pxlw-20210331

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

________________________________

FORM 10-Q

________________________________

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2021


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission File Number: 000-30269

____________________________________

PIXELWORKS, INC.

(Exact name of registrant as specified in its charter)

Oregon

91-1761992

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

226 Airport Parkway, Suite 595

San Jose

California

95110

(Address of principal executive offices)

(Zip Code)

(408) 200-9200

(Registrant’s telephone number, including area code)

____________________________________

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.001 per share	PXLW	The Nasdaq Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer

☐

Accelerated Filer

☐

Non-accelerated Filer

☒

Smaller Reporting Company

☒

Emerging Growth Company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Securities registered pursuant to Section 12(b) of the Act:

The number of outstanding shares of the registrant’s common stock, par value $0.001 per share, was 52,212,421 as of April 30, 2021

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SUMMARY RISK FACTORS

Our business is subject to varying degrees of risk and uncertainty. Investors should consider the risks and uncertainties summarized below, as well as the risks and uncertainties discussed in Part II, Item 1A, “Risk Factors” of this Quarterly Report on Form 10-Q. Investors should also refer to the other information contained or incorporated by reference in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, including our consolidated financial statements and related notes, and our other filings made from time to time with the Securities and Exchange Commission. Our business operations could also be affected by factors that we currently consider to be immaterial or that are unknown to us at the present time. If any of these risks occur, our business, financial condition, and results of operations could be materially and adversely affected, and the trading price of our common stock could decline.

Our business is subject to the following principal risks and uncertainties:

•The ongoing effects of the COVID-19 pandemic could disrupt our business or the business of our customers or suppliers, and as such, may adversely affect our financial condition.

•The continued uncertain global economic environment and volatility in global credit and financial markets could materially and adversely affect our business and results of operations.

•If we fail to meet the evolving needs of our markets, identify new products, services or technologies, or successfully compete in our target markets, our revenue and financial results will be adversely impacted.

•Our product strategy may not address the demands of our target customers and may not lead to increased revenue in a timely manner or at all, which could materially adversely affect our results of operations and limit our ability to grow.

•Achieving design wins involves lengthy competitive selection processes that require us to incur significant expenditures prior to generating any revenue or without any guarantee of any revenue related to this business. If we fail to generate revenue after incurring substantial expenses to develop our products, our business and operating results would suffer.

•If we fail to retain or attract the specialized technical and management personnel required to successfully operate our business, it could harm our business and may result in lost sales and diversion of management resources.

•We have significantly fewer financial resources than most of our competitors, which limits our ability to implement new products or enhancements to our current products, which in turn could adversely affect our future sales and financial condition.

•If we are not profitable in the future, we may be unable to continue our operations.

•A significant amount of our revenue comes from a limited number of customers and distributors exposing us to increased credit risk and subjecting our cash flow to the risk that any of our customers or distributors could decrease or cancel its orders.

•We generally do not have long-term purchase commitments from our customers and if our customers cancel or change their purchase commitments, our revenue and operating results could suffer.

•Our revenue and operating results can fluctuate from period to period, which could cause our share price to decline.

•If we are unable to generate sufficient cash from operations and are forced to seek additional financing alternatives our working capital may be adversely affected and our shareholders may experience dilution or our operations may be impaired.

•We license our intellectual property, which exposes us to risks of infringement or misappropriation, and may cause fluctuations in our operating results.

•We face a number of risks as a result of the concentration of our operations and customers in Asia.

•Our operations in Asia expose us to heightened risks due to natural disasters.

•We face additional risks associated with our operations in China and our results of operations and financial position may be harmed by changes in China's political, economic or social conditions or changes in U.S.-China relations.

•Our international operations expose us to risks resulting from the fluctuations of foreign currencies.

•If we are unable to maintain effective disclosure controls and internal controls over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports, and the market price of our common stock may be materially and adversely affected.

•Our dependence on selling to distributors and integrators increases the complexity of managing our supply chain and may result in excess inventory or inventory shortages.

