What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-08-10 compared with 2022-05-10 · 46 added, 36 removed, 98 unchanged (46% of the section changed)

5 unchanged sentences

In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic, and the virus continues to exist in areas where we operate and sell our products and services.

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

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.

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

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

For more information see “ Note Regarding COVID-19 ”.

25 unchanged sentences

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

As of March 31, 2022, we had an intellectual property portfolio of 334 patents related to the visual display of digital image data.

As of June 30, 2022, we had an intellectual property portfolio of 301 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, bandwidth and increase overall system performance and device functionality.

1 unchanged sentence

Results of Operations

Net revenue for the three months ended March 31, 2022 and 2021, was as follows (dollars in thousands):

Three Months Ended

Net revenue for the three and six months ended June 30, 2022 and 2021, was as follows (dollars in thousands):

Three Months Ended Six Months Ended

June 30, June 30,

2022 2021 % Change 2022 2021 % Change

Revenue, net $ 19,078 $ 14,051 36 % $ 35,706 $ 23,321 53 %

Net revenue increased $7.4 million, or 79%, in the first quarter of 2022 compared to the first quarter of 2021.

Revenue recorded in the first quarter of 2022 consisted of $16.4 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 first quarter of 2021 consisted of $8.6 million in revenue from the sale of IC products and $0.6 million in revenue related to engineering services, license revenue and other.

The increase in IC revenue is primarily due to increased unit sales into the digital projector market, the mobile market and the video delivery market, as we experienced increased demand compared to the prior period.

Net revenue increased $5.0 million, or 36%, in the second quarter of 2022 compared to the second quarter of 2021 and increased $12.4 million, or 53% in the first half of 2022 compared to the first half of 2021.

Revenue recorded in the second quarter of 2022 consisted of $18.7 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 2021 consisted of $13.1 million in revenue from the sale of IC products and $1.0 million in revenue related to engineering services, license revenue and other.

Revenue recorded in the first half of 2022 consisted of $35.1 million in revenue from the sale of IC products and $0.6 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.

The increase in IC revenue in the 2022 periods compared to the 2021 periods is primarily due to increased unit sales into the digital projector market, the mobile market and the video delivery market, as we experienced increased demand compared to the prior periods.

Cost of revenue and gross profit

Cost of revenue and gross profit for the three months ended March 31, 2022 and 2021, were as follows (dollars in thousands):

Three Months Ended March 31,

Cost of revenue and gross profit for the three and six months ended June 30, 2022 and 2021, were as follows (dollars in thousands):

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

revenue 2021 % of

revenue 2022 % of

revenue 2021 % of

Direct product costs and related overhead 1

$ 9,671 51 % $ 6,646 47 % $ 17,447 49 % $ 11,867 51 %

Stock-based compensation 59 0 76 1 67 0 155 1

Amortization of acquired intangible assets — 0 218 2 72 0 463 2

Inventory charges 2

Stock-based compensation 8 0 79 1

— 0 — 0 9 0 — 0

Total cost of revenue $ 9,730 51 % $ 6,940 49 % $ 17,595 49 % $ 12,485 54 %

2 unchanged sentences

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 53% in the first quarter of 2022 compared to 40% in the first quarter of 2021.

The increase in gross profit margin was primarily due to product mix, absorption of fixed overhead costs, decreased stock-based compensation expense and decreased amortization of acquired intangible assets amount and as a percentage of revenue when comparing the first quarter of 2022 to the first quarter of 2021.

Gross profit margin was 49% in the second quarter of 2022 compared to 51% in the second quarter of 2021.

The decrease in gross profit margin was primarily due to product mix, partially offset by absorption of fixed overhead costs, decreased stock-based compensation expense and decreased amortization of acquired intangible assets as an amount and as a percentage of revenue when comparing the second quarter of 2022 to the second quarter of 2021.

Gross profit margin was 51% in the first half of 2022 compared to 46% in the first half of 2021.

The increase in gross profit margin was primarily due to absorption of fixed overhead costs, decreased stock-based compensation expense and decreased amortization of acquired intangible assets as an amount and as a percentage of revenue when comparing the first half of 2022 to the first half of 2021.

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.

7 unchanged sentences

As amounts become due and payable, they are offset against research and development expense on a pro rata basis.

During the first quarter of 2022, we recognized an offset to research and development expense of approximately $1.0 million.

During the remainder of 2022, we expect to record an offset to research and development expense of approximately $0.9 million for the remaining deferred research and development reimbursement on the initial $5.8 million received and a reimbursement of approximately $2.2 million for the next payment milestone.

Research and development expense for the three months ended March 31, 2022 and 2021, was as follows (dollars in thousands):

Three Months Ended

During the first half of 2022, we recognized an offset to research and development expense of approximately $1.8 million.

During the remainder of 2022, we expect to record an offset to research and development expense of approximately $2.2 million for the next payment milestone, however such offset could be delayed to 2023.

Research and development expense for the three and six months ended June 30, 2022 and 2021, was as follows (dollars in thousands):

Three Months Ended Six Months Ended

June 30, June 30,

2022 2021 % Change 2022 2021 % Change

Research and development $ 8,521 $ 6,671 28 % $ 15,681 $ 13,456 17 %

Research and development expense increased $0.4 million, or 6% in the first quarter of 2022 compared to the first quarter of 2021 primarily due to an increase in compensation expense due to annual merit salary increases and an increased headcount as well as an increase in non-recurring engineering expense due to the timing of development activities.

These increases were largely offset by a benefit related to the co-development agreement.

Research and development expense increased $1.9 million, or 28% in the second quarter of 2022 compared to the second quarter of 2021 and increased $2.2 million, or 17% in the first half of 2022 compared to the first half of 2021 primarily due to an increase in compensation expense due to an increased headcount and annual merit salary increases as well as an increase in non-recurring engineering expense due to the timing of development activities.

