What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-08-10 compared with 2020-05-08 · 92 added, 51 removed, 106 unchanged (57% of the section changed)

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These forward-looking statements include, but are not limited to, statements regarding:

the impact of the COVID-19 pandemic (including any changes in laws or regulations in reaction to same) on Company personnel, on Company suppliers, and on Company customers and their respective end markets;

the impact of the COVID-19 pandemic (including any changes in laws or regulations in reaction to same) on Company personnel, on revenue, on Company suppliers, and on Company customers and their respective end markets;

the Company’s restructuring plan, its expectations and estimates regarding the workforce reduction, the objectives of the restructuring plan and the timing thereof, amounts and timing of the charges and savings to be incurred in connection with the restructuring plan, and the potential impact of the restructuring plan;

the anticipated features, benefits and market opportunities for our products;

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our liquidity, capital resources and the sufficiency of our working capital and need for, or ability to secure, additional financing and the potential impact thereof;

our obtaining forgiveness of our PPP loan in whole or in part;

our contractual obligations, exchange rate and interest rate risks;

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On occasion, we have also licensed our technology.

As of March 31, 2020, we had an intellectual property portfolio of 347 patents related to the visual display of digital image data.

As of June 30, 2020, we had an intellectual property portfolio of 345 patents related to the visual display of digital image data.

We focus our research and development efforts on developing video algorithms that improve quality, and architectures that reduce system power, cost and bandwidth and increase overall system performance and device functionality.

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Results of Operations

Net revenue for the three month periods ended March 31, 2020 and 2019, was as follows (dollars in thousands):

Three Months Ended

Net revenue decreased $2.9 million, or 17%, in the first quarter of 2020 compared to the first quarter of 2019.

Revenue recorded in the first quarter of 2020 consisted of $13.1 million in revenue from the sale of integrated circuit ("IC") products and $0.7 million in revenue related to engineering services, license revenue and other.

Revenue recorded in the first quarter of 2019 consisted of $15.1 million in revenue from the sale of IC products and $1.6 million in revenue related to engineering services, license revenue and other.

The decrease in IC revenue is primarily due to decreased unit sales into the digital projector market as customers continue to correct their inventory levels, partially offset by increased unit sales into the mobile market due to recent design wins and have ramped sales within the mobile market as a result.

Net revenue for the three and six month periods ended June 30, 2020 and 2019, was as follows (dollars in thousands):

Three Months Ended Six Months Ended

June 30, June 30,

2020 2019 % Change 2020 2019 % Change

Revenue, net $ 9,253 $ 18,027 (49) % $ 23,027 $ 34,675 (34) %

Net revenue decreased $8.8 million, or 49%, in the second quarter of 2020 compared to the second quarter of 2019 and decreased $11.6 million, or 34% in the first half of 2020 compared to the first half of 2019.

Revenue recorded in the second quarter of 2020 consisted of $8.8 million in revenue from the sale of integrated circuit ("IC") products and $0.4 million in revenue related to engineering services, license revenue and other.

Revenue recorded in the second quarter of 2019 consisted of $17.6 million in revenue from the sale of IC products and $0.4 million in revenue related to engineering services, license revenue and other.

Revenue recorded in the first half of 2020 consisted of $21.9 million in revenue from the sale of IC products and $1.1 million in revenue related to engineering services, license revenue and other.

Revenue recorded in the first half of 2019 consisted of $32.7 million in revenue from the sale of IC products and $2.0 million in revenue related to engineering services, license revenue and other.

The decrease in IC revenue in both periods presented is primarily due to decreased unit sales into the digital projector and video delivery markets as a result of customers continuing to correct their inventory levels and the disruptions caused by COVID-19 to our revenue.

The decrease in revenue related to engineering services, license revenue and other is primarily due to the recognition of license revenue during the first quarter of 2019.

We expect that the disruptions caused by COVID-19 to our revenue will continue into the second half of 2020.

