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PXLW > SEC Filings for PXLW > Form 10-Q on 3-May-2013All Recent SEC Filings

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Form 10-Q for PIXELWORKS, INC


3-May-2013

Quarterly Report


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

Forward-looking Statements
This Management's Discussion and Analysis of Financial Condition and Results of Operations contains "forward-looking statements" that are based on current expectations, estimates, beliefs, assumptions and projections about our business. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks and uncertainties that are difficult to predict and which may cause actual outcomes and results to differ materially from what is expressed or forecasted in such forward-looking statements. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in Part II, Item 1A of this Quarterly Report on Form 10-Q. These forward-looking statements speak only as of the date on which they are made, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q. If we do update or correct one or more forward-looking statements, you should not conclude that we will make additional updates or corrections with respect thereto or with respect to other forward-looking statements. Except where the context otherwise requires, in this Quarterly Report on Form 10-Q, the "Company," "Pixelworks," "we," "us" and "our" refer to Pixelworks, Inc., an Oregon corporation, and its wholly-owned subsidiaries.

Overview
We are an innovative designer, developer and marketer of video and pixel processing semiconductors and software for high-end digital video applications and hold 121 patents related to the visual display of digital image data. Our solutions enable manufacturers of digital display and projection devices, such as large-screen flat panel televisions, smaller screen displays, and digital front projectors, to manufacture their products with a consistently high level of video quality, regardless of the content's source or format. Our core technology leverages unique proprietary techniques for intelligently processing video signals from a variety of sources to ensure that all resulting images are optimized. Additionally, our products help our customers reduce costs and differentiate their display and projection devices, an important factor in industries that experience rapid innovation.
Our business also includes the license of technologies developed for our integrated circuit ("IC") semiconductor products to non-competitive customers and partners, as well as co-development arrangements with current or prospective IC customers. Pixelworks was founded in 1997 and is incorporated under the laws of the state of Oregon.

Results of Operations

Revenue, net
Net revenue for the three month periods ended March 31, 2013 and 2012, was as follows (dollars in thousands):

Three Months Ended
March 31, 2013 v. 2012
2013 2012 $ Change % Change Revenue, net $ 8,271 $ 14,330 $ (6,059 ) (42 )%

Net revenue decreased $6.1 million, or 42%, from the first quarter of 2012 to the first quarter of 2013. Revenue related to IC product sales was $8.3 million and $12.2 million for the first quarter of 2013 and 2012, respectively. Revenue related to licensing agreements was $2.1 million in the first quarter of 2012 and was negligible in the first quarter of 2013; however, we continue to pursue licensing agreements.

The decrease in revenue related to IC product sales was primarily attributable to a 35% decrease in units sold, partially offset by a 3% increase in average selling price ("ASP"). The decrease in units sold was primarily due to decreased sales into both the digital projector and advanced television markets. The decrease in units sold attributable to the digital projector market was primarily due to customers' continued efforts to adjust inventory levels. The decrease in units sold attributable to the advanced television market was primarily due to the continued impact of the macro-environment on end market demand and customer transition to our Ultra High Definition products. The increase in ASP was largely due to a more favorable product mix.


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Cost of revenue and gross profit
Cost of revenue and gross profit for the three month periods ended March 31, 2013 and 2012, was as follows (dollars in thousands):

                                                            Three Months Ended March 31,
                                                                   % of                         % of
                                                  2013           revenue         2012          revenue
Direct product costs and related overhead 1 $    4,161               50 %     $   6,256           44  %
Inventory charges 2                                  2                0              (8 )          0
Licensing costs 3                                    -                0             102            1
Other cost of revenue 4                            131                2             171            1
Total cost of revenue                       $    4,294               52 %     $   6,521           46  %
Gross profit                                $    3,977               48 %     $   7,809           54  %

1 Includes purchased materials, assembly, test, labor, employee benefits, warranty expense and royalties, all of which are related to sales of IC products.

2 Includes charges to reduce inventory to lower of cost or market and a benefit for sales of previously written down inventory.