The increase in non-recurring engineering expense was largely offset by a benefit related to the co-development agreement.

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, 2022 and 2021, was as follows (dollars in thousands):

Three Months Ended

Selling, general and administrative expense for the three and six months ended June 30, 2022 and 2021, was as follows (dollars in thousands):

Three Months Ended Six Months Ended

June 30, June 30,

2022 2021 % Change 2022 2021 % Change

Selling, general and administrative $ 6,024 $ 4,896 23 % $ 11,508 $ 9,750 18 %

Selling, general and administrative expense increased $0.6 million, or 13%, in the first quarter of 2022 compared to the first quarter of 2021 primarily due to an increase in compensation expense due to annual merit salary increases and an increased headcount as well as an increase in accounting fees incurred related to our strategic plan with our PWSH subsidiary.

These increases were partially offset by a decrease in stock based compensation expense as a result of the resignation of our former Chief Financial Officer in January 2022.

Selling, general and administrative expense increased $1.1 million, or 23%, in the second quarter of 2022 compared to the second quarter of 2021 and increased $1.8 million, or 18%, in the first half of 2022 compared to the first half of 2021 primarily due to an increase in compensation expense due to an increased headcount and annual merit salary increases as well as an increase in accounting fees incurred related to our strategic plan with our PWSH subsidiary.

Provision for income taxes

The provision for income taxes during the 2022 and 2021 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 benefit of $0.1 million for the reversal of previously recorded foreign tax contingencies during the first three months of 2022 and a negligible benefit for the reversal of previously recorded foreign tax contingencies during the first three months of 2021.

We recorded a benefit of $0.1 million for the reversal of previously recorded foreign tax contingencies during the first half of 2022 and a negligible benefit for the reversal of previously recorded foreign tax contingencies during the first half of 2021.

Liquidity and Capital Resources

Cash and cash equivalents

Total cash and cash equivalents decreased $6.4 million to $55.2 million at March 31, 2022 from $61.6 million at December 31, 2021.

The net decrease during the first three months of 2022 was the result of $5.2 million used in operating activities, $0.5 million used for purchases of property and equipment, $0.5 million used for purchases of licensed technology and $0.4 million used for payments on other asset financings.

Total cash and cash equivalents decreased $12.0 million to $49.6 million at June 30, 2022 from $61.6 million at December 31, 2021.

The net decrease during the first six months of 2022 was the result of $9.8 million used in operating activities, $1.0 million used for purchases of licensed technology, $0.8 million used for purchases of property and equipment and $0.6 million used for payments on other asset financings.

These decreases were partially offset by $0.2 million in proceeds from the issuances of common stock under our employee equity incentive plans.

As of March 31, 2022, our cash and cash equivalents balance consisted of $11.3 million in cash equivalents held in U.S.

As of June 30, 2022, our cash and cash equivalents balance consisted of $9.9 million in cash equivalents held in U.S.

dollar denominated money market funds and $39.7 million in cash.

Although we did not hold short- or long-term investments as of March 31, 2022, our investment policy requires that our portfolio maintain a weighted average maturity of less than 12 months.

Although we did not hold short- or long-term investments as of June 30, 2022, our investment policy requires that our portfolio maintain a weighted average maturity of less than 12 months.

Additionally, no maturities can extend beyond 24 months and concentrations with individual securities are limited.

2 unchanged sentences

Accounts receivable, net

Accounts receivable, net decreased to $8.6 million as of March 31, 2022 from $8.7 million as of December 31, 2021.

The average number of days sales outstanding decreased to 46 days as of March 31, 2022 from 47 days as of December 31, 2021.

Inventories were $1.8 million as of March 31, 2022 compared to $1.5 million at December 31, 2021.

Inventory turnover decreased to 19.0 as of March 31, 2022 from 19.5 as of December 31, 2021.

Accounts receivable, net increased to $12.4 million as of June 30, 2022 from $8.7 million as of December 31, 2021.

The average number of days sales outstanding increased to 59 days as of June 30, 2022 from 47 days as of December 31, 2021.

The increase 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 2022, and the fourth quarter of 2021.

Inventories were $2.2 million as of June 30, 2022 compared to $1.5 million at December 31, 2021.

Inventory turnover was 19.4 as of June 30, 2022 compared to 19.5 as of December 31, 2021.

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

7 unchanged sentences

During the year ended December 31, 2021, we sold an aggregate of 61,018 shares of our common stock under this at the market offering, resulting in aggregate net proceeds to us of approximately $0.3 million, and gross proceeds of approximately $0.4 million, and paid Cowen commissions and fees and other expenses of approximately $0.1 million.

There was no activity under this at the market offering during the three months ended March 31, 2022.

There was no activity under this at the market offering during the six months ended June 30, 2022.

Capital Increase Agreement

2 unchanged sentences

Redeemable Non-Controlling Interest and Equity Interest of PWSH Sold to Employees", which is incorporated by reference into this section.

As of March 31, 2022, our cash and cash equivalents balance of $55.2 million was highly liquid.

As of June 30, 2022, our cash and cash equivalents balance of $49.6 million was highly liquid.

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

10 unchanged sentences

We can provide no assurance that additional financing will be available at all or, if available, that we would be able to obtain additional financing on terms favorable to us.

Other than as set forth above, there were no material changes to our liquidity and capital resources during the period ended March 31, 2022 from those set forth in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission on March 9, 2022.

Other than as set forth above, there were no material changes to our liquidity and capital resources during the six month period ended June 30, 2022 from those set forth in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission on March 9, 2022.

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