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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________ 
FORM 10-Q
________________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     .
Commission File Number: 000-30269
 ____________________________________
PIXELWORKS, INC.
(Exact name of registrant as specified in its charter)
Oregon 91-1761992
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
226 Airport Parkway, Suite 595
San Jose
, California 95110
(Address of principal executive offices) (Zip Code)
(408) 200-9200
(Registrant’s telephone number, including area code)
____________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, par value $0.001 per share PXLW The Nasdaq Global Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer Accelerated Filer
Non-accelerated Filer Smaller Reporting Company
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes     No  
Securities registered pursuant to Section 12(b) of the Act:
The number of outstanding shares of the registrant’s common stock, par value $0.001 per share, was 40,411,149 as of July 31, 2020


PIXELWORKS, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2020
TABLE OF CONTENTS
 
2

NOTE REGARDING COVID-19
        In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic, and the virus continues to spread in areas where we operate and sell our products and services. Several public health organizations have recommended, and many local governments have implemented, certain measures to slow and limit the transmission of the virus, including shelter in place and social distancing ordinances, which has resulted in a significant deterioration of economic conditions in many of the countries in which we operate.
        The spread of the COVID-19 virus has caused us to modify our business practices, including implementing work-from-home policies and restricting travel by our employees. Our China offices were the first to be impacted, in late January and most of February, but as our China team slowly came back from the COVID-19 disruption, we enabled all critical functions, from integrated circuit development to sales to algorithm and software development, to work remotely through virtual workspaces. Since the beginning of March, our Shanghai and Shenzhen offices have reopened and are at full staffing. Our offices and supply chain partners in Taiwan are fully functional and have not gone on lock down. As of today, our offices in Japan and North America are currently operating in office and remotely and are fully functional.
        
COVID-19 may also affect the operations of our suppliers and customers, as their own workforces and operations are disrupted by the pandemic, which could result in the interruption of our distribution system, temporary or long-term disruption in our supply chains, or delays in the delivery of our product. While we expect the impacts of COVID-19 to be temporary, the disruptions caused by the virus may negatively affect our revenue, results of operations, financial condition, liquidity, capital investments and financing arrangements in 2020. For example, we expect that our revenues for fiscal year 2020 will be lower than initially anticipated at the beginning of the year and travel restrictions and border closures could have a material impact on our ability to achieve our business goals.
In response to the outbreak of COVID-19, we have taken the following measures to date:
Implemented work-from-home and social distancing policies throughout our organization
Suspended all company travel other than business critical travel within China
Drew down from our working capital-based revolving line of credit to help with liquidity
Received a loan for $0.8 million pursuant to the Paycheck Protection Program to help with certain qualifying expenses, including payroll costs
Additionally, in preparation for a potentially prolonged economic recovery, we have taken the following cost-saving measures:
Our CEO and the CFO have taken a 10% base salary reduction
Our Board of Directors have agreed to take Restricted Stock Units (RSUs) in lieu of their director fees for the full year of 2020
Our Executive staff have reduced their base salary by 10% in exchange for RSUs
The Executive Bonus Program for 2020 has been eliminated
Annual Merit increases for all employees have been delayed by one quarter
All hiring has been put on hold other than a few critical hiring requisitions
All employees have been given the opportunity to exchange up to 10% of their quarterly base salary for RSUs
Adopted a restructuring plan that will result in an approximately 14% reduction in our workforce
The impact of the pandemic on our business, as well as the business of our suppliers and customers, and the additional measures that may be needed in the future in response to it, including additional cost-saving measures, will depend on many factors beyond our control and knowledge. We will continually monitor the situation to determine what actions may be necessary or appropriate to address the impact of the pandemic, which may include actions mandated or recommended by federal, state or local authorities.

3

PART I – FINANCIAL INFORMATION
 
Item 1.Financial Statements.
PIXELWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
 
June 30,
2020
December 31,
2019
ASSETS
Current assets:
Cash and cash equivalents $ 20,417    $ 7,257   
Short-term marketable securities 992    6,975   
Accounts receivable, net 5,925    10,915   
Inventories 4,767    5,401   
Prepaid expenses and other current assets 1,783    1,689   
Total current assets 33,884    32,237   
Property and equipment, net 6,138    4,608   
Operating lease right of use assets 7,324    5,434   
Other assets, net 1,264    1,267   
Acquired intangible assets, net 1,955    2,704   
Goodwill 18,407    18,407   
Total assets $ 68,972    $ 64,657   
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 1,071    $ 818   
Accrued liabilities and current portion of long-term liabilities 10,972    8,692   
Short-term line of credit 4,329    —   
Current portion of income taxes payable 219    164   
Total current liabilities 16,591    9,674   
Long-term liabilities, net of current portion 2,184    982   
Operating lease liabilities, net of current portion 5,470    4,212   
Income taxes payable, net of current portion 2,272    2,260   
Total liabilities 26,517    17,128   
Commitments and contingencies (Note 12)
Shareholders’ equity:
Preferred stock —    —   
Common stock 442,998    436,122   
Accumulated other comprehensive income 13    12   
Accumulated deficit (400,556)   (388,605)  
Total shareholders’ equity 42,455    47,529   
Total liabilities and shareholders’ equity $ 68,972    $ 64,657   
See accompanying notes to condensed consolidated financial statements.
4

PIXELWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 
  Three Months Ended June 30, Six Months Ended June 30,
  2020 2019 2020 2019
Revenue, net $ 9,253    $ 18,027    $ 23,027    $ 34,675   
Cost of revenue (1) 4,204    8,651    11,203    16,827   
Gross profit 5,049    9,376    11,824    17,848   
Operating expenses:
Research and development (2) 6,314    6,364    12,581    12,836   
Selling, general and administrative (3) 5,156    4,935    10,349    10,395   
Restructuring —    398    592    398   
Total operating expenses 11,470    11,697    23,522    23,629   
Loss from operations (6,421)   (2,321)   (11,698)   (5,781)  
Interest income (expense) and other, net (24)   104    30    200   
Gain on sale of patents —    —    —    3,905   
Total other income (expense), net (24)   104    30    4,105   
Loss before income taxes (6,445)   (2,217)   (11,668)   (1,676)  
Provision for income taxes 107    231    283    639   
Net loss $ (6,552)   $ (2,448)   $ (11,951)   $ (2,315)  
Net loss per share - basic and diluted $ (0.17)   $ (0.06)   $ (0.31)   $ (0.06)  
Weighted average shares outstanding - basic and diluted 39,444    37,688    39,156    37,469   

(1) Includes:
Amortization of acquired intangible assets 298    298    596    596   
Stock-based compensation 127    83    228    178   
Inventory step-up and backlog amortization —    —    —    12   
(2) Includes stock-based compensation 806    703    1,454    1,364   
(3) Includes:
Stock-based compensation 1,310    879    2,383    1,812   
Amortization of acquired intangible assets 76    76    152    160   
See accompanying notes to condensed consolidated financial statements.
5

PIXELWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
  Three Months Ended June 30, Six Months Ended June 30,
  2020 2019 2020 2019
Net loss $ (6,552)   $ (2,448)   $ (11,951)   $ (2,315)  
Other comprehensive loss:
Unrealized gain on available-for-sale securities        
Total comprehensive loss $ (6,545)   $ (2,445)   $ (11,950)   $ (2,308)  
See accompanying notes to condensed consolidated financial statements.

6

PIXELWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited) 
Six Months Ended June 30,
  2020 2019
Cash flows from operating activities:
Net loss $ (11,951)   $ (2,315)  
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Stock-based compensation 4,065    3,354   
Depreciation and amortization 1,893    1,800   
Amortization of acquired intangible assets 748    756   
Reversal of uncertain tax positions (10)   (31)  
Accretion on short-term marketable securities (10)   (52)  
Deferred income tax benefit   —   
Gain on sale of marketable securities (4)   —   
Gain on sale of patents —    (3,905)  
Inventory step-up and backlog amortization —    12   
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable, net 4,990    (371)  
Inventories 634    100   
Prepaid expenses and other current and long-term assets, net 1,343    207   
Accounts payable 191    37   
Accrued current and long-term liabilities (1,804)   (2,230)  
Income taxes payable 77    382   
Net cash provided by (used in) operating activities 166    (2,256)  
Cash flows from investing activities:
Proceeds from sales and maturities of short-term marketable securities 7,498    5,600   
Purchases of short-term marketable securities (1,500)   (6,045)  
Purchases of property and equipment (612)   (1,859)  
Proceeds from sale of patents —    4,250   
Purchases of licensed technology —    (521)  
Payment associated with sale of patents —    (345)  
Net cash provided by investing activities 5,386    1,080   
Cash flows from financing activities:
Proceeds from line of credit 4,329    —   
Net proceeds from "at the market" equity offering 2,474    —   
Proceeds from Paycheck Protection Program loan 796    —   
Proceeds from issuance of common stock under employee equity incentive plans 337    315   
Payments on asset financings (328)   (337)  
Net cash provided by (used in) financing activities 7,608    (22)  
Net increase (decrease) in cash and cash equivalents 13,160    (1,198)  
Cash and cash equivalents, beginning of period 7,257    17,944   
Cash and cash equivalents, end of period $ 20,417    $ 16,746   
Supplemental disclosure of cash flow information:
Cash paid for income taxes, net of refunds received $ 211    $ 291   
Cash paid during the period for interest 107    66   
Non-cash investing and financing activities:
Acquisitions of property and equipment and other
assets under extended payment terms
1,392    —   
See accompanying notes to condensed consolidated financial statements.
7

PIXELWORKS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except share data)
(Unaudited) 
 
  Common Stock Accumulated
Other
Comprehensive
Income
Accumulated
Deficit
Total
Shareholders'
Equity
2020 Shares Amount
Balance as of December 31, 2019 38,434,488    $ 436,122    $ 12    $ (388,605)   $ 47,529   
Stock issued under employee equity incentive plans 815,375    325    —    —    325   
Stock-based compensation expense —    1,822    —    —    1,822   
Unrealized loss on available for sale securities —    —    (6)   —    (6)  
Net loss —    —    —    (5,399)   (5,399)  
Balance as of March 31, 2020 39,249,863    $ 438,269    $   $ (394,004)   $ 44,271   
"At the market" equity offering 803,528    2,474    —    —    2,474   
Stock issued under employee equity incentive plans 167,100    12    —    —    12   
Stock-based compensation expense —    2,243    —    —    2,243   
Unrealized gain on available for sale securities —    —      —     
Net loss —    —    —    (6,552)   (6,552)  
Balance as of June 30, 2020 40,220,491    $ 442,998    $ 13    $ (400,556)   $ 42,455   
2019
Balance as of December 31, 2018 36,937,458    $ 428,903    $ 15    $ (379,528)   $ 49,390   
Stock issued under employee equity incentive plans 605,911    315    —    —    315   
Stock-based compensation expense —    1,689    —    —    1,689   
Unrealized gain on available for sale securities —    —      —     
Net income —    —    —    133    133   
Balance as of March 31, 2019 37,543,369    $ 430,907    $ 19    $ (379,395)   $ 51,531   
Stock issued under employee equity incentive plans 290,422    —    —    —    —   
Stock-based compensation expense —    1,665    —    —    1,665   
Unrealized gain on available for sale securities —    —      —     
Net loss —    —    —    (2,448)   (2,448)  
Balance as of June 30, 2019 37,833,791    $ 432,572    $ 22    $ (381,843)   $ 50,751   
See accompanying notes to condensed consolidated financial statements.