•We may be unable to successfully manage any future growth, including the integration of any acquisition or equity investment, which could disrupt our business and severely harm our financial condition.

•Continued compliance with regulatory and accounting requirements will be challenging and will require significant resources.

•Regulations related to conflict minerals may adversely impact our business.

•Dependence on a limited number of sole-source, third-party manufacturers for our products exposes us to possible shortages based on low manufacturing yield, errors in manufacturing, uncontrollable lead-times for manufacturing, capacity allocation, price increases with little notice, volatile inventory levels and delays in product delivery, any of which could result in delays in satisfying customer demand, increased costs and loss of revenue.

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•Our highly integrated products and high-speed mixed signal products are difficult to manufacture without defects and the existence of defects could result in increased costs, delays in the availability of our products, reduced sales of products or claims against us.

•The development of new products is extremely complex and we may be unable to develop our new products in a timely manner, which could result in a failure to obtain new design wins and/or maintain our current revenue levels.

•Intense competition in our markets may reduce sales of our products, reduce our market share, decrease our gross profit and result in large losses.

•If we are not able to respond to the rapid technological changes and evolving industry standards in the markets in which we compete, or seek to compete, our products may become less desirable or obsolete.

•We use a customer-owned tooling process for manufacturing most of our products, which exposes us to the possibility of poor yields and unacceptably high product costs.

•We depend on manufacturers of our semiconductor products not only to respond to changes in technology and industry standards but also to continue the manufacturing processes on which we rely.

•Shortages of materials used in the manufacturing of our products and other key components of our customers’ products may increase our costs, impair our ability to ship our products on time and delay our ability to sell our products.

•Because of our long product development process and sales cycles, we may incur substantial costs before we earn associated revenue and ultimately may not sell as many units of our products as we originally anticipated.

•Our developed software may be incompatible with industry standards and challenging and costly to implement, which could slow product development or cause us to lose customers and design wins.

•The competitiveness and viability of our products could be harmed if necessary licenses of third-party technology are not available to us on terms that are acceptable to us or at all.

•Our limited ability to protect our IP and proprietary rights could harm our competitive position by allowing our competitors to access our proprietary technology and to introduce similar products.

•Our products are characterized by average selling prices that can decline over relatively short periods of time, which will negatively affect our financial results unless we are able to reduce our product costs or introduce new products with higher average selling prices.

•The cyclical nature of the semiconductor industry may lead to significant variances in the demand for our products and could harm our operations.

•The price of our common stock has and may continue to fluctuate substantially.

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PIXELWORKS, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2021

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	Summary Risk Factors	2
	Note regarding COVID-19	5

	PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	6

	Condensed Consolidated Balance Sheets	6
	Condensed Consolidated Statements of Operations	7
	Condensed Consolidated Statements of Comprehensive Loss	8
	Condensed Consolidated Statements of Cash Flows	9
	Consolidated Statements of Shareholders' Equity	10
	Notes to Condensed Consolidated Financial Statements	11

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24

Item 3.	Quantitative and Qualitative Disclosure About Market Risk	30

Item 4.	Controls and Procedures	31

	PART II – OTHER INFORMATION

Item 1A.	Risk Factors	32

Item 6.	Exhibits	50

	SIGNATURE	51

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NOTE REGARDING COVID-19

In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic, and the virus continues to spread in areas where we operate and sell our products and services. Several public health organizations have recommended, and many local governments have implemented, certain measures to slow and limit the transmission of the virus, including shelter in place and social distancing ordinances, which has resulted in a significant deterioration of economic conditions in many of the countries in which we operate.

The spread of COVID-19 has caused us to modify our business practices, including implementing work-from-home policies and restricting travel by our employees. To date, our Shanghai and Shenzhen offices have returned to full in-person staffing, our offices and supply chain partners in Taiwan are fully functional, and our offices in Japan and North America are fully operational, working both in-office and remotely.

