What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-11-09 compared with 2021-08-11 · 83 added, 86 removed, 139 unchanged (55% of the section changed)

5 unchanged sentences

the impact of the COVID-19 pandemic (including any changes in laws or regulations in reaction to same) on Company personnel, on revenue, on Company suppliers, and on Company customers and their respective end markets;

the sale of shares of our subsidiary, Pixelworks Semiconductor Technology (Shanghai) Co., Ltd.

(“ PWSH”), to purchasers, including the timing thereof, the expected proceeds and use thereof, and the resulting ownership of PWSH;

the Company’s strategic plan of re-aligning its mobile, projector, and video delivery businesses and timing and expectations related thereto, including the Listing and timing and benefits thereof, including improved access to new capital markets and the funding of its growth worldwide;

the redeemable non-controlling interests in our subsidiary, Pixelworks Semiconductor Technology (Shanghai) Co., Ltd.

(“ PWSH”), including the possible redemption thereof and the impact thereof, and any changes in carrying value of such interests that are attributable to foreign currency;

our strategic plan of re-aligning our mobile, projector, and video delivery businesses and timing and expectations related thereto, including the Listing and timing and benefits thereof, including improved access to new capital markets and the funding of our growth worldwide;

our international operations;

8 unchanged sentences

These statements are not guarantees of future performance and involve certain risks and uncertainties that are difficult to predict and which may cause actual outcomes and results to differ materially from what is expressed or forecasted in such forward-looking statements.

A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements, including risks related to COVID-19, risks related to our business, risks related to our industry, is included in Part II, Item 1A of this Quarterly Report on Form 10-Q.

These forward-looking statements speak only as of the date on which they are made, and we do not intend to update any forward-looking statement to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q unless required by law.

A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements, including risks related to COVID-19, risks related to our business, risks related to our industry, and risks related to our strategic plan and STAR Market listing is included in Part II, Item 1A of this Quarterly Report on Form 10-Q.

If we do update or correct one or more forward-looking statements, you should not conclude that we will make additional updates or corrections with respect thereto or with respect to other forward-looking statements.

Except where the context otherwise requires, in this Quarterly Report on Form 10-Q, the "Company," "Pixelworks," "we," "us" and "our" refer to Pixelworks, Inc., an Oregon corporation, and its wholly-owned subsidiaries.

In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic, and the virus continues to spread in areas where we operate and sell our products and services.

Several public health organizations have recommended, and many local governments have implemented, certain measures to slow and limit the transmission of the virus, including shelter in place and social distancing ordinances, which has resulted in a significant deterioration of economic conditions in many of the countries in which we operate.

In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic, and the virus continues to exist in areas where we operate and sell our products and services.

Several public health organizations have recommended, and many local governments have implemented, certain measures to slow and limit the transmission of the virus, including various social distancing ordinances, which has resulted in a significant deterioration of economic conditions in many of the countries in which we operate.

The spread of COVID-19 has caused us to modify our business practices, including implementing work-from-home policies and restricting travel by our employees.

3 unchanged sentences

For example, our revenues for fiscal year 2020 were lower than initially anticipated and we expect our revenues for 2021 to continue to be negatively impacted by COVID-19.

Co-Development Agreement

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 $5.8 million from the customer within 60 days of the date of the agreement, and may receive up to an additional $4.8 million 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 actual timing and amount 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.

Capital Increase Agreement

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”).

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 79.7 million ($12.3 million USD) in exchange for an equity interest in PWSH of 5.95%, based on a pre-money valuation of PWSH of RMB 1.12 billion ($172.7 million USD), a discount of 30% from the valuation paid by the Investors.

(b) The Investors have agreed to pay a total of RMB 200 million ($30.8 million USD) in exchange for an equity interest in PWSH of 10.45%, based on a pre-money value of PWSH of RMB 1.6 billion ($246.8 million USD).

The total net proceeds raised by PWSH would be RMB 279.7 million ($43.1 million USD).

Additional information is provided in Note 13, which is incorporated by reference into this section.

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.

12 unchanged sentences

On occasion, we have also licensed our technology.

We have 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.

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 taken by us to date and going forward are intended to improve our ability to access capital, customers, and talent.