8


PIXELWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
(Unaudited)

NOTE 1: BASIS OF PRESENTATION
Nature of Business
Pixelworks is a leading provider of high-performance and power-efficient visual processing solutions that bridge the gap between video content formats and rapidly advancing display capabilities. We develop and market semiconductor and software solutions that enable consistently high-quality, authentic viewing experiences in a wide variety of applications from cinema to smartphones. Our primary target markets include Mobile (smartphone, gaming and tablet), Home Entertainment (TV, personal video recorder ("PVR"), over-the-air ("OTA") and projector), Content (creation, remastering and delivery), and Business & Education (projector).
As of June 30, 2020, we had an intellectual property portfolio of 345 patents related to the visual display of digital image data. We focus our research and development efforts on developing video algorithms that improve quality, and architectures that reduce system power, cost, bandwidth and increase overall system performance and device functionality. We seek to expand our technology portfolio through internal development and co-development with business partners, and we continually evaluate acquisition opportunities and other ways to leverage our technology into other high-value markets.
Pixelworks was founded in 1997 and is incorporated under the laws of the state of Oregon. On August 2, 2017, we acquired ViXS Systems, Inc., a corporation organized in Canada ("ViXS").
Condensed Consolidated Financial Statements
The financial information included herein for the three and six month periods ended June 30, 2020 and 2019 is prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") and is unaudited. Such information reflects all adjustments, consisting of only normal recurring adjustments, except as discussed below, that are, in the opinion of management, necessary for a fair presentation of the Company's condensed consolidated financial statements for these interim periods. The financial information as of December 31, 2019 is derived from our audited consolidated financial statements and notes thereto for the fiscal year ended December 31, 2019, included in Item 8 of our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 11, 2020, and should be read in conjunction with such consolidated financial statements.
The results of operations for the three month and six month periods ended June 30, 2020 and 2019 are not necessarily indicative of the results expected for future periods or for the entire fiscal year ending December 31, 2020.

Recent Accounting Pronouncements
In December 2019, the FASB issued Accounting Standards Update No. 2019-12, Simplifying the Accounting for Income Taxes ("ASU 2019-12"). ASU 2019-12 removes certain exceptions to the general principles in Accounting Standards Codification ("ASC") 740 and also clarifies and amends existing guidance to provide for more consistent application. ASU 2019-12 will become effective for us in the first quarter of fiscal 2021, and early adoption is permitted. We are evaluating the impact that the adoption of ASU 2019-12 will have on our financial position, results of operations and cash flows.
In November 2018, the FASB issued Accounting Standards Update No. 2018-18, Collaborative Arrangements: Clarifying the Interaction Between Topic 808 and Topic 606 ("ASU 2018-18"). ASU 2018-18 requires transactions in collaborative arrangements to be accounted for under ASC 606 if the counterparty is a customer for a good or service (or bundle of goods and services) that is a distinct unit of account. The amendment also precludes entities from presenting consideration from transactions with a collaborator that is not a customer together with revenue recognized from contracts with customers. ASU 2018-18 became effective for us on January 1, 2020. The adoption of ASU 2018-18 did not have a material impact on our financial position, results of operations and cash flows.
9

Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and judgments that affect amounts reported in the financial statements and accompanying notes. These estimates reflect considerations related to the impact of COVID-19. Our significant estimates and judgments include those related to revenue recognition, valuation of excess and obsolete inventory, lives and recoverability of equipment and other long-lived assets, valuation of goodwill, valuation of share-based payments, income taxes, litigation and other contingencies. The actual results experienced could differ materially from our estimates.

NOTE 2: BALANCE SHEET COMPONENTS
Accounts Receivable, Net
Accounts receivable are contract assets that arise from the performance of our performance obligation pursuant to our contracts with our customers and represent our unconditional right to payment for the satisfaction of our performance obligations. They are recorded at invoiced amount and do not bear interest when recorded or accrue interest when past due. Accounts receivable are stated net of an allowance for doubtful accounts, which is maintained for estimated losses that may result from the inability of our customers to make required payments.
Accounts receivable consists of the following:
June 30,
2020
December 31,
2019
Accounts receivable, gross $ 5,959    $ 10,938   
Less: allowance for doubtful accounts (34)   (23)  
Accounts receivable, net $ 5,925    $ 10,915   

The following is the change in our allowance for doubtful accounts: 
  Six Months Ended
June 30,
  2020 2019
Balance at beginning of period $ 23    $ 21   
Additions charged 11    24   
Balance at end of period $ 34    $ 45   

Inventories
Inventories consist of finished goods and work-in-process, and are stated at the lower of standard cost (which approximates actual cost on a first-in, first-out basis) or market (net realizable value).
Inventories consist of the following: 
June 30,
2020
December 31,
2019
Finished goods $ 2,913    $ 1,630   
Work-in-process 1,854    3,771   
Inventories $ 4,767    $ 5,401   

Property and Equipment, Net
Property and equipment consists of the following:
June 30,
2020
December 31,
2019
Gross carrying amount $ 26,117    $ 22,866   
Less: accumulated depreciation and amortization (19,979)   (18,258)  
Property and equipment, net $ 6,138    $ 4,608   

