Pixelworks, Inc. — Q2 2013 Form 10-Q Summary
Business context and reporting period
Pixelworks designs and markets video and pixel-processing semiconductors, intellectual property and software for digital displays and projectors. The company also licenses technology and enters co-development arrangements. This unaudited Form 10-Q covers the three and six months ended June 30, 2013, compared with the corresponding 2012 periods.
Key financial metrics
| Metric | Q2 2013 | Q2 2012 | 6M 2013 | 6M 2012 |
|---|---|---|---|---|
| Revenue | $9.6 million | $15.5 million | $17.8 million | $29.9 million |
| Gross profit | $4.6 million | $7.7 million | $8.6 million | $15.5 million |
| Gross margin | 48% | 49% | 48% | 52% |
| Operating loss | $4.7 million | $0.8 million | $10.2 million | $2.2 million |
| Net loss | $4.9 million | $1.1 million | $10.3 million | $1.7 million |
| Loss per share | $0.26 | $0.06 | $0.56 | $0.10 |
| Cash flow from operations | Not separately provided | Not separately provided | $(4.6) million | $1.4 million |
Cash and cash equivalents were $11.2 million at June 30, 2013, down from $13.4 million at December 31, 2012. Current assets were $17.3 million and total assets were $23.4 million. Total liabilities were $17.6 million and shareholders’ equity was $5.8 million, compared with $14.7 million at year-end 2012.
The company had $3.5 million of short-term borrowings under a secured revolving line at June 30, 2013. This was a non-formula advance bearing interest at 3.5% and was repaid within the required period after quarter-end. The company reported no long-term debt.
Material changes versus the prior comparable period
- Revenue declined 38% in Q2 and 40% for the first six months, primarily because unit sales fell 33% and 34%, respectively, in digital projector and advanced television markets.
- Average selling prices increased 7% in Q2 and 5% year to date, largely because of product mix, but did not offset lower volumes.
- Licensing revenue was negligible in 2013 compared with $2.3 million in Q2 2012 and $4.4 million in the first half of 2012.
- Gross margin declined year to date largely because the 2012 periods included higher-margin licensing revenue. Excluding licensing effects, product cost percentages improved in 2013.
- Research and development expense increased 27% in Q2 and 21% year to date, reflecting higher headcount, non-recurring engineering and outside services, and the absence of comparable co-development offsets recognized in 2012.
- Selling, general and administrative expense decreased 14% in Q2 and 12% year to date, primarily due to lower compensation expense from reduced headcount.
- Operating cash flow shifted from $1.4 million provided in the first half of 2012 to $4.6 million used in the first half of 2013. The cash decline was partially funded by the $3.5 million short-term advance.
Guidance, outlook, risks and unusual items
Management anticipated higher revenue in the second half of 2013 as the macroeconomic environment improved, new products were adopted and licensing milestones were achieved. Management also expected improved margins from product mix, lower research and development expense from future co-development milestones and positive operating cash flow in the second half. These expectations are not guarantees.
Under the co-development agreement, the company received an initial $3.5 million payment in 2012. Two additional $1.75 million payments remain payable upon specified milestones, which had not been achieved by June 30, 2013. The arrangement does not guarantee future sales volumes and may limit product exclusivity.
Liquidity is a significant concern. Management believed existing working capital and the revolving facility would fund needs for the next twelve months, but acknowledged that additional financing or expense reductions could be required and may not be available on acceptable terms. The company has incurred operating losses since 2004 and reported an accumulated deficit of $345.1 million.
Revenue is highly concentrated: distributors represented 79% of first-half 2013 revenue, the largest distributor represented 42%, and the top five end customers represented 54%. Approximately 99% of first-half revenue was generated outside the United States. The company relies on a limited number of Asian foundries and assembly and test vendors without long-term supply agreements.
Other material risks include rapid technological change, customer order cancellations, inventory forecasting, foreign currency exposure, dependence on design wins, intellectual-property claims, Asian operating and natural-disaster risks, and limited financial resources. The company stated that its common stockholders’ equity of $5.8 million was below the $10 million NASDAQ equity requirement and that continued listing depended on other applicable market-value requirements.
The company reported no material off-balance-sheet arrangements and no material legal liabilities from its indemnification obligations. Management concluded that disclosure controls were effective and that there were no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether second-half revenue, licensing milestones and new-product adoption occurred as management expected.
- The company’s ability to generate operating cash flow without relying on temporary credit advances.
- Compliance with NASDAQ continued-listing requirements, particularly market value and equity thresholds.
- Availability and borrowing capacity under the revolving credit facility after its December 2014 expiration.
- Customer and distributor concentration, including the 42% contribution from the largest distributor.
- Progress and remaining payment conditions under the co-development agreement.
- Manufacturing capacity, supplier continuity and product-yield risks in Asia.
- Potential dilution or financing needs if losses and cash usage continue.