We have operated its 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 PWSH as a full profit-and-loss center underneath Pixelworks, Inc.

for the mobile, projector, and video delivery businesses.

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 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”).

We believe 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 our 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.

There is no guarantee that PWSH will be approved for a Listing at any point in the future.

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 and bandwidth and increase overall system performance and device functionality.

1 unchanged sentence

Results of Operations

Net revenue for the three and six month periods ended June 30, 2021 and 2020, was as follows (dollars in thousands):

Three Months Ended Six Months Ended

June 30, June 30,

Net revenue for the three and nine month periods ended September 30, 2021 and 2020, was as follows (dollars in thousands):

Three Months Ended Nine Months Ended

September 30, September 30,

2021 2020 % Change 2021 2020 % Change

Revenue, net $ 15,196 $ 8,190 86 % $ 38,516 $ 31,217 23 %

Net revenue increased $4.8 million, or 52%, in the second quarter of 2021 compared to the second quarter of 2020 and increased $0.3 million, or 1% in the first half of 2021 compared to the first half of 2020.

Revenue recorded in the second quarter of 2021 consisted of $13.1 million in revenue from the sale of integrated circuit ("IC") products and $1.0 million in revenue related to engineering services, license revenue and other.

Revenue recorded in the second quarter of 2020 consisted of $8.8 million in revenue from the sale of IC products and $0.4 million in revenue related to engineering services, license revenue and other.

Revenue recorded in the first half of 2021 consisted of $21.7 million in revenue from the sale of IC products and $1.6 million in revenue related to engineering services, license revenue and other.

Revenue recorded in the first half of 2020 consisted of $21.9 million in revenue from the sale of IC products and $1.1 million in revenue related to engineering services, license revenue and other.

The increase in IC revenue in the second quarter of 2021 compared to the second quarter of 2020 is primarily due to increased unit sales into the digital projector market and increased unit sales into the mobile market as we experienced increased demand compared to the second quarter of 2020.

IC revenue was consistent when comparing the first half of 2021 to the first half of 2020, which is a result of slightly decreased unit sales into the digital projector market offset by a significant increase in unit sales into the mobile market.

Net revenue increased $7.0 million, or 86%, in the third quarter of 2021 compared to the third quarter of 2020 and increased $7.3 million, or 23% in the first nine months of 2021 compared to the first nine months of 2020.

Revenue recorded in the third quarter of 2021 consisted of $14.3 million in revenue from the sale of integrated circuit ("IC") products and $0.8 million in revenue related to engineering services, license revenue and other.

Revenue recorded in the third quarter of 2020 consisted of $8.0 million in revenue from the sale of IC products and $0.2 million in revenue related to engineering services, license revenue and other.

Revenue recorded in the first nine months of 2021 consisted of $36.0 million in revenue from the sale of IC products and $2.5 million in revenue related to engineering services, license revenue and other.

Revenue recorded in the first nine months of 2020 consisted of $30.0 million in revenue from the sale of IC products and $1.2 million in revenue related to engineering services, license revenue and other.

The increase in IC revenue over both periods presented is primarily due to increased unit sales into the digital projector market and increased unit sales into the mobile market as we experienced increased demand compared to the comparable period.

Cost of revenue and gross profit

Cost of revenue and gross profit for the three and six month periods ended June 30, 2021 and 2020, were as follows (dollars in thousands):

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

Cost of revenue and gross profit for the three and nine month periods ended September 30, 2021 and 2020, were as follows (dollars in thousands):

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

revenue 2020 % of

5 unchanged sentences

Stock-based compensation (138) (1) 117 1 17 0 345 1

Restructuring — 0 166 2 — 0 166 1

Inventory charges 2

4 unchanged sentences

2 Includes charges to reduce inventory to lower of cost or market and a benefit for sales of previously written down inventory.

Gross profit margin was 51% in the second quarter of 2021 compared to 55% in the second quarter of 2020 and was 46% in the first half of 2021 compared to 51% in the first half of 2020.

The decrease in gross profit margin over both periods presented was primarily due to product mix and increased product costs.

Gross profit margin was 53% in the third quarter of 2021 compared to 49% in the third quarter of 2020.

