•TrueCut Motion Grading and software that controlPre-processing. Through our end-to-end platform, filmmakers determine the operationsmotion look and signal processing for converting multiple bitrates, resolutionstheir creative intent at the source. Their creative intent is preserved through a certified distribution and codecsplayback platform all the way to provide bandwidth efficient video transmissions based on industry standard protocols. Pixelworks’ transcoder technology allows for single, dualthe final presentation to viewers. This approach provides a closer relationship between the filmmaker and even quad streaming solutions for OTA products. Like our other ICs, we have continued to refine the architectures for optimal performance, manufacturing our products on process technologies that align with our customers’ requirements. Additionally, we provide a software development environment that enables our customers to more quickly develop and customize their products.viewer than has been previously possible.
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Customers, Sales and Marketing
IC Products
The key focus of our global sales and marketing strategy for our IC products is to achieve design wins with industry leading branded manufacturers in our target markets and to continue building strong customer relationships. Once a design win has been achieved, sales and marketing efforts are focused on building long-term mutually beneficial business relationships with our customers by providing superior technology and reducing their costs, which complements our customers’ product development objectives and meets their expectations for price-performance and time to market. Marketing efforts are focused on building market-leading brand awareness and preference for our solutions.
We utilize direct sales and marketing resources in Japan, China Japan, Korea, Taiwan, and the U.S. as well as indirect resources in several regions.Taiwan. In addition to sales and marketing representatives, we have field application engineers who provide technical expertise and assistance to manufacturing customers on final product development.
Our global distribution channel is multi-tiered and involves both indirect and direct anddistribution channels.
Indirect Distribution Channels
•We have indirect distribution channels, as described below:
Direct Distribution Channels
We also have direct distributor relationships in Japan, China Europe, Korea, Southeast Asia, Taiwan and the U.S.Taiwan.
We have direct relationships with companies falling into the following three classifications:
•Integrators. Integrators are OEMs who build display devices based on specifications provided by branded suppliers.
•Branded Manufacturers. Branded manufacturers are globally recognized manufacturers who develop display device specifications and manufacture, market and distribute display devices either directly or through resellers to end-users.
•Branded Suppliers. Branded suppliers are globally recognized suppliers who develop display device specifications and then source them from integrators, typically in Asia, and distribute them either directly or through resellers to end-users.
End Customers
Revenue attributable to our top five end customers together represented 79%, 82%87% and 83%76% of revenue in 2017, 20162023 and 2015,2022, respectively. End customers include customers who purchase directly from us as well as customers who purchase products indirectly through distributors. Sales to Seiko Epson Corporation represented more than 10% of revenue in each of 2017, 20162023 and 2015,2022, and accounted for more than 10% of accounts receivable as of December 31, 20172023 and 2016.2022. Sales to HitachiGuangdong OPPO Mobile Telecommunications Corporation, Ltd. accounted for more than 10% of revenue in each of 2023 and 2022. Sales to Vivo Communication Technology Co. Ltd. represented more than 10% of revenue in 2015.2022. Vecima Networks represented more than 10% of accounts receivable as of December 31, 2022. No other end customer accounted for more than 10% of revenue in 2017, 20162023 or 2015.2022 or represented more than 10% of accounts receivable as of December 31, 2023 or 2022.
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TrueCut Products
The sales and marketing of our TrueCut products differs in approach from that of our IC products. The TrueCut platform includes a mix of services and licensing that is targeted at all levels of the creation, finishing, and distribution of cinematic or streaming digital video. For our TrueCut Motion content creation tools we seek to work directly with filmmakers, providing motion grading services, or the tools are also available for license. For content finishing, specific to certain displays, TrueCut Motion will pre-process the content in order to ensure playback according to the original creative intent. For display makers and brands, we provide the certification services, support, and IP licensing necessary to play back TrueCut Motion processed content, and the right to use the TrueCut Motion brand. We do not use distributors for our TrueCut products. Revenue from our TrueCut products is thus far not material, and therefore we include all such revenue in our Engineering services, license and other category for the Mobile market.
Seasonality
Our business is subject to seasonality related to the markets we serve and the location of our customers. We have historicallytypically experienced higher revenue from the digital projector component of the Home & Enterprise market in the third quarter, of the year, and lower revenue in the first quarter, of the year, 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.
Geographic Distribution of Sales
Sales outside the U.S. accounted for approximately 98%, 100%99.7% and 100%95.1% of revenue in 2017, 20162023 and 2015,2022 respectively.
Financial information regarding our domestic and foreign operations is presented in "Note 14:13. Segment Information" in Part II, Item 8 of this Annual Report on Form 10-K.
Backlog
Our sales are made pursuant to customer purchase orders for delivery of standard products. The volume of product actually purchased by our customers, as well as shipment schedules, are subject to frequent revisions that reflect changes in both the customers’ needs and product availability. With the exception of recent end-of-life orders, our entire order backlog is cancelable, with a portion subject to cancellation fees. In light of industry practice and our own experience, we do not believe that backlog as of any particular date is indicative of future results.
Competition
The vast majority of our revenue is derived from sales of integrated circuits within the intensely competitive semiconductor industry is intensely competitive.industry. Further, the markets for higher performance display and projection devices, including the markets for mobile devices, digital projectors and other applications demanding high quality video, are characterized by rapid technological change, evolving industry standards, compressed product life cycles and declining average selling prices. We believe the principal competitive factors in our markets include product performance, time to market, cost, functional versatility provided by software, customer relationships and reputation, patented innovative designs, levels of product integration, compliance with industry standards and system design cost. We believe we compete favorably with respect to these factors.
Our current products face competition from developers of application processors and specialized display controller developers and in-house display controller ICscontrollers designed by merchant chip vendors, our customers, potential customers and potential customers.display panel vendors. Additionally, new alternative display processing technologies and industry standards may emerge that compete with technologies we offer.
We also compete with specialized and diversified electronics and semiconductor companies that offer display processors or scaling components including: Actions Microelectronics Co., Ltd., ARM Holdings PLC, Dolby Laboratories, Inc., HisiliconEGiS Technology Inc., HiSilicon Technologies Co., Ltd., i-Chips TechnologiesTechnology Inc., Lattice Semiconductor Corporation, MediaTek Inc., Novatech Co., Ltd. Inc.Novatek Microelectronics Corp., NVIDIA Corporation, QUALCOMMQualcomm Incorporated, Renesas Electronics America, Realtek Semiconductor Corp., Socionext Inc., Solomon Systech (International) Ltd., Spreadtrum Communications, Inc, STMicroelectronics N.V., Sunplus Technology Co., Ltd., Synaptics Incorporated, Texas Instruments Incorporated, Unisoc Communications, Inc., and other companies. Potential and current competitors may include diversified semiconductor manufacturers and the semiconductor divisions or affiliates of some of our customers, including: Apple Inc., Broadcom Corporation,Inc., LG Electronics, Inc., Matsushita Electric Industrial Co., Ltd., MegaChips Corporation, Mitsubishi Digital Electronics America, Inc., NEC Corporation, Panasonic Corporation, Samsung Electronics Co., Ltd., Socionext Inc., ON Semiconductor Corporation, Seiko Epson Corporation, Sharp Electronics Corporation, Sony Group Corporation, and Toshiba America, Inc. In addition, start-up companies may seek to compete in our markets.
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Although TrueCut Motion is the first motion grading solution for the cinematic market, competitive solutions could arise rapidly. These competitive solutions could come from several sources, including companies that provide solutions for other post-processing needs (such as Dolby Laboratories, Inc., Epic Games, Inc., Unity Technologies, Adobe Inc., Soluciones Gráficas por Ordenador S.L. (SGO), The Foundry Visionmongers Limited, and Autodesk, Inc.) as well as visual effects studios that use digital effects to reduce artifacts before they are created (such as Wētā FX, DNEG Plc, Pixar Animation Studios, Digital Domain, and Industrial Light & Magic (ILM)). We believe that we would compete favorably with respect to these potential competitive solutions and services in terms of cost, price, functionality, efficiency, patented methods, and time to market.
Research and Development
We have invested, and expect to continue to invest, significant resources in research and development activities. Our research and development expenses were $21.4 million, $19.0$30.9 million and $24.6$30.5 million in 2017, 20162023 and 2015,2022, respectively. During 2017,2023 and 2022, we received a reimbursementreimbursements related to a co-development arrangement with a customer for costs incurred in connection with our development of an integrated circuit ("IC")IC product. As a result of the reimbursement,reimbursements, our overall research and development expense was reduced by $4.0$3.2 million and $4.3 million in 2017. There were no reductions to research2023 and development expense related to co-development arrangements in 2016 and 2015.2022, respectively.
Manufacturing
Within the semiconductor industry we are known as a "fabless" company, meaning that we do not manufacture the semiconductors that we design and develop, but instead contract with a limited number of foundries and assembly and test vendors to produce all of our wafers and for completion of finished products. The fabless approach allows us to concentrate our resources on product design and development where we believe we have greater competitive advantages.
See "Risk Factors" in Part I, Item 1A of this Annual Report on Form 10-K for information on risks related to our manufacturing strategy and processes.
Our TrueCut products do not require manufacturing, since they are based on IP, software, and services.
Intellectual Property
We rely onuse a combination of nondisclosure agreements and patent, copyright, trademark and trade secret laws to protect the algorithms, design and architecture of our technology. As of December 31, 2017,2023, we held 536280 patents and have 10018 patent applications pending, compared to 148291 patents and 2017 patent applications pending as of December 31, 2016. These2022. The patents we hold relate generally to improvements in the visual display of digital image data including, but not limited to, improvements in image scaling, image correction, automatic image optimization and video signal processing for digital displays.displays, and in large part, are implemented in our core technologies and products. Our U.S. and foreign patents are generally enforceable for 20 years from the date they were filed. Accordingly, our issued patents have from approximately 1 to 1816 years remaining in their respective term, depending on their filing dates. We believe that the remaining term of our patents is adequate relative to the expected lives of our related products.
We intend to seek patent protection for other significant technologies that we have already developed and expect to seek patent protection for future products and technologies as necessary. Patents may not be issued as a result of any pending applications and any claims allowed under issued patents may be insufficiently broad to protect our technology. Existing or future patents may be invalidated, diluted, circumvented, challenged or licensed to others. Furthermore, the laws of certain foreign countries in which our products are or may be developed, manufactured or sold, including various countries in Asia, may not protect our products or intellectual property rights in the same manner and to the same extent as do the laws of the U.S. and, thus, make the possibility of piracy of our technology and products more likely in these countries.
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The semiconductor industry is characterized by vigorous protection of intellectual property rights, which have resulted in significant and often protracted and expensive litigation. We, our customers or our foundries from time to time may be notified of claims that we may be infringing patents or other intellectual property rights owned by third parties. Litigation by or against us relating to patent infringement or other intellectual property matters could result in significant expense to us and divert the efforts of our technical and management personnel, whether or not such litigation results in a determination favorable to us. In the event of an adverse result in any such litigation, we could be required to pay substantial damages, cease the manufacture, use and sale of infringing products, expend significant resources to develop non-infringing technology, discontinue the use of certain processes or obtain licenses to the infringing technology. We may not be able to settle any alleged patent infringement claim through a cross-licensing arrangement. In the event any third party made a valid claim against us, our customers or our foundries, and a license was not made available to us on terms that are acceptable to us or at all, we would be adversely affected.
See "Risk Factors" in Part I, Item 1A, and "Note 11:10. Commitments and Contingencies" in Part II, Item 8 of this Annual Report on Form 10-K for information on various risks related to intellectual property.
Environmental Matters
Environmental laws and regulations are complex, change frequently and have tended to become more stringent over time. We have incurred, and may continue to incur, significant expenditures to comply with these laws and regulations and we may incur additional capital expenditures and asset impairments to ensure that our products and our vendors’ products are in compliance with these regulations. We would be subject to significant penalties for failure to comply with these laws and regulations.
See "Risk Factors" in Part I, Item 1A of this Annual Report on Form 10-K for information on various environmental risks.
Employees
As of December 31, 2017,2023, we had a total of 215239 employees, allthe majority of which were full-time, compared to 166222 employees as of December 31, 2016.2022.
Corporate Information
Pixelworks was founded in 1997 and is incorporated under the laws of the state of Oregon. Our stock is traded on the Nasdaq Global Market under the symbol "PXLW".
Availability of Securities and Exchange Commission Filings
We make available through our website our annual reportreports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports and any filings filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act of 1934, free of charge as soon as reasonably practicable after we electronically file or furnish such material with the Securities and Exchange Commission ("SEC"). Our Internet address is www.pixelworks.com. The content on, or that can be accessed through, our website is not incorporated by reference into this filing. Our committee charters and codecodes of ethics are also available free of charge on our website.
The SEC maintains an Internet site at http://www.sec.gov that contains our Annual Reportannual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, if any, or other filings filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, and proxy and information statements. All reports that we file with the SEC may be read and copied at the SEC’s Public Reference Room at 100 F Street NE, Room 1580, Washington, DC, 20549. Information about the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330.
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Item 1A.Risk Factors.
The following risks could materially and adversely affect our business, financial condition, and results of operations, and the trading price of our common stock could decline. These risk factors do not identify all of the risks that we face. 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. Investors should also refer to the other information contained or incorporated by reference in this Annual Report on Form 10-K for the year ended December 31, 2017,2023, including our consolidated financial statements and related notes, and our other filings made from time to time with the SecuritiesSEC.
Risks Related to the Global Economy
The continued uncertain global economic environment and Exchange Commission ("SEC").volatility in global credit, banking and financial markets could materially and adversely affect our business and results of operations.
The state of the global economy continues to be uncertain. Additionally, recent high-profile global business failures, such as the court-ordered liquidation of Chinese property developer Evergrande Group, have caused general uncertainty and concern regarding the health of the economy of China, which is a major market for our products. As a result, we or our manufacturers, vendors and customers might experience deterioration of our or their businesses, cash flow shortages and difficulty obtaining financing, which could result in interruptions or delays in the performance of any contracts, reductions and delays in customer purchases, delays in or the inability of the Company or our customers to obtain financing or of our customers to purchase our products, and bankruptcy of customers. Furthermore, the constraints in the capital and credit markets, may limit our ability to access the capital we need when we need it, on favorable terms or otherwise, or limit the ability of our customers to meet their liquidity needs, which could result in an impairment of their ability to make timely payments to us and reduce their demand for our products, adversely impacting our results of operations and cash flows. This environment has also made it difficult for us to accurately forecast and plan future business activities.
Company Specific Risks
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.
We cannot assure you that our strategic direction will result in innovative products and technologies that provide value to our customers and partners. If we fail to anticipate the changing needs of our target markets and emerging technology trends, or adapt that strategy as market conditions evolve, in a timely manner to exploit potential market opportunities our business will be harmed. In addition, if demand for products and solutions from these markets is below our expectations, if we fail to achieve consumer or market acceptance of them or if we are not able to develop these products and solutions in a cost effective or efficient manner, we may not realize benefits from our strategy.
Our target markets remain extremely competitive, and we expect competition to intensify as current competitors expand their product and/or service offerings, industry standards continue to evolve and new competitors enter these markets. If we are unable to successfully compete in our target markets, demand for our products, solutions and technologies could decrease, which would cause our revenue to decline and our financial results to suffer.
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Our product strategy, which is targeted at markets demanding superior video and digital image quality as well as efficient video delivery, 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.
We have adopted a product strategy that focuses on our core competencies in visual display processing and delivering high levels of video and digital image quality. With this strategy, we continue to make further investments in the development of our image processor architecture for the digital projector market, with particular focus on adding increased performance and functionality. For the mobile device market, our strategy focuses on implementing our intellectual property ("IP") to improve the video performance of our customers’ image processors through the use of our MotionEngine® advanced video co-processor integrated circuits. This strategy is designed to address the needs of the high-resolution and high-quality segment of these markets. Such markets may not develop or may take longer to develop than we expect. We cannot assure you that the products we are developing will adequately address the demands of our target customers, or that we will be able to produce our new products at costs that enable us to price these products competitively.
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.
We must achieve "design wins,"wins" that enable us to sell our semiconductor solutions for use in our customers’ products. These competitive selection processes typically are lengthy and can require us to incur significant research and development expenditures and dedicate scarce engineering resources in pursuit of a single customer opportunity. We may not achieve a design win and may never generate any revenue despite incurring significant research and development expenditures. This could cause us to lose revenue and require us to write off obsolete inventory and could weaken our position in future competitive selection processes.
Even if our product strategy is properly targeted, we cannot assure you that the products we are developing will lead to an increase in revenue from new design wins. To achieve design wins, we must design and deliver cost-effective, innovative and integrated semiconductors that overcome the significant costs associated with qualifying a new supplier and which make developers reluctant to change component sources. Additionally, potential developers may be unwilling to select our products due to concerns over our financial strength. Further, design wins do not necessarily result in developers ordering large volumes of our products. Developers can choose at any time to discontinue using our products in their designs or product development efforts. A design win is not a binding commitment by a developer to purchase our products, but rather a decision by a developer to use our products in its design process. Even if our products are chosen to be incorporated into a developer’s products, we may still not realize significant revenue from the developer if its products are not commercially successful or it chooses to qualify, or incorporate the products, of a second source. Additionally, even if our product strategy is successful at achieving design wins and increasing our revenue, we may continue to incur operating losses due to the significant research and development costs that are required to develop competitive products for the digital projection market and mobile market.
System security and data protection breaches, as well as cyber-attacks, could disrupt our operations, reduce our expected revenue and increase our expenses, which could adversely affect our stock price and damage our reputation.
Security breaches, computer malware and cyber-attacks have become more prevalent and sophisticated in recent years. These attacks have occurred on our systems in the past and are expected to occur in the future. Experienced computer programmers, hackers and employees may be able to penetrate our security controls and misappropriate or compromise our confidential information, or that of our employees or third parties. These attacks may create system disruptions or cause shutdowns. For portions of our IT infrastructure, including business management and communication software products, we rely on products and services provided by third parties. These providers may also experience breaches and attacks to their products which may impact our systems. Data security breaches may also result from non-technical means, such as actions by an employee with access to our systems.
Actual or perceived breaches of our security measures or the accidental loss, inadvertent disclosure or unapproved dissemination of proprietary information or sensitive or confidential data about us, our partners, our customers or third parties could expose the parties affected to a risk of loss, or misuse of this information, resulting in litigation and potential liability, damage to our brand and reputation or other harm to our business. Our efforts to prevent and overcome these challenges could increase our expenses and may not be successful. We may experience interruptions, delays, cessation of service and loss of existing or potential customers. Such disruptions could adversely impact our ability to fulfill orders and interrupt other critical functions. Delayed sales, lower margins or lost customers as a result of these disruptions could adversely affect our financial results, stock price and reputation.
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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.
Our success depends on the continued services of our executive officers and other key management, engineering, and sales and marketing personnel and on our ability to continue to attract, retain and motivate qualified personnel. Competition for skilled engineers and management personnel is intense within our industry, and we may not be successful in hiring and retaining qualified individuals. For example, we have experienced, and may continue to experience, difficulty and increased compensation expense in order to hire and retain qualified engineering personnel in our Shanghai design center. The loss of, or inability to hire, key personnel could limit our ability to develop new products and adapt existing products to our customers’ requirements, and may result in lost sales and a diversion of management resources. Any transition in our senior management team may involve a diversion of resources and management attention, be disruptive to our daily operations or impact public or market perception, any of which could have a negative impact on our business or stock price.
We may not fully realize the estimated savings from our restructurings in a timely manner or at all, and our restructuring programs may result in business disruptions and decrease productivity. Any of the foregoing would negatively affect our financial condition and results of operations.
From time to time, we may have the need to execute restructuring plans to make the operation of the Company more efficient. We may not be able to implement our restructuring programs as planned, and we may need to take additional measures to fulfill the objectives of our restructuring. The anticipated expenses associated with our restructuring programs may differ from or exceed our expectations, and we might not be able to realize the full amount of estimated savings from the restructuring programs in a timely manner or at all. Additionally, our restructuring plans may result in business disruptions or decreases in productivity. As a result, our restructuring plans could have an adverse impact on our financial condition or results of operations.
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 and may require us to implement additional future restructuring plans, which in turn could adversely affect our future sales and financial condition.
Financial resource constraints could limit our ability to execute our product strategy or require us to implement additional restructuring plans, particularly if we are unable to generate sufficient cash from operations or obtain additional sources of financing. Any future restructuring actions may slow our development of new or enhanced products by limiting our research and development and engineering activities. Our cash balances are also lower than those of our competitors, which may limit our ability to develop competitive new products on a timely basis or at all. If we are unable to successfully introduce new or enhanced products, our sales, operating results and financial condition will be adversely affected.
If we are not profitable in the future, we may be unable to continue our operations.
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A significant amount of our revenue comes from a limited number of customers and distributors and from time to time we may enter into exclusive deals with customers, 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 itstheir orders.
The display manufacturing market is highly concentrated and we are, and will continue to be, dependent on a limited number of customers and distributors for a substantial portion of our revenue. Sales to our top distributor represented 27%, 24%48% and 31%29% of revenue for the years ended December 31, 2017, 2016,2023 and 2015,2022, respectively. If any of our distributors ceases to do business with us, it may be difficult for us to find adequate replacements, and even if we do, it may take some time. The loss of any of our top distributors could negatively affect our results of operations. Additionally, revenue attributable to our top five end customers represented 79%, 82%87% and 83%76% of revenue for the years ended December 31, 2017, 2016,2023 and 2015,2022, respectively. As of December 31, 2017,2023, we had two accounts that each represented 10% or more of accounts receivable. As of December 31, 20162022, we had one accountfour accounts that each represented 10% or more of accounts receivable. All of the orders included in our backlog are cancelable. A reduction, delay or cancellation of orders from one or more of our significant customers, or a decision by one or more of our significant customers to select products manufactured by a competitor or to use its own internally-developed semiconductors, would significantly and negatively impact our revenue. Further, the concentration of our accounts receivable with a limited number of customers increases our credit risk. The failure of these customers to pay their balances, or any customer to pay future outstanding balances, would result in an operating expense and reduce our cash flows.
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.
Substantially all of our sales to date have been made on a purchase order basis. We generally do not have any long-term commitments with any of our customers. As a result, our customers may cancel, change or delay product purchase commitments, with little or no notice to us and without penalty. This, in turn,which could cause our revenue to decline and materially and adversely affect our results of operations.
Our revenue and operating results can fluctuate from period to period, which could cause our share price to decline.
Our revenue and operating results have fluctuated in the past and may fluctuate from period to period in the future due to a variety of factors, many of which are beyond our control. Factors that may contribute to these fluctuations include those described in this "Risk Factors" section of this report, such as the timing, changes in or cancellation of orders by customers, market acceptance of our products and our customers’ products and the timing and extent of product development costs. Additionally, our business is subject to seasonality related to the markets we serve and the location of our customers. For example, we have historically experienced higher revenue from the digital projector market in the third quarter of the year, and lower revenue in the first quarter of the year. As a result of these and other factors, the results of any prior quarterly or annual periods should not be relied upon as indications of our future revenue or operating performance. Fluctuations in our revenue and operating results 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, or in the event we acquire or make an investment in companies that complement our business, our working capital may be adversely affected and our shareholders may experience dilution or our operations may be impaired.
We may be unable to generate or sustain positive cash flow from operating activities and would then be required to use existing cash and cash equivalents to support our working capital and other cash requirements. Additionally, from time to time, we may evaluate acquisitions of, or investments in, businesses, products or technologies that complement our business. For example, on August 2, 2017 we completed the acquisition of ViXS and issued approximately 3.7 million shares of our common stock as consideration. Any additional 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.
In addition, any proceeds received by PWSH, one of our Chinese subsidiaries, from the private placement of shares (including the transaction that closed in August of 2021) or in connection with the future potential listing of PWSH shares on the STAR Market in Shanghai, are subject to certain PRC laws and regulations that may make it difficult, if not impossible, to use such proceeds to fund those operations of Pixelworks that are not part of PWSH. As a result, it is unlikely that funds raised or generated by PWSH will be readily distributable to Pixelworks.
If additional funds are required to support our working capital requirements, acquisitions or other purposes, we may seek to raise funds through debt and 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.
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We license our intellectual property, which exposes us to risks of infringement or misappropriation, and may cause fluctuations in our operating results.
We have licensed certain of our intellectual propertiesproperty to third parties and may enter into additional license arrangements in the future. We cannot assure you, however, that others will be interested in licensing our intellectual property on commercially favorable terms or at all. We also cannot ensure that licensees will honor agreed-upon market restrictions, not infringe upon or misappropriate our intellectual property or maintain the confidentiality of our proprietary information.
IP license agreements are complex and earning and recognizing revenue under these agreements depends upon many factors, including completion of milestones, allocation of values to delivered items and customer acceptances. Many of these factors require significant judgments. Also, generating revenue from these arrangements is a lengthy and complex process that may last beyond the period in which efforts begin and, once an agreement is in place, the timing of revenue recognition may depend on events such as customer acceptance of deliverables, achievement of milestones, our ability to track and report progress on contracts, customer commercialization of the licensed technology and other factors, any or all of which may or may not be achieved. The accounting rules associated with recognizing revenue from these transactions are complex and subject to interpretation. Due to these factors, the amount of licensing revenue recognized in any period, if any, and our results of operations, may differ significantly from our expectations.
Finally, because licensing revenue typically has a higher margin compared to product sales, licensing revenue can have a disproportionate impact on our gross profit and results of operations. There is no assurance that we will be able to maintain a consistent level of licensing revenue or mix of licensing revenue and revenue from product sales, which could result in wide fluctuations in our results of operations from period to period, making it difficult to accurately measure the performance of our business.
Our net operating loss carryforwards may be limited or they may expire before utilization.
As of December 31, 2017,2023, we had federal, state and foreign net operating loss carryforwards of approximately $215.3$154.5 million, $11.4$16.3 million, and $38.6$89.0 million, respectively, which will begin to expire between 2019 and 2037.in 2024. These net operating loss carryforwards may be used to offset future taxable income and thereby reduce our income taxes otherwise payable. However, we cannot assure you that we will have taxable income in the future before all or a portion of these net operating loss carryforwards expire. Additionally, our federal net operating losses may be limited by Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"), 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. In the event of certain changes in our shareholder base, we may at some time in the future experience an "ownership change" and the use of our federal net operating loss carryforwards may be limited. In addition, the Tax Cuts and Jobs Act (the "TCJA"), limits the deduction for net operating loss carryforwards to 80 percent of taxable income for losses arising in taxable years beginning after December 31, 2017.2020.
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We face a number of risks as a result of the concentration of our operations and customers in Asia.
