PIXELWORKS INC

Previous wording

As of March 31, 2024, we had an intellectual property portfolio of 278 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.

Current wording

As of June 30, 2024, we had an intellectual property portfolio of 265 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.

Previous wording

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. One of our Chinese subsidiaries, 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". PWSH has a branch office located in Shenzhen, China (Pixelworks Semiconductor Technology (Shanghai) Co. Ltd. Shenzhen Branch Office No. 1), which is primarily for sales and customer support for PWSH, and a subsidiary located in Hong Kong (Pixelworks Hong Kong Limited), which has no employees and is used for distribution of PWSH products. Pixelworks has an additional 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. This subsidiary does not operate under PWSH, but rather is owned by Pixelworks through our Oregon limited liability company, Pixelworks Semiconductor Technology Company, LLC.

Current wording

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. (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 14: Redeemable Non-Controlling Interest and Equity Interest of PWSH Sold to Employees" and "Note 15: Non-Controlling Interest". PWSH has a branch office located in Shenzhen, China (Pixelworks Semiconductor Technology (Shanghai) Co. Ltd. Shenzhen Branch Office No. 1), which is primarily for sales and customer support for PWSH, and a subsidiary located in Hong Kong (Pixelworks Hong Kong Limited), which has no employees and is used for distribution of PWSH products. Pixelworks has an additional 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. This subsidiary does not operate under PWSH, but rather is owned by Pixelworks through our Oregon limited liability company, Pixelworks Semiconductor Technology Company, LLC.

Previous wording

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. 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. 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. 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). We are neither a PRC operating company nor do we conduct our operations in China through the use of variable interest entities. Our auditor is Grant Thornton LLP, with headquarters in Chicago, Illinois. The Holding Foreign Companies Accountable Act, as amended by the Consolidated Appropriations Act 2023, and related regulations, therefore do not apply to our Company.

Current wording

As part of the Strategic Plan we have intended to qualify PWSH for an initial public offering on the Shanghai Stock Exchange’s Science Technology Innovation Board, known as the STAR Market (the “Listing”), a lengthy process that involves several reviews by various government agencies of China, such as the Shanghai Stock Exchange (“SSE”) and the China Securities Regulatory Commission (“CSRC”). The market conditions and regulatory requirements continue to not be conducive to a successful listing by PWSH. We continue to believe that the Listing could have many benefits, including improved access to new capital markets and the funding of PWSH’s growth worldwide, and thus remain prepared to re-engage with the various government agencies of China and our advisors involved in a Listing once those conditions and requirements improve. There is no guarantee that PWSH will be approved for a Listing at any point in the future. The Listing would not change the status of PXLW as a U.S. public company. Additionally, if we do not proceed with the Listing and are unable to negotiate for an extension or cancellation, we may be required to repurchase the shares of PWSH held by those investors who elect for repurchase under the provisions of the August 2021 Capital Increase Agreement or the agreements governing the employee-owned entities known as “ESOPs,” which would materially and adversely impact our cash position. Additional information on these rights can be found in "Note 14: Redeemable Non-Controlling Interest and Equity Interest of PWSH Sold to Employees", which is incorporated by reference into this section. 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). We are neither a PRC operating company nor do we conduct our operations in China through the use of variable interest entities. Our auditor is Grant Thornton LLP, with headquarters in Chicago, Illinois. The Holding Foreign Companies Accountable Act, as amended by the Consolidated Appropriations Act 2023, and related regulations, therefore do not apply to our Company.

Previous wording

Net revenue for the three months ended March 31, 2024 and 2023, was as follows (dollars in thousands):

Current wording

Net revenue for the three and six months ended June 30, 2024 and 2023, was as follows (dollars in thousands):

Previous wording

Revenue recorded in the first three months of 2024 consisted of $15.4 million in revenue from the sale of integrated circuit ("IC") products and $0.7 million in revenue related to engineering services, license revenue and other.

Current wording

Revenue recorded in the second quarter of 2024 consisted of $8.4 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 2023 consisted of $13.5 million in revenue from the sale of IC products and $0.1 million in revenue related to engineering services, license revenue and other.

Previous wording

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

Current wording

Revenue recorded in the first half of 2024 consisted of $23.8 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 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.

