GigaMedia (GIGM) - 2019 Q4 - Annual Report

PART I Key Information This section presents selected financial data, highlighting operating losses, declining revenues, and significant business and financial risks including COVID-19 and PFIC classification Selected Financial Data Operating revenues declined from $11.6 million in 2017 to $6.6 million in 2019, with consistent operating losses and no dividends declared Consolidated Statements of Operations Data (2017-2019, in thousands US$) | Indicator | 2017 | 2018 | 2019 | | :--- | :--- | :--- | :--- | | Total operating revenues | $11,596 | $7,101 | $6,645 | | Gross profit | $6,498 | $3,516 | $3,581 | | Loss from operations | ($490) | ($4,823) | ($3,015) | | Net income (loss) attributable to shareholders | $1,086 | ($3,193) | ($1,659) | | Basic and diluted earnings (loss) per share | $0.10 | ($0.29) | ($0.15) | Consolidated Balance Sheet Data (As of Dec 31, in thousands US$) | Indicator | 2017 | 2018 | 2019 | | :--- | :--- | :--- | :--- | | Total current assets | $65,511 | $60,595 | $58,893 | | Total assets | $66,413 | $61,445 | $59,222 | | Total current liabilities | $5,048 | $3,273 | $3,584 | | Total GigaMedia's shareholders' equity | $61,365 | $58,172 | $55,544 | - The company declared no dividends in 2015, 2016, 2017, 2018, and 2019[15] Risk Factors The company faces business and ownership risks, including COVID-19 impact, intense competition, technological changes, data security, potential Nasdaq delisting, and PFIC classification - The COVID-19 pandemic poses a risk of business disruption, though it may also increase demand for online entertainment if people are required to stay home for prolonged periods[20][102] - A substantial portion of revenue comes from PC-based games, which are in decline due to a market shift towards mobile and browser-based games, requiring the company to focus on adapting to this shift[23][24] - The company faces intense competition from other online game operators in Taiwan and Hong Kong, many of whom have greater financial and marketing resources[29][30] - The company has a history of operating and net losses, including a net loss of $1.7 million in 2019 and $3.2 million in 2018, and may experience losses in the future[31] - A lawsuit was filed against a subsidiary, GigaMedia Cloud, by Ennoconn Corporation, with an appeal court partially modifying the decision, awarding Ennoconn approximately $893,000; GigaMedia Cloud has appealed to the Taiwan Supreme Court[57] - As of March 31, 2020, Mr. Andre Koo beneficially owned 19.54% of outstanding shares, giving him significant influence over corporate transactions and shareholder approvals[79][286] - The company believes it is likely classified as a Passive Foreign Investment Company (PFIC) for the 2019 taxable year and will likely be a PFIC for 2020, which could result in adverse U.S. federal income tax consequences for U.S. shareholders[92][321] Information on the Company GigaMedia, founded in 1998, provides digital entertainment services in Asia through FunTown, focusing on mobile and browser-based casual games with an 'Item-Billing' model History and Development of the Company Founded in Taiwan in 1998, GigaMedia Limited incorporated in Singapore in 1999 and completed its Nasdaq IPO in February 2000 - The business was founded in Taiwan in October 1998, with GigaMedia Limited incorporated in Singapore in September 1999[94] - Completed its initial public offering in February 2000 and trades on the Nasdaq Stock Market under the symbol GIGM[95] Business Overview GigaMedia's core FunTown business focuses on mobile and browser-based casual games in Asia, using an 'Item-Billing' model for its 8.8 million registered customers - The company operates FunTown, a digital entertainment portal focused on mobile and browser-based casual games, primarily in Taiwan and Hong Kong[98][100] - Most products use an 'Item-Billing' model, where users play for free and can purchase in-game virtual items and premium features[101] Revenue from Key Game Categories (in millions US$) | Game Category | 2017 | 2018 | 2019 | | :--- | :--- | :--- | :--- | | MahJong and other casual games | $2.4 | $1.8 | $1.8 | | Tales Runner (PC Sports Game) | $1.4 | $1.3 | $1.2 | | Mobile Role Playing Games | $7.8 | $4.0 | $3.5 | - The company develops its casual games in-house, investing over $1.2 million in 2019, and licenses role-playing and sports games from third-party developers[115][116] - As of December 31, 2019, the company had approximately 8.8 million unique registered customers and recorded about 57,000 active paying users during the year[134] - The business experiences seasonality, with the first and fourth quarters typically being the strongest revenue periods[138] Organizational Structure GigaMedia Limited operates through wholly-owned subsidiaries, with principal digital entertainment operations in Taiwan and Hong Kong/Macau - Principal