Many of our customers are located in Japan, China, Korea, or Taiwan. Sales outside the U.S. accounted for approximately 98% , 100%99.7% and 100%95.1% of revenue for the years ended December 31, 2017, 2016,2023 and 2015,2022, respectively. We anticipate that sales outside the U.S. will continue to account for a substantial portion of our revenue in future periods. In addition, customers who incorporate our products into their products sell a substantial portion of their products outside of the U.S. All of our products are also manufactured outside of the U.S. and most of our current manufacturers are located in China or Taiwan. Furthermore, most of our employees are located in China, Japan and Taiwan. Our Asian operations require significant management attention and resources, and we are subject to many risks associated with operations in Asia, including, but not limited to:
•outbreaks of health epidemics in China or other parts of Asia, such as the recent COVID-19 pandemic;
•difficulties in managing international distributors and manufacturers due to varying time zones, languages and business customs;
•compliance with U.S. laws affecting operations outside of the U.S., such as the Foreign Corrupt Practices Act;
•reduced or limited protection of our IP, particularly in software, which is more prone to design piracy;
•difficulties in collecting outstanding accounts receivable balances;
•changes in tax rates, tax laws and the interpretation of those laws;
•difficulties regarding timing and availability of export and import licenses;
•ensuring that we obtain complete and accurate information from our Asian operations to make proper disclosures in the United States;
•political and economic instability;instability and tensions, including tensions between China and each of the U.S., Taiwan and Japan;
•difficulties in maintaining sales representatives outside of the U.S. that are knowledgeable about our industry and products;
•changes in the regulatory environment in China, Japan Taiwan and KoreaTaiwan that may significantly impact purchases of our products by our customers or our customers’ sales of their own products;
•imposition of new tariffs, quotas, trade barriers and similar trade restrictions on our sales;
•varying employment and labor laws; and
•greater vulnerability to infrastructure and labor disruptions than in established markets.
Any of these factors could require a disproportionate share of management’s attention, result in increased costs or decreased revenues, and could materially affect our product sales, financial condition and results of operations.
Our operations in Asia expose us to heightened risks due to natural disasters.
The risk of natural disasters in the Pacific Rim region is significant. Natural disasters in countries where our manufacturers or customers are located could result in disruption of our manufacturers’ and customers’ operations, resulting in significant delays in shipment of, or significant reductions in orders for, our products. There can be no assurance that we can locate additional manufacturing capacity or markets on favorable terms, or find new customers, in a timely manner, if at all. Natural disasters in this region could also result in:
•reduced end user demand due to the economic impact of any natural disaster;
•a disruption to the global supply chain for products manufactured in areas affected by natural disasters that are included in products purchased either by us or by our customers;
•an increase in the cost of products that we purchase due to reduced supply; and
•other unforeseen impacts as a result of the uncertainty resulting from a natural disaster.
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Our international operations expose us to risks resulting from the fluctuations of foreign currencies.
We are exposed to risks resulting from the fluctuations of foreign currencies, primarily those of Japan, Taiwan, KoreaChina and China. Additionally, with the acquisition of ViXS, we will be exposed to risks resulting from fluctuations in the Canadian Dollar.Canada. We sell our products to OEMs that incorporate our products into other products that they sell outside of the U.S. While sales of our products to OEMs are denominated in U.S. dollars, the products sold by OEMs are denominated in foreign currencies. Accordingly, any strengthening of the U.S. dollar against these foreign currencies will increase the foreign currency price equivalent of our products, which could lead to a change in the competitive nature of these products in the marketplace. This, in turn, could lead to a reduction in revenue.
In addition, a portion of our operating expenses, such as employee salaries and foreign income taxes, are denominated in foreign currencies. Accordingly, our operating results are affected by changes in the exchange rate between the U.S. dollar and those currencies. Any future strengthening of those currencies against the U.S. dollar will negatively impact our operating results by increasing our operating expenses as measured in U.S. dollars.
Our cash reserves (including those of PWSH) may be held in part in foreign currencies in amounts that could materially impact the value of those reserves if the U.S. dollar strengthens or weakens against such currencies. In such an event, the corresponding income or expense that is dictated by U.S. GAAP accounting may impact our financial results.
We may engage in financial hedging techniques in the future as part of a strategy to address potential foreign currency exchange rate fluctuations. These hedging techniques, however, may not be successful at reducing our exposure to foreign currency exchange rate fluctuations and may increase costs and administrative complexity.
Failure to comply with anti-bribery, anti-corruption, and anti-money laundering laws could subject us to penalties and other adverse consequences.
We are subject to the Foreign Corrupt Practices Act (FCPA)("FCPA") and other anti-corruption, anti-bribery and anti-money laundering laws in various jurisdictions. From time to time, we may leverage third parties to help conduct our businesses abroad. We and our third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities and may be held liable for the corrupt or other illegal activities of these third-party business partners and intermediaries, our employees, representatives, contractors, channel partners, and agents, even if we do not explicitly authorize such activities. While we have policies and procedures to address compliance with such laws, we cannot assure you that all of our employees and agents will not take actions in violation of our policies and applicable law, for which we may be ultimately held responsible. Any violation of the FCPA or other applicable anti-bribery, anti-corruption laws, and anti-money laundering laws could result in whistleblower complaints, adverse media coverage, investigations, loss of export privileges, severe criminal or civil sanctions, or suspension or debarment from U.S. government contracts, all of which may have an adverse effect on our reputation, our business, results of operations and financial condition.
Our reported financial results may be materially and adversely affected by changes in accounting principles generally accepted in the United States.
Generally accepted accounting principles in the United Sates are subject to interpretation by the Financial Accounting Standards Board (FASB)("FASB"), the SEC, and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results and could materially and adversely affect the transactions completed before the announcement of a change. Additionally, the adoption of new or revised accounting principles may require that we make significant changes to our systems, processes and controls. In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09), which we have implemented from January 1, 2018. The adoption of this new standard did not result in a cumulative-effect adjustment to retained earnings as of January 1, 2018, however we cannot guarantee that there will be no unforeseen effects of this new standard on our financial statements. We continue to monitor implementation of this new standard closely.
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.
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As we have limited insurance coverage, any incurred liability resulting from uncovered claims could adversely affect our financial condition and results of operations.
Our insurance policies may not be adequate to fully offset losses from covered incidents, and we do not have coverage for certain losses. For example, we do not have earthquake insurance related to our Asian operations because adequate coverage is not offered at economically justifiable rates. If our insurance coverage is inadequate to protect us against catastrophic losses, any uncovered losses could adversely affect our financial condition and results of operations.
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.
Selling to distributors and OEMs that build display devices based on specifications provided by branded suppliers, also referred to as integrators, reduces our ability to forecast sales accurately and increases the complexity of our business. Our sales are generally made on the basis of customer purchase orders rather than long-term purchase commitments. Our distributors, integrators and customers may cancel or defer purchase orders at any time, but we must order wafer inventory from our contract manufacturers three to four months in advance.
The estimates we use for our advance orders from contract manufacturers are based, in part, on reports of inventory levels and production forecasts from our distributors and integrators, which act as intermediaries between us and the companies using our products. This process requires us to make numerous assumptions concerning demand and to rely on the accuracy of the reports and forecasts of our distributors and integrators, each of which may introduce error into our estimates of inventory requirements. Our failure to manage this challenge could result in excess inventory or inventory shortages that could materially impact our operating results or limit the ability of companies using our semiconductors to deliver their products. If we overestimate demand for our products, it could lead to significant charges for obsolete inventory. On the other hand, if we underestimate demand, we could forego revenue opportunities, lose market share and damage our customer relationships.
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.
If we fail to effectively manage any future internal growth, our operating expenses may increase more rapidly than our revenue, adversely affecting our financial condition and results of operations. To manage any future growth effectively in a rapidly evolving market, we must be able to maintain and improve our operational and financial systems, train and manage our employee base and attract and retain qualified personnel with relevant experience. We could spend substantial amounts of time and money in connection with expansion efforts for which we may not realize any profit. Our systems, procedures, controls or financial resources may not be adequate to support our operations and we may not be able to grow quickly enough to exploit potential market opportunities. In addition, we may not be able to successfully integrate the businesses, products, technologies or personnel of ViXS or any other entity that we might acquire in the future, or we may fail to realize the anticipated benefits of any such acquisition. The successful integration of any acquired business as well as the retention of personnel may require significant attention from our management and could divert resources from our existing business, which in turn could have an adverse effect on our business operations. Acquired assets or businesses may not achieve the anticipated benefits we expect due to a number of factors including: unanticipated costs or liabilities associated with thesuch acquisition, including in the case of acquisitions we may make outside of the United States, including ViXS, difficulty in operating in foreign countries or complying with foreign regulatory requirements, incurrence of acquisition-related costs, harm to our relationships with existing customers as a result of thesuch acquisition, harm to our brand and reputation, the loss of key employees in the acquired businesses, use of resources that are needed in other parts of our business, and use of substantial portions of our available cash to consummate theany such acquisition. Any failure to successfully integrate ViXS or any other entity we may acquire or any failure to achieve the anticipated benefits of any such acquisition could disrupt our business and seriously harm our financial condition.
Continued compliance with regulatory and accounting requirements will be challenging and will require significant resources.
We spend a significant amount of management time and external resources to comply with changing laws, regulations and standards relating to corporate governance and public disclosure, including evolving SEC rules and regulations, Nasdaq Global Market rules, the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Sarbanes-Oxley Act of 2002, which requires management’s annual review and evaluation of internal control over financial reporting. Failure to comply with these laws and rules could lead to investigation by regulatory authorities, de-listing from the Nasdaq Global Market, or penalties imposed on us. Additionally, beginning January 1, 2018, we have ceased to qualify as a smaller reporting company and, as such, we will be required to provide additional disclosures in our periodic reports, which will require additional management time and external resources.
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Regulations related to conflict minerals may adversely impact our business.
The SEC has adopted disclosure and reporting rules intended to improve transparency and accountability concerning the supply of certain minerals, known as conflict minerals, originating from the Democratic Republic of Congo (“DRC”("DRC") and adjoining countries. These rules require us to conduct a reasonable inquiry to determine the origin of certain materials used in our products and disclose whether weour products use any materials containing conflict minerals originating from the DRC and adjoining countries. ThereSince we do not own or operate a semiconductor fabrication facility and do not manufacture our products internally, we are dependent on the information provided by third-party foundries and production facilities regarding the materials used and the supply chains for the materials. Further, there are costs associated with complying with these rules, including costs incurred to conduct inquiries to determine the sources of any materials containing conflict minerals used in our products, to fulfill our reporting requirements and to develop and implement potential changes to products, processes or sources of supply if it is determined that our products contain or use any conflict minerals from the DRC or adjoining countries. The implementation of these rules could also affect the sourcing, supply and pricing of materials used in our products. For example, there may only be a limited number of suppliers offering “conflict free” materials and we cannot be sure that we will be able to obtain necessary "conflict free" materials from such suppliers in sufficient quantities or at reasonable prices. In addition, we may face reputational challenges if we determine that any of our products contain minerals that are not conflict free or if we are unable to sufficiently verify the origins for all materials containing conflict minerals used in our products through the procedures we may implement.
Our effective income tax rate is subject to unanticipated changes in, or different interpretations of, tax rules and regulations, and forecasting our effective income tax rate is complex and subject to uncertainty.
As a global company, we are subject to taxation by a number of taxing authorities and as such, our tax rates vary among the jurisdictions in which we operate. Unanticipated changes in our tax rates could affect our future results of operations. Our effective tax rates could be adversely affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in tax laws or the interpretation of tax laws either in the U.S. or abroad, or by changes in the valuation of our deferred tax assets and liabilities. The ultimate outcomes of any future tax audits are uncertain, and we can give no assurance as to whether an adverse result from one or more of them would have a material effect on our operating results and financial position.
The computation of income tax expense is complex as it is based on the laws of numerous tax jurisdictions and requires significant judgment on the application of complicated rules governing accounting for tax provisions under U.S. generally accepted accounting principles. Income tax expense for interim quarters is based on our forecasted tax rate for the year, which includes forward looking financial projections, including the expectations of profit and loss by jurisdiction, and contains numerous assumptions. For these reasons, our tax rate may be materially different than our forecast.
We rely upon certain critical information systems for the operation of our business, and the failure of any critical information system may result in serious harm to our business.
We maintain and rely upon certain critical information systems for the effective operation of our business. These information systems include telecommunications, the Internet, our corporate intranet, various computer hardware and software applications, network communications and e-mail. These information systems are subject to attacks, failures and access denials from a number of potential sources including viruses, destructive or inadequate code, power failures, and physical damage to computers, communication lines and networking equipment. To the extent that these information systems are under our control, we have implemented security procedures, such as virus protection software and firewall monitoring, to address the outlined risks. Security procedures for information systems cannot be guaranteed to be failsafe and our inability to use or access these information systems at critical times could compromise the timely and efficient operation of our business. Additionally, any compromise of our information security could result in the unauthorized publication of our confidential business or proprietary information, cause an interruption in our operations, result in the unauthorized release of customer or employee data, result in a violation of privacy or other laws, or expose us to a risk of litigation or damage our reputation, any or all of which could harm our business and operating results.
Environmental laws and regulations may cause us to incur significant expenditures to comply with applicable laws and regulations, and we may be assessed considerable penalties for noncompliance.
We are subject to numerous environmental laws and regulations. Compliance with current or future environmental laws and regulations could require us to incur substantial expenses which could harm our business, financial condition and results of operations. We have worked, and will continue to work, with our suppliers and customers to ensure that our products are compliant with enacted laws and regulations. Failure by us or our contract manufacturers to comply with such legislation could result in customers refusing to purchase our products and could subject us to significant monetary penalties in connection with a violation, either of which would have a material adverse effect on our business, financial condition and results of operations.
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Increasing attention on environmental, social and governance ("ESG") matters may have a negative impact on our business, impose additional costs on us, and expose us to additional risks.
Companies are facing increasing attention from investors, customers, partners, consumers and other stakeholders relating to ESG matters, including environmental stewardship, social responsibility, diversity and inclusion, racial justice and workplace conduct. In addition, organizations that provide information to investors on corporate governance and related matters have developed ratings processes for evaluating companies on their approach to ESG matters. Such ratings are used by some investors to inform their investment and voting decisions. Unfavorable ESG ratings may lead to negative investor sentiment toward the Company, which could have a negative impact on our stock price and our access to and costs of capital.
We have established corporate social responsibility programs aligned with sound environmental, social and governance principles. These programs reflect our current initiatives and are not guarantees that we will be able to achieve them. Our ability to successfully execute these initiatives and accurately report our progress presents numerous operational, financial, legal, reputational and other risks, many of which are outside our control, and all of which could have a material negative impact on our business. Additionally, the implementation of these initiatives imposes additional costs on us. If our ESG initiatives fail to satisfy investors, customers, partners and our other stakeholders, our reputation, our ability to sell products and services to customers, our ability to attract or retain employees, and our attractiveness as an investment, business partner or acquirer could be negatively impacted. Similarly, our failure or perceived failure to pursue or fulfill our goals, targets and objectives or to satisfy various reporting standards within the timelines we announce, or at all, could also have similar negative impacts and expose us to government enforcement actions and private litigation.
Company Risks Related to the Semiconductor Industry and Our Markets
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.
We do not own or operate a semiconductor fabrication facility and do not have the resources to manufacture our products internally. We rely on a limited number of foundries and assembly and test vendors to produce all of our wafers and for completion of finished products. Our wafers are not fabricated at more than one foundry at any given time and our wafers typically are designed to be fabricated in a specific process at only one foundry. Sole sourcing each product increases our dependence on our suppliers. We have limited control over delivery schedules, quality assurance, manufacturing yields, potential errors in manufacturing and production costs. We do not have long-term supply contracts with our third-party manufacturers, so they are not obligated to supply us with products for any specific period of time, quantity or price, except as may be provided in a particular purchase order. Our suppliers can increase the prices of the products we purchase from them with little notice, which may cause us to increase the prices to our customers and harm our competitiveness. Because our requirements represent only a small portion of the total production capacity of our contract manufacturers, they could reallocate capacity to other customers during periods of high demand for our products, as they have done in the past. We expect this may occur again in the future.
Establishing a relationship with a new contract manufacturer in the event of delays or increased prices would be costly and burdensome. The lead time to make such a change would be at least nine months, and the estimated time for us to adapt a product’s design to a particular contract manufacturer’s process is at least four months. Additionally, we have chosen, and may continue to choose new foundries to manufacture our wafers which in turn, may require us to modify our design methodology flow for the process technology and intellectual property cores of the new foundry. If we have to qualify a new foundry or packaging, assembly and testing supplier for any of our products or if we are unable to obtain our products from our contract manufacturers on schedule, at costs that are acceptable to us, or at all, we could incur significant delays in shipping products, our ability to satisfy customer demand could be harmed, our revenue from the sale of products may be lost or delayed and our customer relationships and ability to obtain future design wins could be damaged.
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.
We have in the past and may from time-to-time face shortages of components and materials that are critical to the manufacture of our products and our customers’ products. Such critical components and materials may include semiconductor wafers and packages, double data rate memory die, display components, analog-to-digital converters, digital receivers, video decoders and voltage regulators. These shortages may result in additional costs to us and we may be unable to ship our products to our customers in a timely fashion, which could harm our business and adversely affect our results of operations.
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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 manufacture of semiconductors is a complex process and it is often difficult for semiconductor foundries to produce semiconductors free of defects. Because many of our products are more highly integrated than other semiconductors and incorporate mixed signal analog and digital signal processing, multi-chip modules and embedded memory technology, they are even more difficult to produce without defects. Defective products can be caused by design or manufacturing difficulties. Identifying quality problems can be performed only by analyzing and testing our semiconductors in a system after they have been manufactured. The difficulty in identifying defects is compounded because the process technology is unique to each of the multiple semiconductor foundries we contract with to manufacture our products. Despite testing by both our customers and us, errors or performance problems may be found in existing or new semiconductors. Failure to achieve defect-free products may result in increased costs and delays in the availability of our products. Defects may also divert the attention of our engineering personnel from our product development efforts to find and correct the issue, which would delay our product development efforts.
Additionally, customers could seek damages from us for their losses, and shipments of defective products may harm our reputation with our customers. If a product liability claim is brought against us, the cost of defending the claim could be significant and would divert the efforts of our technical and management personnel and harm our business. Further, our business liability insurance may be inadequate or future coverage may be unavailable on acceptable terms, which could adversely impact our financial results.
We experience a small number of semiconductor field failures infrequently in certain customer applications that required us to institute additional testing. As a result of these field failures, we have incurred warranty costs due to customers returning potentially affected products and have experienced reductions in revenues due to delays in production. Our customers have also experienced delays in receiving product shipments from us that resulted in the loss of revenue and profits. Additionally, shipments of defective products could cause us to lose customers or to incur significant replacement costs, either of which would harm our reputation and our business. Any defects, errors or bugs could also interrupt or delay sales of our new products to our customers, which would adversely affect our financial results.
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.
In addition to the inherent difficulty of designing complex integrated circuits, product development delays may result from:
•difficulties in hiring and retaining necessary technical personnel;
•difficulties in reallocating engineering resources and overcoming resource limitations;
•difficulties with contract manufacturers;
•changes to product specifications and customer requirements;
•changes to market or competitive product requirements; and
•unanticipated engineering complexities.
If we are not successful in the timely development of new products, we may fail to obtain new design wins and our financial results will be adversely affected.
Intense competition in our markets may reduce sales of our products, reduce our market share, decrease our gross profit and result in large losses.
We compete with specialized and diversified electronics and semiconductor companies that offer display processors or scaling components including: Actions Microelectronics Co., Ltd., ARM Holdings PLC, Dolby Laboratories, Inc., EGiS Technologies, Inc., HiSilicon Technologies Co., Ltd., i-Chips Technology Inc., Lattice Semiconductor Corporation, MediaTek Inc., Novatek Microelectronics Corp., NVIDIA Corporation, Qualcomm Incorporated, Realtek Semiconductor Corp., Socionext Inc., Solomon Systech (International) Ltd., STMicroelectronics N.V., Sunplus Technology Co., Ltd., Synaptics Incorporated, Texas Instruments Incorporated, Unisoc (Shanghai) Technologies Co., Ltd., and other companies. Potential and current competitors may include diversified semiconductor manufacturers and the semiconductor divisions or affiliates of some of our customers, including: Apple Inc., Broadcom Inc., LG Electronics, Inc., MegaChips Corporation, Mitsubishi Digital Electronics America, Inc., NEC Corporation, Panasonic Corporation, Samsung Electronics Co., Ltd., Socionext Inc., ON Semiconductor Corporation, Seiko Epson Corporation, Sharp Corporation, Sony Group Corporation, and Toshiba America, Inc. In addition, start-up companies may seek to compete in our markets.
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Many of our competitors have longer operating histories and greater resources to support development and marketing efforts than we do. Some of our competitors operate their own fabrication facilities. These competitors may be able to react more quickly and devote more resources to efforts that compete directly with our own. Additionally, any consolidation in the semiconductor industry may impact our competitive position. Our current or potential customers have developed, and may continue to develop, their own proprietary technologies and become our competitors. Increased competition from both competitors and our customers’ internal development efforts could harm our business, financial condition and results of operations by, for example, increasing pressure on our profit margin or causing us to lose sales opportunities. For example, frame rate conversion technology similar to that used in our line of MotionEngine® advanced video co-processors continues to be integrated into the SoC and display timing controller products of our competitors. We cannot assure you that we can compete successfully against current or potential competitors.
Although our TrueCut Motion product is the first motion grading solution for the cinematic market, competitive solutions could arise rapidly. These competitive solutions could come from several sources, including companies that provide solutions for other post-processing needs (such as Dolby Laboratories, Inc., Epic Games, Inc., Unity Technologies, Adobe Inc., Soluciones Gráficas por Ordenador S.L. (SGO), The Foundry Visionmongers Limited, and Autodesk, Inc.) as well as visual effects studios that use digital effects to reduce artifacts before they are created (such as Wētā FX, DNEG Plc, Pixar Animation Studios, Digital Domain, and Industrial Light & Magic (ILM)).
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.
The markets in which we compete or seek to compete are subject to rapid technological change and miniaturization capabilities, frequent new product introductions, changing customer requirements for new products and features and evolving industry standards. The introduction of new technologies and emergence of new industry standards could render our products less desirable or obsolete, which could harm our business and significantly decrease our revenue. Examples include the increased adoption of artificial intelligence in visual processing systems, the growing use of broadband to deliver video content, increased display resolution and size, faster screen refresh rates, video capability such as High Dynamic Range, the proliferation of new display devices and the drive to network display devices together. Our failure to predict market needs accurately or to timely develop new competitively priced products or product enhancements that incorporate new industry standards and technologies, including integrated circuits with increasing levels of integration and new features, using smaller geometry process technologies, may harm market acceptance and sales of our products.
Our products are incorporated into our customers’ products, which have different parts and specifications and utilize multiple protocols that allow them to be compatible with specific computers, video standards and other devices. If our customers’ products are not compatible with these protocols and standards, consumers will return, or not purchase these products and the markets for our customers’ products could be significantly reduced. Additionally, if the technology used by our customers becomes less competitive due to cost, customer preferences or other factors relative to alternative technologies, sales of our products could decline.
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 build most of our products on a customer-owned tooling basis, whereby we directly contract the manufacture of our products, including wafer production, assembly and test.testing. As a result, we are subject to increased risks arising from wafer manufacturing yields and risks associated with coordination of the manufacturing, assembly and testing process. Poor product yields result in higher product costs, which could make our products less competitive if we increase our prices to compensate for our higher costs or could result in lower gross profit margins if we do not increase our prices.
We depend on the 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.
To respond effectively to changes in technology and industry standards, we depend on our contracted foundries to implement advanced semiconductor technologies and our operations could be adversely affected if those technologies are unavailable, delayed or inefficiently implemented. In order to increase performance and functionality and reduce the size of our products, we are continuously developing new products using advanced technologies that further miniaturize semiconductors and we are dependent on our foundries to develop and provide access to the advanced processes that enable such miniaturization. We cannot be certain that future advanced manufacturing processes will be implemented without difficulties, delays or increased expenses. Our business, financial condition and results of operations could be materially adversely affected if advanced manufacturing processes are unavailable to us, substantially delayed or inefficiently implemented.
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Creating the capacity for new technological changes may cause manufacturers to discontinue older manufacturing processes in favor of newer ones. We must then either retire the affected part or port (develop) a new version of the part that can be manufactured with a newer process technology. In the event that a manufacturing process is discontinued, our current suppliers may be unwilling or unable to manufacture our current products. We may not be able to place last time buy orders for the old technology or find alternate manufacturers of our products to allow us to continue to produce products with the older technology while we expend the significant costs for research and development and time to migrate to new, more advanced processes. For example, a portion of our products use 0.11um technology for memory die, which is being phased out in favor of 63nm technology to increase yields and decrease cost. Because of this transition, our customers must re-qualify the affected parts.
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.
We develop products based on anticipated market and customer requirements and incur substantial product development expenditures, which can include the payment of large up-front, third-party license fees and royalties, prior to generating the associated revenue. Our work under these projects is technically challenging and places considerable demands on our limited resources, particularly on our most senior engineering talent. Additionally, the transition to smaller geometry process technologies continues to significantly increase the cost and complexity of new product development, particularly with regards to tooling, software tools, third party IP and engineering resources. Because the development of our products incorporates not only our complex and evolving technology, but also our customers’ specific requirements, a lengthy sales process is often required before potential customers begin the technical evaluation of our products. Our customers typically perform numerous tests and extensively evaluate our products before incorporating them into their systems. The time required for testing, evaluation and design of our products into a customer’s system can take nine months or more. It can take an additional nine months or longer before a customer commences volume shipments of systems that incorporate our products, if at all. Because of the lengthy development and sales cycles, we will experience delays between the time we incur expenditures for research and development, sales and marketing and inventory and the time we generate revenue, if any, from these expenditures.
Furthermore, we have entered into and may in the future enter into, co-development agreements that do not guarantee future sales volumes and limit our ability to sell the developed products to other customers. The exclusive nature of these development agreements increases our dependence on individual customers, particularly since we are limited in the number of products we are able to develop at any one time.
If actual sales volumes for a particular product are substantially less than originally anticipated, we may experience large write-offs of capitalized license fees, software development tools, product masks, inventories or other capitalized or deferred product-related costs, any of which would negatively affect our operating results.
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.
We provide our customers with software development tools and with software that provides basic functionality for our integrated circuits and enables enhanced connectivity of our customers’ products. Software development is a complex process and we are dependent on software development languages and operating systems from vendors that may limit our ability to design software in a timely manner. Also, as software tools and interfaces change rapidly, new software languages introduced to the market may be incompatible with our existing systems and tools, requiring significant engineering efforts to migrate our existing systems in order to be compatible with those new languages. Software development disruptions could slow our product development or cause us to lose customers and design wins. The integration of software with our products adds complexity, may extend our internal development programs and could impact our customers’ development schedules. This complexity requires increased coordination between hardware and software development schedules and increases our operating expenses without a corresponding increase in product revenue. This additional level of complexity lengthens the sales cycle and may result in customers selecting competitive products requiring less software integration.