3 Includes direct labor costs and allocated overhead associated with license revenue arrangements.

4 Includes stock-based compensation and additional amortization of a non-cancelable prepaid royalty.

Gross profit margin decreased to 48% of total revenue in the first quarter of 2013, down from 54% of total revenue in the first quarter of 2012. The decrease resulted primarily from the recognition of $2.1 million of revenue related to licensing agreements during the first quarter of 2012 for which there were only $0.1 million in associated costs.

Excluding the impact of license revenue recorded in the first quarter of 2012, direct product costs and related overhead as a percentage of revenue was approximately 50% and 51% in the first quarter of 2013 and 2012, respectively. The decrease in direct product costs and related overhead as a percentage of revenue was primarily due to a more favorable product mix.

Pixelworks' gross margin is subject to variability based on changes in revenue levels, recognition of license revenue, product mix, ASPs, startup costs, and the timing and execution of manufacturing ramps as well as other factors. Research and development
Research and development expense includes compensation and related costs for personnel, development-related expenses, including non-recurring engineering and fees for outside services, depreciation and amortization, expensed equipment, facilities and information technology expense allocations and travel and related expenses.
Co-development agreement
During the second quarter of 2012, we entered into a best efforts co-development agreement (the "Co-development Agreement") with a customer to defray a portion of the research and development expenses that we expect to incur in connection with our development of an IC product to be sold exclusively to the customer. We expect our development costs to exceed the amounts received from the customer under the Co-development Agreement, 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.

The initial $3.5 million due under the Co-development Agreement was received within sixty days of contract signing and two additional payments of $1.75 million are each payable upon completion of certain development milestones, which we have not yet reached. As amounts become due and payable without recourse, they are offset against research and development expense up to the amount of related costs incurred. We recognized an offset to research and development expense of $3.5 million related to the Co-development Agreement during 2012. There was no offset to research and development expense recognized in the first quarter of 2013.


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2013 v. 2012
Research and development expense for the three month periods ended March 31, 2013 and 2012, was as follows (dollars in thousands):

Three Months Ended
March 31, 2013 v. 2012
2013 2012 $ Change % Change
Research and development $ 5,884 $ 5,093 $ 791 16 %

Research and development expense increased $0.8 million, or 16%, from the first quarter of 2012 to the first quarter of 2013. The increase was primarily attributable to increases in non-recurring engineering expense related to the Co-development Agreement and an increase in compensation expense due to an increase in headcount.

We anticipate a reduction to research and development expense during the second quarter of 2013 compared to the first quarter of 2013 as we recognize additional offsets to research and development expense upon the completion of certain development milestones related to the Co-development Agreement. 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 for the three month periods ended March 31, 2013 and 2012, was as follows (dollars in thousands):

Three Months Ended
March 31, 2013 v. 2012
2013 2012 $ Change % Change
Selling, general and administrative $ 3,598 $ 4,019 $ (421 ) (10 )%

Selling, general and administrative expense decreased $0.4 million, or 10%, from the first quarter of 2012 to the first quarter of 2013, primarily due to a decrease in compensation expense resulting from reduced headcount and a decrease in non-recurring legal expenses.
Benefit for income taxes
The benefit for income taxes during the 2013 and 2012 periods is primarily due to the reversal of previously recorded foreign tax contingencies due to the expiration of the applicable statutes of limitation, partially offset by current and deferred tax expense in profitable cost-plus foreign jurisdictions and accruals for tax contingencies in foreign jurisdictions. Due to the full valuation allowance on our U.S. net deferred tax assets, including our U.S. net operating losses, we do not incur significant U.S. income tax expense or benefit. We recorded a benefit for the reversal of previously recorded tax contingencies of $0.5 million and $1.0 million during the first quarter of 2013 and 2012, respectively.

Liquidity and Capital Resources
Cash and cash equivalents
Total cash and cash equivalents decreased $0.8 million from $13.4 million at December 31, 2012 to $12.6 million at March 31, 2013. The net decrease in the first quarter of 2013 resulted from $2.5 million used in operating activities and $0.6 million in payments on asset financing, partially offset by a $2.3 million non-formula advance on our short-term line of credit. Excluding the non-formula advance, our cash and marketable securities would have decreased $3.1 million from December 31, 2012 to March 31, 2013.


