Ladies and gentlemen, good afternoon. At this time, I would like to welcome everyone to QuickLogic Corporation's Second Quarter Fiscal Year 2021 Earnings Results Conference Call. As a reminder, today's call is being recorded for replay purposes through August 24, 2021. I would now like to turn the conference over to Mr. Jim Fanucchi of Darrow Associates. Mr. Fanucchi, please go ahead.

Thank you, operator, and thanks to all of you for joining us. Our speakers today are Brian Faith, President and Chief Executive Officer and Anthony Contos, Interim Chief Accounting Officer. The company continues to follow social distancing practices and management is again hosting this call from different locations today. As a reminder, some of the comments QuickLogic makes today are forward-looking statements that involve risks and uncertainties, including but not limited to stated expectations relating to revenue from new and mature products, statements pertaining to QuickLogic's future stock performance, design activity and its ability to convert new design opportunities into production shipments, timing and market acceptance of its customers' products, schedule changes and projected production start dates that could impact the timing of shipments, the company's future evaluation systems, broadening the number of our ecosystem partners and expected results and financial expectations for revenue, gross margin, operating expenses, profitability and cash. Actual results or trends may differ materially from those discussed today. For more detailed discussions of the risks, uncertainties and assumptions that could result in those differences, please refer to the risk factors discussed in QuickLogic's most recently filed periodic reports with the SEC. QuickLogic assumes no obligation to update any forward-looking statements or information, which speak as of the respective dates of any new information or future events. In today's call, we will be reporting non-GAAP financial measures. You may refer to the earnings release we issued today for a detailed reconciliation of our GAAP to non-GAAP results and other financial statements. We have also posted an updated financial table on our IR webpage that provides current and historical non-GAAP data. Please note QuickLogic uses its website, the company blog, corporate Twitter account, Facebook page and LinkedIn page as channels of distribution of information about its business. Such information maybe deemed material information and QuickLogic may use these channels to comply with the disclosure obligations under Regulation FD. A copy of the prepared remarks made on today's call will be posted at QuickLogic's IR page shortly after the conclusion of today's earnings call. I would now like to turn the call over to Brian.

Thank you, Jim. Good afternoon, everyone, and thank you all for joining our second quarter fiscal 2021 financial results conference call. I am pleased with the progress we continue to make on the transformation of our business. In the second quarter, our revenue grew to $2.9 million, up approximately 30% sequentially and reaching the highest level since the first quarter of fiscal 2019. During the quarter, we delivered an eFPGA IP core to our first full-license customer using our soon-to-be announced automated IP generator flow that integrates open source software with our three decades of experience delivering programmable logic. In addition, we significantly grew both FPGA and eFPGA opportunities, which bodes well for our future revenue performance. We are now at the tipping point for scaling this new FPGA and eFPGA approach much more broadly and the timing is coinciding with generally increasing market demand. Our pipeline of new business remains strong, with the vast majority of large opportunities continuing to advance. We also saw acceleration in the number of RFPs and RFQs I discussed previously. Some of the more exciting opportunities include several in the IoT, military, aerospace and defense markets. We should see the number of wins continue to improve through the remainder of the year, leading to a substantial increase in annual revenue, better bottomline performance and significantly lower cash usage. With each passing quarter, it is becoming crystal clear that our move to leverage and build upon the open source tool model continues to be the right move for QuickLogic. Artificial intelligence and machine learning technologies now power a rapidly expanding range of products and applications. The advantages of open source tools, including decentralization, cost efficiency, transparency and customization are things we recognized early on and have been actively advocating. We remain confident we are on…

Thank you Brian and good afternoon to everyone joining us. As Brian mentioned, our revenue results were within the expectation we provided in our previous call. For the second quarter of fiscal 2021, revenue was $2.9 million. This compares with revenue of approximately $2.2 million in both the first quarter of 2021 and second quarter of 2020. Within our Q2 revenue, sales of new products were approximately $1.3 million. This compares with about $1.1 million last quarter and $820,000 in the second quarter of 2020. Our mature product revenue was approximately $1.6 million, compared with $1.2 million last quarter and $1.4 million in the second quarter of last year. In the second quarter, we had two customers who each accounted for 10% or more of our revenue. Non-GAAP gross margin in Q2 was 51.5%, compared with 52.7% in the prior quarter and 47.1% in the same quarter of 2020. The decrease in margin was due primarily to a write-down of raw materials of $156,000 which impacted the gross margin by approximately 5%. This write-down, our Q2 gross margin would have been approximately 56% at the midpoint of our guidance. We continue to believe gross margin will get into the mid-60% range by the end of the year. I will discuss our gross margin outlook in a few minutes. Non-GAAP operating expenses for Q2 were approximately $3.3 million. This compares to $3.5 million in Q1 and $3.2 million in second quarter of last year. Within our Q2 operating expenses, R&D was $1.6 million and SG&A was $1.7 million. This compares with R&D and SG&A of $1.7 million and $1.8 million, respectively last quarter and $1.7 million and $1.4 million, respectively, in the second quarter of last year. The net total of the other income, expenses and taxes in Q2 was a…