10

Acquired Intangible Assets, Net
In connection with the acquisition of ViXS (the "Acquisition"), we recorded certain identifiable intangible assets. Acquired intangible assets resulting from this transaction were assigned to Pixelworks, Inc., and consist of the following:
June 30,
2020
December 31,
2019
Developed technology $ 5,050    $ 5,050   
Customer relationships 1,270    1,270   
Backlog and tradename 410    410   
6,730    6,730   
Less: accumulated amortization (4,775)   (4,026)  
Acquired intangible assets, net $ 1,955    $ 2,704   

Developed technology and customer relationships are amortized over a useful life of 3 to 5 years. Backlog was fully amortized as of September 30, 2018 and tradename was fully amortized as of March 31, 2019.
Amortization expense for intangible assets was $374 and $748 for the three and six months ended June 30, 2020, respectively, $298 and $596 were included in cost of revenue for the three and six months ended June 30, 2020, respectively, and $76 and $152 were included in selling, general and administrative for the three and six months ended June 30, 2020, respectively, in the condensed consolidated statements of operations. As of June 30, 2020, future estimated amortization expense is as follows:
Six months ending December 31:
2020 $ 748   
Years ending December 31:
2021 1,117   
2022 90   
$ 1,955   
Acquired intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Conditions that would trigger an impairment assessment include, but are not limited to, past, current, or expected cash flow or operating losses associated with the asset. There were no such triggering events requiring an impairment assessment of other intangible assets during the six months ended June 30, 2020.
Goodwill
Goodwill resulted from the Acquisition, whereby we recorded goodwill of $18,407.
Goodwill is not amortized; however, we review goodwill for impairment annually and whenever events or changes in circumstances indicate that the fair value of the reporting unit may be less than it's carrying value. Conditions that would trigger an impairment assessment include, but are not limited to, a significant adverse change in our business climate or a current period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continued losses or adverse changes in legal factors, regulation or business environment. There were no such triggering events requiring a goodwill impairment assessment during the six months ended June 30, 2020. We perform our annual impairment assessment for goodwill on November 30 of each year.
11

Accrued Liabilities and Current Portion of Long-Term Liabilities
Accrued liabilities and current portion of long-term liabilities consist of the following:
June 30,
2020
December 31,
2019
Accrued payroll and related liabilities $ 3,002    $ 3,440   
Operating lease liabilities, current 1,940    1,545   
Current portion of accrued liabilities for asset financings 1,056    483   
Accrued commissions and royalties 559    663   
Accrued interest payable 415    397   
Deferred revenue 76    146   
Accrued costs related to restructuring —    66   
Other 3,924    1,952   
Accrued liabilities and current portion of long-term liabilities $ 10,972    $ 8,692   
Deferred revenues are contract liabilities that arise when cash payments are received or due in advance of the satisfaction of our performance obligations. Any increase in deferred revenues is driven by cash payments received or due in advance of satisfying our performance obligation pursuant to the contract with the customer. Any decrease in deferred revenues is due to the recognition of revenue related to satisfying our performance obligation.
The change in deferred revenue is as follows:
  Six Months Ended
June 30,
  2020 2019
Deferred revenue:
Balance at beginning of period $ 146    $ 96   
Revenue deferred 585    335   
Revenue recognized (655)   (275)  
Balance at end of period $ 76    $ 156   

12

Short-Term Line of Credit
On December 21, 2010, we entered into a Loan and Security Agreement with Silicon Valley Bank (the "Bank"), which was amended on December 14, 2012, December 4, 2013, December 18, 2015, December 15, 2016, July 21, 2017, December 21, 2017, December 18, 2018, December 18, 2019 and April 17, 2020 (as amended, the "Revolving Loan Agreement"). The Revolving Loan Agreement provides a secured working capital-based revolving line of credit (the "Revolving Line") in an aggregate amount of up to the lesser of (i) $10,000, or (ii) $2,500 plus 80% of eligible domestic accounts receivable and certain foreign accounts receivable of both Pixelworks and ViXS Systems, Inc., subject to certain limitations on the amount of accounts receivables attributable to ViXS. The Revolving Line has a maturity date of December 27, 2020. In addition, the Revolving Loan Agreement provides for non-formula advances of up to $10,000 which may be made solely 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.
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 our 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 June 30, 2020, we were in compliance with all of the terms of the Revolving Loan Agreement, as amended.
As of June 30, 2020, short-term borrowings outstanding under the Revolving Line consisted of $4,329. The weighted-average interest rate on short-term borrowings outstanding as of June 30, 2020 was 3.5%.
As of December 31, 2019, we had no outstanding borrowings under the Revolving Line.
Paycheck Protection Program Loan
On April 25, 2020, we entered into a loan with Silicon Valley Bank as the lender in an aggregate principal amount of $796 (the “Loan”) pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).
The Loan is evidenced by a promissory note (the “Note”) dated April 25, 2020, and matures 2 years from the disbursement date. The Note bears interest at a rate of 1.000% per annum, with the first six months of interest deferred. Principal and interest are payable monthly commencing 6 months after the disbursement date and may be prepaid by the Company at any time prior to maturity with no prepayment penalties. The Note contains customary events of default relating to, among other things, payment defaults or breaches of the terms of the Note. Upon the occurrence of an event of default, the Lender may require immediate repayment of all amounts outstanding under the Note.
Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of loans granted under the PPP. The Loan is subject to forgiveness to the extent proceeds are used for payroll costs, including payments required to continue group health care benefits, and certain rent, utility, and mortgage interest expenses (collectively, “Qualifying Expenses”), pursuant to the terms and limitations of the PPP. The Company intends to use the Loan amount for Qualifying Expenses and we intend to apply for forgiveness, however, no assurance is provided that the Company will obtain forgiveness of the Loan in whole or in part.
We have elected to account for the Loan as Debt under ASC 470. The Loan proceeds are included within other long-term liabilities, net of current portion in our condensed consolidated balance sheets and we recognize interest expense at 1% per annum within interest income (expense) and other, net in our condensed consolidated statements of operations.
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.

