Pixelworks Reports Fourth Quarter and Fiscal Year 2018 Financial Results

Note: Pixelworks and the Pixelworks logo are registered trademarks of Pixelworks, Inc.

Non-GAAP Financial Measures
This earnings release makes reference to non-GAAP gross profit margins, non-GAAP operating expenses, non-GAAP net income (loss) and non-GAAP net income (loss) per share, which exclude deferred revenue fair value adjustment, inventory step-up and backlog amortization, amortization of acquired intangible assets, stock-based compensation expense, restructuring expenses, acquisition and integration expenses, gain on extinguishment of convertible debt, fair value adjustment on convertible debt conversion option, discount accretion on convertible debt fair value, and benefit related to tax reform which are all required under GAAP as well as the tax effect of the non-GAAP adjustments. The press release also makes reference to and reconciles GAAP net income (loss) and adjusted EBITDA, which Pixelworks defines as GAAP net income (loss) before interest income (expense) and other, net, income tax provision, depreciation and amortization, as well as the specific items listed above.

Pixelworks management uses these non-GAAP financial measures internally to understand, manage and evaluate the business and establish its operational goals, review its operations on a period to period basis, for compensation evaluations, to measure performance, and for budgeting and resource allocation. Pixelworks management believes it is useful for the Company and investors to review, as applicable, both GAAP information and non-GAAP financial measures to help assess the performance of Pixelworks’ continuing businesses and to evaluate Pixelworks’ future prospects. These non-GAAP measures, when reviewed together with the GAAP financial information, provide additional transparency and information for comparison and analysis of operating performance and trends. These non-GAAP measures exclude certain items to facilitate management’s review of the comparability of our core operating results on a period to period basis.

In calculating the above non-GAAP results, management specifically adjusted for certain items related to the acquisition of ViXS Systems, Inc., including deferred revenue fair value adjustment, amortization of acquired intangible assets, impact of inventory step up, all related to fair valuing the items, acquisition and integration costs, restructuring expenses related to a reduction in workforce and facility closure and consolidations, gain on debt extinguishment, fair value adjustment on convertible debt conversion option, and accretion on convertible debt. Management considers these items as either limited in term or having no impact on Pixelworks’ cash flows, and therefore has excluded such items to facilitate a review of current operating performance and comparisons to our past operating performance.

Because the Company’s non-GAAP financial measures are not calculated in accordance with GAAP, they may not necessarily be comparable to similarly titled measures employed by other companies. These non-GAAP financial measures should not be considered in isolation or as a substitute for the comparable GAAP measures, and should be read only in conjunction with the Company’s consolidated financial results as presented in accordance with GAAP. A reconciliation between GAAP and non-GAAP financial measures is included in this earnings release which is available in the investor relations section of the Pixelworks' website.

Safe Harbor Statement
This release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements may be identified by use of terms such as “begin,” “continue,” “will,” “expect”, “believe,” “anticipate” and similar terms or the negative of such terms, and include, without limitation, statements about the Company’s digital projection, mobile and video delivery businesses, including market movement and demand, customer engagements, mobile wins and the timing thereof, growth in the mobile and video delivery markets, strategy, seasonality, the impact of our agreement as to non-strategic patents, accretion and additional guidance, particularly as to revenue for the first quarter of 2019. All statements other than statements of historical fact are forward-looking statements for purposes of this release, including any projections of revenue or other financial items or any statements regarding the plans and objectives of management for future operations. Such statements are based on management's current expectations, estimates and projections about the Company's business. These statements are not guarantees of future performance and involve numerous risks, uncertainties and assumptions that are difficult to predict. Actual results could vary materially from those contained in forward looking statements due to many factors, including, without limitation: our ability to execute on our strategy, including the integration of ViXS; competitive factors, such as rival chip architectures, introduction or traction by competing designs, or pricing pressures; the success of our products in expanded markets; current global economic challenges; changes in the digital display and projection markets; seasonality in the consumer electronics market; our efforts to achieve profitability from operations; our limited financial resources and our ability to attract and retain key personnel. More information regarding potential factors that could affect the Company's financial results and could cause actual results to differ materially from those discussed in the forward-looking statements is included from time to time in the Company's Securities and Exchange Commission filings, including its Annual Report on Form 10-K for the year ended December 31, 2017 as well as subsequent SEC filings.

The forward-looking statements contained in this release are as of the date of this release, and the Company does not undertake any obligation to update any such statements, whether as a result of new information, future events or otherwise.

[Financial Tables Follow]

(In thousands, except per share data)
  Three Months Ended  Twelve Months Ended
  December 31,  September 30,  December 31,  December 31,  December 31,
  2018  2018  2017  2018  2017
Revenue, net (1) $20,539  $21,472  $18,448  $76,554  $80,637 
Cost of revenue (2)  9,634    10,235       9,288       37,076       38,873  
Gross profit     10,905       11,237       9,160       39,478       41,764  
Operating expenses:                    
Research and development (3)     6,673       5,322       6,695       22,881       21,427  
Selling, general and administrative (4)     5,310       5,070       5,068       19,953       20,450  
Restructuring     429       414       439       1,464       1,920  
Total operating expenses     12,412       10,806       12,202       44,298       43,797  
Income (loss) from operations     (1,507 )     431       (3,042 )     (4,820 )     (2,033 )
Interest income (expense) and other, net (5)     (82 )     (112 )     (919 )     647       (1,647 )
Income (loss) before income taxes     (1,589 )     319       (3,961 )     (4,173 )     (3,680 )
Provision (benefit) for income taxes (6)     52       88       (409 )     448       493  
Net income (loss)   $ (1,641 )   $ 231     $ (3,552 )   $ (4,621 )   $ (4,173 )
Net income (loss) per share:                    
Basic   $ (0.04 )   $ 0.01     $ (0.10 )     (0.13 )     (0.13 )
Diluted   $ (0.04 )   $ 0.01     $ (0.10 )     (0.13 )     (0.13 )
Weighted average shares outstanding:                    
Basic     36,736       36,195       34,359       35,959       31,507  
Diluted     36,736       37,993       34,359       35,959       31,507  
(1) Includes deferred revenue fair value adjustment   $     $ 52     $ 68     $ 52     $ 93  
(2) Includes:                    
Amortization of acquired intangible assets     298       298       298       1,192       497  
Stock-based compensation     93       87       64       324       243  
Inventory step-up and backlog amortization     17       97       949       475       1,965  
(3) Includes stock-based compensation     635       609       527       2,466       1,648  
(4) Includes:                    
Stock-based compensation     910       762       556       2,893       2,352  
Amortization of acquired intangible assets     101       101       101       404       168  
Acquisition and integration                 (45 )           2,460  
(5) Includes:  
Fair value adjustment on convertible debt conversion option                 621             743  
Discount accretion on convertible debt fair value                 124       69       196  
Gain on debt extinguishment                 (29 )     (1,272 )     (29 )
(6) Includes benefit related to tax reform                 (343 )           (343 )

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