Pixelworks, Inc. 2019 Q3 Form 10-Q Summary
Business context and reporting period
Pixelworks designs and markets visual-display processing semiconductors, intellectual-property cores, software and ASIC solutions for digital projection, mobile devices and video delivery. The filing covers the three and nine months ended September 30, 2019. The company operates as one segment and had 353 patents related to digital image display technology at quarter-end.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Revenue | $18.1 million | $21.5 million | $52.7 million | $56.0 million |
| Revenue change | -16% | -6% | ||
| Gross profit | $9.3 million | $11.2 million | $27.2 million | $28.6 million |
| Gross margin | 52% | 52% | 52% | 51% |
| Operating income (loss) | $(2.4) million | $0.4 million | $(8.2) million | $(3.3) million |
| Operating margin | -13.5% | 2.0% | -15.6% | -5.9% |
| Net income (loss) | $(2.3) million | $0.4 million | $(4.6) million | $(2.4) million |
| Diluted EPS | $(0.06) | $0.01 | $(0.12) | $(0.07) |
IC sales were $17.7 million in Q3 and $50.4 million year to date, compared with $20.7 million and $53.8 million, respectively, in the prior-year periods. Engineering services, license and other revenue was $0.4 million in Q3 and $2.4 million year to date.
- Research and development expense increased 21% to $6.5 million in Q3 and 19% to $19.3 million year to date, primarily because 2018 benefited from customer co-development reimbursements that were completed by December 31, 2018.
- Selling, general and administrative expense increased 5% to $5.3 million in Q3 and 7% to $15.7 million year to date, including severance associated with the former CFO’s resignation and higher stock-based compensation.
- Stock-based compensation was $1.5 million in Q3 and $4.9 million year to date.
- Cash used in operating activities was $3.0 million for the first nine months, compared with $0.2 million provided in the prior-year period.
- Investing activities provided $0.6 million, including $3.9 million of net proceeds from the sale of patents, partly offset by $2.7 million for property, equipment and licensed technology.
- Cash and cash equivalents were $15.6 million at September 30, 2019, and short-term marketable securities were $6.7 million, for total highly liquid funds of $22.3 million.
- Total assets were $67.7 million and shareholders’ equity was $50.2 million. The accumulated deficit was $384.1 million.
Material changes versus the prior comparable period
- Revenue declined primarily because customers reduced digital-projector inventory levels and unit sales. Increased mobile and video-delivery sales only partially offset the decline.
- Profitability deteriorated: Q3 shifted from operating income of $0.4 million and net income of $0.4 million to operating loss of $2.4 million and net loss of $2.3 million.
- The nine-month net loss increased despite a $3.9 million patent-sale gain in 2019. The prior-year period included a $1.3 million gain on extinguishment of convertible debt.
- Restructuring expense declined to $0.4 million year to date from $1.0 million in the prior-year period; the 2019 workforce reduction was approximately 2% and was complete by the second quarter.
- The company adopted ASC 842 on January 1, 2019, recognizing operating lease right-of-use assets of $4.6 million and operating lease liabilities of $5.0 million at September 30, 2019. Adoption increased assets and liabilities by $6.2 million and $6.8 million, respectively, without a material income-statement or cash-flow effect.
- Prior-period information was revised for an immaterial $4.6 million correction relating to an expired statute of limitations on an accrued liability. The correction did not affect cash.
Debt, liquidity, outlook and risks
Pixelworks had no borrowings under its secured revolving line of credit at September 30, 2019 and was in compliance with its covenants. The facility permits borrowings up to the lesser of $10.0 million or $1.0 million plus 80% of eligible receivables and matures December 27, 2019. Management stated that existing working capital was expected to fund operating, investing and financing needs for at least the next twelve months, but cautioned that additional financing or spending reductions could be required and may not be available on favorable terms.
The filing provides no formal revenue or earnings guidance. Management expects demand to remain dependent on recovery of digital-projector inventory levels, growth in mobile and video-delivery markets, product mix, customer orders and development execution. The company continues to invest in research and development and may evaluate acquisitions or other strategic transactions.
- Revenue and customer exposure are concentrated: Japan represented $42.8 million, or approximately 81%, of nine-month revenue; the top five end customers represented 78%; and one distributor represented 30%.
- The company relies on a limited number of foundries and assembly and test vendors, principally in Taiwan and China, without long-term supply agreements.
- Operating losses, negative operating cash flow, substantial accumulated deficit and the approaching credit-facility maturity create liquidity and financing risks.
- Disclosure controls were not effective because of a previously reported material weakness involving review of aged liabilities and statute-of-limitations issues. Management planned to complete remediation by the end of the fourth quarter of 2019.
- Goodwill of $18.4 million and acquired intangible assets of $3.1 million remained on the balance sheet. Management reported no impairment-triggering events during the first nine months.
- Uncertain tax positions totaled $1.6 million, with approximately $0.1 million of potential reductions expected within twelve months; U.S. deferred tax assets remain substantially subject to a valuation allowance.
- Outstanding contractual obligations include approximately $0.9 million of TPC-related debt, payable through January 2024, and $5.0 million of operating lease liabilities.
Most important facts for investors to verify
- Whether digital-projector inventory corrections have ended and whether mobile and video-delivery growth can offset declining projector revenue.
- The status and renewal or replacement terms of the revolving credit facility after December 27, 2019.
- Progress and final effectiveness testing of remediation for the material weakness in internal controls.
- Customer and geographic concentration, particularly the dependence on Japan, the top distributor and the top five end customers.
- Whether negative operating cash flow persists after excluding the one-time patent-sale proceeds.
- The effect of continued research-and-development spending, stock-based compensation and potential future restructuring or financing on the path to profitability.