PIXELWORKS, INC 10-K

Item 8. Financial Statements and Supplementary Data. The following financial statements and reports are included in Item 8: Reports of Independent Registered Public Accounting Firms Consolidated Balance Sheets as of December 31, 2020 and 2019 Consolidated Statements of Operations for the years ended December 31, 2020 and 2019 Consolidated Statements of Comprehensive Loss for the years ended December 31, 2020 and 2019 Consolidated Statements of Cash Flows for the years ended December 31, 2020 and 2019 Consolidated Statements of Shareholders' Equity for the years ended December 31, 2020 and 2019 Notes to Consolidated Financial Statements 48 Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders Pixelworks, Inc. San Jose, California Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheet of Pixelworks, Inc. and its subsidiaries (the Company) as of December 31, 2020, and the related consolidated statements of operations, comprehensive loss, shareholders' equity, and cash flows for the year ended December 31, 2020, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020, and the results of its operations and its cash flows for the year ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion The Company's management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on the Company's consolidated financial statements. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audit of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. 49 _____________________________________________________________________________________________ Revenue Recognition — Refer to Note 2 to the Consolidated Financial Statements ____________________________________________________________________________ Critical Audit Matter Description The Company recognizes revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The Company’s contract may contain one or more performance obligations, including hardware, professional engineering services, internally developed intellectual property (“IP”) and technical support services. Significant judgment is exercised by the Company in determining revenue recognition for these customer agreements, and includes the following: • Determination of whether products and services are considered distinct performance obligations that should be accounted for separately versus together. • Determination of stand-alone selling prices for each distinct performance obligation (i.e. for IP license fee and support service fee that are sold together under IP licensing arrangements). • The pattern of delivery (i.e., timing of when revenue is recognized) for each distinct performance obligation. • Estimation of variable consideration when determining the amount of revenue to recognize, primarily on product sale arrangements (e.g., customer credits pursuant to price protection rights, stock rotation rights and limited return rights). Given these factors, the related audit effort in evaluating management’s judgments in determining revenue recognition for these customer agreements was extensive and required a high degree of auditor judgment. ____________________________________________________________________________ How the Critical Audit Matter Was Addressed in the Audit Our principal audit procedures related to the Company’s revenue recognition for these customer agreements included the following: • We selected a sample of customer agreements and performed the following procedures: ◦ Obtained and read contract source documents for each selection, including master agreements, and other documents that were part of the agreement to identify significant terms. ◦ Tested management’s identification of significant terms for completeness, including the identification of distinct performance obligations and variable consideration. ◦ Assessed the terms in the customer agreement and evaluated the appropriateness of management’s application of their accounting policies, along with their use of estimates, in the determination of revenue recognition conclusions. • We evaluated the reasonableness of management’s estimate of stand-alone selling prices for products and services that are not sold separately. • We evaluated the reasonableness and accuracy of management’s judgements and estimates used in accounting for customer credits pursuant to price protection rights, stock rotation rights and limited return rights (“variable consideration”). This included testing management’s estimate of calculating expected credits issued to customers and determining whether such credits were completely and accurately reserved as of December 31, 2020. We tested the mathematical accuracy of management’s calculations of revenue and the associated timing of recognizing the related revenue subject to any constraints in the consolidated financial statements. 50 _____________________________________________________________________________________________ Inventory Valuation— Refer to Note 2 to the Financial Statements ____________________________________________________________________________ Critical Audit Matter Description The Company computes inventory cost on a first-in-first out basis and applies judgment in determining the forecast for products and the valuation of inventories. The Company assesses inventory at each reporting date in order to assert that it is recorded at net realizable value, giving consideration to, among other factors: whether the product is valued at the lower of cost or net realizable value; and the estimation of excess and obsolete inventory or that which is not of saleable quality. Most of the Company’s inventory provisions are based on the Company’s inventory levels and future product purchase commitments compared to assumptions about future demand and market conditions. Significant judgment is exercised by the Company to determine inventory carrying value adjustments, specifically the provisions for excess or obsolete inventories, and includes the following: • Developing assumptions such as forecasts of future sales quantities, which are sensitive to the competitiveness of product offerings, customer requirements, and product life cycles. • Applying management judgment on not reserving certain inventory units (e.g. in case they are items that can be used for Return Merchandise Authorization "RMA"/warranty purpose) Given these factors and assumptions are forward-looking and could be affected by future economic and market conditions, the related audit effort to evaluate management’s inventory valuation adjustments was extensive and required a high degree of auditor judgment. ____________________________________________________________________________ How the Critical Audit Matter Was Addressed in the Audit Our principal audit procedures related to the Company’s inventory valuation methodology included the following: • We selected a sample of inventory items and performed the following procedures: ◦ Tested the mathematical accuracy of the schedule by comparing the quantities and carrying value of on-hand inventories to related unit sales, both historical and forecasted. ◦ Assessed and tested the reasonableness of the significant assumptions (e.g. sales and marketing forecast, build plans, RMA requirements, usage and open sales-orders). ◦ Inquired with the management team and evaluated the adequacy of management’s sales forecasts by analyzing potential technological changes in line with product life cycles and/or identified alternative customer uses. Assessed whether there were any potential sources of contrary information, including historical forecast accuracy or history of significant revisions to previously recorded inventory valuation adjustments, and performed sensitivity analyses over significant assumptions to evaluate the changes in inventory valuation that would result from changes in the assumptions. /s/ Armanino LLP We have served as the Company’s auditor since 2020. San Ramon, California March 10, 2021 51 Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors Pixelworks, Inc.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheet of Pixelworks, Inc. and subsidiaries (the Company) as of December 31, 2019, the related consolidated statements of operations, comprehensive loss, shareholders’ equity, and cash flows for the year ended December 31, 2019, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019, and the results of its operations and its cash flows for the year ended December 31, 2019, in conformity with U.S. generally accepted accounting principles. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion. /s/ KPMG LLP We served as the Company’s auditor from 1997 to 2020. Portland, Oregon March 11, 2020 52 PIXELWORKS, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share data) December 31, 2020 2019 ASSETS Current assets: Cash and cash equivalents $ 31,257 $ 7,257 Short-term marketable securities 250 6,975 Accounts receivable, net 4,672 10,915 Inventories 2,445 5,401 Prepaid expenses and other current assets 1,010 1,689 Total current assets 39,634 32,237 Property and equipment, net 5,103 4,608 Operating lease right-of-use assets 6,606 5,434 Other assets, net 1,081 1,267 Acquired intangible assets, net 1,207 2,704 Goodwill 18,407 18,407 Total assets $ 72,038 $ 64,657 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 995 $ 818 Accrued liabilities and current portion of long-term liabilities 9,452 8,692 Current portion of income taxes payable 147 164 Total current liabilities 10,594 9,674 Long-term liabilities, net of current portion 1,007 982 Operating lease liabilities, net of current portion 5,088 4,212 Income taxes payable, net of current portion 2,479 2,260 Total liabilities 19,168 17,128 Commitments and contingencies (Note 10) Shareholders' equity: Preferred stock, $ 0.001 par value, 50,000,000 shares authorized, none issued — — Common stock, $ 0.001 par value; 250,000,000 shares authorized, 51,078,942 and 38,434,488 shares issued and outstanding as of December 31, 2020 and 2019, respectively. 467,957 436,122 Accumulated other comprehensive income 47 12 Accumulated deficit ( 415,134 ) ( 388,605 ) Total shareholders' equity 52,870 47,529 Total liabilities and shareholders' equity $ 72,038 $ 64,657 See accompanying notes to consolidated financial statements. 53 PIXELWORKS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) Year Ended December 31, 2020 2019 Revenue, net $ 40,855 $ 68,755 Cost of revenue (1) 20,670 34,260 Gross profit 20,185 34,495 Operating expenses: Research and development (2) 25,040 26,018 Selling, general and administrative (3) 19,840 21,202 Restructuring 2,041 398 Total operating expenses 46,921 47,618 Loss from operations ( 26,736 ) ( 13,123 ) Interest income and other, net 9 594 Gain on loan extinguishment 796 — Gain on sale of patents — 3,905 Total other income, net 805 4,499 Loss before income taxes ( 25,931 ) ( 8,624 ) Provision for income taxes 598 453 Net loss $ ( 26,529 ) $ ( 9,077 ) Net loss per share - basic and diluted $ ( 0.65 ) $ ( 0.24 ) Weighted average shares outstanding - basic and diluted 40,712 37,851 (1) Includes: Amortization of acquired intangible assets 1,192 1,192 Stock-based compensation 432 367 Restructuring 173 — Inventory step-up and backlog amortization — 12 (2) Includes stock-based compensation 2,943 2,545 (3) Includes: Stock-based compensation 4,296 3,737 Amortization of acquired intangible assets 304 312 See accompanying notes to consolidated financial statements. 54 PIXELWORKS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (In thousands) Year Ended December 31, 2020 2019 Net loss $ ( 26,529 ) $ ( 9,077 ) Other comprehensive income (loss): Foreign pension adjustment 48 ( 7 ) Unrealized gain (loss) on available-for-sale securities ( 3 ) 3 Tax effect of foreign pension adjustment ( 10 ) 1 Total comprehensive loss $ ( 26,494 ) $ ( 9,080 ) See accompanying notes to consolidated financial statements. 55 PIXELWORKS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Year Ended December 31, 2020 2019 Cash flows from operating activities: Net loss $ ( 26,529 ) $ ( 9,077 ) Adjustments to reconcile net loss to net cash used in operating activities: Stock-based compensation 7,853 6,649 Depreciation and amortization 3,737 3,837 Amortization of acquired intangible assets 1,496 1,504 Gain on loan extinguishment ( 796 ) — Reversal of uncertain tax positions ( 88 ) ( 124 ) Deferred income tax expense 26 45 Accretion on short-term marketable securities ( 4 ) ( 94 ) Gain on sale of marketable securities ( 4 ) — Gain on sale of patents — ( 3,905 ) Inventory step-up and backlog amortization — 12 Other 9 ( 3 ) Changes in operating assets and liabilities: Accounts receivable, net 6,243 ( 3,933 ) Inventories 2,956 ( 2,459 ) Prepaid expenses and other current and long-term assets, net 3,295 2,172 Accounts payable 166 ( 1,304 ) Accrued current and long-term liabilities ( 2,361 ) ( 3,686 ) Income taxes payable 290 ( 14 ) Net cash used in operating activities ( 3,711 ) ( 10,380 ) Cash flows from investing activities: Proceeds from sales and maturities of marketable securities 8,229 10,050 Purchases of property and equipment ( 2,637 ) ( 2,629 ) Purchases of available-for-sale marketable securities ( 1,500 ) ( 10,856 ) Purchases of licensed technology ( 152 ) ( 521 ) Proceeds from sale of patents — 4,250 Payment associated with sale of patents — ( 345 ) Net cash used in (provided by) investing activities 3,940 ( 51 ) Cash flows from financing activities: Net proceeds from equity offering 12,743 — Net proceeds from private placement investment 6,210 — Net proceeds from "at the market" equity offering 4,429 — Payments on asset financings ( 1,007 ) ( 826 ) Proceeds from Paycheck Protection Program loan 796 — Proceeds from issuances of common stock under employee equity incentive plans 600 570 Net cash provided by (used in) financing activities 23,771 ( 256 ) Net increase (decrease) in cash and cash equivalents 24,000 ( 10,687 ) Cash and cash equivalents, beginning of period 7,257 17,944 Cash and cash equivalents, end of period $ 31,257 $ 7,257 Supplemental disclosure of cash flow information: Cash paid for income taxes, net of refunds received $ 397 $ 547 Cash paid during the year for interest 217 142 Non-cash investing and financing activities: Gain on loan extinguishment $ ( 796 ) $ — Acquisitions of property and equipment and other assets under extended payment terms 1,495 934 See accompanying notes to consolidated financial statements. 56 PIXELWORKS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands, except share data) Common Stock Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Shareholders' Equity Shares Amount Balance as of December 31, 2018 36,937,458 428,903 15 ( 379,528 ) 49,390 Stock issued under employee equity incentive plans 1,497,030 570 — — 570 Stock-based compensation expense — 6,649 — — 6,649 Unrealized gain on available-for-sale securities — — 3 — 3 Net loss — — — ( 9,077 ) ( 9,077 ) Foreign pension adjustment, net of tax of $( 1 ) — — ( 6 ) — ( 6 ) Balance as of December 31, 2019 38,434,488 436,122 12 ( 388,605 ) 47,529 Stock issued under employee equity incentive plans 2,061,988 600 — — 600 Equity offering 5,635,000 12,743 — — 12,743 Private placement investment 3,200,000 6,210 — — 6,210 "At the market" equity offering 1,747,466 4,429 — — 4,429 Stock-based compensation expense — 7,853 — — 7,853 Unrealized loss on available-for-sale securities — — ( 3 ) — ( 3 ) Net loss — — — ( 26,529 ) ( 26,529 ) Foreign pension adjustment, net of tax of $ 10 — — 38 — 38 Balance as of December 31, 2020 51,078,942 $ 467,957 $ 47 $ ( 415,134 ) $ 52,870 See accompanying notes to consolidated financial statements. 57 PIXELWORKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) 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 December 31, 2020, we had an intellectual property portfolio of 338 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") ("the Acquisition"). Our consolidated financial statements include the accounts of Pixelworks and its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated. All foreign subsidiaries use the U.S. dollar as the functional currency, and as a result, transaction gains and losses are included in the consolidated statements of operations. Transaction losses were $ 419 and $ 270 for the years ended December 31, 2020 and 2019, respectively. Use of Estimates The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles ("U.S. GAAP") requires us to make estimates and judgments that affect amounts reported in the financial statements and accompanying notes. Our significant estimates and judgments include those related to revenue recognition, valuation of excess and obsolete inventory, lives and recoverability of equipment and other long-lived assets, valuation of goodwill, stock-based compensation and income taxes. The actual results experienced could differ materially from our estimates. 58 NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cash and Cash Equivalents We classify all cash and highly liquid investments with original maturities of three months or less at the date of purchase as cash and cash equivalents. Cash equivalents, which as of December 31, 2020 and 2019 consisted of U.S. denominated money market funds, totaled $ 23,832 and $ 1,307 as of December 31, 2020 and 2019, respectively. Marketable Securities Our investments in marketable securities are classified as available-for-sale. Available-for-sale securities are stated at fair value based on quoted market prices with unrealized holding gains or losses, net of tax, included in accumulated other comprehensive income, a component of shareholders’ equity. The cost of securities sold is based on the specific identification method. Accounts Receivable Accounts receivable are recorded at invoiced amount and do not bear interest when recorded or accrue interest when past due. We maintain an allowance for doubtful accounts for estimated losses that may result from the inability of our customers to make required payments. At the end of each reporting period, we estimate the allowance for doubtful accounts based on an account-by-account risk analysis of outstanding receivable balances. The determination to write-off specific accounts receivable balances is made based on the likelihood of collection and past due status. Past due status is based on invoice date and terms specific to each customer. 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). Property and Equipment Property and equipment are stated at cost. Depreciation and amortization is calculated on a straight-line basis over the estimated useful life of the assets which are generally as follows: Software Lesser of 3 years or contractual license term Equipment, furniture and fixtures 2 years Tooling 2 to 4 years Leasehold improvements Lesser of lease term or estimated useful life The cost of property and equipment repairs and maintenance is expensed as incurred. Licensed Technology We have capitalized licensed technology assets in other long-term assets. These assets are stated at cost and are amortized on a straight-line basis over the term of the license or the estimated life of the asset, if the license is not contractually limited, which is generally two to five years . Useful Lives and Recoverability of Equipment and Other Long-Lived Assets We evaluate the remaining useful life and recoverability of equipment and other assets, including identifiable intangible assets, whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If there is an indicator of impairment, we prepare an estimate of future, undiscounted cash flows expected to result from the use of each asset and its eventual disposition. If these cash flows are less than the carrying value of the asset, we adjust the carrying amount of the asset to its estimated fair value. We have concluded that the carrying value of our long-lived assets is recoverable as of December 31, 2020. 59 Goodwill Goodwill is not amortized, rather it is tested, at least annually, for impairment at a reporting unit level. Impairment of goodwill is the condition that exists when the carrying amount of a reporting unit that includes goodwill exceeds its fair value. A goodwill impairment loss is recognized for the amount that the carrying amount of the reporting unit, including goodwill, exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit. If the fair value of a reporting unit exceeds the carrying amount, goodwill of the reporting unit is not considered impaired. We evaluate impairment using the guidance set forth in FASB Accounting Standards Update No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-04") which states that an entity may first assess qualitative factors to determine whether it is necessary to perform the quantitative goodwill impairment test. If determined to be necessary, the quantitative impairment test shall be used to identify goodwill impairment and measure the amount of goodwill impairment loss to be recognized. An entity has an unconditional option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to the quantitative goodwill impairment test. Accordingly, we have elected to bypass the qualitative assessment and proceed directly to the quantitative goodwill impairment test. We tested goodwill for impairment under the quantitative goodwill impairment test during the fourth quarter of 2020 and concluded that goodwill was not impaired. Warranty Program We warrant that our products will be free from defects in material and workmanship for a period of twelve months from delivery. Warranty repairs are guaranteed for the remainder of the original warranty period. Our warranty is limited to repairing or replacing products, or refunding the purchase price. At the end of each reporting period, we estimate a reserve for warranty returns based on historical experience and knowledge of any applicable events or transactions. The reserve for warranty returns is included in accrued liabilities in our consolidated balance sheets. Stock-Based Compensation We currently sponsor a stock incentive plan that allows for issuance of employee stock options and restricted stock awards, including restricted stock units. We also have an employee stock purchase plan for all eligible employees. The fair value of share-based payment awards is expensed straight-line over the requisite service period, which is generally the vesting period, for the entire award. Additionally, any modification of an award that increases its fair value will require us to recognize additional expense. The fair value of our stock option grants and purchase rights under our employee stock purchase plan are estimated as of the grant date using the Black-Scholes option pricing model which is affected by our estimates of the risk free interest rate, our expected dividend yield, expected term and the expected share price volatility of our common shares over the expected term. The fair value of our restricted stock awards are based on the market value of our stock on the date of grant. Research and Development Costs associated with research and development activities are expensed as incurred, except for items with alternate future uses which are capitalized and depreciated over their estimated useful lives. On occasion, we enter into co-development arrangements with current or prospective customers to defray a portion of the research and development expenses we expect to incur in connection with our development of an IC product. As amounts become due and payable, they are offset against research and development expense on a pro-rata basis. Income Taxes We account for income taxes under the asset and liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between financial statement carrying amounts and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We establish a valuation allowance to reduce deferred tax assets if it is "more likely than not" that a portion or all of the asset will not be realized in future tax returns. An uncertain tax position represents treatment of a tax position taken in a filed tax return, or planned to be taken in a future tax return, that has not been reflected in measuring income tax expense for financial reporting purposes. Until these positions are sustained by the taxing authorities, we do not recognize the tax benefits resulting from such positions and report the tax effects for uncertain tax positions in our consolidated balance sheets. 60 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. Recent Accounting Pronouncements In December 2019, the Financial Accounting Standards Board ("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, but don't estimate the impact to be significant. 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. 61 NOTE 3. BALANCE SHEET COMPONENTS Accounts Receivable, Net Accounts receivable consists of the following: December 31, 2020 2019 Accounts receivable, gross $ 4,713 $ 10,938 Allowance for doubtful accounts ( 41 ) ( 23 ) Accounts receivable, net $ 4,672 $ 10,915 The following is a summary of the change in our allowance for doubtful accounts: Year Ended December 31, 2020 2019 Balance at beginning of year $ 23 $ 21 Additions charged 18 2 Balance at end of year $ 41 $ 23 Inventories Inventories consist of the following: December 31, 2020 2019 Finished goods $ 1,775 $ 1,630 Work-in-process 670 3,771 Inventories $ 2,445 $ 5,401 We recorded inventory write-downs of $ 95 and $ 137 for the years ended December 31, 2020 and 2019, respectively. The inventory write-downs were for lower of cost or market and excess and obsolescence exposure. The inventory write-downs were offset by sales of previously written-down inventory of $ 29 and $ 35 for the years ended December 31, 2020 and 2019, respectively. Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets consist of current prepaid expenses, deposits, income taxes receivable and other receivables. 62 Property and Equipment, Net Property and equipment consists of the following: December 31, 2020 2019 Equipment, furniture and fixtures $ 8,889 $ 8,494 Tooling 6,298 6,552 Software 5,711 6,428 Leasehold improvements 1,393 1,392 22,291 22,866 Accumulated depreciation and amortization ( 17,188 ) ( 18,258 ) Property and equipment, net $ 5,103 $ 4,608 Software amortization was $ 1,174 and $ 1,320 for the years ended December 31, 2020 and 2019, respectively. Depreciation and amortization expense for equipment, furniture, fixtures, tooling and leasehold improvements was $ 2,227 and $ 2,300 for the years ended December 31, 2020 and 2019, respectively. Other Assets, Net Other assets consist primarily of deposits, deferred tax assets and licensed technology. Amortization of licensed technology was $ 336 and $ 217 for the years ended December 31, 2020 and 2019, respectively. Acquired Intangible Assets, Net In connection with the Acquisition, we recorded certain identifiable intangible assets. Acquired intangible assets resulting from this transaction consist of the following: December 31, 2020 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 ( 5,523 ) ( 4,026 ) Acquired intangible assets, net $ 1,207 $ 2,704 Intangible assets are amortized over the following estimated useful lives: developed technology and customer relationships, 3 to 5 years; tradename and backlog, 6 to 18 months. Backlog was fully amortized as of December 31, 2018 and tradename was fully amortized as of December 31, 2019. Amortization expense for intangible assets was $ 1,496 for the year ended December 31, 2020, with $ 1,192 included in cost of revenue and $ 304 included in selling, general and administrative on the consolidated statements of operations. As of December 31, 2020, future estimated amortization expense is as follows: Years ending December 31: 2021 $ 1,117 2022 90 $ 1,207 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 as of December 31, 2020. 63 Goodwill Goodwill resulted from the Acquisition, whereby we recorded goodwill of $ 18,407 . See Note 2: "Summary of Significant Accounting Policies" for information on our assessment of goodwill impairment. Accrued Liabilities and Current Portion of Long-Term Liabilities Accrued liabilities and current portion of long-term liabilities consist of the following: December 31, 2020 2019 Accrued payroll and related liabilities $ 2,867 $ 3,440 Operating lease liability, current 2,039 1,545 Current portion of accrued liabilities for asset financings 786 483 Accrued costs related to restructuring 630 66 Accrued commissions and royalties 474 663 Accrued interest payable 429 397 Deferred revenue 179 146 Other 2,048 1,952 Accrued liabilities and current portion of long-term liabilities $ 9,452 $ 8,692 The following is a summary of the change in deferred revenue: Year Ended December 31, 2020 2019 Deferred revenue: Balance at beginning of period $ 146 $ 96 Revenue deferred 935 511 Revenue recognized ( 902 ) ( 461 ) Balance at end of period $ 179 $ 146 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, April 17, 2020 and December 14, 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. The Revolving Line has a maturity date of March 26, 2021. 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 the Company on or before the fifth business day after the applicable fiscal month or quarter end. Amounts advanced under the Revolving Line bear interest at an annual rate equal to the lender's prime rate plus 0.25 %. The Revolving Loan Agreement, as amended also provides an option for LIBOR advances that bear interest based on the LIBOR rate, subject to the availability of a LIBOR rate. Interest on the Revolving Line is due monthly, with the balance due on March 26, 2021, which is the scheduled maturity date for the Revolving Line. 64 The Revolving Loan Agreement, as amended contains customary affirmative and negative covenants, including with respect to the following: compliance with laws, provision of financial statements and periodic reports, payment of taxes, maintenance of inventory and insurance, maintenance of operating accounts at the Bank, the Bank's access to collateral, formation or acquisition of subsidiaries, incurrence of indebtedness, dispositions of assets, granting liens, changes in business, ownership or business locations, engaging in mergers and acquisitions, making investments or distributions and affiliate transactions. The covenants also require that the Company maintain a minimum ratio of qualifying financial assets to the sum of qualifying financial obligations. The Revolving Loan Agreement, as amended also contains customary events of default, including the following: defaults with respect to covenant compliance, the occurrence of a material adverse change, the occurrence of certain bankruptcy or insolvency events, cross-defaults, judgment defaults and material misrepresentations. The occurrence of an event of default could result in the acceleration of the Company's obligations under the Revolving Loan Agreement, as amended and an increase to the applicable interest rate, and would permit the Bank to exercise remedies with respect to its security interest. To secure the repayment of any amounts borrowed under the Revolving Loan Agreement, as amended, the Company granted to the Bank a security interest in substantially all of its assets, excluding its intellectual property assets. The Company has agreed not to pledge or otherwise encumber its intellectual property assets without prior written permission from the Bank. As of December 31, 2020 and December 31, 2019, we had no outstanding borrowings on 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. We used the Loan amount for Qualifying Expenses. During the fourth quarter of 2020, we applied for and received full forgiveness and have recorded a gain of $ 796 within other income in our consolidated statements of operations. 65 NOTE 4. MARKETABLE SECURITIES AND FAIR VALUE MEASUREMENTS Marketable Securities As of December 31, 2020 and December 31, 2019, all of our marketable securities are classified as available-for-sale and consist of the following: Cost Unrealized Gain (Loss) Fair Value Short-term marketable securities: As of December 31, 2020: Corporate debt securities $ 253 $ ( 3 ) $ 250 $ 253 $ ( 3 ) $ 250 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 consolidated balance sheets. 66 Fair Value Measurements Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Three levels of inputs may be used to measure fair value: Level 1: Valuations based on quoted prices in active markets for identical assets and liabilities. Level 2: Valuations based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3: Valuations based on unobservable inputs in which there is little or no market data available, which require the reporting entity to develop its own assumptions. The following table presents information about our assets and liabilities measured at fair value on a recurring basis in the consolidated balance sheets as of December 31, 2020 and 2019: Level 1 Level 2 Level 3 Total As of December 31, 2020: Assets: Cash equivalents: Money market funds $ 23,832 $ — $ — $ 23,832 Short-term marketable securities: Corporate debt securities — 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 instruments. The fair value of our current assets and liabilities, including accounts receivable and accounts payable approximates the carrying value due to the short-term nature of these balances. We have currently chosen not to elect the fair value option for any items that are not already required to be measured at fair value in accordance with U.S. GAAP. 67 NOTE 5: RESTRUCTURINGS In August 2020, we executed a restructuring plan to make the operation of the Company more efficient (the "August 2020 Plan"). The August 2020 Plan included an approximately 14 % reduction in workforce, primarily in the areas of operations, research and development, sales and marketing. In January 2020, we executed a restructuring plan to make the operation of the Company more efficient (the "January 2020 Plan"). The January 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 years ended December 31, 2020 and 2019 is comprised of the following: Year Ended December 31, 2020 2019 Cost of revenue — restructuring: Employee severance and benefits $ 173 $ — 173 — Operating expenses — restructuring: Employee severance and benefits $ 2,041 $ 398 2,041 398 Total restructuring expense $ 2,214 $ 398 The following is a rollforward of the accrued liabilities related to restructuring for the year ended December 31, 2020: Balance as of December 31, 2019 Expensed Payments Balance as of December 31, 2020 Employee severance and benefits $ 66 $ 2,214 $ ( 1,650 ) $ 630 Accrued costs related to restructuring $ 66 $ 2,214 $ ( 1,650 ) $ 630 NOTE 6: LEASES On January 1, 2019, we adopted the new requirements of ASC 842, under the modified retrospective approach, using the effective date method. Under the effective date method, financial information and disclosures prior to January 1, 2019 are not required to be restated. 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 consolidated balance sheets. 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: 68 Year Ended Year Ended December 31, 2020 December 31, 2019 Operating lease cost $ 2,721 $ 2,496 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases 2,816 2,697 Leased assets obtained in exchange for new operating lease liabilities 3,535 1,440 Weighted average remaining lease term (in years) 3.76 4.97 Weighted average discount rate 4.99 % 5.49 % Future minimum lease payments under non-cancellable leases as of December 31, 2020 were as follows: Operating Lease Payments Years ending December 31: 2021 $ 2,353 2022 2,475 2023 1,342 2024 877 2025 364 2026 364 Thereafter 91 Total operating lease payments 7,866 Less imputed interest ( 739 ) Total operating lease liabilities $ 7,127 As of December 31, 2020, the Company had no operating lease liabilities that had not commenced. 69 NOTE 7: 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 years ended December 31, 2020 and 2019: Year ended December 31, 2020 2019 IC sales $ 39,205 $ 66,250 Engineering services, license and other 1,650 2,505 Total revenues $ 40,855 $ 68,755 For segment information, including revenue by geographic region, see "Note 13: Segment Information". Our contract balances include accounts receivable, deferred revenue and our liability for warranty returns. For information concerning these contract balances, see "Note 3: 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. 70 The aggregate amount of the transaction price allocated to unsatisfied performance obligations with an original expected duration of greater than one year is $ 150 , which we expect to recognize ratably over the next 15 months. NOTE 8: INTEREST INCOME AND OTHER, NET Interest income and other, consists of the following: Year Ended December 31, 2020 2019 Other income $ 161 $ 425 Interest income 87 327 Interest expense ( 239 ) ( 158 ) Total interest income and other, net $ 9 $ 594 NOTE 9. INCOME TAXES Current and Deferred Income Tax Expense Domestic and foreign pre-tax income (loss) is as follows: Year Ended December 31, 2020 2019 Domestic $ ( 25,590 ) $ ( 16,072 ) Foreign ( 341 ) 7,448 Domestic and foreign pre-tax loss $ ( 25,931 ) $ ( 8,624 ) Income tax expense attributable to operations is comprised of the following: Year Ended December 31, 2020 2019 Current: Federal $ ( 74 ) $ ( 103 ) State 3 2 Foreign 643 509 Total current 572 408 Deferred: Foreign 26 45 Total deferred 26 45 Income tax expense $ 598 $ 453 71 The reconciliation of the U.S. federal statutory income tax rate to our effective income tax rate is as follows: Year Ended December 31, 2020 2019 Federal statutory rate 21 % 21 % Expiration of tax attributes ( 14 ) ( 38 ) Impact of foreign earnings ( 7 ) ( 25 ) Permanent items ( 1 ) 3 Research and development credits 1 7 Stock-based compensation ( 2 ) ( 5 ) Change in valuation allowance — 31 Tax contingencies, net of reversals — 1 Effective income tax rate ( 2 ) % ( 5 ) % Deferred Tax Assets, Liabilities and Valuation Allowance Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts for income tax purposes. Significant components of our deferred tax assets and liabilities are as follows: December 31, 2020 2019 Deferred tax assets: Research and experimentation credit and deduction carryforwards $ 65,772 $ 67,648 Net operating loss carryforwards 50,917 47,779 Depreciation and amortization 2,282 1,956 Deferred stock-based compensation 1,158 1,134 Foreign tax credit carryforwards 275 719 Reserves and accrued expenses 145 1,785 Other 2,074 1,434 Total gross deferred tax assets 122,623 122,455 Deferred tax liabilities: Other ( 1,526 ) ( 1,300 ) Total gross deferred tax liabilities ( 1,526 ) ( 1,300 ) Less valuation allowance ( 120,981 ) ( 121,005 ) Net deferred tax assets $ 116 $ 150 We continue to record a full valuation allowance against our U.S. and Canadian net deferred tax assets as of December 31, 2020 and 2019, as it is not more likely than not that we will realize a benefit from these assets in a future period. We have not provided a valuation allowance against any of our foreign net deferred tax assets as we have concluded it is more likely than not that we will realize a benefit from these assets in a future period because our subsidiaries in these jurisdictions are cost-plus taxpayers. The net valuation allowance decreased $ 24 for the year ended December 31, 2020 and decreased $ 2,667 for the year ended December 31, 2019. As of December 31, 2020, we had federal, state and foreign net operating loss carryforwards of $ 195,856 , $ 8,610 and $ 34,309 respectively, which will begin to expire in 2021 with $ 32,258 of our federal net operating loss carryforward lasting indefinitely. As of December 31, 2020, we had available federal, state and foreign research and experimentation tax credit carryforwards of $ 8,631 , $ 4,761 , and $ 26,869 respectively. The federal and state tax credits will begin expiring in 2021 while the foreign credits have an indefinite life. In addition, our Canadian subsidiary has unclaimed scientific and experimental expenditures to be carried forward and applied against future income in Canada of approximately $ 121,076 . We have a general foreign tax credit of $ 163 which will begin to expire in 2021. 72 Our ability to utilize our federal net operating losses may be limited by Section 382 of the Internal Revenue Code of 1986, as amended, which imposes an annual limit on the ability of a corporation that undergoes an "ownership change" to use its net operating loss carryforwards to reduce its tax liability. An ownership change is generally defined as a greater than 50% increase in equity ownership by 5% shareholders in any three-year period. We are not indefinitely reinvested in the earnings of our subsidiaries and have accrued tax on the future repatriation of cash for jurisdictions where withholding taxes would apply . Our Chinese subsidiary is designated as an Advanced Technology Service Enterprise, allowing it to benefit from a Chinese tax holiday resulting in a reduction of its tax rate to 15% through 2021. The tax rate will return to 25% in 2022 upon expiration of the tax holiday. Uncertain Tax Positions We have recorded tax liabilities to address potential exposures involving positions that could be challenged by taxing authorities. As of December 31, 2020, the amount of our uncertain tax positions was a liability of $ 1,610 and a reduction to deferred tax assets of $ 1,189 . As of December 31, 2019, the amount of our uncertain tax positions was a liability of $ 1,554 and a reduction to deferred tax assets of $ 1,100 . The following is a summary of the change in our liability for uncertain tax positions and interest and penalties: 2020 2019 Uncertain tax positions: Balance at beginning of year $ 2,569 $ 2,504 Accrual for positions taken in a prior year 24 ( 14 ) Accrual for positions taken in current year 192 188 Reversals due to lapse of statute of limitations ( 74 ) ( 109 ) Balance at end of year $ 2,711 $ 2,569 Interest and penalties: Balance at beginning of year $ 85 $ 82 Accrual for positions taken in prior year 18 28 Accrual for positions taken in current year — 2 Reversals due to lapse of statute of limitations ( 15 ) ( 27 ) Balance at end of year $ 88 $ 85 During the years ended December 31, 2020 and 2019 we recognized $ 18 and $ 30 , respectively, of interest and penalties in income tax expense in our consolidated statements of operations. We file income tax returns in the U.S. and various foreign jurisdictions. A number of years may elapse before an uncertain tax position is resolved by settlement or statute of limitations. Settlement of any particular position could require the use of cash. If the uncertain tax positions we have accrued for are sustained by the taxing authorities in our favor, the reduction of the liability will reduce our effective tax rate. We reasonably expect reductions in the liability for unrecognized tax benefits and interest and penalties of approximately $ 13 within the next twelve months due to the expiration of statutes of limitation in federal, state and foreign jurisdictions. We are no longer subject to U.S. federal, state, and foreign examinations for years before 2017, 2016 and 2013, respectively. Our net operating loss and tax credit carryforwards from all years may be subject to adjustment for three years following the year in which utilized. We do not anticipate that any potential tax adjustments will have a significant impact on our financial position or results of operations. We were not subject to, nor have we received any notice of, income tax examinations in any jurisdiction as of December 31, 2020. 73 NOTE 10. COMMITMENTS AND CONTINGENCIES Royalties We license technology from third parties and have agreed to pay certain suppliers a royalty based on the number of chips sold or manufactured, the net sales price of the chips containing the licensed technology or a fixed non-cancelable fee. Royalty expense is recognized based on our estimated average unit cost for royalty contracts with non-cancelable prepayments and the stated contractual per unit rate for all other agreements. Royalty expense was $ 242 and $ 521 for the years ended December 31, 2020 and 2019, respectively, which is included in cost of revenue in our consolidated statements of operations. 401(k) Plan We sponsor a 401(k) plan for eligible employees. Participants may defer a percentage of their annual compensation on a pre-tax basis, not to exceed the dollar limit that is set by law. A discretionary matching contribution by the Company is allowed and is equal to a uniform percentage of the amount of salary reduction elected to be deferred, which percentage will be determined each year by the Company. We made contributions of $ 48 and $ 62 to the 401(k) plan during the years ended December 31, 2020 and 2019, respectively. Software licenses We acquire rights to use certain software engineer design tools under software licenses. As of December 31, 2020, future minimum payments under non-cancelable software licenses are as follows: Year Ending December 31, Software licenses 2021 $ 829 2022 679 2023 99 1,607 Less: Interest component ( 107 ) Present value of minimum software license payments 1,500 Less: Current portion ( 786 ) Long-term portion of obligations $ 714 74 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. $ 499 and $ 482 are included in accrued liabilities and current portion of long-term liabilities in our consolidated balance sheet as of December 31, 2020 and 2019, respectively. $ 268 and $ 441 are included in long-term liabilities, net of current portion in our consolidated balance sheets as of December 31, 2020 and 2019, respectively. Contract Manufacturers In the normal course of business, we commit to purchase products from our contract manufacturers to be delivered within the next 90 days. In certain situations, should we cancel an order, we could be required to pay cancellation fees. Such obligations could impact our immediate results of operations but would not materially affect our business. Indemnifications Certain of our agreements include limited 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 December 31, 2020, we have not incurred any material liabilities arising from these indemnification obligations. In the future, however, such obligations could immediately impact our results of operations but are not expected to materially affect our business. Legal Proceedings We are subject to legal matters that arise from time to time in the ordinary course of our business. Although we currently believe that resolving such matters, individually or in the aggregate, will not have a material adverse effect on our financial position, our results of operations, or our cash flows, these matters are subject to inherent uncertainties and our view of these matters may change in the future. NOTE 11. EARNINGS PER SHARE Basic earnings per share amounts are computed based on the weighted average number of common shares outstanding. Diluted weighted average shares outstanding include the weighted average number of common shares outstanding plus potentially dilutive common shares outstanding during the period. The following schedule reconciles the computation of basic and diluted net loss per share (in thousands, except per share data): Year Ended December 31, 2020 2019 Net loss $ ( 26,529 ) $ ( 9,077 ) Weighted average shares outstanding - basic and diluted 40,712 37,851 Net loss per share - basic and diluted $ ( 0.65 ) $ ( 0.24 ) The following shares were excluded from the calculation of diluted net loss per share as their effect would have been anti-dilutive (in thousands): Year Ended December 31, 2020 2019 Employee equity incentive plans 4,148 3,419 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. 75 NOTE 12. SHAREHOLDERS’ EQUITY Preferred Stock The Company is authorized to issue 50,000,000 shares of preferred stock with a par value of $ 0.001 per share. The Board of Directors is authorized to fix or alter the rights, preferences, privileges and restrictions granted to, or imposed on, each series of preferred stock. There were no shares of preferred stock issued as of December 31, 2020 and 2019. Common Stock The Company is authorized to issue 250,000,000 shares of common stock with a par value of $ 0.001 per share. Shareholders of common stock have unlimited voting rights and are entitled to receive the net assets of the Company upon dissolution, subject to the rights of the preferred shareholders, if any. Equity Offering On December 14, 2020, we completed the sale of 4,900,000 shares of common stock in an underwritten registered offering. On December 16, 2020, an additional 735,000 shares were issued pursuant to the 30 -day over-allotment option exercised by the underwriter. With the over-allotment shares, a total of 5,635,000 shares of common stock were sold in the offering at a price to the public of $ 2.45 per share. Net proceeds to the Company, after deducting underwriting discounts, commissions, and other expenses, were approximately $ 12,743 . Private Placement Investment On December 7, 2020, we completed a private placement of 724,288 shares of common stock to a certain accredited investor at a purchase price of $ 2.071 per share. On December 15, 2020, we completed a private placement of 2,475,712 shares of common stock to a certain accredited investor at a purchase price of $ 2.071 . Net proceeds to the Company, after deducting commissions and other expenses, were approximately $ 6,210 . 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. During the year ended December 31, 2020, we sold an aggregate of 1,747,466 shares of our common stock under this at the market offering, resulting in aggregate net proceeds to us of approximately $ 4,429 . Employee Equity Incentive Plans On May 23, 2006, our shareholders approved the adoption of the Pixelworks, Inc. 2006 Stock Incentive Plan (the "2006 Plan"). The 2006 Plan has since been amended on certain occasions, most recently on May 15, 2020 when our shareholders approved an increase to the total number of authorized shares to 19,683,333 shares. As of December 31, 2020, 1,566,811 shares were available for grant under the 2006 Plan. Stock Options The contractual life of newly issued stock option awards is six years . Our new hire vesting schedule provides that each option becomes exercisable at a rate of 25 % on the first anniversary date of the grant and 2.083 % on the last day of every month thereafter for a total of 36 additional increments. Our merit vesting schedule provides that merit-type awards become exercisable monthly over a period of three years . 76 The following is a summary of stock option activity: Number of shares Weighted average exercise price Options outstanding as of December 31, 2019: 533,484 $ 2.87 Granted 234,000 2.00 Exercised ( 25,563 ) 2.74 Canceled and forfeited ( 4,896 ) 3.98 Expired ( 17,958 ) 5.16 Options outstanding as of December 31, 2020: 719,067 $ 2.53 The following table summarizes information about options outstanding as of December 31, 2020: Options Outstanding Options Exercisable Range of exercise prices Number outstanding as of December 31, 2020 Weighted average remaining contractual life Weighted average exercise price Number exercisable as of December 31, 2020 Weighted average exercise price $ 2.00 - $ 2.00 237,500 5.79 $ 2.00 3,500 $ 2.00 2.46 - 2.46 350,000 1.01 2.46 350,000 2.46 2.79 - 6.05 131,567 2.59 3.67 105,150 3.54 $ 2.00 - $ 6.05 719,067 2.88 $ 2.53 458,650 $ 2.70 During the years ended December 31, 2020 and 2019 the total intrinsic value of options exercised was $ 28 and $ 256 , respectively, for which no income tax benefit has been recorded because a full valuation allowance has been provided for our U.S. deferred tax assets. As of December 31, 2020, options outstanding had a total intrinsic value of $ 323 . Options outstanding that have vested and are expected to vest as of December 31, 2020 are as follows: Number of shares Weighted average exercise price Weighted average remaining contractual term Aggregate intrinsic value Vested 458,650 $ 2.70 1.30 $ 131 Expected to vest 244,024 2.22 5.64 180 Total 702,674 $ 2.54 2.81 $ 311 Restricted Stock The 2006 Plan provides for the issuance of restricted stock, including restricted stock units. During the years ended December 31, 2020 and 2019 we granted 2,137,317 and 1,917,514 shares, respectively, of restricted stock with a weighted average grant date fair value of $ 3.42 and $ 3.81 per share, respectively. The following is a summary of restricted stock activity: Number of shares Weighted average grant date fair value Unvested at December 31, 2019: 3,112,426 $ 4.06 Granted 2,137,817 3.42 Vested ( 1,834,406 ) 3.93 Canceled ( 239,232 ) 4.28 Unvested at December 31, 2020: 3,176,605 $ 3.68 Expected to vest after December 31, 2020 2,947,031 $ 3.68 77 Employee Stock Purchase Plans On May 18, 2010, our shareholders approved the adoption of the 2010 Pixelworks, Inc. Employee Stock Purchase Plan (the "ESPP") for U.S. employees and for certain foreign subsidiary employees. The ESPP provides for separate offering periods commencing on February 1 and August 1, with the first offering period beginning August 1, 2010. Each offering period continues for a period of 18 months with purchases every six months . Each eligible employee may purchase up to 3,000 shares of stock on each purchase date, with a maximum annual purchase amount of $ 25 . The purchase price is equal to 85 % of the lesser of the fair market value of the shares on the offering date or on the purchase date. On May 15, 2020 the ESPP was amended when our shareholders approved an increase to the total number of shares of common stock reserved for issuance to 3,300,000 . During the years ended December 31, 2020 and 2019, we issued 202,019 and 194,361 shares, respectively for proceeds of $ 529 and $ 519 , respectively, under the ESPP. Stock-Based Compensation Expense The fair value of stock-based compensation was determined using the Black-Scholes option pricing model and the following weighted average assumptions: Year Ended December 31, 2020 2019 Stock Option Plans: Risk free interest rate 2.00 % 2.47 % Expected dividend yield 0 % 0 % Expected term (in years) 3.75 5.00 Volatility 64 % 66 % Employee Stock Purchase Plan: Risk free interest rate 0.79 % 2.05 % Expected dividend yield 0 % 0 % Expected term (in years) 1.05 1.05 Volatility 65 % 65 % The weighted average fair value of options granted during the years ended December 31, 2020 and 2019 was $ 0.93 and $ 2.23 , respectively. The risk free interest rate is estimated using an average of treasury bill interest rates. The expected dividend yield is zero as we have not paid any dividends to date and do not expect to pay dividends in the future. Expected volatility is estimated based on the historical volatility of our common stock over the expected term as this represents our best estimate of future volatility. The contractual life of newly issued stock options is six years , and we have elected to use the "simplified method" to estimate expected term. Under the simplified method, an option's expected term is calculated as the average of its vesting period and original contractual life. The expected term of ESPP purchase rights is based on the estimated weighted average time to purchase. As of December 31, 2020, unrecognized stock-based compensation expense is $ 5,391 , which is expected to be recognized as stock-based compensation expense over a weighted average period of 1.09 years. 78 NOTE 13. SEGMENT INFORMATION We have identified a single operating segment: the design and development of ICs for use in electronic display devices. Substantially all of our assets are located in the U.S. Geographic Information Revenue by geographic region, was as follows: Year Ended December 31, 2020 2019 Japan $ 26,554 $ 53,628 China 8,935 10,213 U.S. 3,057 3,105 Taiwan 1,668 1,597 Europe 333 104 Korea 308 108 $ 40,855 $ 68,755 Significant Customers The percentage of revenue attributable to our distributors, top five end customers, and individual distributors or end customers that represented more than 10% of revenue in at least one of the periods presented, is as follows: Year Ended December 31, 2020 2019 Distributors: All distributors 49 % 44 % Distributor A 23 % 28 % End Customers: 1 Top five end customers 58 % 77 % End customer A 40 % 49 % End customer B 5 % 12 % 1 End customers include customers who purchase directly from us, as well as customers who purchase our products indirectly through distributors. Each of the following accounts represented 10% or more of total accounts receivable in at least one of the periods presented: December 31, 2020 2019 Account X 39 % 42 % Account Y 20 % 26 % Account Z 7 % 24 % 79 NOTE 14. QUARTERLY FINANCIAL DATA (UNAUDITED) Quarterly Period Ended March 31 June 30 September 30 December 31 2020 Revenue, net $ 13,774 $ 9,253 $ 8,190 $ 9,638 Gross profit 6,775 5,049 3,976 4,385 Loss from operations ( 5,277 ) ( 6,421 ) ( 8,137 ) ( 6,901 ) Loss before income taxes ( 5,223 ) ( 6,445 ) ( 8,165 ) ( 6,098 ) Net loss ( 5,399 ) ( 6,552 ) ( 8,139 ) ( 6,439 ) Net loss per share - basic and diluted ( 0.14 ) ( 0.17 ) ( 0.20 ) ( 0.15 ) 2019 Revenue, net $ 16,648 $ 18,027 $ 18,057 $ 16,023 Gross profit 8,472 9,376 9,347 7,300 Loss from operations ( 3,460 ) ( 2,321 ) ( 2,444 ) ( 4,898 ) Income (loss) before income taxes 541 ( 2,217 ) ( 2,374 ) ( 4,574 ) Net income (loss) 133 ( 2,448 ) ( 2,306 ) ( 4,456 ) Net income (loss) per share: Basic 0.00 ( 0.06 ) ( 0.06 ) ( 0.12 ) Diluted 0.00 ( 0.06 ) ( 0.06 ) ( 0.12 ) Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. None.