PIXELWORKS, INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. (In thousands, except per share data) The following discussion and analysis of our financial condition and results of operations (“MD&A”) should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this document. In addition to historical information, the MD&A contains forward-looking statements that reflect our plans, estimates, and beliefs that involve significant risks and uncertainties. Our actual results could differ materially from those discussed in the forward-looking statements. 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.” 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 357,000, or approximately $51,000 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 $1,000 in U.S. dollars. Additionally, approximately RMB 8,700, or approximately $1,200 in U.S. dollars, which was being held in an escrow account was released to the Company on March 31, 2026 due to the resolution of a tax matter 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. 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. 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. 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 21 Table of Contents 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 Except as noted otherwise, all results exclude discontinued operations. Revenue, net Net revenue for the three and six months ended June 30, 2026 and 2025, was as follows (dollars in thousands): Three Months Ended June 30, Six Months Ended June 30, 2026 2025 % Change 2026 2025 % Change Revenue, net $ 64 $ 159 (60) % $ 510 $ 159 221 % Revenue recorded in the three and six months ended June 30, 2026 and 2025 was related to the category of services. Cost of revenue and gross profit Cost of revenue and gross profit for the three and six months ended June 30, 2026 and 2025, were as follows (dollars in thousands): Three Months Ended June 30, Six Months Ended June 30, 2026 % of revenue 2025 % of revenue 2026 % of revenue 2025 % of revenue Total cost of revenue $ 25 39 % $ 46 29 % $ 218 43 % $ 53 33 % Gross profit $ 39 61 % $ 113 71 % $ 292 57 % $ 106 67 % Cost of revenue recorded in the three and six months ended June 30, 2026 and 2025 was primarily related to remastering services performed in connection with the associated service revenue 22 Table of Contents 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 for the three and six months ended June 30, 2026 and 2025, was as follows (dollars in thousands): Three Months Ended Six Months Ended June 30, June 30, 2026 2025 % Change 2026 2025 % Change Research and development $ 1,195 $ 896 33 % $ 2,160 $ 1,866 16 % Research and development expense increased $299, or 33%, in the second quarter of 2026 compared to the second quarter of 2025 and increased $294, or 16%, in the first half of 2026 compared to the first half of 2025. The increases in the 2026 periods compared to the 2025 periods were primarily due to an increase in stock based compensation expense due to the timing of awards granted, an increase in compensation expense due to annual merit-based salary increases occurring in the first quarter of 2026 and a general increase in outside services expense. 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 for the three and six months ended June 30, 2026 and 2025, was as follows (dollars in thousands): Three Months Ended Six Months Ended June 30, June 30, 2026 2025 % Change 2026 2025 % Change Selling, general and administrative $ 2,114 $ 1,728 22 % $ 4,317 $ 3,842 12 % Selling, general and administrative expense increased $386, or 22%, in the second quarter of 2026 compared to the second quarter of 2025 and increased $475, or 12%, in the first half of 2026 compared to the first half of 2025. The increases in the 2026 periods compared to the 2025 periods were primarily due to an increase in stock based compensation expense due to the timing of awards granted, an increase in compensation expense due to annual merit-based salary increases occurring in the first quarter of 2026, an increase in professional services primarily associated with the sale of PWSH and a general increase in outside services expense. Restructurings In the first quarter of 2026, we executed a restructuring plan to eliminate several positions that would no longer be necessary after the Sale (the "2026 Plan"). The 2026 Plan included an approximately 43% reduction in workforce associated with our continuing operations, in the areas of operations, research and development, sales, marketing and administration. Restructuring expense for the three and six month periods ended June 30, 2026 and 2025, was as follows (dollars in thousands): Three Months Ended Six Months Ended June 30, June 30, 2026 2025 2026 2025 Employee severance and benefits $ 37 $ — $ 1,967 $ — Entity dissolution costs 57 — 122 — Total restructuring expense $ 94 $ — $ 2,089 $ — Included in operating expenses $ 94 — 2,089 — 23 Table of Contents During the three months ended June 30, 2026, we recorded $94 in restructuring expense related to