operating subsidiaries include Hoshin GigaMedia (Taiwan) and FunTown World Limited (operates in Hong Kong and Macau)[152] Operating and Financial Review and Prospects This section analyzes GigaMedia's financial performance, noting a 6.4% revenue decrease in 2019, narrowed operating and net losses, and sufficient liquidity for 2020 Operating Results In 2019, operating revenues decreased by 6.4% to $6.6 million, while gross margin improved to 53.9%, leading to reduced operating and net losses Financial Performance Summary (2018 vs. 2019, in millions US$) | Metric | 2018 | 2019 | Change | | :--- | :--- | :--- | :--- | | Operating Revenues | $7.1 | $6.6 | -6.4% | | Gross Profit | $3.5 | $3.6 | +1.8% | | Gross Margin | 49.5% | 53.9% | +4.4pp | | Operating Expenses | $8.3 | $6.6 | -20.9% | | Loss from Operations | ($4.8) | ($3.0) | -37.5% | | Net Loss | ($3.2) | ($1.7) | -48.0% | - The decrease in 2019 revenue was mainly due to an 11.5% decline in mobile game revenues, as certain role-playing games saw declining revenue despite retaining core players[225] - Gross margin improved in 2019 due to better management of player payment channels and fewer initial costs associated with launching new licensed games[227] - Selling and marketing expenses decreased by 39.5% in 2019 to $2.0 million, attributed to fewer new licensed game launches and enhanced marketing efficiency[231] - The company recognized impairment losses in 2019 totaling $109k on property, plant, and equipment, and $15k on intangible assets[235] - Net non-operating income was $1.4 million in 2019, primarily consisting of $1.5 million in interest income from bank deposits[236] Liquidity and Capital Resources As of December 31, 2019, cash and equivalents were $58.3 million, a $1.6 million decrease due to operating activities, with no bank borrowings and sufficient liquidity for 2020 Cash and Liquidity (in thousands US$) | Metric | 2017 | 2018 | 2019 | | :--- | :--- | :--- | :--- | | Net cash used in operating activities | ($1,110) | ($3,914) | ($1,567) | | Net cash provided by (used in) investing activities | $935 | ($90) | ($73) | | Cash, restricted cash and cash equivalents at end of year | $64,177 | $59,826 | $58,274 | - The company had no bank borrowings as of December 31, 2019, and 2018[238] - Capital expenditures were $0.1 million in 2019, primarily for software and computer hardware[244] - The company believes its existing cash and working capital are sufficient for its present requirements and to meet obligations through 2020[243] Research and Development The company invests in R&D to maintain competitiveness, with expenses at $1.2 million in 2019, a slight increase from prior years Research and Development Expenses (in millions US$) | Year | R&D Expense | | :--- | :--- | | 2017 | $1.1 | | 2018 | $1.1 | | 2019 | $1.2 | Trend Information The digital entertainment industry is shifting from PC to browser/mobile platforms, prompting GigaMedia to transition its game portfolio to casual browser/mobile games - The company is actively extending its PC-based platform to browser/mobile casual games to capitalize on strong market growth trends in Asia[249] - The strongest demand in the company's markets of Taiwan and Hong Kong is for casual browser/mobile games[248] Directors, Senior Management and Employees This section details the company's leadership, compensation, and workforce, noting a six-member board, $0.4 million in 2019 compensation, and a decrease to 136 employees Directors and Senior Management The company's leadership includes James Cheng-Ming Huang as Chairman, CEO, and CFO, with a six-member board comprising five independent directors - James Cheng-Ming Huang holds the positions of Chairman of the Board, Chief Executive Officer, and Chief Financial Officer, appointed in 2017[256][258] Compensation Total cash compensation for directors and executive officers was approximately $0.4 million in 2019, with 24,000 outstanding stock options as of March 31, 2020 - Aggregate cash compensation paid to directors and executive officers for the year ended December 31, 2019, was approximately US$0.4 million[266] - As of March 31, 2020, directors and executive officers as a group held 24,000 outstanding stock options[267][284] Board Practices The board comprises six members, five independent, with standing Audit and Compensation Committees composed of independent directors - The board has a standing Audit Committee and Compensation Committee; the Audit Committee consists of three independent directors, and the Compensation Committee consists of two[279][280] Employees Total full-time employees decreased to 136 in 2019, with the majority (117) based in Taiwan and the largest group in development roles Employee Headcount by Year | Year | Total Employees | | :--- | :--- | | 2017 | 151 | | 2018 | 154 | | 2019 | 136 | - As of December 31, 2019, 117 of the 136 employees were