What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-08-11 compared with 2021-05-07 · 96 added, 50 removed, 129 unchanged (53% of the section changed)

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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;

our technologies and intellectual property;

the sale of shares of our subsidiary, Pixelworks Semiconductor Technology (Shanghai) Co., Ltd.

(“ PWSH”), to purchasers, including the timing thereof, the expected proceeds and use thereof, and the resulting ownership of PWSH;

the Company’s strategic plan of re-aligning its mobile, projector, and video delivery businesses and timing and expectations related thereto, including the Listing and timing and benefits thereof, including improved access to new capital markets and the funding of its growth worldwide;

our international operations;

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accounting policies and use of estimates and potential impact of changes thereto;

our revenue, the potential impact on our business of certain risks, including the concentration of our suppliers, risks of technological change, concentration of credit risk, changes in the markets in which we operate, our international operations, including in Asia and our exchange rate risks, our indemnification obligations and litigation risks and statements relating to our customer agreement that defrays R&D expenses, including amounts to be received thereunder, the accounting treatment thereof, the timing of the work thereunder, expenses related thereto and our expectations with respect to sales related thereto.

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.

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For example, our revenues for fiscal year 2020 were lower than initially anticipated and we expect our revenues for 2021 to continue to be negatively impacted by COVID-19.

Co-Development Agreement

On July 26, 2021, we entered into an agreement with a customer to defray a portion of the research and development expenses expected to be incurred by us in connection with our development of an integrated circuit product.

Under the agreement, we will receive $5.8 million from the customer within 60 days of the date of the agreement, and may receive up to an additional $4.8 million upon completion of certain development milestones.

We currently believe that such amounts will be treated as a reduction to research and development expenses related to the product for accounting purposes.

Development work on the product is currently expected to be performed through 2022.

The actual timing and amount of our expenses and payments by the customer cannot be determined at this time, and there is no assurance that all amounts will be received by us.

In any event, we expect our research and development expenses will exceed the amounts received from the customer.

Upon the completion of the development, we expect to sell units of the product to the customer.

However, there is no commitment or agreement from the customer for such sales at this time or assurance that the development will be successful.

Capital Increase Agreement

On August 6, 2021, the Company and its subsidiary, PWSH, entered into a Capital Increase Agreement with certain private equity and strategic investors based in China (collectively, the “Investors”) and certain entities which collectively are owned by approximately 75% of the employees of PWSH and its subsidiaries (collectively, the “ESOP”).

Under this Capital Increase Agreement, the purchasers have agreed to pay to PWSH, subject to certain closing conditions, certain amounts in RMB in exchange for an equity position in PWSH.

More specifically:

(a) The ESOP have agreed to pay a total of RMB 79.7 million ($12.3 million USD) in exchange for an equity interest in PWSH of 5.95%, based on a pre-money valuation of PWSH of RMB 1.12 billion ($172.7 million USD), a discount of 30% from the valuation paid by the Investors.

(b) The Investors have agreed to pay a total of RMB 200 million ($30.8 million USD) in exchange for an equity interest in PWSH of 10.45%, based on a pre-money value of PWSH of RMB 1.6 billion ($246.8 million USD).

The total net proceeds raised by PWSH would be RMB 279.7 million ($43.1 million USD).

Additional information is provided in Note 13, which is incorporated by reference into this section.

Pixelworks is a leading provider of high-performance and power-efficient visual processing solutions that bridge the gap between video content formats and rapidly advancing display capabilities.

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On occasion, we have also licensed our technology.

As of March 31, 2021, we had an intellectual property portfolio of 336 patents related to the visual display of digital image data.

We have engaged in a strategic plan to re-align our mobile, projector, and video delivery businesses to improve their focus on the Asia-centered customers and employee stakeholders of those businesses.

The global center of the mobile, projector, and video delivery businesses continues to be in Asia, and the steps taken by us to date and going forward are intended to improve our ability to access capital, customers, and talent.

We have operated its primary R&D center in Asia for over 15 years and feel that the time is right to take advantage of that existing footprint and develop PWSH as a full profit-and-loss center underneath Pixelworks, Inc.

for the mobile, projector, and video delivery businesses.

