Pivotal Systems Corp
ASX:PVS
Pivotal Systems Corp
Pivotal Systems Corp. engages in the design, development, and manufacture of gas flow monitoring and control products. The company is headquartered in Fremont, California. The company went IPO on 2018-07-02. The firm designs, develops, manufactures, and sells gas-flow control products, which include the Gas Flow Controller (GFC) family of products and Flow Ratio Controllers (FRC) for both etch and deposition applications. Its products include GFC20, GFC200, GFC1000, GFC2000, GFC5L, GFC20L and GFC50L. The GFC combines its patented GFM system with patented control valve technology. Its products are used by original equipment manufacturers, foundries, and integrated device manufacturers. Its platform includes GFC product lines that offer real-time monitoring for control in wafer processing, mainly for gas flow and chamber conditions. The Company’s hardware and software utilize machine learning to enable preventative diagnostic capability. The company has third-party contracted manufacturing and assembling facilities in Shenzhen, China, and Dongtan, South Korea.
Earnings Calls
Pivotal Systems is raising approximately AUD 5.1 million to strengthen its financial position amid a semiconductor industry slowdown. The company reported revenues of USD 18.2 million with a goal to achieve positive EBITDA by year-end, thanks to a 38% reduction in operating expenses and over 20% cut in cost of goods sold. Revenue growth is expected to rebound in the second half of 2023, supported by new product launches and market share gains. With a committed capital raise, Pivotal's strategy targets a 10% market share of the semiconductor flow control sector by 2026, positioning it for future expansion.
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Thank you for standing by, and welcome to the Pivotal Systems Investor Presentation, capital raise.
[Operator Instructions]
I would now like to hand the conference over to Mr. Kevin Hill, CEO. Please go ahead.
Thank you, operator. Joining me on the call today is Ron Warrington, Pivotal's Chief Financial Officer. I'm speaking with you today to summarize and discuss Pivotal's announcement on ASX made in relation to the accelerated renounceable pro rata entitlement offer to raise gross proceeds of up to approximately AUD 5.1 million, equating to USD 3.4 million.
I remind participants on today's call, the company will present certain forward-looking statements and comments about future events. Slide 3 provides an overview of the business update, our financials and the basic structure of the accelerated institutional entitlement offer and the retail entitlement offer to eligible security holders.
As I've been commenting on throughout the 2022 calendar year and at our FY '22 results in February of 2023, Pivotal's past growth momentum has been set back by the current semiconductor industry cyclical slowdown, which has impacted many industry suppliers, including ourselves. However, we have taken swift action to lower our costs, with operating expenses already cut by approximately 38%, and we have closed underutilized facilities and reduced headcount. This has rebaselined the business spend until return of expected quarter-over-quarter revenue growth, which is anticipated to return in the second half of 2023.
As a result of the capital raise initiative we announced, Pivotal is no longer considering a delisting for the foreseeable future unless an exit transaction occurs, resulting from the company's parallel strategic review process led by Needham & Company.
To date, this has resulted in multiple indications of interest in the company from strategics but there is no certainty to any particular outcome and the company sees strong potential to continue its current independent path on ASX. To remind investors of our financials, we reported 2022 revenue of USD 18.2 million with 2022 adjusted gross margins of 27% when onetime and unusual costs are removed.
Our reported gross margins were 8.5% for the year. Our operating expenses have been reduced from USD 15.5 million in 2022 to a forecast range of USD 9.5 million to USD 10.5 million in 2023, alongside aggressive reductions of our cost of goods sold by over 20% anticipated throughout the year 2023.
Accordingly, the target raise of AUD 5.1 million equating to USD 3.4 million could provide sufficient capital to reach EBITDA positive. A lower raise would provide runway to industry recovery and provide optionality for further financing or other strategic directions.
