What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-08 compared with 2022-08-10 · 73 added, 48 removed, 96 unchanged (56% of the section changed)

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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, which has resulted in a significant deterioration of economic conditions in many of the countries in which we operate.

In response to the COVID-19 pandemic, many state governments in the U.S.

and abroad issued restrictive orders, including “shelter in place” or “stay at home” orders, that have restricted their residents from leaving their homes or returning to work.

Since March 2022, various cities in China have imposed lockdowns in response to China’s “zero-COVID” policy, leading to weaker consumer demand which has had, and we anticipate may continue to have, an adverse impact on China’s economy, on our customers and on our business

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.

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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.

While we expect the impacts of COVID-19 to be temporary, the disruptions caused by the virus have negatively affected our revenue and results of operations in 2020 and 2021, and we anticipate it will continue to do so in 2022.

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.

We develop and market semiconductor and software solutions that enable consistently high-quality, authentic viewing experiences in a wide variety of applications from cinema to smartphones.

Our primary target markets include Mobile (smartphone, gaming and tablet), Home Entertainment (TV, personal video recorder ("PVR"), over-the-air ("OTA") and projector), Content (creation, remastering and delivery), and Business & Education (projector).

While we expect the impacts of COVID-19 to be temporary, the disruptions caused by the virus have negatively affected our revenue and results of operations in 2020 and 2021, and it continues to do so in 2022.

Pixelworks, Inc.

(together with our subsidiaries, the “Company”, "Pixelworks", “we”, “our” or “us”) 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.

We develop and market semiconductor and software solutions that enable consistently high-quality, authentic viewing experiences in a wide variety of applications.

Our primary target markets include mobile (smartphone and tablet), projector (business, education and home entertainment), video delivery (personal video recorder ("PVR") and over-the-air) and cinema (content creation, remastering and video streaming).

We were one of the first companies to commercially launch a video System on Chip ("SoC") capable of deinterlacing 1080i HDTV signals and one of the first companies with a commercial dual-channel 1080i deinterlacer integrated circuit.

Our Topaz product line was one of the industry’s first single-chip SoC for digital projection.

Our Topaz product line was one of the industry’s first single-chip SoC for projection.

We first introduced our motion estimation / motion compensation technology ("MEMC") for TVs and in recent years introduced a mobile-optimized MEMC solution for smartphones, one of several unique features in the mobile-optimized Iris visual processor.

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Our core visual display processing technology intelligently processes digital images and video from a variety of sources and optimizes the content for a superior viewing experience.

Our video coding technology reduces storage requirements, significantly reduces bandwidth constraint issues and converts content between multiple formats to enable seamless delivery of video, including OTA streaming, while also maintaining end-to-end content security.

Our video coding technology reduces storage requirements, significantly reduces bandwidth constraint issues and converts content between multiple formats to enable seamless delivery of video, including OTA, or over-the-air, streaming, while also maintaining end-to-end content security.

Rapid growth in video consumption, combined with the move towards high frame rate / refresh rate displays, especially in mobile, is increasing the demand for our visual processing and video delivery solutions.

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

As of June 30, 2022, we had an intellectual property portfolio of 301 patents related to the visual display of digital image data.

As of September 30, 2022, we had an intellectual property portfolio of 297 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.

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Results of Operations

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,

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

Three Months Ended Nine Months Ended

September 30, September 30,

2022 2021 % Change 2022 2021 % Change

Revenue, net $ 17,552 $ 15,196 16 % $ 53,258 $ 38,516 38 %

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.

Net revenue increased $2.4 million, or 16%, in the third quarter of 2022 compared to the third quarter of 2021 and increased $14.7 million, or 38% in the first nine months of 2022 compared to the first nine months of 2021.

Revenue recorded in the third quarter of 2022 consisted of $17.2 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 third quarter of 2021 consisted of $14.3 million in revenue from the sale of IC products and $0.8 million in revenue related to engineering services, license revenue and other.

Revenue recorded in the first nine months of 2022 consisted of $52.3 million in revenue from the sale of IC products and $0.9 million in revenue related to engineering services, license revenue and other.

Revenue recorded in the first nine months of 2021 consisted of $36.0 million in revenue from the sale of IC products and $2.5 million in revenue related to engineering services, license revenue and other.

The increase in IC revenue in the third quarter of 2022 compared to the third quarter of 2021 is due to the following factors:

• Sales into the mobile market increased $1.6 million or 36%.

• Sales into the projector market increased $0.9 million or 10%.

• Sales into the video delivery market increased $0.4 million or 38%.

The increase in IC revenue in the first nine months of 2022 compared to the first nine months of 2021 is due to the following factors:

• Sales into the mobile market increased $6.9 million or 59%.

