Pixelworks Inc.
03/13/2025 | Press release | Distributed by Public on 03/13/2025 14:05
Annual Report for Fiscal Year Ending December 31, 2024 (Form 10-K)
Management's Discussion and Analysis of Financial Condition and Results of Operations.
Overview
Pixelworks is a leading provider of high-performance and power-efficient visual processing semiconductor and software solutions that enable consistently high-quality and authentic viewing experiences in a wide variety of applications. We define our primary target markets as Mobile (smartphone and tablet), Home & Enterprise (projectors, personal video recorders ("PVR"), and over-the-air ("OTA") streaming devices), and Cinema (creation, remastering, and delivery of digital video content). Previously we classified our primary target markets as Mobile, Projector, Video Delivery and Cinema, but have since aggregated the Projector and Video Delivery categories into one called "Home & Enterprise".
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 MotionTMvideo platform, the industry's first motion grading technology that allows fine tuning of motion appearance in cinematic content.
Our core visual processing technology intelligently processes digital images and video from a variety of sources and optimizes the content for a superior viewing experience. Rapid growth in video and gaming consumption, combined with the move towards bright, high resolution, high frame rate and high refresh rate displays, especially in mobile, is increasing the demand for our solutions. Our technologies can be applied across a wide range of applications: cinema theaters, low-power mobile tablets, smartphones, streaming devices, and digital projectors for the home, school, or the workplace. Our products are designed and optimized for power, cost, bandwidth, viewer experience, and overall system performance, according to the requirements of the specific application. On occasion, we have also licensed our technology.
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.
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.
Pixelworks continues to work with Morgan Stanley as financial advisor to assist with reviewing potential alternative strategic options specific to inbound interest in the Pixelworks Shanghai subsidiary.
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.
Pixelworks was founded in 1997 and is incorporated under the laws of the state of Oregon.
Historically, significant portions of our revenue have been generated by sales to a relatively small number of end customers and distributors. We sell our products worldwide through a direct sales force, distributors and manufacturers' representatives. We sell to distributors in China, Japan and Taiwan. Our distributors often provide engineering support to our end customers and often have valuable and established relationships with our end customers. In certain countries in which we operate, it is customary to sell to distributors. While distributor payment to us is not dependent upon the distributor's ability to resell the product or to collect from the end customer, the distributors may provide longer payment terms to end customers than those we would offer.
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.
Seasonality
Our business is subject to seasonality related to the markets we serve and the location of our customers. We have typically experienced higher revenue from the digital projector component of the Home & Enterprise market in the third quarter, and lower revenue in the first quarter, as our Japanese customers reduce inventories in anticipation of their March 31 fiscal year end. We have typically experienced higher revenue from the mobile market in the fourth quarter, and lower revenue in the first quarter, as mobile phone OEMs ramp production in advance of Chinese New Year.
Results of Operations
For the year ended December 31, 2024 compared with year ended December 31, 2023.
Revenue, net
Net revenue was as follows (in thousands):
| Year ended December 31, | 2024 v. 2023 | ||||||||||||||||||||||
| 2024 | 2023 | $ change | % change | ||||||||||||||||||||
| Revenue, net | $ | 43,206 | $ | 59,677 | $ | (16,471) | (28) | % | |||||||||||||||
Net revenue decreased $16.5 million, or 28%, from 2023 to 2024.
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.
The decrease in IC revenue from 2023 compared to 2024 is due to the following factors:
•Sales into the Mobile market decreased $15.7 million or 54%, primarily due to decreased units sold associated with a delayed transition to our latest generation mobile products.
•Sales into the Home & Enterprise market decreased $0.6 million or 2%.
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.
Cost of revenue and gross profit
Cost of revenue and gross profit were as follows (in thousands):
| Year ended December 31, | |||||||||||||||||||||||
| 2024 |
% of revenue |
2023 |
% of revenue |
||||||||||||||||||||
|
Direct product costs and related overhead 1
|
$ | 20,454 | 47.3 | % | $ | 33,599 | 56.3 | % | |||||||||||||||
|
Inventory charges 2
|
414 | 1.0 | 280 | 0.5 | |||||||||||||||||||
| Stock-based compensation | 53 | 0.1 | 89 | 0.1 | |||||||||||||||||||
| Total cost of revenue | $ | 20,921 | 48.4 | % | $ | 33,968 | 56.9 | % | |||||||||||||||
| Gross profit | $ | 22,285 | 51.6 | % | $ | 25,709 | 43.1 | % | |||||||||||||||
1Includes purchased materials, assembly, test, labor, employee benefits and royalties.
