QuickLogic Corporation
QUICKLOGIC CORPORATION (Form: 10-Q, Received: 08/07/2009 15:08:13)

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q
 

(Mark One)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the Quarterly Period Ended June 28, 2009

 

 

OR

 

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the Transition Period From                      To                      

 

COMMISSION FILE NUMBER: 000-22671

 


 

QUICKLOGIC CORPORATION

(Exact name of registrant as specified in its charter)

 

DELAWARE

 

77-0188504

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

1277 ORLEANS DRIVE SUNNYVALE, CA  94089

(Address of principal executive offices, including Zip Code)

 

(408) 990-4000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days.   Yes  x   No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  o   No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.(Check one):

 

Large accelerated filer  o

 

Accelerated filer  o

 

 

 

Non-accelerated filer  x

 

Smaller Reporting Company  o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act). Yes  o No  x

 

As of August 5, 2009, the registrant had outstanding 30,258,350 shares of common stock, par value $0.001.

 

 

 



Table of Contents

 

QUICKLOGIC CORPORATION

FORM 10-Q

June 28, 2009

 

 

 

Page

 

 

 

Part I. Financial Information

 

3

 

 

 

Item 1. Financial Statements

 

3

Condensed Unaudited Consolidated Statements of Operations for the three and six months ended June 28, 2009 and June 29, 2008

 

3

Condensed Unaudited Consolidated Balance Sheets as of June 28, 2009 and December 28, 2008

 

4

Condensed Unaudited Consolidated Statements of Cash Flows for the six months ended June 28, 2009 and June 29, 2008

 

5

Condensed Unaudited Consolidated Statements of Comprehensive Loss for the three and six months ended June 28, 2009 and June 29, 2008

 

6

Notes to Condensed Unaudited Consolidated Financial Statements

 

7

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

22

 

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

34

 

 

 

Item 4. Controls and Procedures

 

34

 

 

 

Part II. Other Information

 

35

 

 

 

Item 1. Legal Proceedings

 

35

 

 

 

Item 1A. Risk Factors

 

35

 

 

 

Item 4. Submission of Matters to a Vote of Security Holders

 

46

 

 

 

Item 6. Exhibits

 

47

 

 

 

Signatures

 

48

 

2



Table of Contents

 

PART I. Financial Information

 

Item 1. Financial Statements

 

QUICKLOGIC CORPORATION

CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 28, 2009

 

June 29, 2008

 

June 28, 2009

 

June 29, 2008

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

2,911

 

$

8,743

 

$

7,463

 

$

19,766

 

Cost of revenue

 

1,589

 

3,982

 

3,408

 

9,240

 

Long-lived asset impairment

 

 

1,545

 

 

1,545

 

Gross profit

 

1,322

 

3,216

 

4,055

 

8,981

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

1,877

 

2,610

 

3,489

 

5,431

 

Selling, general and administrative

 

2,709

 

3,970

 

5,352

 

8,290

 

Long-lived asset impairment

 

 

468

 

 

468

 

Restructuring costs

 

 

452

 

 

452

 

Loss from operations

 

(3,264

)

(4,284

)

(4,786

)

(5,660

)

Write-down of investment in Tower Semiconductor Ltd.

 

 

(417

)

 

(417

)

Interest expense

 

(23

)

(72

)

(47

)

(143

)

Interest income and other, net

 

45

 

30

 

(1

)

134

 

Loss before income taxes

 

(3,242

)

(4,743

)

(4,834

)

(6,086

)

Provision for (benefit from) income taxes

 

(15

)

 

(11

)

34

 

Net loss

 

$

(3,227

)

$

(4,743

)

$

(4,823

)

$

(6,120

)

 

 

 

 

 

 

 

 

 

 

Net loss per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.11

)

$

(0.16

)

$

(0.16

)

$

(0.21

)

Diluted

 

$

(0.11

)

$

(0.16

)

$

(0.16

)

$

(0.21

)

 

 

 

 

 

 

 

 

 

 

Weighted average shares:

 

 

 

 

 

 

 

 

 

Basic

 

30,081

 

29,589

 

29,994

 

29,498

 

Diluted

 

30,081

 

29,589

 

29,994

 

29,498

 

 

See accompanying Notes to Condensed Unaudited Consolidated Financial Statements.

 

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Table of Contents

 

QUICKLOGIC CORPORATION

CONDENSED UNAUDITED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value amount)

 

 

 

June 28, 2009

 

December 28, 2008

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

16,450

 

$

19,376

 

Short-term investment in Tower Semiconductor Ltd.

 

286

 

116

 

Accounts receivable, net of allowances for doubtful accounts of $10 and $10, respectively

 

1,468

 

1,746

 

Inventories

 

2,042

 

1,900

 

Other current assets

 

721

 

833

 

Total current assets

 

20,967

 

23,971

 

Property and equipment, net

 

3,465

 

3,493

 

Investment in Tower Semiconductor Ltd.

 

144

 

59

 

Other assets

 

676

 

903

 

TOTAL ASSETS

 

$

25,252

 

$

28,426

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Revolving line of credit

 

$

2,000

 

$

2,000

 

Trade payables

 

2,224

 

1,992

 

Accrued liabilities

 

1,580

 

1,537

 

Deferred income on shipments to distributors

 

11

 

282

 

Current portion of debt and capital lease obligations

 

612

 

753

 

Total current liabilities

 

6,427

 

6,564

 

 

 

 

 

 

 

Long-term liabilities:

 

 

 

 

 

Debt and capital lease obligations, less current portion

 

390

 

 

Total liabilities

 

6,817

 

6,564

 

 

 

 

 

 

 

Commitments and contingencies (see Notes 12 and 13)

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock, $0.001 par value; 100,000 shares authorized; 30,253 and 29,909 shares issued and outstanding, respectively

 

30

 

30

 

Additional paid-in capital

 

170,987

 

169,846

 

Accumulated other comprehensive income

 

255

 

 

Accumulated deficit

 

(152,837

)

(148,014

)

Total stockholders’ equity

 

18,435

 

21,862

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

25,252

 

$

28,426

 

 

See accompanying Notes to Condensed Unaudited Consolidated Financial Statements.

 

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Table of Contents

 

QUICKLOGIC CORPORATION

CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

 

 

Six Months Ended

 

 

 

June 28, 2009

 

June 29, 2008

 

Cash flows from operating activities:

 

 

 

 

 

Net loss

 

$

(4,823

)

$

(6,120

)

Adjustments to reconcile net loss to net cash used for operating activities:

 

 

 

 

 

Depreciation and amortization

 

914

 

1,182

 

Loss on disposal of property and equipment

 

 

15

 

Stock-based compensation

 

951

 

1,582

 

Utilization of wafer credits from Tower Semiconductor Ltd.

 

213

 

148

 

Write-down of inventories

 

236

 

1,128

 

Long-lived asset impairment

 

 

2,013

 

Write-down of marketable securities

 

 

417

 

Bad debt expense

 

 

43

 

Write-off of long-lived asset

 

13

 

 

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable

 

278

 

208

 

Inventories

 

(378

)

1,651

 

Other assets

 

228

 

305

 

Trade payables

 

43

 

(2,720

)

Accrued liabilities

 

43

 

(219

)

Deferred income on shipments to distributors

 

(271

)

 

Net cash used for operating activities

 

(2,553

)

(367

)

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures for property and equipment

 

(46

)

(363

)

Net cash used for investing activities

 

(46

)

(363

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Payment of debt and capital lease obligations

 

(2,517

)

(1,247

)

Proceeds from debt obligations

 

2,000

 

 

Proceeds from issuance of common stock

 

190

 

109

 

Net cash used for financing activities

 

(327

)

(1,138

)

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(2,926

)

(1,868

)

Cash and cash equivalents at beginning of period

 

19,376

 

20,868

 

Cash and cash equivalents at end of period

 

$

16,450

 

$

19,000

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

Interest paid

 

$

40

 

$

148

 

Income taxes paid

 

$

 

$

16

 

 

 

 

 

 

 

Supplemental schedule of non-cash investing and financing activities :

 

 

 

 

 

Capital lease obligation to finance capital expenditures and related maintenance

 

$

632

 

$

 

Purchase of equipment included in accounts payable

 

$

189

 

$

 

 

See accompanying Notes to Condensed Unaudited Consolidated Financial Statements

 

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Table of Contents

 

QUICKLOGIC CORPORATION

CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 28, 2009

 

June 29, 2008

 

June 28, 2009

 

June 29, 2008

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(3,227

)

$

(4,743

)

$

(4,823

)

$

(6,120

)

Other comprehensive gain (loss), net of tax:

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on available-for-sale investments

 

134

 

161

 

255

 

(350

)

Total comprehensive loss

 

(3,093

)

(4,582

)

(4,568

)

(6,470

)

 

See accompanying Notes to Condensed Unaudited Consolidated Financial Statements.

 

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Table of Contents

 

QUICKLOGIC CORPORATION

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1— The Company and Basis of Presentation

 

QuickLogic Corporation, referenced herein as QuickLogic or the Company, was founded in 1988 and reincorporated in Delaware in 1999. The Company develops and markets low power programmable solutions that enable customers to add differentiated features and capabilities to their mobile, consumer and industrial products. The Company is a fabless semiconductor company that operates in a single industry segment where it designs, markets and supports Customer Specific Standard Products, or CSSPs, Field Programmable Gate Arrays, or FPGAs, application solutions, associated design software and programming hardware.

