Pixelworks, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2020. The unaudited filing covers Pixelworks, a semiconductor and software company providing visual-processing solutions for mobile, home entertainment, content, and business and education markets. The company operates as one segment and held 344 patents as of September 30, 2020.
Financial Performance and Position
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Revenue | $8.2 million | $18.1 million | $31.2 million | $52.7 million |
| Gross profit | $4.0 million | $9.3 million | $15.8 million | $27.2 million |
| Gross margin | 49% | 52% | 51% | 52% |
| Loss from operations | $(8.1) million | $(2.4) million | $(19.8) million | $(8.2) million |
| Net loss | $(8.1) million | $(2.3) million | $(20.1) million | $(4.6) million |
| Net loss per diluted share | $(0.20) | $(0.06) | $(0.51) | $(0.12) |
| Operating cash flow | Not separately provided | Not separately provided | $(3.2) million | $(3.0) million |
- Q3 revenue declined 55%, while nine-month revenue declined 41%. IC sales accounted for $8.0 million of Q3 revenue and $29.9 million for the first nine months.
- Management attributed the revenue decline primarily to lower unit sales into digital projector and video-delivery markets, customer inventory corrections, and COVID-19 disruptions.
- Research and development expense declined 6% in Q3 and 3% year to date, while selling, general and administrative expense declined 13% in Q3 and 5% year to date.
- Restructuring expense was $1.6 million in Q3 and $2.2 million for the first nine months, compared with none in Q3 2019 and $0.4 million in the first nine months of 2019.
- Cash and cash equivalents were $16.1 million at September 30, 2020, compared with $7.3 million at December 31, 2019. Short-term marketable securities were $0.7 million, compared with $7.0 million at year-end.
- Total cash, cash equivalents, and short-term marketable securities were $16.8 million. Accounts receivable were $5.4 million and inventories were $3.9 million.
- Shareholders’ equity declined to $37.6 million from $47.5 million at December 31, 2019, primarily reflecting the nine-month net loss, partially offset by equity issuances and stock-based compensation.
Debt, Liquidity, and Financing
- The company had $4.0 million outstanding under its secured working-capital revolving line, at a weighted-average interest rate of 3.5%. The facility had a stated maturity of December 27, 2020, and the company was in compliance with its terms at September 30, 2020.
- Pixelworks received a $0.8 million Paycheck Protection Program loan bearing 1% interest and maturing two years from disbursement. The company applied for forgiveness but disclosed that forgiveness was not assured.
- The company generated $8.3 million of financing cash flow during the first nine months, including $4.0 million from the revolving line, $3.6 million of net proceeds from an at-the-market equity offering, and $0.8 million from the PPP loan.
- Management stated that existing working capital was expected to fund operating, investing, and financing needs for at least the next twelve months, while also noting that additional financing or expenditure reductions could be required over the longer term.
- Under the at-the-market program, the company sold 1.37 million shares for approximately $3.6 million of net proceeds and had approximately $20.9 million of remaining availability at September 30, 2020.
Material Changes and Unusual Items
- In August 2020, Pixelworks implemented a restructuring plan reducing its workforce by approximately 14%, primarily in operations, research and development, sales, and marketing. Management expected approximately $0.1 million of additional restructuring charges during the remainder of 2020.
- Cost-saving actions included salary reductions for senior executives, elimination of the 2020 executive bonus program, delayed merit increases, limited hiring, employee elections to exchange part of salary for restricted stock units, and director compensation paid in RSUs.
- COVID-19-related disruption reduced demand and created risks involving suppliers, customers, logistics, travel, and international operations. Management expected the revenue disruption to continue into the fourth quarter of 2020.
- On October 19, 2020, after quarter-end, the company agreed to sell 3.2 million shares in a private placement at $2.071 per share for gross proceeds of approximately $6.6 million, subject to closing conditions and expected to close in November 2020.
- The nine-month 2019 results included a $3.9 million gain on the sale of patents; no comparable gain occurred in 2020, materially affecting the year-over-year comparison.
Outlook, Commentary, and Risks
- Management expected fiscal 2020 revenue to be lower than initially anticipated because of COVID-19 and stated that pandemic-related effects could continue to affect revenue, liquidity, supply chains, capital investments, and financing arrangements.
- Major risks include continued operating losses, customer and distributor concentration, reliance on a limited number of Asian foundries and assembly vendors, lack of long-term supply commitments, rapid technological change, competitive pressure, inventory volatility, and foreign-exchange exposure.
- Revenue concentration remained significant: the top five end customers represented 61% of nine-month revenue, the largest end customer represented 38%, and the largest distributor represented 28%. Japan represented approximately 68% of nine-month revenue.
- The company had an accumulated deficit of $408.7 million at September 30, 2020 and disclosed that it had incurred operating losses each fiscal year since 2010.
- Potential liquidity risks include the December 2020 maturity of the revolving line, continued negative operating cash flow, inability to obtain additional financing, and dilution from future equity issuance.
- The company disclosed no material off-balance-sheet arrangements and stated that its disclosure controls and procedures were effective as of September 30, 2020.
Investor Verification Checklist
- Verify whether the revolving credit facility was renewed, refinanced, or repaid after its December 27, 2020 maturity.
- Verify the closing and final proceeds of the October 2020 private placement and its resulting share dilution.
- Verify whether the $0.8 million PPP loan was forgiven in whole or in part and assess any repayment obligation.
- Assess whether revenue stabilized after Q3 2020 and whether customer inventory corrections and COVID-19 effects continued.
- Monitor operating cash flow, restructuring savings, additional restructuring charges, and the company’s need for further financing.
- Evaluate customer, distributor, geographic, and supplier concentration, particularly exposure to Japan, China, Taiwan, and a limited number of foundries.