Ron Warrington will provide more details on the capital raise later in the presentation, but I do wish to add that our major shareholder, Anzu Partners have committed to take up their full pro rata entitlement of AUD 0.9 million, and major shareholder by Viburnum have committed to take a minimum of AUD 0.5 million.
Anzu Partners has committed to taking up an additional AUD 0.58 million in shortfall securities and Anzu RBI has committed to subscribe for AUD 0.45 million of shortfall to the extent available in each case subject to shareholder approval. In addition, certain directors and senior management have committed to subscribe for their pro rata entitlements and have asked if they can participate in any of the shortfall.
Shareholders and new shortfall investors subscribing for more than USD 500,000 each will be entitled to together nominate 1 new director to the Board on completion of the offer. Turning to Slide 4, which provides a number of reasons why the announced entitlement offers an attractive entry point for investors given the upcoming market cycle, the industry technology evolution, our new leadership team and Pivotal's position to satisfy the industry's tech requirements.
First, as I mentioned, we are anticipating a revenue rebound in the second half of 2023 and 2024 after the industry's temporary down cycle. Valuations have been compressed, but semiconductor industry growth and the outlook remains robust.
Second, Pivotal's differentiated technology has been validated in over 73,000 units sold and is being integrated into new products by leading wafer fab equipment companies for the next semiconductor technology nodes.
Third, we have taken aggressive turnaround steps in the drive to profitability. And fourth, the Pivotal strategy is to aggressively target market share gains and implement additional product extensions. Slide 5 highlights the continued growth path in the semiconductor industry towards USD 1 trillion in integrated circuit or chip sales by 2030.
The semiconductor market reached USD 500 billion in its first 50 years and is expected to double to USD 1 trillion within the next 10 years. Semiconductors are created by wafer fab equipment, WFE. These are machines that push the limits of physics and chemistry. Yet many of the gas flow control devices in use in today's WFE use decades old technology.
Pivotal has leapfrogged that flow control technology gap and brought advanced gas flow control into the digital age, where our unique and proprietary software plays a major role in enabling WFE performance.
Slide 6 highlights how we better enable advanced semiconductor road maps. As investors will appreciate, we address flow control, which is essential to the semiconductor technology road map. Our patent portfolio uniquely enables us to transform the sector towards our digital gas flow control technology.
Our approximately 73,000 units already installed in the field provides strong proof of the value of a pivotal GFC device demonstrating performance benchmarks for speed and accuracy and repeatability, all absolutely crucial in chip production.
We are now qualifying on the most advanced and critical flow processes for 2023 and beyond. This provides Pivotal access to some of the higher growth markets within the overall semi sector. Turning now to Slide 7, on our transformation to profitability. We have targeted 6 main areas for cost savings and efficiencies in our business operations through the combination of large reductions in operating expenditures, reduction in COGS, headcount reduction, temporary furloughs, targeted reductions in general and administrative expenses and miscellaneous expenses. We anticipate the business to be profitable on a USD 6 million to USD 7 million revenue run rate each quarter.
Slide 8. Slide 8 summarizes our strategy for market share gains resulting from this capital raise announced yesterday on the ASX. Today, Pivotal has an installed base of approximately 73,000 gas flow controllers, GFCs, and we have the highest performance solution for critical gas flows, serving primarily the memory segment via Etch platforms.
Our new initiatives, we expect will potentially transform the business in a positive manner, leading to market share gains. We are planning to launch 2 new product platforms to attack competitor weak points this year. It's clear from our installed base that we have a superior performance in our product offering.
And now the more competitive pricing structures planned will permit us to scale business in current application and penetrate into additional applications. We plan to enable sales growth for memory focus to broadly serve all chip segments and to more aggressively promote flow control software to accelerate chip manufacturers path to performance and efficiency.
Hence, in the future, we expect to double the size of the served market, penetrate new geographies, provide scalable product architecture and mitigate the company's dependency on the memory segment for the majority of its revenues.
In conclusion, Pivotal's sustainable advantage of flow control software advances the semi industry with advanced digital flow control.