• Sales into the projector market increased $5.7 million or 26%.

• Sales into the video delivery market increased $3.7 million or 132%.

These increases were due to increased demand compared to the prior periods.

Cost of revenue and gross profit

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,

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

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

revenue 2021 % of

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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 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.

Gross profit margin was 50% in the third quarter of 2022 compared to 53% in the third quarter of 2021.

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

Gross profit margin was 51% in the first nine months of 2022 compared to 49% in the first nine months of 2021.

The increase in gross profit margin was primarily due to decreased amortization of acquired intangible assets as an amount and as a percentage of revenue when comparing the first nine months of 2022 to the first nine months 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.

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

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,

During the first nine months 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.

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

Three Months Ended Nine Months Ended

September 30, September 30,

2022 2021 % Change 2022 2021 % Change

Research and development $ 8,445 $ 6,792 24 % $ 24,126 $ 20,248 19 %

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.

Research and development expense increased $1.7 million, or 24% in the third quarter of 2022 compared to the third quarter of 2021 due to the following factors:

• A $1.3 million benefit related to the co-development agreement was recognized in the third quarter of 2021, there was no benefit recognized in the third quarter of 2022.

• Compensation expense increased $0.4 million due to an increased headcount and annual merit salary increases.

Research and development expense increased $3.9 million, or 19% in the first nine months of 2022 compared to the first nine months of 2021 due to the following factors:

• Compensation expense increased $2.3 million due to an increased headcount and annual merit salary increases.

• Non -recurring engineering expense and d epreciation and amortization expense increased $1.8 million due to the timing of development activities.

• These increases were partially offset by a $0.5 million increase in benefit related to the co-development agreement in the first nine months of 2022 compared to the benefit recognized in the first nine months of 2021.

• Remaining $0.3 million increase was due to smaller increases in many other expense categories.

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 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,

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

Three Months Ended Nine Months Ended

September 30, September 30,

2022 2021 % Change 2022 2021 % Change

Selling, general and administrative $ 5,082 $ 5,097 0 % $ 16,590 $ 14,847 12 %

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.

Selling, general and administrative expense was $5.1 million in the third quarter of 2022 consistent with $5.1 million in the third quarter of 2021 and increased $1.7 million, or 12%, in the first nine months of 2022 compared to the first nine months of 2021.

The increase in the first nine months of 2022 compared to the first nine months of 2021 was due to the following factors:

• Compensation expense increased $0.8 million due to an increased headcount and annual merit salary increases.

• Accounting and other professional fees increased $0.7 million as a result of our strategic plan with our PWSH subsidiary.

• Marketing expenses increased $0.2 million due to increased focus on marketing to expand our gaming eco-system.

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

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

Liquidity and Capital Resources

Cash and cash equivalents

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

Total cash and cash equivalents decreased $4.0 million to $57.6 million at September 30, 2022 from $61.6 million at December 31, 2021.

The net decrease during the first nine months of 2022 was the result of $11.5 million used in operating activities, $1.4 million used for purchases of licensed technology, $1.3 million used for purchases of property and equipment and $0.9 million used for payments on other asset financings.

These decreases were partially offset by $10.7 million received in net proceeds from our non-controlling interest and $0.4 million in proceeds from the issuances of common stock under our employee equity incentive plans.

As of September 30, 2022, our cash and cash equivalents balance consisted of $19.0 million in cash equivalents held in U.S.

dollar denominated money market funds and $38.6 million in cash.

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.

Although we did not hold short- or long-term investments as of September 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.

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Accounts receivable, net

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.

Accounts receivable, net increased to $10.8 million as of September 30, 2022 from $8.7 million as of December 31, 2021.

The average number of days sales outstanding increased to 55 days as of September 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 third quarter of 2022, and the fourth quarter of 2021.

Inventories were $2.7 million as of September 30, 2022 compared to $1.5 million at December 31, 2021.

Inventory turnover decreased to 14.2 as of September 30, 2022 from to 19.5 as of December 31, 2021 primarily due to higher average inventory balances during the third quarter of 2022 compared to the fourth quarter of 2021.

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

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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 six months ended June 30, 2022.

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

Capital Increase Agreement

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

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

Equity Transfer Agreement

We have entered into an Equity Transfer Agreement pursuant to which we received net proceeds of $10.7 million in exchange for a 2.73% equity interest in PWSH.

Additional information is provided in "Note 14:

Non-Controlling Interest ", which is incorporated by reference into this section.

As of September 30, 2022, our cash and cash equivalents balance of $57.6 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.

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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 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.

Other than as set forth above, there were no material changes to our liquidity and capital resources during the nine month period ended September 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