What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-11-06 compared with 2020-08-10 · 71 added, 61 removed, 137 unchanged (49% of the section changed)

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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;

the Private Placement;

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

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These statements are not guarantees of future performance and involve certain risks and uncertainties that are difficult to predict and which may cause actual outcomes and results to differ materially from what is expressed or forecasted in such forward-looking statements.

A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements, including risks related to COVID-19, risks related to our business, risks related to our industry, risks related to the Private Placement, including whether the Company will be able to close the Private Placement on the expected timeline or at all and whether the Company will be able to realize the full amount of estimated proceeds from the Private Placement or in the timeframe expected risks related to the Private Placement, including whether the Company will be able to close the Private Placement on the expected timeline or at all and whether the Company will be able to realize the full amount of estimated proceeds from the Private Placement or in the timeframe expected and risks related to our common stock, is included in Part II, Item 1A of this Quarterly Report on Form 10-Q.

These forward-looking statements speak only as of the date on which they are made, and we do not intend to update any forward-looking statement to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q.

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Several public health organizations have recommended, and many local governments have implemented, certain measures to slow and limit the transmission of the virus, including shelter in place and social distancing ordinances, which has resulted in a significant deterioration of economic conditions in many of the countries in which we operate.

The impact of COVID-19 and the related disruptions caused to the global economy and our business did not have a material adverse impact on our business during the quarter ended March 31, 2020.

However, the spread of the COVID-19 virus caused us to modify our business practices, including implementing work-from-home policies and restricting travel by our employees.

The spread of COVID-19 has caused us to modify our business practices, including implementing work-from-home policies and restricting travel by our employees.

We also took certain actions in response to the pandemic, which are set forth above in “Note Regarding COVID-19.”

Looking forward, the impact of the pandemic on the global economy and on our business, as well as on the business of our suppliers and customers, and the additional measures that may be needed in the future in response to it, will depend on many factors beyond our control and knowledge.

The impact of the pandemic on the global economy and on our business, as well as on the business of our suppliers and customers, and the additional measures that may be needed in the future in response to it, will depend on many factors beyond our control and knowledge.

We will continually monitor the situation to determine what actions may be necessary or appropriate to address the impact of the pandemic, which may include actions mandated or recommended by federal, state or local authorities.

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On occasion, we have also licensed our technology.

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

As of September 30, 2020, we had an intellectual property portfolio of 344 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 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,

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

Three Months Ended Nine Months Ended

September 30, September 30,

2020 2019 % Change 2020 2019 % Change

Revenue, net $ 8,190 $ 18,057 (55) % $ 31,217 $ 52,732 (41) %

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.

Net revenue decreased $9.9 million, or 55%, in the third quarter of 2020 compared to the third quarter of 2019 and decreased $21.5 million, or 41% in the first nine months of 2020 compared to the first nine months of 2019.

Revenue recorded in the third quarter of 2020 consisted of $8.0 million in revenue from the sale of integrated circuit ("IC") products and $0.2 million in revenue related to engineering services, license revenue and other.

Revenue recorded in the third quarter of 2019 consisted of $17.7 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 nine months of 2020 consisted of $29.9 million in revenue from the sale of IC products and $1.3 million in revenue related to engineering services, license revenue and other.

Revenue recorded in the first nine months of 2019 consisted of $50.3 million in revenue from the sale of IC products and $2.4 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.

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

Cost of revenue and gross profit

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,

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

Three Months Ended September 30, Nine Months Ended September 30,

revenue 2019 % of

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Amortization of acquired intangible assets 298 4 298 2 894 3 894 2

Restructuring 166 2 — 0 166 1 — 0

Stock-based compensation 117 1 89 0 345 1 267 1

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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 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.

Gross profit margin was 49% in the third quarter of 2020 compared to 52% in the third quarter of 2019 and was 51% in the first nine months of 2020 compared to 52% in the first nine months of 2019.

The decrease in gross profit margin in the third quarter of 2020 compared to the third quarter of 2019 was primarily due to less absorption of fixed overhead costs and one-time restructuring charges, partially offset by a more favorable mix of sales into the digital projector market.

The decrease in gross profit margin in the first nine months of 2020 compared to the first nine months of 2019 is primarily due to less absorption of fixed overhead costs and high margin license revenue recorded in the first nine months of 2019, partially offset by a more favorable mix of sales into the digital projector market.

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 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,

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

Three Months Ended Nine Months Ended

September 30, September 30,

2020 2019 % Change 2020 2019 % Change

Research and development $ 6,062 $ 6,458 (6) % $ 18,643 $ 19,294 (3) %

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.

Research and development expense decreased $0.4 million, or 6% in the third quarter of 2020 compared to the third quarter of 2019 and decreased $0.7 million, or 3% in the first nine months of 2020 compared to the first nine months 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.

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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 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,

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

Three Months Ended Nine Months Ended

September 30, September 30,

2020 2019 % Change 2020 2019 % Change

Selling, general and administrative $ 4,621 $ 5,333 (13) % $ 14,970 $ 15,728 (5) %

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.