2Includes charges to reduce inventory to lower of cost or net realizable value and a benefit for sales of previously written down inventory.
Gross profit margin increased to 52% in 2024 compared to 43% in 2023, primarily due to decreased unit sales into the Mobile market which generally have lower margins than products sold into the Home & Enterprise market, increased average selling prices ("ASP") on IC products sold into the Home & Enterprise market and decreased costs on Mobile products. These factors which positively impacted margin were partially offset by reduced absorption due to reduced revenue and increased inventory charges.
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.
Research and development
Research and development expense includes compensation and related costs for personnel, development-related expenses including non-recurring engineering and fees for outside services, depreciation and amortization, expensed equipment, facilities and information technology expense allocations and travel and related expenses.
Co-Development Agreement
During 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.
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.
Research and development expense was as follows (in thousands):
| Year ended December 31, | 2024 v. 2023 | ||||||||||||||||||||||
| 2024 | 2023 | $ change | % change | ||||||||||||||||||||
| Research and development | $ | 31,337 | $ | 30,878 | $ | 459 | 1 | % | |||||||||||||||
Research and development expense increased $0.5 million, or 1%, from 2023 to 2024 due to the following factors:
•A $3.2 million benefit related to the co-development agreement was recognized in 2023 compared to no benefit recognized in 2024.
•Compensation expense decreased $1.6 million primarily due to decreased headcount associated with our June 2024 restructuring plan and a decreased management bonus accrual.
•Non-recurring engineering expense decreased $1.1 million due to the timing of development activities.
Selling, general and administrative
Selling, general and administrative expense includes compensation and related costs for personnel, sales commissions, allocations for facilities and information technology expenses, travel, outside services and other general expenses incurred in our sales, marketing, customer support, management, legal and other professional and administrative support functions.
Selling, general and administrative expense was as follows (in thousands):
| Year ended December 31, | 2024 v. 2023 | ||||||||||||||||||||||
| 2024 | 2023 | $ change | % change | ||||||||||||||||||||
| Selling, general and administrative | $ | 20,697 | $ | 23,467 | $ | (2,770) | (12) | % | |||||||||||||||
Selling, general and administrative expense decreased $2.8 million, or 12%, from 2023 to 2024 due to the following factors:
•Compensation expense decreased $1.1 million primarily due to decreased headcount associated with our June 2024 restructuring plan and a decreased management bonus accrual.
•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.
Restructurings
In June 2024, we executed a restructuring plan to make the operation of the Company more efficient (the "Plan"). The Plan included an approximately 16% reduction in workforce, primarily in the areas of operations, research and development, sales, marketing and administration.
Restructuring expense was as follows (dollars in thousands):
| Year ended December 31, | |||||||||||
| 2024 | 2023 | ||||||||||
|
Employee severance and benefits
|
$ | 1,624 | $ | - | |||||||
|
Total restructuring expense
|
$ | 1,624 | $ | - | |||||||
|
Included in cost of revenue
|
$ | 16 | $ | - | |||||||
|
Included in operating expenses
|
1,608 | - | |||||||||
During 2024, we recorded $1.6 million, in restructuring expense related to the Plan. During 2023, we did not record any restructuring expense. The Plan was complete in 2024 and we do not expect to incur any further expenses related to the Plan after 2024.
Interest income and other, net
Interest income and other, net, consisted of the following (in thousands):
| Year ended December 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Interest income | $ | 1,267 | $ | 1,950 | |||||||
| Government subsidies received | 1,100 | - | |||||||||
| Interest expense | (69) | (25) | |||||||||
| Other income | - | 125 | |||||||||
| Total interest income and other, net | $ | 2,298 | $ | 2,050 | |||||||
The increase in interest income and other, net in 2024 compared to 2023 is due to an increase in government subsidies received, partially offset by a decrease in interest earned on our cash and cash equivalents balance due to the decrease in our cash and cash equivalents balance in 2024 compared to 2023. Additional information on the government subsides received is provided in "Note 17: Government Grants", which is incorporated by reference into this section.
Provision for income taxes
The benefit for income taxes was as follows (in thousands):
| Year ended December 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Provision for income taxes | $ | 478 | $ | 357 | |||||||
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.
The income tax expense of $0.4 million recorded for the year ended December 31, 2023 is primarily composed of tax expense of $0.1 million for our profitable cost-plus jurisdictions and deferred tax expense of approximately $0.3 million.
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.
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.