Cost of revenue and gross profit

Cost of revenue and gross profit for the three month periods ended March 31, 2020 and 2019, were as follows (dollars in thousands):

Three Months Ended March 31,

Cost of revenue and gross profit for the three and six month periods ended June 30, 2020 and 2019, were as follows (dollars in thousands):

Three Months Ended June 30, Six Months Ended June 30,

revenue 2019 % of

revenue 2020 % of

revenue 2019 % of

Direct product costs and related overhead 1

$ 3,783 41 % $ 8,151 45 % $ 10,294 45 % $ 15,945 46 %

Amortization of acquired intangible assets 298 3 298 2 596 3 596 2

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Inventory charges 2

(4) 0 119 1 85 0 96 0

Inventory step-up and backlog amortization — 0 — 0 — 0 12 0

Total cost of revenue $ 4,204 45 % $ 8,651 48 % $ 11,203 49 % $ 16,827 49 %

Gross profit $ 5,049 55 % $ 9,376 52 % $ 11,824 51 % $ 17,848 51 %

1 Includes purchased materials, assembly, test, labor, employee benefits and royalties.

2 Includes charges to reduce inventory to lower of cost or market and a benefit for sales of previously written down inventory.

Gross profit margin was 49% in the first quarter of 2020 compared to 51% in the first quarter of 2019.

The decrease in gross profit margin was primarily due to charges to reduce inventory to lower of cost or market in the first quarter of 2020 compared to the first quarter of 2019 as well as a small decrease due to increased sales into the mobile market and decreased sales into the digital projector market in the first quarter of 2020 compared to the first quarter of 2019.

Gross profit margin was 55% in the second quarter of 2020 compared to 52% in the second quarter of 2019 and was 51% in the first half of 2020 compared to 51% in the first half of 2019.

The increase in gross profit margin in the second quarter of 2020 compared to the second quarter of 2019 was primarily due to a more favorable mix of sales into the digital projector market.

The consistent gross profit margin in the first half of 2020 compared to the first half of 2019 is primarily due to a more favorable mix of sales into the digital projector market offset by high margin license revenue recorded in the first half of 2019.

Pixelworks’ gross profit margin is subject to variability based on changes in revenue levels, product mix, average selling prices, startup costs, restructuring charges, amortization related to acquired intangible assets, inventory step-up and backlog, and the timing and execution of manufacturing ramps as well as other factors.

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Research and development expense includes compensation and related costs for personnel, development-related expenses, including non-recurring engineering expenses and fees for outside services, depreciation and amortization, expensed equipment, facilities and information technology expense allocations and travel and related expenses.

Research and development expense for the three month periods ended March 31, 2020 and 2019, was as follows (dollars in thousands):

Three Months Ended

Research and development expense for the three and six month periods ended June 30, 2020 and 2019, was as follows (dollars in thousands):

Three Months Ended Six Months Ended

June 30, June 30,

2020 2019 % Change 2020 2019 % Change

Research and development $ 6,314 $ 6,364 (1) % $ 12,581 $ 12,836 (2) %

Research and development expense decreased $0.2 million, or 3%, in the first quarter of 2020 compared to the first quarter of 2019.

The decrease in the first quarter of 2020 compared to the first quarter of 2019 was primarily due to a general decrease across multiple expense categories as we focused on cost management in response to the effects of COVID-19.

Research and development expense decreased $0.1 million, or 1% in the second quarter of 2020 compared to the second quarter of 2019 and decreased $0.3 million, or 2% in the first half of 2020 compared to the first half of 2019.

The decreases in the 2020 periods compared to the 2019 periods were primarily due to a general decrease across multiple expense categories as we focused on cost management in response to the effects of COVID-19.

These decreases were partially offset by an increase in non-recurring engineering expense due to the timing of development activities.

Selling, general and administrative

Selling, general and administrative expense includes compensation and related costs for personnel, sales commissions, facilities and information technology expense allocations, travel, outside services and other general expenses incurred in our sales, marketing, customer support, management, legal and other professional and administrative support functions.