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.
We license technology from independent third parties that is incorporated into our products or product enhancements. Future products or product enhancements may require additional third-party licenses that may not be available to us on terms that are acceptable to us or at all. In addition, in the event of a change in control of one of our licensors, it may become difficult to maintain access to its licensed technology. If we are unable to obtain or maintain any third-party license required to develop new products and product enhancements, we may have to obtain substitute technology with lower quality or performance standards, or at greater cost, either of which could seriously harm the competitiveness of our products.
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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 ability to compete effectively with other companies depends, in part, on our ability to maintain the proprietary nature of our technology, including our semiconductor designs and software code. We provide the computer programming code for our software to customers in connection with their product development efforts, thereby increasing the risk that customers will misappropriate our proprietary software. We rely on a combination of patent, copyright, trademark and trade secret laws, as well as nondisclosure agreements and other methods, to help protect our proprietary technologies.technologies As of December 31, 2017,2023, we held 536280 patents and had 10018 patent applications pending for protection of our significant technologies. Competitors in both the U.S. and foreign countries, many of whom have substantially greater resources than we do, may apply for and obtain patents that will prevent, limit or interfere with our ability to make and sell our products, or they may develop similar technology independently or design around our patents. Effective patent, copyright, trademark and trade secret protection may be unavailable or limited in foreign countries and, thus, make the possibility of piracy of our technology and products more likely in these countries.
We cannot assure you that the degree of protection offered by patent or trade secret laws will be sufficient. Furthermore, we cannot assure you that any patents will be issued as a result of any pending applications or that any claims allowed under issued patents will be sufficiently broad to protect our technology. We may incur significant costs to stop others from infringing our patents. In addition, it is possible that existing or future patents may be invalidated, diluted, circumvented, challenged or licensed to others.
Others may bring infringement or indemnification actions against us that could be time-consuming and expensive to defend.
We may become subject to claims involving patents or other intellectual property rights. In recent years, there has been significant litigation in the U.S. and in other jurisdictions involving patents and other intellectual property rights. This litigation is particularly prevalent in the semiconductor industry, in which a number of companies aggressively use their patent portfolios to bring infringement claims. In recent years, there has been an increase in the filing of so-called "nuisance suits," alleging infringement of intellectual property rights. These claims may be asserted initially or as counterclaims in response to claims made by a company alleging infringement of intellectual property rights. These suits pressure defendants into entering settlement arrangements to quickly dispose of such suits, regardless of merit. We may also face claims brought by companies that are organized solely to hold and enforce patents. In addition, we may be required to indemnify our customers against IP claims related to their usage of our products as certain of our agreements include indemnification provisions from third parties relating to our intellectual property.
IP claims could subject us to significant liability for damages and invalidate our proprietary rights. Responding to such claims, regardless of their merit, can be time-consuming, result in costly litigation, divert management’s attention and resources and cause us to incur significant expenses. As each claim is evaluated, we may consider the desirability of entering into settlement or licensing agreements. No assurance can be given that settlements will occur or that licenses can be obtained on acceptable terms or that litigation will not occur. In the event there is a temporary or permanent injunction entered prohibiting us from marketing or selling certain of our products, or a successful claim of infringement against us requiring us to pay damages or royalties to a third-party and we fail to develop or license a substitute technology, our business, results of operations or financial condition could be materially adversely affected. Any IP litigation or claims also could force us to do one or more of the following:
•stop selling products using technology that contains the allegedly infringing IP;
•attempt to obtain a license to the relevant IP, which may not be available on terms that are acceptable to us or at all;
•attempt to redesign those products that contain the allegedly infringing IP; or
•pay damages for past infringement claims that are determined to be valid or which are arrived at in settlement of such litigation or threatened litigation.
If we are forced to take any of the foregoing actions, we may incur significant additional costs or be unable to manufacture and sell our products, which could seriously harm our business. In addition, we may not be able to develop, license or acquire non-infringing technology under reasonable terms. These developments could result in an inability to compete for customers or otherwise adversely affect our results of operations.
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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.
Average selling prices for our products can decline over relatively short periods of time, while many of our product costs are relatively fixed. When our average selling prices decline, our gross profit declines unless we are able to sell more units or reduce the cost to manufacture our products. We have experienced declines in our average selling prices and expect that we will continue to experience them in the future, although we cannot predict when they may occur or how severe they will be. Our financial results will suffer if we are unable to offset any reductions in our average selling prices by increasing our sales volumes, reducing our costs, adding new features to our existing products or developing new or enhanced products in a timely manner with higher selling prices or gross profits.
The cyclical nature of the semiconductor industry may lead to significant variances in the demand for our products and could harm our operations.
In the past, the semiconductor industry has been characterized by significant downturns and wide fluctuations in supply and demand. Also, the industry has experienced significant fluctuations in anticipation of changes in general economic conditions, including economic conditions in Asia, Europe and North America. The cyclical nature of the semiconductor industry has also led to significant variances in product demand and production capacity. We have experienced, and may continue to experience, periodic fluctuations in our financial results because of changes in industry-wide conditions.
Our business is subject to the risks of earthquakes, fire, power outages, floods, and other catastrophic events, and to interruption by man-made problems such as acts of war and terrorism.
Risks Related to Our Operations in China
We face additional risks associated with our operations in China, including the risk of changes in China’s political, economic or social conditions or changes in U.S.-China relations, as well as liquidity risks, any of which may adversely and materially affect our results of operations, financial position and value of our securities.
We have, and expect to continue to have, more than a majority of our operations in China as PWSH, one of our Chinese subsidiaries, is a full profit-and-loss center underneath the Company for our Mobile and Home & Enterprise businesses. The economy of China differs from the economies of the United States in important respects such as structure, government involvement, level of development, growth rate, capital reinvestment, allocation of resources, self-sufficiency, rate of inflation, foreign currency flows and balance of payments position, among others. There can be no assurance that China’s economic policies will be consistent or effective and because more than a majority of our operations are in China, our results of operations, financial position and value of our securities may be materially harmed by changes in China’s political, economic or social conditions. Additionally, the political and economic relationship between the U.S. and China is uncertain, and any changes in policy as a result may adversely affect our business. For example, recent statements and actions by the United States regarding the export of certain semiconductor technology, although not applicable to our technology or products, could result in responsive actions taken by China that could adversely impact our operations, financial position, or the value of our securities.
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In addition, the Company faces certain liquidity risks from its operations in China. PWSH has, in the past, and may decide in the future, to sell shares of its stock, such as in a private placement similar to that which closed in August 2021, in an initial public offering on a stock exchange located in China, such as the STAR Market, or otherwise. In addition, PWSH may, in the future, become profitable. Any proceeds raised or generated by PWSH are subject to certain PRC laws and regulations that may make it difficult, if not impossible, for the Company to use such proceeds to fund its operations outside of China. For example, China’s government imposes control over the convertibility of RMB into foreign currencies, which can cause difficulties converting cash held in RMB to other currencies. It is therefore unlikely that funds raised or generated by PWSH will be readily distributable to the Company or its U.S. shareholders. To date, no dividends or distributions have been made by PWSH to either the Company or its U.S. investors. Additionally, cash is transferred through the Company between entities through settling cash owed between one entity and another, for example for services rendered, through intercompany agreements, and the Company intends to continue settling amounts owed in the ordinary course of business in this manner. During the fiscal years ended December 31, 2022 and December 31, 2023, an aggregate of $8.6 million in cash was transferred from the Company to PWSH, and $14.2 million from PWSH to the Company as part of such settlements. While currently the Company has been able to settle cash owed between PWSH and other entities within the Company, PRC laws and regulations could change so as to make it more difficult, if not impossible, to make such transfers in the future, which in turn would adversely affect our results of operations.
We face legal and operational risks related to the PRC legal system, including uncertainties regarding the enforcement of laws, and sudden or unexpected changes in laws, required approvals and permissions, and regulations in China, which could adversely affect us and limit the legal protections available to the Company and its shareholders, as well as materially and adversely affect our business and value of our securities.
While the overall effect of legislation over the past two decades has significantly enhanced the protections afforded to various foreign investments in China, China has not developed a fully integrated legal system based on the rule of law, and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. Because the PRC legal system continues to evolve rapidly, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involves uncertainties, which may limit legal protections available to the Company. Uncertainties due to evolving laws and regulations could also impede the ability of an entity based in China, such as our Chinese subsidiaries, to obtain or maintain permits or licenses required to conduct business in China. In addition, some regulatory requirements issued by certain PRC government authorities may not be consistently applied by other PRC government authorities (including local government authorities), thus making strict compliance with all regulatory requirements impractical, or in some circumstances impossible. In addition, China's legal system is based in part on government policies and internal rules, some of which are not published on a timely basis or at all, which may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until after the violation occurs. Any administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources and management attention. Further, since Chinese administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings. These uncertainties may also impede our ability to enforce the contracts entered into by our Chinese subsidiaries and could materially and adversely affect our business and results of operations.
The PRC government at times will exercise significant oversight and discretion over the conduct of business in the PRC and may intervene or influence business operations as the government deems appropriate to further regulatory, political and societal goals. Our Chinese subsidiaries are required to obtain certain permits and licenses from certain PRC government agencies to operate businesses in China, such as business licenses from the SAMR, registrations with PRC tax authorities, filings with PRC customs for carrying out export and import business activities and registrations with China’s State Administration of Foreign Exchange (SAFE) for the ability to receive funds from offshore entities and transfer funds to offshore entities. The Company has determined, in consultation with its general counsel, that we are not currently required to obtain permissions or approvals from the CAC. The Company is also not currently required to obtain permissions or approvals from the CSRC, but would need to obtain approval from CSRC if PWSH applies for the Listing, and as a listed company PWSH would continue to be subject to CSRC rules and regulations. As of the date of this filing, our Chinese subsidiaries have obtained the required business licenses from the SAMR and complied with registration and filing requirements of other Chinese government agencies, and have not been denied such registrations or filings by any PRC authority, however, if we do not receive or maintain the necessary permissions or approvals, inadvertently conclude that such permissions or approvals are not required, or applicable laws, regulations or interpretations change and we become required to obtain such permissions or approvals in the future and we fail to do so, we may be subject to investigations, fines, penalties, suspensions in operations, or other punitive action which could result in a material adverse change in our PRC operations and our results of operation, which in turn could cause our stock price to be materially and adversely affected.
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Additionally, rules and regulations in China can change quickly and with little advance notice. For example, the PRC government has recently initiated a series of regulatory actions and made a number of public statements on the regulation of businesses in China with little advance notice, including enhancing supervision over China-based companies listed overseas, adopting new measures to extend the scope of cybersecurity reviews, and expanding efforts in anti-monopoly enforcement. While we do not believe we are subject to these regulatory actions or statements, as we have not implemented the kind of monopolistic behavior that is the target of these rules, and our business does not involve large-scale collection of user data, implicate cybersecurity, or involve any other type of restricted industry, and therefore these regulatory actions and statements do not impact our ability to conduct our business, accept foreign investments into PWSH, or list our PWSH shares on the STAR Market, there is no guarantee that the PRC government will refrain from releasing regulations or policies regarding the Company’s industry that could adversely affect our business, financial condition, results of operations or ability to list PWSH shares on the STAR Market.
If we are unable to implement our strategy to expand our PRC operations, including the positioning of PWSH to qualify and seek an initial public offering on the STAR Market, our ability to access capital, customers, and talent in China could suffer, which in turn may materially and adversely affect our worldwide growth and revenue potential.
In August 2021, we announced our strategic plan to transform PWSH into a profit center for our Mobile and Home & Enterprise businesses to improve our access to capital, customers, and talent in China. As part of this strategic plan, we intend to qualify PWSH to file an application for an initial public offering on the STAR Market to further improve our access to capital markets and to fund growth. We may not be successful in the implementation of our strategic plan, and we may not be able to complete the Listing for a number of reasons, including those related to the risks we face associated with our operations in China as detailed separately above, many of which are outside our control. With respect to the Listing, PWSH must succeed in obtaining PRC governmental approvals required to permit the Listing, and one or more of those approvals may be denied, or significantly delayed, by the PRC regulators for reasons outside our control or unknown to us, or may be conditioned on requirements that we deem would result in an undue burden or material adverse impact on our business. Similarly, the Listing application may be denied or delayed by the SSE in its discretion. Further, the COVID‑19 outbreak, the tensions between the United States and China, or other geopolitical forces, including war, could negatively impact our currently planned projects and investments in the PRC, including the Listing.
Additionally, pursuant to our August 2021 Capital Increase Agreement and the agreements for the employee-owned entities that have invested in PWSH (“ESOP”), PWSH agreed to attempt to complete all requirements to qualify for a Listing such that the Listing is consummated prior to a certain date (for the private equity and strategic investors ("Investors"), June 30, 2024, and for the ESOP, December 31, 2024). If PWSH has not consummated the Listing before those dates, or if it seriously violates certain other restructuring actions required by the Capital Increase Agreement such that a Listing by such dates becomes impossible, the respective purchasers may elect to require that we repurchase the purchaser’s respective equity interest for a price equal to the initial purchase price paid by the purchaser (and for the ESOP, plus annual simple interest at a rate of 5%). As noted above, various elements in the Listing process are outside our control or may be subject to conditions that are unacceptable to us, and if we fail to obtain the Listing, the provisions of the Capital Increase Agreement would require a use of cash for purposes not otherwise planned for, which in turn would negatively impact our plans for growth and our cash position.
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 generally accepted accounting principles, or 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. The CSRC and the SSE may relax the standards, but there is no guarantee that this will happen in any particular time frame. The Company continues to prepare our application so it is ready to file once the situation changes or PWSH achieves profitability under China GAAP standards, but there can be no assurances that the Listing will occur at all. In the interim, PWSH may require additional funding to augment its PRC operations, and we cannot give any assurance that such capital will be available on terms acceptable to us. Any such inability to obtain funds may impair the ability of PWSH to grow its operations, which could have a material adverse effect on our consolidated operating results and on the price of our common stock.
If we are unable to successfully implement our strategic plan, including the Listing, we may not realize the advantages to our PRC operations contemplated by our business strategy, including improving our access to capital markets, customers, and talent in China. Because it may be several years before we know whether the Listing will be completed, we may, in the interim, forego or postpone other alternative actions to strengthen our market position and operations in the PRC.
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PRC companies are critical to the global semiconductor industry, and our current business is substantially concentrated in the PRC market. Our inability to build, or any delay in growing, our PRC-based operations over the next several years would materially and adversely limit our operations and operating results, including our revenue growth. In addition, during that time, the process underlying the Listing could result in significant diversion of management time as well as substantial out-of-pocket costs, which could further impair our ability to expand our business.
Even if we complete the Listing, we may not achieve the results contemplated by our business strategy and our strategy for growth in the PRC may not result in increases in the price of our common stock.
We cannot assure you that, even if the Listing is completed, we will realize any or all of our anticipated benefits of the Listing. Our completion of the Listing may not have the anticipated effects of providing access to new capital markets or strengthening our market position and operations in the PRC. If the Listing is completed, PWSH will have broad discretion in the use of the proceeds from the initial sales of shares to PWSH investors, and it may not spend or invest those proceeds in a manner that results in our operating success or with which the common shareholders of Pixelworks agree. Our failure to successfully leverage the completion of the Listing to enhance our access to new capital markets and expand our PRC business could result in a decrease in the price of our common stock, and we cannot assure you that the success of PWSH will have an associated positive effect on the price of our common stock.
If the Listing is completed, PWSH’s status as a publicly traded company in China that is controlled, but less than wholly owned, by Pixelworks could have an adverse effect on us.
PWSH is not currently a wholly owned subsidiary of Pixelworks, and following the Listing, other holders may hold as much as 30% of the subsidiary. The interests of PWSH may diverge from the interests of Pixelworks and its other subsidiaries in the future. We may face conflicts of interest in managing, financing, or engaging in transactions with PWSH, or allocating business opportunities between our subsidiaries, including future arrangements for operating subsidiaries other than PWSH to license and use our intellectual property.
Pixelworks will retain majority ownership of PWSH after the Listing, but PWSH will be managed by a separate board of directors and officers and those directors and officers will owe fiduciary duties to the various stakeholders of PWSH, including shareholders other than Pixelworks. In the operation of PWSH’s business, there may be situations that arise whereby the directors and officers of PWSH, in the exercise of their fiduciary duties, take actions that may be contrary to the best interests of Pixelworks or its shareholders. Additionally, because PWSH will be managed by a separate board of directors and officers, our organizational structure will become more complex, which may in turn require substantial financial, operational, and management resources.
In the future, PWSH may issue options, restricted shares, and other forms of share-based compensation to its directors, officers, and employees, which could dilute Pixelworks’ ownership in PWSH. In addition, PWSH may engage in capital raising activities in the future that could further dilute Pixelworks’ ownership interest.
The STAR Market is relatively new, and as a result, it is difficult to predict the effect of the proposed Listing, which may in turn negatively affect the price of our common stock on the Nasdaq Global Market.
The CSRC initially launched the STAR Market in June 2019 and trading on that market began in July 2019. No assurance can be given regarding the effect of the Listing on the market price of PWSH shares or on the price of our common stock on the Nasdaq Global Market. The market price of the PWSH shares and Pixelworks common stock may be volatile or may decline for reasons other than the risk and uncertainties described above, as the result of investor negativity or uncertainty with respect to the proposed Listing.
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If the Listing is completed, Pixelworks and PWSH both will be public reporting companies, but each will be subject to separate, and potentially inconsistent, accounting and disclosure requirements, which may lead to investor confusion or uncertainty that could cause decreased demand for, or fluctuations in the price of, one or both of the companies’ publicly traded shares.
If PWSH completes the Listing, it will be subject to accounting, disclosure, and other regulatory requirements of the CSRC and the STAR Market. At the same time, Pixelworks will remain subject to accounting, disclosure, and other regulatory requirements of the SEC and the Nasdaq Global Market. As a result, Pixelworks and PWSH periodically will disclose information simultaneously pursuant to differing laws and regulations. The information disclosed by the two companies will differ, and may differ materially from time to time, due to the distinct, and potentially inconsistent, accounting standards applicable to the two companies and disclosure requirements imposed by securities regulatory authorities, as well as differences in language, culture, and expression habit, in composition of investors in the United States and PRC, and in the capital markets of the United States and the PRC. Differing disclosures could lead to confusion or uncertainty among investors in the publicly traded shares of one or both companies. Differences between the price of PWSH shares on the STAR Market and the price of Pixelworks common stock on Nasdaq Global Market could lead to increased volatility, as some investors seek to arbitrage price differences. Additionally, news about PWSH may affect the price of Pixelworks’ common stock, and vice versa, creating additional uncertainty and volatility.
General Risks
The price of our common stock has and may continue to fluctuate substantially.
Our stock price and the stock prices of technology companies similar to Pixelworks have been highly volatile. The price of our common stock may decline and the value of our shareholders' investment may be reduced regardless of our performance.
The daily trading volume of our common stock has historically been relatively low, although, in the three most recent years, trading volume increased compared to historical levels. As a result of the historically low volume, our shareholders may be unable to sell significant quantities of common stock in the public trading markets without a significant reduction in the price of our common shares. Additionally, market fluctuations, as well as general economic and political conditions, including recessions, interest rate changes or international currency fluctuations, may negatively impact the market price of our common stock. Other factors that could negatively impact our stock price include:
•actual or anticipated fluctuations in our operating results;
•changes in or failure to meet expectations as to our future financial performance;
•changes in or failure to meet financial estimates of securities analysts;
•announcements by us or our competitors of technological innovations, design wins, contracts, standards, acquisitions or divestitures;
•the operating and stock price performance of other comparable companies;
•issuances or proposed issuances of equity, debt or other securities by us, or sales of securities by our security holders; and
•changes in market valuations of other technology companies.
Any inability or perceived inability of investors to realize a gain on an investment in our common stock could have an adverse effect on our business, financial condition and results of operations by potentially limiting our ability to retain our customers, to attract and retain qualified employees and to raise capital. In addition, in the past, following periods of volatility in the overall market and the market price of a particular company's securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management's attention and resources.
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The interest of our current or potential significant shareholders may conflict with other shareholders and they may attempt to effect changes or acquire control, which could adversely affect our results of operations and financial condition.
Our shareholders may from time to time engage in proxy solicitations, advance shareholder proposals, acquire control or otherwise attempt to effect changes, including by directly voting their shares on shareholder proposals. Campaigns by shareholders to effect changes at publicly traded companies are sometimes led by investors seeking to increase short-term shareholder value through actions such as financial restructuring, increased debt, special dividends, stock repurchases or sales of assets or the entire company. Responding to proxy contests and other actions by activist shareholders can be costly and time-consuming, disrupting our operations and diverting the attention of our Board of Directors and senior management from the pursuit of business strategies. Additionally, uncertainty over our direction and leadership may negatively impact our relationship with our customers and make it more difficult to attract and retain qualified personnel and business partners. As a result, shareholder campaigns could adversely affect our results of operations and financial condition.
Future sales of our equity could result in significant dilution to our existing shareholders and depress the market price of our common stock.
It is likely that we will need to seek additional capital in the future and from time to time. If this financing is obtained through the issuance of equity securities, debt convertible into equity securities, options or warrants to acquire equity securities or similar instruments or securities, our existing shareholders will experience dilution in their ownership percentage upon the issuance, conversion or exercise of such securities and such dilution could be significant. For example, in December 2020, we completed a private placement of 3,200,000 shares of common stock to certain accredited investors at a purchase price of $2.071 per share. The issuance and sale of the shares in the private placement had a dilutive impact on our existing shareholders. Additionally, also in December 2020, we completed the sale of 4,900,000 shares of common stock in an underwritten registered offering and an additional 735,000 shares were issued approximately 3.7 million and 3.0 millionpursuant to the 30-day over-allotment option exercised by the underwriter, at a price to the public of $2.45 per share. Additionally, pursuant to our “at the market” equity offering program, we may sell shares of our common stock in underwritten registered public offerings in August 2015having aggregate sales proceeds of up to $25.0 million from time to time through Cowen and August 2013, respectively. NewCompany, LLC, as our agent. Through December 31, 2023, we sold an aggregate of 1,808,484 shares of our common stock under this at the market offering. The issuance and sale of additional shares of our common stock pursuant to our “at the market” equity offering program or otherwise will have a dilutive impact on our existing shareholders. Additionally, any new equity securities issued by us could have rights, preferences or privileges senior to those of our common stock. Further, the issuance and sale of, or the perception that we may issue and sell, additional shares of common stock pursuant to our “at the market” equity offering program or an additional private placement or another offering could have the effect of depressing the market price of our common stock or increasing the volatility thereof.
We may be unable to maintain compliance with Nasdaq Marketplace Rules which could cause our common stock to be delisted from the Nasdaq Global Market. This could result in the lack of a market for our common stock, cause a decrease in the value of our common stock, and adversely affect our business, financial condition and results of operations.
Under the Nasdaq Marketplace Rules our common stock must maintain a minimum price of $1.00 per share for continued inclusion on the Nasdaq Global Market. Our stock price was previously below $1.00$2.91 on May 6, 2009 and was $1.22 on February 12, 2016March 8, 2024 and we cannot guarantee that our stock price will remain at or above $1.00 per share. If the price again drops below $1.00 per share, our stock could become subject to delisting, and we may seek shareholder approval for a reverse stock split, which in turn could produce adverse effects and may not result in a long-term or permanent increase in the price of our common stock. Further, for continued listing on the Nasdaq Global Market we must have at least 400 total shareholders.
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In addition to the minimum $1.00 per share requirement,and 400 total shareholders requirements, the Nasdaq Global Market has other continued listing requirements, including:and we must meet all of the criteria under at least one of the following three standards: (i) a minimum of $50.0 million in total asset value and $50.0 million in revenues in the latest fiscal year or in two of the last three fiscal years;years, at least 1.1 million publicly held shares, at least $15.0 million in market value of publicly held shares and at least four registered and active market makers (as such term is defined by the Nasdaq Marketplace Rules); (ii) a minimum of $50.0 million in market value of listed securities, at least 1.1 million publicly held shares, at least $15.0 million in market value of publicly held securitiesshares and at least 1.1 million publicly held shares;four registered and active market makers; or (iii) a minimum of $10.0 million in shareholders' equity.equity, at least 750,000 publicly held shares, at least $5.0 million in market value of publicly held shares and at least two registered and active market makers. As of December 31, 2017,2023, we were in compliance with these listing requirements. However, as recently as June 30, 2013, our shareholders’ equity was below $10.0 million and as recently as June 30, 2017, our total asset value was less than $50.0 million. In addition, as recently as during the first quarter of 2016, the aggregate market value of our listed securities was below $50.0 million. Our stock price is volatile and we believe that we continue to remain susceptible to the market value of our listed securities and/or the market value of our publicly held securities falling below $50.0 million and $15.0$5.0 million, respectively. Accordingly, we cannot assure you that we will be able to continue to comply with Nasdaq’sNasdaq Global Market’s listing requirements. Should we be unable to remain in compliance with these requirements, our stock could become subject to delisting.
If our common stock is delisted, trading of the stock will most likely take place on an over-the-counter market established for unlisted securities. An investor is likely to find it less convenient to sell, or to obtain accurate quotations in seeking to buy, our common stock on an over-the-counter market, and many investors may not buy or sell our common stock due to difficulty in accessing over-the-counter markets, or due to policies preventing them from trading in securities not listed on a national exchange or other reasons. For these reasons and others, delisting would adversely affect the liquidity, trading volume and price of our common stock, causing the value of an investment in us to decrease and having an adverse effect on our business, financial condition and results of operations by limiting our ability to attract and retain qualified executives and employees and limiting our ability to raise capital.
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.
Provisions of our articles of incorporation and bylaws and provisions of Oregon law may have the effect of delaying or preventing a merger or acquisition of us, making a merger or acquisition of us less desirable to a potential acquirer or preventing a change in our management, even if our shareholders consider the merger, acquisition or change in management favorable or if doing so would benefit our shareholders. In addition, these provisions could limit the price that investors would be willing to pay in the future for shares of our common stock. The following are examples of such provisions:
•if the number of directors is fixed by the board at eight or more, our board of directors is divided into three classes serving staggered terms, which would make it more difficult for a group of shareholders to quickly replace a majority of directors;
•our board of directors is authorized, without prior shareholder approval, to create and issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to acquire us or to effect a change of control, commonly referred to as "blank check" preferred stock;
•members of our board of directors can be removed only for cause and at a meeting of shareholders called expressly for that purpose, by the vote of 75 percent of the votes then entitled to be cast for the election of directors;
•our board of directors may alter our bylaws without obtaining shareholder approval; and shareholders are required to provide advance notice for nominations for election to the board of directors or for proposing matters to be acted upon at a shareholder meeting;
•Oregon law permits our board to consider other factors beyond stockholdershareholder value in evaluating any acquisition offer (so-called "expanded constituency" provisions); and
•a supermajority (67%) vote of shareholders is required to approve certain fundamental transactions.