 

The accompanying interim consolidated financial statements are unaudited. In the opinion of management, these statements have been prepared in accordance with generally accepted accounting principles, or GAAP, and include all adjustments, consisting only of normal recurring adjustments, necessary to provide a fair statement of results for the interim periods presented. The Company recommends that these consolidated financial statements be read in conjunction with the Company’s Form 10-K for the year ended December 28, 2008. Operating results for the three and six months ended June 28, 2009 are not necessarily indicative of the results that may be expected for the full year.

 

QuickLogic’s fiscal year ends on the Sunday closest to December 31.  QuickLogic’s second fiscal quarter for 2009 and 2008 ended Sunday, June 28, 2009 and June 29, 2008, respectively.

 

Subsequent events have been disclosed through August 7, 2009, the date of the issuance of these Condensed Unaudited Consolidated Financial Statements.

 

Liquidity

 

We have financed our operating losses and capital investments through sales of common stock, private equity investments, capital and operating leases, bank lines of credit and cash flow from operations. As of June 28, 2009, our principal sources of liquidity consisted of our cash and cash equivalents of $16.4 million, available credit under our revolving line of credit with Silicon Valley Bank of $4.0 million, and our investment in Tower with a market value of approximately $430,000. As of June 28, 2009, there is no material difference between the fair value and the carrying amount of the debt outstanding under the Company’s line of credit and capital leasing arrangements.

 

The Company anticipates that its existing cash resources will fund operations, finance purchases of capital equipment and provide adequate working capital for the next twelve months. The Company’s liquidity is affected by many factors including, among others, the level of revenue and gross profit as a result of the cyclicality of the semiconductor industry and the current global economic crisis, the conversion of design opportunities into revenue, market acceptance of existing and new products including CSSPs based on our ArcticLink™ and PolarPro ®  solution platforms, fluctuations in revenue as a result of product end-of-life, fluctuations in revenue as a result of the stage in the product life cycle of its customers’ products, costs of securing access to and availability of adequate manufacturing capacity, levels of inventories, wafer purchase commitments, customer credit terms, the amount and timing of research and development expenditures, the timing of new product introductions, production volumes, product quality, sales and marketing efforts, the value and liquidity of its investment portfolio, the amount and financing arrangements for purchases of capital equipment, changes in operating assets and liabilities, the ability to obtain or renew debt financing and to remain in compliance with the terms of existing credit facilities, the ability to raise funds from the sale of shares of Tower Semiconductor Ltd., or Tower, and equity in the Company, the issuance and exercise of stock options and participation in the Company’s employee stock purchase plan, and other factors related to the uncertainties of the industry and global economics. Accordingly, there can be no assurance that events in the future will not require the Company to seek additional capital or, if so required, that such capital will be available on terms acceptable to the Company.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of QuickLogic Corporation and its wholly owned subsidiaries, QuickLogic International, Inc., QuickLogic Canada Company, QuickLogic Kabushiki Kaisha and QuickLogic Software (India) Private Ltd. The Company and its subsidiaries use the U.S. dollar as its functional currency. All intercompany accounts and transactions are eliminated in consolidation.

 

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Table of Contents

 

QUICKLOGIC CORPORATION

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Foreign Currency

 

The functional currency of the Company’s non-U.S. operations is the U.S. dollar. Accordingly, all monetary assets and liabilities of these foreign operations are translated into U.S. dollars at current period-end exchange rates and non-monetary assets and related elements of expense are translated using historical rates of exchange. Income and expense elements are translated to U.S. dollars using average exchange rates in effect during the period. Gains and losses from the foreign currency transactions of these subsidiaries are recorded as interest income and other, net in the statement of operations.

 

Uses of Estimates

 

The preparation of these consolidated financial statements in conformity with generally accepted accounting principles, or GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities and the reported amounts of revenue and expenses during the period. Actual results could differ from those estimates, particularly in relation to revenue recognition, the allowance for doubtful accounts, sales returns, valuation of investments, valuation of long-lived assets, valuation of inventories including identification of excess quantities, market value and obsolescence, measurement of stock-based compensation awards, accounting for income taxes and measuring accrued liabilities.

 

Concentration of Risk

 

The Company’s accounts receivable are denominated in U.S. dollars and are derived primarily from sales to customers located in North America, Europe and Asia Pacific. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. See Note 11 for information regarding concentrations associated with accounts receivable. The Company’s investment in Tower is subject to equity risk. See Note 4 for information regarding the Company’s investment in Tower Semiconductor Ltd.

 

Note 2—Significant Accounting Policies

 

There have been no material changes in the Company’s significant accounting policies for the second quarter of 2009 from its disclosure in the Annual Report on Form 10-K for the year ended December 28, 2008, except as described below. For a discussion of the significant accounting policies, please see the Annual Report on Form 10-K for the fiscal year ended December 28, 2008 filed with the Securities Exchange Commission, or SEC, on March 11, 2009.

 

Revenue Recognition

 

The Company supplies standard products which must be programmed before they can be used in an application. The Company’s products may be programmed by the Company, distributors, end-customers or third parties. Once programmed, the Company’s parts cannot be erased and, therefore, programmed parts are only useful to a specific customer.

 

The Company generally recognizes 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 original equipment manufacturer, or OEM, customers, provided that legal title and risk of ownership have transferred.

 

A significant portion of our sales is made through distributors. In the case of programmed parts and unprogrammed, end-of-life products, it is the Company’s practice to agree upon the sales price with a distributor prior to shipment. Furthermore, distributors are not allowed any future price adjustments and have no rights of return. Accordingly, the sales price is fixed or determinable and revenue is recognized upon shipment if persuasive evidence of an arrangement exists, delivery has occurred, collection of the resulting receivable is reasonably assured and title and risk of loss have been transferred.

 

Until the first quarter of 2009 in the case of unprogrammed, other than end-of-life parts, which may be used by multiple end-customers, the distribution agreements allowed for rights of return and post shipment price adjustments such as Ship from Stock and Debits, or SSDs. These rights of return and SSD provisions prevented us

 

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Table of Contents

 

QUICKLOGIC CORPORATION

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

from being able to reasonably estimate the final price of the inventory to be sold and the amount of inventory that could be returned pursuant to these agreements. As a result, the price to the customer was not fixed or determinable at the time we delivered products to our distributors. Accordingly, product revenue from sales made through those distributors was deferred until the distributors shipped the product to the end-customers. Deferred income on shipments to distributors reflected the amount of gross margin expected to be realized when distributors sell through these products purchased from the Company.

 

During the fourth quarter of 2008, the Company renegotiated the majority of its agreements with its distributors. Under the new agreements, post shipment price adjustments such as SSDs have been eliminated and parts held by distributors may only be returned for quality reasons under the Company’s standard warranty policy. Revenue is recognized upon shipment of both programmed and unprogrammed parts to distributors if persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, collection of the resulting receivable is reasonably assured and risk of loss has been transferred. As of the end of the first quarter of 2009, all of the Company’s distributors had signed the new agreements.

 

New Accounting Pronouncements

 

In April 2009, the Financial Accounting Standards Board, or FASB, issued three FASB Staff Positions, or FSPs, related to fair value measurements, disclosures and other-than-temporary impairments. FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly , provides additional guidance for estimating fair value in accordance with Statement of Financial Accounting Standard, or SFAS, No. 157 when the volume and level of activity for an asset or liability have significantly decreased. FSP FAS 157-4 also includes guidance on identifying circumstances that indicate a transaction is not orderly. FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments , amends the other-than-temporary impairment guidance in U.S. GAAP to make the guidance more operational and to improve the presentation of other-than-temporary impairments in the financial statements. Finally, FSP FAS 107-1 and Accounting Principles Board, or APB, 28-1, Interim Disclosures About Fair Value of Financial Instruments , amends SFAS No. 107, Disclosures about Fair Value of Financial Instruments , to require disclosures about fair value of financial instruments in interim financial statements as well as in annual financial statements and also amends APB Opinion No. 28, Interim Financial Reporting , to require those disclosures in all interim financial statements. These FSPs are effective for periods ending after June 15, 2009. Early adoption is permitted for periods ending after March 15, 2009. The Company adopted the FSPs during the second quarter of 2009. The FSPs have no impact on the Company’s consolidated results of operations or financial condition.

 

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events”, which established general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This standard required the Company to disclose the date through which the Company has evaluated subsequent events and the basis for the date. This standard was effective for interim periods which ended after June 15, 2009. See Note 1, “Basis of Presentation,” for disclosure of the date to which subsequent events are disclosed and Note 15, “Subsequent Events,” for disclosure of subsequent events.

 

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162 . SFAS No. 168 replaces SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles , and establishes the FASB Accounting Standards Codification, or Codification, as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting principles in the United States. All guidance contained in the Codification carries an equal level of authority. On the effective date of SFAS No. 168, the Codification superseded all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification will become non-authoritative. SFAS No. 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company has evaluated this new statement, and determined that it will not have a significant impact on the determination or reporting of our financial results.

 

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Table of Contents

 

QUICKLOGIC CORPORATION

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Note 3—Net Loss Per Share

 

Basic net loss per share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net loss per share was computed using the weighted average number of common shares outstanding during the period plus potentially dilutive common shares outstanding during the period under the treasury stock method. In computing diluted net loss per share, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options.

