Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
Pixelworks, Inc. (the “Company” or “Pixelworks”) provides industry-leading content creation, video delivery and display processing solutions, and technology that enables highly authentic viewing experiences with superior visual quality across all screens, from cinema to smartphone and beyond. Pixelworks has been delivering image processing innovations to leading providers of consumer electronics, professional displays, and video streaming services for more than 20 years.
On January 6, 2026 (the “Closing Date”), the Company completed the previously announced sale (the “Sale”) of all of the shares of common stock of Pixelworks Semiconductor Technology (Shanghai) Co., Ltd. (“PWSH”) held by Pixelworks Semiconductor Technology Company, LLC, a wholly owned subsidiary of the Company (“Pixelworks LLC”), to Tiansui Xinyuan Technology (Shanghai) Co., Ltd. (the “Buyer”). The terms of the Sale were set forth in a Purchase Agreement dated as of October 15, 2025 (the “Purchase Agreement”), among the Company, PWSH, Pixelworks LLC, all other shareholders of PWSH except VeriSilicon Microelectronics (Shanghai) Co., Ltd. (each, a “Selling Shareholder"), and the Buyer. Each Selling Shareholder and VeriSilicon Microelectronics (Shanghai) Co., Ltd. (collectively, the “Minority Shareholders”) and Pixelworks LLC also entered into Support Agreements (the “Support Agreements”), and Pixelworks LLC, PWSH and each of the Minority Shareholders entered into a Termination and Release Agreement (the “Release Agreement”), in each case dated October 14, 2025. On the Closing Date: (i) Pixelworks LLC transferred to the Minority Shareholders shares of PWSH capital stock representing a total of approximately 29% of the total outstanding shares of PWSH capital stock; (ii) the Selling Shareholders sold and transferred all of their PWSH shares to the Buyer; (iii) Pixelworks LLC sold and transferred its remaining shares of PWSH capital stock, representing approximately 49% of the total outstanding shares of PWSH capital stock, to the Buyer; and (iv) the Buyer paid the Company approximately RMB 357 million, or approximately $51.0 million in U.S. dollars, net of transaction costs and withholding taxes paid in China. The remaining transaction expenses incurred by the Company in connection with the Sale, not including compensation that has been paid to the Company’s executive officers and other employees, totaled approximately $1.0 million in U.S. dollars. Additionally, approximately RMB 8.7 million, or approximately $1.2 million in U.S. dollars, is being held in an escrow account to be released upon the resolution of certain tax matters in China.
The foregoing references to certain provisions of the Purchase Agreement, the Support Agreements and the Release Agreement are not complete and are subject to and qualified in their entirety by reference to the Purchase Agreement filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on October 15, 2025 (the “October 15 8-K”), the Amendment Agreement filed as Exhibit 10.2 to the October 15 8-K, and the form of Support Agreement, together with the form of Termination and Release Agreement attached to the form of Support Agreement as Exhibit A, filed as Exhibit 10.3 to the October 15 8-K. The Company’s definitive proxy statement filed with the SEC on October 27, 2025, includes additional information under the heading “Principal Terms and Conditions of the Purchase Agreement”, which description is incorporated herein by reference.
As a result of the Sale, Pixelworks no longer operates a semiconductor business, which included the businesses that it previously described as “Mobile” (smartphone and tablet) and “Home & Enterprise” (projectors, personal video recorders, and over-the-air streaming devices). Following the Sale, the Company is focused on developing and licensing cinematic visualization solutions, including its flagship TrueCut Motion TM platform. For more information regarding the events leading up to the Sale, and about the Mobile and Home & Enterprise business, see Item 1 under the heading “Overview” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2024, filed with the SEC on March 13, 2025 (the “ 2024 10-K ”).
Pixelworks has one remaining subsidiary in China, Frame Shadow Technology (Shanghai) Co., Ltd. (formerly called Mucheng Huai Management Consulting (Shanghai) Co., Ltd), which is a research and development center for our TrueCut business. Our executive officers and all of our directors are located in the United States. Our auditor is Grant Thornton LLP, with headquarters in Chicago, Illinois.
Pixelworks was founded in 1997 and is incorporated under the laws of the state of Oregon.
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Reverse Stock Split
On June 6, 2025, the Company effected a one-for-twelve reverse stock split of the Company’s common stock (the "Reverse Stock Split"). As a result of the Reverse Stock Split, every twelve shares of the Company's Common Stock issued or outstanding were automatically reclassified into one new share of common stock. Proportionate adjustments were also made to the exercise prices and the number of shares underlying the Company’s outstanding equity awards, as applicable, as well as to the number of shares issuable under the Company’s equity incentive plans and certain existing agreements. The Reverse Stock Split did not decrease the number of authorized shares of common stock or otherwise affect the par value of the common stock. No fractional shares were issued in connection with the Reverse Stock Split. Shareholders who would have otherwise been entitled to receive fractional shares were entitled to have their fractional shares rounded up to the next whole number share quantity. All shares of the Company’s common stock, per-share data and related information included in the accompanying consolidated financial statements have been retroactively adjusted as though the Reverse Stock Split had been effected prior to all periods presented.