Item 1B.Unresolved Staff Comments.
Not applicable.
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Item 1C. Cybersecurity.
We place the utmost importance on the security of our systems and the data we handle. We maintain a comprehensive process for identifying, assessing, and managing material risks from cybersecurity threats as part of our broader risk management system and processes.
To identify and assess risks from cybersecurity threats, we evaluate a variety of developments including threat intelligence, vulnerabilities of third parties, including any auditors or consultants who advise on our cybersecurity systems, evolving regulatory requirements, and observed cybersecurity incidents, among others. We regularly conduct risk assessments to evaluate the maturity and effectiveness of our systems and processes in addressing cybersecurity threats and to identify any areas for remediation and opportunities for enhancements. The results of such assessments are evaluated by management and reported to our board of directors and the audit committee, and we adjust our cybersecurity policies, standards, processes, and practices as necessary.
Our audit committee is responsible for the oversight of risks from cybersecurity threats and directly oversees our cybersecurity policies and practices, internal controls regarding information security, and compliance with legal and regulatory requirements regarding cybersecurity risks. The audit committee receives regular reports and updates on cybersecurity matters from the leaders of our dedicated security team and management, including developments on existing and new cybersecurity risks and how management is addressing and/or mitigating such risks, cybersecurity and data privacy incidents (if any), the status of key information security initiatives, vulnerability assessments, as well as on existing and emerging threat landscapes. Additionally, on at least an annual basis, the audit committee reviews and discusses with management our policies and programs with respect to the audit committee’s oversight of cybersecurity threats, which enable the audit committee’s effective oversight of our overall cybersecurity risk and compliance posture. The audit committee regularly reports to the board of directors on these matters.
We have a dedicated security team led by our Director of Worldwide IT, who, in coordination with management, including our Chief Executive Officer, Chief Financial Officer, and Chief Legal Officer, monitors the prevention, detection, mitigation, and remediation of cybersecurity threats and incidents in accordance with our incident response and recovery plans. Threats and incidents that are identified as potentially significant are promptly reported to the audit committee. Our dedicated security team has over 20 years of experience in managing and monitoring corporate cybersecurity programs.
While risks from cybersecurity threats, including as a result of any previous cybersecurity incidents, have not materially affected and are not reasonably likely to materially affect our Company, including our business strategy, results of operations, or financial condition,
we cannot provide assurance that they will not be materially affected in the future by such risks or any future material incidents. See “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K for further information regarding cybersecurity risks.
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Item 2.Properties.
We lease facilities around the world to house our engineering, sales, customer support, administrative and operations functions. We do not own any of our facilities. As of December 31, 2017,2023, our major facilities consisted of the following:
| Location | Function(s) | |||||||||||||||||||||
| Square Feet Utilized | Lease Expiration | |||||||||||||||||||||
| China | Engineering; sales; customer | 46,000 | Various dates through August 2026 | |||||||||||||||||||
| Toronto | Engineering; administration | 12,000 | March | |||||||||||||||||||
| California | Administration; engineering; sales | 10,000 | ||||||||||||||||||||
| Taiwan | Customer support; sales; operations; engineering | 16,000 | Various dates through | |||||||||||||||||||
| Oregon | Administration | 5,000 | December | |||||||||||||||||||
| Sales; customer support | 3,000 | January | ||||||||||||||||||||
Item 3.Legal Proceedings.
We are subject to legal matters that arise from time to time in the ordinary course of our business. Although we currently believe that resolving such matters, individually or in the aggregate, will not have a material adverse effect on our financial position, our results of operations, or our cash flows, these matters are subject to inherent uncertainties and our view of these matters may change in the future.
Item 4.Mine Safety Disclosures.
Not Applicable.
PART II
Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market for Registrant’s Common Equity and Related Stockholder Matters
Our common stock is listed for trading on the Nasdaq Global Market under the symbol "PXLW". Our stock began trading on May 19, 2000. The following table sets forth, for the periods indicated, the highest and lowest sales prices of our common stock as reported on the Nasdaq Global Market.
| Fiscal 2017 | High | Low | |||||
| Fourth Quarter | $ | 6.73 | $ | 4.75 | |||
| Third Quarter | 5.15 | 4.05 | |||||
| Second Quarter | 6.22 | 4.21 | |||||
| First Quarter | 4.89 | 2.80 | |||||
| Fiscal 2016 | High | Low | |||||
| Fourth Quarter | $ | 3.49 | $ | 2.17 | |||
| Third Quarter | 3.29 | 1.77 | |||||
| Second Quarter | 2.48 | 1.55 | |||||
| First Quarter | 2.58 | 1.22 | |||||
As of March 9, 2018,8, 2024, there were 126115 shareholders of record of our common stock and the last per share sales price of the common stock on that date was $4.66.$2.80. The number of beneficial owners of our common stock is substantially greater than the number of shareholders of record because a significant portion of our outstanding common stock is held in broker "street name" for the benefit of individual investors.
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| Year ended December 31, | |||||||||||||||||||
| 2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||
| Consolidated Statements of Operations Data | |||||||||||||||||||
| Revenue, net | $ | 80,637 | $ | 53,390 | $ | 59,517 | $ | 60,923 | $ | 48,118 | |||||||||
| Cost of revenue | 38,873 | 28,322 | 30,224 | 29,142 | 21,708 | ||||||||||||||
| Gross profit | 41,764 | 25,068 | 29,293 | 31,781 | 26,410 | ||||||||||||||
| Operating expenses: | |||||||||||||||||||
| Research and development | 21,427 | 19,036 | 24,644 | 25,296 | 20,664 | ||||||||||||||
| Selling, general and administrative | 20,450 | 13,770 | 14,453 | 15,434 | 13,883 | ||||||||||||||
| Restructuring | 1,920 | 2,608 | — | — | — | ||||||||||||||
| Total operating expenses | 43,797 | 35,414 | 39,097 | 40,730 | 34,547 | ||||||||||||||
| Loss from operations | (2,033 | ) | (10,346 | ) | (9,804 | ) | (8,949 | ) | (8,137 | ) | |||||||||
| Other expense, net | (1,647 | ) | (406 | ) | (446 | ) | (493 | ) | (405 | ) | |||||||||
| Loss before income taxes | (3,680 | ) | (10,752 | ) | (10,250 | ) | (9,442 | ) | (8,542 | ) | |||||||||
| Provision for income taxes | 493 | 355 | 320 | 518 | 328 | ||||||||||||||
| Net loss | $ | (4,173 | ) | $ | (11,107 | ) | $ | (10,570 | ) | $ | (9,960 | ) | $ | (8,870 | ) | ||||
| Net loss per share - basic and diluted | $ | (0.13 | ) | $ | (0.39 | ) | $ | (0.42 | ) | $ | (0.44 | ) | $ | (0.45 | ) | ||||
| Weighted average shares outstanding - basic and diluted | 31,507 | 28,276 | 25,088 | 22,766 | 19,816 | ||||||||||||||
| December 31, | |||||||||||||||||||
| 2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||
| Consolidated Balance Sheets Data | |||||||||||||||||||
| Cash and cash equivalents | $ | 27,523 | $ | 19,622 | $ | 26,591 | $ | 17,926 | $ | 20,805 | |||||||||
| Working capital | 18,069 | 16,545 | 21,796 | 11,470 | 15,163 | ||||||||||||||
| Total assets | 67,543 | 30,857 | 43,842 | 34,144 | 36,744 | ||||||||||||||
| Long-term liabilities, net of current portion | 9,838 | 2,074 | 2,773 | 3,570 | 2,878 | ||||||||||||||
| Total shareholders’ equity | 39,437 | 19,049 | 26,376 | 15,684 | 18,942 | ||||||||||||||
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
Pixelworks designs, developsis 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 display processing semiconductors, intellectual property cores, softwaretechnology 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 custom application specificone of the first companies with a commercial dual-channel 1080i deinterlacer integrated circuitscircuit. 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 ("ASIC"MEMC") solutionsas a mobile-optimized solution for high-quality energy efficientsmartphones. In 2019, we introduced our Hollywood award-winning TrueCut® video applications. In addition, we offer a suiteplatform, the industry’s first motion grading technology that allows fine tuning of solutions for advanced media processing and the efficient delivery and streaming of video.motion appearance in cinematic content.
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.
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 include digital projection systems, tablets, smartphones, and OTA streaming devices.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.
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As of December 31, 2017,2023, we had an intellectual property portfolio of 536280 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").
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, Europe, Japan Korea, Southeast Asia, Taiwan and the U.S., and our manufacturers’ representatives support some of our Korean and European sales.Taiwan. Our distributors typicallyoften 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%, 100%99.7% and 100%95.1% of revenue in 2017, 20162023 and 2015,2022, respectively. Our integrators, branded manufacturers and branded suppliers incorporate our products into systems that are sold worldwide. AllThe 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 historicallytypically experienced higher revenue from the digital projector component of the Home & Enterprise market in the third quarter, of the year, and lower revenue in the first quarter, of the year, 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.
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Results of Operations
Revenue, net
Net revenue was as follows (in thousands):
| Year ended December 31, | 2017 v. 2016 | 2016 v. 2015 | |||||||||||||||||||||||
| 2017 | 2016 | 2015 | $ change | % change | $ change | % change | |||||||||||||||||||
| Revenue, net | $ | 80,637 | $ | 53,390 | $ | 59,517 | $ | 27,247 | 51 | % | $ | (6,127 | ) | (10 | )% | ||||||||||
| Year ended December 31, | 2023 v. 2022 | ||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | $ change | % change | ||||||||||||||||||||||||||||||||||||||
| Revenue, net | $ | 59,677 | $ | 70,146 | $ | (10,469) | (15) | % | |||||||||||||||||||||||||||||||||
Net revenue increased $27.2decreased $10.5 million, or 51%15%, from 20162022 to 2017, primarily2023.
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.
The decrease in IC revenue from 2022 compared to 2023 is due to the following factors:
•Sales into the Mobile market which wasincreased $8.3 million or 39%, primarily due to lower sales in 2016, due to customers' efforts to adjust inventory levels within the digital projector market as well as supply disruptions in Japan.
Revenue related to engineering services, license revenue and panel markets associated with a price increase for some of our products.
2023 or 2022 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, | |||||||||||||||||||||||||||||||||||
| 2023 | % of revenue | 2022 | % of revenue | ||||||||||||||||||||||||||||||||
Direct product costs and related overhead 1 | $ | 33,599 | 56.3 | % | $ | 34,070 | 48.6 | % | |||||||||||||||||||||||||||
Inventory charges 2 | 280 | 0.5 | 82 | 0.1 | |||||||||||||||||||||||||||||||
| Stock-based compensation | 89 | 0.1 | 41 | 0.1 | |||||||||||||||||||||||||||||||
| Amortization of acquired developed technology | — | 0.0 | 72 | 0.1 | |||||||||||||||||||||||||||||||
| Total cost of revenue | $ | 33,968 | 56.9 | % | $ | 34,265 | 48.8 | % | |||||||||||||||||||||||||||
| Gross profit | $ | 25,709 | 43.1 | % | $ | 35,881 | 51.2 | % | |||||||||||||||||||||||||||
| Year ended December 31, | ||||||||||||||||||||
| 2017 | % of revenue | 2016 | % of revenue | 2015 | % of revenue | |||||||||||||||
Direct product costs and related overhead 1 | $ | 35,984 | 45 | % | $ | 26,376 | 49 | % | $ | 29,843 | 50 | % | ||||||||
| Inventory step-up and backlog amortization | 1,965 | 2 | — | 0 | — | 0 | ||||||||||||||
| Amortization of acquired developed technology | 497 | 1 | — | 0 | — | 0 | ||||||||||||||
Other cost of revenue 2 | 243 | 0 | 190 | 0 | 182 | 0 | ||||||||||||||
Inventory charges 3 | 184 | 0 | (28 | ) | 0 | 199 | 0 | |||||||||||||
| Restructuring | — | 0 | 1,784 | 3 | — | 0 | ||||||||||||||
| Total cost of revenue | $ | 38,873 | 48 | % | $ | 28,322 | 53 | % | $ | 30,224 | 51 | % | ||||||||
| Gross profit | $ | 41,764 | 52 | % | $ | 25,068 | 47 | % | $ | 29,293 | 49 | % | ||||||||
Gross profit margin decreased to 48% of revenue43% in 2017 from 53% of revenue in 2016. Contributing to the majority of this decrease was a decrease in direct product costs and related overhead as a percent of revenue. Direct product costs and related overhead as a percent of revenue was 45% in 20172023 compared to 49% of revenue51% in 2016.2022, primarily due to product mix. The decrease in direct product costs and related overheadsales into the Home & Enterprise market as a percent of revenue was primarily due towell as the following factors:
both unfavorably impacted gross profit margin. The decrease in cost of revenue as a percent of revenue was also due to a decrease in restructuring charges from 2016 to 2017. There were no restructuring charges in 2017 that impacted costlower absorption of revenue. These decreases were partially offset by an increase in amortization of acquired developed technology and backlog as well as step-up of inventory, all associated with the accounting for the Acquisition.
Pixelworks’ gross profit margin is subject to variability based on changes in revenue levels, recognition of licensing revenue and licensing costs, product mix, average selling prices, startup costs, restructuring charges, amortization related to acquired developed technology inventory step-up and backlog, and the timing and execution of manufacturing ramps as well as other factors.
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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.
During the first quarter of 2017,2021, we entered into a best effortsbest-efforts co-development agreement (the "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 to be sold exclusively to the customer.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, $4.0co-development agreement, $5.8 million was payable by the customer within 60 days of the date of the agreement and twothree additional payments of $2.0$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 an offsetoffsets to research and development expense of $4.0approximately $3.2 and $4.3 million related toduring the Co-development Agreement during 2017.
Research and development expense was as follows (in thousands):
| Year ended December 31, | 2017 v. 2016 | 2016 v. 2015 | |||||||||||||||||||||||
| 2017 | 2016 | 2015 | $ change | % change | $ change | % change | |||||||||||||||||||
| Research and development | $ | 21,427 | $ | 19,036 | $ | 24,644 | $ | 2,391 | 13 | % | $ | (5,608 | ) | (23 | )% | ||||||||||
| Year ended December 31, | 2023 v. 2022 | ||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | $ change | % change | ||||||||||||||||||||||||||||||||||||||
| Research and development | $ | 30,878 | $ | 30,521 | $ | 357 | 1 | % | |||||||||||||||||||||||||||||||||
Research and development expense increased $2.4$0.4 million, or 1%, from 20162022 to 2017. The increase was primarily2023 due to a $2.0the following factors:
•Compensation expense increased $1.0 million increase in compensation expense due to an increase in headcount as a result ofand annual merit salary increases.
•The credit recognized related to the Acquisition and an increased management bonus accrual. The increase was also dueco-development agreement decreased by $1.1 million in 2023 compared to a $0.4 million increase in rent expense which was primarily due to a non-recurring overlap in rent expense associated with our old and new China facility locations in 2017. Research and development expense in 2017 also included a benefit of $4.0 millionthe credit recognized in 2017 largely2022.
•These increases were partially offset by an increasea $1.7 million decrease in non-recurring engineering expense. The benefit recognized and the increase in non-recurring engineering expense are both related to the Co-development Agreement.
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, | 2017 v. 2016 | 2016 v. 2015 | |||||||||||||||||||||||
| 2017 | 2016 | 2015 | $ change | % change | $ change | % change | |||||||||||||||||||
| Selling, general and administrative | $ | 20,450 | $ | 13,770 | $ | 14,453 | $ | 6,680 | 49 | % | $ | (683 | ) | (5 | )% | ||||||||||
| Year ended December 31, | 2023 v. 2022 | ||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | $ change | % change | ||||||||||||||||||||||||||||||||||||||
| Selling, general and administrative | $ | 23,467 | $ | 22,177 | $ | 1,290 | 6 | % | |||||||||||||||||||||||||||||||||
Selling, general and administrative expense increased $6.7$1.3 million, or 6%, from 20162022 to 2017. The increase was primarily2023 due to $2.5the following factors:
•Compensation expense increased $0.8 million in acquisition and integration costs associated with the Acquisition and a $1.7 million increase in compensation expense due to an increase in headcount as a result of the Acquisition and an increased management bonus accrual. The increase was also due to a $1.5 million increase in stock-based compensation expense, partially due to awards granted in association with the Acquisitionaccrual and partially due to a credit in 2016 for theone time reversal of stock-based compensation expense associated with the February 1, 2016 resignation of our former Chief Executive Officer, Bruce Walicek. These increases were partially offset by a $0.8payroll tax accrual in 2022.
•Accounting and other professional fees increased $0.5 million decrease in severance expense. The severance expense in 2016 was also due to the February 1, 2016 resignation of our former Chief Executive Officer, Bruce Walicek. The remaining $1.8 million increase was due to a general increase in most other expense categories as a result of our expanded operations as a result of the Acquisition.
| Year ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Employee severance and benefits | $ | 1,920 | $ | 2,618 | $ | — | |||||
| Write off of assets | — | 1,744 | — | ||||||||
| Other | — | 30 | — | ||||||||
| Total restructuring expense | $ | 1,920 | $ | 4,392 | $ | — | |||||
| Included in cost of revenue | $ | — | $ | 1,784 | $ | — | |||||
| Included in operating expenses | 1,920 | 2,608 | — | ||||||||
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Interest expenseincome and other, net
Interest expenseincome and other, net, consisted of the following (in thousands):
| Year ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Interest expense | $ | (878 | ) | $ | (446 | ) | $ | (450 | ) | ||
| Fair value adjustment on convertible debt conversion option | (743 | ) | — | — | |||||||
| Discount accretion on convertible debt fair value | (196 | ) | — | — | |||||||
| Interest income | 141 | 40 | 4 | ||||||||
| Gain on debt extinguishment | 29 | — | — | ||||||||
| Total interest expense and other, net | $ | (1,647 | ) | $ | (406 | ) | $ | (446 | ) | ||
| Year ended December 31, | |||||||||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||||||||
| Interest income | $ | 1,950 | $ | 670 | |||||||||||||||||||||||||
| Other income | 125 | 80 | |||||||||||||||||||||||||||
| Interest expense | (25) | (50) | |||||||||||||||||||||||||||
| Total interest income and other, net | $ | 2,050 | $ | 700 | |||||||||||||||||||||||||
The increase in interest expenseincome in 20172023 compared to 20162022 is due to contractualincreased interest earned on convertible debt, as well as imputedour cash and cash equivalents balance due to the increase in the interest on short and long-term liabilities acquired as a part ofrate available throughout the Acquisition.
full year in 2023 compared to the full year in 2022.
Provision (benefit) for income taxes
The provisionbenefit for income taxes was as follows (in thousands):
| Year ended December 31, | |||||||||||||||||
| 2023 | 2022 | ||||||||||||||||
| Provision (benefit) for income taxes | $ | 357 | $ | (884) | |||||||||||||
| Year ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Provision for income taxes | $ | 493 | $ | 355 | $ | 320 | |||||
The income tax expense of $0.4 million recorded for the year ended December 31, 20172023 is comprisedprimarily composed of $1.0tax expense of $0.1 million in currentfor our profitable cost-plus jurisdictions and deferred tax expense of approximately $0.3 million.
The income tax benefit of $0.9 million recorded for our profitable cost-plus foreign jurisdictions and accrualsthe 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 benefit related to the treatment of AMT tax credits under the Tax Cuts and Jobs Act ("TCJA") and $0.2 million for the reversal of previously recorded tax contingencies due to the expiration of the applicable statute of limitations.
As of December 31, 2017,2023, we have federal, state and foreign net operating loss carryforwards of approximately $215.3$154.5 million, $11.4$16.3 million, and $38.6$89.0 million respectively, which will expire between 2019 and 2037.begin expiring in 2024. As of December 31, 2017,2023, we have available federal, state and foreign research and experimentation tax credit carryforwards of approximately $9.0$5.7 million,, $4.0 $5.4 million and $27.3$21.9 million respectively. The federal and state tax credits will begin expiring in 20192024 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 $119,447. We have a general foreign tax credit of $1.7 million which will begin expiring in 2018.$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.
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Liquidity and Capital Resources
Cash and cash equivalents
Total cash and cash equivalents increased $7.9decreased $9.3 million from $19.6$56.8 million at December 31, 20162022 to $27.5$47.5 million at December 31, 2017.2023. The net increasedecrease was the result of $12.2 million provided by operating activities, $3.0 million in proceeds from the issuances of common stock under our employee equity incentive plans and $1.9 million net cash acquired in the Acquisition. These increases were partially offset by $4.0$18.8 million used in payments on the line of credit associated with the Acquisition, $2.5operating activities, $4.0 million used for purchases of property and equipment $1.7 million in payments on other asset financings and $1.0 million used in payments on convertible debt.
As of December 31, 2017,2023, our cash and cash equivalents balance of $27.5 million consisted of $4.1$36.5 million in cash and $23.4$1.0 million in cash equivalents held in U.S. dollar denominated money market funds. Although we did not hold short- or long-term investments asfunds and $10.0 million held in U.S. dollar denominated certificates of December 31, 2017, ourdeposit. 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-1A-2 / P-1P-2 / F-1F-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 A2A3 by at least two NRSROs. Our investment policy is reviewed at least annually by our Audit Committee.
Accounts receivable, net
Accounts receivable, net increased to $4.6$10.1 million at December 31, 20172023 from $3.1$10.0 million at December 31, 2016.2022. Average number of days sales outstanding increased to 2356 days at December 31, 20172023 from 1854 days at December 31, 2016. The increase in accounts receivable and days sales outstanding was partially2022.
Inventories
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 an increasehigher average inventory balances in sales due2023 compared to the Acquisition and partially due to normal fluctuations in the timing of sales and customer receipts within the fourth quarter of 2017, and the fourth quarter of 2016.
Capital resources
On December 21, 2010,June 5, 2020, we entered into a Loansales agreement (the "Sales Agreement") with Cowen and Security Agreement with Silicon Valley Bank (the "Bank"Company, LLC ("Cowen"), pursuant to which was amended on December 14, 2012, December 4, 2013, December 18, 2015, December 15, 2016, July 21, 2017we may issue and December 21, 2017 (as amended,sell shares of the "Revolving Loan Agreement"). The Revolving Loan Agreement provides a secured working capital-based revolving line of credit (the "Revolving Line") inCompany's common stock, par value $0.001 per share, having an aggregate amountoffering price of up to $25.0 million, from time to time, through an "at the lessermarket" 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 (i) $10.0 million,1933, as amended, including sales made by means of ordinary brokers’ transactions on the Nasdaq Global Market or (ii) $1.0 million plus 80%on any other existing trading market for the common stock or otherwise at market prices prevailing at the time of eligible domestic accounts receivable and certain foreign accounts receivable.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 Revolving Line has a maturity date of December 28, 2018. In addition, the Revolving LoanSales Agreement provides for non-formula advances of up to $10.0 million which may be made solelyterminated 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.
There was no activity under this at the market offering during the last five business days of any fiscal month or quarter and which must be repaid by us on or before the fifth business day after the applicable fiscal month or quarter end. Due to their repayment terms, non-formula advances do not provide us with usable liquidity.
46
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 14: 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 15: 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 had no outstanding borrowings under the Revolving Line.received net proceeds of $10.7 million in exchange for a 2.73% equity interest in PWSH. Additional information is provided in "Note 15: Non-Controlling Interest", which is incorporated by reference into this section.
Liquidity
As of December 31, 2017,2023, 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 at least the next twelve months.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.
From time to time, we evaluate acquisitions of businesses, products or technologies that complement our business. For example, on August 2, 2017 we closed our acquisition of ViXS and issued 3,708,263 of our shares of common stock as consideration. Any additional 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.,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 Policies and 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, product returns, warranty obligations, bad debts, inventories, property and equipment, impairment of long-lived assets, valuation of goodwill, valuation of convertible debt, 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 market.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.
47
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. Accordingly, we have elected to bypass theWe performed a qualitative assessment and proceed directly to the quantitative goodwill impairment test. We tested goodwill for impairment under the quantitative goodwill impairment test as during the fourth quarter of 2023 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.
| Payments Due By Period | |||||||||||||||||||
| Contractual Obligation | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | ||||||||||||||
| Estimated purchase commitments to contract manufacturers | $ | 5,807 | $ | 5,807 | $ | — | $ | — | $ | — | |||||||||
| Operating leases | 5,067 | 2,564 | 2,172 | 331 | — | ||||||||||||||
Convertible debt 1 | 4,749 | — | 4,749 | — | — | ||||||||||||||
| Payments on accrued balances related to asset financings | 2,546 | 1,904 | 642 | — | — | ||||||||||||||
Interest on convertible debt 1 | 1,082 | 475 | 607 | — | — | ||||||||||||||
| Other purchase obligations and commitments | 1,676 | 222 | 548 | 558 | 348 | ||||||||||||||
Total 2 | $ | 20,927 | $ | 10,972 | $ | 8,718 | $ | 889 | $ | 348 | |||||||||
Item 8.Financial Statements and Supplementary Data.
The following financial statements and reports are included in Item 8:
48
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors and Shareholders
Pixelworks, Inc.:
Opinion on the Consolidated Financial Statementsfinancial statements
We have audited the accompanying consolidated balance sheetssheet of Pixelworks, Inc. and subsidiaries (the “Company”) as of December 31, 2017 and 2016,2023, the related consolidated statements of operations, comprehensive loss, shareholders’ equity, and cash flows for each of the years in the three‑year period ended December 31, 2017,2023, and the related notes (collectively referred to as the “consolidated financial“financial statements”). In our opinion, the consolidatedfinancial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016,2023, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2017,2023, in conformity with U.S.accounting principles generally accepted accounting principles.
Basis for Opinionopinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidatedthe Company’s financial statements based on our audits.audit. We are a public accounting firm registered with the PCAOBPublic Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our auditsaudit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical audit matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Net Realizable Value of Inventories - the Determination of Obsolete or Excess Inventories
As described further in Notes 2 and 3 to the consolidated financial statements, the Company writes down any obsolete, unmarketable, or otherwise impaired inventory to net realizable value. The determination of obsolete or excess inventory requires management to estimate the future demand for the Company’s products. The estimate of future demand is compared to inventory levels to determine the amount, if any, of obsolete or excess inventory. We identified the net realizable value of inventories as a critical audit matter.