 

For the second quarter and first half of 2009 and 2008, 9.5 million and 8.2 million shares, respectively, associated with equity awards outstanding and the estimated number of shares to be purchased under the current offering period of the 2009 Employee Stock Purchase Plan were not included in the calculation of diluted net loss per share, as they were considered antidilutive due to the net loss the Company experienced during these periods.

 

Note 4—Investment in Tower Semiconductor Ltd.

 

On December 12, 2000, the Company entered into several agreements with Tower, as amended, under which the Company agreed to make a strategic investment in Tower of up to $25 million as part of Tower’s plan to build and equip a new wafer fabrication facility. During 2001 and 2002, the Company paid a total of $21.3 million to Tower to fulfill its investment requirements under the agreement. In partial consideration for the investment, the Company received 1,757,368 Tower ordinary shares with an original cost of $16.6 million. The Company sold approximately 413,000 of the Tower ordinary shares in fiscal 2003.

 

During 2008 the Company wrote down the value of its investment in Tower shares by $1.4 million due to an “other than temporary” decline in market value, resulting in a carrying value of $0.13 per share for the period ended December 28, 2008. This determination included factors such as market value and the period of time that the market had been below the carrying value of the shares.

 

As of June 28, 2009, the Company held 1,344,543 available-for-sale Tower ordinary shares with an unrealized gain of $255,000 recorded in accumulated other comprehensive income on the balance sheet, representing the difference between the carrying value per share and $0.32 per share, their market value on the last trading day of the reporting period. Pursuant to SFAS 157, the fair value of the Company’s marketable securities as of June 28, 2009 was determined based on “Level 1” inputs as described in Note 7. The Company plans to continue to hold 450,000 of the Tower ordinary shares in order to receive preferred product pricing under the agreements with Tower and has recorded these shares as a long-term investment on the balance sheets. The remaining 894,543 shares are classified as a short-term investment on the balance sheets.

 

During the years of 2001 and 2002, the Company also received $4.7 million in prepaid wafer credits in partial consideration for the investment. During 2008, the Company assessed the value of its Tower wafer credit and incurred a long-lived asset impairment of $1.3 million. As of June 28, 2009, the prepaid wafer credits balance was $634,000. The Company has guaranteed capacity at Tower through at least 2010. These credits are recorded within long-term other assets on the balance sheets and can be applied toward wafer purchases from Tower at 15% of the value of purchases made through 2010.

 

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QUICKLOGIC CORPORATION

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Note 5—Balance Sheet Components

 

 

 

June 28, 2009

 

December 28, 2008

 

 

 

(in thousands)

 

Inventories:

 

 

 

 

 

Raw materials

 

$

8

 

$

75

 

Work-in-process

 

1,809

 

1,579

 

Finished goods

 

225

 

246

 

 

 

$

2,042

 

$

1,900

 

 

 

 

 

 

 

Other current assets:

 

 

 

 

 

Prepaid expenses

 

$

575

 

$

743

 

Other

 

146

 

90

 

 

 

$

721

 

$

833

 

 

 

 

 

 

 

Property and equipment:

 

 

 

 

 

Equipment

 

$

13,563

 

$

13,881

 

Software

 

8,696

 

8,030

 

Furniture and fixtures

 

781

 

840

 

Leasehold improvements

 

800

 

800

 

 

 

23,840

 

23,551

 

Accumulated depreciation and amortization

 

(20,375

)

(20,058

)

 

 

$

3,465

 

$

3,493

 

 

 

 

 

 

 

Other assets:

 

 

 

 

 

Prepaid wafer credits

 

$

634

 

$

846

 

Other

 

42

 

57

 

 

 

$

676

 

$

903

 

 

 

 

 

 

 

Accrued liabilities:

 

 

 

 

 

Employee related accruals

 

$

983

 

$

1,047

 

Other

 

597

 

490

 

 

 

$

1,580

 

$

1,537

 

 

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Table of Contents

 

QUICKLOGIC CORPORATION

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Note 6—Obligations

 

 

 

June 28,
2009

 

December 28,
2008

 

 

 

(in thousands)

 

Debt and capital lease obligations:

 

 

 

 

 

Revolving line of credit

 

$

2,000

 

$

2,000

 

Capital leases

 

1,002

 

753

 

 

 

3,002

 

2,753

 

Current portion of debt and capital lease obligations

 

(2,612

)

(2,753

)

 

 

$

390

 

$

 

 

Revolving Line of Credit

 

Effective August 2008, the Company amended its Second Amended and Restated Loan and Security Agreement with Silicon Valley Bank. Terms of the amended agreement include a $6.0 million revolving line of credit available through June 2010, as long as the Company is in compliance with the loan covenants. Upon each advance, the Company can elect a variable interest rate, which is the greater of six percent or the prime rate plus one percent, or a fixed rate which is LIBOR plus 3.50%. During the second quarter of 2009, the Company repaid $2.0 million of revolving debt and borrowed $2.0 million of revolving debt with a variable interest rate of 6.0% as of June 28, 2009.

 

The bank has a first priority security interest in substantially all of the Company’s tangible and intangible assets to secure any outstanding amounts under the agreement. Under the terms of the agreement, except as noted above, the Company must maintain a minimum tangible net worth and adjusted quick ratio. The agreement also has certain restrictions including, among others, on the incurrence of other indebtedness, the maintenance of depository accounts, the disposition of assets, mergers, acquisitions, investments, the granting of liens and the payment of dividends. The Company was in compliance with the financial covenants of the agreement as of the end of the current reporting period.

 

Capital Leases

 

In 2007, the Company leased design software and related maintenance under a two year capital lease at an imputed interest rate of 7.1% per annum. Terms of the agreement require the Company to make quarterly payments of approximately $190,000 through November 2009. The Company recorded a capital asset of $1.2 million and prepaid maintenance of $256,000 that is being amortized over the term of the agreement and a capital lease obligation of $1.4 million. As of June 28, 2009, $370,000 was outstanding under the capital lease, all of which was classified as a current liability.

 

In January 2009, the Company leased design software tools and related maintenance under a three-year capital lease at an imputed interest rate of 5.75% per annum. Terms of the agreement require the Company to make semi-annual payments of approximately $138,000 through August 2011, for a total of approximately $825,000 over the three years period. As of June 28, 2009, $632,000 was outstanding under the capital lease, of which $242,000 was classified as a current liability.

 

Note 7—Fair Value Measurements

 

Effective December 31, 2007, the Company adopted the provisions of SFAS No. 157, Fair Value Measurements , as amended by FSP FAS 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13 , and FSP FAS 157-2, Effective Date of FASB Statement No. 157 . The adoption of this standard in fiscal 2008 was limited to financial assets and liabilities. The adoption of SFAS 157

 

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Table of Contents

 

QUICKLOGIC CORPORATION

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

did not have a material effect on the Company’s financial condition or results of operations. The Company adopted FSP FAS 157-2 with respect to the Company’s non-financial assets and liabilities on December 29, 2008, and the adoption did not have an effect on its consolidated financial statements.

 

SFAS No. 157 specifies a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions other market participants would use based upon market data obtained from independent sources (observable inputs) or reflect the company’s own assumption of market participant valuation (unobservable inputs). The fair value hierarchy consists of the following three levels:

 

· Level 1 — Inputs are quoted prices in active markets for identical assets or liabilities.

 

· Level 2 — Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data.

 

· Level 3 — Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.

 

The following table presents the Company’s financial assets that are measured at fair value on a recurring basis as of June 28, 2009 consistent with the fair value hierarchy provisions of SFAS No. 157 (in thousands):

 

 

 

As of June 28, 2009

 

As of December 28, 2008

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds (1)

 

$

12,714

 

$

12,714

 

$

 

$

 

$

19,376

 

$

19,376

 

$

 

$

 

Investment in Tower Semiconductor Ltd.

 

430

 

430

 

 

 

175

 

175

 

 

 

Total assets

 

$

13,144

 

$

13,144

 

$

 

$

 

$

19,551

 

$

19,551

 

$

 

$

 

 


(1)              Money market funds are presented as a part of cash and cash equivalents on the accompanying consolidated balance sheets.

 

The Company does not have any financial liabilities that are subject to the provision of SFAS No. 157.

 

Note 8—Employee Stock Plans

 

1989 Stock Option Plan

 

The 1989 Stock Option Plan, or 1989 Plan, provided for the issuance of incentive and nonqualified options for the purchase of up to 4.6 million shares of common stock. Options granted under the 1989 Plan have a term of up to ten years, and typically vest at a rate of 25% of the total grant per year over a four year period. In September 1999, the Company adopted the 1999 Stock Plan and no further stock option grants were made under the 1989 Plan.

 

1999 Stock Plan

 

The 1999 Stock Plan, or 1999 Plan, provided for the issuance of incentive and nonqualified options, restricted stock units and restricted stock. Equity awards granted under the 1999 Plan have a term of up to ten years. Options typically vest at a rate of 25% one year after the vesting commencement date, and one forty-eighth for each month of service thereafter. In March 2009, the Board adopted the 2009 Stock Plan which was approved by the

 

13



Table of Contents

 

QUICKLOGIC CORPORATION

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Company’s stockholders on April 22, 2009.  Effective April 22, 2009, no further stock options may be granted under the 1999 Plan.