The increase in gross profit margin was primarily due to decreased stock-based compensation expense and decreased amortization of acquired intangible assets amount and as a percentage of revenue when comparing the third quarter of 2021 to the third quarter of 2020.

This was partially offset by an increase in direct product costs and related overhead primarily due to product mix and increased product costs.

Gross profit margin was 49% in the first nine months of 2021 compared to 51% in the first nine months of 2020.

The decrease in gross profit margin was primarily due to an increase in direct product costs and related overhead due to product mix and increased product costs.

Pixelworks’ gross profit margin is subject to variability based on changes in revenue levels, product mix, average selling prices, startup costs, restructuring charges, amortization related to acquired intangible assets, and the timing and execution of manufacturing ramps as well as other factors.

1 unchanged sentence

Research and development expense includes compensation and related costs for personnel, development-related expenses, including non-recurring engineering expenses and fees for outside services, depreciation and amortization, expensed equipment, facilities and information technology expense allocations and travel and related expenses.

Research and development expense for the three and six month periods ended June 30, 2021 and 2020, was as follows (dollars in thousands):

Three Months Ended Six Months Ended

June 30, June 30,

Co-development agreement

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, $5.8 million was payable by the customer within 60 days of the date of the agreement and three additional payments of $2.2 million, $1.3 million and $1.3 million 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 $1.3 million.

During the remainder of 2021, we expect to record an offset to research and development expense of approximately $2.5 million of the remaining deferred research and development reimbursement.

Research and development expense for the three and nine month periods ended September 30, 2021 and 2020, was as follows (dollars in thousands):

Three Months Ended Nine Months Ended

September 30, September 30,

2021 2020 % Change 2021 2020 % Change

Research and development $ 6,792 $ 6,062 12 % $ 20,248 $ 18,643 9 %

Research and development expense increased $0.4 million, or 6% in the second quarter of 2021 compared to the second quarter of 2020 and increased $0.9 million, or 7% in the first half of 2021 compared to the first half of 2020.

The increases in the 2021 periods compared to the 2020 periods were primarily due to an increase in compensation expense due to a COVID-19 relief benefit received in China in 2020 that was not received in 2021.

The increases were also due to an increase in non-recurring engineering expense due to the timing of development activities.

Research and development expense increased $0.7 million, or 12% in the third quarter of 2021 compared to the third quarter of 2020 and increased $1.6 million, or 9% in the first nine months of 2021 compared to the first nine months of 2020.

The 2021 periods also included an increase in non-recurring engineering expense due to the timing of development activities.

These increases were largely offset by a benefit related to the co-development agreement.

Selling, general and administrative

Selling, general and administrative expense includes compensation and related costs for personnel, sales commissions, facilities and information technology expense allocations, travel, outside services and other general expenses incurred in our sales, marketing, customer support, management, legal and other professional and administrative support functions.

Selling, general and administrative expense for the three and six month periods ended June 30, 2021 and 2020, was as follows (dollars in thousands):

Three Months Ended Six Months Ended

June 30, June 30,

Selling, general and administrative expense for the three and nine month periods ended September 30, 2021 and 2020, was as follows (dollars in thousands):

Three Months Ended Nine Months Ended

September 30, September 30,

2021 2020 % Change 2021 2020 % Change

Selling, general and administrative $ 5,097 $ 4,621 10 % $ 14,847 $ 14,970 (1) %

Selling, general and administrative expense decreased $0.3 million, or 5%, in the second quarter of 2021 compared to the second quarter of 2020 and decreased $0.6 million, or 6% in the first half of 2021 compared to the first half of 2020.

The decreases in the 2021 periods compared to the 2020 periods were primarily due to a decrease in compensation expense due to a reduction in headcount and a decrease in stock-based compensation expense due to the timing of awards granted.

Selling, general and administrative expense increased $0.5 million, or 10%, in the third quarter of 2021 compared to the third quarter of 2020 primarily due to an increase in compensation expense due to a COVID-19 relief benefit received in China in 2020 that was not received in 2021 as well as an increased management bonus accrual and an increase in stock-based compensation expense due to the timing of awards granted.

Selling, general and administrative expense decreased $0.1 million, or 1% in the first nine month of 2021 compared to the first nine months of 2020 primarily due to a decrease in stock-based compensation expense due to the timing of awards granted, partially offset by increases in accounting and legal fees incurred as a result of the Capital Increase Agreement.

