Pixelworks, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2019; filed August 9, 2019. The financial statements are unaudited and presented under U.S. GAAP. Pixelworks designs and markets visual-display processing semiconductors, intellectual-property cores, software and video-delivery solutions. It operates as one segment and held 349 related patents as of June 30, 2019.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First six months 2019 | First six months 2018 |
|---|
| Revenue | $18.0 million | $19.3 million | $34.7 million | $34.5 million |
| Gross profit | $9.4 million | $9.5 million | $17.8 million | $17.3 million |
| Gross margin | 52% | 50% | 51% | 50% |
| Loss from operations | $(2.3) million | $(2.5) million | $(5.8) million | $(3.7) million |
| Net loss | $(2.4) million | $(2.4) million | $(2.3) million | $(2.9) million |
| Net loss per share | $(0.06) | $(0.07) | $(0.06) | $(0.08) |
- Q2 revenue declined 6%, primarily because of lower digital-projector unit sales as customers corrected inventory levels. Increased video-delivery sales partially offset the decline.
- First-half revenue was essentially flat year over year. IC sales declined to $32.7 million from $33.1 million, while engineering, license and other revenue increased to $2.0 million from $1.4 million, largely due to license revenue recognized in the first quarter.
- Operating expenses were $11.7 million in Q2 and $23.6 million for the first six months. First-half research and development expense increased 18% to $12.8 million, partly because the prior-year period benefited from co-development reimbursements that were complete by December 31, 2018.
- Q2 and first-half results included $0.4 million of restructuring expense related to an approximately 2% workforce reduction. Management stated that the 2019 plan was complete and no further charges were expected from that plan.
- Stock-based compensation was $1.7 million in Q2 and $3.4 million in the first half.
Cash flow, liquidity and capital structure
| Balance or cash-flow item | June 30, 2019 | December 31, 2018 |
|---|
| Cash and cash equivalents | $16.7 million | $17.9 million |
| Short-term marketable securities | $6.6 million | $6.1 million |
| Total cash, cash equivalents and securities | $23.3 million | $24.0 million |
| Accounts receivable, net | $7.4 million | $7.0 million |
| Inventory | $2.8 million | $3.0 million |
| Total liabilities | $18.5 million | $16.0 million |
| Shareholders’ equity | $50.8 million | $49.4 million |
- Operating activities used $2.3 million in the first half of 2019, compared with $3.4 million used in the prior-year period.
- Investing activities provided $1.1 million, including $4.25 million of patent-sale proceeds, partly offset by capital expenditures, licensed-technology purchases and securities purchases.
- Net cash decreased $1.2 million during the first half, ending at $16.7 million. Management stated that existing working capital was expected to fund operating, investing and financing needs for at least the next twelve months.
- The secured revolving credit facility permits borrowings up to the lesser of $10.0 million or $1.0 million plus 80% of eligible receivables. It matures December 27, 2019. No borrowings were outstanding at June 30, 2019, and the company was in compliance with its covenants.
- The company had no outstanding convertible debt; the prior-year debt was redeemed or converted by March 31, 2018.
Material changes and unusual items
- Gross margin improved because of product mix, including more favorable projector-market sales, increased video-delivery sales and high-margin license revenue.
- The company sold patents for $4.25 million of proceeds and recognized a $3.9 million gain in the first half of 2019.
- Pixelworks adopted ASC 842 lease accounting on January 1, 2019, recognizing operating lease right-of-use assets of $6.2 million and lease liabilities of $6.8 million. Total operating lease liabilities were $5.6 million at June 30, 2019.
- The company corrected an immaterial prior-period error related to an expired statute of limitations on an accrued liability. The correction reduced December 31, 2018 liabilities by $4.6 million and increased equity by the same amount; management stated that it did not affect cash or materially affect prior-period results.
- A previously reported material weakness in internal control remained outstanding. It related to the review of aged liabilities for possible extinguishment under applicable statutes of limitation. Management expected to complete remediation by the end of the third quarter of 2019, subject to operating effectiveness and testing.
Outlook, risks and contingencies
- The filing does not provide formal revenue or earnings guidance. Management expects existing working capital to support operations for at least twelve months but may seek debt or equity financing or reduce expenditures over the longer term.
- Revenue is highly concentrated: the top five end customers represented 80% of first-half revenue, and one end customer represented 50%. One distributor represented 30% of first-half revenue.
- Approximately 96% of first-half revenue was generated outside the United States, primarily in Japan and China. The company faces foreign-exchange, geopolitical, trade, regulatory and regional-disruption risks.
- Pixelworks relies on a limited number of third-party foundries and assembly and test vendors, principally in Taiwan and China, without long-term supply agreements. Supply interruption, capacity constraints, quality problems or price increases could materially affect results.
- Customers generally purchase through cancellable purchase orders rather than long-term commitments. Demand changes could create inventory shortages, excess inventory or write-downs.
- The company has historically incurred operating losses and had an accumulated deficit of $381.8 million at June 30, 2019. Additional financing, if required, could be unavailable, costly or dilutive.
- Commitments included approximately $1.0 million of TPC-related debt obligations, with scheduled payments extending through January 2024. The filing states that pending legal matters and indemnification obligations were not expected to be material, but outcomes remain uncertain.
Investor verification points
- Verify whether the material weakness was remediated by the stated third-quarter 2019 target and whether subsequent filings identified additional control deficiencies.
- Assess the sustainability of revenue after the digital-projector inventory correction and the company’s progress in video delivery, mobile and licensing markets.
- Review the December 2019 maturity of the revolving credit facility and the company’s ability to maintain liquidity without additional financing.
- Monitor customer, distributor and geographic concentration, especially the dependence on Japan, China and a small number of accounts.
- Evaluate the effect of continued operating losses, restructuring activity, stock-based compensation and potential equity financing on shareholder dilution.
- Reconcile the patent-sale gain and other non-recurring items when evaluating operating performance and cash-generation capacity.