located in Taiwan, and 19 were in Hong Kong[281] Major Shareholders and Related-Party Transactions As of March 31, 2020, John-Lee Andre Koo was the largest shareholder with 19.54% ownership, and no material related-party transactions occurred Major Shareholders (as of March 31, 2020) | Name of Owner | Percentage of Shares Owned | | :--- | :--- | | John-Lee Andre Koo | 19.54% | | James Cheng-Ming Huang | 7.90% | | Collin Hwang | 6.30% | | Jonathan Honig | 5.65% | - As of March 31, 2020, 60.60% of outstanding shares were held by shareholders other than the major ones listed[287] Financial Information This section refers to the full consolidated financial statements and reiterates the company's policy of retaining earnings with no dividends paid or anticipated - The company has not declared or paid any dividends on its shares and does not intend to pay dividends in the foreseeable future[294] The Offer and Listing The company's ordinary shares have been listed and traded on the Nasdaq Stock Market under the ticker symbol 'GIGM' since February 2000 - Shares are listed on the Nasdaq Stock Market with the symbol 'GIGM'[296] Additional Information This section covers corporate details including share capital, exchange controls, and taxation, notably highlighting the high likelihood of PFIC classification for U.S. tax purposes Taxation This section outlines tax considerations for shareholders in Singapore and the U.S., emphasizing the high likelihood of PFIC classification for U.S. shareholders and its adverse tax implications - In Singapore, there is no tax on capital gains, but gains from share disposals could be taxed as income if considered part of a trade or business; Stamp duty is payable on share transfers within Singapore[310][312] - The company believes it is likely classified as a Passive Foreign Investment Company (PFIC) for U.S. federal income tax purposes for 2019 and will likely be a PFIC for 2020[92][321] - If classified as a PFIC, U.S. shareholders face special, penalizing tax rules on 'excess distributions' and gains from selling shares; an alternative is a mark-to-market election, but this has its own set of rules and may not cover lower-tier PFICs[322][325] - The company does not intend to provide the information necessary for U.S. shareholders to make a Qualified Electing Fund (QEF) election[327] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are foreign currency and interest rate risks, with foreign currency exposure from assets and minimal interest rate risk due to no outstanding bank loans - The company's primary market risk is foreign currency risk, as it holds some assets in currencies other than the functional currency of the holding entity; as of Dec 31, 2019, approximately $7.8 million in bank deposits were subject to this risk[343][345] - A hypothetical 10% change in exchange rates would result in a 1.1% change in total equity as of December 31, 2019[346] - The company had no outstanding bank loans as of December 31, 2019, limiting its exposure to interest rate risk[348] PART II Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2019, with no auditor attestation required - Management concluded that as of December 31, 2019, the company's disclosure controls and procedures were effective[351] - Based on the COSO 2013 framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2019[352] - The annual report does not include an auditor's attestation report on internal control over financial reporting because the company is an exempt non-accelerated filer[353] Other Information This section covers corporate governance, including the audit committee financial expert, code of ethics, and $255,000 in 2019 accountant fees, noting adherence to Singapore practices - The board of directors has determined that Mr. Casey K. TUNG is the audit committee financial expert[355] - The company has adopted a code of ethics, an anti-fraud policy, and a whistleblower program[357][358][359] Principal Accountant Fees (in US$) | Fee Type | 2018 | 2019 | | :--- | :--- | :--- | | Audit Fees | $237,000 | $248,000 | | Tax Fees | $18,000 | $7,000 | | All Other Fees | $0 | $0 | | Total | $255,000 | $255,000 | PART III Financial Statements This section contains the company's audited consolidated financial statements for 2017-2019, prepared under U.S. GAAP, including the auditor's report and various financial statements - The financial statements were audited by Deloitte & Touche, which issued an opinion that the statements present fairly the financial position and results of operations in conformity with U.S. GAAP[379] - The company changed its accounting method for leases in 2019 (adoption of ASC Topic 842) and for revenue from contracts with customers in 2018 (adoption of ASC Topic 606)[380] Exhibits This section lists all exhibits filed with the annual report, including corporate governance documents and Sarbanes-Oxley Act certifications