13

As of June 30, 2020 and during the three months ended June 30, 2020, we sold an aggregate of 803,528 shares of our common stock under this at the market offering, resulting in aggregate net proceeds to us of approximately $2,474, and gross proceeds of approximately $2,812, and paid Cowen commissions and fees of approximately $144, and other expenses of $194. As of June 30, 2020, the remaining availability under the at the market offering is $22,188.

NOTE 3: MARKETABLE SECURITIES AND FAIR VALUE MEASUREMENTS
Marketable Securities
As of June 30, 2020 and December 31, 2019, all of our marketable securities are classified as available-for-sale, have contractual maturities of one year or less and consist of the following:
Cost Unrealized Gain (Loss) Fair Value
Short-term marketable securities:
As of June 30, 2020:
Corporate debt securities $ 735    $   $ 742   
Commercial paper 250    —    250   
$ 985    $   $ 992   
As of December 31, 2019:
Commercial paper $ 2,487    $ —    $ 2,487   
U.S. government treasury bills 2,249      2,250   
Corporate debt securities 2,236      2,238   
$ 6,972    $   $ 6,975   

Unrealized holding gains and losses are recorded in accumulated other comprehensive income, a component of shareholders’ equity, in the condensed consolidated balance sheets.
14

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 measured at fair value on a recurring basis in the condensed consolidated balance sheets as of June 30, 2020 and December 31, 2019:  
Level 1 Level 2 Level 3 Total
As of June 30, 2020:
Assets:
Cash equivalents:
Money market funds $ 13,897    $ —    $ —    $ 13,897   
Short-term marketable securities:
Corporate debt securities —    742    —    742   
Commercial paper —    250    —    250   
As of December 31, 2019:
Assets:
Cash equivalents:
Money market funds $ 1,307    $ —    $ —    $ 1,307   
Short-term marketable securities:
U.S. government treasury bills 2,250    —    —    2,250   
Commercial paper —    2,487    —    2,487   
Corporate debt securities —    2,238    —    2,238   
We primarily use the market approach to determine the fair value of our financial assets. 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.


15

NOTE 4: RESTRUCTURINGS
In January 2020, we executed a restructuring plan to make the operation of the Company more efficient (the "2020 Plan"). The 2020 Plan included an approximately 4% reduction in workforce, primarily in the areas of research and development and sales.
In June 2019, we executed a restructuring plan to make the operation of the Company more efficient (the "2019 Plan"). The 2019 Plan included an approximately 2% reduction in workforce, primarily in the areas of sales and operations.
Total restructuring expense included in our statement of operations for the three and six month periods ended June 30, 2020 and 2019 is comprised of the following:
  Three Months Ended Six Months Ended
June 30, June 30,
  2020 2019 2020 2019
Operating expenses — restructuring:
Employee severance and benefits
$ —    $ 398    $ 592    $ 398   
Total restructuring expense $ —    $ 398    $ 592    $ 398   

During the three months ended June 30, 2020, we did not record any restructuring expense. During the six months ended June 30, 2020 we recorded $592 in restructuring expense related to the 2020 Plan. During the three and six months ended June 30, 2019, we recorded $398 in restructuring expense related to the 2019 Plan.

The following is a rollforward of the accrued liabilities related to restructuring for the six month period ended June 30, 2020:

Balance as of December 31, 2019
Expensed Payments
Balance as of
June 30, 2020
Employee severance and benefits
$ 66    $ 592    $ (658)   $ —   
Accrued costs related to restructuring
$ 66    $ 592    $ (658)   $ —   

NOTE 5: LEASES
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) ("ASC 842"), which requires lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842; and ASU No. 2018-11, Targeted Improvements. The standard establishes a right-of-use model ("ROU") that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.
We adopted the standard on January 1, 2019 and used the effective date as our date of initial application under the modified retrospective approach. Under the effective date method, financial information and disclosures prior to January 1, 2019 are not required to be restated.
We elected the "practical expedient package," which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. We did not elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable to us. We elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. We also elected the practical expedient to not separate lease and non-lease components for all of our leases.
Upon adoption, we recognized operating lease liabilities of $6,847 based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases. We also recognized ROU assets of $6,224 which represents the operating lease liability adjusted for accrued rent and cease-use liabilities. The adoption did not have a material impact on our condensed consolidated statements of operations or cash flows. The most significant impact relates to (1) the recognition of new ROU assets and lease liabilities on our balance sheet for our office operating leases; and (2) providing significant new disclosures about our leasing activities.
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 operating lease liabilities in our condensed consolidated balance sheets.
16

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 for office buildings and one vehicle. Our leases have remaining lease terms of 1 year to 7 years. Supplemental information related to lease expense and valuation of the ROU assets and lease liabilities was as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
Operating lease cost: $ 676    $ 657    $ 1,323    $ 1,286   

Six Months Ended
June 30,
2020 2019
Cash paid for amounts included in the measurement of lease liabilities:
      Operating cash flows from operating leases $ 1,434    $ 1,339   
Leased assets obtained in exchange for new operating lease liabilities 3,052    1,226   
Weighted average remaining lease term (in years) 4.01 3.58
Weighted average discount rate 5.07  % 5.75  %

Future minimum lease payments under non-cancellable leases as of June 30, 2020 were as follows:
Operating Lease Payments
Six months ending December 31, 2020 $ 1,148   
Years ending December 31:
2021 2,221   
2022 2,193   
2023 1,211   
2024 807   
2025 294   
Thereafter 370   
Total operating lease payments 8,244   
Less imputed interest (834)  
Total operating lease liabilities $ 7,410   

As of June 30, 2020, the Company had no operating lease liabilities that had not commenced.