Most of these steps have been completed or will be completed before the end of 2021.

This plan will further enable PWSH to seek qualification to file an application for an initial public offering on the Shanghai Stock Exchange’s Sci-Tech innovAtion boaRd, known as the STAR Market (the “Listing”).

We believe that the Listing will have many benefits, including improved access to new capital markets and the funding of its growth worldwide.

The Company presently intends to qualify PWSH to apply for the Listing so that the Listing is consummated in the first half of 2023.

The process of going public on the STAR Market includes several periods of review and, therefore, is a lengthy process.

There is no guarantee that PWSH will be approved for a Listing at any point in the future.

As of June 30, 2021, we had an intellectual property portfolio of 335 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, 2021 and 2020, was as follows (dollars in thousands):

Three Months Ended

Net revenue for the three and six month periods ended June 30, 2021 and 2020, was as follows (dollars in thousands):

Three Months Ended Six Months Ended

June 30, June 30,

2021 2020 % Change 2021 2020 % Change

Revenue, net $ 14,051 $ 9,253 52 % $ 23,321 $ 23,027 1 %

Net revenue decreased $4.5 million, or 33%, in the first quarter of 2021 compared to the first quarter of 2020.

Revenue recorded in the first quarter of 2021 consisted of $8.6 million in revenue from the sale of integrated circuit ("IC") products and $0.6 million in revenue related to engineering services, license revenue and other.

Revenue recorded in the first quarter of 2020 consisted of $13.1 million in revenue from the sale of IC products and $0.7 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 is partially offset by increased unit sales into the mobile market.

Net revenue increased $4.8 million, or 52%, in the second quarter of 2021 compared to the second quarter of 2020 and increased $0.3 million, or 1% in the first half of 2021 compared to the first half of 2020.

Revenue recorded in the second quarter of 2021 consisted of $13.1 million in revenue from the sale of integrated circuit ("IC") products and $1.0 million in revenue related to engineering services, license revenue and other.

Revenue recorded in the second quarter of 2020 consisted of $8.8 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 2021 consisted of $21.7 million in revenue from the sale of IC products and $1.6 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.

The increase in IC revenue in the second quarter of 2021 compared to the second quarter of 2020 is primarily due to increased unit sales into the digital projector market and increased unit sales into the mobile market as we experienced increased demand compared to the second quarter of 2020.

IC revenue was consistent when comparing the first half of 2021 to the first half of 2020, which is a result of slightly decreased unit sales into the digital projector market offset by a significant increase in unit sales into the mobile market.

Cost of revenue and gross profit

Cost of revenue and gross profit for the three month periods ended March 31, 2021 and 2020, 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, 2021 and 2020, were as follows (dollars in thousands):

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

revenue 2020 % of

revenue 2021 % of

revenue 2020 % of

Direct product costs and related overhead 1

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Inventory charges 2

— 0 (4) 0 — 0 85 0

Total cost of revenue $ 6,940 49 % $ 4,204 45 % $ 12,485 54 % $ 11,203 49 %

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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 40% in the first quarter of 2021 compared to 49% in the first quarter of 2020.

The decrease in gross profit margin was primarily due to product mix, increased product costs and absorption of fixed overhead costs

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.

Gross profit margin was 51% in the second quarter of 2021 compared to 55% in the second quarter of 2020 and was 46% in the first half of 2021 compared to 51% in the first half of 2020.

The decrease in gross profit margin over both periods presented was primarily due to product mix and increased product costs.

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, and the timing and execution of manufacturing ramps as well as other factors.

Research and development

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, 2021 and 2020, was as follows (dollars in thousands):

Three Months Ended

Research and development expense for the three and six month periods ended June 30, 2021 and 2020, was as follows (dollars in thousands):

Three Months Ended Six Months Ended

June 30, June 30,

2021 2020 % Change 2021 2020 % Change

Research and development $ 6,671 $ 6,314 6 % $ 13,456 $ 12,581 7 %

Research and development expense increased $0.5 million, or 8% in the first quarter of 2021 compared to the first quarter of 2020 primarily due to an increase in compensation expense due to a COVID-19 relief benefit received in China in 2020 that was not received in 2021, partially offset by a reduction in headcount.