Liquidity and Capital Resources
Cash and cash equivalents
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.
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.
Accounts receivable, net
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.
Inventories
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.
Capital resources
At the Market Offering
On November 14, 2024, we entered into a sales agreement (the "Sales Agreement") with Roth Capital Partners, LLC ("Roth"), pursuant to which we may issue and sell shares of the Company's common stock, par value $0.001 per share, having an aggregate offering price of up to $10.0 million, from time to time, through an "at the market" equity offering program under which Roth will act as sales agent (the "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.
During the year ended December 31, 2024, we sold an aggregate of 358,272 shares of our common stock under the 2024 ATM Program, resulting in aggregate net proceeds to us of approximately $0.2 million.
Capital Increase Agreements
We have entered into a Capital Increase Agreement pursuant to which PWSH, one of our Chinese subsidiaries, received net proceeds from the sale of its securities pursuant thereto in an amount of RMB 279.7 million ($42.3 million USD). Additional information is provided in "Note 15: Redeemable Non-Controlling Interest and Equity Interest of PWSH Sold to Employees", which is incorporated by reference into this section.
We have entered into a Capital Increase Agreement pursuant to which PWSH, one of our Chinese subsidiaries, received net proceeds from the sale of its securities pursuant thereto in an amount of 99.0 million RMB ($14.6 million USD). Additional information is provided in "Note 16: Non-Controlling Interest", which is incorporated by reference into this section.
Equity Transfer Agreement
We have entered into an Equity Transfer Agreement pursuant to which we received net proceeds of $10.7 million in exchange for a 2.73% equity interest in PWSH. Additional information is provided in "Note 16: Non-Controlling Interest", which is incorporated by reference into this section.
Liquidity
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.
From time to time, we evaluate acquisitions of businesses, products or technologies that complement our business. Any transactions, if consummated, may consume a material portion of our working capital or require the issuance of equity securities that may result in dilution to existing shareholders. Our ability to generate cash from operations is also subject to substantial risks described in Part I, "Item 1A, Risk Factors." If any of these risks occur, we may be unable to generate or sustain positive cash flow from operating activities. We would then be required to use existing cash and cash equivalents to support our working capital and other cash requirements. If additional funds are required to support our working capital requirements, acquisitions or other purposes, we may seek to raise funds through debt financing, equity financing or from other sources. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our shareholders could be significantly diluted, and these newly-issued securities may have rights, preferences or privileges senior to those of existing shareholders. If we raise additional funds by obtaining loans from third parties, the terms of those financing arrangements may include negative covenants or other restrictions on our business that could impair our operating flexibility, and would also require us to incur interest expense. We can provide no assurance that additional financing will be available at all or, if available, that we would be able to obtain additional financing on terms favorable to us.
Critical Accounting Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and judgments that affect the amounts reported. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, inventories, property and equipment, impairment of long-lived assets, valuation of goodwill, valuation of share-based payments, income taxes, litigation and other contingencies. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:
Inventory Valuation.We value inventory at the lower of cost or net realizable value. In addition, we write down any obsolete, unmarketable or otherwise impaired inventory to net realizable value. The determination of obsolete or excess inventory requires us to estimate the future demand for our products. The estimate of future demand is compared to inventory levels to determine the amount, if any, of obsolete or excess inventory. If actual market conditions are less favorable than those we projected at the time the inventory was written down, additional inventory write-downs may be required. Inventory valuation is re-evaluated on a quarterly basis.
Goodwill.Goodwill is not amortized, rather tested, at least annually, for impairment at a reporting unit level. Impairment of goodwill is the condition that exists when the carrying amount of a reporting unit that includes goodwill exceeds its fair value. A goodwill impairment loss is recognized for the amount that the carrying amount of the reporting unit, including goodwill, exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit. If the fair value of a reporting unit exceeds the carrying amount, goodwill of the reporting unit is not considered impaired.
We evaluate impairment using the guidance set forth in FASB Accounting Standards Update ("ASU") No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-04") which states that an entity may first assess qualitative factors to determine whether it is necessary to perform the quantitative goodwill impairment test. If determined to be necessary, the quantitative impairment test shall be used to identify goodwill impairment and measure the amount of goodwill impairment loss to be recognized. An entity has an unconditional option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to the quantitative goodwill impairment test. We performed a qualitative assessment during the fourth quarter of 2024 and concluded that it was not more likely than not that the fair value of the reporting unit was less than its carrying amount. As a result, we concluded that a quantitative impairment test was not required and that goodwill was not impaired.