Previous wording

The increase in IC revenue in the first quarter of 2024 compared to the first quarter of 2023 is due to the following partially offsetting factors:

Current wording

The increase in IC revenue in the first half of 2024 compared to the first half of 2023 is due to the following partially offsetting factors:

Previous wording

•Sales into the Mobile market increased approximately $6.1 million or 200% due primarily to increased units sold.

Current wording

•Sales into the Mobile market increased $1.3 million or 13%, primarily due to increased units sold in the first quarter of 2024.

Previous wording

Cost of revenue and gross profit for the three months ended March 31, 2024 and 2023, were as follows (dollars in thousands):

Current wording

Cost of revenue and gross profit for the three and six months ended June 30, 2024 and 2023, were as follows (dollars in thousands):

Previous wording

Gross profit margin increased to 51% in the first quarter of 2024 compared to 44% in the first quarter of 2023, primarily due to increased ASPs on IC products sold into the Home & Enterprise market as well as decreased costs on Mobile products.

Current wording

The increase in gross profit margin in the first half of 2024 compared to the first half of 2023 is primarily due to increased ASPs on IC products sold into the Home & Enterprise market as well as decreased costs on Mobile products. These factors which positively impacted margin were partially offset by inventory charges recorded in the second quarter of 2024.

Previous wording

During the third quarter of 2021, we entered into a best efforts co-development agreement with a customer to defray a portion of the research and development expenses we expect to incur in connection with our development of an integrated circuit product. We expect our development costs to exceed the amounts received from the customer, and although we expect to sell units of the product to the customer, there is no commitment or agreement from the customer for such sales at this time. Additionally, we retain ownership of any modifications or improvements to our pre-existing intellectual property and may use such improvements in products sold to other customers.

Current wording

During the third quarter of 2021, we entered into a best-efforts co-development agreement with a customer to defray a portion of the research and development expenses we expected to incur in connection with our development of an integrated circuit product. Our development costs exceeded the amounts received from the customer, and although we expect to sell units of the product to the customer, there is no commitment or agreement from the customer for such sales at this time. Additionally, we retain ownership of any modifications or improvements to our pre-existing intellectual property and may use such improvements in products sold to other customers.

Previous wording

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 were each payable upon completion of certain development milestones. 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 three months ended March 31, 2024 and 2023. All milestones under the co-development agreement were completed as of December 31, 2023.

Current wording

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 were each payable upon completion of certain development milestones. 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 three months ended June 30, 2024 and 2023 or during the six months ended June 30, 2024. We recognized an offset to research and development expense of $1.9 million during the six months ended June 30, 2023. All milestones under the co-development agreement were completed as of December 31, 2023.

Previous wording

Research and development expense for the three months ended March 31, 2024 and 2023, was as follows (dollars in thousands):

Current wording

Research and development expense for the three and six months ended June 30, 2024 and 2023, was as follows (dollars in thousands):

Previous wording

•Non-recurring engineering expense decreased $0.8 million due to the timing of development activities.

Current wording

•Non-recurring engineering expense decreased $0.3 million primarily due to the timing of development activities.

Previous wording

Selling, general and administrative expense for the three months ended March 31, 2024 and 2023, was as follows (dollars in thousands):

Current wording

Selling, general and administrative expense for the three and six months ended June 30, 2024 and 2023, was as follows (dollars in thousands):

Previous wording

•Foreign currency loss of $0.2 million in the first quarter of 2023 compared to a foreign currency gain of $0.2 million in the first quarter of 2024, for an overall decrease in foreign currency gains and losses of $0.4 million primarily due to weakening in the CNY compared to USD.

Current wording

•Foreign currency gain of $0.1 million in the second quarter of 2023 compared to a foreign currency loss of $0.3 million in the second quarter of 2024, for an overall increase in foreign currency gains and losses of $0.4 million primarily due to strengthening in the CNY compared to USD.

Previous wording

•Professional fees decreased $0.3 million primarily due to a decrease in fees incurred related to our strategic plan with our subsidiary, PWSH.

Current wording

Selling, general and administrative expense decreased $0.3 million, or 2% in the first half of 2024 compared to the first half of 2023 primarily due to a decrease in professional fees incurred related to our strategic plan with our subsidiary, PWSH.

Previous wording

The provision for income taxes during the 2024 and 2023 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 2024 and 2023.

Current wording

The provision for income taxes during the 2024 and 2023 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 six months of 2024 and 2023.

Previous wording

Total cash and cash equivalents decreased $1.3 million to $46.2 million at March 31, 2024 from $47.5 million at December 31, 2023. The net decrease during the first three months of 2024 was the result of $0.8 million used in operating activities, $0.4 million used for purchases of property and equipment and $0.2 million used for payments on other asset financings. These decreases were partially offset by $0.1 million in proceeds from the issuances of common stock under our employee equity incentive plans.

Current wording

Total cash and cash equivalents decreased $9.7 million to $37.8 million at June 30, 2024 from $47.5 million at December 31, 2023. The net decrease during the first six months of 2024 was the result of $6.4 million used in operating activities, $2.9 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 $0.1 million in proceeds from the issuances of common stock under our employee equity incentive plans.

Previous wording

As of March 31, 2024, our cash and cash equivalents balance consisted of $32.0 million in cash, $13.0 million held in U.S. dollar denominated certificates of deposit and $1.2 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, 2024, 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. At the time of purchase, the 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 NRSRO. Our investment policy is reviewed at least annually by our Audit Committee.

Current wording

As of June 30, 2024, our cash and cash equivalents balance consisted of $24.3 million in cash, $13.0 million held in U.S. dollar denominated certificates of deposit and $0.5 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 June 30, 2024, 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. At the time of purchase, the 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 NRSRO. Our investment policy is reviewed at least annually by our Audit Committee.

Previous wording

Accounts receivable, net decreased to $7.4 million as of March 31, 2024 from $10.1 million as of December 31, 2023. The average number of days sales outstanding decreased to 41 days as of March 31, 2024 from 56 days as of December 31, 2023. The decrease in accounts receivable and days sales outstanding was due to normal fluctuations in the timing of sales and customer receipts within the first quarter of 2024, and the fourth quarter of 2023 as well as a decrease in revenue in the first quarter of 2024 compared to the fourth quarter of 2023.

Current wording

Accounts receivable, net decreased to $4.9 million as of June 30, 2024 from $10.1 million as of December 31, 2023. The average number of days sales outstanding decreased to 52 days as of June 30, 2024 from 56 days as of December 31, 2023. The decrease in accounts receivable and days sales outstanding was due to normal fluctuations in the timing of sales and customer receipts within the second quarter of 2024, and the fourth quarter of 2023 as well as a decrease in revenue in the second quarter of 2024 compared to the fourth quarter of 2023.

Previous wording

Inventories were $3.4 million as of March 31, 2024 compared to $4.0 million at December 31, 2023. Inventory turnover was 8.5 as of March 31, 2024 and 8.6 as of December 31, 2023. Inventory turnover is calculated based on annualized quarterly operating results and average inventory balances during the quarter.

Current wording

Inventories were $5.0 million as of June 30, 2024 compared to $4.0 million at December 31, 2023. Inventory turnover decreased to 4.0 as of June 30, 2024 from 8.6 as of December 31, 2023 primarily due to lower cost of goods sold as a result of lower revenue during the second quarter of 2024 compared to the fourth quarter of 2023. Inventory turnover is calculated based on annualized quarterly operating results and average inventory balances during the quarter.

Previous wording

There was no activity under this at the market offering during the three months ended March 31, 2024 or March 31, 2023.

Current wording

There was no activity under this at the market offering during the six months ended June 30, 2024 or June 30, 2023.

Previous wording

As of March 31, 2024, our cash and cash equivalents balance of $46.2 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. We may pursue financing arrangements including the issuance of debt or equity securities or reduce expenditures, or both, to meet our 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 financial position, results of operations and cash flows.

Current wording

As of June 30, 2024, our cash and cash equivalents balance of $37.8 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. We may pursue financing arrangements including the issuance of debt or equity securities or reduce expenditures, or both, to meet our 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 financial position, results of operations and cash flows.

Previous wording

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, 2024 from those set forth in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the Securities and Exchange Commission on March 13, 2024.

Current wording

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, 2024 from those set forth in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the Securities and Exchange Commission on March 13, 2024.