 

2009 Stock Plan

 

The 2009 Stock Plan, or 2009 Plan, was adopted by the Board of Directors in March 2009 and approved by the Company’s stockholders on April 22, 2009. As of June 28, 2009, approximately 2.5 million shares were reserved for issuance under the 2009 Plan. Equity awards that are cancelled, forfeited or repurchased under the 1999 Plan also become available for grant under the 2009 Plan, up to a maximum of an additional 7,500,000 shares. Equity awards granted under the 2009 Plan have a term of up to ten years. Options typically vest at a rate of 25% one year after the vesting commencement date, and one forty-eighth for each month of service thereafter. The Company may implement different vesting schedules in the future with respect to any new equity awards.

 

Employee Stock Purchase Plan

 

The 1999 Employee Stock Purchase Plan, or 1999 ESPP, was adopted by the Board of Directors in August 1999 and was approved by the Company’s stockholders in September 1999.  The 1999 ESPP provided for standard six month offering periods.

 

In April 2009, the Company adopted the 2009 Employee Stock Purchase Plan, or 2009 ESPP, and the last purchase under the 1999 ESPP was made on May 15, 2009. The 2009 ESPP, was adopted by the Board of Directors in March 2009 and approved by the Company’s stockholders in April 2009. 2.3 million shares have been reserved for issuance under the 2009 ESPP. The 2009 ESPP provides for six month offering periods. Participants purchase shares through payroll deductions of up to 20% of an employee’s total compensation (maximum of 20,000 shares per offering period). The 2009 ESPP permits the Board of Directors to determine, prior to each offering period, whether participants purchase shares at: (i) 85% of the fair market value of the common stock at the end of the offering period; or (ii) 85% of the lower of the fair market value of the common stock at the beginning or the end of an offering period. The Board of Directors has determined that, until further notice, future offering periods will be made at 85% of the lower of the fair market value of the common stock at the beginning or the end of an offering period.

 

Note 9—Stock-Based Compensation

 

Under SFAS 123(R), stock-based compensation expense is recognized in the Company’s consolidated statements of operations and includes: (i) compensation expense for stock-based compensation awards granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated and re-measured upon modification in accordance with the pro forma provisions of SFAS 123, and (ii) compensation expense for the stock-based compensation awards granted or modified subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). The impact of SFAS 123(R) on the Company’s consolidated financial statements for the second quarter and first half of 2009 and 2008 was as follows (in thousands):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 28,
2009

 

June 29,
2008

 

June 28,
2009

 

June 29,
2008

 

Cost of revenue

 

$

71

 

$

106

 

$

122

 

$

171

 

Research and development

 

138

 

196

 

226

 

354

 

Selling, general and administrative

 

358

 

615

 

603

 

1,057

 

Total costs and expenses

 

$

567

 

$

917

 

$

951

 

$

1,582

 

 

The amount of stock-based compensation included in inventories as of June 28, 2009 and December 28, 2008 was not significant.

 

14



Table of Contents

 

QUICKLOGIC CORPORATION

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Valuation Assumptions

 

The following weighted average assumptions are included in the estimated fair value calculations for stock option grants:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 28,
2009

 

June 29,
2008

 

June 28,
2009

 

June 29,
2008

 

Expected term (years)

 

5.15

 

6.28

 

5.14

 

5.65

 

Risk-free interest rate

 

1.98

%

3.16

%

1.97

%

2.91

%

Expected volatility

 

51.04

%

55.95

%

51.00

%

52.77

%

Expected dividend

 

 

 

 

 

 

The weighted average estimated fair value for options granted during the second quarter of 2009 and 2008 was $0.75 and $1.39 per option, respectively. The weighted average estimated fair value for options granted during the first half of 2009 and 2008 was $0.74 and $1.40 per option, respectively. As of June 28, 2009, the fair value of unvested stock options, net of expected forfeitures, was approximately $4.1 million. This unrecognized stock-based compensation expense is expected to be recorded over a weighted average period of 2.94 years.

 

Stock-Based Compensation Award Activity

 

The following table summarizes the shares available for grant under the 2009 Plan for the first half of 2009:

 

 

 

Shares
Available for Grant

 

 

 

(in thousands)

 

Balance at December 28, 2008

 

8,313

 

Authorized

 

2,500

 

Options granted

 

(2,095

)

Options forfeited or expired

 

(6,964

)

RSAs granted

 

 

RSUs granted

 

 

RSUs forfeited or expired

 

599

 

Balance at June 28, 2009

 

2,353

 

 

15



Table of Contents

 

QUICKLOGIC CORPORATION

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Stock Options

 

The following table summarizes stock options outstanding and stock option activity under the 1989 Plan, the 1999 Plan and the 2009 Plan, and the related weighted average exercise price, for the first half of 2009:

 

 

 

Number of Shares

 

Weighted
Average Exercise
Price

 

Weighted
Average
Remaining Term

 

Aggregate
Intrinsic Value

 

 

 

(in thousands)

 

 

 

(in years)

 

(in thousands)

 

Balance outstanding at December 28, 2008

 

7,367

 

$

 4.13

 

 

 

 

 

Granted

 

2,095

 

1.60

 

 

 

 

 

Forfeited or expired

 

(416

)

3.28

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

Balance outstanding at June 28, 2009

 

9,046

 

$

 3.58

 

6.56

 

$

 573

 

Exercisable at June 28, 2009

 

4,754

 

$

 5.10

 

4.20

 

$

 13

 

Vested and expected to vest at June 28, 2009

 

9,046

 

$

 3.58

 

6.56

 

$

 573

 

 

The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on the Company’s closing stock price of $1.37 as of the end of the Company’s current reporting period, which would have been received by the option holders had all option holders exercised their options as of that date.

 

There were no stock option exercises during the first half of 2009. The total intrinsic value of options exercised during the first half of 2008 was $30,000. Total cash received from employees as a result of employee stock option exercises during the first half of 2008 was approximately $96,000. The Company settles employee stock option exercises with newly issued common shares. In connection with these exercises, there was no tax benefit realized by the Company due to its current loss position.

 

Restricted Stock Awards and Restricted Stock Units

 

The Company began issuing RSAs in the second quarter of 2007 and RSUs in the third quarter of 2007 under the 1999 Plan. RSAs entitle the holder to purchase shares of common stock at par value during a short period of time, and purchased shares are held in escrow until they vest. RSUs entitle the holder to receive, at no cost, one common share for each restricted stock unit as it vests. A summary of the Company’s RSA and RSU activity and related information are as follows:

 

 

 

RSAs and RSUs Outstanding

 

 

 

Number of Shares

 

Weighted Average
Grant Date Fair Value

 

 

 

(in thousands)

 

 

 

Nonvested at December 28, 2008

 

654

 

$

 3.35

 

Granted

 

 

 

Vested

 

 

 

Forfeited

 

(599

)

3.57

 

Nonvested at June 28, 2009

 

55

 

$

 0.96

 

 

As of June 28, 2009, the unrecognized stock-based compensation expense related to outstanding performance based RSUs which are not currently expected to vest, was $15,000. The Company will recognize this expense to the extent it determines these performance based RSUs are likely to vest.

 

Employee Stock Purchase Plan

 

Under the 2009 ESPP, the Company issued 343,491 shares at a price of $0.55 per share during the six months ended June 28, 2009. As of June 28, 2009, 2,300,000 shares under the 2009 ESPP remained available for issuance. For the three and six months ended June 28, 2009, the Company recorded compensation expense related to the ESPP of $105,000 and $127,000, respectively.

 

16



Table of Contents

 

QUICKLOGIC CORPORATION

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The fair value of rights issued pursuant to the Company’s ESPP was estimated on the commencement date of each offering period using the following weighted average assumptions:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 28,
2009

 

June 29,
2008

 

June 28,
2009

 

June 29,
2008

 

Expected term (months)

 

6.00

 

6.00

 

6.00

 

6.00

 

Risk-free interest rate

 

0.29

%

3.56

%

0.29

%

3.56

%

Expected volatility

 

126.98

%

49.57

%

126.98

%

49.57

%

Expected dividend

 

 

 

 

 

 

As of June 28, 2009, the unrecognized stock-based compensation expense relating to the Company’s ESPP was $109,000 and is expected to be recognized over a weighted average period of approximately 4.5 months.

 

Note 10—Income Taxes

 

In the second quarter of 2009 and 2008, the Company recorded an income tax benefit of $15,000 and $0, respectively, which consisted primarily of income taxes on foreign operations offset by the monetization of prior year federal research credits. In the first half of 2009 and 2008, the Company recorded an income tax benefit of $11,000 and an income tax expense of $34,000, respectively, which consisted primarily of income taxes on foreign operations offset by the monetization of prior year federal research credits.

 

Due to the uncertainties surrounding the realization of the deferred tax assets resulting from the Company’s accumulated deficit and net tax losses in previous years, the Company has provided a full valuation allowance against the associated deferred tax assets. The Company will continue to assess the realizability of the deferred tax assets in future periods.

 

The Company had approximately $68,000 and $66,000 of unrecognized tax benefits at June 28, 2009 and December 28, 2008, respectively. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of June 28, 2009, the Company had approximately $11,000 of accrued interest and penalties related to uncertain tax positions.

 

The Company is no longer subject to U.S. federal, state and non-U.S. income tax audits by taxing authorities for fiscal years through 1992. The Company estimates that any unrecognized tax benefit will not change significantly within the next twelve months.

 

Note 11—Information Concerning Product Lines, Geographic Information and Revenue Concentration

 

The Company identifies its business segments based on business activities, management responsibility and geographic location. For all periods presented, the Company operated in a single business segment.

