Pixelworks, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2021. The filing is unaudited and prepared under U.S. GAAP. Pixelworks develops visual-processing semiconductors and software for mobile, projector, video-delivery, home-entertainment, content, and business and education markets. Most operations, customers, employees, and manufacturing relationships are concentrated in Asia.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Change | 9M 2021 | 9M 2020 |
|---|---|---|---|---|---|
| Revenue | $15.2 million | $8.2 million | +86% | $38.5 million | $31.2 million |
| Gross profit | $8.0 million | $4.0 million | +101% | $18.8 million | $15.8 million |
| Gross margin | 53% | 49% | +4 pts | 49% | 51% |
| Operating loss | $(3.9) million | $(8.1) million | Improved | $(16.3) million | $(19.8) million |
| Net loss attributable to Pixelworks | $(4.1) million | $(8.1) million | Improved | $(16.5) million | $(20.1) million |
| Loss per share | $(0.08) | $(0.20) | Improved | $(0.32) | $(0.51) |
Revenue growth was driven primarily by higher unit sales into the digital projector and mobile markets. IC sales were $14.3 million in the quarter and $36.0 million for the nine months. Engineering services, licensing, and other revenue were $0.8 million and $2.5 million, respectively.
Research and development expense increased 12% in the quarter and 9% year to date, while selling, general and administrative expense increased 10% in the quarter but declined 1% year to date. No restructuring expense was recorded in 2021, compared with $1.6 million in Q3 2020 and $2.2 million in the first nine months of 2020.
Cash flow, liquidity, debt, and balance sheet
- Cash and cash equivalents were $66.6 million at September 30, 2021, compared with $31.3 million at December 31, 2020. Cash included $18.8 million in money-market funds and $47.8 million in cash.
- Net cash used in operating activities was $3.0 million for the first nine months, compared with $3.2 million used in the comparable period.
- Capital expenditures were $2.3 million, and payments on asset financings were $0.9 million.
- Financing cash inflows included $30.0 million of net proceeds from the issuance of PWSH equity to redeemable non-controlling investors, $9.7 million from employee-owned entities, $1.3 million from employee equity plans, and $0.3 million from the at-the-market offering.
- Accounts receivable were $6.1 million and inventories were $1.6 million at quarter-end. Management reported 36 days sales outstanding, down from 44 days at year-end.
- The Silicon Valley Bank revolving line matured on March 26, 2021 and was not renewed. There were no outstanding borrowings under it at December 31, 2020. The previously issued $0.8 million PPP loan was fully forgiven in 2020.
- Total liabilities were $34.2 million, including $5.9 million of operating lease liabilities and $0.6 million of remaining TPC-related debt. A $9.7 million deposit liability relates to the employee-owned PWSH interest.
Management stated that existing working capital is expected to fund operating, investing, and financing needs for at least the next twelve months, while noting that additional financing or expenditure reductions may be required over the longer term.
Material changes versus the prior comparable period
- Quarterly revenue increased 86%, and nine-month revenue increased 23%, reflecting stronger projector and mobile demand.
- Quarterly gross margin improved to 53%, but nine-month gross margin declined to 49% because of product mix and higher direct product costs.
- Operating and net losses narrowed, aided partly by the absence of 2020 restructuring charges.
- Pixelworks established PWSH as a less-than-wholly-owned profit center for its mobile, projector, and video-delivery businesses. Investors acquired a 10.45% redeemable interest for approximately $30.8 million, and employee-owned entities acquired a 4.68% redeemable interest for approximately $9.7 million.
- A customer co-development agreement is expected to reimburse specified research and development costs. Pixelworks recognized a $1.3 million R&D offset in Q3 and expected to recognize approximately $2.5 million more during the remainder of 2021. The agreement does not commit the customer to future product purchases.
- Common shares outstanding increased to 53.2 million as of November 5, 2021, from 41.5 million at September 30, 2020, reflecting equity issuances and employee plans.
Outlook, commentary, and key risks
- Pixelworks expects COVID-19 to continue negatively affecting 2021 revenue and results through potential disruptions to customers, suppliers, logistics, and global demand.
- The company intends to qualify PWSH to apply for a Shanghai STAR Market initial public offering, presently targeting consummation in 2023. There is no assurance that the listing will occur.
- If the STAR Market listing is not completed by June 30, 2024, investors may require PWSH to redeem their interests at the original purchase price plus 3% annual interest. Employee-owned entities may require redemption by December 31, 2024 at the original purchase price plus 5% annual interest. Required redemptions could require additional capital and materially affect liquidity and results.
- Pixelworks relies on a limited number of customers, distributors, and sole-source semiconductor manufacturers, generally without long-term purchase or supply commitments. The top five end customers represented 78% of nine-month revenue, and all distributors represented 55%.
- The company reported shortages of semiconductor wafers, packages, memory die, display components, and other materials, creating potential shipment delays, higher costs, and lost revenue.
- Additional risks include rapid technological change, intense competition, declining average selling prices, foreign-currency exposure, China and U.S.-China geopolitical conditions, cybersecurity, intellectual-property claims, customer cancellations, and continued operating losses.
- Management reported effective disclosure controls and procedures as of September 30, 2021, with no material changes to internal control over financial reporting during the period.
Investor verification checklist
- Verify whether revenue growth in mobile and projector markets is recurring and whether customer and distributor concentration has changed.
- Assess the sustainability of the 53% quarterly gross margin and the reasons for the 49% year-to-date margin.
- Track operating cash burn, the company’s path to profitability, and whether the $66.6 million cash balance remains sufficient.
- Review the terms, milestones, collectability, and future sales implications of the co-development agreement.
- Evaluate the probability, timing, and regulatory requirements of the PWSH STAR Market listing and the potential redemption obligations if it is delayed or fails.
- Monitor semiconductor supply constraints, manufacturing capacity, inventory levels, customer cancellations, and pricing pressure.
- Confirm the impact of future equity issuance, employee equity plans, and any required financing on shareholder dilution.