Pixelworks, Inc. Form 10-Q Summary
Business context and reporting period
Pixelworks designs and markets semiconductor and software solutions for visual processing, display optimization and video delivery, serving mobile, digital projection, home entertainment, content and business markets. The filing covers the unaudited quarter and six months ended June 30, 2020. The company operates as one segment and held 345 patents related to digital image processing as of June 30, 2020.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $9.3 million, down 49% | $23.0 million, down 34% |
| Gross profit | $5.0 million | $11.8 million |
| Gross margin | 55%, versus 52% in 2019 | 51%, unchanged from 2019 |
| Loss from operations | $6.4 million | $11.7 million |
| Net loss | $6.6 million, or $0.17 per share | $12.0 million, or $0.31 per share |
| Operating cash flow | Not separately provided for the quarter | $0.2 million provided, versus $2.3 million used in 2019 |
Second-quarter revenue was primarily IC sales of $8.8 million; engineering services, license and other revenue was $0.4 million. First-half revenue included $22.0 million of IC sales and $1.1 million of engineering, license and other revenue. The company recorded $4.1 million of stock-based compensation during the first half.
Cash and cash equivalents were $20.4 million at June 30, 2020, compared with $7.3 million at December 31, 2019. Short-term marketable securities were $1.0 million, down from $7.0 million, resulting in total cash, cash equivalents and marketable securities of $21.4 million. Accounts receivable declined to $5.9 million from $10.9 million, and inventories declined to $4.8 million from $5.4 million.
Debt included $4.3 million drawn under the secured working-capital revolving line at a weighted-average interest rate of 3.5%, compared with no borrowings at year-end 2019. The company also received a $0.8 million Paycheck Protection Program loan bearing interest at 1.0% and maturing two years from disbursement. Total liabilities were $26.5 million and shareholders’ equity was $42.5 million at June 30, 2020.
Material changes versus the prior comparable period
- Revenue decreased $8.8 million in the quarter and $11.6 million in the first half, primarily because of lower unit sales into digital projector and video delivery markets, customer inventory corrections and COVID-19 disruptions.
- Operating and net losses increased materially from the prior-year periods. The first half of 2019 benefited from a $3.9 million gain on the sale of patents; no comparable gain was recorded in 2020.
- Gross margin improved in the second quarter because of a more favorable digital-projector sales mix, while first-half gross margin remained 51%.
- Research and development expense declined 1% in the quarter and 2% in the first half as management focused on cost control. Selling, general and administrative expense was broadly unchanged.
- Operating cash flow improved to positive $0.2 million from negative $2.3 million, aided by a $5.0 million reduction in accounts receivable and other working-capital changes.
- Liquidity increased principally through $4.3 million of revolving borrowings, $2.5 million of net proceeds from an at-the-market equity offering, $0.8 million of PPP proceeds and $6.0 million of marketable-security sales and maturities.
- The company sold 803,528 shares under the at-the-market program for approximately $2.5 million of net proceeds. Approximately $22.2 million remained available under the program at June 30, 2020.
Guidance, outlook, commentary and risks
Management expected fiscal-year 2020 revenue to be lower than initially anticipated and expected COVID-19-related disruption to continue into the second half of 2020. The company stated that existing working capital was expected to fund operating, investing and financing needs for at least the next twelve months, while noting that additional financing or spending reductions could become necessary and may not be available on favorable terms.
In response to COVID-19, Pixelworks implemented remote-work and travel restrictions, drew on its revolving credit facility, obtained the PPP loan, reduced executive compensation, eliminated the 2020 executive bonus program, delayed merit increases, paused most hiring and allowed employees to exchange part of their salary for restricted stock units.
After quarter-end, the Board approved an additional restructuring plan involving an approximately 14% workforce reduction. The company estimated approximately $1.5 million of severance and benefit charges, largely in the third quarter of 2020, and anticipated annualized savings of approximately $3.2 million. The filing states the restructuring was expected to be substantially complete by September 30, 2020.
Key risks include prolonged COVID-19 effects on demand, customers and suppliers; dependence on a limited number of Asian foundries and assembly vendors; customer and distributor concentration; rapid technological change and competition; continuing operating losses and accumulated deficit; potential dilution from additional equity sales; expiration of the revolving credit facility on December 27, 2020; and uncertainty regarding forgiveness of the PPP loan. The company also cited international, foreign-currency, cybersecurity, intellectual-property, tax and Nasdaq listing risks.
Management reported effective disclosure controls as of June 30, 2020 and no material changes to internal control over financial reporting during the period. Legal matters were described as ordinary-course matters not currently expected to have a material adverse effect, although outcomes remain uncertain.
Most important facts for investors to verify
- Whether revenue stabilizes after the reported 49% quarterly decline and whether COVID-19 disruption persists beyond 2020.
- Progress toward the projected $3.2 million of annualized restructuring savings and the actual severance charges from the approximately 14% workforce reduction.
- Availability, covenant compliance and refinancing plans for the revolving credit facility maturing December 27, 2020.
- Whether the $0.8 million PPP loan is forgiven in whole or in part and the resulting cash-flow impact.
- Future use of the $25 million at-the-market equity program and the potential dilution to existing shareholders.
- Customer and distributor concentration, particularly the top distributor’s 29% share of first-half revenue and the top five end customers’ 61% share.
- Manufacturing and supply-chain continuity in Taiwan and China, along with inventory levels and potential inventory write-downs.
- The company’s ability to return to sustained positive operating cash flow and eventually achieve profitability.