Turning now to our business strategy and growth plans. Slide 10 shows the 5 pillars of our strategic turnaround plans to deliver growth. The core pillars of our plan are: team, focus, execute, deliver and explore. Our team build-out is complete with Ron as CFO, alongside our new Head of Sales, John Arima; and Head of Operations, Cam Worsham; joining alongside CTO, Dr. Monkowski and myself. We are focusing the portfolio of products on delivering a higher return on investment ROI which we expect to complete by the end of 2023 and are already executing our path to profit efficiently across sales, R&D, ops, and finance functions within the organization.
We are focused on delivering positive operating cash flows via these cost reductions we have already talked about. And in parallel, we continue to explore strategic opportunities with our adviser Needham & Company. Slide 11 summarizes our growth strategies with our target to exceed 10% market share of total semiconductor flow control market by 2026, firmly, front and center of everything we do.
The 3 phases of this strategy occur in 2023 to 2024, with a competitively priced product achieving higher performance than competitors, followed by penetration of new customer accounts in 2024 and 2025, towards our final phase in 2025 to 2026 of fanning out our product offerings with new customers. I will now turn the call over to Ron Warrington, who will discuss the capital raise in more detail. Please go ahead, Ron.
Thank you, Kevin. I'll now provide you a bit of an overview of the capital raise for investors. Starting with Slide 13. Pivotal Systems is offering approximately 638,000 -- 638 million CHESS Depositary Interests, or CDIs, to raise gross proceeds of up to AUD 5.1 million or USD 3.4 million via a 4-for-1 accelerated renounceable entitlement offer to eligible existing security holders. The offer will be conducted at an issue price of AUD 0.08 per new fully paid CDI, which represents underlying shares of common stock in the company. The equity raising will comprise an accelerated institutional entitlement offer and a retail entitlement offer, which has been jointly led and managed by Foster Stock Brokering and JP Equity.
Proceeds from the equity raising will be used for working capital and general corporate purposes. The offer price represents a 69.2% discount to the last traded price of AUD 0.026 on Friday, March 31. A 70.8% discount to the 5-day VWAP price of AUD 2.741 and a 33% discount to the theoretical ex-rights price, T-E-R-P, TERP, of AUD 0.012 per CDI.
Under the institutional entitlement offer, eligible institutional security holders can choose to take up all part or none of their entitlement. Entitlement not taken up under the institutional entitlement offer will be offered by the joint lead managers to eligible institutional investors under the institutional book build.
The institutional offer is renounceable and entitlements not taking up entitlements of intangible institutional securities will be placed into a book build for the institutional entitlement offer. Entitlements will not be quoted in tradable on the ASX. Eligible retail security holders have the opportunity to invest in new securities at the offer price on the terms and conditions that will be set out in the retail offer booklet to be sent to eligible retail security holders on 20th of April 2023.
On the retail entitlement offer, eligible retail security holders who take up their full entitlement may also apply for additional new securities in excess of their entitlement at the offer price, which is subject to scale back at Pivotal's discretion.
The retail entitlement offer is renounceable and entitlements not taking up an entitlements of ineligible retail security holders will be placed into a book build for the retail entitlement offer. Entitlements will not be quoted in tradable on the ASX.
On Slide 14, we've provided a concise summary of some additional features of the raising. Major shareholders, Anzu Partners, has committed to take up its full pro rata entitlement of AUD 0.9 million, and up to an additional AUD 0.58 million of -- in the shortfall securities takes debt available and subject to shareholder approval.
A major shareholder, Viburnum, has committed to take a minimum of AUD 0.5 million. Anzu RBI has also committed to subscribe for AUD 0.45 million to the extent available and subject to shareholder approval. Certain senior managers have committed to subscribe for their pro rata entitlements and have asked if they can participate in any shortfall.