Thank you Anthony. And one point of clarification I would like to make is, without the Q2 write-down, the gross margin in Q2 would have been approximately 56% at the midpoint of guidance, just to clarify. And now moving to my closing remarks. Before we move on to the Q&A, I want to reiterate that I am very excited about where we are as a company. We have the right suite of products and capabilities that are being used by a broad range of current and new customers. We have made a lot of strides in enabling a broader ecosystem with well-known firms such as Silicon Labs, Microchip, STMicro and NXP. We continue to advance several multimillion dollar opportunities forward, many more than we did even a year ago. The trends are clearly in our favor as the proliferation of machine learning and AI is driving the transformation of edge computing. QuickLogic has a strong product portfolio to address this transformation from our eFPGA IP licensing, from our device business or from the SensiML AI software platform that sits on top and runs on anybody's processor. Most importantly our financial performance is improving. As Anthony discussed in the revenue guidance for Q3, the midpoint of $3.8 million would be the highest revenue quarter since Q3 of 2015 with corresponding improvement to the bottomline. The transformation of QuickLogic continues and we believe the best is yet to come in the very near future. That completes our prepared remarks. Operator, I would now like to open the call for questions.

Ladies and gentlemen, we will now have our question-and-answer session. [Operator Instructions]. Our first question comes from Suji Desilva with ROTH Capital. Please proceed with your question.

Hi, Brian. Hi, Anthony. Again, congratulations on the new product growth and the guidance. Good start to the second half here. A couple of clarifications, first of all. The gross margin, I just want to be clear I heard it right. Is the guidance 56% or 66%? I couldn't hear it quite?

66%.

Six, six, right?

66%.

56%, just wanted to be clear there. Thank you.

66%.

And then 2Q1, the cash burn - 2Q 2021, what was the cash burn?

Go ahead, Anthony. Q2 cash burn?

Q2 cash burn was – let me – give me a second.

Sure.

So the Q2 cash burn was basically $1.94 million.

$1.9 million. Okay, great. Brian, the new product growth you are guiding for in 3Q 2021, obviously very impressive. What are may be the one or two largest drivers there of that sequential growth, just to help us understand?

So the sequential growth drivers are related to upside in smartphone. We do have IP-related revenues as a big component of that coming in the quarter sequentially. And then some strength in the military business that falls into new products. So those are the three large drivers of that sequentially.

Okay. And then the - Brian, specifically, the eFPGA, you cited one customer I guess in 2Q 2021. So is there revenue from that customer that flows through into 3Q? Or is that new additional eFPGA wins in 3Q 2021 that are kind of building on top of it?

It's actually both, Suji. I like to say, we are not in Kansas anymore. So we had some in Q2, but definitely some of that is leading into Q3 from that customers as we have some customizations to that on top. But the big driver is going to be new opportunity coming into Q3. And we just got an influx of eFPGA opportunity, specifically. Even before the call today, I was on two new calls with customers who wanted to talk about it. They had heard we are doing things and wanted to start talking about doing a deal. So very different times and a lot of the upside and interest we are seeing right now is on the eFPGA side specifically. And more importantly, because we are doing it with open source.

Okay. A couple of last questions and I will jump back in the queue here. The eFPGA wins, can you talk about what end markets those are in? Is it DARPA military? Or is it broader than that? Any color there would be helpful.

It's broader than that. So some of the near-term revenue is related to audio processors and IoT broad market applications. We do have several in the funnel right now that are related to military or defense that were initially brought to us through this whole DARPA Toolbox initiative. Those generally take a little bit longer to close, I guess, unsurprisingly. But the nearest term revenue is from more audio processing and IoT general purpose processors.

Okay. And then one last housekeeping question. So Europe, the mix of geographic European revenue grew significantly in the quarter versus 2Q versus 1Q. What was the - what's the driver there to ship there? Thanks.

