What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2021-11-09 compared with 2021-08-11 · 170 added, 97 removed, 432 unchanged (38% of the section changed)

3 unchanged sentences

(In thousands)

September 30,

2021 December 31,

19 unchanged sentences

Long-term liabilities, net of current portion 649 1,007

Deposit liability 9,741 —

Operating lease liabilities, net of current portion 3,468 5,088

2 unchanged sentences

Commitments and contingencies (Note 13)

Redeemable non-controlling interest 30,288 —

Shareholders’ equity:

1 unchanged sentence

Common stock 474,067 467,957

Accumulated other comprehensive income 47 47

Accumulated other comprehensive income (loss) ( 33 ) 47

Accumulated deficit ( 431,664 ) ( 415,134 )

Total shareholders’ equity 42,370 52,870

Total liabilities and shareholders’ equity $ 63,383 $ 72,038

Total liabilities, redeemable non-controlling interest and shareholders’ equity $ 106,903 $ 72,038

See accompanying notes to condensed consolidated financial statements.

2 unchanged sentences

(In thousands, except per share data)

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

11 unchanged sentences

Loss before income taxes ( 3,850 ) ( 8,165 ) ( 15,983 ) ( 19,833 )

Provision for income taxes 107 107 324 283

Provision (benefit) for income taxes ( 9 ) ( 26 ) 315 257

Net loss ( 3,841 ) ( 8,139 ) ( 16,298 ) ( 20,090 )

Net loss per share - basic and diluted $ ( 0.08 ) $ ( 0.17 ) $ ( 0.24 ) $ ( 0.31 )

Net income attributable to redeemable non-controlling interest ( 232 ) — ( 232 ) —

Net loss attributable to Pixelworks Inc.

$ ( 4,073 ) $ ( 8,139 ) $ ( 16,530 ) $ ( 20,090 )

Net loss attributable to Pixelworks Inc.

per share - basic and diluted $ ( 0.08 ) $ ( 0.20 ) $ ( 0.32 ) $ ( 0.51 )

Weighted average shares outstanding - basic and diluted 52,768 40,766 52,245 39,697

2 unchanged sentences

Stock-based compensation ( 138 ) 117 17 345

Restructuring — 166 — 166

(2) Includes stock-based compensation 549 820 1,740 2,274

6 unchanged sentences

(In thousands)

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

1 unchanged sentence

Other comprehensive loss:

Foreign currency translation adjustment ( 80 ) — ( 80 ) —

Unrealized gain on available-for-sale securities — ( 2 ) — ( 1 )

Total comprehensive loss $ ( 4,382 ) $ ( 6,545 ) $ ( 12,457 ) $ ( 11,950 )

Comprehensive loss ( 3,921 ) ( 8,141 ) ( 16,378 ) ( 20,091 )

comprehensive income attributable to redeemable non-controlling interest ( 232 ) — ( 232 ) —

Total comprehensive loss attributable to Pixelworks, Inc.

$ ( 4,153 ) $ ( 8,141 ) $ ( 16,610 ) $ ( 20,091 )

See accompanying notes to condensed consolidated financial statements.

2 unchanged sentences

(In thousands)

Six Months Ended June 30,

Nine Months Ended September 30,

Cash flows from operating activities:

Net loss $ ( 16,298 ) $ ( 20,090 )

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

Adjustments to reconcile net loss to net cash used in operating activities:

Stock-based compensation 4,495 5,915

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Income taxes payable ( 77 ) ( 41 )

Net cash provided by (used in) operating activities ( 8,047 ) 166

Net cash used in operating activities ( 2,990 ) ( 3,231 )

Cash flows from investing activities:

2 unchanged sentences

Purchases of short-term marketable securities — ( 1,500 )

Purchases of licensed technology — ( 152 )

Net cash provided by (used in) investing activities ( 2,043 ) 3,720

Cash flows from financing activities:

Net proceeds from issuance of equity interest to redeemable non-controlling interest 29,976 —

Net proceeds from issuance of equity interest to certain entities owned by employees 9,670 —

Proceeds from issuance of common stock under employee equity incentive plans 1,282 600

Payments on asset financings ( 926 ) ( 675 )

