PIXELWORKS, INC annual report, FY2020

Pixelworks, Inc. 2020 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2020. The filing was signed March 10, 2021. Although the request references 2020 Q4, this is an annual Form 10-K; fourth-quarter data is included where relevant. Pixelworks is a fabless semiconductor and software company providing visual-processing, video-delivery and display solutions for mobile devices, projectors, home entertainment and content applications.

Financial Performance

Metric	2020	2019	Change
Revenue	$40.9 million	$68.8 million	Down 41%
Gross profit	$20.2 million	$34.5 million	Down 41%
Gross margin	49%	50%	Down 1 percentage point
Loss from operations	$(26.7) million	$(13.1) million	Loss increased
Net loss	$(26.5) million	$(9.1) million	Loss increased
Net loss per share	$(0.65)	$(0.24)	Loss increased
Cash used in operating activities	$(3.7) million	$(10.4) million	Improved by $6.7 million

IC product revenue was $39.2 million, compared with $66.3 million in 2019. Engineering services, license and other revenue was $1.7 million, compared with $2.5 million.
Revenue declined primarily because of lower unit sales into the digital projector and video-delivery markets, customer inventory corrections and COVID-19 disruptions. The 2019 period also benefited from license revenue recognized in the first quarter.
Gross margin declined modestly because of lower fixed-overhead absorption and the absence of higher-margin 2019 license revenue, partly offset by a more favorable digital-projector product mix.
Research and development expense declined 4% to $25.0 million, while selling, general and administrative expense declined 6% to $19.8 million.
Restructuring expense increased to $2.2 million from $0.4 million, including workforce reductions under January and August 2020 plans.
Other income included a $0.8 million gain from forgiveness of the Paycheck Protection Program loan. The 2019 period included a $3.9 million gain on the sale of patents.
Fourth-quarter 2020 revenue was $9.6 million, gross profit was $4.4 million and net loss was $6.4 million. Fourth-quarter 2019 revenue was $16.0 million and net loss was $4.5 million.

Balance Sheet, Cash Flow and Liquidity

Cash and cash equivalents increased to $31.3 million at December 31, 2020, from $7.3 million at December 31, 2019. Including short-term marketable securities, highly liquid resources were $31.5 million.
Cash generation was supported primarily by $12.7 million of net proceeds from an underwritten equity offering, $6.2 million from a private placement, $4.4 million from an at-the-market offering and $0.8 million from the PPP loan.
Accounts receivable declined to $4.7 million from $10.9 million, and inventories declined to $2.4 million from $5.4 million.
Total liabilities were $19.2 million and shareholders’ equity was $52.9 million at year-end. The accumulated deficit was $415.1 million.
The company had no borrowings under its secured revolving line of credit at December 31, 2020. The facility provided availability of up to the lesser of $10.0 million or $2.5 million plus 80% of eligible receivables, subject to covenants and lender discretion, and was scheduled to mature March 26, 2021.
The company reported $7.1 million of operating lease liabilities, $1.5 million of software-license obligations and other contractual obligations. Total contractual obligations were $14.0 million, excluding $2.5 million of uncertain tax positions whose payment timing could not be reliably estimated.
Management stated that existing working capital was expected to fund operating, investing and financing needs for at least the next twelve months, while noting potential future reliance on additional financing or expenditure reductions.

Material Changes Versus 2019

Revenue fell by $27.9 million, or 41%, reflecting COVID-19 effects, lower projector and video-delivery demand and customer inventory corrections.
Operating loss more than doubled to $26.7 million, despite lower research and development and SG&A expenses, because the revenue decline exceeded cost reductions.
Net loss widened to $26.5 million from $9.1 million. Results were also affected by the absence of the $3.9 million patent-sale gain recorded in 2019.
The workforce was reduced by approximately 14% under the August 2020 restructuring plan, in addition to an approximately 4% reduction under the January plan. Employees totaled 197 at year-end, versus 229 at year-end 2019.
The company issued approximately 10.6 million shares through public, private-placement and at-the-market offerings, increasing shares outstanding to 51.1 million at year-end from 38.4 million and diluting existing holders.
Distributor sales increased to 49% of revenue from 44%, while the top five end customers represented 58% of revenue versus 77% in 2019. One end customer represented 40% of 2020 revenue.
International sales remained highly concentrated, accounting for approximately 93% of revenue versus 95% in 2019. Japan represented $26.6 million, or approximately 65% of 2020 revenue.

Outlook, Management Commentary and Risks

The filing does not provide quantitative revenue, earnings or margin guidance. Management expects COVID-19 impacts to be temporary but states that the pandemic negatively affected 2020 revenue and results and could continue to disrupt customers, suppliers, distribution, travel and supply chains.
Management’s strategy focuses on mobile visual processors and software, digital projection, video delivery, TrueCut content technology and continued investment in video algorithms and low-power architectures. The company held 338 patents and had nine patent applications pending at year-end.
Key operating risks include sustained operating losses, limited financial resources, uncertain customer demand, lengthy and nonbinding design-win cycles, declining average selling prices, rapid technological change and intense competition from larger semiconductor and technology companies.
Manufacturing is outsourced to a limited number of foundries and assembly/test vendors, primarily in Taiwan and China. Sole-source and geographically concentrated supply arrangements create risks from shortages, yield problems, capacity allocation, price increases, natural disasters and geopolitical disruption.
Customer and channel concentration is significant. The largest distributor accounted for 23% of revenue, the largest end customer for 40%, and the top five end customers for 58%.
The company has incurred operating losses every fiscal year since 2010. Its U.S. net deferred tax assets remain fully offset by a valuation allowance, and significant federal, state and foreign net operating loss carryforwards begin expiring in 2021. Utilization may also be limited by Section 382.
Legal matters arising in the ordinary course were not expected by management to have a material adverse effect, although the filing notes that such matters involve inherent uncertainties. No material off-balance-sheet arrangements were reported.
Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2020. The independent auditor audited the financial statements but was not engaged to attest to internal control effectiveness because the company qualifies for the applicable smaller-reporting-company exemption.

Most Important Facts to Verify

Whether revenue recovers from the 2020 decline, particularly in mobile, digital projection and video-delivery markets, and whether COVID-19 or customer inventory corrections persist.
The company’s ability to reduce operating losses and generate positive operating cash flow without repeated equity issuance.
Liquidity after the revolving credit facility’s March 26, 2021 maturity and the availability and terms of any replacement financing.
Customer, distributor and geographic concentration, especially the 40% contribution from one end customer and approximately 65% of revenue from Japan.
Potential dilution from the remaining at-the-market equity program, employee equity awards and any future capital raises.
Supply continuity, pricing and manufacturing yields from concentrated third-party foundries and assembly/test vendors.
Expiration and potential limitations on the company’s substantial tax attributes, including federal net operating losses and tax credits.
Whether restructuring savings are realized without impairing research and development, product development or future design wins.