 

17



Table of Contents

 

QUICKLOGIC CORPORATION

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The following is a breakdown of revenue by product line (in thousands):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 28,
2009

 

June 29,
2008

 

June 28,
2009

 

June 29,
2008

 

Revenue by product line (1):

 

 

 

 

 

 

 

 

 

New products

 

$

 816

 

$

 2,564

 

$

 1,474

 

$

 5,162

 

Mature products

 

1,879

 

4,591

 

5,485

 

8,915

 

End-of-life products

 

216

 

1,588

 

504

 

5,689

 

Total revenue

 

$

 2,911

 

$

 8,743

 

$

 7,463

 

$

 19,766

 

 


(1)              For all periods presented: New products include ArcticLink, PolarPro II, PolarPro, Eclipse™ II and QuickPCI ®  II products. Mature products include pASIC ®  3, QuickRAM ® , Eclipse, QuickDSP and QuickFC products, as well as royalty revenue, programming hardware and software. End-of-life products include pASIC 1, pASIC 2, V3, QuickMIPS and QuickPCI products.

 

The following is a breakdown of revenue by shipment destination (in thousands):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 28,
2009

 

June 29,
2008

 

June 28,
2009

 

June 29,
2008

 

Revenue by geography:

 

 

 

 

 

 

 

 

 

United States

 

$

 1,245

 

$

 3,148

 

$

 3,455

 

$

 7,691

 

Europe

 

564

 

1,376

 

1,561

 

3,145

 

Taiwan

 

16

 

1,917

 

11

 

3,976

 

Japan

 

449

 

684

 

815

 

1,558

 

China

 

353

 

940

 

673

 

2,176

 

Rest of North America

 

111

 

172

 

328

 

557

 

Rest of Asia Pacific

 

173

 

506

 

620

 

663

 

Total revenue

 

$

 2,911

 

$

 8,743

 

$

 7,463

 

$

 19,766

 

 

The following distributors and customers accounted for 10% or more of the Company’s revenue for the periods presented:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 28, 2009

 

June 29, 2008

 

June 28, 2009

 

June 29, 2008

 

Distributor “A”

 

19

%

11

%

25

%

14

%

Distributor “B”

 

20

%

*

 

16

%

13

%

Distributor “C”

 

11

%

*

 

*

 

*

 

Customer “A”

 

*

 

21

%

*

 

19

%

Customer “B”

 

*

 

17

%

14

%

12

%

 


* Represents less than 10% of revenue for the period presented.

 

18



Table of Contents

 

QUICKLOGIC CORPORATION

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The following distributors and customers accounted for 10% or more of the Company’s accounts receivable as of the dates presented:

 

 

 

June 28, 2009

 

December 28, 2008

 

Distributor “A”

 

16

%

20

%

Distributor “B”

 

19

%

*

 

Distributor “C”

 

11

%

13

%

Distributor “D”

 

*

 

12

%

Distributor “E”

 

10

%

*

 

 


* Represents less than 10% of accounts receivable as of the date presented.

 

As of June 28, 2009, less than 10% of the Company’s long-lived assets, including property and equipment and other assets, were located outside the United States.

 

Note 12—Commitments and Contingencies

 

Certain of the Company’s wafer manufacturers require the Company to forecast wafer starts several months in advance. The Company is committed to take delivery of and pay for a portion of forecasted wafer volume. As of June 28, 2009 and December 28, 2008, the Company had $3.5 million and $4.8 million, respectively, of outstanding commitments for the purchase of wafer inventory.

 

The Company leases, with an option to renew, its primary facility under a non-cancelable operating lease that expires in 2012. In addition, the Company rents development facilities in Canada and India as well as sales offices in Europe and Asia. Total rent expense for the second quarter of 2009 and 2008 was approximately $145,000 and $180,000, respectively, and rent expense for the first half of 2009 and 2008 was approximately $290,000 and $360,000, respectively.

 

Future minimum lease commitments under the Company’s operating leases, and excluding property taxes and insurance are as follows:

 

 

 

Operating
Leases

 

 

 

(in thousands)

 

Fiscal Years

 

 

 

Rest of 2009

 

$

 297

 

2010

 

429

 

2011

 

396

 

2012

 

396

 

2013 and thereafter

 

 

 

 

$

 1,518

 

 

19



Table of Contents

 

QUICKLOGIC CORPORATION

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Note 13—Litigation

 

On October 26, 2001, a putative securities class action was filed in the U.S. District Court for the Southern District of New York against certain investment banks that underwrote QuickLogic’s initial public offering, QuickLogic and some of QuickLogic’s officers and directors. The complaint alleges excessive and undisclosed commissions in connection with the allocation of shares of common stock in QuickLogic’s initial and secondary public offerings and artificially high prices through “tie-in” arrangements which required the underwriters’ customers to buy shares in the aftermarket at pre-determined prices in violation of the federal securities laws. Plaintiffs seek an unspecified amount of damages on behalf of persons who purchased QuickLogic’s stock pursuant to the registration statements between October 14, 1999 and December 6, 2000. Various plaintiffs have filed similar actions asserting virtually identical allegations against over 300 other public companies, their underwriters, and their officers and directors arising out of each company’s public offering. These actions, including the action against QuickLogic, have been coordinated for pretrial purposes and captioned In re Initial Public Offering Securities Litigation, 21 MC 92 .

 

In June 2004, a stipulation of settlement and release of claims against the issuer defendants, including QuickLogic, was submitted to the court for approval. On August 31, 2005, the Court preliminarily approved the settlement. In December 2006, the appellate Court overturned the certification of classes in the six test cases that were selected by the underwriter defendants and plaintiffs in the coordinated proceedings. Because class certification was a condition of the settlement, it was unlikely that the settlement would receive final Court approval. On June 25, 2007, the Court entered an order terminating the proposed settlement based upon a stipulation among the parties to the settlement. Plaintiffs have filed amended master allegations and amended complaints, in the six test cases. On March 26, 2008, the Court denied the defendants’ motion to dismiss the amended complaints.

 

The parties recently reached a global settlement of the litigation. On June 9, 2009, the Court issued an order granting preliminary approval of the settlement. The final approval hearing has been set for September 10, 2009. Under the settlement, the insurers would pay the full amount of settlement share allocated to the Company, and the Company would bear no financial liability. The Company, as well as the officer and director defendants who were previously dismissed from the action pursuant to tolling agreements, would receive complete dismissals from the case. If the settlement does not receive final Court approval, and litigation against the Company continues, the Company believes it has meritorious defenses and intends to defend the action vigorously.

 

No estimate can be made of the possible loss or possible range of loss associated with the resolution of these contingencies and, accordingly, the Company has not recorded a liability.

 

From time to time, the Company is involved in legal actions arising in the ordinary course of business, including but not limited to intellectual property infringement and collection matters. Absolute assurance cannot be given that third party assertions will be resolved without costly litigation in a manner that is not adverse to the Company’s financial position, results of operations or cash flows or without requiring royalty or other payments in the future which may adversely impact gross profit.

 

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QUICKLOGIC CORPORATION

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Note 14—Restructuring Charges

 

In April 2008, the Company decided to outsource certain development functions that were previously performed in-house. This reorganization resulted in a headcount reduction of approximately 13% of employees worldwide. In June 2008, the Company announced the completion of its CSSP focused operational realignment which included an additional 17% reduction in headcount worldwide, resulting in a total reduction in worldwide headcount of approximately 30%. The purpose of the operational realignment is to lower fixed costs in order to conserve cash, to reduce the Company’s break-even revenue level and enable a quicker return to profitability, to provide optimal profitability scaling with revenue growth and to provide greater headroom for discretionary costs to enable new product revenue growth. Our restructuring liabilities were included in the “Accrued Liabilities” line item in our consolidated balance sheets as of June 28, 2009 and December 28, 2008, and the remaining balance is expected to be paid by the end of fiscal year 2009.

 

 

 

Restructuring
Liabilities

 

 

 

(in thousands)

 

Balance at December 28, 2008

 

$

 121

 

Payments

 

(73

)

Balance at June 28, 2009

 

$

 48

 

 

Note 15—Subsequent Events

 

Effective in July 2009, the Company implemented an across the board salary reduction plan for the second half of 2009.  As a result, all executives and most of the Company’s employees will take a 10% reduction of cash based compensation and, in its place, receive RSUs that vest in two tranches over a four month period. Our Chief Executive Officer will take a 20% reduction in salary for the second half of 2009 and will receive RSUs on the same basis as the other employees.

 

Effective in the third quarter of 2009, the Board members will take a 20% reduction in their cash compensation and the Company will substitute the reduction amount with fully vested RSUs.

 

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Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

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 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 factors that affect gross profit, (5) our level of operating expenses, (6) our research and development efforts, (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 December 28, 2008, found in our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on March 11, 2009.

 

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 differentiated features and capabilities to their mobile, prosumer (derived from the term “ pro fessional con sumer ”), 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, and, secondarily, Field Programmable Gate Arrays, or FPGAs, associated design software and programming hardware. Our CSSPs are customized semiconductor building blocks created from our new solution platforms including ArcticLink ®  II, ArcticLink, PolarPro ®  II, PolarPro, Eclipse TM  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.

 

We are marketing CSSPs to Original Equipment Manufacturers, or OEMs, and Original Design Manufactures, or ODMs, offering differentiated mobile products. Our target mobile markets include:

 

·                   Cellular — including multimedia and smartphones;

 

·                   Computing — including Mobile Internet Devices, or MIDs, Netbooks, Smartbooks, Ultra Mobile PCs, or UMPCs, industrial personal digital assistants, or PDAs, handheld point-of-sales, or POS, terminals and broadband 3G data cards; and

 

·                   Consumer Electronics — including portable media players, or PMPs, personal navigation devices, or PNDs, and wireless hard disk drives or wireless storage 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. 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.