Proceeds from line of credit — 4,329

Net proceeds from "at the market" equity offering 333 3,641

Proceeds from line of credit — 3,954

Proceeds from Paycheck Protection Program loan — 796

Net cash provided by financing activities 40,335 8,316

Net increase (decrease) in cash and cash equivalents ( 7,633 ) 13,160

Net increase in cash and cash equivalents 35,302 8,805

Cash and cash equivalents, beginning of period 31,257 7,257

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Comprehensive

Income Accumulated

Income (loss) Accumulated

Deficit Total

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Balance as of June 30, 2021 52,352,564 $ 471,958 $ 47 $ ( 427,591 ) $ 44,414

Stock issued under employee equity incentive plans 813,914 219 — — 219

"At the market" equity offering 61,018 333 333

Stock-based compensation expense — 1,557 — — 1,557

Foreign currency translation adjustment — — ( 80 ) ( 80 )

Net loss attributable to Pixelworks, Inc.

— — — ( 4,073 ) ( 4,073 )

Balance as of September 30, 2021 53,227,496 $ 474,067 $ ( 33 ) $ ( 431,664 ) $ 42,370

Balance as of December 31, 2019 38,434,488 $ 436,122 $ 12 $ ( 388,605 ) $ 47,529

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Balance as of June 30, 2020 40,220,491 $ 442,998 $ 13 $ ( 400,556 ) $ 42,455

"At the market" equity offering 570,989 1,167 1,167

Stock issued under employee equity incentive plans 745,878 263 — — 263

Stock-based compensation expense — 1,850 — — 1,850

Unrealized loss on available for sale securities — — ( 2 ) — ( 2 )

Net loss — — — ( 8,139 ) ( 8,139 )

Balance as of September 30, 2020 41,537,358 $ 446,278 $ 11 $ ( 408,695 ) $ 37,594

See accompanying notes to condensed consolidated financial statements.

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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.

Pixelworks, Inc.

(together with our subsidiaries, the “Company”, “we”, “our” or “us”) 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, 2021, we had an intellectual property portfolio of 335 patents related to the visual display of digital image data.

As of September 30, 2021, we had an intellectual property portfolio of 334 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.

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On August 2, 2017, we acquired ViXS Systems, Inc., a corporation organized in Canada ("ViXS").

The Company has engaged in a strategic plan to re-align its mobile, projector, and video delivery businesses to improve their focus on the Asia-centered customers and employee stakeholders of those businesses.

The global center of the mobile, projector, and video delivery businesses continues to be in Asia, and the steps taken by the Company to date and going forward are intended to improve its ability to access capital, customers, and talent.

The Company has operated its primary R&D center in Asia for over 15 years and feels that the time is right to take advantage of that existing footprint and develop its subsidiary, Pixelworks Semiconductor Technology (Shanghai) Co., Ltd.

(or "PWSH") as a full profit-and-loss center underneath the Company for the mobile, projector, and video delivery businesses.

During the third quarter of 2021, we engaged in a strategic plan to re-align our mobile, projector, and video delivery businesses to improve their focus on the Asia-centered customers and employee stakeholders of those businesses.

The global center of the mobile, projector, and video delivery businesses continues to be in Asia, and the steps we have taken to date and going forward are intended to improve our ability to access capital, customers, and talent.

We have operated our primary R&D center in Asia for over 15 years and feel that the time is right to take advantage of that existing footprint and develop our subsidiary, Pixelworks Semiconductor Technology (Shanghai) Co., Ltd.

(or "PWSH") as a full profit-and-loss center underneath Pixelworks, Inc.

for the mobile, projector, and video delivery businesses.

Most of these steps have been completed or will be completed before the end of 2021.

This plan will further enable PWSH to seek qualification to file an application for an initial public offering on the Shanghai Stock Exchange’s Sci-Tech innovAtion boaRd, known as the STAR Market (the “Listing”).

The Company believes that the Listing will have many benefits, including improved access to new capital markets and the funding of its growth worldwide.

The Company presently intends to qualify PWSH to apply for the Listing so that the Listing is consummated in the first half of 2023.

We believe that the Listing will have many benefits, including improved access to new capital markets and the funding of its growth worldwide.