Selling, general and administrative expense for the three month periods ended March 31, 2020 and 2019, was as follows (dollars in thousands):

Three Months Ended

Selling, general and administrative expense for the three and six month periods ended June 30, 2020 and 2019, was as follows (dollars in thousands):

Three Months Ended Six Months Ended

June 30, June 30,

2020 2019 % Change 2020 2019 % Change

Selling, general and administrative $ 5,156 $ 4,935 4 % $ 10,349 $ 10,395 0 %

Selling, general and administrative expense decreased $0.3 million, or 5%, in the first quarter of 2020 compared to the first quarter of 2019.

Selling, general and administrative expense increased $0.2 million, or 4%, in the second quarter of 2020 compared to the second quarter of 2019 and decreased $0.1 million, or 0% in the first half of 2020 compared to the first half of 2019.

There were no individually significant increases or decreases contributing to the overall changes in the 2020 periods compared to the 2019 periods.

Restructurings

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The 2020 Plan included an approximately 4% reduction in workforce, primarily in the areas of research and development and sales.

Restructuring expense for the three month periods ended March 31, 2020 and 2019, was as follows and was included in operating expenses (dollars in thousands):

Three Months Ended

In June 2019, we executed a restructuring plan to make the operation of the Company more efficient (the "2019 Plan").

The 2019 Plan included an approximately 2% reduction in workforce, primarily in the areas of sales and operations.

Restructuring expense for the three and six month periods ended June 30, 2020 and 2019, was as follows and was included in operating expenses (dollars in thousands):

Three Months Ended Six Months Ended

June 30, June 30,

2020 2019 2020 2019

Employee severance and benefits

$ — $ 398 $ 592 $ 398

Total restructuring expense

During the first quarter of 2020, we recorded $0.6 million in restructuring expense related to the 2020 Plan.

The 2020 Plan was completed in the first quarter of 2020 and we do not expect to incur any further expenses related to the 2020 Plan.

During the first quarter of 2019, we did not incur any restructuring expense.

$ — $ 398 $ 592 $ 398

During the three months ended June 30, 2020, we did not record any restructuring expense.

During the six months ended June 30, 2020 we recorded $0.6 million in restructuring expense related to the 2020 Plan.

The 2020 Plan was complete in the first quarter of 2020 and we do not expect to incur any further expenses related to the 2020 Plan.

During the three and six months ended June 30, 2019, we recorded $0.4 million in restructuring expense related to the 2019 Plan.

The 2019 Plan was complete as of the second quarter of 2019.

On August 6, 2020, the Board approved an additional restructuring plan which would result in an approxim ately 14% re duction in workforce.

For additional information, see “Note 13:

Subsequent Events”.

Provision for income taxes

The provision for income taxes during the 2020 and 2019 periods is primarily comprised of current and deferred tax expense in profitable cost-plus foreign jurisdictions, accruals for tax contingencies in foreign jurisdictions and benefits for the reversal of previously recorded foreign tax contingencies due to the expiration of the applicable statutes of limitation.

We recorded a negligible benefit for the reversal of previously recorded foreign tax contingencies during the first quarter of 2020 and during the first quarter of 2019.

We recorded a negligible benefit for the reversal of previously recorded foreign tax contingencies during the first half of 2020 and during the first half of 2019.

Liquidity and Capital Resources

Cash, cash equivalents and short-term marketable securities

Total cash and cash equivalents increased $10.6 million to $17.9 million at March 31, 2020 from $7.3 million at December 31, 2019.

Short-term marketable securities decreased $4.5 million to $2.5 million at March 31, 2020 from $7.0 million at December 31, 2019.

The net increase in cash, cash equivalents and short-term marketable securities of $6.1 million during the first three months of 2020 was the result of $5.2 million in proceeds from our short-term line of credit, $0.9 million provided by operating activities and $0.3 million in proceeds from the issuances of common stock under our employee equity incentive plans.