Selling, general and administrative expense decreased $0.7 million, or 13%, in the third quarter of 2020 compared to the third quarter of 2019, which 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 as well as due to severance expense associated with the resignation of our former Chief Financial Officer in the third quarter of 2019.

Selling, general and administrative expense decreased $0.8 million, or 5% in the first nine months of 2020 compared to the first nine months of 2019, which 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 as well due to severance expense associated with the resignation of our former Chief Financial Officer in the third quarter of 2019.

These decreases were partially offset by an increase in stock-based compensation expense due to the timing of awards granted.

Restructurings

In January 2020, we executed a restructuring plan to make the operation of the Company more efficient (the "2020 Plan").

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

In August 2020, we executed a restructuring plan to make the operation of the Company more efficient (the "August 2020 Plan").

The August 2020 Plan included an approximately 14% reduction in workforce, primarily in the areas of operations, research and development, sales and marketing.

In January 2020, we executed a restructuring plan to make the operation of the Company more efficient (the "January 2020 Plan").

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

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,

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

Three Months Ended Nine Months Ended

September 30, September 30,

2020 2019 2020 2019

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$ 1,596 $ — $ 2,188 $ 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.

Included in cost of revenue

$ 166 $ — $ 166 $ —

Included in operating expenses

1,430 — 2,022 398

During the three months ended September 30, 2020, we recorded $1.6 million in restructuring expense related to the August 2020 Plan.

During the nine months ended September 30, 2020 we recorded $1.6 million in restructuring expense related to the August 2020 Plan and $0.6 million in restructuring expense related to the January 2020 Plan.

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

As we continue to implement the August 2020 Plan, we expect to incur $0.1 million additional restructuring charges over the remainder of 2020.

During the three months ended September 30, 2019, we did not record any restructuring expense.

During the nine months ended September 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 half of 2020 and during the first half of 2019.

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

Liquidity and Capital Resources

Cash, cash equivalents and short-term marketable 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.

Total cash and cash equivalents increased $8.8 million to $16.1 million at September 30, 2020 from $7.3 million at December 31, 2019.

Short-term marketable securities decreased $6.2 million to $0.7 million at September 30, 2020 from $7.0 million at December 31, 2019.

The net increase in cash, cash equivalents and short-term marketable securities of $2.6 million during the first nine months of 2020 was the result of $4.0 million in proceeds from our short-term line of credit, $3.6 million in net proceeds from our "at the market" equity offering, $0.8 million in proceeds from a Paycheck Protection Program loan and $0.6 million in proceeds from the issuances of common stock under our employee equity incentive plans.

These increases were partially offset by $3.2 million used in operating activities, $2.5 million used for purchases of property and equipment and licensed technology and $0.7 million used for payments on other asset financings.

As of September 30, 2020, our cash, cash equivalents and short-term marketable securities balance consisted of $9.4 million in cash equivalents held in U.S.

dollar denominated money market funds, $6.7 million in cash and $0.7 million in corporate debt securities.

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 $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.

Accounts receivable, net decreased to $5.4 million as of September 30, 2020 from $10.9 million as of December 31, 2019.

The average number of days sales outstanding decreased to 60 days as of September 30, 2020 from 61 days as of December 31, 2019.

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

Inventories were $3.9 million as of September 30, 2020 and $5.4 million at December 31, 2019.

Inventory turnover decreased to 3.3 as of September 30, 2020 from 7.9 as of December 31, 2019 primarily due to lower cost of goods sold during the third 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 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 September 30, 2020, we were in compliance with all of the terms of the Revolving Loan Agreement.

As of September 30, 2020, short-term borrowings outstanding under the Revolving Line consisted of $4.0 million.

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

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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.

The Company has used the Loan amount for Qualifying Expenses and we have applied 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

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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.

During the nine months ended September 30, 2020, we sold an aggregate of 1,374,517 shares of our common stock under this at the market offering, resulting in aggregate net proceeds to us of approximately $3.6 million, and gross proceeds of approximately $4.1 million and paid Cowen commissions and fees of approximately $0.2 million, and other expenses of $0.3 million.

As of September 30, 2020, the remaining availability under the at the market offering is $20.9 million.

Private Placement

On October 19, 2020, we entered into a Securities Purchase Agreement with MTM-Xinhe Investment Limited, a British Virgin Islands company pursuant to which the we agreed to issue and sell in a private placement 3,200,000 shares of the our common stock at a purchase price of $2.071 per share, for gross proceeds to us of approximately $6.6 million (the “Private Placement”).

Subject to the fulfilment of certain closing conditions, the Private Placement is expected to close in November 2020.

As of September 30, 2020, our cash, cash equivalents and short-term marketable securities balance of $16.8 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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If additional funds are required to support our working capital requirements, acquisitions or other purposes, we may seek to raise funds through debt financing, equity financing or from other sources.

If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our shareholders could be significantly diluted, and these newly-issued securities may have rights, preferences or privileges senior to those of existing shareholders.

senior to those of existing shareholders.

If we raise additional funds by obtaining loans from third parties, the terms of those financing arrangements may include negative covenants or other restrictions on our business that could impair our operating flexibility and would also require us to incur interest expense.

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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.

Our obligations for 2020 and beyond have not changed materially as of September 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