 

During the second quarter we completed development, and released for manufacturing the latest in our family of VEE-enabled solution platforms - ArcticLink II, VX2 and VX4. The VX family embeds the second generation Visual Enhancement Engine, or VEE™, Proven System Block (PSB), which improves the user’s video viewing experience while extending system battery life by allowing reduction in the power used by a mobile device’s single biggest consumer of power, the backlight. The VX4 platform also embeds the Qualcomm developed MDDI serial interface for ease of connection with their mobile processors. The VX2 platform also embeds an LCD Controller and optional CellularRAM frame buffer for storing display content.  By embedding the frame buffer, the mobile processor can be powered down more frequently, saving previous energy and extending battery life.  Both

 

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the VX2 and VX4 embed a programmable fabric for integrating additional PSBs that can reduce BOM cost, reduce PCB space, and can optimize system power consumption.

 

Although the semiconductor industry as a whole has seen a dramatic decline in 2009 with modest growth predicted in 2010, consumer products remain a strong driver for semiconductor sales.  We believe that the target mobile markets for our CSSPs continue to provide growth potential.  Trends in the rapidly growing sub-segments of the consumer market in which we participate include:

 

·                   Mobile, Handheld Devices:  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.

 

·                   Netbook/Smartbook Category:  iSuppli predicts shipments of wirelessly-enabled netbooks will more than triple by 2012, rising to 36.3 million units, up from 10.3 million in 2008. This segment is largely driven by the desire for a consumer platform that combines the mobile computing and Internet experience of Notebooks with the day-long battery life of Multimedia and Smartphones.

 

·                   USB-Based Broadband Data Card:  Mobile data service providers anticipate consumer demand for these data cards to reach nearly 40 million units in 2009, according to the market research firm ABI Research.  These data cards enable consumers to connect their Notebook, Netbook, Smartbook or PC to the cellular network as a broadband internet connection.  During our second quarter, QuickLogic announced the selection of a CSSP, based on the ArcticLink solution platform, for the Icera Espresso® 300 3G soft modem platform.  Icera is a leader in software-defined wireless chipsets and is the only company to deliver software-based cellular modems for broadband data cards, USB sticks, and mobile internet devices. Icera’s reference design uses a wafer-level chip scale (WLCSP) version of the ArcticLink solution platform to compliment its second-generation baseband chip design.

 

Underlying 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.

 

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 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, 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, fair value measurements of financial assets and liabilities, and measuring 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 statements of operations and financial condition. 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 December 28, 2008 filed with the SEC on March 11, 2009.

 

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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

 

Six Months Ended

 

 

 

June 28, 2009

 

June 29, 2008

 

June 28, 2009

 

June 29, 2008

 

Revenue

 

100.0

%

100.0

%

100.0

%

100.0

%

Cost of revenue (1)

 

54.6

 

45.5

 

45.7

 

46.7

 

Long-lived asset impairment

 

 

17.7

 

 

7.8

 

Gross profit

 

45.4

 

36.8

 

54.3

 

45.5

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

64.5

 

29.8

 

46.8

 

27.5

 

Selling, general and administrative

 

93.0

 

45.4

 

71.7

 

42.0

 

Long-lived asset impairment

 

 

5.4

 

 

2.4

 

Restructuring costs

 

 

5.2

 

 

2.3

 

Loss from operations

 

(112.1

)

(49.0

)

(64.2

)

(28.7

)

Write-down of investment in Tower Semiconductor Ltd.

 

 

(4.7

)

 

 

(2.1

)

Interest expense

 

(0.8

)

(0.8

)

(0.6

)

(0.7

)

Interest income and other, net

 

1.5

 

0.3

 

 

0.7

 

Loss before income taxes

 

(111.4

)

(54.2

)

(64.8

)

(30.8

)

Provision for (benefit from) income taxes

 

(0.5

)

 

(0.1

)

0.2

 

Net loss

 

(110.9

)%

(54.2

)%

(64.7

)%

(31.0

)%

 


(1) The second quarter of 2009 and 2008 includes $58,000 and $172,000, respectively, of costs for the write-down of inventories and related charges, which represents 2.0% and 2.0% of revenue, respectively. The first half of 2009 and 2008 includes $236,000 and $1.1 million, respectively, of costs for the write-down of inventories and related charges, which represents 3.2% and 5.7% of revenue, respectively.

 

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Table of Contents

 

Three Months Ended June 28, 2009 and June 29, 2008

 

Revenue

 

The table below sets forth the changes in revenue for the three months ended June 29, 2008 as compared to the three months ended June 28, 2009 (in thousands, except percentage data):

 

 

 

Three Months Ended

 

 

 

 

 

 

 

June 28, 2009

 

June 29, 2008

 

 

 

 

 

 

 

Amount

 

% of Total
Revenues

 

Amount

 

% of Total
Revenues

 

Year-Over-
Year Change

 

New products

 

$

816

 

28

%

$

2,564

 

29

%

$

(1,748

)

(68

)%

Mature products

 

1,879

 

65

 

4,591

 

53

 

(2,712

)

(59

)

End-of-life products

 

216

 

7

 

1,588

 

18

 

(1,372

)

(86

)

Total revenue

 

$

2,911

 

100

%

$

8,743

 

100

%

$

(5,832

)

(67

)%

 

For all periods presented, new products include ArcticLink, PolarPro, Eclipse II and QuickPCI II products; mature products include pASIC 3, QuickRAM, Eclipse, QuickDSP and QuickFC products, as well as royalty revenue, programming hardware and design software; end-of-life products include pASIC 1, pASIC 2, V3, QuickMIPS and QuickPCI products.

 

The decline in revenue was due to declines in both our legacy and new product lines. The decline in new product revenue was caused by the expected end of life by the manufacturer of a product family of a personal navigation device, or PND, and by delays in new product production ramp-up with several major customers. The decline in mature product revenue resulted from the general economic slowdown. Our mature product revenue decreased as a result of lower customer demand for pASIC 3 and QuickRAM products. One of our U.S. customers, purchasing primarily pASIC 3 devices, accounted for 8% and 17% of total revenue in the second quarters of 2009 and 2008, respectively.

 

In order to grow our revenue from its current level, we are dependent upon increased revenue from our existing products, especially revenue from CSSPs designed using our ArcticLink and PolarPro solution platforms and the development of additional new products and CSSPs.

 

We continue to seek to expand our revenue, including the pursuit of high volume sales opportunities in the consumer market segment, by providing CSSPs incorporating intellectual property such as boot from managed NAND or industry standard interfaces such as USB 2.0 OTG, SDIO and integrated drive electronics, or IDE. 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 three months ended June 29, 2008 as compared to the three months ended June 28, 2009 (in thousands, except percentage data):

 

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Table of Contents

 

 

 

Three Months Ended

 

 

 

 

 

 

 

June 28, 2009

 

June 29, 2008

 

 

 

 

 

 

 

Amount

 

% of Total
Revenues

 

Amount

 

% of Total
Revenues

 

Year-Over-Year Change

 

Revenue

 

$

2,911

 

100

%

$

8,743

 

100

%

$

(5,832

)

(67

)%

Cost of revenue

 

1,589

 

55

 

3,982

 

46

 

(2,393

)

(60

)

Long-lived asset impairment

 

 

 

1,545

 

18

 

(1,545

)

(100

)%

Gross Profit

 

$

1,322

 

45

%

$

3,216

 

36

%

$

(1,894

)

(59

)%

 

The decline in gross profit was mainly due to the decline in revenue in the second quarter of 2009 as compared to the second quarter of 2008. The second quarter 2009 gross profit decline was partially offset by the absence in the second quarter of 2009 of long-lived asset impairments which accounted for $1.5 million of gross profit charges in the second quarter of 2008; a change in product mix towards mature products which carry higher gross margins than new products; and a reduction of excess and obsolescence provisions in the second quarter of 2009 as compared to the second quarter of 2008.  The sale of previously reserved inventories contributed $94,000, or 3.2% of revenue, to gross profit in the second quarter of 2009 and $153,000, or 1.7% of revenue, in the second quarter of 2008.

 

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, 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.

 

Operating Expenses

 

The table below sets forth the changes in operating expenses for the three months ended June 29, 2008 as compared to the three months ended June 28, 2009 (in thousands, except percentage data):

 

 

 

Three Months Ended

 

 

 

 

 

 

 

June 28, 2009

 

June 29, 2008

 

 

 

 

 

 

 

Amount

 

% of Total
Revenues

 

Amount

 

% of Total
Revenues

 

Year-Over-Year Change

 

R&D expense

 

$

1,877

 

64

%

$

2,610

 

30

%

$

(733

)

(28

)%

SG&A expense

 

2,709

 

93

 

3,970

 

45

 

(1,261

)

(32

)

Long-lived asset impairment

 

 

 

468

 

5

 

(468

)

(100

)

Restructuring costs

 

 

 

452

 

5

 

(452

)

(100

)

Total operating expenses

 

$

4,586

 

157

%

$

7,500

 

85

%

$

(2,914

)

(39

)%

 

Research and Development

 

Our research and development expenses consist primarily of personnel, overhead and other costs associated with engineering process improvements, programmable logic design, ASSP design and software development. The decrease in R&D expenses results primarily from measures undertaken in the second quarter of 2008 to change certain development activities to an on-demand, outsourced model from an in-house, fixed cost model. As a result of this decision, our research and development staffing in Toronto, Canada was reduced during the second quarter of 2008. The $0.7 million decrease in R&D expenses in the second quarter of 2009 as compared to the second quarter of 2008 is attributable primarily to a $540,000 or 56% decrease in compensation expenses due to reduced headcount; a $280,000 or 47% decrease in expense allocations to R&D such as facilities and other corporate costs; a $60,000 or 30% decrease in stock based compensation expenses, and a $30,000 or 64% decrease in travel and entertainment expenses, offset by an increase of $230,000 or 51% in outside services.