The principal considerations for our determination that the net realizable value of inventories is a critical audit matter are that significant judgement by management is needed when determining obsolete or excess inventories, including developing an estimate of future demand. The estimate of future demand requires management to make subjective and complex assumptions related to market conditions, business strategies and technology trends. Given this, significant auditor judgment and effort in performing procedures and evaluating management’s significant assumptions are required for this estimate.
49
Our audit procedures related to the net realizable value of inventories included the following, among others:
•We obtained management’s analysis for estimated excess or obsolete inventories. We evaluated the appropriateness of management’s approach and tested the completeness and accuracy of the underlying data.
•We evaluated the reasonableness of management’s significant assumptions related to future demand and market conditions considering current and past results, industry reports, and inquiries with management and employees outside of accounting function.
•We assessed management’s ability to forecast by comparing the actual results with the respective forecast for the same period.
| /s/ GRANT THORNTON LLP | ||
| We have served as the Company's auditor since 2023. | ||
| San Francisco, California | ||
| March 13, 2024 | ||
50
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
Pixelworks, Inc.
Portland, Oregon
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Pixelworks, Inc. and its subsidiaries (the "Company") as of December 31, 2022, and the related consolidated statements of operations, comprehensive loss, shareholders' equity, and cash flows for the year ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022, and the results of its operations and its cash flows for the year ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our auditsaudit also included performing such other procedures as we considered necessary in the circumstances.
Our audit of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our auditsaudit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provideaudit provides a reasonable basis for our opinion.
/s/ Armanino LLP | ||
| San Ramon, California | ||
51
PIXELWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
| December 31, | December 31, | ||||||||||||||||||||
| 2017 | 2016 | 2023 | 2022 | ||||||||||||||||||
| ASSETS | |||||||||||||||||||||
| Current assets: | |||||||||||||||||||||
| Current assets: | |||||||||||||||||||||
| Current assets: | |||||||||||||||||||||
| Cash and cash equivalents | $ | 27,523 | $ | 19,622 | |||||||||||||||||
| Cash and cash equivalents | |||||||||||||||||||||
| Cash and cash equivalents | |||||||||||||||||||||
| Accounts receivable, net | |||||||||||||||||||||
| Accounts receivable, net | |||||||||||||||||||||
| Accounts receivable, net | 4,640 | 3,118 | |||||||||||||||||||
| Inventories | 2,846 | 2,803 | |||||||||||||||||||
| Prepaid expenses and other current assets | 1,328 | 736 | |||||||||||||||||||
| Total current assets | 36,337 | 26,279 | |||||||||||||||||||
| Property and equipment, net | 5,605 | 3,793 | |||||||||||||||||||
| Operating lease right-of-use assets | |||||||||||||||||||||
| Other assets, net | 1,338 | 785 | |||||||||||||||||||
| Acquired intangible assets, net | 5,856 | — | |||||||||||||||||||
| Goodwill | |||||||||||||||||||||
| Goodwill | |||||||||||||||||||||
| Goodwill | 18,407 | — | |||||||||||||||||||
| Total assets | $ | 67,543 | $ | 30,857 | |||||||||||||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||||||||||||||||
| LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST AND SHAREHOLDERS' EQUITY | |||||||||||||||||||||
| Current liabilities: | |||||||||||||||||||||
| Current liabilities: | |||||||||||||||||||||
| Current liabilities: | |||||||||||||||||||||
| Accounts payable | |||||||||||||||||||||
| Accounts payable | |||||||||||||||||||||
| Accounts payable | $ | 1,436 | $ | 1,734 | |||||||||||||||||
| Accrued liabilities and current portion of long-term liabilities | 16,387 | 7,860 | |||||||||||||||||||
| Current portion of income taxes payable | 445 | 140 | |||||||||||||||||||
| Total current liabilities | |||||||||||||||||||||
| Total current liabilities | |||||||||||||||||||||
| Total current liabilities | 18,268 | 9,734 | |||||||||||||||||||
| Long-term liabilities, net of current portion | 1,487 | 194 | |||||||||||||||||||
| Convertible debt | 6,069 | — | |||||||||||||||||||
| Deposit liability | |||||||||||||||||||||
| Operating lease liabilities, net of current portion | |||||||||||||||||||||
| Income taxes payable, net of current portion | |||||||||||||||||||||
| Income taxes payable, net of current portion | |||||||||||||||||||||
| Income taxes payable, net of current portion | 2,282 | 1,880 | |||||||||||||||||||
| Total liabilities | 28,106 | 11,808 | |||||||||||||||||||
| Commitments and contingencies (Note 11) | |||||||||||||||||||||
| Commitments and contingencies (Note 10) | Commitments and contingencies (Note 10) | ||||||||||||||||||||
| Redeemable non-controlling interest | |||||||||||||||||||||
| Shareholders' equity: | |||||||||||||||||||||
| Preferred stock, $0.001 par value, 50,000,000 shares authorized, none issued | — | — | |||||||||||||||||||
| Common stock, $0.001 par value; 250,000,000 shares authorized, 34,651,087 and 28,885,795 shares issued and outstanding as of December 31, 2017 and 2016, respectively | 418,891 | 394,296 | |||||||||||||||||||
| Preferred stock, $0.001 par value, 50,000,000 shares authorized, none issued | |||||||||||||||||||||
| Preferred stock, $0.001 par value, 50,000,000 shares authorized, none issued | |||||||||||||||||||||
| Common stock, $0.001 par value; 250,000,000 shares authorized, 57,126,680 and 55,113,186 shares issued and outstanding as of December 31, 2023 and 2022, respectively. | |||||||||||||||||||||
| Accumulated other comprehensive income | 20 | 10 | |||||||||||||||||||
| Accumulated deficit | (379,474 | ) | (375,257 | ) | |||||||||||||||||
| Total Pixelworks, Inc. shareholders’ equity | |||||||||||||||||||||
| Non-controlling interest | |||||||||||||||||||||
| Total shareholders' equity | 39,437 | 19,049 | |||||||||||||||||||
| Total liabilities and shareholders' equity | $ | 67,543 | $ | 30,857 | |||||||||||||||||
| Total liabilities, redeemable non-controlling interest and shareholders' equity | |||||||||||||||||||||
See accompanying notes to consolidated financial statements.
52
PIXELWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Revenue, net (1) | $ | 80,637 | $ | 53,390 | $ | 59,517 | |||||
| Cost of revenue (2) | 38,873 | 28,322 | 30,224 | ||||||||
| Gross profit | 41,764 | 25,068 | 29,293 | ||||||||
| Operating expenses: | |||||||||||
| Research and development (3) | 21,427 | 19,036 | 24,644 | ||||||||
| Selling, general and administrative (4) | 20,450 | 13,770 | 14,453 | ||||||||
| Restructuring | 1,920 | 2,608 | — | ||||||||
| Total operating expenses | 43,797 | 35,414 | 39,097 | ||||||||
| Loss from operations | (2,033 | ) | (10,346 | ) | (9,804 | ) | |||||
| Interest expense and other, net (5) | (1,647 | ) | (406 | ) | (446 | ) | |||||
| Loss before income taxes | (3,680 | ) | (10,752 | ) | (10,250 | ) | |||||
| Provision for income taxes (6) | 493 | 355 | 320 | ||||||||
| Net loss | $ | (4,173 | ) | $ | (11,107 | ) | $ | (10,570 | ) | ||
| Net loss per share - basic and diluted | $ | (0.13 | ) | $ | (0.39 | ) | $ | (0.42 | ) | ||
| Weighted average shares outstanding - basic and diluted | 31,507 | 28,276 | 25,088 | ||||||||
| (1) Includes deferred revenue fair value adjustment | $ | 93 | $ | — | $ | — | |||||
| (2) Includes: | |||||||||||
| Inventory step-up and backlog amortization | 1,965 | — | — | ||||||||
| Amortization of acquired intangible assets | 497 | — | — | ||||||||
| Stock-based compensation | 243 | 190 | 196 | ||||||||
| Restructuring | — | 1,784 | — | ||||||||
| Additional amortization of non-cancelable prepaid royalty | — | — | (14 | ) | |||||||
| (3) Includes stock-based compensation | 1,648 | 1,600 | 1,927 | ||||||||
| (4) Includes: | |||||||||||
| Acquisition and integration | 2,460 | — | — | ||||||||
| Stock-based compensation | 2,352 | 872 | 1,798 | ||||||||
| Amortization of acquired intangible assets | 168 | — | — | ||||||||
| (5) Includes: | |||||||||||
| Fair value adjustment on convertible debt conversion option | 743 | — | — | ||||||||
| Discount accretion on convertible debt fair value | 196 | — | — | ||||||||
| Gain on debt extinguishment | (29 | ) | — | — | |||||||
| (6) Includes benefit related to tax reform | (343 | ) | — | — | |||||||
| Year Ended December 31, | |||||||||||||||||
| 2023 | 2022 | ||||||||||||||||
| Revenue, net | $ | 59,677 | $ | 70,146 | |||||||||||||
| Cost of revenue (1) | 33,968 | 34,265 | |||||||||||||||
| Gross profit | 25,709 | 35,881 | |||||||||||||||
| Operating expenses: | |||||||||||||||||
| Research and development (2) | 30,878 | 30,521 | |||||||||||||||
| Selling, general and administrative (3) | 23,467 | 22,177 | |||||||||||||||
| Total operating expenses | 54,345 | 52,698 | |||||||||||||||
| Loss from operations | (28,636) | (16,817) | |||||||||||||||
| Interest income and other, net | 2,050 | 700 | |||||||||||||||
| Loss before income taxes | (26,586) | (16,117) | |||||||||||||||
| Provision (benefit) for income taxes | 357 | (884) | |||||||||||||||
| Net loss | (26,943) | (15,233) | |||||||||||||||
| Less: Net (income) loss attributable to non-controlling interests and redeemable non-controlling interests | 767 | (797) | |||||||||||||||
| Net loss attributable to Pixelworks, Inc. | $ | (26,176) | $ | (16,030) | |||||||||||||
| Net loss attributable to Pixelworks, Inc. per share - basic and diluted | $ | (0.47) | $ | (0.30) | |||||||||||||
| Weighted average shares outstanding - basic and diluted | 56,163 | 54,335 | |||||||||||||||
| (1) Includes: | |||||||||||||||||
| Stock-based compensation | $ | 89 | $ | 41 | |||||||||||||
| Amortization of acquired intangible assets | — | 72 | |||||||||||||||
| (2) Includes stock-based compensation | 1,866 | 2,351 | |||||||||||||||
| (3) Includes: | |||||||||||||||||
| Stock-based compensation | 2,841 | 2,806 | |||||||||||||||
| Amortization of acquired intangible assets | — | 18 | |||||||||||||||
See accompanying notes to consolidated financial statements.
53
PIXELWORKS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Net loss | $ | (4,173 | ) | $ | (11,107 | ) | $ | (10,570 | ) | ||
| Other comprehensive income (loss): | |||||||||||
| Foreign pension adjustment | 14 | 6 | (6 | ) | |||||||
| Tax effect of pension adjustment | (4 | ) | (2 | ) | 1 | ||||||
| Total comprehensive loss | $ | (4,163 | ) | $ | (11,103 | ) | $ | (10,575 | ) | ||
| Year Ended December 31, | |||||||||||||||||
| 2023 | 2022 | ||||||||||||||||
| Net loss | $ | (26,943) | $ | (15,233) | |||||||||||||
| Other comprehensive loss: | |||||||||||||||||
| Foreign currency translation adjustment | 1,192 | 2,612 | |||||||||||||||
| Foreign pension adjustment | 10 | 53 | |||||||||||||||
| Tax effect of foreign pension adjustment | (2) | (19) | |||||||||||||||
| Comprehensive loss | (25,743) | (12,587) | |||||||||||||||
| Less: comprehensive (income) loss attributable to non-controlling interest and redeemable non-controlling interests | 767 | (797) | |||||||||||||||
| Total comprehensive loss attributable to Pixelworks, Inc. | $ | (24,976) | $ | (13,384) | |||||||||||||
See accompanying notes to consolidated financial statements.
PIXELWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||
| 2017 | 2016 | 2015 | ||||||||||||||||||
| Cash flows from operating activities: | ||||||||||||||||||||
| Cash flows from operating activities: | ||||||||||||||||||||
| Cash flows from operating activities: | ||||||||||||||||||||
| Net loss | $ | (4,173 | ) | $ | (11,107 | ) | $ | (10,570 | ) | |||||||||||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||||||||||||||
| Net loss | ||||||||||||||||||||
| Net loss | ||||||||||||||||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||||||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||||||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||
| Stock-based compensation | 4,243 | 2,662 | 3,921 | |||||||||||||||||
| Depreciation and amortization | 3,577 | 3,466 | 4,263 | |||||||||||||||||
| Inventory step-up and backlog amortization | 1,965 | — | — | |||||||||||||||||
| Fair value adjustment on convertible debt conversion option | 743 | — | — | |||||||||||||||||
| Depreciation and amortization | ||||||||||||||||||||
| Depreciation and amortization | ||||||||||||||||||||
| Deferred income tax expense | ||||||||||||||||||||
| Deferred income tax expense | ||||||||||||||||||||
| Deferred income tax expense | ||||||||||||||||||||
| Reversal of uncertain tax positions | ||||||||||||||||||||
| Reversal of uncertain tax positions | ||||||||||||||||||||
| Reversal of uncertain tax positions | ||||||||||||||||||||
| Amortization of acquired intangible assets | 665 | — | — | |||||||||||||||||
| Discount accretion on convertible debt fair value | 196 | — | — | |||||||||||||||||
| Reversal of uncertain tax positions | (191 | ) | (170 | ) | (323 | ) | ||||||||||||||
| Gain on debt extinguishment | (29 | ) | — | — | ||||||||||||||||
| Write off of certain assets to restructuring | — | 1,744 | — | |||||||||||||||||
| Deferred income tax expense | 4 | 22 | 23 | |||||||||||||||||
| Amortization of acquired intangible assets | ||||||||||||||||||||
| Amortization of acquired intangible assets | ||||||||||||||||||||
| Other | ||||||||||||||||||||
| Other | ||||||||||||||||||||
| Other | 71 | 47 | 53 | |||||||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||||||||
| Accounts receivable, net | ||||||||||||||||||||
| Accounts receivable, net | ||||||||||||||||||||
| Accounts receivable, net | (554 | ) | 2,870 | (1,340 | ) | |||||||||||||||
| Inventories | 1,378 | 179 | (368 | ) | ||||||||||||||||
| Inventories | ||||||||||||||||||||
| Inventories | ||||||||||||||||||||
| Prepaid expenses and other current and long-term assets, net | ||||||||||||||||||||
| Prepaid expenses and other current and long-term assets, net | ||||||||||||||||||||
| Prepaid expenses and other current and long-term assets, net | 650 | (166 | ) | 163 | ||||||||||||||||
| Accounts payable | (2,063 | ) | (1,210 | ) | (210 | ) | ||||||||||||||
| Accounts payable | ||||||||||||||||||||
| Accounts payable | ||||||||||||||||||||
| Accrued current and long-term liabilities | ||||||||||||||||||||
| Accrued current and long-term liabilities | ||||||||||||||||||||
| Accrued current and long-term liabilities | 4,819 | 101 | 346 | |||||||||||||||||
| Income taxes payable | 898 | 27 | 195 | |||||||||||||||||
| Net cash provided by (used in) operating activities | 12,199 | (1,535 | ) | (3,847 | ) | |||||||||||||||
| Income taxes payable | ||||||||||||||||||||
| Income taxes payable | ||||||||||||||||||||
| Net cash used in operating activities | ||||||||||||||||||||
| Net cash used in operating activities | ||||||||||||||||||||
| Net cash used in operating activities | ||||||||||||||||||||
| Cash flows from investing activities: | ||||||||||||||||||||
| Cash flows from investing activities: | ||||||||||||||||||||
| Cash flows from investing activities: | ||||||||||||||||||||
| Purchases of property and equipment | (2,484 | ) | (2,144 | ) | (3,012 | ) | ||||||||||||||
| Cash received in connection with acquisition of business | 1,901 | — | — | |||||||||||||||||
| Purchases of property and equipment | ||||||||||||||||||||
| Purchases of property and equipment | ||||||||||||||||||||
| Purchases of licensed technology | — | — | (55 | ) | ||||||||||||||||
| Purchases of licensed technology | ||||||||||||||||||||
| Purchases of licensed technology | ||||||||||||||||||||
| Net cash used in investing activities | ||||||||||||||||||||
| Net cash used in investing activities | ||||||||||||||||||||
| Net cash used in investing activities | (583 | ) | (2,144 | ) | (3,067 | ) | ||||||||||||||
| Cash flows from financing activities: | ||||||||||||||||||||
| Payments on line of credit related to acquisition | (4,046 | ) | — | — | ||||||||||||||||
| Cash flows from financing activities: | ||||||||||||||||||||
| Cash flows from financing activities: | ||||||||||||||||||||
| Net proceeds from issuance of equity interest to non-controlling interest | ||||||||||||||||||||
| Net proceeds from issuance of equity interest to non-controlling interest | ||||||||||||||||||||
| Net proceeds from issuance of equity interest to non-controlling interest | ||||||||||||||||||||
| Payments on asset financings | ||||||||||||||||||||
| Payments on asset financings | ||||||||||||||||||||
| Payments on asset financings | ||||||||||||||||||||
| Proceeds from issuances of common stock under employee equity incentive plans | 3,004 | 1,077 | 990 | |||||||||||||||||
| Payments on asset financings | (1,673 | ) | (1,367 | ) | (1,767 | ) | ||||||||||||||
| Payments on convertible debt | (1,000 | ) | — | — | ||||||||||||||||
| Payments on line of credit | — | (3,000 | ) | — | ||||||||||||||||
| Net proceeds from equity offering | — | — | 16,356 | |||||||||||||||||
| Net cash provided by (used in) financing activities | (3,715 | ) | (3,290 | ) | 15,579 | |||||||||||||||
| Net increase (decrease) in cash and cash equivalents | 7,901 | (6,969 | ) | 8,665 | ||||||||||||||||
| Proceeds from issuances of common stock under employee equity incentive plans | ||||||||||||||||||||
| Proceeds from issuances of common stock under employee equity incentive plans | ||||||||||||||||||||
| Net proceeds from issuance of equity interest to certain entities owned by employees | ||||||||||||||||||||
| Net proceeds from issuance of equity interest to certain entities owned by employees | ||||||||||||||||||||
| Net proceeds from issuance of equity interest to certain entities owned by employees | ||||||||||||||||||||
| Net cash provided by financing activities | ||||||||||||||||||||
| Net cash provided by financing activities | ||||||||||||||||||||
| Net cash provided by financing activities | ||||||||||||||||||||
| Net decrease in cash and cash equivalents | ||||||||||||||||||||
| Net decrease in cash and cash equivalents | ||||||||||||||||||||
| Net decrease in cash and cash equivalents | ||||||||||||||||||||
| Cash and cash equivalents, beginning of period | 19,622 | 26,591 | 17,926 | |||||||||||||||||
| Cash and cash equivalents, beginning of period | ||||||||||||||||||||
| Cash and cash equivalents, beginning of period | ||||||||||||||||||||
| Cash and cash equivalents, end of period | ||||||||||||||||||||
| Cash and cash equivalents, end of period | ||||||||||||||||||||
| Cash and cash equivalents, end of period | $ | 27,523 | $ | 19,622 | $ | 26,591 | ||||||||||||||
| Supplemental disclosure of cash flow information: | ||||||||||||||||||||
| Supplemental disclosure of cash flow information: | ||||||||||||||||||||
| Supplemental disclosure of cash flow information: | ||||||||||||||||||||
| Cash paid for income taxes, net of refunds received | ||||||||||||||||||||
| Cash paid for income taxes, net of refunds received | ||||||||||||||||||||
| Cash paid for income taxes, net of refunds received | ||||||||||||||||||||
| Cash paid during the year for interest | $ | 418 | $ | 139 | $ | 104 | ||||||||||||||
| Cash paid for income taxes, net of refunds received | 160 | 437 | 366 | |||||||||||||||||
| Cash paid during the year for interest | ||||||||||||||||||||
| Cash paid during the year for interest | ||||||||||||||||||||
| Non-cash investing and financing activities: | ||||||||||||||||||||
| Value of shares issued in acquisition | $ | 16,975 | $ | — | $ | — | ||||||||||||||
Acquisitions of property and equipment and other assets under extended payment terms | 3,558 | — | 765 | |||||||||||||||||
| Value of debt converted into shares | 329 | — | — | |||||||||||||||||
| Non-cash investing and financing activities: | ||||||||||||||||||||
| Non-cash investing and financing activities: | ||||||||||||||||||||
| Purchases of property and equipment and other assets under extended payment terms | ||||||||||||||||||||
| Purchases of property and equipment and other assets under extended payment terms | ||||||||||||||||||||
| Purchases of property and equipment and other assets under extended payment terms | ||||||||||||||||||||
See accompanying notes to consolidated financial statements.
55
PIXELWORKS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except share data)
| Common Stock | Accumulated Other Comprehensive Income (Loss) | Accumulated Deficit | Total Shareholders' Equity | |||||||||||||||
| Shares | Amount | |||||||||||||||||
| Balance as of December 31, 2014 | 23,220,534 | 369,253 | 11 | (353,580 | ) | 15,684 | ||||||||||||
| Stock issued under employee equity incentive plans | 806,174 | 990 | — | — | 990 | |||||||||||||
| Equity offering | 3,737,500 | 16,356 | — | — | 16,356 | |||||||||||||
| Stock-based compensation expense | — | 3,921 | — | — | 3,921 | |||||||||||||
| Net loss | — | — | — | (10,570 | ) | (10,570 | ) | |||||||||||
| Foreign pension adjustment, net of tax of $(1) | — | — | (5 | ) | — | (5 | ) | |||||||||||
| Balance as of December 31, 2015 | 27,764.208 | 390,520 | 6 | (364,150 | ) | 26,376 | ||||||||||||
| Stock issued under employee equity incentive plans | 1,121,587 | 1,077 | — | — | 1,077 | |||||||||||||
| Stock-based compensation expense | — | 2,662 | — | — | 2,662 | |||||||||||||
| Other | — | 37 | — | — | 37 | |||||||||||||
| Net loss | — | — | — | (11,107 | ) | (11,107 | ) | |||||||||||
| Foreign pension adjustment, net of tax of $2 | — | — | 4 | — | 4 | |||||||||||||
| Balance as of December 31, 2016 | 28,885,795 | 394,296 | 10 | (375,257 | ) | 19,049 | ||||||||||||
| Stock issued under employee equity incentive plans | 2,001,782 | 3,004 | — | — | 3,004 | |||||||||||||
| Stock-based compensation expense | — | 4,243 | — | — | 4,243 | |||||||||||||
| Other | — | 44 | — | (44 | ) | — | ||||||||||||
| Issuance of stock for acquisition | 3,708,262 | 16,975 | — | — | 16,975 | |||||||||||||
| Debt conversion | 55,248 | 329 | — | — | 329 | |||||||||||||
| Net loss | — | — | — | (4,173 | ) | (4,173 | ) | |||||||||||
| Foreign pension adjustment, net of tax of $4 | — | — | 10 | — | 10 | |||||||||||||
| Balance as of December 31, 2017 | 34,651,087 | $ | 418,891 | $ | 20 | $ | (379,474 | ) | $ | 39,437 | ||||||||
| Common Stock | Accumulated Other Comprehensive Income (Loss) | Accumulated Deficit | Non-Controlling Interest | Total Shareholders' Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2021 | 53,367,136 | $ | 475,644 | $ | (468) | $ | (434,955) | $ | — | $ | 40,221 | ||||||||||||||||||||||||
| Stock issued under employee equity incentive plans | 1,746,050 | 387 | — | — | — | 387 | |||||||||||||||||||||||||||||
| Stock-based compensation expense | — | 5,198 | — | — | — | 5,198 | |||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | 2,612 | — | — | 2,612 | |||||||||||||||||||||||||||||
| Net proceeds from issuance of equity interest to non-controlling interest | — | — | — | — | 10,738 | 10,738 | |||||||||||||||||||||||||||||
| Net income attributable to non-controlling interest | — | — | — | — | 171 | 171 | |||||||||||||||||||||||||||||
| Net loss attributable to Pixelworks, Inc. | — | — | — | (16,030) | — | (16,030) | |||||||||||||||||||||||||||||
| Foreign pension adjustment, net of tax of $19 | — | — | 34 | — | — | 34 | |||||||||||||||||||||||||||||
| Balance as of December 31, 2022 | 55,113,186 | 481,229 | 2,178 | (450,985) | 10,909 | 43,331 | |||||||||||||||||||||||||||||
| Stock issued under employee equity incentive plans | 2,013,494 | 299 | — | — | — | 299 | |||||||||||||||||||||||||||||
| Stock-based compensation expense | — | 4,796 | — | — | — | 4,796 | |||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | 1,192 | — | (630) | 562 | |||||||||||||||||||||||||||||
| Net proceeds from issuance of equity interest to non-controlling interest | — | — | — | — | 14,596 | 14,596 | |||||||||||||||||||||||||||||
| Net loss attributable to non-controlling interest | — | — | — | — | (624) | (624) | |||||||||||||||||||||||||||||
| Other | — | — | — | — | 6 | 6 | |||||||||||||||||||||||||||||
| Net loss attributable to Pixelworks, Inc. | — | — | — | (26,176) | — | (26,176) | |||||||||||||||||||||||||||||
| Foreign pension adjustment, net of tax of $2 | — | — | 8 | — | — | 8 | |||||||||||||||||||||||||||||
| Balance as of December 31, 2023 | 57,126,680 | $ | 486,324 | $ | 3,378 | $ | (477,161) | $ | 24,257 | $ | 36,798 | ||||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
56
PIXELWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
NOTE 1. BASIS OF PRESENTATION
Nature of Business
Pixelworks designs, developsis a leading provider of high-performance and marketspower-efficient visual display processing semiconductors, intellectual property cores,semiconductor and software solutions that enable consistently high-quality and custom application specific integrated circuits ("ASIC") solutions for high-quality energy efficient video applications. In addition, we offerauthentic viewing experiences in a suite of solutions for advanced media processing and the efficient delivery and streaming of video.
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", below. 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 effortscenter 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 prepare PWSH to file an application for an initial public offering of PWSH shares on developing video algorithmsthe 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 improve quality,the Listing will have many benefits, including improved access to new capital markets and architectures that reduce system power, cost, bandwidththe funding of PWSH’s growth worldwide. The process of going public on the STAR Market is lengthy 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.