17

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. 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 a 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 engineering 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 proportion of labor hours expended to the total 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"). IP licensing agreements that we enter into generally provide licensees the right to incorporate our IP components in their products with terms and conditions that vary by licensee. Fees under these agreements generally include license fees relating to our IP and support service fees, resulting in two performance obligations. We evaluate each performance obligation, which generally results in the transfer of control at a point in time for the license fee and over time for support services.
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 each circumstance, we evaluate such arrangements for our performance obligations which generally results in the transfer of control for such services over time. Historically, such arrangements have not been material to our operating results.
The following table provides information about disaggregated revenue based on the preceding categories for the three and six months ended June 30, 2020 and 2019:
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
IC sales $ 8,840    $ 17,588    $ 21,958    $ 32,662   
Engineering services, license and other 413    439    1,069    2,013   
Total revenues $ 9,253    $ 18,027    $ 23,027    $ 34,675   
For segment information, including revenue by geographic region, see "Note 10: Segment Information".
Our contract balances include accounts receivable and deferred revenue. For information concerning these contract balances, see "Note 2: Balance Sheet Components".
Payment terms and conditions for goods and services provided vary by contract; however, payment is generally 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.
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The aggregate amount of the transaction price allocated to unsatisfied performance obligations with an original expected duration of greater than one year is $210, which we expect to recognize ratably over the next 21 months.

NOTE 7: INTEREST INCOME (EXPENSE) AND OTHER, NET
Interest income (expense) and other, consists of the following:
  Three Months Ended Six Months Ended
June 30, June 30,
  2020 2019 2020 2019
Interest income $ 21    $ 85    $ 71    $ 185   
Other income 37    53    81    97   
Interest expense (82)   (34)   (122)   (82)  
Total interest income (expense) and other, net $ (24)   $ 104    $ 30    $ 200   

NOTE 8: INCOME TAXES
The provision for income taxes during the 2020 and 2019 periods is primarily comprised of current and deferred tax expense in profitable cost-plus foreign jurisdictions, accruals for tax contingencies in foreign jurisdictions and benefits for the reversal of previously recorded foreign tax contingencies due to the expiration of the applicable statutes of limitation. We recorded a benefit for the reversal of previously recorded foreign tax contingencies of $10 and $31 during the first six months of 2020 and 2019, respectively.
As we do not believe that it is more likely than not that we will realize a benefit from our U.S. net deferred tax assets, including our U.S. net operating losses, we continue to provide a full valuation allowance against essentially all of those assets, therefore, we do not incur significant U.S. income tax expense or benefit. We have not recorded a valuation allowance against our other foreign net deferred tax assets, with the exception of Canada, as we believe that it is more likely than not that we will realize a benefit from those assets.
As of June 30, 2020 and December 31, 2019, the amount of our uncertain tax positions was a liability of $1,537 and $1,554, respectively, as well as a contra deferred tax asset of $1,244 and $1,100, respectively. A number of years may elapse before an uncertain tax position is resolved by settlement or statute of limitation. 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 or if the statute of limitation expires, 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 $79 within the next twelve months due to the expiration of statutes of limitation in foreign jurisdictions. We recognize interest and penalties related to uncertain tax positions in income tax expense in our condensed consolidated statements of operations.


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NOTE 9: EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted net loss per share (in thousands, except per share data):
  Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
Net loss
$ (6,552)   $ (2,448)   $ (11,951)   $ (2,315)  
Weighted average shares outstanding - basic and diluted 39,444    37,688    39,156    37,469   
Net loss per share - basic and diluted $ (0.17)   $ (0.06)   $ (0.31)   $ (0.06)  

The following shares were excluded from the calculation of diluted net loss per share as their effect would have been anti-dilutive (in thousands): 
  Three Months Ended Six Months Ended
June 30, June 30,
  2020 2019 2020 2019
Employee equity incentive plans 4,023    3,423    3,979    3,353   
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.

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NOTE 10: SEGMENT INFORMATION
We function as a single operating segment: the design and development of integrated circuits for use in electronic display devices. The majority of our assets are located in the United States.
Geographic Information
Revenue by geographic region, is as follows:
  Three Months Ended Six Months Ended
June 30, June 30,
  2020 2019 2020 2019
Japan $ 7,515    $ 15,234    $ 16,001    $ 28,694   
China 959    1,686    3,805    3,548   
United States 433    623    2,099    1,337   
Europe 185    71    190    104   
Taiwan 161    380    899    899   
Korea —    33    33    93   
$ 9,253    $ 18,027    $ 23,027    $ 34,675   

Significant Customers
The percentage of revenue attributable to our distributors, top five end customers, and individual distributors or end customers that represented 10% or more of revenue in at least one of the periods presented, is as follows:
  Three Months Ended Six Months Ended
June 30, June 30,
  2020 2019 2020 2019
Distributors:
All distributors 65  % 45  % 51  % 36  %
Distributor A 54  % 37  % 29  % 30  %
End customers: 1
Top five end customers 73  % 81  % 61  % 80  %
End customer A 25  % 45  % 37  % 50  %
End customer B 14  % % % %
End customer C 13  % % % %
End customer D 11  % % % %
End customer E 10  % 12  % % 14  %

1End customers include customers who purchase directly from us, as well as customers who purchase our products indirectly through distributors.
The following accounts represented 10% or more of total accounts receivable in at least one of the periods presented:
June 30,
2020
December 31,
2019
Account X 63  % 24  %
Account Y 15  % 42  %
Account Z —  % 26  %


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NOTE 11: 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.