the 2026 Plan, which primarily consisted of costs associated with dissolving an entity that was no longer necessary after the Sale. During the three months ended June 30, 2025, we did not record any restructuring expense. During the six months ended June 30, 2026, we recorded $2,089 in restructuring expense related to the 2026 Plan, which primarily consisted of costs associated with employee severance and benefits. During the six months ended June 30, 2025, we did not record any restructuring expense. We do not expect to incur any additional restructuring charges related to the 2026 Plan. Provision for income taxes The provision for income taxes during the three and six month periods ended June 30, 2026 and 2025 is primarily composed 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 for the reversal of previously recorded foreign tax contingencies of $87 and $261 during the first six months of 2026 and 2025, respectively. Net income (loss) from discontinued operations (dollars in thousands): Three Months Ended Six Months Ended June 30, June 30, 2026 2025 % Change 2026 2025 % Change Net income (loss) from discontinued operations, net of income taxes $ — $ (4,345) (100) % $ 85,153 $ (9,550) (992) % Net income (loss) from discontinued operations increased $4,345 in the second quarter of 2026 compared to the second quarter of 2025. The change was primarily driven by an $8,456 reduction in operating expenses, partially offset by a $3,666 decrease in gross profit. Net income (loss) from discontinued operations increased $94,703 in the first half of 2026 compared to the first half of 2025. The increase was primarily driven by the $85,153 gain on the Sale compared to a loss of $9,550 in the 2025 period. The 2025 loss was largely due to $16,920 in operating expenses, partially offset by $7,125 in gross profit. Liquidity and Capital Resources Cash and cash equivalents Total cash and cash equivalents increased approximately $41,645 to $52,888 at June 30, 2026 from $11,243 at December 31, 2025. The net increase during the first six months of 2026 was primarily the result of $51,261 in proceeds from the Sale, net of transaction costs, partially offset by $6,295 used in operating activities and $3,192 used to repurchase the Company's common stock. As of June 30, 2026, our cash and cash equivalents balance consisted of $1,387 in cash and $51,501 in cash equivalents held in U.S. dollar denominated money market funds. Although we did not hold short- or long-term investments as of June 30, 2026, our investment policy as updated effective August 7, 2026, 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. At the time of purchase, each investment must have a short-term credit rating under at least one of the Nationally Recognized Statistical Rating Organizations (“NRSROs”) at or above a minimum threshold set forth in the investment policy. Our investment policy is reviewed at least annually by our Audit Committee. Liquidity and capital resources As of June 30, 2026, our cash and cash equivalents balance of $52,888 was highly liquid. 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 shareholde rs. Our ability to generate cash from operations is also subject to substantial risks described in our Annual Report on Form 10-K for the year ended December 31, 2025, which was filed with the SEC on March 12, 2026. 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 24 Table of Contents 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. Repurchase of common stock Our board of directors approved a share repurchase program on March 30, 2026, under which our Chief Executive Officer and Chief Financial Officer, or either of them, are authorized to direct the purchase of up to $5,000 of our common stock over a two-year period beginning May 15, 2026. The repurchased shares are recorded as part of treasury stock and are accounted for under the cost method. We repurchased 464 shares for $3,192 in the second quarter of 2026. 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 , 2026 from those set forth in our Annual Report on Form 10-K for the year ended December 31, 2025. 25 Table of Contents 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. As of June 30 , 2026, our significant estimates and judgments include those related to revenue recognition, useful lives and recoverability of equipment and other long-lived assets, valuation of share-based payments, income taxes, litigation and other contingencies. As of June 30 , 2025, we also considered valuation of excess and obsolete inventory and valuation of goodwill to require significant estimates and judgments. The actual results experienced could differ materially from our estimates. There have been no material changes to these estimates, or the policies related to them during the six months ended June 30, 2026. For a full discussion of these estimates and policies, see “Critical Accounting Estimates” in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2025. Item 3. Quantitative and Qualitative Disclosures About Market Risk. Not applicable.