Well, I think military or defense is coming on strong, which has historically been Europe and U.S. for us. Asia-Pac for us with the smartphones is the big driver in Japan. But the States side and the European side is military or defense and then some of the IP, the audio processor, specifically is an European company.

Okay. Thanks. That's all the questions I have got. I am sorry. Go ahead.

Sorry just one other thing. The gross margin for Q3, just in case the audio broke up is 66%. Six, Six.

That's what I was trying to get. Six, six. Okay. Great. Thank you, guys.

That’s what I said and my apologies.

Thank you. Our next question comes from Sam Peterman with Craig-Hallum. Please proceed with your question.

Hi, guys. Thanks for taking my question. I guess first one, just on modeling. You talked about mature products. I think you said that the midpoint, that’d be about $1 million next quarter. Just doing the math, I guess, that's going to be flat versus 2020, that implies a pretty big fourth quarter. Is that primarily just timing of lead times and inventory, which looks like it’s a little low right now? Or is there kind of demand drivers in there that we should be aware of heading into FY 2022? Thanks.

Yes. So historically, Sam, Q3 is generally a light quarter on the mature side for us. If you look back several years, a lot of that is because the heavy percentage of customers in that bucket for us are European and a lot of them tend to take longer holidays during Q3. So that's one of the reasons why Q3 even at $1 million is going to look like compared to previous quarters. We do expect that's going to be up next quarter, meaning Q4 of this year, compared to Q3 as well as some other domestic demand on the mature side to get it back to that sort of on par with last year. And by the way, just on that note, just sort of anecdotally, we are starting to see some things come back online on the mature side from previous quarters. So it does seem like people are getting back into normal operating mode and building and consuming more products. So I think we will see some uplift on that in Q4 on the mature side, specifically.

Okay. Great. That's really helpful. Second question, just on the DARPA initiative. I am curious, are you seeing any response from your competitors in terms of, I guess, responding to your open source push, right, since you guys are the only one in there doing eFPGA open source? Do you see anyone else starting to think about approaching the market that way? Or do you think it will stay the way it is for a long time or for a while with just you guys rally bringing open source FPGAs to that initiative?

Well, in the near-term, we don't. At least I haven't heard of any of our competitors jumping into the fray on this on the open source side. I talked about it a lot in the past on these calls and in podcast interviews I have done. I think there's a fear among companies to do that. And we were one of them for a long time before we got comfortable with how we could build a viable business around this. So I think that's going to keep people out of it for a little while longer at least. On the other hand, when people join the fray and come into the open source side, then I think everybody can take comfort in saying, yes, this is going to be much more mainstream and not as niche as maybe we thought. So that's a good thing, especially because you know, open source collectively gets better for everybody when more developers jump on board. But in the near-term, I just don't see anybody doing that yet.

Okay. Thanks for that. I think just one more for me. I think you said, the pipeline of strategic partners that you talked about was accelerating. I believe last quarter you talked about that pipeline kind of getting RFPs and RFQs in the tens of millions range total, I think. You’re seeing an acceleration or are you - is that in a similar range of these are totaling tens of millions of dollars across those RFPs, RFQs? And then are you also seeing an acceleration in those RFPs, RFQs transitioning to customer orders? And if you could talk a little bit about what you are seeing is driving that, that would be great.

Yes. So I will start at the bottomline impact first. I mean part of the sequential increase for our guidance for this quarter is driven from some of those advancing into the wins page, which is giving us the revenue impact this quarter and I think next quarter and the quarter after that from the near term opportunities that we closed. Generally speaking, we are getting more million-dollar type opportunities coming in, many of which that we already had or advanced to the next age in engagement process. And then I guess the question is why is that, which is your last question. I think there's a confluence of events happen here. The supply chain shortages where people are getting absolutely cut off or they have to put two-year POs in place with suppliers, they don't like that. A lot of these companies have the scale to do their own chip design. And so why would they do that? They are looking at maybe they should do their chips and take more control of their supply chain. And if they are buying FPGAs from Xilinx and Intel and Lattice, then if they are going to integrate and do their own chip, then they not get that programmable logic onto that same device. And that's where we come in with the IP licensing side. And so I think that's a big component of this. It's just taking control of their own destiny and building their own chips and vertically integrating. That's one. The second is, I think, it's pretty well documented and understood that FPGA is a very good technology for implanting machine learning and AI. And there is a big push around the world to make things more intelligent and how do you accelerate that or how do you it with lower power? FPGA is a great technology for that. And so if you combine sort of this technical need with the business need, I think a lot of that is driving some very near term demand to us as far as FPGA and eFPGAs go. Like I said, even this morning I was on two different customer calls, new calls, for people interested in this and they are not happy with the status quo. They want to do something different. They have the means to do their own chips, but they need the IP and that's where we come.