NOTE 12: COMMITMENTS AND CONTINGENCIES
Indemnifications
Certain of our agreements include indemnification provisions for claims from third-parties relating to our intellectual property. 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 March 31, 2020, we have not incurred any material liabilities arising from these indemnification obligations. In the future, however, such obligations could materially impact our results of operations.
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.
Other Contractual Obligation
As part of the Acquisition, 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 June 30, 2020, $463 is included in accrued liabilities and current portion of long-term liabilities in our condensed consolidated balance sheets and $339 is included in long-term liabilities, net of current portion in our condensed consolidated balance sheets.

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NOTE 13: SUBSEQUENT EVENTS

On August 7, 2020, the Board of Directors (the “Board”) of the Company approved a restructuring plan to make the operation of the Company more efficient and which would result in an approximately 14% reduction in workforce, primarily in the areas of operations, research and development, sales, and marketing. The Board believes adoption of this restructuring plan will help streamline the Company’s operations and workforce, and more appropriately align the Company’s operating expenses with current revenue levels. The Company expects the restructuring to be substantially completed by the end of the third quarter ending September 30, 2020 and expects to incur total estimated restructuring charges of approximately $1,500 related to employee severance and benefits. The Company expects that these charges will largely be recorded in the third quarter of 2020.
As a result of the restructuring, the Company expects to realize annualized savings of approximately $3,200.

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

Forward-looking Statements
This Quarterly Report on Form 10-Q contains "forward-looking statements" that are based on current expectations, estimates, beliefs, assumptions and projections about our business. Words such as "may," "will," "appears," "predicts," "continue," "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and the negative or other variations of such words and similar expressions are intended to identify such forward-looking statements. These forward-looking statements include, but are not limited to, statements regarding: the impact of the COVID-19 pandemic (including any changes in laws or regulations in reaction to same) on Company personnel, on revenue, on Company suppliers, and on Company customers and their respective end markets; the Company’s restructuring plan, its expectations and estimates regarding the workforce reduction, the objectives of the restructuring plan and the timing thereof, amounts and timing of the charges and savings to be incurred in connection with the restructuring plan, and the potential impact of the restructuring plan; the anticipated features, benefits and market opportunities for our products; our technologies and intellectual property; our international operations; our strategy, including with respect to our intellectual property portfolio, research and development efforts and acquisition and investment opportunities; our gross profit margin; our restructuring programs, including estimates, timing and impact thereof, as well as any future restructuring programs; our liquidity, capital resources and the sufficiency of our working capital and need for, or ability to secure, additional financing and the potential impact thereof; our obtaining forgiveness of our PPP loan in whole or in part; our contractual obligations, exchange rate and interest rate risks; our income taxes, including our ability to realize the benefit of net deferred tax assets, our uncertain tax position liability; accounting policies and use of estimates and potential impact of changes thereto; our revenue, the potential impact on our business of certain risks, including the concentration of our suppliers, risks of technological change, concentration of credit risk, changes in the markets in which we operate, our international operations, including in Asia and our exchange rate risks, our indemnification obligations and litigation risks. 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, including risks related to COVID-19, risks related to our business, risks related to our industry and risks related to our common stock, 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 intend 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.


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COVID-19
In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic, and the virus continues to spread in areas where we operate and sell our products and services. Several public health organizations have recommended, and many local governments have implemented, certain measures to slow and limit the transmission of the virus, including shelter in place and social distancing ordinances, which has resulted in a significant deterioration of economic conditions in many of the countries in which we operate.
The impact of COVID-19 and the related disruptions caused to the global economy and our business did not have a material adverse impact on our business during the quarter ended March 31, 2020. However, the spread of the COVID-19 virus caused us to modify our business practices, including implementing work-from-home policies and restricting travel by our employees. We also took certain actions in response to the pandemic, which are set forth above in “Note Regarding COVID-19.”
Looking forward, the impact of the pandemic on the global economy and on our business, as well as on the business of our suppliers and customers, and the additional measures that may be needed in the future in response to it, will depend on many factors beyond our control and knowledge. We will continually monitor the situation to determine what actions may be necessary or appropriate to address the impact of the pandemic, which may include actions mandated or recommended by federal, state or local authorities. While we expect the impacts of COVID-19 to be temporary, the disruptions caused by the virus may negatively affect our revenue, results of operations, financial condition, liquidity capital investments and financing arrangements in 2020. For example, we expect that our revenues for fiscal year 2020 will be lower than initially anticipated at the beginning of the year and travel restrictions and border closures could have a material impact on our ability to achieve our business goals.

