What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-08 compared with 2023-05-09 · 58 added, 41 removed, 110 unchanged (47% of the section changed)

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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.

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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.

As of June 30, 2023, we had an intellectual property portfolio of 280 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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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.

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Results of Operations

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

Three Months Ended

Net revenue for the three and six months ended June 30, 2023 and 2022, was as follows (dollars in thousands):

Three Months Ended Six Months Ended

June 30, June 30,

2023 2022 % Change 2023 2022 % Change

Revenue, net $ 13,605 $ 19,078 (29) % $ 23,571 $ 35,706 (34) %

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:

Net revenue decreased $5.5 million, or 29%, in the second quarter of 2023 compared to the second quarter of 2022 and decreased $12.1 million, or 34%, in the first half of 2023 compared to the first half of 2022.

Revenue recorded in the second quarter of 2023 consisted of $13.5 million in revenue from the sale of integrated circuit ("IC") products and $0.1 million in revenue related to engineering services, license revenue and other.

Revenue recorded in the second quarter of 2022 consisted of $18.7 million in revenue from the sale of IC products and $0.4 million in revenue related to engineering services, license revenue and other.

Revenue recorded in the first half of 2023 consisted of $23.2 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 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.

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

• Sales into the Mobile market decreased $0.4 million or 5%.

• Sales into the Home & Enterprise market decreased $4.8 million or 42%, 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 referred to as the video delivery market.

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

• Sales into the Mobile market decreased $2.8 million or 22%, primarily due to a decrease in customer demand.

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Cost of revenue and gross profit

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,

Cost of revenue and gross profit for the three and six months ended June 30, 2023 and 2022, were as follows (dollars in thousands):

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

revenue 2022 % of

revenue 2023 % of

revenue 2022 % of

Direct product costs and related overhead 1

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Inventory charges 2

62 0 — 0 62 0 9 0

Total cost of revenue $ 8,121 60 % $ 9,730 51 % $ 13,720 58 % $ 17,595 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 decreased to 44% in the first quarter of 2023 compared to 53% in the first quarter of 2022, primarily due to product mix.

Gross profit margin decreased to 40% in the second quarter of 2023 compared to 49% in the second 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.

Gross profit margin decreased to 42% in the first half of 2023 compared to 51% in the first half 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.

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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 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

We recognized offsets to research and development expense of $1.9 million and $0.9 million, during the three months ended June 30, 2023 and 2022, respectively and $1.9 million and $1.8 million during the six months ended June 30, 2023 and 2022, respectively.

During the remainder of 2023, we expect to record offsets to research and development expense of approximately $1.3 million for the remaining payment milestone.

Research and development expense for the three and six months ended June 30, 2023 and 2022, was as follows (dollars in thousands):

Three Months Ended Six Months Ended

June 30, June 30,

2023 2022 % Change 2023 2022 % Change

Research and development $ 6,507 $ 8,521 (24) % $ 15,173 $ 15,681 (3) %

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.

Research and development expense decreased $2.0 million, or 24% in the second quarter of 2023 compared to the second quarter of 2022 due to the following factors:

• A $1.9 million benefit related to the co-development agreement was recognized in the second quarter of 2023 compared to a $0.9 million benefit recognized in the second quarter of 2022.

• Non-recurring engineering expense decreased $1.0 million primarily due to the timing of development activities.

Research and development expense decreased $0.5 million, or 3% in the first half of 2023 compared to the first half of 2022 due to the following factors:

• Non-recurring engineering expense decreased $0.6 million primarily due to the timing of development activities.

• Stock-based compensation expense decreased $0.2 million primarily due to the change in our stock price.

• These decreases were partially offset by a $0.3 million increase in compensation expense primarily due to annual merit salary increases.

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 months ended March 31, 2023 and 2022, was as follows (dollars in thousands):

Three Months Ended

Selling, general and administrative expense for the three and six months ended June 30, 2023 and 2022, was as follows (dollars in thousands):

Three Months Ended Six Months Ended

June 30, June 30,

2023 2022 % Change 2023 2022 % Change

Selling, general and administrative $ 5,468 $ 6,024 (9) % $ 11,540 $ 11,508 0 %

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.

• 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.

Selling, general and administrative expense decreased $0.6 million, or 9% in the second quarter of 2023 compared to the second quarter of 2022 due to the following factors:

• Foreign currency gains and losses decreased $0.4 million primarily due to weakening in the CNY compared to USD.

• Stock-based compensation expense decreased $0.3 million primarily due to the change in our stock price.

• These decreases were partially offset by a $0.1 million increase in travel related expense due to increased travel in Shanghai as COVID-19 restrictions have been lifted.

Selling, general and administrative expense had a negligible increase in the first half of 2023 compared to the first half of 2022 due to the following factors:

• Compensation expense increased primarily due to an increased management bonus accrual due to the timing of achievement of corporate bonus objectives.

• This increase was partially offset by a foreign currency gain due to weakening in the CNY compared to USD.

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 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.

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

Liquidity and Capital Resources

Cash and cash equivalents

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.

Total cash and cash equivalents decreased $2.3 million to $54.5 million at June 30, 2023 from $56.8 million at December 31, 2022.

The net decrease during the first six months of 2023 was the result of $13.8 million used in operating activities, $2.7 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 increases of $14.6 million received in net proceeds from issuance of equity interest to non-controlling interest and $0.1 million in proceeds from the issuances of common stock under our employee equity incentive plans.

As of June 30, 2023, our cash and cash equivalents balance consisted of $39.8 million in cash, $11.0 million held in U.S.

dollar denominated certificates of deposit and $3.7 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.

Although we did not hold short- or long-term investments as of June 30, 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 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.

Accounts receivable, net decreased to $7.4 million as of June 30, 2023 from $10.0 million as of December 31, 2022.

The average number of days sales outstanding decreased to 52 days as of June 30, 2023 from 54 days as of December 31, 2022.

Inventories were $5.5 million as of June 30, 2023 compared to $1.8 million at December 31, 2022.

Inventory turnover decreased to 8.3 as of June 30, 2023 from to 13.7 as of December 31, 2022 primarily due to higher average inventory balances during the second 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.

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

There was no activity under this at the market offering during the six months ended June 30, 2023 or June 30, 2022.

Capital Increase Agreements

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

As of March 31, 2023, our cash and cash equivalents balance of $62.8 million was highly liquid.

As of June 30, 2023, our cash and cash equivalents balance of $54.5 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 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.

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, 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