These increases were partially offset by $0.2 million used for purchases of property and equipment.

As of March 31, 2020, our cash, cash equivalents and short-term marketable securities balance consisted of $13.4 million in cash equivalents held in U.S.

dollar denominated money market funds, $4.5 million in cash, $1.3 million in commercial paper and $1.2 million in corporate debt securities.

Total cash and cash equivalents increased $13.1 million to $20.4 million at June 30, 2020 from $7.3 million at December 31, 2019.

Short-term marketable securities decreased $6.0 million to $1.0 million at June 30, 2020 from $7.0 million at December 31, 2019.

The net increase in cash, cash equivalents and short-term marketable securities of $7.1 million during the first half of 2020 was the result of $4.3 million in proceeds from our short-term line of credit, $2.5 million in net proceeds from our "at the market" equity offering, $0.8 million in proceeds from a Paycheck Protection Program loan, $0.3 million in proceeds from the issuances of common stock under our employee equity incentive plans and $0.2 million provided by operating activities.

These increases were partially offset by $0.6 million used for purchases of property and equipment and $0.3 million used for payments on other asset financings.

As of June 30, 2020, our cash, cash equivalents and short-term marketable securities balance consisted of $13.9 million in cash equivalents held in U.S.

dollar denominated money market funds, $6.5 million in cash, $0.7 million in corporate debt securities and $0.3 million in commercial paper.

Our investment policy requires that our portfolio maintain a weighted average maturity of less than 12 months.

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Accounts receivable, net

Accounts receivable, net decreased to $8.9 million as of March 31, 2020 from $10.9 million as of December 31, 2019.

The average number of days sales outstanding decreased to 58 days as of March 31, 2020 from 61 days as of December 31, 2019.

The decrease in accounts receivable and days sales outstanding was due to normal fluctuations in the timing of sales and customer receipts within the first quarter of 2020, and the fourth quarter of 2019.

Inventories were $4.5 million as of March 31, 2020 and $5.4 million at December 31, 2019.

Inventory turnover decreased to 5.2 as of March 31, 2020 from 7.9 as of December 31, 2019 primarily due to lower cost of goods sold and higher average inventory balances during the first quarter of 2020 compared to the fourth quarter of 2019.

Accounts receivable, net decreased to $5.9 million as of June 30, 2020 from $10.9 million as of December 31, 2019.

The average number of days sales outstanding decreased to 58 days as of June 30, 2020 from 61 days as of December 31, 2019.

The decrease in accounts receivable and days sales outstanding was due to normal fluctuations in the timing of sales and customer receipts within the second quarter of 2020, and the fourth quarter of 2019.

Inventories were $4.8 million as of June 30, 2020 and $5.4 million at December 31, 2019.

Inventory turnover decreased to 3.1 as of June 30, 2020 from 7.9 as of December 31, 2019 primarily due to lower cost of goods sold during the second quarter of 2020 compared to the fourth quarter of 2019.

Inventory turnover is calculated based on annualized quarterly operating results and average inventory balances during the quarter.

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The occurrence of an event of default could result in the acceleration of our obligations under the Revolving Loan Agreement, and an increase to the applicable interest rate, and would permit the Bank to exercise remedies with respect to its security interest.

As of March 31, 2020, we were in compliance with all of the terms of the Revolving Loan Agreement.

As of March 31, 2020, short-term borrowings outstanding under the Revolving Line consisted of $5.2 million.

The weighted-average interest rate on short-term borrowings outstanding as of March 31, 2020 was 3.5%.

As of June 30, 2020, we were in compliance with all of the terms of the Revolving Loan Agreement.

As of June 30, 2020, short-term borrowings outstanding under the Revolving Line consisted of $4.3 million.

The weighted-average interest rate on short-term borrowings outstanding as of June 30, 2020 was 3.5%.