Shareholders and new shortfall investors subscribing for more than USD 500,000 each will be entitled to together nominate 1 new director to the Board on completion of the offer. In conjunction with the entitlement offer, the following changes will be made to the Board of Directors, as announced to the ASX today. Nonexecutive Directors, Peter McGregor and Ryan Benton have retired from the Board. Shareholders and new shortfall investors subscribing to more than USD 500,000 each, as mentioned, under the entitlement offer will be entitled to together nominate 1 new independent Board member.
On behalf of the Board of Directors of Pivotal, our staff and customers, we express our sincere thanks and gratitude to Ryan and Peter for their hard work and valuable contributions to the company. We wish them every success.
Turning to Slide 15, which provides the summary of capital structure on completion of the entitlement offer and assuming the full AUD 5.1 million raising is achieved. On completion of the offer, the company will hold cash of AUD 7.4 million with AUD 1.7 million in debt with an enterprise value of $26.2 million.
Turning to Slide 16, which provides the effect of the capital raise on the company's balance sheet in U.S. dollar terms, which is our reporting currency. The major change is our cash position with all numbers assuming subscriptions are received for the entire AUD 5.1 million.
Turning to Slide 17 on the timetable. I remind investors of all dates and times they are only indicative and subject to change. Retail investors seeking more information on the entitlement offer can contact the Link Market Services. And with the company having established an information line for investors, details of which will be provided with the dispatch of the offer booklet per the time table below.
We expect to announce the results of the institutional entitlement offer on the 15th of April with the current trading halt lifted and trading recommencing on an ex entitlement basis on the 17th of April. Other key dates associated with the offer are shown on the slide and are also available on our ASX announcement. I'll now turn the call back to Kevin. Go ahead, Kevin.
Thank you, Ron. Slide 18 summarizes Pivotal's outlook. We are anticipating revenue growth to return in the second half of 2023, driven by an acceleration of new qualifications with OEMs and IDMs as well as new markets served with the release of 2 additional Pivotal products.
In addition, we are planning on an improved gross margin performance with steadfast improvements in cost of goods sold of over 20%, driven by improvements in supply chain efficiencies, manufacturing and component cost normalization post COVID.
As I've mentioned, the significant cost reductions have already been implemented with a 38% reduction in operating expenditures and further cost initiatives anticipated throughout 2023, which we believe will deliver positive EBITDA by the end of 2023, assuming the maximum raise is achieved. We have implemented new business development initiatives, including a sales road map, expected to deliver an expansion into the deposition markets and new market share gains in Etch with new customers. Our R&D is focused and we anticipate 2 new product launches in 2023 to serve new segments and customers.
So in summary, on Slide 19, an investment into Pivotal Systems provides investors with an opportunity to gain exposure to the large and growing global semiconductor industry and adjacent markets, all with opportunities for significant expansion of market share.
Our management team is aligned and we have the technical and commercial experience to deliver on the growth strategies we have announced today. In addition, there remains an opportunity to further diversify our revenue streams with later growth in high-quality subscription revenues from the sale of software to customers.
Finally, I'd like to remind investors that we show strong customer retention and a highly defensible product model which creates high barriers to entry. Indeed, these relationships comprise the leading blue-chip IDMs and OEMs globally. Turning to Slide 20. Thank you. That concludes the formal aspects to today's calls. Investors seeking further information on the company, the markets we serve, our financials, et cetera, can read through the appendices attached to this deck.
In addition, we have summarized the key risks of an investment into Pivotal Systems, the associated international offer restrictions and the key terms with our joint lead managers, Foster Stock Brokering and JP Equity Holdings. I would like to now hand over to the operator for Q&A. Operator, please go ahead.
[Operator Instructions]
There are no questions at this time. I'll now hand back to Mr. Hill for closing remarks.
Thank you, operator. I wish to thank everyone for joining the call today. We look forward to seeing you at our shareholders' meeting in Sydney around the 23rd of May 2023. Thank you, and goodbye for now.
Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.