We presently intend to qualify PWSH to apply for the Listing so that the Listing is consummated in 2023.

The process of going public on the STAR Market includes several periods of review and, therefore, is a lengthy process.

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Condensed Consolidated Financial Statements

The financial information included herein for the three and six month periods ended June 30, 2021 and 2020 is prepared in accordance with U.S.

The financial information included herein for the three and nine month periods ended September 30, 2021 and 2020 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, that are, in the opinion of management, necessary for a fair presentation of the Company's condensed consolidated financial statements for these interim periods.

Such information reflects all adjustments, consisting of only normal recurring adjustments, that are, in the opinion of management, necessary for a fair presentation of our condensed consolidated financial statements for these interim periods.

The financial information as of December 31, 2020 is derived from our audited consolidated financial statements and notes thereto for the fiscal year ended December 31, 2020, included in Item 8 of our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 10, 2021, and should be read in conjunction with such consolidated financial statements.

The results of operations for the three and six month periods ended June 30, 2021 and 2020 are not necessarily indicative of the results expected for future periods or for the entire fiscal year ending December 31, 2021.

The results of operations for the three and nine month periods ended September 30, 2021 and 2020 are not necessarily indicative of the results expected for future periods or for the entire fiscal year ending December 31, 2021.

Recent Accounting Pronouncements

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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:

Accounts receivable consist of the following:

September 30,

2021 December 31,

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The following is the change in our allowance for doubtful accounts:

Six Months Ended

Nine Months Ended

September 30,

Balance at beginning of period $ 41 $ 23

3 unchanged sentences

Inventories consist of the following:

September 30,

2021 December 31,

4 unchanged sentences

Property and equipment, net consists of the following:

September 30,

2021 December 31,

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Acquired intangible assets resulting from this transaction were assigned to Pixelworks, Inc., and consist of the following:

September 30,

2021 December 31,

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Acquired intangible assets, net $ 361 $ 1,207

Developed technology and customer relationships are amortized over a useful life of 3 to 5 years.

Developed technology and customer relationships are amortized over a useful life of three to five 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 $ 271 and $576 for the three and six months ended June 30, 2021, respectively, $ 218 and $463 were included in cost of revenue for the three and six months ended June 30, 2021, respectively, and $ 53 and $113 were included in selling, general and administrative for the three and six months ended June 30, 2021, respectively, in the condensed consolidated statements of operations.

As of June 30, 2021, future estimated amortization expense is as follows:

Six months ending December 31, 2021 $ 541

Amortization expense for intangible assets was $ 271 and $ 847 for the three and nine months ended September 30, 2021, respectively, $ 218 and $ 681 were included in cost of revenue for the three and nine months ended September 30, 2021, respectively, and $ 53 and $ 166 were included in selling, general and administrative for the three and nine months ended September 30, 2021, respectively, in the condensed consolidated statements of operations.

As of September 30, 2021, future estimated amortization expense is as follows:

Three months ending December 31, 2021 $ 271

Year ending December 31, 2022 90

1 unchanged sentence

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, 2021.

There were no such triggering events requiring an impairment assessment of other intangible assets during the nine months ended September 30, 2021.

Goodwill resulted from the Acquisition, whereby we recorded goodwill of $ 18,407 .

2 unchanged sentences

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, 2021.

There were no such triggering events requiring a goodwill impairment assessment during the nine months ended September 30, 2021.

We perform our annual impairment assessment for goodwill on November 30 of each year.

1 unchanged sentence

Accrued liabilities and current portion of long-term liabilities consist of the following:

September 30,

2021 December 31,

Deferred research and development reimbursement $ 4,542 $ —

Accrued payroll and related liabilities 3,895 2,867

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Accrued liabilities and current portion of long-term liabilities $ 15,075 $ 9,452

Deferred research and development reimbursement is related to the Co-Development Agreement discussed in "Note 8:

Research and Development".

Deferred revenues are contract liabilities that arise when cash payments are received or due in advance of the satisfaction of our performance obligations.

2 unchanged sentences

The change in deferred revenue is as follows:

Six Months Ended

Nine Months Ended

September 30,

Deferred revenue:

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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").

