PIXELWORKS INC

Previous wording

Pixelworks has been a pioneer in visual processing technology for over 20 years. We were one of the first companies to commercially launch a video System on Chip ("SoC") capable of deinterlacing 1080i HDTV signals and one of the first companies with a commercial dual-channel 1080i deinterlacer integrated circuit. We launched one of the industry’s first single-chip SoCs for digital projection. 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.

Current wording

Pixelworks has been a pioneer in visual processing technology for over 20 years. We were one of the first companies to commercially launch a video System on Chip ("SoC") capable of deinterlacing 1080i HDTV signals and one of the first companies with a commercial dual-channel 1080i deinterlacer integrated circuit. We launched one of the industry’s first single-chip SoCs for digital projection. 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 Motion TM video platform, the industry’s first motion grading technology that allows fine tuning of motion appearance in cinematic content.

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 14: Redeemable Non-Controlling Interest and Equity Interest of PWSH Sold to Employees" and "Note 15: Non-Controlling Interest", which are incorporated by reference into this section. 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 15: Redeemable Non-Controlling Interest and Equity Interest of PWSH Sold to Employees" and "Note 16: 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.

Current wording

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 initial public offering. 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 (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.

Previous wording

As of December 31, 2023, we had an intellectual property portfolio of 280 patents related to the visual display of digital image data. We focus our research and development efforts on developing video algorithms that improve quality and architectures that reduce system power, cost, bandwidth and increase overall system performance and device functionality. 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 December 31, 2024, we had an intellectual property portfolio of 261 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

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").

Current wording

Pixelworks was founded in 1997 and is incorporated under the laws of the state of Oregon.

Previous wording

Significant portions of our products are sold overseas. Sales outside the U.S. accounted for approximately 99.7% and 95.1% of revenue in 2023 and 2022, respectively. Our integrators, branded manufacturers and branded suppliers incorporate our products into systems that are sold worldwide. The majority of our revenue to date has been denominated in U.S. dollars.

Current wording

Significant portions of our products are sold overseas. Sales outside the U.S. accounted for approximately 98.3% and 99.7% of revenue in 2024 and 2023, respectively. Our integrators, branded manufacturers and branded suppliers incorporate our products into systems that are sold worldwide. The majority of our revenue to date has been denominated in U.S. dollars.

Previous wording

Revenue recorded in 2023 consisted of $58.6 million in revenue from the sale of integrated circuits ("IC") products and $1.1 million in revenue related to engineering services, license revenue and other. Revenue recorded in 2022 consisted of $68.2 million in revenue from the sale of IC products and $1.9 million in revenue related to engineering services, license revenue and other.

Current wording

Revenue recorded in 2024 consisted of $42.3 million in revenue from the sale of integrated circuits ("IC") products and $0.9 million in revenue related to engineering services, license revenue and other. Revenue recorded in 2023 consisted of $58.6 million in revenue from the sale of IC products and $1.1 million in revenue related to engineering services, license revenue and other.

Previous wording

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. Revenue related to the Cinema market was not material in 2023 or 2022 and was therefore included in the engineering services, license revenue and other category within the Mobile market.

Current wording

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.

Previous wording

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.

Current wording

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.

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 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.

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 are 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 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.

Previous wording

Research and development expense increased $0.4 million, or 1%, from 2022 to 2023 due to the following factors:

Current wording

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

Previous wording

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

Current wording

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

Previous wording

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

Current wording

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

Previous wording

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

Current wording

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

Previous wording

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

Current wording

•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.

Previous wording

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.

Current wording

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.

Previous wording

We continue to record a full valuation allowance against our U.S., Canada and China net deferred tax assets as of December 31, 2023 and 2022, 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. 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.

Current wording

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

Previous wording

As of December 31, 2023, we have federal, state and foreign net operating loss carryforwards of approximately $154.5 million, $16.3 million, and $89.0 million respectively, which will begin expiring in 2024. As of December 31, 2023, we have available federal, state and foreign research and experimentation tax credit carryforwards of approximately $5.7 million, $5.4 million and $21.9 million respectively. The federal tax credits will begin expiring in 2024 while the state and foreign tax credits have an indefinite life. In addition, our Canadian subsidiary has unclaimed scientific and experimental expenditures to be carried forward and applied against future income in Canada of approximately $120.5 million. 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% increase in equity ownership by 5% shareholders in any three-year period.

Current wording

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. As of December 31, 2024, we have available federal, state and foreign research and experimentation tax credit carryforwards of approximately $4.7 million, $5.5 million and $21.1 million respectively. The federal tax credits will begin expiring in 2025 while the state and foreign tax credits have an indefinite life. In addition, our Canadian subsidiary has unclaimed scientific and experimental expenditures to be carried forward and applied against future income in Canada of approximately $121.3 million. 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% increase in equity ownership by 5% shareholders in any three-year period.

Previous wording

Total cash and cash equivalents decreased $9.3 million from $56.8 million at December 31, 2022 to $47.5 million at December 31, 2023. 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.

Current wording

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 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.

Previous wording

As of December 31, 2023, our cash and cash equivalents balance consisted of $36.5 million in cash and $1.0 million in cash equivalents held in U.S. dollar denominated money market funds and $10.0 million held in U.S. dollar denominated certificates of deposit. 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.

Current wording

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. dollar denominated money market funds and $5.0 million held in U.S. dollar denominated certificates of deposit. 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.

Previous wording

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.

Current wording

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.

Previous wording

Inventories increased to $4.0 million at December 31, 2023 from $1.8 million at December 31, 2022. 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 is calculated based on annual operating results and average inventory balances during the year.

Current wording

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

Previous wording

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

Current wording

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.

Previous wording

As of December 31, 2023, our cash and cash equivalents balance of $47.5 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.

Current wording

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