The increase was also due to an increase in non-recurring engineering expense due to the timing of development activities.

Research and development expense increased $0.4 million, or 6% in the second quarter of 2021 compared to the second quarter of 2020 and increased $0.9 million, or 7% in the first half of 2021 compared to the first half of 2020.

The increases in the 2021 periods compared to the 2020 periods were primarily due to an increase in compensation expense due to a COVID-19 relief benefit received in China in 2020 that was not received in 2021.

The increases were also due to 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, 2021 and 2020, was as follows (dollars in thousands):

Three Months Ended

Selling, general and administrative expense for the three and six month periods ended June 30, 2021 and 2020, was as follows (dollars in thousands):

Three Months Ended Six Months Ended

June 30, June 30,

2021 2020 % Change 2021 2020 % Change

Selling, general and administrative $ 4,896 $ 5,156 (5) % $ 9,750 $ 10,349 (6) %

Selling, general and administrative expense decreased $0.3 million, or 7%, in the first quarter of 2021 compared to the first quarter of 2020 primarily due to a decrease in compensation expense due to a reduction in headcount and a decrease in stock-based compensation expense due to the timing of awards granted.

Selling, general and administrative expense decreased $0.3 million, or 5%, in the second quarter of 2021 compared to the second quarter of 2020 and decreased $0.6 million, or 6% in the first half of 2021 compared to the first half of 2020.

The decreases in the 2021 periods compared to the 2020 periods were primarily due to a decrease in compensation expense due to a reduction in headcount and a decrease in stock-based compensation expense due to the timing of awards granted.

Restructurings

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The January 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, 2021 and 2020, was as follows and was included in operating expenses (dollars in thousands):

Three Months Ended

Restructuring expense for the three and six month periods ended June 30, 2021 and 2020, was as follows and was included in operating expenses (dollars in thousands):

Three Months Ended Six Months Ended

June 30, June 30,

2021 2020 2021 2020

Employee severance and benefits

$ — $ — $ — $ 592

Total restructuring expense

During the first quarter of 2021, we did not incur any restructuring expense.

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

$ — $ — $ — $ 592

During the three and six months ended June 30, 2021, we did not record any restructuring expense.

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 January 2020 Plan.

The January 2020 Plan was complete in the first quarter of 2020 and we did not incur any further charges related to the January 2020 Plan after the first quarter of 2020.

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The provision for income taxes during the 2021 and 2020 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 2021 and during the first quarter of 2020.

We recorded a negligible benefit for the reversal of previously recorded foreign tax contingencies during the first half of 2021 and during the first half of 2020.

Liquidity and Capital Resources

Cash, cash equivalents and short-term marketable securities

Total cash and cash equivalents decreased $5.8 million to $25.4 million at March 31, 2021 from $31.3 million at December 31, 2020.

Short-term marketable securities decreased $0.3 million to zero at March 31, 2021 from $0.3 million at December 31, 2020.

The net decrease in cash, cash equivalents and short-term marketable securities of $6.1 million during the first three months of 2021 was the result of $6.7 million used in operating activities, $0.2 million used for purchases of property and equipment and $0.2 million used for payments on other asset financings.

Total cash and cash equivalents decreased $7.6 million to $23.6 million at June 30, 2021 from $31.3 million at December 31, 2020.

Short-term marketable securities decreased $0.3 million to zero at June 30, 2021 from $0.3 million at December 31, 2020.

The net decrease in cash, cash equivalents and short-term marketable securities of $7.8 million during the first half of 2021 was the result of $8.0 million used in operating activities, $0.4 million used for purchases of property and equipment and $0.5 million used for payments on other asset financings.

These decreases were partially offset by $1.1 million in proceeds from the issuances of common stock under our employee equity incentive plans.

As of March 31, 2021, our cash and cash equivalents balance consisted of $18.1 million in cash equivalents held in U.S.

As of June 30, 2021, our cash and cash equivalents balance consisted of $15.1 million in cash equivalents held in U.S.

dollar denominated money market funds and $8.5 million in cash.