On December 21, 2010, we entered into a Loan and Security Agreement with Silicon Valley Bank (the "Bank"), which has been amended over time, including as recently as December 14, 2020 (as amended, the "Revolving Loan Agreement").

The Revolving Loan Agreement provided 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.

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Marketable Securities

We had no marketable securities a s of June 30, 2021.

We had no marketable securities a s of September 30, 2021.

As of December 31, 2020, all of our marketable securities were classified as available-for-sale, had contractual maturities of one year or less and consisted of the following:

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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, 2021 and December 31, 2020:

The following table presents information about our assets measured at fair value on a recurring basis in the condensed consolidated balance sheets as of September 30, 2021 and December 31, 2020:

Level 1 Level 2 Level 3 Total

As of June 30, 2021:

As of September 30, 2021:

Cash equivalents:

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The January 2020 Plan included an approximately 4 % reduction in workforce, primarily in the areas of research and development and sales.

Total restructuring expense included in our condensed consolidated statements of operations for the three and six month periods ended June 30, 2021 and 2020 is comprised of the following:

Three Months Ended Six Months Ended

June 30, June 30,

Total restructuring expense included in our condensed consolidated statements of operations for the three and nine month periods ended September 30, 2021 and 2020 is comprised of the following:

Three Months Ended Nine Months Ended

September 30, September 30,

2021 2020 2021 2020

Cost of revenue — restructuring:

Employee severance and benefits

$ — $ 166 $ — $ 166

Operating expenses — restructuring:

1 unchanged sentence

$ — $ 1,430 $ — $ 2,022

— 1,430 — 2,022

Total restructuring expense $ — $ 1,596 $ — $ 2,188

During the three and six months ended June 30, 2021, we did not record any restructuring expense.

During the three months ended June 30, 2020, we did not record any restructuring expense.

During the six months ended June 30, 2020 we recorded $ 592 in restructuring expense related to the January 2020 Plan.

The following is a rollforward of the accrued liabilities related to restructuring for the six month period ended June 30, 2021:

During the three and nine months ended September 30, 2021, we did not record any restructuring expense.

During the three months ended September 30, 2020, we recorded $ 1,596 in restructuring expense related to the August 2020 Plan.

During the nine months ended September 30, 2020 we recorded $ 1,596 in restructuring expense related to the August 2020 Plan and $ 592 in restructuring expense related to the January 2020 Plan.

The following is a rollforward of the accrued liabilities related to restructuring for the nine month period ended September 30, 2021:

Balance as of December 31, 2020 Expensed Payments

Balance as of

June 30, 2021

September 30, 2021

Employee severance and benefits

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We have operating leases for office buildings and one vehicle.

Our leases have remaining lease terms of 1 year to 6 years.

Our leases have remaining lease terms of one year to six 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,

Three Months Ended Nine Months Ended

September 30, September 30,

2021 2020 2021 2020

1 unchanged sentence

$ 657 $ 702 $ 1,943 $ 2,024

Six Months Ended

Nine Months Ended

September 30,

Cash paid for amounts included in the measurement of lease liabilities:

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Weighted average discount rate 4.93 % 5.06 %

Future minimum lease payments under non-cancellable leases as of June 30, 2021 were as follows:

Future minimum lease payments under non-cancellable leases as of September 30, 2021 were as follows:

Operating Lease Payments

Six months ending December 31, 2021 $ 1,252

Three months ending December 31, 2021 $ 548

Years ending December 31:

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Total operating lease liabilities $ 5,908

As of June 30, 2021, the Company had no operating lease liabilities that had not commenced.

As of September 30, 2021, we had no operating lease liabilities that had not commenced.

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.

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License Revenue - On occasion, we derive revenue from the license of our internally developed intellectual property ("IP").

Additionally, for certain IP license agreements, royalties are collected as customers sell their own products that incorporate the Company’s IP.

Additionally, for certain IP license agreements, royalties are collected as customers sell their own products that incorporate our 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.

1 unchanged sentence

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.

Royalties are recognized as revenue is earned, generally when the customer sells its products that incorporate the Company’s IP.

Royalties are recognized as revenue is earned, generally when the customer sells its products that incorporate our IP.

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.

