What changed in this filing

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Item 7. Management’s Discussion and Analysis

2025-03-13 compared with 2024-03-13 · 58 added, 44 removed, 171 unchanged (37% of the section changed)

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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.

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

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.

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On occasion, we have also licensed our technology.

During 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.

During 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 (the “Strategic Plan”).

One of our Chinese subsidiaries, Pixelworks Semiconductor Technology (Shanghai) Co., Ltd.

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Redeemable Non-Controlling Interest and Equity Interest of PWSH Sold to Employees" and "Note 16:

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

Non-Controlling Interest".

PWSH has a branch office located in Shenzhen, China (Pixelworks Semiconductor Technology (Shanghai) Co.

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This subsidiary does not operate under PWSH, but rather is owned by Pixelworks through our Oregon limited liability company, Pixelworks Semiconductor Technology Company, LLC.

We continue to prepare PWSH 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”) once market conditions in China are supportive.

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 continue to believe that an initial public offering of PWSH shares on the Shanghai Stock Exchange’s Science Technology Innovation Board, known as the STAR Market (the “Listing”) will have many benefits, including improved access to new capital markets and the funding of PWSH’s growth worldwide.

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 (“SSE”) and the China Securities Regulatory Commission (“CSRC”).

The CSRC and the SSE have recently tightened the standards for the STAR Market and are currently advising companies that are not yet profitable under China GAAP standards against filing an IPO application in the present environment.

The Company believes this is in large part due to the current economic conditions in China and the recent performance of companies already listed on the STAR Market that were not profitable at the time of their IPO.

PWSH is not currently profitable under China GAAP standards.

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public company.

More than a majority of our operations are in China, but our executive officers and all of our directors but one are located in the United States (and he resides in Singapore).

More than a majority of our operations are in China, but our executive officers and all of our directors but one are located in the United States (he resides in Singapore).

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

Pixelworks continues to work with Morgan Stanley as financial advisor to assist with reviewing potential alternative strategic options specific to inbound interest in the Pixelworks Shanghai subsidiary.

As of December 31, 2024, we had an intellectual property portfolio of 261 patents related to the visual display of digital image data.

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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").

Historically, significant portions of our revenue have been generated by sales to a relatively small number of end customers and distributors.

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The decrease in IC revenue from 2023 compared to 2024 is due to the following factors:

• Sales into the Home & Enterprise market decreased $17.8 million or 38%, primarily due to a decrease in customer demand resulting from customers absorbing inventory purchased with long lead times during the supply shortage in 2022, 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.

• Sales into the Mobile market increased $8.3 million or 39%, primarily due to i ncreased average selling prices as our customers adopt and transition to our next generation mobile product.

Revenue related to engineering services, license revenue and other decreased $0.9 million or 46% primarily due to a decrease in licensing revenue in the Mobile market.

• Sales into the Mobile market decreased $15.7 million or 54%, primarily due to decreased units sold associated with a delayed transition to our latest generation mobile products.

• Sales into the Home & Enterprise market decreased $0.6 million or 2% .

Revenue related to the Cinema market was not material in 2024 or 2023 and was therefore included in the engineering services, license revenue and other category within the Mobile market.

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Stock-based compensation 53 0.1 89 0.1

Amortization of acquired developed technology — 0.0 72 0.1

Total cost of revenue $ 20,921 48.4 % $ 33,968 56.9 %

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2 Includes charges to reduce inventory to lower of cost or net realizable value and a benefit for sales of previously written down inventory.

Gross profit margin decreased to 43% in 2023 compared to 51% in 2022, primarily due to product mix.

The decrease in sales into the Home & Enterprise market as well as the increase in sales into the Mobile market both 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 developed technology and the timing and execution of manufacturing ramps as well as other factors.

Gross profit margin increased to 52% in 2024 compared to 43% in 2023, primarily due to decreased unit sales into the Mobile market which generally have lower margins than products sold into the Home & Enterprise market, increased average selling prices ("ASP") on IC products sold into the Home & Enterprise market and decreased costs on Mobile products.

These factors which positively impacted margin were partially offset by reduced absorption due to reduced revenue and increased inventory charges.

Pixelworks’ gross profit margin is subject to variability based on changes in revenue levels, product mix, average selling prices, startup costs and the timing and execution of manufacturing ramps as well as other factors.

Research and development

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Under the co-development agreement, $5.8 million was payable by the customer within 60 days of the date of the agreement and three additional payments of $2.5 million, $1.9 million and $1.3 million are each payable upon completion of certain development milestones.

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

We recognized offsets to research and development expense of approximately $3.2 and $4.3 million during the years ended December 31, 2023 and 2022, respectively.

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

We did not recognize any offsets to research and development expense during the year ended December 31, 2024.

We recognized an offset to research and development expense of approximately $3.2 million during the year ended December 31, 2023.

All milestones under the co-development agreement were completed as of December 31, 2023.

Research and development expense was as follows (in thousands):

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Research and development expense increased $0.5 million, or 1%, from 2023 to 2024 due to the following factors:

• Compensation expense increased $1.0 million due to an increase in headcount and annual merit salary increases.