 

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Table of Contents

 

Selling, General and Administrative Expense

 

Our selling, general and administrative expenses consist primarily of personnel and related overhead costs for sales, marketing, finance, administration, human resources and general management.  The $1.3 million quarter to quarter decrease in SG&A expenses resulted from our effort to realign resources with our expected revenue outlook and was primarily due to a $430,000 or 24% decrease in compensation expenses as a result of headcount reductions; a $520,000 or 48% decrease in outside services such as consulting, temporary help and legal, a $110,000 or 21% decrease in occupancy costs including rent, utilities and insurance expenses, and $260,000 or 42% decrease in stock based compensation expenses.

 

Long-Lived Assets Impairment

 

In the second quarter of 2008, we recorded a $468,000 long-lived asset impairment charge to operating expenses as a result of our decision to outsource design implementation activity, which resulted in unutilized EDA software licenses. There were no long-lived asset impairment charges in the second quarter of 2009.

 

Restructuring Costs

 

In the second quarter of 2008, we reduced our worldwide headcount by approximately 30% in order to: lower fixed cost; enable a lower break-even revenue level and optimal profitability scaling with revenue growth; provide greater headroom for discretionary costs, resulting in the agility to pursue new product market opportunities; conserve cash by reducing operating expenses; and enable a quicker return to profitability. In connection with this decision, we recorded a $452,000 restructuring charge for employee severance benefits in the second quarter of 2008; these benefits are expected to be paid by the end of fiscal 2009.

 

Interest and Other Income (Expense), net

 

The table below sets forth the changes in Interest and Other Income (Expense), net, from the three months ended June 29, 2008 as compared to the three months ended June 28, 2009:

 

 

 

Three Months Ended

 

 

 

June 28, 2009

 

June 29, 2008

 

 

 

(in thousands)

 

 

 

 

 

 

 

Write-down of investment in Tower Semiconductor Ltd.

 

$

 

$

(417

)

Interest expense

 

(23

)

(72

)

Interest income and other, net

 

45

 

30

 

 

 

$

22

 

$

(459

)

 

In the second quarter of 2008, we determined that our investment in Tower had suffered a decline in value that was determined to be “other than temporary.” This determination included factors such as market value and the period of time that the market value has been below the carrying value. Accordingly, we recorded a write-down of $417,000 in the second quarter of 2008 based on the quoted market price of the stock on the last day of the reporting period. There were no write-downs of marketable securities in the second quarter of 2009.

 

The decrease in interest expense is due primarily to the reduction of our average debt obligation to $3.1 million in the second quarter of 2009 from $4.1 million in the second quarter of 2008. The decrease in interest income is due primarily to the drop in investment yields between the second quarter of 2008 and the second quarter of 2009.

 

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 income and other,

 

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Table of Contents

 

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

 

 

 

Three Months Ended

 

 

 

June 28, 2009

 

June 29, 2008

 

 

 

(in thousands)

 

 

 

 

 

 

 

Income tax provision (benefit)

 

$

(15

)

$

 

 

The income tax provision (benefit) for the second quarters of 2009 and 2008 are primarily for our foreign operations which are cost-plus entities offset by the monetization of prior year federal research credits. As of the end of the second quarter of 2009, 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 benefit. We will continue to assess the realizability of deferred tax assets in future periods.

 

Six Months Ended June 28, 2009 and June 29, 2008

 

Revenue

 

The table below sets forth the changes in revenue for the six months ended June 29, 2008 as compared to the six months ended June 28, 2009 (in thousands, except percentage data):

 

 

 

Six Months Ended

 

 

 

 

 

 

 

June 28, 2009

 

June 29, 2008

 

 

 

 

 

 

 

Amount

 

% of Total
Revenues

 

Amount

 

% of Total
Revenues

 

Year-Over-
Year Change

 

New products

 

$

1,474

 

20

%

$

5,162

 

26

%

$

(3,688

)

(71

)%

Mature products

 

5,485

 

73

 

8,915

 

45

 

(3,430

)

(38

)

End-of-life products

 

504

 

7

 

5,689

 

29

 

(5,185

)

(91

)

Total revenue

 

$

7,463

 

100

%

$

19,766

 

100

%

$

(12,303

)

(62

)%

 

For all periods presented, new products include ArcticLink, PolarPro, Eclipse II and QuickPCI II products; mature products include pASIC 3, QuickRAM, Eclipse, QuickDSP and QuickFC products, as well as royalty revenue, programming hardware and design software; end-of-life products include pASIC 1, pASIC 2, V3, QuickMIPS and QuickPCI products.

 

The decline in revenue was due to declines in both our legacy and new product lines. The decline in new product revenue was caused by the expected end of life of a product family of a personal navigation device, or PND, manufacturer and by delays in new product production ramp-up with several major customers. The decline in mature product revenue resulted from the general economic slowdown. Our mature product revenue decreased as a result of lower customer demand for pASIC 3 and QuickRAM products. One of our U.S. customers, purchasing primarily pASIC 3 devices, accounted for 14% and 12% of total revenue in the first half of 2009 and 2008, respectively.

 

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Table of Contents

 

Gross Profit

 

The table below sets forth the changes in gross profit for the six months ended June 29, 2008 as compared to the six months ended June 28, 2009 (in thousands, except percentage data):

 

 

 

Six Months Ended

 

 

 

 

 

 

 

June 28, 2009

 

June 29, 2008

 

 

 

 

 

 

 

Amount

 

% of Total
Revenues

 

Amount

 

% of Total
Revenues

 

Year-Over-Year Change

 

Revenue

 

$

7,463

 

100

%

$

19,766

 

100

%

$

(12,303

)

(62

)%

Cost of revenue

 

3,408

 

46

 

9,240

 

47

 

(5,832

)

(63

)

Long-lived asset impairment

 

 

 

1,545

 

8

 

(1,545

)

(100

)%

Gross Profit

 

$

4,055

 

54

%

$

8,981

 

45

%

$

(4,926

)

(55

)%

 

The decline in gross profit was mainly due to the decline in revenue in the first half of 2009 as compared to the first half of 2008. The gross profit decline during the first half of 2009 was partially offset by the absence of long-lived asset impairments which accounted for $1.5 million of gross profit charges in the first half of 2008; a change in product mix towards mature products which carry higher gross margins than new products; a reduction of excess and obsolescence provisions in the first half of 2009 as compared to the first half of 2008; and a change to favorable purchase price variances in the first half of 2009 from unfavorable purchase price variances in the first half of 2008.  The sale of previously reserved inventories contributed $215,000, or 2.9% of revenue, to gross profit in the first half of 2009 and $384,000, or 1.9% of revenue, in the first half of 2008.

 

Operating Expenses

 

The table below sets forth the changes in operating expenses for the six months ended June 29, 2008 as compared to the six months ended June 28, 2009 (in thousands, except percentage data):

 

 

 

Six Months Ended

 

 

 

 

 

 

 

June 28, 2009

 

June 29, 2008

 

 

 

 

 

 

 

Amount

 

% of Total
Revenues

 

Amount

 

% of Total
Revenues

 

Year-Over-Year Change

 

R&D expense

 

$

3,489

 

47

%

$

5,431

 

27

%

$

(1,942

)

(36

)%

SG&A expense

 

5,352

 

72

 

8,290

 

42

 

(2,938

)

(35

)

Long-lived asset impairment

 

 

 

468

 

2

 

(468

)

(100

)

Restructuring costs

 

 

 

452

 

2

 

(452

)

(100

)

Total operating expenses

 

$

8,841

 

119

%

$

14,641

 

73

%

$

(5,800

)

(40

)%

 

Research and Development

 

Our research and development expenses consist primarily of personnel, overhead and other costs associated with engineering process improvements, programmable logic design, ASSP design and software development. The decrease in R&D expenses results primarily from measures undertaken in the second quarter of 2008 to change certain development activities to an on-demand, outsourced model from an in-house, fixed cost model. As a result of this decision, our research and development staffing in Toronto, Canada was reduced during the second quarter of 2008. The $1.9 million decrease in R&D expenses in the first half of 2009 as compared to the first half of 2008 is attributable primarily to a $1.2 million or 57% decrease in compensation expenses due to reduced headcount; a

 

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$610,000 or 47% decrease in expense allocations to R&D such as facilities and other corporate costs; and a $130,000 or 36% decrease in stock based compensation expenses.

 

Selling, General and Administrative Expense

 

Our selling, general and administrative expenses consist primarily of personnel and related overhead costs for sales, marketing, finance, administration, human resources and general management.  The $2.9 million decrease in SG&A expenses in the first half of 2009 as compared to the first half of 2008 resulted from our effort to realign resources with our expected revenue outlook and was primarily due to a $1.1 million or 28% decrease in compensation expenses as a result of headcount reductions; a $1.2 million or 53% decrease in outside services such as consulting, temporary help and legal, and a $210,000 or 22% decrease in occupancy costs including rent, utilities and insurance expenses, and a $450,000 or 43% decrease in stock based compensation expenses.

