Business Context and Reporting Period
Pixelworks, Inc. filed its Form 10-K for the fiscal year ended December 31, 2021, including fourth-quarter results. The company develops fabless semiconductor and software solutions for visual processing, mobile devices, digital projectors, video delivery, and content applications. Sales are heavily international, with 97% of revenue generated outside the United States in 2021.
During the third quarter of 2021, Pixelworks implemented a strategic realignment of its mobile, projector, and video delivery businesses around its Asia-centered subsidiary, Pixelworks Semiconductor Technology (Shanghai) Co., Ltd. (PWSH). The company intends to pursue a potential PWSH listing on the Shanghai STAR Market, targeted for 2023, although approval and completion are not assured.
Financial Performance and Liquidity
| Metric | FY 2021 | FY 2020 | Change |
|---|---|---|---|
| Revenue | $55.1 million | $40.9 million | Up 35% |
| Gross profit | $27.7 million | $20.2 million | Up 37% |
| Gross margin | 50% | 49% | Up 1 percentage point |
| Loss from operations | $(20.0) million | $(26.7) million | Improved $6.7 million |
| Net loss attributable to Pixelworks | $(19.8) million | $(26.5) million | Improved $6.7 million |
| Loss per share | $(0.38) | $(0.65) | Improved |
| Net cash used in operating activities | $(9.2) million | $(3.7) million | Use increased |
IC product revenue was $50.8 million, compared with $39.2 million in 2020. Engineering services, license revenue, and other revenue increased to $4.3 million from $1.7 million, primarily because of license revenue recognized in 2021. Research and development expense was $27.3 million, including a $4.0 million reduction related to a customer co-development agreement. Selling, general and administrative expense was $20.4 million, compared with $19.8 million in 2020. No restructuring expense was recorded in 2021, compared with $2.2 million in 2020.
Fourth-quarter 2021 revenue was $16.6 million, gross profit was $8.9 million, operating loss was $3.7 million, and net loss attributable to Pixelworks was $3.3 million, or $0.06 per share. Fourth-quarter 2020 revenue was $9.6 million and net loss attributable to Pixelworks was $6.4 million, or $0.15 per share.
Cash and cash equivalents increased to $61.6 million at December 31, 2021, from $31.3 million at December 31, 2020. The increase primarily reflected $42.3 million of proceeds from PWSH equity issuances, partially offset by operating cash use of $9.2 million, capital expenditures of $3.5 million, and asset-financing payments of $1.2 million. The company had no short-term marketable securities at year-end and no outstanding borrowings under its former revolving credit facility.
Accounts receivable increased to $8.7 million from $4.7 million, while inventories declined to $1.5 million from $2.4 million. Total liabilities were $35.5 million, including $12.7 million of deposit liabilities and $30.9 million of redeemable non-controlling interest. The accumulated deficit was $435.0 million.
Material Changes Versus the Prior Comparable Period
- Revenue increased 35%, driven by higher mobile unit sales, sustained digital projector recovery, and increased license revenue.
- Gross margin improved modestly to 50%, benefiting from high-margin license revenue, higher fixed-cost absorption, and lower acquired-technology amortization; increased mobile-market sales partially offset these benefits.
- Operating and net losses narrowed, aided by revenue growth and the absence of 2020 restructuring charges.
- Operating cash flow deteriorated from $(3.7) million to $(9.2) million, primarily reflecting the increase in accounts receivable and continued operating losses.
- PWSH raised approximately $42.3 million from outside investors and employee-owned entities. The investors received a 10.45% redeemable interest and the employee entities received a 5.95% interest.
- Revenue concentration increased: the top five end customers represented 76% of 2021 revenue versus 58% in 2020, and distributors represented 56% versus 49%.
- China revenue increased to $24.0 million from $8.9 million, while U.S. revenue declined to $1.6 million from $3.1 million.
Guidance, Outlook, Risks, and Unusual Items
Management states that existing working capital is expected to fund operating, investing, and financing needs for the twelve months following fiscal year-end and beyond. The filing does not provide formal revenue or earnings guidance. Management continues to expect investment in mobile, projector, and video delivery products and intends to pursue the potential PWSH STAR Market listing.
- COVID-19 negatively affected revenue and results in both 2020 and 2021 and may continue to disrupt customers, suppliers, distribution, and manufacturing.
- The company remains unprofitable, has incurred operating losses every year since 2010, and may require additional financing if it cannot generate sufficient operating cash flow. Future equity financing could dilute shareholders.
- The potential STAR Market listing is subject to regulatory and exchange approvals. If it is not completed by the applicable deadlines, investors and employee-owned entities may require PWSH to repurchase their interests plus interest, potentially requiring significant cash or additional financing.
- Pixelworks depends on a limited number of customers, distributors, foundries, and assembly and test vendors. The company has no long-term supply commitments with its manufacturers and reported ongoing component and materials shortages.
- The business is exposed to semiconductor cyclicality, declining average selling prices, rapid technological change, competition, foreign exchange movements, geopolitical tensions involving China, natural disasters, and intellectual-property claims.
- Contractual obligations totaled $14.4 million at year-end, including $6.6 million of estimated contract-manufacturer purchase commitments, $5.7 million of operating lease payments, and $1.5 million of asset-financing obligations. Approximately $10.7 million was due within one year.
- Federal, state, and foreign net operating loss carryforwards totaled approximately $166.4 million, $6.8 million, and $39.5 million, respectively, with some beginning to expire in 2022. Utilization may be limited by tax rules and future profitability.
- The independent auditor issued an unqualified opinion on the consolidated financial statements. Management assessed internal control over financial reporting as effective, but the auditor was not required to provide an attestation because of the company’s smaller reporting company status.
Important Facts for Investors to Verify
- Whether mobile-market growth and the 2021 revenue increase are sustained without further deterioration in gross margin.
- The timing, approvals, ownership effects, and cash obligations associated with the proposed PWSH STAR Market listing.
- Whether operating cash flow improves and whether the $61.6 million cash balance remains sufficient given continuing losses and contractual obligations.
- The credit quality and ordering behavior of the concentrated customer and distributor base, particularly the top five end customers representing 76% of revenue.
- The severity and duration of component shortages, foundry constraints, COVID-19 disruptions, and China-related geopolitical or regulatory risks.
- The potential dilution from the company’s at-the-market equity program and other future financing needs.
- The realizability and expiration profile of net operating losses and tax credits, together with uncertain tax positions of approximately $3.6 million plus interest and penalties.