Okay. That's great. Thanks Brian. I think that's it for me.

Thanks Sam.

[Operator Instructions]. Our next question comes from Rick Neaton with Rivershore Investment Research. Please proceed with your question.

Thank you. Hello, Brian and Anthony. Thanks for better news this evening. First off, I would like to ask about the gross margin. Is the decision to write-down the raw materials in Q2, is that a factor in the explosion of your gross margin to 66% in Q3? And will we see further benefits in future quarters from that?

Let me explain the way these thing work, Rick. So periodically, we have to evaluate our inventory against future demands. And if we don't see opportunities or orders for the future demand, then we take reserves. And then of course, if we have taken a reserve, then yes, in the future when we do sell it, we will get the gross margin benefit at that point. But the gross margin that Anthony guided to for this quarter is independent of those reserves that we took last quarter. So it's not an artificial inflation. It's a real gross margin number because we have a higher component of higher margin product revenue and IP-related our revenue in the quarter, which again, I think this is evidence of this model that we have been talking about that as we can transform the company to have a higher degree of software and IP sales in licensing and royalties, we are going to see that gross margin uplift into the mid and hopefully high 60s in the future, not from artificially taking reserves against products and selling in the future, but actual real products gross margins.

In your new product guidance for Q3, how relevant is SensiML's progress and partnerships in that number?

It's relevant, but not material enough that we need to break it out as a separate number yet.

Okay. When you talked about issues in packaging, most companies are seeing various supply chain issues with their customers or the end users of the customers. Maybe accounting for 4% or 5% softness in the revenue, is that possibility included in your $3.8 million midpoint for Q3?

I don't --

First off, is that 4%, 5%, 6% number relevant to use since your differentiated your product demand from other typical OEMs? And then secondly, is that a fair number? If that is a fair number, is that built-in to the 15%, plus or minus?

Sorry, Rick. I am not following the 5% you are talking about. Can you elaborate a little bit?

Okay. Some companies, I will try again. Some companies are saying that their revenue, they could have shipped 5% more revenue in the quarter, but due to supply chain constraints, their shipments are constrained. What I wanted to know was, first, is that a relevant number for QuickLogic? And secondly, if so, is it built into your guidance with the plus or minus 15%?

So it's not relevant. The point I was trying to convey in the prepared remarks is that we acknowledge that there are challenges in the supply chain, specifically in the packaging side. But we are not constrained in our revenue this quarter because of that. We have worked with our supply chain partners. In fact, we brought up second sources in certain cases where things were like absolutely constrained and we couldn't get enough products to fulfill future POs or forecast. So we brought on second suppliers, second sources so that we could fulfill that demand and forecast. So the current quarter is not capacity constrained and there's no 5% softness as a result of that. I can't speak to what other companies are saying to you, but that's not the case for us.

Okay. And longer term, are you confident in your supply chain should you demand keep expanding the way it has been this year for new products?

Yes. I think so. And in fact, the evidence I would use is that we already have gone through a situation where we didn't have enough supply on a specific package substrate for some of the demand that we were seeing this year and we went out and we got a compatible second source for that. So we can continue to fulfill the demand. So I think we have a very good relationship with the supply chain. We work with the leading companies in the world in that sense, TSMC, GlobalFoundries, Amcor. They have lots of capacity that they are allocating. We have got a good relationship. And you know what they are really asking companies for is for forecast. And if you give them a forecast and you are hitting the forecast, they are going to give you the capacity. And we are doing that. And like I said, if they are constrained in certain areas, we work with them to qualify a second source for that component. So I don't see us having an issue with that but we will see. Like I said in the prepared remarks, we are going to continue to monitor this as it evolves.

Okay. So the supply chain is an opportunity. The supply chain problems for others is creating opportunity for you. And at least the in the near future, you don't see any issues constraining you. Is that how I should take your remarks?

Yes. And in fact, I am smiling right now because there are in fact some FPGAs, some low-density FPGAs that it's very difficult to get from competitors right now through common distribution sources like Digi-Key and Mouser. And that's one of the reasons why those distributors, I won't say names but people that have reach out to us to add our product to their distribution channels so that they actually do have parts that they have able to sell within weeks as opposed to quarters. It was a lead time issue. And so that's, like in the prepared remarks, I talked about the Digi-Key and Mouser. So you are going to see QuickLogic devices on Digi-Key very soon, which is another very large worldwide stocking distributor partly because of these supply chain issues. People want low-density FPGAs, they can't get them. They have to wait till February of next year. That's crazy. We have things in stock and we can handle that. So we are going to start pushing, I think, a little bit more into that territory as a result. So yes I do think there is an opportunity there because we have navigated and managed that challenge on the supply chain side.