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As of March 31, 2013, our cash and cash equivalents balance of $12.6 million consisted of $0.2 million in cash and $12.4 million in cash equivalents held in U.S. denominated money market funds. Although we did not hold short- or long-term investments as of March 31, 2013, 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. Investments must be rated at least A-1 / P-1 / F-1 by at least two Nationally Recognized Statistical Rating Organizations, and our investment policy is reviewed at least annually by our Audit Committee. Although cash balances held at our foreign subsidiaries would be subject to U.S. taxes if repatriated, we have sufficient U.S. net operating losses to offset the liability associated with any such repatriation and foreign taxes due upon repatriation would not be significant.
Accounts receivable, net
Accounts receivable, net decreased to $2.4 million as of March 31, 2013 from $3.8 million as of December 31, 2012. The decrease in accounts receivable was primarily due to a decrease in revenue from the fourth quarter of 2012 to the first quarter of 2013. The average number of days sales outstanding increased to 26 days as of March 31, 2013 from 25 days as of December 31, 2012. Inventories
Inventories decreased to $2.4 million as of March 31, 2013 from $2.7 million as of December 31, 2012. Inventory turnover decreased to 6.5 as of March 31, 2013 from 7.3 as of December 31, 2012, due to decreased average inventory balances and decreased costs associated with decreased revenue. Inventory turnover is calculated based on annualized operating results and average inventory balances for the respective quarters.
Capital resources
Short-term line of credit
On December 21, 2010, we entered into a Loan and Security Agreement (the "Revolving Loan Agreement") with Silicon Valley Bank (the "Bank"). On December 14, 2012, we and the Bank entered into Amendment No. 1 to the Revolving Loan Agreement. The Revolving Loan Agreement, as amended, provides a secured working capital-based revolving line of credit (the "Revolving Line") in an aggregate amount of up to the lesser of (i) $10.0 million, or (ii) $1.0 million plus 80% of eligible domestic accounts receivable and certain foreign accounts receivable. In addition, the Revolving Loan Agreement, as amended, also provides for non-formula advances of up to $10.0 million which may be made solely during the last five business days of any fiscal month or quarter and which must be repaid by the Company 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 the Company with usable liquidity.
The Revolving Loan Agreement, as amended, contains customary affirmative and negative covenants as well as customary events of default. The occurrence of an event of default could result in the acceleration of the Company's obligations under the Revolving Loan Agreement, as amended, and an increase to the applicable interest rate, and would permit the Bank to exercise remedies with respect to its security interest. As of March 31, 2013 we were in compliance with all of the terms of the Revolving Loan Agreement, as amended.
Short-term borrowings outstanding under the Revolving Line as of March 31, 2013 consisted of a non-formula advance of $2.3 million which was repaid within required terms. As of December 31, 2012, we had no outstanding borrowings under the Revolving Line.
Liquidity
As of March 31, 2013, we had no long-term debt and short-term debt of $2.3 million. This short-term debt was repaid before the fifth business day following March 31, 2013. Our cash and cash equivalents balance is highly liquid. We anticipate that our existing working capital, as well as funds available under our Revolving Line, will be adequate to fund our operating, investing and financing needs for the next twelve months. If necessary, management will pursue financing arrangements including the issuance of debt or equity securities or will reduce expenditures, in order to meet the Company's cash requirements. There is no assurance that, if required, we will be able to raise additional capital or reduce discretionary spending to provide the required liquidity which, in turn, may have an adverse effect on our results of operations and financial position.
From time to time, we may evaluate acquisitions of businesses, products or technologies that complement our business. Any further transactions, if consummated, may consume a material portion of our working capital or require additional financing activities, including the issuance of equity securities that may result in dilution to existing shareholders.


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Contractual Payment Obligations
Our contractual obligations for 2013 and beyond are included in our Annual Report on Form 10-K for the year ended December 31, 2012, filed with the Securities and Exchange Commission on March 6, 2013. Our obligations for 2013 and beyond have not changed materially as of March 31, 2013.

Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.


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