Our consolidated financial statements include the accounts of Pixelworks and its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated. All foreign subsidiaries use the U.S. dollar as the functional currency, and as a result, transaction gains and losses are included in the consolidated statements of operations. Transaction (gains) and losses were $172, $153$429 and $125$394 for the years ended December 31, 2017, 20162023 and 2015,2022, respectively.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles ("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 convertible debt,stock-based compensation and income taxes. The actual results experienced could differ materially from our estimates.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
57
We classify all cash and highly liquid investments with original maturities of three months or less at the date of purchase as cash and cash equivalents. Cash equivalents which consisttotaled $10,950 and $23,836 as of December 31, 2023 and 2022, respectively and consisted of U.S. denominated money market funds totaled $23,402and $17,960 ascertificates of December 31, 2017 and 2016, respectively.deposit.
Accounts Receivable, Net
Accounts receivable are recorded at invoiced amount and do not bear interest when recorded or accrue interest when past due. We maintainAccounts receivable are reduced by an allowance for doubtfulcredit losses, which is our best estimate of the expected credit losses in our existing accounts for estimated losses that may result fromreceivable. We determine the inability of our customers to make required payments. At the end of each reporting period, we estimate the allowance based on historical experience and current economic conditions, among other factors. Allowances for doubtful accounts basedwere not material as of December 31, 2023 or December 31, 2022.
We adopted ASC 326 using a modified retrospective approach which requires a cumulative effect adjustment as of the beginning of the reporting period in which the guidance is adopted. We adopted Topic 326 effective January 1, 2023. The adoption did not have a material impact on an account-by-account risk analysis of outstanding receivable balances. The determination to write-off specific accounts receivable balances is made based on the likelihood of collection and past due status. Past due status is based on invoice date and terms specific to each customer.
our consolidated financial statements.
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 (netnet realizable value).value.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization is calculated on a straight-line basis over the estimated useful life of the assets which are generally as follows:
| Software | Lesser of 3 years or contractual license term | ||||||||||
| Equipment, furniture and fixtures | 2 years | ||||||||||
| Tooling | 2 to | ||||||||||
| Leasehold improvements | Lesser of lease term or estimated useful life | ||||||||||
The cost of property and equipment repairs and maintenance is expensed as incurred.
Licensed Technology
We have capitalized licensed technology assets in other long-term assets. These assets are stated at cost and are amortized on a straight-line basis over the term of the license or the estimated life of the asset, if the license is not contractually limited, which is generally two to five years.
58
Useful Lives and Recoverability of Equipment and Other Long-Lived Assets
We evaluate the remaining useful life and recoverability of equipment and other assets, including identifiable intangible assets, whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If there is an indicator of impairment, we prepare an estimate of future, undiscounted cash flows expected to result from the use of each asset and its eventual disposition. If these cash flows are less than the carrying value of the asset, we adjust the carrying amount of the asset to its estimated fair value. We have concluded that the carrying value of our long-lived assets is recoverable as of December 31, 2017.
2023.
Goodwill
Goodwill is not amortized, rather it is 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 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. Accordingly, we have elected to bypass theWe performed a qualitative assessment and proceed directly to the quantitative goodwill impairment test. We tested goodwill for impairment under the quantitative goodwill impairment test during the fourth quarter of 20172023 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.
Stock-Based Compensation
We currently sponsor a stock incentive plan that allows for issuance of employee stock options and restricted stock awards, including restricted stock units. We also have an employee stock purchase plan for all eligible employees. The fair value of share-based payment awards is expensed straight-lineusing the graded vesting method over the requisite service period, which is generally the vesting period, for each separately-vesting tranche of the entire award. Additionally, any modification of an award that increases its fair value will require us to recognize additional expense.
The fair value of our stock option grants and purchase rights under our employee stock purchase plan are estimated as of the grant date using the Black-Scholes option pricing model which is affected by our estimates of the risk free interest rate, our expected dividend yield, expected term and the expected share price volatility of our common shares over the expected term. The fair value of our restricted stock awards are based on the market value of our stock on the date of grant.
Research and Development
Costs associated with research and development activities are expensed as incurred, except for items with alternate future uses which are capitalized and depreciated over their estimated useful lives.
On occasion, we enter into co-development arrangements with current or prospective integrated circuit ("IC") customers to defray a portion of the research and development expenses we expect to incur in connection with our development of an IC product. As amounts become due and payable, they are offset against research and development expense on a pro-rata basis.
59
Income Taxes
We account for income taxes under the asset and liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between financial statement carrying amounts and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We establish a valuation allowance to reduce deferred tax assets if it is "more likely than not" that a portion or all of the asset will not be realized in future tax returns.
An uncertain tax position represents treatment of a tax position taken in a filed tax return, or planned to be taken in a future tax return, that has not been reflected in measuring income tax expense for financial reporting purposes. Until these positions are sustained by the taxing authorities, we do not recognize the tax benefits resulting from such positions and report the tax effects for uncertain tax positions in our consolidated balance sheets.
| December 31, | |||||||
| 2017 | 2016 | ||||||
| Actuarial income on foreign pension obligation | $ | 35 | $ | 27 | |||
| Accumulated transition foreign pension obligation | (15 | ) | (17 | ) | |||
| Accumulated other comprehensive income | $ | 20 | $ | 10 | |||
Risks and Uncertainties
Concentration of Suppliers
We do not own or operate a semiconductor fabrication facility and do not have the resources to manufacture our products internally. We rely on a limited number of foundries and assembly and test vendors to produce all of our wafers and for completion of finished products. We do not have any long-term agreements with any of these suppliers. In light of these dependencies, it is reasonably possible that failure to perform by one of these suppliers could have a severe impact on our results of operations. Additionally, the concentration of these vendors within Taiwan and the People’s Republic of China increases our risk of supply disruption due to natural disasters, economic instability, political unrest or other regional disturbances.
Risk of Technological Change
The markets in which we compete, or seek to compete, are subject to rapid technological change, frequent new product introductions, changing customer requirements for new products and features, and evolving industry standards. The introduction of new technologies and the emergence of new industry standards could render our products less desirable or obsolete, which could harm our business.
Concentrations of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist of cash equivalents and accounts receivable. We limit our exposure to credit risk associated with cash equivalent balances by holding our funds in high quality, highly liquid money market accounts. We limit our exposure to credit risk associated with accounts receivable by carefully evaluating creditworthiness before offering terms to customers. To mitigate the risk of concentration associated with cash and cash equivalents, funds are held with creditworthy institutions and, at certain times, temporarily swept into insured programs overnight to reduce single firm concentration risk. Amounts on deposit may exceed federal deposit insurance limits.
Recent Accounting Pronouncements
In January 2017,November 2023, the FASBFinancial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business ("2023-07, Improvements to Reportable Segment Disclosures ("ASU 2017-01"2023-07"). ASU 2017-01 clarifies2023-07 expands the definition ofdisclosures for reportable segments made by public entities. The amendments retain the existing disclosure requirements in ASC 280 and expand upon them to require public entities to disclose significant expenses for reportable segments in both interim and annual reporting periods, as well as items that were previously disclosed only annually on an interim basis, including disclosures related to a businessreportable segment’s profit or loss and provides furtherassets. In addition, entities with a single reportable segment must now provide all segment disclosures required in ASC 280, including the new disclosures for reportable segments under the amendments in ASU 2023-07. The amendments do not change the existing guidance for evaluating whetheron how a transaction will be accounted for as an acquisition of an asset or a business.public entity identifies and determines its reportable segments. ASU 2017-012023-07 will become effective for us on January 1, 2018, within the year ending December 31, 2024, and early adoption is permitted. We do not expectare evaluating the impact that the adoption of this update toASU 2023-07 will have a material impact on our financial position, results of operations orand cash flows.
60
| Purchase price | $ | 16,975 | ||||
| Less net liabilities assumed: | ||||||
| Assets acquired: | ||||||
| Cash and cash equivalents | 1,901 | |||||
| Accounts receivable | 968 | |||||
| Inventories | 3,175 | |||||
| Property and equipment | 964 | |||||
| Other assets | 1,562 | |||||
| Identifiable intangible assets | 6,730 | |||||
| Liabilities assumed: | ||||||
| Accounts payable | (1,736 | ) | ||||
| Accrued liabilities and other current liabilities | (2,832 | ) | ||||
| Revolving bank loan | (4,046 | ) | ||||
| Convertible debt | (6,485 | ) | ||||
| Other noncurrent liabilities | (1,633 | ) | (1,432 | ) | ||
| Goodwill | $ | 18,407 | ||||
| Year Ended | |||||||
| December 31, | |||||||
| 2017 | 2016 | ||||||
| Revenue, net | $ | 90,764 | $ | 81,909 | |||
| Net loss | $ | (3,733 | ) | $ | (25,234 | ) | |
| Net loss per share: | |||||||
| Basic | $ | (0.11 | ) | $ | (0.79 | ) | |
| Diluted | $ | (0.11 | ) | $ | (0.79 | ) | |
| Weighted average shares outstanding: | |||||||
| Basic | 33,670 | 31,984 | |||||
| Diluted | 33,670 | 31,984 | |||||
NOTE 4.3. BALANCE SHEET COMPONENTS
| December 31, | |||||||
| 2017 | 2016 | ||||||
| Accounts receivable, gross | $ | 4,687 | $ | 3,150 | |||
| Allowance for doubtful accounts | (47 | ) | (32 | ) | |||
| Accounts receivable, net | $ | 4,640 | $ | 3,118 | |||
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Balance at beginning of year | $ | 32 | $ | 60 | $ | 301 | |||||
| Additions charged (reductions credited) | 15 | (28 | ) | 9 | |||||||
| Accounts written-off, net of recoveries | — | — | (250 | ) | |||||||
| Balance at end of year | $ | 47 | $ | 32 | $ | 60 | |||||
Inventories
Inventories consist of the following:
| December 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Finished goods | $ | 2,719 | $ | 480 | |||||||
| Work-in-process | 1,249 | 1,280 | |||||||||
| Inventories | $ | 3,968 | $ | 1,760 | |||||||
| December 31, | |||||||
| 2017 | 2016 | ||||||
| Finished goods | $ | 1,115 | $ | 1,707 | |||
| Work-in-process | 1,731 | 1,096 | |||||
| Inventories | $ | 2,846 | $ | 2,803 | |||
We recorded inventory write-downs offset by sales of previously written-down inventory of $184$280 and $99 for the yearyears ended December 31, 2017. We recorded inventory write-downs, offset by sales of previously written-down inventory of $257 for the year ended December 31, 2016, of which $285 was included in restructuring2023 and was related to the write off of inventory associated with markets we are no longer pursuing. We recorded inventory write-downs, offset by sales of previously written-down inventory of $199 for the year ended December 31, 2015.2022, respectively. The inventory write-downs were for lower of cost or marketnet realizable value and excess and obsolescence exposure,exposure. The inventory write-downs were offset by sales of previously written-down inventory of $165, $44$0 and $8$17 for the years ended December 31, 2017, 20162023 and 2015,2022, respectively.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of current prepaid expenses, deposits, income taxes receivable and other receivables.
Property and Equipment, Net
Property and equipment consists of the following:
| December 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Equipment, furniture and fixtures | $ | 10,118 | $ | 9,637 | |||||||
| Software | 5,613 | 6,739 | |||||||||
| Tooling | 5,081 | 2,903 | |||||||||
| Leasehold improvements | 1,707 | 1,513 | |||||||||
| 22,519 | 20,792 | ||||||||||
| Accumulated depreciation and amortization | (16,522) | (16,160) | |||||||||
| Property and equipment, net | $ | 5,997 | $ | 4,632 | |||||||
| December 31, | |||||||
| 2017 | 2016 | ||||||
| Equipment, furniture and fixtures | $ | 9,040 | $ | 10,070 | |||
| Software | 6,112 | 6,295 | |||||
| Tooling | 5,665 | 5,714 | |||||
| Leasehold improvements | 2,255 | 2,337 | |||||
| 23,072 | 24,416 | ||||||
| Accumulated depreciation and amortization | (17,467 | ) | (20,623 | ) | |||
| Property and equipment, net | $ | 5,605 | $ | 3,793 | |||
Software amortization was $1,501, $1,755$1,420 and $2,127$1,505 for the years ended December 31, 2017, 20162023 and 2015,2022, respectively. Depreciation and amortization expense for equipment, furniture, fixtures, tooling and leasehold improvements was $2,076, $1,705$2,253 and $1,483$2,620 for the years ended December 31, 2017, 20162023 and 2015,2022, respectively.
Other Assets, Net
Other assets consist primarily of deposits, deferred tax assets and licensed technology. Amortization of licensed technology was $0, $6$615 and $653$532 for the years ended December 31, 2017, 20162023 and 2015,2022, respectively.
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| December 31, | |||||||
| 2017 | 2016 | ||||||
| Developed technology | $ | 5,050 | $ | — | |||
| Customer relationships | 1,270 | — | |||||
| Backlog and tradename | 410 | — | |||||
| 6,730 | — | ||||||
| Less: accumulated amortization | (874 | ) | — | ||||
| Acquired intangible assets, net | $ | 5,856 | $ | — | |||
| Years ending December 31: | |||
| 2018 | 1,648 | ||
| 2019 | 1,505 | ||
| 2020 | 1,496 | ||
| 2021 | 1,117 | ||
| 2022 | 90 | ||
| $ | 5,856 | ||
Goodwill
Goodwill resulted from our acquisitionthe Acquisition of ViXS on August 2,Systems, Inc. in 2017, whereby we recorded goodwill of $18,407. See Note 3: "Acquisition" for information concerning the acquisition. See Note 2: "Summary of Significant Accounting Policies" for information on our assessment of goodwill impairment.
Accrued Liabilities and Current Portion of Long-Term Liabilities
Accrued liabilities and current portion of long-term liabilities consist of the following:
| December 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Accrued payroll and related liabilities | $ | 4,286 | $ | 3,632 | |||||||
| Operating lease liability, current | 2,381 | 1,391 | |||||||||
| Current portion of accrued liabilities for asset financings | 1,124 | 876 | |||||||||
| Other accrued expenses | 1,901 | 2,950 | |||||||||
| Accrued liabilities and current portion of long-term liabilities | $ | 9,692 | $ | 8,849 | |||||||
| December 31, | |||||||
| 2017 | 2016 | ||||||
| Accrued payroll and related liabilities | $ | 5,400 | $ | 2,169 | |||
| Accrued interest payable | 2,770 | 2,078 | |||||
| Accrued commissions and royalties | 2,610 | 2,427 | |||||
| Current portion of accrued liabilities for asset financings | 1,701 | 389 | |||||
| Deferred revenue | 418 | — | |||||
| Accrued costs related to restructuring | 352 | 60 | |||||
| Liability for warranty returns | 17 | 28 | |||||
| Other | 3,119 | 709 | |||||
| Accrued liabilities and current portion of long-term liabilities | $ | 16,387 | $ | 7,860 | |||
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Liability for warranty returns: | |||||||||||
| Balance at beginning of year | $ | 28 | $ | 49 | $ | 105 | |||||
| Provision (benefit) | 2 | 6 | (24 | ) | |||||||
| Charge-offs | (13 | ) | (27 | ) | (32 | ) | |||||
| Balance at end of year | $ | 17 | $ | 28 | $ | 49 | |||||
| 10% convertible notes, principal amount | $ | 4,749 | |
| Unamortized debt discount | (1,030 | ) | |
| Conversion feature, at fair value | 2,350 | ||
| $ | 6,069 | ||
NOTE 6.4. FAIR VALUE MEASUREMENTS
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Three levels of inputs may be used to measure fair value:
Level 1:Valuations based on quoted prices in active markets for identical assets and liabilities.
Level 2:Valuations based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3:Valuations based on unobservable inputs in which there is little or no market data available, which require the reporting entity to develop its own assumptions.
The following table presents information about our assets and liabilities measured at fair value on a recurring basis in the consolidated balance sheets as of December 31, 20172023 and 2016:2022:
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| As of December 31, 2017: | |||||||||||||||
| Assets: | |||||||||||||||
| Money market funds | $ | 23,402 | $ | — | $ | — | $ | 23,402 | |||||||
| Liabilities: | |||||||||||||||
| Convertible debt - including conversion feature | $ | — | $ | 5,300 | $ | — | $ | 5,300 | |||||||
| Conversion feature - convertible debt | — | 2,350 | — | 2,350 | |||||||||||
| As of December 31, 2016: | |||||||||||||||
| Assets: | |||||||||||||||
| Money market funds | $ | 17,960 | $ | — | $ | — | $ | 17,960 | |||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| As of December 31, 2023: | |||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Cash equivalents: | |||||||||||||||||||||||
| Money market funds | $ | 950 | $ | — | $ | — | $ | 950 | |||||||||||||||
| Certificates of deposit | 10,000 | — | — | 10,000 | |||||||||||||||||||
| As of December 31, 2022: | |||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Cash equivalents: | |||||||||||||||||||||||
| Money market funds | $ | 18,836 | $ | — | $ | — | $ | 18,836 | |||||||||||||||
| Certificates of deposit | 5,000 | — | — | 5,000 | |||||||||||||||||||
We primarily use the market approach to determine the fair value of our financial instruments. The fair value of our current assets and liabilities, including accounts receivable and accounts payable approximates the carrying value due to the short-term nature of these balances. We have currently chosen not to elect the fair value option for any items that are not already required to be measured at fair value in accordance with U.S. GAAP.
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NOTE 5. LEASES
We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, other current liabilities, and Fernandes Convertible Debt Model. Three primary assumptions used in the calculations were: volatility of 60%, credit spread of 13.13% and risk free rate of 1.87%. The embedded conversion feature is measured at fair value on a recurring basis and included with convertible debtoperating lease liabilities in our consolidated balance sheet. Convertible debtsheets.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Operating lease ROU assets also exclude lease incentives received. For purposes of calculating operating lease liabilities, lease terms may be deemed to include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.
We have operating leases primarily for office buildings and spaces. Our leases have remaining lease terms of 1 year to 3 years. Supplemental information related to lease expense and valuation of the ROU assets and lease liabilities was recordedas follows:
| Year Ended December 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Operating lease cost | $ | 2,884 | $ | 2,657 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||
| Operating cash flows from operating leases | 2,762 | 2,676 | |||||||||
| Leased assets obtained in exchange for new operating lease liabilities | 3,878 | 994 | |||||||||
| Weighted average remaining lease term (in years) | 2.19 | 3.12 | |||||||||
| Weighted average discount rate | 7.02 | % | 5.55 | % | |||||||
Future minimum lease payments under non-cancellable leases as of December 31, 2023 were as follows:
| Operating Lease Payments | |||||
| Years ending December 31: | |||||
| 2024 | $ | 2,656 | |||
| 2025 | 1,907 | ||||
| 2026 | 713 | ||||
| 2027 | 87 | ||||
| Total operating lease payments | 5,363 | ||||
| Less imputed interest | (415) | ||||
| Total operating lease liabilities | $ | 4,948 | |||
As of December 31, 2023, the Company had no operating lease liabilities that had not commenced.
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NOTE 6. REVENUE
Revenue is recognized when control of the promised good or service is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Our principal revenue generating activities consist of the following:
Product Sales - We sell integrated circuit products, also known as “chips” or “ICs”, based upon a customer purchase order, which includes a fixed price per unit. ICs are sold into two target end markets: Mobile and Home & Enterprise. We have elected to account for shipping and handling as activities to fulfill the promise to transfer the goods, and not evaluate whether these activities are promised services to the customer. We generally satisfy our single performance obligation upon shipment of the goods to the customer and recognize revenue at fair valuea point in time upon shipment of the underlying product.
Our shipments are subject to limited return rights subject to our limited warranty for our products sold. In addition, we may provide other credits to certain customers pursuant to price protection and stock rotation rights, all of which are considered variable consideration when estimating the amount of revenue to recognize. We use the “most likely amount” method to determine the amount of consideration to which we are entitled. Our estimate of variable consideration is reassessed at the end of each reporting period based on changes in facts and circumstances. Historically, returns and credits have not been material.
Engineering Services - We enter into contracts for professional engineering services that include software development and customization. We identify each performance obligation in our consolidated balance sheetengineering services agreements (“ESAs”) at contract inception. The ESA generally includes project deliverables specified by the customer. The performance obligations in the ESA are generally combined into one deliverable, with the pricing for services stated at a fixed amount. Services provided under the ESA generally result in the transfer of control over time. We recognize revenue on ESAs based on the dateproportion of labor hours expended to the Acquisition, however fair value adjustmentstotal hours expected to complete the contract performance obligation. ESAs could include substantive customer acceptance provisions. In ESAs that include substantive customer acceptance provisions, we recognize revenue upon customer acceptance.
License Revenue - On occasion, we derive revenue from the license of our internally developed intellectual property ("IP"). Additionally, for certain IP license agreements, royalties are not required aftercollected as customers sell their own products that incorporate our IP. IP licensing agreements that we enter into generally provide licensees the Acquisition date.
Other - From time-to-time, we enter into arrangements for other revenue generating activities, such as providing technical support services to customers through technical support agreements. In April 2016,each circumstance, we executed a restructuring plan to streamline the Company’s operations and product offerings and to align the Company’s expenses with current revenue levels. The plan included an approximately 24% reduction in workforce, primarilyevaluate such arrangements for our performance obligations which generally results in the areatransfer of development, however, it also impacted operations,control for such services over time. Historically, such arrangements have not been material to our operating results.
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The following table provides information about disaggregated revenue based on the preceding categories, with IC sales and marketing. The plan also included abandonmentdisaggregated further into net revenue from external customers for each group of certain assets resulting in impairment charges to write off the assets associated with markets we are no longer pursuing.
| Year ended December 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| IC sales | $ | 58,603 | $ | 68,168 | |||||||
| Engineering services, license and other | 1,074 | 1,978 | |||||||||
| Total revenues | $ | 59,677 | $ | 70,146 | |||||||
IC sales by end market:
| Year ended December 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Mobile market | $ | 29,416 | $ | 21,160 | |||||||
| Home & Enterprise market | 29,187 | 47,008 | |||||||||
| Total IC sales | $ | 58,603 | $ | 68,168 | |||||||
For segment information, including revenue by geographic region, see "Note 13. Segment Information".
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.
Contract Balances
Our contract balances include accounts receivable, deferred revenue and our liability for warranty returns.
Payment terms and conditions for goods and services provided vary by contract; however, payment is comprisedgenerally required within 30 to 60 days of invoicing.
We have not identified any material costs incurred associated with obtaining a contract with a customer which would meet the criteria to be capitalized, therefore, these costs are expensed as incurred.
The Company has elected the practical expedient of not accounting for significant financing components if the period between revenue recognition and when the customer pays for the product or service is one year or less. The aggregate amount of the transaction price allocated to unsatisfied performance obligations with an original expected duration of greater than one year is $110, which we expect to recognize ratably over the next 11 months.
The following table presents the contract assets and contract liabilities recorded on the consolidated balance sheets as of December 31, 2023, 2022 and 2021:
| Year Ended December 31, | |||||||||||||||||||||||||||||
| Balance Sheet Classification | 2023 | 2022 | 2021 | ||||||||||||||||||||||||||
| Accounts receivable | Accounts receivable, net | $ | 10,075 | $ | 10,047 | $ | 8,708 | ||||||||||||||||||||||
| Deferred revenue | Accrued liabilities and current portion of long-term liabilities | 146 | 230 | 50 | |||||||||||||||||||||||||
| Liability for Warranty returns | Accrued liabilities and current portion of long-term liabilities | 13 | 15 | 17 | |||||||||||||||||||||||||
During the years ended December 31, 2023 and 2022, the Company recognized $120 and $50, respectively, of revenue related to amounts that were previously included in deferred revenue at the beginning of the period. Deferred revenue fluctuates over time due to changes in the timing of payments received from customers and revenue recognized for services provided.
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NOTE 7. INTEREST INCOME AND OTHER, NET
Interest income and other, net consists of the following:
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Cost of revenue — restructuring: | |||||||||||
| Tooling and inventory write offs | $ | — | $ | 1,679 | $ | — | |||||
| Employee severance and benefits | — | 105 | — | ||||||||
| — | 1,784 | — | |||||||||
| Operating expenses — restructuring: | |||||||||||
| Employee severance and benefits | $ | 1,920 | $ | 2,513 | $ | — | |||||
| Licensed technology and other asset write offs | — | 65 | — | ||||||||
| Other | — | 30 | — | ||||||||
| 1,920 | 2,608 | — | |||||||||
| Total restructuring expense | $ | 1,920 | $ | 4,392 | $ | — | |||||
| Year Ended December 31, | |||||||||||||||||
| 2023 | 2022 | ||||||||||||||||
| Interest income | $ | 1,950 | $ | 670 | |||||||||||||
| Other income | 125 | 80 | |||||||||||||||
| Interest expense | (25) | (50) | |||||||||||||||
| Total interest income and other, net | $ | 2,050 | $ | 700 | |||||||||||||
The followingincrease in interest income in 2023 compared to 2022 is a rollforward ofdue to increased interest earned on our cash and cash equivalents balance due to the accrued liabilities relatedincrease in the interest rate available throughout the full year in 2023 compared to restructuring for the full year ended December 31, 2017:in 2022.
Balance as of December 31, 2016 | Expensed | Payments | Balance as of December 31, 2017 | ||||||||||||
| Employee severance and benefits | $ | 60 | $ | 1,920 | $ | (1,628 | ) | $ | 352 | ||||||
| Accrued costs related to restructuring | $ | 60 | $ | 1,920 | $ | (1,628 | ) | $ | 352 | ||||||
NOTE 8:8. RESEARCH AND DEVELOPMENTDEVELOPMENT
During the first quarter of 2017,2021, we entered into a best effortsbest-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 to be sold exclusively to the customer.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, $4,000$5,800 was payable by the customer within 60 days of the date of the agreement and twothree additional payments of $2,000$2,500, $1,900 and $1,300 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 an offsetoffsets to research and development expense of $4,000$3,243 and $4,338 during the yearyears ended December 31, 2017.2023 and 2022, respectively.
NOTE 9: INTEREST EXPENSE AND OTHER, NET
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
Interest expense 1 | $ | (878 | ) | $ | (446 | ) | $ | (450 | ) | ||
| Fair value adjustment on convertible debt conversion option | (743 | ) | — | — | |||||||
| Discount accretion on convertible debt fair value | (196 | ) | — | — | |||||||
| Interest income | 141 | 40 | 4 | ||||||||
| Gain on debt extinguishment | 29 | — | — | ||||||||
| Total interest expense and other, net | $ | (1,647 | ) | $ | (406 | ) | $ | (446 | ) | ||
Current and Deferred Income Tax Expense
Domestic and foreign pre-tax income (loss)loss is as follows:
| Year Ended December 31, | |||||||||||||||||
| 2023 | 2022 | ||||||||||||||||
| Domestic | $ | (14,835) | $ | (20,196) | |||||||||||||
| Foreign | (11,751) | 4,079 | |||||||||||||||
| Domestic and foreign pre-tax loss | $ | (26,586) | $ | (16,117) | |||||||||||||
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Domestic | $ | 903 | $ | (11,881 | ) | $ | (11,675 | ) | |||
| Foreign | (4,583 | ) | 1,129 | 1,425 | |||||||
| Domestic and foreign pre-tax loss | $ | (3,680 | ) | $ | (10,752 | ) | $ | (10,250 | ) | ||
Income tax expense (benefit) attributable to operations is comprised of the following:
| Year Ended December 31, | |||||||||||||||||
| 2023 | 2022 | ||||||||||||||||
| Current: | |||||||||||||||||
| Federal | $ | (325) | $ | 396 | |||||||||||||
| State | 14 | 14 | |||||||||||||||
| Foreign | 367 | (1,722) | |||||||||||||||
| Total current | 56 | (1,312) | |||||||||||||||
| Deferred: | |||||||||||||||||
| Federal | 292 | (364) | |||||||||||||||
| Foreign | 9 | 792 | |||||||||||||||
| Total deferred | 301 | 428 | |||||||||||||||
| Income tax expense (benefit) | $ | 357 | $ | (884) | |||||||||||||
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| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Current: | |||||||||||
| Federal | $ | (321 | ) | $ | 55 | $ | 55 | ||||
| State | 4 | 2 | 2 | ||||||||
| Foreign | 806 | 276 | 240 | ||||||||
| Total current | 489 | 333 | 297 | ||||||||
| Deferred: | |||||||||||
| Foreign | 4 | 22 | 23 | ||||||||
| Total deferred | 4 | 22 | 23 | ||||||||
| Income tax expense | $ | 493 | $ | 355 | $ | 320 | |||||
The reconciliation of the U.S. federal statutory income tax rate to our effective income tax rate is as follows:
| Year Ended December 31, | |||||||||||||||||
| 2023 | 2022 | ||||||||||||||||
| Federal statutory rate | 21 | % | 21 | % | |||||||||||||
| Impact of foreign earnings | (10) | (27) | |||||||||||||||
| Change in valuation allowance | (43) | 28 | |||||||||||||||
| Tax contingencies, net of reversals | — | 13 | |||||||||||||||
| Corporate restructuring | — | (11) | |||||||||||||||
| Expiration of tax attributes | (5) | (12) | |||||||||||||||
| Permanent items | 19 | (2) | |||||||||||||||
| Research and development credits | 1 | 4 | |||||||||||||||
| Stock-based compensation | (3) | (4) | |||||||||||||||
| Adjustment to deferred balances | 18 | (4) | |||||||||||||||
| Other | 1 | (1) | |||||||||||||||
| Effective income tax rate | (1) | % | 5 | % | |||||||||||||
| Year Ended December 31, | ||||||||
| 2017 | 2016 | 2015 | ||||||
| Federal statutory rate | 34 | % | 34 | % | 34 | % | ||
| Change in valuation allowance | 887 | (14 | ) | (17 | ) | |||
| Tax law change | (789 | ) | — | — | ||||
| Expiration of tax attributes | (127 | ) | (11 | ) | (18 | ) | ||
| Permanent items | (8 | ) | — | — | ||||
| Stock-based compensation | (8 | ) | (13 | ) | (7 | ) | ||
| Impact of foreign earnings | (2 | ) | 1 | 1 | ||||
| State income taxes, net of federal tax benefit | — | 2 | 3 | |||||
| Other | — | (2 | ) | 1 | ||||
| Effective income tax rate | (13 | )% | (3 | )% | (3 | )% | ||
Deferred Tax Assets, Liabilities and Valuation Allowance
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts for income tax purposes. Significant components of our deferred tax assets and liabilities are as follows:
| December 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Deferred tax assets: | |||||||||||
| Research and experimentation credit and deduction carryforwards | $ | 59,450 | $ | 60,041 | |||||||
| Net operating loss carryforwards | 56,196 | 44,424 | |||||||||
| Depreciation and amortization | 5,402 | 5,568 | |||||||||
| Reserves and accrued expenses | 1,458 | 1,000 | |||||||||
| Deferred stock-based compensation | 725 | 821 | |||||||||
| Foreign tax credit carryforwards | 81 | 163 | |||||||||
| Other | 454 | 1,201 | |||||||||
| Total gross deferred tax assets | 123,766 | 113,218 | |||||||||
| Deferred tax liabilities: | |||||||||||
| Foreign earnings | (248) | (212) | |||||||||
| Other | (403) | (620) | |||||||||
| Total gross deferred tax liabilities | (651) | (832) | |||||||||
| Less valuation allowance | (122,975) | (111,941) | |||||||||
| Net deferred tax assets | $ | 140 | $ | 445 | |||||||
| December 31, | |||||||
| 2017 | 2016 | ||||||
| Deferred tax assets: | |||||||
| Net operating loss carryforwards | $ | 56,461 | $ | 77,357 | |||
| Research and experimentation credit and deduction carryforwards | 63,796 | 11,849 | |||||
| Foreign tax credit carryforwards | 2,216 | 3,575 | |||||
| Deferred stock-based compensation | 802 | 1,705 | |||||
| Depreciation and amortization | 3,068 | 1,241 | |||||
| Reserves and accrued expenses | 511 | 623 | |||||
| Other | 705 | 438 | |||||
| Total gross deferred tax assets | 127,559 | 96,788 | |||||
| Deferred tax liabilities: | |||||||
| Foreign earnings | — | (327 | ) | ||||
| Other | (485 | ) | (269 | ) | |||
| Total gross deferred tax liabilities | (485 | ) | (596 | ) | |||
| Less valuation allowance | (126,946 | ) | (96,079 | ) | |||
| Net deferred tax assets | $ | 128 | $ | 113 | |||
We continue to record a full valuation allowance against our U.S. Canada and China net deferred tax assets as of December 31, 20172023 and 20162022, as it is not more likely than not that we will realize a benefit from these assets in a future period. We have not provided a valuation allowance against any of our foreignother net deferred tax assets with the exception of Canada, 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 $30,867, $1,555 and $1,732$11,034 for the yearsyear ended December 31, 2017, 2016,2023 and 2015, respectively.decreased $4,431 for the year ended December 31, 2022.
As of December 31, 2017,2023, we had federal, state and foreign net operating loss carryforwards of $215,326, $11,444$154,456, $16,324 and $38,578$89,001 respectively, which will begin to expire between 2018 and 2037.in 2024 with $31,705 of our federal net operating loss carryforward lasting indefinitely. As of December 31, 2017,2023, we had available federal, state and foreign research and experimentation tax credit carryforwards of $8,962, $4,019,$5,734, $5,357, and $27,322$21,898 respectively. The federal and state tax credits will begin expiring in 20192024 while the state and foreign 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 $119,447. We have a general foreign tax credit of $1,655 which will begin expiring in 2018. As of December 31, 2017 we recorded a receivable for our AMT tax credit carryforwards of $343 which will be refundable under the Tax Cuts and Jobs Act. $120,458.
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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.
We recognized all ofare not indefinitely reinvested in the earnings of our foreign subsidiaries as partin China TrueCut, Japan and Taiwan and have accrued tax on the future repatriation of the transition tax of thecash for jurisdictions where withholding taxes would apply.
The Tax Cuts and Jobs Act. As ofAct ("TCJA") was enacted on December 22, 2017. Included in the TCJA is the requirement to capitalize and amortize research and experimental expenditures starting with the first tax year after December 31, 2017, we do2021. The required capitalization and amortization of these costs resulted in an increase to our taxable income before utilization of our operating loss carryforward. The capitalization did not have a liability for unremitted foreign earnings.
the years ended December 31, 2023 and 2022.
Uncertain Tax Positions
We have recorded tax liabilities to address potential exposures involving positions that could be challenged by taxing authorities. As of December 31, 20172023, the amount of our uncertain tax positions was a liability of $1,735$376 and a reduction to deferred tax assets of $777.$1,370. As of December 31, 2016,2022, the amount of our uncertain tax positions was a liability of $1,419$378 and a reduction to deferred tax assets of $560.$1,353.
The following is a summary of the change in our liability for uncertain tax positions and interest and penalties:
| 2023 | 2022 | ||||||||||
| Uncertain tax positions: | |||||||||||
| Balance at beginning of year | $ | 1,643 | $ | 3,646 | |||||||
| Reversal of accrual for positions taken in a prior year | (23) | (214) | |||||||||
| Accrual for positions taken in current year | 112 | 117 | |||||||||
| Reversals due to lapse of statute of limitations | (84) | (97) | |||||||||
| Reversals due to positions taken in the current year | — | (1,809) | |||||||||
| Balance at end of year | $ | 1,648 | $ | 1,643 | |||||||
| Interest and penalties: | |||||||||||
| Balance at beginning of year | $ | 88 | $ | 101 | |||||||
| Accrual for positions taken in prior year | 11 | 11 | |||||||||
| Accrual for positions taken in current year | — | — | |||||||||
| Reversals due to lapse of statute of limitations | (1) | (24) | |||||||||
| Balance at end of year | $ | 98 | $ | 88 | |||||||
| 2017 | 2016 | ||||||
| Uncertain tax positions: | |||||||
| Balance at beginning of year | $ | 1,886 | $ | 1,863 | |||
| Accrual for positions taken in a prior year | 40 | (126 | ) | ||||
| Accrual for positions taken in current year | 263 | 257 | |||||
| Reversals due to lapse of statute of limitations | (120 | ) | (108 | ) | |||
| Accrual for positions acquired in acquisition of ViXS Systems | 375 | — | |||||
| Balance at end of year | $ | 2,444 | $ | 1,886 | |||
| Interest and penalties: | |||||||
| Balance at beginning of year | $ | 93 | $ | 129 | |||
| Accrual for positions taken in prior year | 8 | 7 | |||||
| Accrual for positions taken in current year | 30 | 19 | |||||
| Reversals due to lapse of statute of limitations | (71 | ) | (62 | ) | |||
| Accrual for positions acquired in acquisition of ViXS Systems | 8 | — | |||||
| Balance at end of year | $ | 68 | $ | 93 | |||
During both the years ended December 31, 2017, 20162023 and 2015,2022, we recognized $46, $26 and $9, respectively,$11 of interest and penalties in income tax expense in our consolidated statements of operations.
During the year ended December 31, 2022, one of our Chinese subsidiaries, PWSH settled a portion of the outstanding intercompany debt with the US parent, Pixelworks, Inc. The portion that was not able to be settled was forgiven and was recognized as taxable income in China. We previously accrued for a long term liability in the event that the full amount of the intercompany debt would be recognized as taxable income in China. The related uncertain tax position was reversed as a part of the settlement of the intercompany debt.
We file income tax returns in the U.S. and various foreign jurisdictions. A number of years may elapse before an uncertain tax position is resolved by settlement or statutestatutes of limitations. Settlement of any particular position could require the use of cash. If the uncertain tax positions we have accrued for are sustained by the taxing authorities in our favor, the reduction of the liability will reduce our effective tax rate. We reasonably expect reductions in the liability for unrecognized tax benefits and interest and penalties of approximately $8$81 within the next twelve months due to the expiration of statutes of limitation in federal, state, and foreign jurisdictions.jurisdictions, $3 of which is expected to impact our effective tax rate.
We are no longer subject to U.S. federal, state, and foreign examinations for years before 2014, 20132020, 2019 and 2010,2016, respectively. Our net operating loss and tax credit carryforwards from all years may be subject to adjustment for three years following the year in which utilized. We do not anticipate that any potential tax adjustments will have a significant impact on our financial position or results of operations.
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In January 2024, we were notified that our 2019 and 2020 Canada income tax returns have been selected for audit by the Canadian tax authorities. We have not received any proposed assessments associated with the audit and do not expect any material impacts to our financial statements as a result of the audit. We were not subject to, nor have we received any notice of, income tax examinations in any other jurisdiction as of December 31, 2017.2023.
NOTE 11.10. COMMITMENTS AND CONTINGENCIES
Royalties
We license technology from third parties and have agreed to pay certain suppliers a royalty based on the number of chips sold or manufactured, the net sales price of the chips containing the licensed technology or a fixed non-cancelable fee. Royalty expense is recognized based on our estimated average unit cost for royalty contracts with non-cancelable prepayments and the stated contractual per unit rate for all other agreements. Royalty expense was $1,017, $722$145 and $826$272 for the years ended December 31, 2017, 20162023 and 2015,2022, respectively, which is included in cost of revenue in our consolidated statements of operations.
401(k) Plan
We sponsor a 401(k) plan for eligible employees. Participants may defer a percentage of their annual compensation on a pre-tax basis, not to exceed the dollar limit that is set by law. A discretionary matching contribution by the Company is allowed and is equal to a uniform percentage of the amount of salary reduction elected to be deferred, which percentage will be determined each year by the Company. We made no contributions of $50 and $54 to the 401(k) plan during the years ended December 31, 2017, 2016 or 2015.2023 and 2022, respectively.
We acquire rights to use certain software engineer design tools under software licenses, accounting for such arrangements is similar to capital leases.licenses.
As of December 31, 2017,2023, future minimum payments under non-cancelable software licenses and operating lease agreements are as follows:
| Year Ending December 31, | Software licenses | Operating leases | Total | |||||||||
| 2018 | $ | 1,904 | $ | 2,564 | $ | 4,468 | ||||||
| 2019 | 642 | 1,546 | 2,188 | |||||||||
| 2020 | — | 626 | 626 | |||||||||
| 2021 | — | 265 | 265 | |||||||||
| 2022 | — | 66 | 66 | |||||||||
| 2,546 | $ | 5,067 | $ | 7,613 | ||||||||
| Less: Interest component | (271 | ) | ||||||||||
| Present value of minimum software license payments | 2,275 | |||||||||||
| Less: Current portion | (1,701 | ) | ||||||||||
| Long-term portion of obligations | $ | 574 | ||||||||||
| Year Ending December 31, | Software licenses | |||||||
| 2024 | $ | 1,187 | ||||||
| 2025 | 1,067 | |||||||
| 2026 | 206 | |||||||
| 2,460 | ||||||||
| Less: Interest component | (166) | |||||||
| Present value of minimum software license payments | 2,294 | |||||||
| Less: Current portion | (1,124) | |||||||
| Long-term portion of obligations | $ | 1,170 | ||||||
Other Contractual Obligation
As part of the Acquisition discussedacquisition of ViXS Systems, Inc. ("ViXS") in "Note 3: Acquisition",2017, we acquired debt associated with an agreement with the Government of Canada called Technology Partnerships Canada ("TPC"). As part of the TPC agreement, ViXS Systems Inc. was provided funding to assist in research and development expenses of which a portion was later required to be repaid because the conditions for repayment were met. The scheduled payments are made on a quarterly basis and end in January 2024. As of December 31, 2017, $381 is$66 and $308 are included in accrued liabilities and current portion of long-term liabilities in our consolidated balance sheet as of December 31, 2023 and $727 is included in long-term liabilities, net of current portion in our consolidated balance sheet.2022, respectively.
Contract Manufacturers
In the normal course of business, we commit to purchase products from our contract manufacturers to be delivered within the next 90 days. In certain situations, should we cancel an order, we could be required to pay cancellation fees. Such obligations could impact our immediate results of operations but would not materially affect our business.
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Indemnifications
Certain of our agreements include limited indemnification provisions for claims from third-parties relating to our intellectual property.products and technology. It is not possible for us to predict the maximum potential amount of future payments or indemnification costs under these or similar agreements due to the conditional nature of our obligations and the unique facts and circumstances involved in each particular agreement. We have not made any payments under these agreements in the past, and as of December 31, 2017,2023, we have not incurred any material liabilities arising from these indemnification obligations. In the future, however, such obligations could immediately impact our results of operations but are not expected to materially affect our business.
Legal Proceedings
We are subject to legal matters that arise from time to time in the ordinary course of our business. Although we currently believe that resolving such matters, individually or in the aggregate, will not have a material adverse effect on our financial position, our results of operations, or our cash flows, these matters are subject to inherent uncertainties and our view of these matters may change in the future.
NOTE 12.11. EARNINGS PER SHARE
Basic earnings per share amounts are computed based on the weighted average number of common shares outstanding. Diluted weighted average shares outstanding include the weighted average number of common shares outstanding plus potentially dilutive common shares outstanding during the period.
The following schedule reconciles the computation of basic and diluted net loss per share (in thousands, except per share data):
| Year Ended December 31, | |||||||||||||||||
| 2023 | 2022 | ||||||||||||||||
| Net loss | $ | (26,943) | $ | (15,233) | |||||||||||||
| Less: Net (income) loss attributable to non-controlling interests and redeemable non-controlling interests | 767 | (797) | |||||||||||||||
| Less: Net income attributable to certain entities owned by employees | — | (89) | |||||||||||||||
| Net loss attributable to Pixelworks Inc. - for purposes of earnings per share calculation | $ | (26,176) | $ | (16,119) | |||||||||||||
| Weighted average shares outstanding - basic and diluted | 56,163 | 54,335 | |||||||||||||||
| Net loss attributable to Pixelworks, Inc. per share - basic and diluted | $ | (0.47) | $ | (0.30) | |||||||||||||
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Net loss | $ | (4,173 | ) | $ | (11,107 | ) | $ | (10,570 | ) | ||
| Weighted average shares outstanding - basic and diluted | 31,507 | 28,276 | 25,088 | ||||||||
| Net loss per share - basic and diluted | $ | (0.13 | ) | $ | (0.39 | ) | $ | (0.42 | ) | ||
Basic and diluted earnings (loss) per share was computed by dividing the net income (loss) by the weighted-average number of common shares outstanding for the period. The numerator adjustments include an allocation of PWSH income to the non-controlling interests, the redeemable non-controlling interests and the employee owned entities. The equity interest associated with the employee-owned entities are considered participating securities at PWSH and will be allocated income, however, they are not required to fund losses, and therefore, no allocations of losses will be made to the employee owned entities in periods of loss at PWSH. Potentially dilutive common shares from employee equity incentive plans are determined by applying the treasury stock method to the assumed exercise of outstanding stock options, the assumed vesting of outstanding restricted stock units, and the assumed issuance of common stock under the employee stock purchase plan.
The following shares were excluded from the calculation of diluted net loss per share as their effect would have been anti-dilutive (in thousands):anti-dilutive:
| Year Ended December 31, | ||||||||
| 2017 | 2016 | 2015 | ||||||
| Employee equity incentive plans | 3,879 | 4,982 | 4,248 | |||||
| Convertible debt | 371 | — | — | |||||
| Year Ended December 31, | |||||||||||||||||
| 2023 | 2022 | ||||||||||||||||
| Employee equity incentive plans | 4,163 | 4,071 | |||||||||||||||
Potentially dilutive common shares from employee equity incentive plans are determined by applying the treasury stock method to the assumed exercise of outstanding stock options, the assumed vesting of outstanding restricted stock units, and the assumed issuance of common stock under the employee stock purchase plan. Potentially dilutive common shares from the convertible debt are determined by applying the if-converted method to the assumed conversion of the outstanding convertible debt.
NOTE 13.12. SHAREHOLDERS’ EQUITY
Preferred Stock
The Company is authorized to issue 50,000,000 shares of preferred stock with a par value of $0.001$0.001 per share. The Board of Directors is authorized to fix or alter the rights, preferences, privileges and restrictions granted to, or imposed on, each series of preferred stock. There were no shares of preferred stock issued as of December 31, 20172023 and 2016.2022.
Common Stock
The Company is authorized to issue 250,000,000 shares of common stock with a par value of $0.001$0.001 per share. Shareholders of common stock have unlimited voting rights and are entitled to receive the net assets of the Company upon dissolution, subject to the rights of the preferred shareholders, if any.
At the Market Offering
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 $25,000, 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 the Company. 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.
There was no activity under this at the market offering during the years ended December 31, 2023 and December 31, 2022.
Employee Equity Incentive Plans
On May 23, 2006, our shareholders approved the adoption of the Pixelworks, Inc. 2006 Stock Incentive Plan (the "2006 Plan"). The 2006 Plan has since been amended and restated on certain occasions, most recently on May 10, 201711, 2023 when our shareholders approved an increase to the total number of authorized shares to 11,983,33327,433,333 shares. As of December 31, 2017, 615,9132023, 2,509,390 shares were available for grant under the 2006 Plan.
Stock Options
The following is a summary of stock option activity:
| Number of shares | Weighted average exercise price | ||||||||||
| Options outstanding as of December 31, 2022: | 400,000 | $ | 2.33 | ||||||||
| Granted | — | — | |||||||||
| Exercised | — | — | |||||||||
| Canceled and forfeited | — | — | |||||||||
| Expired | (9,000) | 4.80 | |||||||||
| Options outstanding as of December 31, 2023: | 391,000 | $ | 2.28 | ||||||||
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Number of shares | Weighted average exercise price | |||||
| Options outstanding as of December 31, 2016: | 2,505,702 | $ | 2.46 | |||
| Granted | 44,000 | 4.20 | ||||
| Exercised | (991,332 | ) | 2.76 | |||
| Canceled and forfeited | (154,061 | ) | 2.13 | |||
| Expired | (98,559 | ) | 5.43 | |||
| Options outstanding as of December 31, 2017: | 1,305,750 | $ | 2.11 | |||
The following table summarizes information about options outstanding as of December 31, 2017:2023:
| Options Outstanding | Options Exercisable | |||||||||||||||||||||||||||||||
| Range of exercise prices | Number outstanding as of December 31, 2023 | Weighted average remaining contractual life | Weighted average exercise price | Number exercisable as of December 31, 2023 | Weighted average exercise price | |||||||||||||||||||||||||||
| $1.86 - $1.86 | 52,745 | 4.69 | $ | 1.86 | 16,484 | $ | 1.86 | |||||||||||||||||||||||||
| 2.00 - 2.00 | 234,000 | 2.85 | 2.00 | 234,000 | 2.00 | |||||||||||||||||||||||||||
| 2.07- 6.05 | 104,255 | 2.78 | 3.11 | 70,334 | 3.62 | |||||||||||||||||||||||||||
| $1.86 - $6.05 | 391,000 | 3.08 | $ | 2.28 | 320,818 | $ | 2.35 | |||||||||||||||||||||||||
| Options Outstanding | Options Exercisable | |||||||||||||||
| Range of exercise prices | Number outstanding as of December 31, 2017 | Weighted average remaining contractual life | Weighted average exercise price | Number exercisable as of December 31, 2017 | Weighted average exercise price | |||||||||||
| $0.60 - $0.60 | 300,000 | 1.22 | $ | 0.60 | 300,000 | $ | 0.60 | |||||||||
| 0.68 - 2.43 | 205,541 | 1.03 | 1.16 | 201,333 | 1.14 | |||||||||||
| 2.46 - 2.46 | 352,000 | 3.99 | 2.46 | 169,708 | 2.46 | |||||||||||
| 2.67 - 3.15 | 385,209 | 1.72 | 3.03 | 312,459 | 3.09 | |||||||||||
| 3.27 - 6.16 | 63,000 | 3.93 | 4.72 | 27,272 | 4.86 | |||||||||||
| $0.60 - $6.16 | 1,305,750 | 2.22 | $ | 2.11 | 1,010,772 | $ | 1.94 | |||||||||
During the years ended December 31, 2017, 20162023 and 2015 the total intrinsic value of2022, there were no options exercised was $1,801, $481 and $440, respectively, for which no income tax benefit has been recorded because a full valuation allowance has been provided for our U.S. deferred tax assets.exercised. As of December 31, 2017,2023, options outstanding had a total intrinsic value of $5,516.$0.
Options outstanding that have vested and are expected to vest as of December 31, 20172023 are as follows:
Number of shares | Weighted average exercise price | Weighted average remaining contractual term | Aggregate intrinsic value | ||||||||||||||||||||||||||||||||||||||||||||||
| Number of shares | Number of shares | Weighted average exercise price | Weighted average remaining contractual term | Aggregate intrinsic value | |||||||||||||||||||||||||||||||||||||||||||||
| Vested | 1,010,772 | $ | 1.90 | 1.59 | $ | 4,473 | |||||||||||||||||||||||||||||||||||||||||||
| Expected to vest | 263,380 | 2.77 | 4.34 | 938 | |||||||||||||||||||||||||||||||||||||||||||||
| Total | 1,274,152 | $ | 2.08 | 2.16 | $ | 5,411 | |||||||||||||||||||||||||||||||||||||||||||
Restricted Stock
The 2006 Plan provides for the issuance of restricted stock, including restricted stock units. During the years ended December 31, 2017, 20162023 and 20152022 we granted 1,514,527, 1,572,519,2,559,137 and 530,7352,289,418 shares, respectively, of restricted stock with a weighted average grant date fair value of $4.87, $2.21,$1.39 and $4.31$2.58 per share, respectively.
The following is a summary of restricted stock activity:
| Number of shares | Weighted average grant date fair value | ||||||||||
| Unvested at December 31, 2022: | 3,375,754 | $ | 2.99 | ||||||||
| Granted | 2,559,137 | 1.39 | |||||||||
| Vested | (1,828,835) | 2.95 | |||||||||
| Canceled | (118,405) | 2.91 | |||||||||
| Unvested at December 31, 2023: | 3,987,651 | $ | 1.98 | ||||||||
| Expected to vest after December 31, 2023 | 3,705,585 | $ | 1.99 | ||||||||
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Number of shares | Weighted average grant date fair value | |||||
| Unvested at December 31, 2016: | 1,698,500 | $ | 2.93 | |||
| Granted | 1,514,527 | 4.87 | ||||
| Vested | (857,208 | ) | 3.63 | |||
| Canceled | (53,217 | ) | 3.33 | |||
| Unvested at December 31, 2017: | 2,302,602 | $ | 3.94 | |||
| Expected to vest after December 31, 2017 | 1,925,115 | $ | 3.94 | |||
Employee Stock Purchase Plans
On May 18, 2010, our shareholders approved the adoption of the 2010 Pixelworks, Inc. Employee Stock Purchase Plan (the "ESPP") for U.S. employees and for certain foreign subsidiary employees. The ESPP provides for separate offering periods commencing on February 1 and August 1, with the first offering period beginning August 1, 2010. Each offering period continues for a period of 18 months with purchases every six months.months. Each eligible employee may purchase up to 3,000 shares of stock on each purchase date, with a maximum annual purchase amount of $25.$25. The purchase price is equal to 85% of the lesser of the fair market value of the shares on the offering date or on the purchase date. AOn May 15, 2020 the ESPP was amended when our shareholders approved an increase to the total number of1,300,000 shares of common stock have been reserved for issuance under the ESPP.to 3,300,000. During the years ended December 31, 2017, 20162023 and 2015,2022, we issued 153,242, 141,633184,659 and 92,899171,620 shares, respectively for proceeds of $270, $252$299 and $352,$388, respectively, under the ESPP.