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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, 2021 and 2020:

Three Months Ended Six Months Ended

June 30, June 30,

The following table provides information about disaggregated revenue based on the preceding categories for the three and nine months ended September 30, 2021 and 2020:

Three Months Ended Nine Months Ended

September 30, September 30,

2021 2020 2021 2020

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Interest income and other, consists of the following:

Three Months Ended Six Months Ended

June 30, June 30,

Three Months Ended Nine Months Ended

September 30, September 30,

2021 2020 2021 2020

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Total interest income and other, net $ 54 $ ( 28 ) $ 292 $ 2

RESEARCH AND DEVELOPMENT

During the third quarter of 2021, we entered into a best-efforts co-development agreement with a customer to defray a portion of the research and development expenses we expect to incur in connection with our development of an integrated circuit product.

We expect our development costs to exceed the amounts received from the customer, and although we expect to sell units of the product to the customer, there is no commitment or agreement from the customer for such sales at this time.

Additionally, we retain ownership of any modifications or improvements to our pre-existing intellectual property and may use such improvements in products sold to other customers.

Under the co-development agreement, $ 5,800 was payable by the customer within 60 days of the date of the agreement and three additional payments of $ 2,200 , $ 1,300 and $ 1,300 are each payable upon completion of certain development milestones.

As amounts become due and payable, they are offset against research and development expense on a pro rata basis.

During the third quarter of 2021, we recognized an offset to research and development expense of $ 1,300 .

The provision for income taxes during the 2021 and 2020 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 $ 2 and $ 10 during the first six months of 2021 and 2020, respectively.

We recorded a benefit for the reversal of previously recorded foreign tax contingencies of $ 2 and $ 10 during the first nine months of 2021 and 2020, respectively.

As we do not believe that it is more likely than not that we will realize a benefit from our U.S.

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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, 2021 and December 31, 2020, the amount of our uncertain tax positions was a liability of $ 1,650 and $ 1,610 , respectively, as well as a contra deferred tax asset of $ 1,267 and $ 1,189 , respectively.

We have not recorded a valuation allowance against our other foreign net deferred tax assets, with the exception of Canada and China, as we believe that it is more likely than not that we will realize a benefit from those assets.

As of September 30, 2021 and December 31, 2020, the amount of our uncertain tax positions was a liability of $ 1,661 and $ 1,610 , respectively, as well as a contra deferred tax asset of $ 1,258 and $ 1,189 , respectively.

A number of years may elapse before an uncertain tax position is resolved by settlement or statute of limitation.

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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,

Three Months Ended Nine Months Ended

September 30, September 30,

2021 2020 2021 2020

$ ( 3,841 ) $ ( 8,139 ) $ ( 16,298 ) $ ( 20,090 )

Net income attributable to redeemable non-controlling interest ( 232 ) — ( 232 ) —

Net income attributable to certain entities owned by employees ( 104 ) — ( 104 ) —

Net loss attributable to Pixelworks Inc.

- for purposes of earnings per share calculation $ ( 4,177 ) $ ( 8,139 ) $ ( 16,634 ) $ ( 20,090 )

Weighted average shares outstanding - basic and diluted 52,768 40,766 52,245 39,697

Net loss per share - basic and diluted $ ( 0.08 ) $ ( 0.17 ) $ ( 0.24 ) $ ( 0.31 )

Net loss attributable to Pixelworks, Inc.

per share - basic and diluted $ ( 0.08 ) $ ( 0.20 ) $ ( 0.32 ) $ ( 0.51 )

Basic and diluted earnings (loss) per share was computed by dividing the net income (loss) by the weighted-average number of common shares outstanding for the period.

The numerator adjustments include an allocation of PWSH income to the redeemable non-controlling interests and the employee owned entities.

The equity interest associated with the employee-owned entities are considered participating securities at PWSH and will be allocated income, however, they are not required to fund losses, and therefore, no allocations of losses will be made to the employee owned entities in periods of loss at PWSH.

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.

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,

Three Months Ended Nine Months Ended

September 30, September 30,

2021 2020 2021 2020

Employee equity incentive plans 3,842 3,732 3,727 3,836

SEGMENT INFORMATION

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the design and development of integrated circuits for use in electronic display devices.

The majority of our assets are located in the United States.

The majority of our assets are located in the United States and China.