Restructurings

3 unchanged sentences

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

Restructuring expense for the three and six month periods ended June 30, 2021 and 2020, was as follows and was included in operating expenses (dollars in thousands):

Three Months Ended Six Months Ended

June 30, June 30,

Restructuring expense for the three and nine month periods ended September 30, 2021 and 2020, was as follows and was included in operating expenses (dollars in thousands):

Three Months Ended Nine Months Ended

September 30, September 30,

2021 2020 2021 2020

3 unchanged sentences

$ — $ 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 $0.6 million in restructuring expense related to the January 2020 Plan.

The January 2020 Plan was complete in the first quarter of 2020 and we did not incur any further charges related to the January 2020 Plan after the first quarter of 2020.

Included in cost of revenue

$ — $ 166 $ — $ 166

Included in operating expenses

— 1,430 — 2,022

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 $1.6 million in restructuring expense related to the August 2020 Plan.

During the nine months ended September 30, 2020 we recorded $1.6 million in restructuring expense related to the August 2020 Plan and $0.6 million in restructuring expense related to the January 2020 Plan.

Provision for income taxes

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 negligible benefit for the reversal of previously recorded foreign tax contingencies during the first half of 2021 and during the first half of 2020.

We recorded a negligible benefit for the reversal of previously recorded foreign tax contingencies during the first nine months of 2021 and during the first nine months of 2020.

Liquidity and Capital Resources

Cash, cash equivalents and short-term marketable securities

Total cash and cash equivalents decreased $7.6 million to $23.6 million at June 30, 2021 from $31.3 million at December 31, 2020.

Short-term marketable securities decreased $0.3 million to zero at June 30, 2021 from $0.3 million at December 31, 2020.

The net decrease in cash, cash equivalents and short-term marketable securities of $7.8 million during the first half of 2021 was the result of $8.0 million used in operating activities, $0.4 million used for purchases of property and equipment and $0.5 million used for payments on other asset financings.

These decreases were partially offset by $1.1 million in proceeds from the issuances of common stock under our employee equity incentive plans.

As of June 30, 2021, our cash and cash equivalents balance consisted of $15.1 million in cash equivalents held in U.S.

Total cash and cash equivalents increased $35.3 million to $66.6 million at September 30, 2021 from $31.3 million at December 31, 2020.

Short-term marketable securities decreased $0.3 million to zero at September 30, 2021 from $0.3 million at December 31, 2020.

The net increase in cash, cash equivalents and short-term marketable securities of $35.0 million during the first nine months of 2021 was the result of $39.6 million in proceeds from equity interests issued to the redeemable non-controlling interest and certain entities owned by employees, $1.3 million in proceeds from the issuances of common stock under our employee equity incentive plans and $0.3 million in net proceeds from our "at the market" equity offering.

These increases were partially offset by $3.0 million used in operating activities, $2.3 million used for purchases of property and equipment and $0.9 million used for payments on other asset financings.

As of September 30, 2021, our cash and cash equivalents balance consisted of $18.8 million in cash equivalents held in U.S.

dollar denominated money market funds and $47.8 million in cash.

4 unchanged sentences

Accounts receivable, net

Accounts receivable, net increased to $6.4 million as of June 30, 2021 from $4.7 million as of December 31, 2020.

The average number of days sales outstanding decreased to 41 days as of June 30, 2021 from 44 days as of December 31, 2020.

The increase in accounts receivable was due to normal fluctuations in the timing of sales and customer receipts within the second quarter of 2021, and the fourth quarter of 2020.

Inventories were $1.6 million as of June 30, 2021 compared to $2.4 million at December 31, 2020.

Inventory turnover increased to 16.0 as of June 30, 2021 from 6.0 as of December 31, 2020 primarily due to lower average inventory balances during the second quarter of 2021 compared to the fourth quarter of 2020.

Accounts receivable, net increased to $6.1 million as of September 30, 2021 from $4.7 million as of December 31, 2020.

The average number of days sales outstanding decreased to 36 days as of September 30, 2021 from 44 days as of December 31, 2020.

The increase in accounts receivable was due to normal fluctuations in the timing of sales and customer receipts within the third quarter of 2021, and the fourth quarter of 2020.