Results of Operations
For the year ended December 31, 2025 compared with year ended December 31, 2024. Except as noted otherwise, all results exclude discontinued operations.
Revenue, net
Net revenue was as follows (in thousands):
Year ended December 31, 2025 v. 2024
2025 2024 $ change % change
Revenue, net $ 693 $ 690 $ 3 — %
Revenue of $0.7 million recorded in 2025 was consistent with revenue of $0.7 million recorded in 2024. The majority of revenue in 2024 and 2025 related to the category of services.
Cost of revenue and gross profit
Cost of revenue and gross profit were as follows (in thousands):
Year ended December 31,
2025 % of
revenue 2024 % of
revenue
Total cost of revenue $ 104 15.0 % $ 129 18.7 %
Gross profit $ 589 85.0 % $ 561 81.3 %
Cost of revenue of $0.1 million and gross profit of $0.6 million recorded in 2025 was consistent with cost of revenue of $0.1 million and gross profit of $0.6 million recorded in 2024.
Research and development
Research and development expense includes compensation and related costs for personnel, development-related expenses including fees for outside services, depreciation and amortization, expensed equipment, facilities and information technology expense allocations and travel and related expenses.
Research and development expense was as follows (in thousands):
Year ended December 31, 2025 v. 2024
2025 2024 $ change % change
Research and development $ 3,695 $ 4,437 $ (742) (17) %
Research and development expense decreased $0.7 million, or 17%, from 2024 to 2025 due to the following factors:
• Stock based compensation expense decreased $0.2 million primarily due to the change in our stock price.
• A $0.5 million overall decrease across multiple expense categories, as we continued to implement cost control measures.
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Selling, general and administrative
Selling, general and administrative expense includes compensation and related costs for personnel, allocations for facilities and information technology expenses, travel, outside services and other general expenses incurred in our sales, marketing, management, legal and other professional and administrative support functions.
Selling, general and administrative expense was as follows (in thousands):
Year ended December 31, 2025 v. 2024
2025 2024 $ change % change
Selling, general and administrative $ 8,450 $ 8,914 $ (464) (5) %
Selling, general and administrative expense decreased $0.5 million, or 5%, from 2024 to 2025 due to an overall decrease across multiple expense categories, as we continue to implement cost control measures.
Restructurings
In May 2025, we executed a restructuring plan to make the operation of the Company more efficient (the "May 2025 Plan"). The May 2025 Plan included an approximately 4% reduction in workforce, primarily in the area of research and development.
In February 2025, we executed a restructuring plan to make the operation of the Company more efficient (the "February 2025 Plan"). The February 2025 Plan included an approximately 6% reduction in workforce, primarily in the areas of operations, research and development, and marketing.
In June 2024, we executed a restructuring plan to make the operation of the Company more efficient (the "2024 Plan"). The 2024 Plan included an approximately 16% reduction in workforce, primarily in the areas of operations, research and development, sales, marketing and administration.
Restructuring expense included in our consolidated statements of operations related to continuing operations was as follows (dollars in thousands):
Year ended December 31,
2025 2024
Employee severance and benefits
$ — $ 174
Total restructuring expense
$ — $ 174
Included in operating expenses
$ — $ 174
Restructuring expense included in our consolidated statements of operations related to discontinued operations was as follows (dollars in thousands):
Year ended December 31,
2025 2024
Employee severance and benefits
$ 1,109 $ 1,451
Lease termination costs
153 —
Total restructuring expense
$ 1,262 $ 1,451
Included in cost of revenue
$ 78 $ 16
Included in operating expenses
1,184 1,435
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Other income, net
Other income, net, consisted of the following (in thousands):
Year ended December 31,
2025 2024
Interest income $ 123 $ 354
Gain on sale of patents 3,000 —
Total other income, net $ 3,123 $ 354
On October 22, 2025, the Company and an unrelated third party (the “Purchaser”) entered into an agreement under which the Company sold 37 patents and related rights and materials (the “Patents”) to the Purchaser for $3.0 million. The Company became the indirect owner of the Patents when it acquired ViXS Systems, Inc. in 2017, and became the sole owner of the Patents in 2021. The technologies underlying the Patents pertain to markets that the Company no longer pursues.