As of December 31, 2019, we had no outstanding borrowings under the Revolving Line.

As of March 31, 2020, our cash, cash equivalents and short-term marketable securities balance of $20.4 million was highly liquid.

Paycheck Protection Program Loan

On April 25, 2020, we entered into a loan with Silicon Valley Bank as the lender in an aggregate principal amount of $0.8 million (the “Loan”) pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).

The Loan is evidenced by a promissory note (the “Note”) dated April 25, 2020, and matures 2 years from the disbursement date.

The Note bears interest at a rate of 1.000% per annum, with the first six months of interest deferred.

Principal and interest are payable monthly commencing 6 months after the disbursement date and may be prepaid by the Company at any time prior to maturity with no prepayment penalties.

The Note contains customary events of default relating to, among other things, payment defaults or breaches of the terms of the Note.

Upon the occurrence of an event of default, the Lender may require immediate repayment of all amounts outstanding under the Note.

Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of loans granted under the PPP.

The Loan is subject to forgiveness to the extent proceeds are used for payroll costs, including payments required to continue group health care benefits, and certain rent, utility, and mortgage interest expenses (collectively, “Qualifying Expenses”), pursuant to the terms and limitations of the PPP.

The Company intends to use the Loan amount for Qualifying Expenses and we intend to apply for forgiveness, however, no assurance is provided that the Company will obtain forgiveness of the Loan in whole or in part.

At the Market Offering

On June 5, 2020, we entered into a sales agreement (the "Sales Agreement") with Cowen and Company, LLC ("Cowen"), pursuant to which we may issue and sell shares of the Company's common stock, par value $0.001 per share, having an aggregate offering price of up to $25 million from time to time, through an "at the market" equity offering program under which Cowen will act as sales agent.

Under the Sales Agreement, Cowen may sell the shares by methods deemed to be an "at the market offering" as defined in Rule 415(a)(4) promulgated under the Securities Act of 1933, as amended, including sales made by means of ordinary brokers’ transactions on the Nasdaq Global Market or on any other existing trading market for the common stock or otherwise at market prices prevailing at the time of sale, in block transactions, or as otherwise directed by the Company.

We pay Cowen a commission equal to three percent (3.0%) of the gross sales proceeds of any common stock sold through Cowen under the Sales Agreement.

The Sales Agreement may be terminated by us upon prior notice to Cowen or by Cowen upon prior notice to us, or at any time under certain circumstances, including but not limited to the occurrence of a material adverse change in the Company.

We are not obligated to sell any shares under the Sales Agreement.

As of June 30, 2020 and during the three months ended June 30, 2020, we sold an aggregate of 803,528 shares of our common stock under this at the market offering, resulting in aggregate net proceeds to us of approximately $2.5 million, and gross proceeds of approximately $2.8 million and paid Cowen commissions and fees of approximately $0.1 million, and other expenses of $0.2 million.

As of June 30, 2020, the remaining availability under the at the market offering is $22.2 million.

As of June 30, 2020, our cash, cash equivalents and short-term marketable securities balance of $21.4 million was highly liquid.

We anticipate that our existing working capital will be adequate to fund our operating, investing and financing needs for at least the next twelve months.

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Contractual Payment Obligations

A summary of our contractual obligations as of March 31, 2020 is as follows:

Payments Due By Period

Contractual Obligation

More than 5 years

Operating leases

Estimated purchase commitments to contract manufacturers

Payments on accrued balances related to asset financings

Other purchase obligations and commitments

We are unable to reliably estimate the timing of future payments related to uncertain tax positions and repatriation of foreign earnings;

therefore, $2.5 million of income taxes payable has been excluded from the table above.

Our contractual obligations for 2020 and beyond are included in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, filed with the Securities and Exchange Commission on May 8, 2020.

Our obligations for 2020 and beyond have not changed materially as of June 30, 2020.

Off-Balance Sheet Arrangements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis