PIXELWORKS, INC 10-Q

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 Table of Contents 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 Table of Contents 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 7 3 1 7 Total comprehensive loss $ ( 6,545 ) $ ( 2,445 ) $ ( 11,950 ) $ ( 2,308 ) See accompanying notes to condensed consolidated financial statements. 6 Table of Contents 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 4 — 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 Table of Contents 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 $ 6 $ ( 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 — — 7 — 7 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 — — 4 — 4 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 — — 3 — 3 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 Table of Contents 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 Table of Contents 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 Table of Contents 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 Table of Contents 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 Table of Contents 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 Table of Contents 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 $ 7 $ 742 Commercial paper 250 — 250 $ 985 $ 7 $ 992 As of December 31, 2019: Commercial paper $ 2,487 $ — $ 2,487 U.S. government treasury bills 2,249 1 2,250 Corporate debt securities 2,236 2 2,238 $ 6,972 $ 3 $ 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 Table of Contents 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 Table of Contents 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 no t 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 Table of Contents 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 Table of Contents 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. 18 Table of Contents 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. 19 Table of Contents 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. 20 Table of Contents 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 % 7 % 7 % 5 % End customer C 13 % 7 % 5 % 5 % End customer D 11 % 9 % 6 % 6 % End customer E 10 % 12 % 5 % 14 % 1 End 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 % 21 Table of Contents 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. 22 Table of Contents 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 approximat ely 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 .