Overview
Pixelworks is a leading provider of high-performance and power-efficient visual processing solutions that bridge the gap between video content formats and rapidly advancing display capabilities. We develop and market semiconductor and software solutions that enable consistently high-quality, authentic viewing experiences in a wide variety of applications from cinema to smartphones. Our primary target markets include Mobile (smartphone, gaming and tablet), Home Entertainment (TV, personal video recorder ("PVR"), over-the-air ("OTA") and projector), Content (creation, remastering and delivery), and Business & Education (projector).
We were one of the first companies to commercially launch a video System on Chip ("SoC") capable of deinterlacing 1080i HDTV signals and one of the first companies with a commercial dual-channel 1080i deinterlacer integrated circuit. Our Topaz product line was one of the industry’s first single-chip SoC for digital projection. We first introduced our motion estimation / motion compensation technology ("MEMC") for TVs and in recent years introduced a mobile-optimized MEMC solution for smartphones, one of several unique features in the mobile-optimized Iris visual processor. In 2019, we introduced our Hollywood award-winning TrueCut® video platform, the industry’s first motion grading technology that allows fine tuning of motion appearance in cinematic content for a wide range of frame rates, shutter angles and display types.
Our solutions enable worldwide manufacturers to offer leading-edge consumer electronics and professional display products, as well as video delivery and streaming solutions for content service providers. Our core visual display processing technology intelligently processes digital images and video from a variety of sources and optimizes the content for a superior viewing experience. Our video coding technology reduces storage requirements, significantly reduces bandwidth constraint issues and converts content between multiple formats to enable seamless delivery of video, including OTA streaming, while also maintaining end-to-end content security.
Rapid growth in video consumption, combined with the move towards high frame rate / refresh rate displays, especially in mobile, is increasing the demand for our visual processing and video delivery solutions. Our technologies can be applied to a wide range of devices from large-screen projectors to cinematic big screens, to low-power mobile tablets, smartphones, high-quality video infrastructure equipment and streaming devices. Our products are architected and optimized for power, cost, bandwidth, and overall system performance, according to the requirements of the specific application. On occasion, we have also licensed our technology.
As of June 30, 2020, we had an intellectual property portfolio of 345 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 and 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.

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Results of Operations
Revenue, net
Net revenue for the three and six month periods ended June 30, 2020 and 2019, was as follows (dollars in thousands):
  Three Months Ended Six Months Ended
  June 30, June 30,
  2020 2019 % Change 2020 2019 % Change
Revenue, net $ 9,253    $ 18,027    (49) % $ 23,027    $ 34,675    (34) %

Net revenue decreased $8.8 million, or 49%, in the second quarter of 2020 compared to the second quarter of 2019 and decreased $11.6 million, or 34% in the first half of 2020 compared to the first half of 2019.
Revenue recorded in the second quarter of 2020 consisted of $8.8 million in revenue from the sale of integrated circuit ("IC") products and $0.4 million in revenue related to engineering services, license revenue and other. Revenue recorded in the second quarter of 2019 consisted of $17.6 million in revenue from the sale of IC products and $0.4 million in revenue related to engineering services, license revenue and other. Revenue recorded in the first half of 2020 consisted of $21.9 million in revenue from the sale of IC products and $1.1 million in revenue related to engineering services, license revenue and other. Revenue recorded in the first half of 2019 consisted of $32.7 million in revenue from the sale of IC products and $2.0 million in revenue related to engineering services, license revenue and other.
The decrease in IC revenue in both periods presented is primarily due to decreased unit sales into the digital projector and video delivery markets as a result of customers continuing to correct their inventory levels and the disruptions caused by COVID-19 to our revenue. The decrease in revenue related to engineering services, license revenue and other is primarily due to the recognition of license revenue during the first quarter of 2019.
We expect that the disruptions caused by COVID-19 to our revenue will continue into the second half of 2020.
Cost of revenue and gross profit
Cost of revenue and gross profit for the three and six month periods ended June 30, 2020 and 2019, were as follows (dollars in thousands): 
  Three Months Ended June 30, Six Months Ended June 30,
  2020 % of
revenue
2019 % of
revenue
2020 % of
revenue
2019 % of
revenue
Direct product costs and related overhead 1
$ 3,783    41  % $ 8,151    45  % $ 10,294    45  % $ 15,945    46  %
Amortization of acquired intangible assets 298      298      596      596     
Stock-based compensation 127      83      228      178     
Inventory charges 2
(4)     119      85      96     
Inventory step-up and backlog amortization —      —      —      12     
Total cost of revenue $ 4,204    45  % $ 8,651    48  % $ 11,203    49  % $ 16,827    49  %
Gross profit $ 5,049    55  % $ 9,376    52  % $ 11,824    51  % $ 17,848    51  %
 
1Includes purchased materials, assembly, test, labor, employee benefits and royalties.
2Includes charges to reduce inventory to lower of cost or market and a benefit for sales of previously written down inventory.
Gross profit margin was 55% in the second quarter of 2020 compared to 52% in the second quarter of 2019 and was 51% in the first half of 2020 compared to 51% in the first half of 2019. The increase in gross profit margin in the second quarter of 2020 compared to the second quarter of 2019 was primarily due to a more favorable mix of sales into the digital projector market. The consistent gross profit margin in the first half of 2020 compared to the first half of 2019 is primarily due to a more favorable mix of sales into the digital projector market offset by high margin license revenue recorded in the first half of 2019.
Pixelworks’ gross profit margin is subject to variability based on changes in revenue levels, product mix, average selling prices, startup costs, restructuring charges, amortization related to acquired intangible assets, 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 expenses and fees for outside services, depreciation and amortization, expensed equipment, facilities and information technology expense allocations and travel and related expenses.
Research and development expense for the three and six month periods ended June 30, 2020 and 2019, was as follows (dollars in thousands): 
  Three Months Ended Six Months Ended
  June 30, June 30,
  2020 2019 % Change 2020 2019 % Change
Research and development $ 6,314    $ 6,364    (1) % $ 12,581    $ 12,836    (2) %
Research and development expense decreased $0.1 million, or 1% in the second quarter of 2020 compared to the second quarter of 2019 and decreased $0.3 million, or 2% in the first half of 2020 compared to the first half of 2019. The decreases in the 2020 periods compared to the 2019 periods were primarily due to a general decrease across multiple expense categories as we focused on cost management in response to the effects of COVID-19. These decreases were partially offset by an increase in non-recurring engineering expense due to the timing of development activities.
Selling, general and administrative
Selling, general and administrative expense includes compensation and related costs for personnel, sales commissions, facilities and information technology expense allocations, 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 and six month periods ended June 30, 2020 and 2019, was as follows (dollars in thousands): 
  Three Months Ended