Provision (benefit) for income taxes
As discussed in Item 8, "Note 1: Basis of Presentation", as of December 31, 2025, the operations of PWSH and subsidiaries in Japan, Hong Kong, and Canada were classified as held-for-sale and the results reported within discontinued operations.
The expense (benefit) for income taxes related to continuing operations was as follows (in thousands):
Year ended December 31,
2025 2024
Provision (benefit) for income taxes $ (184) $ 44
The income tax benefit of $0.2 million recorded for the year ended December 31, 2025 primarily relates to the reversal of unrecognized tax benefits due to the lapse of the statute of limitations. Also included is the tax expense related to our profitable cost-plus operations in China and Taiwan.
The income tax expense of $0.01 million recorded for the year ended December 31, 2024 is primarily composed of current and deferred tax expense related to our profitable cost-plus operations in China and Taiwan.
We continue to record a full valuation allowance against our U.S. federal and state net deferred tax assets at December 31, 2025 and 2024, as it is not more likely than not that we will realize a benefit from these assets in a future period. The net valuation allowance decreased by $1.2 million for the year ended December 31, 2025 and decreased by $0.6 for the year ended December 31, 2024.
As of December 31, 2025, we have federal and state net operating loss carryforwards of approximately $157.9 million, and $18.3 million, respectively, which will begin expiring in 2026. Approximately $44.6 million of our federal net operating losses carry forward indefinitely. As of December 31, 2025, we have available federal and state research and experimentation tax credit carryforwards of approximately $3.5 million, $5.4 million, respectively. The federal credits will begin expiring in 2026 while the state credits have an indefinite life. Our ability to utilize our federal net operating losses may be limited by Section 382 of the Internal Revenue Code of 1986, as amended, which imposes an annual limit on the ability of a corporation that undergoes an 'ownership change' to use its net operating loss carryforwards to reduce its tax liability. An ownership change is generally defined as a greater than 50% point increase in equity ownership by 5% shareholders in any three-year period.
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which focuses on the rate reconciliation and income taxes paid. ASU No. 2023-09 requires public business entities to disclose, on an annual basis, specific categories in the effective tax rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold. In addition, ASU No. 2023-09 requires companies to disclose further information about income taxes paid. The standard is effective for annual periods beginning after December 15, 2024, and may be applied prospectively or retrospectively. We adopted the ASU prospectively for the period ending December 31, 2025, and it affects only our disclosures and does not impact our results of operations or financial condition.
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Net loss from discontinued operations
Year ended December 31, 2025 v. 2024
2025 2024 $ change % change
Net loss from discontinued operations, net of income taxes $ (15,009) $ (16,883) $ 1,874 (11) %
Net loss from discontinued operations decreased $1.8 million from 2024 to 2025. The decrease was primarily driven by a $8.6 million reduction in operating expenses, partially offset by a $6.5 million decrease in gross profit.
The decrease in operating expenses was primarily attributable to lower compensation expense, reflecting actions taken under our 2024 and 2025 restructuring plans, as well general decreases across multiple expense categories as we continued to implement cost control measures. These reductions reflect management’s efforts to streamline operations and reduce the cost structure of the discontinued business.
The decrease in gross profit was primarily driven by a $10.9 million decline in revenue from the sale of integrated circuits ("IC") products. The decrease in IC revenue from 2024 to 2025 was attributable to the following factors:
• Mobile market revenue decreased by $9.5 million, or 69%, primarily due to lower unit sales resulting from a delayed transition to the Company’s latest generation mobile products.
• Home & Enterprise market revenue decreased by $1.4 million, or 5%, reflecting lower demand in those end markets.
Liquidity and Capital Resources
Cash and cash equivalents
Total cash and cash equivalents increased $5.7 million from $5.5 million at December 31, 2024 to $11.2 million at December 31, 2025. The net increase was primarily the result of $7.9 million in net proceeds from our registered direct offerings, $3.0 million in net proceeds from the sale of patents and $3.0 million in net proceeds from our at the market equity offering, partially offset by $8.0 million used in operating activities, and $0.2 million used for purchases of property and equipment.
As of December 31, 2025, our cash and cash equivalents balance consisted of $1.9 million in cash and $9.3 million in cash equivalents held in U.S. dollar denominated money market funds. Our investment policy requires that our portfolio maintains a weighted average maturity of less than 12 months. Additionally, no maturities can extend beyond 24 months and concentrations with individual securities are limited. At the time of purchase, short-term credit rating must be rated at least A-2 / P-2 / F-2 by at least two Nationally Recognized Statistical Rating Organizations ("NRSRO") and securities of issuers with a long-term credit rating must be rated at least A or A3 by at least two NRSROs. Our investment policy is reviewed at least annually by our Audit Committee.
Capital resources
At the Market Offering
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 "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.