COVID-19 may also affect the operations of our suppliers and customers, as their own workforces and operations are disrupted by the pandemic, which could result in the interruption of our distribution system, temporary or long-term disruption in our supply chains, or delays in the delivery of our product. While we expect the impacts of COVID-19 to be temporary, the disruptions caused by the virus have negatively affected our revenue and results of operations in 2020 and 2021. For example, our revenues for fiscal year 2020 were lower than initially anticipated and we expect our revenues for 2021 to continue to be negatively impacted by COVID-19.

The impact of the pandemic on our business, as well as the business of our suppliers and customers, and the additional measures that may be needed in the future in response to it, including cost-saving measures, will depend on many factors beyond our control and knowledge. We will continually monitor the situation to determine what actions may be necessary or appropriate to address the impact of the pandemic, which may include actions mandated or recommended by federal, state or local authorities.

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PART I – FINANCIAL INFORMATION

Item 1.Financial Statements.

PIXELWORKS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)


	March 31, 2021		December 31, 2020
ASSETS
Current assets:
Cash and cash equivalents	$	25,437	$	31,257
Short-term marketable securities	—		250
Accounts receivable, net	5,522		4,672
Inventories	1,670		2,445
Prepaid expenses and other current assets	1,923		1,010
Total current assets	34,552		39,634
Property and equipment, net	4,384		5,103
Operating lease right-of-use assets	6,625		6,606
Other assets, net	1,005		1,081
Acquired intangible assets, net	902		1,207
Goodwill	18,407		18,407
Total assets	$	65,875	$	72,038
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,726	$	995
Accrued liabilities and current portion of long-term liabilities	8,523		9,452

Current portion of income taxes payable	155		147
Total current liabilities	10,404		10,594
Long-term liabilities, net of current portion	790		1,007
Operating lease liabilities, net of current portion	4,791		5,088

Income taxes payable, net of current portion	2,600		2,479
Total liabilities	18,585		19,168
Commitments and contingencies (Note 12)
Shareholders’ equity:
Preferred stock	—		—
Common stock	470,452		467,957
Accumulated other comprehensive income	47		47
Accumulated deficit	(423,209)		(415,134)
Total shareholders’ equity	47,290		52,870
Total liabilities and shareholders’ equity	$	65,875	$	72,038

See accompanying notes to condensed consolidated financial statements.

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PIXELWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)


	Three Months Ended March 31,
	2021		2020
Revenue, net	$	9,270	$	13,774
Cost of revenue (1)	5,545		6,999
Gross profit	3,725		6,775
Operating expenses:
Research and development (2)	6,785		6,267
Selling, general and administrative (3)	4,854		5,193
Restructuring	—		592
Total operating expenses	11,639		12,052
Loss from operations	(7,914)		(5,277)
Interest income and other, net	56		54

Total other income, net	56		54
Loss before income taxes	(7,858)		(5,223)
Provision for income taxes	217		176
Net loss	$	(8,075)	$	(5,399)

Net loss per share - basic and diluted	$	(0.16)	$	(0.14)


Weighted average shares outstanding - basic and diluted	51,673		38,868


(1) Includes:
Amortization of acquired intangible assets	245	298

Stock-based compensation	79	101

(2) Includes stock-based compensation

581

648


(3) Includes:
Stock-based compensation	772	1,073
Amortization of acquired intangible assets	60	76

See accompanying notes to condensed consolidated financial statements.

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PIXELWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(Unaudited)


	Three Months Ended March 31,
	2021		2020
Net loss	$	(8,075)	$	(5,399)
Other comprehensive loss:
Unrealized loss on available-for-sale securities	—		(6)
Total comprehensive loss	$	(8,075)	$	(5,405)

See accompanying notes to condensed consolidated financial statements.