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Accounts receivable, net

Accounts receivable, net increased to $5.5 million as of March 31, 2021 from $4.7 million as of December 31, 2020.

The average number of days sales outstanding increased to 54 days as of March 31, 2021 from 44 days as of December 31, 2020.

The increase 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 2021, and the fourth quarter of 2020.

Inventories were $1.7 million as of March 31, 2021 compared to $2.4 million at December 31, 2020.

Inventory turnover increased to 10.1 as of March 31, 2021 from 6.0 as of December 31, 2020 primarily due to lower average inventory balances during the first quarter of 2021 compared to the fourth quarter of 2020.

Accounts receivable, net increased to $6.4 million as of June 30, 2021 from $4.7 million as of December 31, 2020.

The average number of days sales outstanding decreased to 41 days as of June 30, 2021 from 44 days as of December 31, 2020.

The increase in accounts receivable was due to normal fluctuations in the timing of sales and customer receipts within the second quarter of 2021, and the fourth quarter of 2020.

Inventories were $1.6 million as of June 30, 2021 compared to $2.4 million at December 31, 2020.

Inventory turnover increased to 16.0 as of June 30, 2021 from 6.0 as of December 31, 2020 primarily due to lower average inventory balances during the second quarter of 2021 compared to the fourth quarter of 2020.

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

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We did not renew the Revolving Loan Agreement upon its maturity.

As of March 31, 2021 and December 31, 2020, we had no outstanding borrowings under the Revolving Line.

As of December 31, 2020, we had no outstanding borrowings under the Revolving Line.

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

The Note had an interest rate of 1.000% per annum, with the first six months of interest deferred.

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

The Note contained 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 could require immediate repayment of all amounts outstanding under the Note.

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

The Loan was subject to forgiveness to the extent proceeds were 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.

We used the Loan amount for Qualifying Expenses.

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During the year ended December 31, 2020, we sold an aggregate of 1,747,466 shares of our common stock under this at the market offering, resulting in aggregate net proceeds to us of approximately $4.4 million, and gross proceeds of approximately $4.9 million and paid Cowen commissions and fees of approximately $0.2 million, and other expenses of $0.3 million.

As of March 31, 2021, our cash and cash equivalents balance of $25.4 million was highly liquid.

There was no activity under this at the market offering during the six months ended June 30, 2021.

Capital Increase Agreement

We have entered into a Capital Increase Agreement pursuant to which our subsidiary PWSH, is expected to receive net proceeds from the sale of its securities pursuant thereto in an amount of approximately RMB 279.7 million ($43.1 million USD) in August 2021.

Additional information is provided in Note 13, which is incorporated by reference into this section.

As of June 30, 2021, our cash and cash equivalents balance of $23.6 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.

We may pursue financing arrangements including the issuance of debt or equity securities or reduce expenditures, or both, to meet our cash requirements, including in the longer term.

In addition to the Capital Increase Agreement, we may pursue financing arrangements including the issuance of debt or equity securities or reduce expenditures, or both, to meet our cash requirements, including in the longer term.

There is no assurance that, if required, we will be able to raise additional capital or reduce discretionary spending to provide the required liquidity which, in turn, may have an adverse effect on our financial position, results of operations and cash flows.

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Any transactions, if consummated, may consume a material portion of our working capital or require the issuance of equity securities that may result in dilution to existing shareholders.

Our ability to generate cash from operations is also subject to

substantial risks described in Part II, “Item 1A., Risk Factors.” If any of these risks occur, we may be unable to generate or sustain positive cash flow from operating activities.

Our ability to generate cash from operations is also subject to substantial risks described in Part II, “Item 1A., Risk Factors.” If any of these risks occur, we may be unable to generate or sustain positive cash flow from operating activities.

We would then be required to use existing cash and cash equivalents to support our working capital and other cash requirements.

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Our contractual obligations for 2021 and beyond are included in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission on March 10, 2021.

Our obligations for 2021 and beyond have not changed materially as of March 31, 2021.

Our obligations for 2021 and beyond have not changed materially as of June 30, 2021.

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