Inventories were $1.6 million as of September 30, 2021 compared to $2.4 million at December 31, 2020.

Inventory turnover increased to 17.8 as of September 30, 2021 from 6.0 as of December 31, 2020 primarily due to lower average inventory balances and increased cost of goods sold during the third quarter of 2021 compared to the fourth quarter of 2020.

Inventory turnover is calculated based on annualized quarterly operating results and average inventory balances during the quarter.

1 unchanged sentence

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) $10.0 million, or (ii) $2.5 million 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.

10 unchanged sentences

The Note had an interest rate of 1.000% per annum, with the first six months of interest deferred.

Principal and interest were payable monthly commencing 6 months after the disbursement date and were able to be prepaid by the Company at any time prior to maturity with no prepayment penalties.

Principal and interest were payable monthly commencing 6 months after the disbursement date and were able to be prepaid by us at any time prior to maturity with no prepayment penalties.

The Note contained customary events of default relating to, among other things, payment defaults or breaches of the terms of the Note.

14 unchanged sentences

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.

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 $25.0 million, from time to time, through an "at the market" equity offering program under which Cowen will act as sales agent.

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.

2 unchanged sentences

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 $4.4 million, and gross proceeds of approximately $4.9 million and paid Cowen commissions and fees of approximately $0.2 million, and other expenses of $0.3 million.

There was no activity under this at the market offering during the six months ended June 30, 2021.

During the three and nine months ended September 30, 2021, we sold an aggregate of 61,018 shares of our common stock under this at the market offering, resulting in aggregate net proceeds to us of approximately $0.3 million, and gross proceeds of approximately $0.4 million, and paid Cowen commissions and fees and other expenses of approximately $0.1 million.

Capital Increase Agreement

We have entered into a Capital Increase Agreement pursuant to which our subsidiary PWSH, is expected to receive net proceeds from the sale of its securities pursuant thereto in an amount of approximately RMB 279.7 million ($43.1 million USD) in August 2021.

Additional information is provided in Note 13, which is incorporated by reference into this section.

As of June 30, 2021, our cash and cash equivalents balance of $23.6 million was highly liquid.

We have entered into a Capital Increase Agreement pursuant to which our subsidiary PWSH, received net proceeds from the sale of its securities pursuant thereto in an amount of RMB 262.7 million ($39.6 million USD).

Additional information is provided in "Note 14:

Redeemable Non-Controlling Interest and Shares of PWSH Sold to Employees", which is incorporated by reference into this section.

As of September 30, 2021, our cash and cash equivalents balance of $66.6 million was highly liquid.

We anticipate that our existing working capital will be adequate to fund our operating, investing and financing needs for at least the next twelve months.

In addition to the Capital Increase Agreement, we may pursue financing arrangements including the issuance of debt or equity securities or reduce expenditures, or both, to meet our cash requirements, including in the longer term.

We may pursue financing arrangements including the issuance of debt or equity securities or reduce expenditures, or both, to meet our cash requirements, including in the longer term.

There is no assurance that, if required, we will be able to raise additional capital or reduce discretionary spending to provide the required liquidity which, in turn, may have an adverse effect on our financial position, results of operations and cash flows.

1 unchanged sentence

Any transactions, if consummated, may consume a material portion of our working capital or require the issuance of equity securities that may result in dilution to existing shareholders.

Our ability to generate cash from operations is also subject to substantial risks described in Part II, “Item 1A., Risk Factors.” If any of these risks occur, we may be unable to generate or sustain positive cash flow from operating activities.

Our ability to generate cash from operations is also subject to substantial risks described in Part II, Item 1A., "Risk Factors".

If any of these risks occur, we may be unable to generate or sustain positive cash flow from operating activities.

We would then be required to use existing cash and cash equivalents to support our working capital and other cash requirements.

5 unchanged sentences

Our contractual obligations for 2021 and beyond are included in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission on March 10, 2021.

Our obligations for 2021 and beyond have not changed materially as of June 30, 2021.

Our obligations for 2021 and beyond have not changed materially as of September 30, 2021.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.

Quantitative and Qualitative Disclosure About Market Risk.

Not applicable.

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 2. Management’s Discussion and Analysis