Stock-Based Compensation Expense
The fair value of stock-based compensation was determined using the Black-Scholes option pricing model and the following weighted average assumptions:
| Year Ended December 31, | |||||||||||||||||||
| 2017 | 2016 | 2015 | |||||||||||||||||
| Year Ended December 31, | |||||||||||||||||||
| Year Ended December 31, | |||||||||||||||||||
| Year Ended December 31, | |||||||||||||||||||
| 2023 | |||||||||||||||||||
| Stock Option Plans: | |||||||||||||||||||
| Stock Option Plans: | |||||||||||||||||||
| Stock Option Plans: | |||||||||||||||||||
| Risk free interest rate | 1.85 | % | 1.37 | % | 1.52 | % | |||||||||||||
| Risk free interest rate | |||||||||||||||||||
| Risk free interest rate | |||||||||||||||||||
| Expected dividend yield | |||||||||||||||||||
| Expected dividend yield | |||||||||||||||||||
| Expected dividend yield | 0 | % | 0 | % | 0 | % | |||||||||||||
| Expected term (in years) | 5.00 | 5.00 | 5.00 | ||||||||||||||||
| Expected term (in years) | |||||||||||||||||||
| Expected term (in years) | |||||||||||||||||||
| Volatility | |||||||||||||||||||
| Volatility | |||||||||||||||||||
| Volatility | 75 | % | 74 | % | 68 | % | |||||||||||||
| Employee Stock Purchase Plan: | |||||||||||||||||||
| Employee Stock Purchase Plan: | |||||||||||||||||||
| Employee Stock Purchase Plan: | |||||||||||||||||||
| Risk free interest rate | |||||||||||||||||||
| Risk free interest rate | |||||||||||||||||||
| Risk free interest rate | 1.09 | % | 0.20 | % | 0.28 | % | |||||||||||||
| Expected dividend yield | 0 | % | 0 | % | 0 | % | |||||||||||||
| Expected dividend yield | |||||||||||||||||||
| Expected dividend yield | |||||||||||||||||||
| Expected term (in years) | |||||||||||||||||||
| Expected term (in years) | |||||||||||||||||||
| Expected term (in years) | 1.07 | 1.12 | 1.10 | ||||||||||||||||
| Volatility | 65 | % | 84 | % | 89 | % | |||||||||||||
| Volatility | |||||||||||||||||||
| Volatility | |||||||||||||||||||
There were no options granted during the year ended December 31, 2023. The weighted average fair value of options granted during the yearsyear ended December 31, 2017, 2016 and 20152022 was $2.58, $1.41 and $2.93, respectively.$1.19. The risk free interest rate is estimated using an average of treasury bill interest rates. The expected dividend yield is zero as we have not paid any dividends to date and do not expect to pay dividends in the future. Expected volatility is estimated based on the historical volatility of our common stock over the expected term as this represents our best estimate of future volatility. Subsequent to the May 2009 amendment of our 2006 Stock Incentive Plan, which shortened theWe recognize forfeitures as they occur. The contractual life of newly issued stock options from ten tois six years, and we have elected to use the "simplified method" to estimate expected term. Under the simplified method, an option's expected term is calculated as the average of its vesting period and original contractual life. The expected term of ESPP purchase rights is based on the estimated weighted average time to purchase. The vesting period for restricted stock units is approximately three years.
As of December 31, 2017,2023, unrecognized stock-based compensation expense is $5,979,$3,373, which is expected to be recognized as stock-based compensation expense over a weighted average period of 2.320.97 years.
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NOTE 14.13. SEGMENT INFORMATION
We have identified a single operatingoperate in one segment: the design, development, marketing and developmentsale of ICsIC solutions for use in electronic display devices. Substantially all ofWe generate our assets are locatedrevenue from two broad product markets: the Mobile market and the Home & Enterprise market. The chief operating decision maker, or CODM, is our CEO. Our CODM evaluates financial performance and allocates resources using financial information reported on a company-wide basis. The Cinema market does not contribute material revenue and is therefore being included in the U.S.this one segment.
Geographic Information
Revenue by geographic region, was as follows:
| Year Ended December 31, | |||||||||||||||||
| 2023 | 2022 | ||||||||||||||||
| China | $ | 33,624 | $ | 25,570 | |||||||||||||
| Japan | 24,083 | 37,675 | |||||||||||||||
| Taiwan | 1,813 | 3,032 | |||||||||||||||
| U.S. | 157 | 3,442 | |||||||||||||||
| Korea | — | 277 | |||||||||||||||
| Europe | — | 150 | |||||||||||||||
| $ | 59,677 | $ | 70,146 | ||||||||||||||
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Japan | $ | 66,041 | $ | 44,186 | $ | 50,436 | |||||
| Taiwan | 6,841 | 5,095 | 5,909 | ||||||||
| Europe | 2,166 | 634 | 611 | ||||||||
| China | 2,117 | 1,616 | 765 | ||||||||
| U.S. | 1,697 | 84 | 167 | ||||||||
| Korea | 987 | 963 | 942 | ||||||||
| Other | 788 | 812 | 687 | ||||||||
| $ | 80,637 | $ | 53,390 | $ | 59,517 | ||||||
Significant Customers
The percentage of revenue attributable to our distributors, top five end customers, and individual distributors or end customers that represented more than 10% of revenue in at least one of the periods presented, is as follows:
| Year Ended December 31, | |||||||||||||||||
| 2023 | 2022 | ||||||||||||||||
| Distributors: | |||||||||||||||||
| All distributors | 66 | % | 57 | % | |||||||||||||
| Distributor A | 48 | % | 29 | % | |||||||||||||
| Distributor B | 8 | % | 17 | % | |||||||||||||
End Customers: 1 | |||||||||||||||||
| Top five end customers | 87 | % | 76 | % | |||||||||||||
| End customer A | 34 | % | 13 | % | |||||||||||||
| End customer B | 32 | % | 37 | % | |||||||||||||
| End customer C | — | % | 14 | % | |||||||||||||
| Year Ended December 31, | ||||||||
| 2017 | 2016 | 2015 | ||||||
| Distributors: | ||||||||
| All distributors | 47 | % | 43 | % | 48 | % | ||
| Distributor A | 27 | % | 24 | % | 31 | % | ||
End Customers: 1 | ||||||||
| Top five end customers | 79 | % | 82 | % | 83 | % | ||
| End customer A | 47 | % | 53 | % | 47 | % | ||
| End customer B | 9 | % | 8 | % | 13 | % | ||
1 End customers include customers who purchase directly from us, as well as customers who purchase our products indirectly through distributors.
Each of the following accounts represented 10% or more of total accounts receivable in at least one of the periods presented:
| December 31, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| Account W | 46 | % | 31 | % | ||||||||||
| Account X | 33 | % | 27 | % | ||||||||||
| Account Y | 8 | % | 11 | % | ||||||||||
| Account Z | — | % | 12 | % | ||||||||||
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| December 31, | |||||||
| 2017 | 2016 | ||||||
| Account X | 38 | % | 54 | % | |||
| Account Y | 29 | % | 5 | % | |||
During 2021, Pixelworks and PWSH entered into a capital increase agreement (the "Capital Increase Agreement") with certain private equity and strategic investors based in China (collectively, the “Investors”) and certain entities which collectively are owned by approximately 75% of the employees of PWSH and its subsidiaries (collectively, the “ESOP”) (together, the “Investors” and the “ESOP” are referred to below as the “Capital Contributors”). The ESOP entities do not qualify as Employee Share Ownership Programs under IRC 4975(e)(7), but do qualify as employee share ownership plans qualified under the laws of China, under which the employees hold a pro rata share of an ESOP partnership entity that then holds an equity ownership in trust for employees.
Under the Capital Increase Agreement, during 2021, the Investors invested approximately $30,844 in exchange for a redeemable non-controlling equity interest of 10.45% of PWSH and the ESOP entities invested approximately $12,329 in exchange for a redeemable non-controlling equity interest representing 5.95% of PWSH, which includes a discount of 30% from the valuation paid by the Investors. The agreement further provided that the Capital Contributors have a liquidation preference in PWSH, a right to co-sell their interest in PWSH along with Pixelworks on the same terms and conditions as Pixelworks, a right to participate on a pro rata basis in any future financing rounds of PWSH, and Pixelworks’ agreement while it remains an owner of PWSH and for two (2) years thereafter to not compete with the business of PWSH, nor solicit or otherwise cause any of PWSH’s core employees or customers to end their relationship with PWSH. These rights all expire upon initial public offering on the STAR Market.
Prior to entering into a certain supplemental agreement, each Investor had the option to require PWSH to redeem the entire equity interest held by such Investor, at the original purchase price paid plus 3% annual interest, if PWSH did not consummate an initial public offering on the STAR Market on or before June 30, 2024. Based on this contingency, the initial carrying amount of the redeemable non-controlling interests was recorded at fair value on the date of issuance of PWSH equity interests, net of issuance costs and presented in temporary equity on the consolidated balance sheets. Until the interest that was to accrue on the redeemable non-controlling interest was deleted with the Supplemental Agreement, the Company had elected to accrete changes in the redemption value of the redeemable non-controlling interests from the issuance date through the earliest redemption date of June 30, 2024 using the interest method (as the non-controlling interest was probable of becoming redeemable upon the passage of time for the original issuance price plus 3% annual interest).
On March 24, 2022, Pixelworks and PWSH entered into a supplemental agreement to the Capital Increase Agreement (the “Supplemental Agreement”) with the Capital Contributors. The Supplemental Agreement, among other things, deletes the interest that was to accrue in connection with the redemption option, and adds a provision that will suspend the redemption option on the date PWSH files its initial public offering listing documents pending the approval of such documents by the applicable authorities. The suspension ends if PWSH withdraws the listing application or such application is finally rejected, at which point the redemption option will once again become effective with a deadline of the later of the date of the withdrawal/rejection and June 30, 2024. Given the current uncertain economic environment of China and its impact on the suitability of seeking a Listing at this present time, PWSH is engaged in and intends to continue discussions with the Investors regarding an extension or removal of this redemption option.
After entering into the Supplemental Agreement, the redeemable non-controlling interest will no longer accrete up to a redemption amount because the interest component has been removed. The Investors will continue to hold PWSH equity and be considered as a redeemable non-controlling interest, however, the redeemable non-controlling interest is only probable of becoming redeemable upon the passage of time for its original issuance price. Therefore, until the redemption feature expires, we will only allocate profits to the redeemable non-controlling interest and continue to recognize the non-controlling interest at an amount at least equal to its redemption value. Because the redeemable non-controlling interest is denominated in RMB, it will be revalued to USD at the end of each reporting period, with the changes in carrying value attributable to foreign currency being reflected within accumulated other comprehensive income on the consolidated balance sheets.
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| Quarterly Period Ended | |||||||||||||||
| March 31 | June 30 | September 30 | December 31 1 | ||||||||||||
| 2017 | |||||||||||||||
| Revenue, net | $ | 22,710 | $ | 20,721 | $ | 18,758 | $ | 18,448 | |||||||
| Gross profit | 12,392 | 11,201 | 9,011 | 9,160 | |||||||||||
| Income (loss) from operations | 3,347 | 2,040 | (4,378 | ) | (3,042 | ) | |||||||||
| Income (loss) before income taxes | 3,254 | 1,933 | (4,906 | ) | (3,961 | ) | |||||||||
| Net income (loss) | 2,821 | 1,264 | (4,706 | ) | (3,552 | ) | |||||||||
| Net income (loss) per share: | |||||||||||||||
| Basic | 0.10 | 0.04 | (0.14 | ) | (0.10 | ) | |||||||||
| Diluted | 0.09 | 0.04 | (0.14 | ) | (0.10 | ) | |||||||||
| 2016 | |||||||||||||||
| Revenue, net | $ | 11,167 | $ | 12,580 | $ | 13,656 | $ | 15,987 | |||||||
| Gross profit | 3,592 | 6,415 | 6,557 | 8,504 | |||||||||||
| Income (loss) from operations | (8,486 | ) | (1,336 | ) | (960 | ) | 436 | ||||||||
| Income (loss) before income taxes | (8,585 | ) | (1,443 | ) | (1,059 | ) | 335 | ||||||||
| Net income (loss) | (8,642 | ) | (1,560 | ) | (1,242 | ) | 337 | ||||||||
| Net income (loss) per share: | |||||||||||||||
| Basic | (0.31 | ) | (0.06 | ) | (0.04 | ) | 0.01 | ||||||||
| Diluted | (0.31 | ) | (0.06 | ) | (0.04 | ) | 0.01 | ||||||||
On December 21, 2022, the Company and its subsidiary, PWSH, entered into a capital increase agreement (the “CIA”) with Jing Xin Ying (Shanghai) Management Consulting Partnership (Limited Partnership), an entity owned by certain of the employees of PWSH (the “ESOP”). The ESOP invested approximately $1,407 in exchange for an equity interest in PWSH of 0.54%, based on a pre-money valuation of PWSH of RMB 1,750,000 ($251,256 USD), which includes a discount of 50%.
The process of going public on the STAR Market includes several periods of review and is therefore a lengthy process. There can be no assurances that PWSH will complete the Listing by June 30, 2024, or at all. In the event Pixelworks is required to redeem the entire equity interest held by the Investors or the ESOP entities, we may be required to seek additional capital in order to redeem their PWSH shares and there would be no assurances that such capital would be available on terms acceptable to us, if at all. Any redemptions could have a material adverse effect on our business, financial condition and results of operations. The listing of PWSH on China's STAR Market will not change our status as a U.S. public company.
The components of the change in redeemable non-controlling interests for the year ended December 31, 2017 includes $9492023 are presented in the following table:
| Carrying Value of Redeemable NCI as of January 1, 2023 | $ | 28,919 | |||
| Net loss attributable to redeemable non-controlling interest | (143) | ||||
| Effect of foreign currency translation attributable to redeemable non-controlling interest | (562) | ||||
| Carrying Value of Redeemable NCI as of December 31, 2023 | $ | 28,214 | |||
NOTE 15: NON-CONTROLLING INTEREST
On August 15, 2022, the Company entered into an Equity Transfer Agreement with certain private equity investors based in China (Hainan Qixin Investment Partnership (Limited Partnership) and Suzhou Saixiang Equity Investment Partnership (Limited Partnership)) (collectively, the “Purchasers”). Under this agreement, the Purchasers agreed to pay to the Company, subject to customary closing conditions, a total of 87,500 RMB, approximately $10,738 (net of issuance costs) at closing, in exchange for inventory step-upa 2.74% equity interest in PWSH. The Company incurred costs related to the sale of equity in PWSH of $275 paid to a third party for assisting in the transaction close as well as 8,408 RMB to fulfill Chinese withholding tax requirements. Both of these costs are direct and backlog amortization, $621incremental and related to the sale of equity in PWSH and as such will be included as costs that reduce proceeds and carrying amount of the NCI in the Company’s balance sheet.
The Equity Transfer Agreement provides the Purchasers with some additional rights: (1) if there is a change in control of PWSH that closes prior to its filing an application for a listing on the STAR Board of the SSE (the “Listing Application”), each Purchaser would be entitled to a minimum return of 10% on the price they paid for their respective equity interest, payable by Company in cash at the close of the change in control transaction, with such right terminating automatically upon the filing by PWSH of the Listing Application; and (2) the Company would cause PWSH to give each Purchaser a right to participate on a pro rata basis in any future financing rounds of PWSH, which right also would expire on the filing of a Listing Application.
76
On December 21, 2022, the Company and its subsidiary, PWSH, entered into a capital increase agreement (the “CIA”) with certain private equity investors based in China who have agreed to pay a total of 99,000 RMB, approximately $14,596 (net of issuance costs) at closing, in exchange for an equity interest in PWSH of 2.76%, based on a pre-money value of PWSH of 3,500,000 RMB, approximately $501,400. This transaction closed in February 2023.
The CIA provides that if there is a change in control of PWSH that closes prior to its filing an application for the Listing, each capital contributor would be entitled to a minimum return of 10% on the price they paid for their respective equity interest, payable by the Company in cash at the close of the change in control transaction, with such right terminating automatically upon the filing by PWSH of the Listing.
When the Company’s relative ownership interest in PWSH changes, adjustments to non-controlling interest and paid-in capital, tax effected, will occur. Because these changes in the ownership interest in PWSH do not result in a change of control, the transactions are accounted for as equity transactions under ASC Topic 810, (-Consolidations), which requires that any differences between the carrying value of the Company’s interest in PWSH and the fair value adjustment on convertible debt conversion feature,of the consideration received are recognized directly in equity and $439 in restructuring expenses.
| Carrying Value of Permanent Equity Non-Controlling Interest as of January 1, 2023 | $ | 10,909 | |||
| Increase in additional paid-in capital | 14,742 | ||||
| Net loss attributable to non-controlling interest | (624) | ||||
| Closing and direct costs incurred | (146) | ||||
| Effect of foreign currency translation attributable to non-controlling interest | (630) | ||||
| Other | 6 | ||||
| Carrying Value of Permanent Equity Non-Controlling Interest as of December 31, 2023 | $ | 24,257 | |||
Item 9.Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A.Controls and Procedures.
Disclosure Controls and Procedures
As of the end of the period covered by this report, we conducted an evaluation under the supervision and with the participation of our Chief Executive Officer (our Principal Executive Officer) and Chief Financial Officer (our Principal Accounting and Financial Officer) of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(f)15d-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")). Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2017,2023, our disclosure controls and procedures were effective to ensure that information required to be disclosed in our periodic reports filed or submitted under the Securities Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.
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Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining a system of internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles ("U.S. GAAP"). All internal control systems, no matter how well designed, have inherent limitations.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.U.S. GAAP. A company’s internal control over financial reporting includes those policies and procedures that (1) that:
•pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2)
•provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles,GAAP, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3)
•provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Accordingly, even effective internal control over financial reporting can only provide reasonable assurance of achieving its control objectives.
Rule 10b5-1 and Non-Rule 10b5-1 Trading Arrangements
None of the Company’s directors or officers adopted or terminated a periodic review“Rule 10b5-1 trading arrangement” or a “non-Rule 10b5-1 trading arrangement” during the Company’s fiscal quarter ended December 31, 2023, as such terms are defined under Item 408(a) of its existing form indemnification agreement, we entered into an updated indemnification agreement (the “Indemnity Agreement”) with each of our directors and with Steven Moore, our Chief Financial Officer. The Indemnity Agreement providesRegulation S-K.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Pixelworks will indemnify the director or officer party to the agreement against certain expenses arising out of claims to which such individual becomes subject in connection with his or her service to the Company. The Indemnity Agreement further provides procedures for the determination of an indemnitee's right to receive indemnification and the advancement of expenses. The Indemnity Agreement will be the form used for all newly appointed directors and executive officers, as determined by the board of directors.Prevent Inspections
Not applicable.
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PART III
Item 10.Directors, Executive Officers and Corporate Governance.
Information required by Item 10 with respect to our directors and executive officers will be set forth under the captions "Election"Proposal No. 1: Election of Directors - Director Nominees for Election" and "Information about ourAbout Our Executive Officers" in our Proxy Statement for our 20182024 Annual Meeting of Shareholders (the "2018"2024 Proxy Statement") to be filed within 120 days after December 31, 20172023 and pursuant to Regulation 14A and is incorporated herein by reference.
Item 405 of Regulation S-K calls for disclosure of any known late filing or failure by an insider to file a report required by Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). This informationTo the extent disclosure for delinquent reports is being made, it can be found under the caption "Delinquent Section 16(a) Reports" in the 2024 Proxy Statement and is herein incorporated by reference from the Section called "Section 16(a) Beneficial Ownership Reporting Compliance" in the 2018 Proxy Statement.reference.
We have adopted a Code of Business Conduct and Ethics (the "Code of Business Conduct and Ethics") that applies to all directors and employees, including theour Chief Executive Officer (our Principal Executive Officer) and our Chief Financial Officer (our Principal Accounting and Financial Officer). We have also adopted a Code of Ethics for Senior or Designated Financial Personnel (the "Code of Ethics for Senior or Designated Financial Personnel") that applies to our Chief Executive Officer (our Principal Executive Officer), our Chief Financial Officer (our Principal Accounting and Financial Officer) and other designated financial personnel. The Code of Business Conduct and Ethics and the Code of Ethics for Senior or Designated Financial Personnel are each available on our website free of charge at www.pixelworks.com.www.pixelworks.com. We intend to disclose any changes in or waivers from our Code of Business Conduct and Ethics or Code of Ethics for Senior or Designated Financial Personnel by posting such information on our website at www.pixelworks.com or by filing a Current Report on Form 8-K.
We have a separately designated standing audit committee established in accordance with the Securities Exchange Act of 1934. The members of the audit committee are Dean W. Butler, Daniel J. Heneghan, Chairman,and C. Scott Gibson and Richard Sanquini.Gibson. The audit committee has the responsibility and authority described in the Pixelworks, Inc. Charter of the Audit Committee of the Board of Directors, which has been approved by our board of directors. A copy of the audit committee charter is available on our website at www.pixelworks.com. Our board of directors has determined that Mr. Butler, Mr. Heneghan and Mr. Gibson and Mr. Sanquini meet the independence requirements set forth in Rule 10A-3(b)(1) under the Exchange Act and in the applicable rules of Nasdaq. In addition, our board of directors has determined that Mr. Butler, Mr. Heneghan and Mr. Gibson and Mr. Sanquini each qualify as an audit committee financial expert as defined by Securities and Exchange Commission rules.
Item 11.Executive Compensation.
Information required by Item 11 with respect to executive compensation will be included under the captions "Compensation Committee Report", "Executive Compensation", "Executive Compensation - Compensation Discussion and Analysis" and "Information About Our Board of Directors - Director Compensation" in our 20182024 Proxy Statement and is incorporated herein by reference.
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Information required by Item 12 with respect to security ownership of certain beneficial owners and management and related stockholdershareholder matters will be included under the captions "Security Ownership of Certain Beneficial Owners and Management" and "Information about ourAbout Our Equity Compensation Plans" in our 20182024 Proxy Statement and is incorporated herein by reference.
Item 13.Certain Relationships and Related Transactions, and Director Independence.
Information required by Item 13 with respect to certain relationships and related transactions and director independence will be included under the captions "Certain Relationships and Related Person Transactions" and "Information About Our Board of Directors" in our 20182024 Proxy Statement and is incorporated herein by reference.
Item 14.Principal Accounting Fees and Services.
Information required by Item 14 with respect to principal accounting fees and services will be set forth under the caption "Information About Our Independent Registered Publiccaptions "Principal Accounting Firm"Fees and Services" and "Pre-Approval of Audit and Permissible Non-Audit Services" in our 20182024 Proxy Statement and is incorporated herein by reference.
PART IV
Item 15.Exhibits and Financial Statement Schedules.
(a)1. Financial Statements.
The following financial statements are included in Part II, Item 8 Financial Statements and Supplementary Data:
2. Financial Statement Schedules.
All schedules have been omitted because the required information is included in the consolidated financial statements or the notes thereto, or is not applicable or required.
3. Exhibits.
The exhibits listed below are either filed with this report or incorporated by reference into this report.
Exhibit Number | Description | ||||
| 3.2 | |||||
| 4.1 | |||||
80
| 10.9+ | |||||
| 10.10+ | |||||
| 10.13+ | |||||
| 10.14+ | |||||
| 10.15 | |||||
| 10.18 | |||||
| 10.19 | |||||
| 10.20 | |||||
81
| 10.23 | |||||
| 10.28 | |||||
| 10.29 | |||||
| 10.30 | |||||
| 10.31 | |||||
| 10.32* | |||||
| 10.33 | |||||
| 21 | |||||
| 23.2 | |||||
| 24.1 | |||||
82
| 31.2 | |||||
| 32.1** | |||||
| 32.2** | |||||
| 97 | |||||
| 101.INS | XBRL Instance Document | ||||
| 101.SCH | XBRL Taxonomy Extension Schema Document | ||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | ||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | ||||
| 101.LAB | XBRL Taxonomy Label Linkbase Document | ||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | ||||
| 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) | ||||
| + | |||||
| Indicates a management contract or compensation arrangement. | |||||
| * | Certain schedules and exhibits to this agreement have been omitted pursuant to Item 601(b) of Regulation S-K. The registrant hereby undertakes to furnish supplementally a copy of any omitted schedule or exhibit to such agreement to the SEC upon request. | ||||
| ** | |||||
| Exhibits 32.1 and 32.2 are being furnished and shall not be deemed to be "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or otherwise subject to the liability of that section, nor shall such exhibits be deemed to be incorporated by reference in any registration statement or other document filed under the Securities Act of 1933, as amended, or the Exchange Act, except as otherwise stated in such filing. | |||||
83
(b) Exhibits.
See Item 15 (a) (3) above.
(c) Financial Statement Schedules.
See Item 15 (a) (2) above.
Item 16. Form 10-K Summary.
Not applicable.
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SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| PIXELWORKS, INC. | |||||||||||||||||
| Dated: | March 13, 2024 | ||||||||||||||||
| By: | |||||||||||||||||
| /s/ Todd A. DeBonis | |||||||||||||||||
| Todd A. DeBonis | |||||||||||||||||
| President and Chief Executive Officer (Principal Executive Officer) | |||||||||||||||||
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Todd A. DeBonis and Steven L. Moore,Haley F. Aman, and each of them, his true and lawful attorneys-in-fact, each with full power of substitution, for him or her in any and all capacities, to sign any amendments to this report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact or their substitute or substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrantregistrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||||||||||||||
| /s/ Todd A. DeBonis | President and Chief Executive Officer and Director | |||||||||||||||
| Todd A. DeBonis | (Principal Executive Officer) | March | ||||||||||||||
| /s/ | ||||||||||||||||
| Haley F. Aman | March 13, 2024 | |||||||||||||||
| /s/ | Chairman of the Board | |||||||||||||||
| Daniel J. Heneghan | March 13, 2024 | |||||||||||||||
| /s/ Amy Bunszel | Director | |||||||||||||||
| Amy Bunszel | March | |||||||||||||||
| /s/ Dean W. Butler | Director | |||||||||||||||
| Dean W. Butler | March 13, 2024 | |||||||||||||||
| /s/ C. Scott Gibson | Director | |||||||||||||||
| C. Scott Gibson | March | |||||||||||||||
| /s/ John Y. Liu | Director | |||||||||||||||
| John Y. Liu | March 13, 2024 | |||||||||||||||
| /s/ David J. Tupman | Director | |||||||||||||||
| David J. Tupman | March | |||||||||||||||
85