 

Long-Lived Assets Impairment

 

In the first half of 2008, we recorded a $468,000 long-lived asset impairment charge to operating expenses as a result of our decision to outsource design implementation activity, which resulted in unutilized EDA software licenses. There were no long-lived asset impairment charges in the first half of 2009.

 

Restructuring Costs

 

In the first half of 2008, we reduced our worldwide headcount by approximately 30% in order to: lower fixed cost; enable a lower break-even revenue level and optimal profitability scaling with revenue growth; provide greater headroom for discretionary costs, resulting in the agility to pursue new product market opportunities; conserve cash by reducing operating expenses; and enable a quicker return to profitability. In connection with this decision, we recorded a $452,000 restructuring charge for employee severance benefits in the first half of 2008; these benefits are expected to be paid by the end of fiscal 2009.

 

Interest and Other Income (Expense), net

 

The table below sets forth the changes in Interest and Other Income (Expense), net, for the six months ended June 29, 2008 as compared to the six months ended June 28, 2009:

 

 

 

Six Months Ended

 

 

 

June 28, 2009

 

June 29, 2008

 

 

 

(in thousands)

 

 

 

 

 

 

 

Write-down of investment in Tower Semiconductor Ltd.

 

$

 

$

(417

)

Interest expense

 

(47

)

(143

)

Interest income and other, net

 

(1

)

134

 

 

 

$

(48

)

$

(426

)

 

In the first half of 2008, we determined that our investment in Tower had suffered a decline in value that was determined to be “other than temporary.” This determination included factors such as market value and the period of time that the market value has been below the carrying value. Accordingly, we recorded a write-down of $417,000 in the first half of 2008 based on the quoted market price of the stock on the last day of the reporting period. There were no write-downs of marketable securities in the first half of 2009.

 

The decrease in interest expense is due primarily to the reduction of our average debt obligation to $2.9 million in the first half of 2009 from $4.4 million in the first half of 2008. The decrease in interest income is due primarily to the drop in investment yields between the first half of 2008 and the first half of 2009.

 

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Provision for (benefit from) Income Taxes

 

 

 

Six Months Ended

 

 

 

June 28, 2009

 

June 29, 2008

 

 

 

(in thousands)

 

 

 

 

 

 

 

Income tax provision (benefit)

 

$

(11

)

$

34

 

 

The income tax provision (benefit) for the second half of 2009 and 2008 are primarily for our foreign operations which are cost-plus entities offset by the monetization of prior year federal research credits. As of the end of the second half of 2009, 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 benefit. We will continue to assess the realizability of deferred tax assets in future periods.

 

Liquidity and Capital Resources

 

We have financed our operating losses and capital investments through sales of common stock, private equity investments, capital and operating leases, bank lines of credit and cash flow from operations. As of June 28, 2009, our principal sources of liquidity consisted of our cash and cash equivalents of $16.4 million, available credit under our revolving line of credit with Silicon Valley Bank of $4.0 million, and our investment in Tower with a market value of approximately $430,000. As of June 28, 2009, there is no material difference between the fair value and the carrying amount of the debt outstanding under the Company’s line of credit and capital leasing arrangements.

 

Most of our cash and cash equivalents were invested in a US Treasury money market fund rated AAAm/Aaa. Our interest-bearing debt consisted of $2.0 million of revolving debt outstanding from Silicon Valley Bank and $1.0 million outstanding under capital leases (see Note 6 of the Condensed Unaudited Consolidated Financial Statements). The term of the revolving debt facility runs until June 2010. Upon each advance, the Company can elect a variable interest rate, which is the greater of six percent or the prime rate plus one percent, or a fixed rate which is the LIBOR plus 3.50%. We were in compliance with all loan covenants as of the end of the current reporting period. Our investment in Tower had a market value of approximately $430,000 as of June 28, 2009. We intend to hold 450,000 of these shares, valued at $144,000 as of the end of the second quarter of 2009 in order to obtain preferred wafer pricing from Tower.

 

Net cash from operating activities

 

Net cash used for operating activities was $2.6 million in the first half of 2009. The cash used for operating activities resulted primarily from a net loss of $4.8 million, which included $2.3 million of non-cash charges. These non-cash charges included stock-based compensation of $951,000, depreciation and amortization of $914,000, a write-down of inventory of $236,000 and utilization of wafer credits of $213,000. In addition, changes in working capital accounts in the first half of 2009 accounted for used cash of $71,000 which consisted of a decrease in current assets of $114,000 partially offset by a decrease in current liabilities of $185,000 in the first half of 2009. The decrease in current assets resulted from a decrease in accounts receivable of $278,000 due primarily to higher collection effort in the last month of the quarter and a decrease in other current assets of $228,000 partially offset by an increase in inventories of $378,000. The decrease in current liabilities resulted primarily from a decrease in deferred income on shipments to distributors of $271,000.

 

Net cash used for operating activities was $367,000 in the first half of 2008. The Company’s net loss of $6.1 million, excluding non-cash charges of $6.5 million, provided $408,000 of cash flow. This was reduced by $775,000 for changes in working capital accounts. The non-cash charges included $2.0 million of long-lived asset impairment, stock-based compensation of $1.6 million, depreciation and amortization of $1.2 million, write-down of inventories of $1.1 million, write-down of marketable securities of $417,000 and decrease in wafer credits of $148,000.  Changes in working capital accounts used cash as a result of a decrease in accounts payable of $2.7 million due to timing of expenditures and purchases of inventories and a decrease in deferred income and royalty revenue of $210,000. These cash uses were partially offset by a decrease in inventories of $1.7 million, decrease in other assets of $305,000 and a decrease in accounts receivable of $208,000.

 

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Net cash from investing activities

 

Net cash used for investing activities for the first half of 2009 and 2008 was $46,000 and $363,000, respectively, as a result of capital expenditures made primarily to acquire software used in the development and production of our products and solutions. Capital expenditures, which are largely driven by the development of new products and manufacturing levels, are projected to be approximately $100,000 during the rest of fiscal year 2009.

 

Net cash from financing activities

 

Net cash used for financing activities was $327,000 for the first half of 2009, resulting from scheduled payments under the terms of our debt and capital lease obligations, partially offset by $190,000 in proceeds related to the issuance of common shares to employees under our equity plans. During the first half of 2009, we repaid $2.0 million of revolving debt and borrowed $2.0 million of revolving debt with a variable interest rate of 6.0%.

 

Net cash used for financing activities was $1.1 million for the first half of 2008, resulting from scheduled payments of $1.2 million under the terms of our debt and capital lease obligations, partially offset by $109,000 in proceeds related to the issuance of common shares to employees under our equity plans.

 

We require substantial cash to fund our business. However, we believe that our existing cash resources will be sufficient to fund operations and capital expenditures, and provide adequate working capital for at least the next twelve months. After the next twelve months, our cash requirements will depend on many factors, including our level of revenue and gross profit, the market acceptance of our existing and new products, the levels at which we maintain inventories and accounts receivable, costs of securing access to adequate manufacturing capacity, new product development efforts, capital expenditures and the level of our operating expenses.

 

Contractual Obligations and Commercial Commitments

 

The following table summarizes our contractual obligations and commercial commitments as of June 28, 2009 and the effect such obligations and commitments are expected to have on our liquidity and cash flows in future fiscal periods (in thousands):

 

 

 

Payments Due by Period

 

 

 

Total

 

Less than
1 Year

 

1-3 Years

 

More than
3 Years

 

Contractual cash obligations:

 

 

 

 

 

 

 

 

 

Operating leases

 

$

1,518

 

$

528

 

$

792

 

$

198

 

Wafer purchases (1)

 

3,511

 

3,511

 

 

 

Other purchase commitments

 

1,364

 

1,264

 

100

 

 

Total contractual cash obligations

 

6,393

 

5,303

 

892

 

198

 

Other commercial commitments (2):

 

 

 

 

 

 

 

 

 

Revolving line of credit

 

2,000

 

2,000

 

 

 

Capital lease obligations

 

1,002

 

612

 

390

 

 

Total commercial commitments

 

3,002

 

2,612

 

390

 

 

Total contractual obligations and commercial commitments (3)

 

$

9,395

 

$

7,915

 

$

1,282

 

$

198

 

 


(1)          Certain of our wafer manufacturers require us to forecast wafer starts several months in advance. We are committed to take delivery of and pay for a portion of forecasted wafer volume. Wafer purchase

 

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commitments of $3.5 million include both firm purchase commitments and a portion of our forecasted wafer starts as of June 28, 2009.

 

(2)          Other commercial commitments are included as liabilities on our balance sheets as of June 28, 2009.

 

(3)          Does not include unrecognized tax benefits of $68,000 as of June 28, 2009. See Note 10 of the Condensed Unaudited Consolidated Financial Statements.

 

Concentration of Suppliers

 

We depend on a limited number of contract manufacturers, subcontractors, and suppliers for wafer fabrication, assembly, programming and test of our devices, and for the supply of programming equipment, and these services are typically provided by one supplier for each of our devices. We generally purchase these single or limited source services through standard purchase orders or under our agreement with Tower. Because we rely on independent subcontractors to perform these serv