• The credit recognized related to the co-development agreement decreased by $1.1 million in 2023 compared to the credit recognized in 2022.

• These increases were partially offset by a $1.7 million decrease in non-recurring engineering expense due to the timing of development activities.

• A $3.2 million benefit related to the co-development agreement was recognized in 2023 compared to no benefit recognized in 2024.

• Compensation expense decreased $1.6 million primarily due to decreased headcount associated with our June 2024 restructuring plan and a decreased management bonus accrual.

• Non-recurring engineering expense decreased $1.1 million due to the timing of development activities.

Selling, general and administrative

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Selling, general and administrative $ 20,697 $ 23,467 $ (2,770) (12) %

Selling, general and administrative expense increased $1.3 million, or 6%, from 2022 to 2023 due to the following factors:

• Compensation expense increased $0.8 million due to an increased management bonus accrual and one time reversal of a payroll tax accrual in 2022.

• Accounting and other professional fees increased $0.5 million primarily due to fees incurred related to our strategic plan with our subsidiary, PWSH.

Selling, general and administrative expense decreased $2.8 million, or 12%, from 2023 to 2024 due to the following factors:

• Compensation expense decreased $1.1 million primarily due to decreased headcount associated with our June 2024 restructuring plan and a decreased management bonus accrual.

• Accounting and other professional fees decreased $1.7 million primarily due to a decrease in fees incurred related to our strategic plan with our subsidiary, PWSH.

Restructurings

In June 2024, we executed a restructuring plan to make the operation of the Company more efficient (the "Plan").

The Plan included an approximately 16% reduction in workforce, primarily in the areas of operations, research and development, sales, marketing and administration.

Restructuring expense was as follows (dollars in thousands):

Year ended December 31,

Employee severance and benefits

Total restructuring expense

Included in cost of revenue

Included in operating expenses

During 2024, we recorded $1.6 million, in restructuring expense related to the Plan.

During 2023, we did not record any restructuring expense.

The Plan was complete in 2024 and we do not expect to incur any further expenses related to the Plan after 2024.

Interest income and other, net

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Interest income $ 1,267 $ 1,950

Other income 125 80

Government subsidies received 1,100 —

Interest expense (69) (25)

Other income — 125

Total interest income and other, net $ 2,298 $ 2,050

The increase in interest income in 2023 compared to 2022 is due to increased interest earned on our cash and cash equivalents balance due to the increase in the interest rate available throughout the full year in 2023 compared to the full year in 2022.

Provision (benefit) for income taxes

The increase in interest income and other, net in 2024 compared to 2023 is due to an increase in government subsidies received, partially offset by a decrease in interest earned on our cash and cash equivalents balance due to the decrease in our cash and cash equivalents balance in 2024 compared to 2023.

Additional information on the government subsides received is provided in "Note 17:

Government Grants", which is incorporated by reference into this section.

Provision for income taxes

The benefit for income taxes was as follows (in thousands):

Year ended December 31,

Provision (benefit) for income taxes $ 357 $ (884)

Provision for income taxes $ 478 $ 357

The income tax expense of $0.5 million recorded for the year ended December 31, 2024 is primarily composed of tax expense of $0.4 million for our profitable cost-plus jurisdictions and deferred tax expense of approximately $0.1 million.

The income tax benefit of $0.9 million recorded for the year ended December 31, 2022 is primarily composed of $1.8 million of tax benefit for the reversal of tax contingencies in foreign jurisdictions, partially offset by tax expense of $0.3 million for our profitable cost-plus jurisdictions and deferred tax expense of approximately $0.6 million related to a change in the realizability of our Canadian deferred tax assets.

The income tax expense of $0.4 million recorded for the year ended December 31, 2023 is primarily composed of tax expense of $0.1 million for our profitable cost-plus jurisdictions and deferred tax expense of approximately $0.3 million.

We continue to record a full valuation allowance against our U.S., Canada and China net deferred tax assets as of December 31, 2024 and 2023, as it is not more likely than not that we will realize a benefit from these assets in a future period.

As of December 31, 2022, we were no longer more-likely-than-not to realize our remaining Canadian deferred tax assets and have recorded a full valuation allowance.

During the fourth quarter of 2024, we established a valuation allowance against the carryforwards of our California LLC in connection with closing this entity.

We have not provided a valuation allowance against our other foreign net deferred tax assets as we have concluded it is more-likely-than-not that we will realize a benefit from these assets in a future period because our subsidiaries in these jurisdictions are cost-plus taxpayers.

The net valuation allowance decreased $11.0 million for the year ended December 31, 2023 and decreased $4.4 million for the year ended December 31, 2022.

The net valuation allowance increased $9.0 million and $11.0 million for the years ended December 31, 2024 and December 31, 2023, respectively.

As of December 31, 2024, we have federal, state and foreign net operating loss carryforwards of approximately $155.6 million, $17.4 million, and $133.2 million respectively, which will begin expiring in 2025.

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Total cash and cash equivalents decreased $23.9 million from $47.5 million at December 31, 2023 to $23.6 million at December 31, 2024.

