ 15,223 128 % $ 14,803 89 % $ 420 3 %
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Research and Development
The $267,000 increase in R&D expenses in the first nine months of 2012 as compared to the first nine months of 2011 was attributable primarily to a $465,000 decrease in intellectual property expenses and a $327,000 decrease in third party chip design costs. These costs were partially offset by an increase of $427,000 in compensation expenses due to an increase in headcount and a $104,000 increase in stock-based compensation expenses.
Selling, General and Administrative Expense
. . .
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