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During the year ended December 31, 2025, we sold an aggregate of 347,559 shares of our common stock under the ATM Program, resulting in aggregate net proceeds to us of approximately $3.0 million, and gross proceeds of approximately $3.1 million, and paid Roth commissions and fees and other expenses of approximately $0.1 million.
Effective March 11, 2026, the Company exercised its right to terminate the Sales Agreement and thus it is no longer in force.
Capital Increase Agreements
We entered into a Capital Increase Agreement pursuant to which PWSH, one of our Chinese subsidiaries, received net proceeds from the sale of its securities pursuant thereto in an amount of RMB 279.7 million ($42.3 million USD). Additional information is provided in "Note 15: Redeemable Non-Controlling Interest and Equity Interest of PWSH Sold to Employees", which is incorporated by reference into this section.
We entered into a Capital Increase Agreement pursuant to which PWSH, one of our Chinese subsidiaries, 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 16: Non-Controlling Interest", which is incorporated by reference into this section.
Pursuant to the Sale, following the closing on January 6, 2026, these Capital Increase Agreements have been terminated and the Company has no further obligations under their terms and conditions.
Equity Transfer Agreement
We 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 16: Non-Controlling Interest", which is incorporated by reference into this section.
Pursuant to the Sale, following the closing on January 6, 2026, this Equity Transfer Agreement has been terminated and the Company has no further obligations under its terms and conditions.
Liquidity
As of December 31, 2025, our cash and cash equivalents balance of $11.2 million was highly liquid. Following the Sale, at the beginning of January 2026, before payment of certain transaction expenses and severances, our cash and cash equivalents balance was approximately $62 million. 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. Any transactions, if consummated, may consume a material portion of our working capital or require the issuance of equity securities that may result in dilution to existing shareholders. Our ability to generate cash from operations is also subject to substantial risks described in Part I, “Item 1A, Risk Factors.” If any of these risks occur, we may be unable to generate or sustain positive cash flow from operating activities. We would then be required to use existing cash and cash equivalents to support our working capital and other cash requirements. If additional funds are required to support our working capital requirements, acquisitions or other purposes, we may seek to raise funds through debt financing, equity financing or from other sources. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our shareholders could be significantly diluted, and these newly issued securities may have rights, preferences or privileges senior to those of existing shareholders. If we raise additional funds by obtaining loans from third parties, the terms of those financing arrangements may include negative covenants or other restrictions on our business that could impair our operating flexibility, and would also require us to incur interest expense. 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.
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Critical Accounting Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and judgments that affect the amounts reported. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, inventories, property and equipment, impairment of long-lived assets, valuation of goodwill, valuation of share-based payments, income taxes, litigation and other contingencies. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements for the years ended December 31, 2024 and 2025, however as of December 31, 2025, both inventory and goodwill have been classified as held-for-sale assets:
Discontinued Operations. We evaluate whether a disposal group qualifies as a discontinued operation under ASC 205-20 based on management’s planned exit strategy, whether the disposal represents a strategic shift with a major effect on the Company’s operations and financial results, and whether the disposal is probable and expected to occur within the required timeframe. For qualifying disposals, we measure assets held for sale at the lower of carrying amount and fair value less costs to sell.
Inventory Valuation. We value inventory at the lower of cost or net realizable value. In addition, we write down any obsolete, unmarketable or otherwise impaired inventory to net realizable value. The determination of obsolete or excess inventory requires us to estimate the future demand for our products. The estimate of future demand is compared to inventory levels to determine the amount, if any, of obsolete or excess inventory. If actual market conditions are less favorable than those we projected at the time the inventory was written down, additional inventory write-downs may be required. Inventory valuation is re-evaluated on a quarterly basis.
Goodwill. Goodwill is not amortized, rather tested, at least annually, for impairment at a reporting unit level. Impairment of goodwill is the condition that exists when the carrying amount of a reporting unit that includes goodwill exceeds its fair value. A goodwill impairment loss is recognized for the amount that the carrying amount of the reporting unit, including goodwill, exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit. If the fair value of a reporting unit exceeds the carrying amount, goodwill of the reporting unit is not considered impaired.
We evaluate impairment using the guidance set forth in FASB Accounting Standards Update ("ASU") No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-04") which states that an entity may first assess qualitative factors to determine whether it is necessary to perform the quantitative goodwill impairment test. If determined to be necessary, the quantitative impairment test shall be used to identify goodwill impairment and measure the amount of goodwill impairment loss to be recognized. An entity has an unconditional option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to the quantitative goodwill impairment test. We performed a qualitative assessment during the fourth quarter of 2025 and concluded that it was not more likely than not that the fair value of the reporting unit was less than its carrying amount. As a result, we concluded that a quantitative impairment test was not required and that goodwill was not impaired.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Not applicable.