The net decrease was the result of $18.8 million used in operating activities, $4.0 million used for purchases of property and equipment and licensed technology and $1.4 million used for payments on other asset financings.

These decreases were partially offset by increases of $14.6 million received in net proceeds from our non-controlling interest and certain entities owned by employees and $0.3 million in proceeds from the issuances of common stock under our employee equity incentive plans.

The net decrease was primarily the result of $19.8 million used in operating activities, $3.8 million used for purchases of property and equipment and $1.3 million used for payments on other asset financings.

As of December 31, 2024, our cash and cash equivalents balance consisted of $18.4 million in cash and $0.2 million in cash equivalents held in U.S.

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Accounts receivable, net

Accounts receivable, net increased to $10.1 million at December 31, 2023 from $10.0 million at December 31, 2022.

Average number of days sales outstanding increased to 56 days at December 31, 2023 from 54 days at December 31, 2022.

Accounts receivable, net decreased to $5.8 million at December 31, 2024 from $10.1 million at December 31, 2023.

Average number of days sales outstanding decreased to 48 days at December 31, 2024 from 56 days at December 31, 2023.

The decrease in accounts receivable was primarily due to the decrease in revenue in 2024 compared to 2023.

Inventories increased to $4.2 million at December 31, 2024 from $4.0 million at December 31, 2023.

Inventory turnover decreased to 8.6 at December 31, 2023 from 16.6 at December 31, 2022 primarily due to higher average inventory balances in 2023 compared to 2022.

Inventory turnover decreased to 5.1 at December 31, 2024 from 8.6 at December 31, 2023 primarily due to lower cost of goods sold as a result of lower revenue in 2024 compared to 2023.

Inventory turnover is calculated based on annual operating results and average inventory balances during the year.

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At the Market Offering

On June 5, 2020, we entered into a sales agreement (the "Sales Agreement") with Cowen and Company, LLC ("Cowen"), pursuant to which we may issue and sell shares of the Company's common stock, par value $0.001 per share, having an aggregate offering price of up to $25.0 million, from time to time, through an "at the market" equity offering program under which Cowen will act as sales agent.

Under the Sales Agreement, Cowen may sell the shares by methods deemed to be an "at the market offering" as defined in Rule 415(a)(4) promulgated under the Securities Act of 1933, as amended, including sales made by means of ordinary brokers’ transactions on the Nasdaq Global Market or on any other existing trading market for the common stock or otherwise at market prices prevailing at the time of sale, in block transactions, or as otherwise directed by us.

We pay Cowen a commission equal to three percent (3.0%) of the gross sales proceeds of any common stock sold through Cowen under the Sales Agreement.

The Sales Agreement may be terminated by us upon prior notice to Cowen or by Cowen upon prior notice to us, or at any time under certain circumstances, including but not limited to the occurrence of a material adverse change in the Company.

On November 14, 2024, we entered into a sales agreement (the “Sales Agreement”) with Roth Capital Partners, LLC (“Roth”), pursuant to which we may issue and sell shares of the Company’s common stock, par value $0.001 per share, having an aggregate offering price of up to $10.0 million, from time to time, through an “at the market” equity offering program under which Roth will act as sales agent (the "2024 ATM Program").

Under the Sales Agreement, we will set the parameters for the sale of shares, including the number of shares to be issued, the time period during which sales are requested to be made, limitations on the number of shares that may be sold in any one trading day and any minimum price below which sales may not be made.

Subject to the terms and conditions of the Sales Agreement, Roth may sell the shares by methods deemed to be an “at the market offering” as defined in Rule 415(a)(4) promulgated under the Securities Act of 1933, as amended, including sales made through Nasdaq or on any other existing trading market for our common stock.

We pay Roth a commission equal to two and a half percent (2.5%) of the gross sales proceeds of any common stock sold through Roth under the Sales Agreement.

The Sales Agreement may be terminated by us upon prior notice to Roth or by Roth upon prior notice to us, or at any time under certain circumstances, including but not limited to the occurrence of a material adverse change in the Company.

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

There was no activity under this at the market offering during the years ended December 31, 2023 and December 31, 2022.

During the year ended December 31, 2024, we sold an aggregate of 358,272 shares of our common stock under the 2024 ATM Program, resulting in aggregate net proceeds to us of approximately $0.2 million.

Capital Increase Agreements

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As of December 31, 2024, our cash and cash equivalents balance of $23.6 million was highly liquid.

We currently anticipate that our existing working capital will be adequate to fund our operating, investing and financing needs for the twelve months following our 2023 fiscal year end and beyond.

We may pursue financing arrangements including the issuance of debt or equity securities or reduce expenditures, or both, to meet the Company’s 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 results of operations, financial position and cash flows.

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.

If our cash is insufficient to meet our needs, including in the longer term, we may seek to raise capital by pursuing financing arrangements, including the issuance of debt or equity securities, or reducing expenditures, or both, to meet our cash requirements.

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.

From time to time, we evaluate acquisitions of businesses, products or technologies that complement our business.

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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-K

Item 7. Management’s Discussion and Analysis