What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-05-09 compared with 2022-11-08 · 80 added, 98 removed, 71 unchanged (71% of the section changed)

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Factors that could cause or contribute to those differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in “Risk Factors,” and “Note Regarding Forward-Looking Statements.”

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.

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.

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

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 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.

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).

Pixelworks is a leading provider of high-performance and power-efficient visual processing semiconductor and software solutions that enable consistently high-quality and authentic viewing experiences in a wide variety of applications.

We define our primary target markets as Mobile (smartphone and tablet), Home & Enterprise (projectors, personal video recorders ("PVR"), and over-the-air ("OTA") streaming devices), and Cinema (creation, remastering, and delivery of digital video content).

Previously we classified our primary target markets as Mobile, Projector, Video Delivery and Cinema, but have since aggregated the Projector and Video Delivery categories into one called "Home & Enterprise".

Pixelworks has been a pioneer in visual processing technology for over 20 years.

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 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.

In 2019, we introduced our Hollywood award-winning TrueCut® video platform, the industry’s first motion grading technology that allows fine tuning of motion appearance in cinematic content for a wide range of frame rates, shutter angles and display types.

Our solutions enable worldwide manufacturers to offer leading-edge consumer electronics and professional display products, as well as video delivery and streaming solutions for content service providers.

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, 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.

Our technologies can be applied to a wide range of devices from large-screen projectors to cinematic big screens, to low-power mobile tablets and smartphones, to high-quality video infrastructure equipment and streaming devices.

Our products are architected and optimized for power, cost, bandwidth, and overall system performance, according to the requirements of the specific application.

On occasion, we have also licensed our technology.

During the third quarter of 2021, we 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 our 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 were 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 Science and Technology 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 our growth worldwide.

We presently intend to qualify PWSH to apply for the Listing so that the Listing is consummated in 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 September 30, 2022, we had an intellectual property portfolio of 297 patents related to the visual display of digital image data.

We launched one of the industry’s first single-chip SoCs for digital projection.

We were the first company to integrate motion estimation / motion compensation technology ("MEMC") as a mobile-optimized solution for smartphones.

In 2019, we introduced our Hollywood award-winning TrueCut® video platform, the industry’s first motion grading technology that allows fine tuning of motion appearance in cinematic content.

As of March 31, 2023, we had an intellectual property portfolio of 286 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.

We seek to expand our technology portfolio through internal development and co-development with business partners, and we continually evaluate acquisition opportunities and other ways to leverage our technology into other high-value markets.

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

Rapid growth in video and gaming consumption, combined with the move towards bright, high resolution, high frame rate and high refresh rate displays, especially in mobile, is increasing the demand for our solutions.

Our technologies can be applied across a wide range of applications:

cinema theaters, low-power mobile tablets, smartphones, streaming devices, and digital projectors for the home, school, or the workplace.

Our products are designed and optimized for power, cost, bandwidth, viewer experience, and overall system performance, according to the requirements of the specific application.

On occasion, we have also licensed our technology.

During the third quarter of 2021, we engaged in a strategic plan to re-align our Mobile and Home & Enterprise businesses to improve their focus on their Asia-centered customers and employee stakeholders.

Our subsidiary, Pixelworks Semiconductor Technology (Shanghai) Co., Ltd.

(or "PWSH"), now operates these businesses as a full profit-and-loss center underneath Pixelworks.

In connection with this strategic plan, the Company and PWSH closed three separate financing transactions in 2021 and 2022, which are further described in "Note 13:

Redeemable Non-Controlling Interest and Equity Interest of PWSH Sold to Employees" and "Note 14:

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

PWSH is in the process of preparing to file an application for an initial public offering of PWSH shares on the Shanghai Stock Exchange’s Science Technology 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 PWSH’s growth worldwide.

We presently intend to qualify PWSH to apply for the Listing in the second half of 2023.

The process of going public on the STAR Market is lengthy and includes several periods of review by various government agencies of the People’s Republic of China (“PRC”), such as the Shanghai Stock Exchange and the China Securities Regulatory Commission (“CSRC”).

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

The listing of PWSH on the STAR Market will not change the status of PXLW as a U.S.

public company.

We are neither a PRC operating company nor do we conduct our operations in China through the use of variable interest entities.

For additional information regarding how the COVID-19 pandemic has affected us, please see “NOTE REGARDING COVID- 19” above.

Pixelworks was founded in 1997 and is incorporated under the laws of the state of Oregon.

On August 2, 2017, we acquired ViXS Systems, Inc., a corporation organized in Canada ("ViXS").

Results of Operations

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,

Net revenue for the three months ended March 31, 2023 and 2022, was as follows (dollars in thousands):

Three Months Ended

2023 2022 $ Change % Change

Revenue, net $ 9,966 $ 16,628 $ (6,662) (40) %

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.

Net revenue decreased $6.7 million, or 40%, in the first quarter of 2023 compared to the first quarter of 2022.

Revenue recorded in the first three months of 2023 consisted of $9.7 million in revenue from the sale of integrated circuit ("IC") products and $0.3 million in revenue related to engineering services, license revenue and other.

Revenue recorded in the first three months of 2022 consisted of $16.4 million in revenue from the sale of IC products and $0.2 million in revenue related to engineering services, license revenue and other.

The decrease in IC revenue in the first quarter of 2023 compared to the first quarter of 2022 is due to the following factors:

• Sales into the Mobile market decreased $2.5 million or 45%, primarily due to a decrease in customer demand.

• Sales into the Home & Enterprise market decreased $4.3 million or 39%, primarily due to a decrease in customer demand as well as implementing an end-of-life in 2022 on some of our legacy products sold into what we previously referenced as the video delivery market.

Cost of revenue and gross profit

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

revenue 2022 % of

Cost of revenue and gross profit for the three months ended March 31, 2023 and 2022, were as follows (dollars in thousands):

Three Months Ended March 31,

revenue 2022 % of

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Inventory charges 2

43 0 — 0 52 0 — 0

Total cost of revenue $ 5,599 56 % $ 7,865 47 %

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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 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.

Gross profit margin decreased to 44% in the first quarter of 2023 compared to 53% in the first quarter of 2022, primarily due to product mix.

The decrease in sales into the Home & Enterprise market unfavorably impacted gross profit margin.

The decrease was also due to lower 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, amortization related to acquired intangible assets, and the timing and execution of manufacturing ramps as well as other factors.

Research and development

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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 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,

During the first quarter of 2023, we did not recognize an offset to research and development expense.

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

During the remainder of 2023, we expect to record offsets to research and development expense of approximately $3.2 million for the remaining payment milestones.

Research and development expense for the three months ended March 31, 2023 and 2022, was as follows (dollars in thousands):

Three Months Ended

2023 2022 $ Change % Change

Research and development $ 8,666 $ 7,160 $ 1,506 21 %

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.

Research and development expense increased $1.5 million, or 21% in the first quarter of 2023 compared to the first quarter of 2022 due to the following factors:

• A $1.0 million benefit related to the co-development agreement was recognized in the first quarter of 2022, there was no benefit recognized in the first quarter of 2023.

• Compensation expense increased $0.2 million due to increased headcount and annual merit salary increases.

• Non-recurring engineering expense increased $0.3 million 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 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,

Selling, general and administrative expense for the three months ended March 31, 2023 and 2022, was as follows (dollars in thousands):

Three Months Ended

2023 2022 $ Change % Change

Selling, general and administrative $ 6,072 $ 5,484 $ 588 11 %

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:

Selling, general and administrative expense increased $0.6 million, or 11% in the first quarter of 2023 compared to the first quarter of 2022 due to the following factors:

• Compensation expense increased $0.3 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.

• Stock-based compensation increased $0.2 million due to the resignation of our former Chief Financial Officer in January 2022, which resulted in a reversal of stock-based compensation expense in the first quarter of 2022.

• Outside services increased $0.1 million due to fees incurred related to our strategic plan with our PWSH subsidiary.

Provision for income taxes

The provision for income taxes during the 2023 and 2022 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 nine months of 2022 and a negligible benefit for the reversal of previously recorded foreign tax contingencies during the first nine months of 2021.

We recorded a negligible benefit for the reversal of previously recorded foreign tax contingencies during the first three months of 2023 and a benefit of $0.1 million for the reversal of previously recorded foreign tax contingencies during the first three months of 2022.

Liquidity and Capital Resources

Cash and cash equivalents

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 September 30, 2022, our investment policy requires that our portfolio maintain a weighted average maturity of less than 12 months.

Total cash and cash equivalents increased $6.0 million to $62.8 million at March 31, 2023 from $56.8 million at December 31, 2022.

The net increase during the first three months of 2023 was the result of $14.6 million received in net proceeds from our non-controlling interest and $0.1 million in proceeds from the issuances of common stock under our employee equity incentive plans.

These increases were partially offset by $6.5 million used in operating activities, $2.0 million used for purchases of property and equipment and $0.2 million used for payments on other asset financings.

As of March 31, 2023, our cash and cash equivalents balance consisted of $47.2 million in cash, $11.0 million held in U.S.

dollar denominated certificates of deposit and $4.6 million in cash equivalents held in U.S.

dollar denominated money market funds.

Although we did not hold short- or long-term investments as of March 31, 2023, 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 $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.

Accounts receivable, net decreased to $7.9 million as of March 31, 2023 from $10.0 million as of December 31, 2022.

The average number of days sales outstanding increased to 71 days as of March 31, 2023 from 54 days as of December 31, 2022.

The increase in days sales outstanding was due to normal fluctuations in the timing of sales and customer receipts within the first quarter of 2023, and the fourth quarter of 2022.

Inventories were $2.3 million as of March 31, 2023 compared to $1.8 million at December 31, 2022.

Inventory turnover decreased to 10.9 as of March 31, 2023 from to 13.7 as of December 31, 2022 primarily due to decreased cost of goods sold during the first quarter of 2023 compared to the fourth quarter of 2022.

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

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

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 nine months ended September 30, 2022.

Capital Increase Agreement

We have entered into a Capital Increase Agreement pursuant to which our subsidiary PWSH, received net proceeds from the sale of its securities pursuant thereto in an amount of RMB 279.7 million ($42.3 million USD).

There was no activity under this at the market offering during the three months ended March 31, 2023 or March 31, 2022.

Capital Increase Agreements

We have entered into a Capital Increase Agreement pursuant to which our subsidiary PWSH, received net proceeds from the sale of its securities pursuant thereto in an amount of 279.7 million RMB ($42.3 million USD).

Additional information is provided in "Note 13:

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

We have entered into a Capital Increase Agreement pursuant to which our subsidiary PWSH, received net proceeds from the sale of its securities pursuant thereto in an amount of 99.0 million RMB ($14.6 million USD).

Additional information is provided in "Note 14:

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

Equity Transfer Agreement

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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.

As of March 31, 2023, our cash and cash equivalents balance of $62.8 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 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.

Other than as set forth above, there were no material changes to our liquidity and capital resources during the three month period ended March 31, 2023 from those set forth in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission on March 8, 2023.

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