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PIXELWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Three Months Ended March 31,
	2021		2020
Cash flows from operating activities:
Net loss	$	(8,075)	$	(5,399)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Stock-based compensation	1,432		1,822
Depreciation and amortization	1,016		1,022
Amortization of acquired intangible assets	305		374
Deferred income tax expense (benefit)	(10)		4
Reversal of uncertain tax positions	(2)		(10)
Accretion on short-term marketable securities	—		(10)
Gain on sale of marketable securities	—		(4)








Changes in operating assets and liabilities:
Accounts receivable, net	(850)		2,065
Inventories	775		861
Prepaid expenses and other current and long-term assets, net	(267)		470
Accounts payable	721		1,204
Accrued current and long-term liabilities	(1,827)		(1,545)
Income taxes payable	131		46
Net cash provided by (used in) operating activities	(6,651)		900
Cash flows from investing activities:
Proceeds from sales and maturities of short-term marketable securities	250		5,998
Purchases of property and equipment	(243)		(204)
Purchases of short-term marketable securities	—		(1,500)





Net cash provided by investing activities	7		4,294
Cash flows from financing activities:


Payments on asset financings	(239)		—
Proceeds from issuance of common stock under employee equity incentive plans	1,063		325
Proceeds from line of credit	—		5,157



Net cash provided by financing activities	824		5,482
Net increase (decrease) in cash and cash equivalents	(5,820)		10,676
Cash and cash equivalents, beginning of period	31,257		7,257
Cash and cash equivalents, end of period	$	25,437	$	17,933

Supplemental disclosure of cash flow information:
Cash paid for income taxes, net of refunds received	$	90	$	135
Cash paid during the period for interest	32		51
Non-cash investing and financing activities:

Acquisitions of property and equipment and other assets under extended payment terms	—		1,392

See accompanying notes to condensed consolidated financial statements.

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PIXELWORKS, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(In thousands, except share data)

(Unaudited)


	Common Stock			Accumulated Other Comprehensive Income		Accumulated Deficit		Total Shareholders' Equity
2021	Shares	Amount
Balance as of December 31, 2020	51,078,942	$	467,957	$	47	$	(415,134)	$	52,870
Stock issued under employee equity incentive plans	1,133,479	1,063		—		—		1,063
Stock-based compensation expense	—	1,432		—		—		1,432

Net loss	—	—		—		(8,075)		(8,075)
Balance as of March 31, 2021	52,212,421	$	470,452	$	47	$	(423,209)	$	47,290













2020
Balance as of December 31, 2019	38,434,488	$	436,122	$	12	$	(388,605)	$	47,529
Stock issued under employee equity incentive plans	815,375	325		—		—		325

Stock-based compensation expense	—	1,822		—		—		1,822
Unrealized loss on available for sale securities	—	—		(6)		—		(6)
Net loss	—	—		—		(5,399)		(5,399)

Balance as of March 31, 2020	39,249,863	$	438,269	$	6	$	(394,004)	$	44,271

See accompanying notes to condensed consolidated financial statements.

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PIXELWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

(Unaudited)

NOTE 1: BASIS OF PRESENTATION

Nature of Business

Pixelworks is a leading provider of high-performance and power-efficient visual processing solutions that bridge the gap between video content formats and rapidly advancing display capabilities. We develop and market semiconductor and software solutions that enable consistently high-quality, authentic viewing experiences in a wide variety of applications from cinema to smartphones. Our primary target markets include Mobile (smartphone, gaming and tablet), Home Entertainment (TV, personal video recorder ("PVR"), over-the-air ("OTA") and projector), Content (creation, remastering and delivery), and Business & Education (projector).

As of March 31, 2021, we had an intellectual property portfolio of 336 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.

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").

Condensed Consolidated Financial Statements

The financial information included herein for the three month periods ended March 31, 2021 and 2020 is prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") and is unaudited. Such information reflects all adjustments, consisting of only normal recurring adjustments, that are, in the opinion of management, necessary for a fair presentation of the Company's condensed consolidated financial statements for these interim periods. The financial information as of December 31, 2020 is derived from our audited consolidated financial statements and notes thereto for the fiscal year ended December 31, 2020, included in Item 8 of our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 10, 2021, and should be read in conjunction with such consolidated financial statements.

The results of operations for the three month periods ended March 31, 2021 and 2020 are not necessarily indicative of the results expected for future periods or for the entire fiscal year ending December 31, 2021.

