Pixelworks, Inc. — Q2 2021 Form 10-Q Summary
Business context and reporting period
Pixelworks designs semiconductor and software solutions for visual processing, primarily serving mobile, digital projection, home entertainment, video delivery, and content markets. The company operates as a single segment and is heavily concentrated in Asia. This unaudited filing covers the quarter and six months ended June 30, 2021, compared with the same periods in 2020.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $14.1 million | $9.3 million | $23.3 million | $23.0 million |
| Gross profit | $7.1 million | $5.0 million | $10.8 million | $11.8 million |
| Gross margin | 51% | 55% | 46% | 51% |
| Loss from operations | $(4.5) million | $(6.4) million | $(12.4) million | $(11.7) million |
| Net loss | $(4.4) million | $(6.6) million | $(12.5) million | $(12.0) million |
| Net loss per share | $(0.08) | $(0.17) | $(0.24) | $(0.31) |
- Q2 revenue increased 52%, driven by higher digital projector and mobile IC unit sales. First-half revenue increased only 1%, as lower projector volume largely offset mobile growth.
- IC sales were $13.1 million in Q2 and $21.7 million for the first half. Engineering services, license, and other revenue were $1.0 million and $1.6 million, respectively.
- Operating expenses were $11.6 million in Q2 and $23.2 million for the first half. Research and development increased 6% in Q2 and 7% year to date; selling, general and administrative expense declined 5% and 6%, respectively.
- No restructuring expense was recorded in 2021; the first half of 2020 included $0.6 million of restructuring expense.
- Net cash used in operating activities was $8.0 million for the first six months of 2021, compared with $0.2 million provided in the prior-year period. Capital expenditures were $0.4 million.
- Cash and cash equivalents were $23.6 million at June 30, 2021, down from $31.3 million at December 31, 2020. The company held no short-term marketable securities at June 30, 2021.
- Total assets were $63.4 million and shareholders’ equity was $44.4 million at June 30, 2021. Accumulated deficit was $427.6 million.
- The company had no outstanding borrowings under its revolving credit facility at December 31, 2020 and did not renew the facility when it matured on March 26, 2021. TPC-related obligations totaled $0.7 million, including $0.5 million classified as current. Operating lease liabilities totaled $6.6 million.
Material changes versus the prior comparable period
- Q2 revenue improved substantially, but gross margin declined four percentage points because of product mix and increased product costs.
- First-half revenue was broadly flat, while gross profit declined $1.0 million and gross margin declined five percentage points.
- First-half operating cash flow deteriorated by approximately $8.2 million, primarily reflecting the net loss, a $1.7 million increase in accounts receivable, and changes in accrued liabilities.
- Accounts receivable increased to $6.4 million from $4.7 million, while inventory declined to $1.6 million from $2.4 million.
- Revenue concentration remained significant: distributors represented 54% of first-half revenue, the top five end customers represented 76%, and one distributor represented 28%. Two accounts represented at least 10% of accounts receivable, including one account at 56%.
- Weighted-average shares increased to 52.0 million for the first half from 39.2 million, primarily reflecting prior equity financings and other share issuance activity.
Guidance, outlook, commentary, risks, and unusual items
- Management expects COVID-19 to continue negatively affecting 2021 revenue and results, although the company expects the effects to be temporary. Operations and supply-chain partners were reported as functional at the filing date.
- Management stated that existing working capital was expected to fund operating, investing, and financing needs for at least the next twelve months, but acknowledged that additional financing or expenditure reductions may be required if operating cash flow remains negative.
- On July 26, 2021, the company entered into a customer co-development agreement providing for $5.8 million within 60 days and up to an additional $4.8 million upon development milestones. The amounts are expected to reduce related R&D expense, but receipt of all amounts is not assured and there is no commitment for future product purchases.
- On August 6, 2021, Pixelworks and its Shanghai subsidiary entered into an agreement for approximately RMB279.7 million, or $43.1 million, of subsidiary-level equity proceeds, subject to closing conditions. Following the proposed transaction, Pixelworks expected to own 83.6% of the subsidiary. The transaction was expected to close in August 2021.
- Pixelworks intends to prepare its Shanghai subsidiary for a potential STAR Market listing targeted for the first half of 2023, but approval and completion are not assured.
- Key risks include continuing operating losses, negative operating cash flow, customer and distributor concentration, reliance on sole-source manufacturers in Taiwan and China, semiconductor supply constraints, rapid technological change, COVID-19, China and U.S.-China risks, foreign exchange exposure, intellectual-property claims, customer order cancellations, and possible future equity dilution.
- Management reported effective disclosure controls and procedures as of June 30, 2021, with no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the proposed PWSH capital increase closed on the stated terms and whether the expected $43.1 million of proceeds was received.
- Whether the customer co-development payments were received, the related accounting treatment, and whether development milestones and eventual product sales materialized.
- The company’s ability to reduce operating cash burn and reach profitability without additional dilutive equity or debt financing.
- Sustainability of Q2 revenue growth, particularly in mobile and digital projection, and the effect of product mix and manufacturing costs on gross margin.
- Exposure to the largest customers, distributors, accounts receivable concentrations, and the absence of long-term purchase commitments.
- Supply availability, pricing, and capacity commitments from the company’s limited foundry, assembly, and test suppliers.
- Progress toward the proposed STAR Market listing, including governmental approvals, subsidiary restructuring, ownership effects, and timing.