GigaMedia Limited — 2018 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2018. The filing is an annual Form 20-F, not a standalone fourth-quarter filing; separate Q4 financial results are not provided. Financial statements are prepared under U.S. GAAP. GigaMedia operates primarily through FunTown, a digital entertainment business serving Taiwan, Hong Kong and Macau. GigaCloud activities have been wound down and are used primarily for internal support.
Financial performance and position
| US$ thousands, except per-share data | 2018 | 2017 | Change |
|---|---|---|---|
| Operating revenue | 7,101 | 11,596 | -38.8% |
| Gross profit | 3,516 | 6,498 | -45.9% |
| Gross margin | 49.5% | 56.0% | -6.5 pts |
| Operating loss | (4,823) | (490) | Loss increased |
| Net income attributable to shareholders | (3,193) | 1,086 | Turned to loss |
| Basic and diluted EPS | $(0.29) | $0.10 | Declined |
| Net cash used in operating activities | (3,914) | (1,110) | Higher cash use |
| Cash, restricted cash and equivalents | 59,826 | 64,177 | -6.8% |
| Total assets | 61,445 | 66,413 | -7.5% |
| Total liabilities | 3,273 | 5,048 | -35.1% |
| Shareholders’ equity | 58,172 | 61,365 | -5.2% |
Revenue was generated entirely by digital entertainment services. Mobile role-playing game revenue declined 48.6% to approximately $4.0 million, primarily following termination of a mobile game. MahJong and casino casual game revenue declined 23.2% to approximately $1.8 million. PC massively multiplayer online game revenue was approximately $1.3 million, down from $1.4 million.
Non-operating income was $1.6 million, including approximately $1.3 million of interest income and $267 thousand of foreign-exchange gain. No income tax benefit or expense was recognized in 2018. The company recorded a $244 thousand impairment of prepaid licensing and royalty fees.
Cash and cash equivalents were $59.3 million, with an additional $518 thousand of restricted cash held as a performance bond for customer prepayments and virtual points. The company reported no outstanding bank loans at December 31, 2018 and had approximately $7.3 million of unused credit lines. Capital expenditures were approximately $0.1 million. Contractual cash obligations totaled $1.154 million, consisting primarily of operating leases and $200 thousand of minimum royalty guarantees.
Material changes versus 2017
- Revenue fell $4.5 million as a result of the terminated mobile game and continued weakness in legacy PC-based games.
- Gross margin declined to 49.5% from 56.0%, partly because of outsourcing translation and art costs for games planned for launch.
- Operating loss widened to $4.8 million from $0.5 million. The comparison was affected by a nonrecurring $1.7 million licensing-termination gain recorded in 2017.
- Selling and marketing expense decreased 17.4% to $3.3 million, while general and administrative expense increased to $3.7 million and product development expense remained approximately $1.1 million.
- Operating cash use increased to $3.9 million from $1.1 million. Cash declined by $4.4 million during the year.
- The company invested more than $1 million directly in developing its own offerings and enhanced its customer relationship management system.
- GigaMedia adopted ASC Topic 606 using the modified retrospective method. The adoption reduced deferred revenue by $346 thousand and increased opening accumulated deficit by the same amount; management stated that the adoption otherwise had no significant 2018 income-statement or cash-flow impact.
Outlook, commentary, risks and unusual items
Management’s strategy is to reduce dependence on licensed games, which it considers to have unfavorable licensing and channel-cost structures, and to focus resources on internally developed browser-based and mobile casual games. The filing does not provide quantitative revenue or earnings guidance. Management stated that existing cash, available credit and anticipated financing capacity should be sufficient for capital expenditures, debt and operating obligations through 2019, and that working capital was sufficient for current requirements.
- The principal operating challenge is the continued migration of users from PC-based games to mobile and browser-based games. The company had approximately 8.3 million registered customers and 40,000 active paying users during 2018.
- Results remain dependent on the commercial success of new products, user retention, changing consumer preferences, competition and the company’s ability to develop mobile offerings.
- The company relies on third-party distributors, payment processors, Internet infrastructure and Google Cloud for certain mobile services. Service interruptions, higher hosting costs, cyberattacks or payment failures could reduce revenue and damage operations.
- Management disclosed a pending appeal by Ennoconn relating to an approximately $2.7 million claim against a subsidiary concerning taximeter purchases. A trial court dismissed the claim, but the appeal was ongoing as of the filing date. Management considered the claim without merit but stated that the likelihood and potential damages could not be assessed.
- Management believed GigaMedia was likely a passive foreign investment company for U.S. tax purposes in 2018 and likely in 2019, subject to changes in share value and deployment of cash. This may create adverse tax consequences for U.S. investors.
- The company could face investment-company status risk because of its significant cash and investment assets, although management believed it was not required to register under the Investment Company Act of 1940.
- The company had no dividends in 2018 and stated that it does not intend to pay dividends in the foreseeable future.
- Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2018. As a non-accelerated filer, the company was exempt from an external Section 404(b) attestation.
Most important facts for investors to verify
- Whether the mobile and browser-based product transition can stabilize revenue after the 2018 decline and the termination of a major mobile game.
- Cash-burn trends, including whether operating cash outflows can be reduced without materially impairing product development.
- The composition and deployment of the company’s approximately $59.8 million of cash, including restrictions, currency exposure and potential PFIC or investment-company implications.
- The status and potential financial effect of the Ennoconn litigation appeal.
- The commercial performance, launch timing and licensing commitments of internally developed and newly licensed games.
- The effect of the ASC 842 lease adoption in 2019, which was expected to recognize approximately $1.0 million of lease liabilities and a similar right-of-use asset without a material operating or cash-flow impact.
- Nasdaq continued-listing compliance and the implications of historically volatile trading prices.