Recent Accounting Pronouncements

In December 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2019-12, Simplifying the Accounting for Income Taxes ("ASU 2019-12"). ASU 2019-12 removes certain exceptions to the general principles in Accounting Standards Codification ("ASC") 740 and also clarifies and amends existing guidance to provide for more consistent application. ASU 2019-12 became effective for us on January 1, 2021. The adoption of ASU 2019-12 did not have a material impact on our financial position, results of operations and cash flows.

In November 2018, the FASB issued Accounting Standards Update No. 2018-18, Collaborative Arrangements: Clarifying the Interaction Between Topic 808 and Topic 606 ("ASU 2018-18"). ASU 2018-18 requires transactions in collaborative arrangements to be accounted for under ASC 606 if the counterparty is a customer for a good or service (or bundle of goods and services) that is a distinct unit of account. The amendment also precludes entities from presenting consideration from transactions with a collaborator that is not a customer together with revenue recognized from contracts with customers. ASU 2018-18 became effective for us on January 1, 2020. The adoption of ASU 2018-18 did not have a material impact on our financial position, results of operations and cash flows.

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Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and judgments that affect amounts reported in the financial statements and accompanying notes. Our significant estimates and judgments include those related to revenue recognition, valuation of excess and obsolete inventory, lives and recoverability of equipment and other long-lived assets, valuation of goodwill, valuation of share-based payments, income taxes, litigation and other contingencies. The actual results experienced could differ materially from our estimates.

NOTE 2: BALANCE SHEET COMPONENTS

Accounts Receivable, Net

Accounts receivable are contract assets that arise from the performance of our performance obligation pursuant to our contracts with our customers and represent our unconditional right to payment for the satisfaction of our performance obligations. They are recorded at invoiced amount and do not bear interest when recorded or accrue interest when past due. Accounts receivable are stated net of an allowance for doubtful accounts, which is maintained for estimated losses that may result from the inability of our customers to make required payments.

Accounts receivable consists of the following:


	March 31, 2021		December 31, 2020
Accounts receivable, gross	$	5,557	$	4,713
Less: allowance for doubtful accounts	(35)		(41)
Accounts receivable, net	$	5,522	$	4,672

The following is the change in our allowance for doubtful accounts:


	Three Months Ended
	March 31,
	2021		2020
Balance at beginning of period	$	41	$	23
Additions charged (reductions credited)	(6)		42

Balance at end of period	$	35	$	65

Inventories

Inventories consist of finished goods and work-in-process, and are stated at the lower of standard cost (which approximates actual cost on a first-in, first-out basis) or market (net realizable value).

Inventories consist of the following:


	March 31, 2021		December 31, 2020
Finished goods	$	921	$	1,775
Work-in-process	749		670
Inventories	$	1,670	$	2,445

Property and Equipment, Net

Property and equipment, net consists of the following:


	March 31, 2021		December 31, 2020
Gross carrying amount	$	21,597	$	22,291
Less: accumulated depreciation and amortization	(17,213)		(17,188)
Property and equipment, net	$	4,384	$	5,103

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Acquired Intangible Assets, Net

In connection with the acquisition of ViXS (the "Acquisition"), we recorded certain identifiable intangible assets. Acquired intangible assets resulting from this transaction were assigned to Pixelworks, Inc., and consist of the following:


	March 31, 2021		December 31, 2020
Developed technology	$	5,050	$	5,050
Customer relationships	1,270		1,270
Backlog and tradename	410		410
	6,730		6,730
Less: accumulated amortization	(5,828)		(5,523)
Acquired intangible assets, net	$	902	$	1,207

Developed technology and customer relationships are amortized over a useful life of 3 to 5 years. Backlog was fully amortized as of September 30, 2018 and tradename was fully amortized as of March 31, 2019.

Amortization expense for intangible assets was $305 for the three months ended March 31, 2021, $245 was included in cost of revenue and $60 was included in selling, general and administrative for the three months ended March 31, 2021, in the condensed consolidated statements of operations.

SEC Form 10-Q filed by Pixelworks, Inc.