Okay. Thanks for that extra color on that issue. And thanks a lot, Brian. I appreciate it.

No problem. Thank you Rick.

Thank you. Our next question comes from Martin Yang with Oppenheimer. Please proceed with your question. Mr. Yang, you may proceed with your question.

Thank you. Thank you for taking my question, Brian and Anthony. My first question is on your assumptions behind the annual guidance, your expected revenue to be up by 50% year-over-year. Is the potential income from the strategic initiative which you haven't really identified a target timeline for the funding part of that annual guidance?

The specific strategic initiative I mentioned in February and updated on today's call is not part of the financial outlook for this year. For Q3 and for Q4 this year, it is all based on other opportunities that we have closed or darn near close to the point where I felt comfortable to include in that guidance for Q3 and for Q4, not that other strategic one. If that one comes in, that is upside.

And on the Digi-Key distribution agreement, is it right to understand, right now it's SensiML toolkit only and that you will add the devices and dev kit later?

That is correct. And it's not just a lot later, its eminent.

Can you maybe help us frame the potential revenue impact of signing on another major distribution partner? How big of a boost that potentially can be for your revenues?

Yes. I think this year could be tens to hundreds of thousands of dollars through those because those are basically in that timeframe you are talking about customers that are looking for immediate product to start prototyping, either a new design or perhaps they are not able to ship their product because they are designed with other things that are not available. And so they need to switch the component to something else, which means a new printed circuit board. So given we have a handful of months left in the year, we are talking about a small amount of revenue impact this year. Looking forward though, we are talking about tapping into the broad swath of the market in terms of design engineers. And from day one, when we launched this whole new open source initiative and serving the masses, people were asking, hey, you need to be in a big distributor like Digi-Key, you need to make it easy for me to get my credit card out and buy a device. Same with Mouser. You need to get on Mouser. So I think we have done that now. It's what the engineering community likes and prefers. Our own engineers in fact prefer that, buying stuff off of Mouser and Digi-Key. So I think it's just removing another hurdle or speed-bump for people to start prototyping with the technology this year and then of course, getting into higher volumes next year.

Got it. The final question for me is on SensiML. Can you give next update on know what do you consider the pipeline, how that pipeline of potential subscribers or paying users have changed since last quarter?

I would say that we have grown the community users, for sure, since we launched the community edition. We also launched a new price tier that's more of a project-based price tier because there were folks that were uneasy to sign up to the $10,000 SaaS from free to $10,000 a quarter. They wanted something more in the range of several thousand dollars that they could go through the whole full cycle before they commit to the sort of the longer term five-digit SaaS fee. And we have seen some uptake on that version. There are some very large customers that have come in now. We are talking very substantial customers, very well-known names, that have come in and we have signed agreements with them that actually couples the sort of project-based, the SaaS based with a little bit of that services side from us because a lot of people, they intuitively know that AI can help and they want to use it, but they don't quite have the data science expertise to actually build something out. And so we are seeing some ask on their part to bundle in a little bit more of the services side to sort of teach them how to use AI effectively. And so we are seeing some of that progress happen in this quarter also that I think is going to be a good sign for future quarters. Really gets people more comfortable and removes that speed-bump, that hurdle to get them on board the platform.

Got it.

Sometimes we forget that AI is still, you know, we have been reading about it for years, right but I think is a big difference between us reading about it and people actually that are not data scientists trying to implement something with AI. And so we recognize that and we are trying to sort of adapt our go-to-market strategy to help serve the big customers that do have know the money to invest in it, they just don't know how to use it. So we are trying to get them through that cycle.

Yes. Understood. Thanks.

Yes. Anything else, Martin? Okay.

Ladies and gentlemen, we have reached the end of our allotted time. I would now like to turn the floor back to Brian Faith for closing remarks.

Yes. In closing, I want to thank you for participating in today's call and continued support. We look forward to speaking with you again when we participate in upcoming investor events and again when we report our third quarter results in November. Have a great day.

Ladies and gentlemen, this concludes today's webcast. You may now disconnect your lines at this time. Thank you for your participation and have a great day.