Geographic Information

Revenue by geographic region, is as follows:

Three Months Ended Six Months Ended

June 30, June 30,

Three Months Ended Nine Months Ended

September 30, September 30,

2021 2020 2021 2020

1 unchanged sentence

China 6,670 2,045 16,719 5,850

United States 417 433 1,183 2,099

Taiwan 582 120 1,625 1,019

Europe 71 185 71 190

United States 176 384 1,359 2,483

Korea 50 275 66 308

Europe — 70 71 260

$ 15,196 $ 8,190 $ 38,516 $ 31,217

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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,

Three Months Ended Nine Months Ended

September 30, September 30,

2021 2020 2021 2020

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Distributor B 13 % 24 % 11 % 28 %

Distributor C 13 % 5 % 9 % 3 %

End customers:

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End customer D — % 10 % — % 6 %

End customer E 1 % 13 % 1 % 5 %

End customer F — % 10 % — % 5 %

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:

September 30,

2021 December 31,

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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 June 30, 2021, we have not incurred any material liabilities arising from these indemnification obligations.

We have not made any payments under these agreements in the past, and as of September 30, 2021, 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.

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The scheduled payments are made on a quarterly basis and end in January 2024.

As of June 30, 2021, $ 516 is included in accrued liabilities and current portion of long-term liabilities in our condensed consolidated balance sheets and $ 171 is included in long-term liabilities, net of current portion in our condensed consolidated balance sheets.

SUBSEQUENT EVENTS

On July 26, 2021, we entered into an agreement with a customer to defray a portion of the research and development expenses expected to be incurred by us in connection with our development of an integrated circuit product.

Under the agreement, we will receive $ 5,800 from the customer within 60 days of the date of the agreement, and may receive up to an additional $ 4,800 upon completion of certain development milestones.

We currently believe that such amounts will be treated as a reduction to research and development expenses related to the product for accounting purposes.

Development work on the product is currently expected to be performed through 2022.

The specific dates and final amounts of our expenses and payments by the customer cannot be determined at this time, and there is no assurance that all amounts will be received by us.

In any event, we expect our research and development expenses will exceed the amounts received from the customer.

Upon the completion of the development, we expect to sell units of the product to the customer.

However, there is no commitment or agreement from the customer for such sales at this time or assurance that the development will be successful.

On August 6, 2021, the Company and its subsidiary, PWSH, entered into a Capital Increase Agreement with certain private equity and strategic investors based in China (collectively, the “Investors”) and certain entities which collectively are owned by approximately 75 % of the employees of PWSH and its subsidiaries (collectively, the “ESOP”) (none of the employees are a named executive officer of the Company) (See Exhibit 10.1a).

An affiliate of the MTM entities, MTM-Xinhe Investment Limited, purchased shares of common stock from the Company on December 15, 2020, pursuant to an Amended and Restated Securities Purchase Agreement.

Under this Capital Increase Agreement, the purchasers have agreed to pay to PWSH, subject to certain closing conditions, certain amounts in RMB in exchange for an equity position in PWSH.

More specifically:

(a) The ESOP have agreed to pay a total of RMB 79,700 ($ 12,300 USD) in exchange for an equity interest in PWSH of 5.95 %, based on a pre-money valuation of PWSH of RMB 1,120,000 ($ 172,700 USD), a discount of 30 % from the valuation paid by the Investors.

(b) The Investors have agreed to pay a total of RMB 200,000 ($ 30,800 USD) in exchange for an equity interest in PWSH of 10.45 %, based on a pre-money value of PWSH of RMB 1,600,000 ($ 246,800 USD).

The closing conditions include receipt of all required governmental approvals and the completion of certain elements of the PWSH realignment plan described above in Note 1.

Following the closing, which is expected in August of 2021, the Company would continue to hold 83.6 % of PWSH.

The total net proceeds raised by PWSH would be RMB 279,700 ($ 43,100 USD).

As of September 30, 2021, $ 503 is included in accrued liabilities and current portion of long-term liabilities in our condensed consolidated balance sheets and $ 113 is included in long-term liabilities, net of current portion in our condensed consolidated balance sheets.

REDEEMABLE NON-CONTROLLING INTEREST AND EQUITY INTEREST OF PWSH SOLD TO EMPLOYEES

During the third quarter of 2021, Pixelworks, Inc.

and our subsidiary, PWSH, entered into a Capital Increase Agreement with certain private equity and strategic investors based in China (collectively, the “Investors”) and certain entities which collectively are owned by approximately 75 % of the employees of PWSH and its subsidiaries (collectively, the “ESOP”).

The ESOP entities do not qualify as Employee Share Ownership Programs under IRC 4975(e)(7), but function as a qualified ESOP and hold an equity ownership in trust for employees.

The Investors invested approximately $ 30,844 in exchange for a redeemable non-controlling equity interest of 10.45 % of PWSH.

The Investors will have a liquidation preference in PWSH, a right to co-sell their interest in PWSH along with the Company on the same terms and conditions as the Company, a right to participate on a pro rata basis in any future financing rounds of PWSH, and the Company’s agreement while it remains an owner of PWSH and for two (2) years thereafter to not compete with the business of PWSH, nor solicit or otherwise cause any of PWSH’s core employees or customers to end their relationship with PWSH.

These rights all expire upon initial public offering on the STAR Market.

Each Investor has the right to require PWSH to redeem the entire equity interest held by such Investor, at the original purchase price paid plus 3 % annual interest, if PWSH does not consummate an initial public offering on the STAR Market on or before June 30, 2024.

Based on this contingency, the initial carrying amount of the redeemable non-controlling interests was recorded at fair value on the date of issuance of PWSH equity interests, net of issuance costs and presented in temporary equity on the condensed consolidated balance sheets.

The Company has elected to accrete changes in the redemption value of the redeemable non-controlling interests from the issuance date through the earliest redemption date of June 30, 2024 using the interest method.

Because the redeemable non-controlling interest is denominated in RMB, it will be revalued to USD at the end of each reporting period, with the changes in carrying value attributable to foreign currency being reflected within accumulated other comprehensive income on the condensed consolidated balance sheets.

The ESOP entities invested approximately $ 9,670 in exchange for a redeemable non-controlling equity interest representing 4.68 % of PWSH, which includes a discount of 30 % from the valuation paid by the Investors.

Each of the ESOP entities has the right to require PWSH to redeem the entire equity interest held by such ESOP entities at the original purchase price paid plus 5 % annual interest, if PWSH does not achieve its Listing on or before December 31, 2024.

Because the ESOP entities are owned by employees of PWSH and its subsidiaries and employees are required to render service until either the initial public offering on the STAR Market or repurchase date, the equity interest owned by the ESOP entities will be accounted for under ASC 718 (Compensation - Stock Compensation).

The initial carrying amount of the investment has been recorded as a long-term deposit liability on the condensed consolidated balance sheets as the initial public offering cannot be considered probable at this time.

We will recognize the periodic interest component of the award as compensation expense and accrete the long-term deposit liability to its redemption value as of December 31, 2024.

Because the long-term deposit liability is denominated in RMB and is considered a monetary liability as defined in ASC 255 (Changing Prices), it will be revalued to USD at the end of each reporting period, with the changes in carrying value recorded as foreign currency gain/loss in our condensed consolidated statements of operations.

The process of going public on the STAR Market includes several periods of review and is therefore a lengthy process.

There can be no assurances that PWSH will complete the Listing by June 30, 2024, or at all.

In the event Pixelworks, Inc.

is required to redeem the entire equity interest held by the Investors or the ESOP entities,, we may be required to seek additional capital in order to redeem their PWSH shares and there would be no assurances that such capital would be available on terms acceptable to us, if at all.

Any redemptions could have a material adverse effect on our business, financial condition and results of operations.

The listing of PWSH on China's STAR Market will not change our status as a U.S.

public company.

The components of the change in redeemable non-controlling interests for the nine months ended September 30, 2021 are presented in the following table (in thousands):

Carrying Value of Redeemable NCI as of January 1, 2021

Increase in non-controlling interest due to issuance of stock 30,844

Closing costs incurred ( 868 )

Net income attributable to redeemable non-controlling interest 232

Effect of foreign currency translation attributable to redeemable non-controlling interest 80

Carrying Value of Redeemable NCI as of September 30, 2021

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements