What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2022-03-09 compared with 2021-03-10 · 170 added, 136 removed, 771 unchanged (28% of the section changed)

1 unchanged sentence

The following financial statements and reports are included in Item 8:

Reports of Independent Registered Public Accounting Firms

Report of Independent Registered Public Accounting Firm (PCAOB ID:

Consolidated Balance Sheets as of December 31, 2021 and 2020

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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.

We have audited the accompanying consolidated balance sheets of Pixelworks, Inc.

and its subsidiaries (the Company) as of December 31, 2021 and 2020, and the related consolidated statements of operations, comprehensive loss, shareholders' equity, and cash flows for each of the two years ended December 31, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the two years ended December 31, 2021 in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

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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.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audits 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.

As part of our audits, 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.

Our audits 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.

Our audits 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 audits provides a reasonable basis for our opinion.

Critical Audit Matters

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◦ 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).

◦ 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.

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March 9, 2022

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.

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.

We believe that our audit provides a reasonable basis for our opinion.

We served as the Company’s auditor from 1997 to 2020.

Portland, Oregon

March 11, 2020

PIXELWORKS, INC.

CONSOLIDATED BALANCE SHEETS

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Total assets $ 106,600 $ 72,038

LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST AND SHAREHOLDERS' EQUITY

Current liabilities:

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Long-term liabilities, net of current portion 519 1,007

Deposit liability 12,716 —

Operating lease liabilities, net of current portion 2,853 5,088

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Commitments and contingencies (Note 11)

Redeemable non-controlling interest 30,905 —

Shareholders' equity:

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475,644 467,957

Accumulated other comprehensive income 47 12

Accumulated other comprehensive income (loss) ( 468 ) 47

Accumulated deficit ( 434,955 ) ( 415,134 )

Total shareholders' equity 40,221 52,870

Total liabilities and shareholders' equity $ 72,038 $ 64,657

Total liabilities, redeemable non-controlling interest and shareholders' equity $ 106,600 $ 72,038

See accompanying notes to consolidated financial statements.

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Gain on loan extinguishment — 796

Gain on sale of patents — 3,905

Total other income, net 457 805

Loss before income taxes ( 19,545 ) ( 25,931 )

Provision for income taxes 598 453

Provision (benefit) for income taxes ( 133 ) 598

Net loss ( 19,412 ) ( 26,529 )

Net loss per share - basic and diluted $ ( 0.65 ) $ ( 0.24 )

Net income attributable to redeemable non-controlling interest ( 409 ) —

Net loss attributable to Pixelworks, Inc.

$ ( 19,821 ) $ ( 26,529 )

Net loss attributable to Pixelworks, Inc.

per share - basic and diluted $ ( 0.38 ) $ ( 0.65 )

Weighted average shares outstanding - basic and diluted 52,509 40,712

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Restructuring — 173

Inventory step-up and backlog amortization — 12

(2) Includes stock-based compensation 2,363 2,943

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Other comprehensive income (loss):

Foreign currency translation adjustment

Foreign pension adjustment

Unrealized gain (loss) on available-for-sale securities

Tax effect of foreign pension adjustment ( 1 ) ( 10 )

Total comprehensive loss $ ( 26,494 ) $ ( 9,080 )

Unrealized loss on available-for-sale securities

Comprehensive loss ( 19,927 ) ( 26,494 )

comprehensive income attributable to redeemable non-controlling interest ( 409 ) —

Total comprehensive loss attributable to Pixelworks, Inc.

$ ( 20,336 ) $ ( 26,494 )

See accompanying notes to consolidated financial statements.

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Amortization of acquired intangible assets 1,118 1,496

Gain on loan extinguishment ( 796 ) —

Deferred income tax expense (benefit) ( 768 ) 26

Reversal of uncertain tax positions ( 2 ) ( 88 )

Deferred income tax expense 26 45

Gain on loan extinguishment — ( 796 )

Accretion on short-term marketable securities — ( 4 )

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:

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Cash flows from investing activities:

Proceeds from sales and maturities of marketable securities 8,229 10,050

Purchases of property and equipment ( 3,475 ) ( 2,637 )

Proceeds from sales and maturities of marketable securities 250 8,229

Purchases of available-for-sale marketable securities — ( 1,500 )

Purchases of licensed technology — ( 152 )

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 )

Net cash provided by (used in) investing activities ( 3,225 ) 3,940

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 12,329 —

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

Payments on asset financings ( 1,195 ) ( 1,007 )

Net proceeds from "at the market" equity offering 320 4,429

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 )

Net cash provided by financing activities 42,712 23,771

Net increase in cash and cash equivalents 30,330 24,000

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

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Non-cash investing and financing activities:

Gain on loan extinguishment $ ( 796 ) $ —

Acquisitions of property and equipment and other assets under extended payment terms $ 1,229 $ 1,495

Gain on loan extinguishment — ( 796 )

See accompanying notes to consolidated financial statements.

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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 gain on available-for-sale securities — — 3 — 3

Net loss — — — ( 9,077 ) ( 9,077 )

Foreign pension adjustment, net of tax of $( 1 )

Unrealized loss on available-for-sale securities — — ( 3 ) — ( 3 )

Net loss attributable to Pixelworks, Inc.

— — — ( 26,529 ) ( 26,529 )

Foreign pension adjustment, net of tax of $ 10

Balance as of December 31, 2020 51,078,942 467,957 47 ( 415,134 ) 52,870

Stock issued under employee equity incentive plans 2,227,176 1,282 — — 1,282

Equity offering 5,635,000 12,743 — — 12,743

Private placement investment 3,200,000 6,210 — — 6,210

"At the market" equity offering 61,018 321 — — 321

Stock-based compensation expense — 6,084 — — 6,084

Unrealized loss on available-for-sale securities — — ( 3 ) — ( 3 )

Net loss — — — ( 26,529 ) ( 26,529 )

Foreign currency translation adjustment — — ( 520 ) — ( 520 )

Net loss attributable to Pixelworks, Inc.

— — — ( 19,821 ) ( 19,821 )

Foreign pension adjustment, net of tax of $ 1

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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.

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 as of 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 Science and Technology 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.

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.

Our consolidated financial statements include the accounts of Pixelworks and its subsidiaries.

Intercompany accounts and transactions have been eliminated.

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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.

Transaction (gains) and losses were $( 258 ) and $ 419 for the years ended December 31, 2021 and 2020, respectively.

Use of Estimates

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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.

ASU 2019-12 became effective for us in the first quarter of fiscal 2021, and early adoption is permitted.

The adoption of ASU 2019-12 did not have a material impact on our financial position, results of operations and cash flows.

In November 2018, the FASB issued Accounting Standards Update No.

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Balance at beginning of year $ 41 $ 23

Additions charged 18 2

Additions charged (reductions credited) ( 5 ) 18

Balance at end of year $ 36 $ 41

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We recorded inventory write-downs of $ 488 and $ 95 for the years ended December 31, 2021 and 2020, respectively.

The inventory write-downs were for lower of cost or market and excess and obsolescence exposure.

The inventory write-downs were for lower of cost or net realizable value and excess and obsolescence exposure.

The inventory write-downs were offset by sales of previously written-down inventory of $ 9 and $ 29 for the years ended December 31, 2021 and 2020, respectively.

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As of December 31, 2021, future estimated amortization expense is as follows:

Years ending December 31:

Year ending December 31, 2022 $ 90

Acquired intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

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Operating lease liability, current 2,439 2,039

Deferred research and development reimbursement 1,838 —

Current portion of accrued liabilities for asset financings 1,077 786

Accrued costs related to restructuring 630 66

Accrued commissions and royalties 474 663

Accrued interest payable 361 429

Accrued commissions and royalties 259 474

Deferred revenue 50 179

Accrued costs related to restructuring — 630

Other 4,049 2,048

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Balance at beginning of period $ 179 $ 146

Revenue deferred 935 511

Revenue recognized ( 1,127 ) ( 902 )

Revenue deferred 998 935

Balance at end of period $ 50 $ 179

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.

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.

On December 21, 2010, we entered into a Loan and Security Agreement with Silicon Valley Bank (the "Bank"), which was 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.

The Revolving Line had a maturity date of March 26, 2021.

In addition, the Revolving Loan Agreement provided for non-formula advances of up to $ 10,000 which could be made solely during the last five business days of any fiscal month or quarter and which were required to be repaid by the Company on or before the fifth business day after the applicable fiscal month or quarter end.

The Revolving Loan Agreement, as amended, contained customary affirmative and negative covenants as well as customary events of default.

The occurrence of an event of default could have resulted in the acceleration of our obligations under the Revolving Loan Agreement, as amended, and an increase to the applicable interest rate, and would have permitted the Bank to exercise remedies with respect to its security interest.

The Revolving Line had a maturity date of March 26, 2021.

We did not renew the Revolving Loan Agreement upon its maturity.

As of December 31, 2020, 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.

The Loan was evidenced by a promissory note (the “Note”) dated April 25, 2020, and matured 2 years from the disbursement date.

The Note bore interest at a 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 could be prepaid by the Company 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.

Upon the occurrence of an event of default, the Lender could 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.

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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.

During the fourth quarter of 2020, we applied for and received full forgiveness and recorded a gain of $ 796 within other income in our consolidated statements of operations.

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:

We had no marketable securities as of December 31, 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:

Cost Unrealized Gain (Loss) Fair Value

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$ 253 $ ( 3 ) $ 250

As of December 31, 2019:

Commercial paper $ 2,487 $ — $ 2,487

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.

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Money market funds $ 15,254 $ — $ — $ 15,254

Short-term marketable securities:

Corporate debt securities — 250 — 250

As of December 31, 2020:

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Short-term marketable securities:

government treasury bills 2,250 — — 2,250

Commercial paper — 2,487 — 2,487

Corporate debt securities — 250 — 250

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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.

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, 2021 and 2020 is comprised of the following:

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Employee severance and benefits

$ 2,041 $ 398

Total restructuring expense $ — $ 2,214

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$ 630 $ — $ ( 630 ) $ —

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.

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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 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.

Fees under these agreements generally include license fees relating to our IP and support service fees, resulting in two performance obligations.

Fees under these agreements generally include license fees or royalty 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.

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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Total interest income and other, net $ 457 $ 9

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 year ended December 31, 2021, we recognized an offset to research and development expense of $ 3,962 .

Current and Deferred Income Tax Expense

Domestic and foreign pre-tax income (loss) is as follows:

Domestic and foreign pre-tax loss is as follows:

Year Ended December 31,

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Total deferred ( 768 ) 26

Income tax expense $ 598 $ 453

Income tax expense (benefit) $ ( 133 ) $ 598

The reconciliation of the U.S.

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Federal statutory rate 21 % 21 %

Corporate restructuring ( 38 ) —

Change in valuation allowance 24 —

Expiration of tax attributes ( 6 ) ( 14 )

Tax contingencies, net of reversals ( 5 ) —

Impact of foreign earnings 3 ( 7 )

2 unchanged sentences

Stock-based compensation ( 1 ) ( 2 )

Change in valuation allowance — 31

Tax contingencies, net of reversals — 1

Other ( 3 ) —

Effective income tax rate 1 % ( 2 ) %

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Deferred stock-based compensation 994 1,158

Foreign tax credit carryforwards 275 719

Reserves and accrued expenses 992 145

Foreign tax credit carryforwards 208 275

Other 1,451 2,074

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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.

net deferred tax assets as of December 31, 2021 and 2020, as it is not more likely than not that we will realize a benefit from these assets in a future period.

In the third quarter of 2021, we recorded a valuation allowance against our net deferred tax assets in China in conjunction with the restructuring of our intercompany agreements and intellectual property.

In the fourth quarter of 2021, we recognized $ 558 of our Canadian net deferred tax assets as we are more likely than not to realize a benefit from these assets in a future period.

We have not provided a valuation allowance against our other 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 $ 4,609 for the year ended December 31, 2021 and decreased $ 24 for the year ended December 31, 2020.

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The federal and state tax credits will begin expiring in 2022 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 .

In addition, our Canadian subsidiary has unclaimed scientific and experimental expenditures to be

carried forward and applied against future income in Canada of approximately $ 120,906 .

We have a general foreign tax credit of $ 118 which will begin to expire in 2022.

1 unchanged sentence

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.

We are not indefinitely reinvested in the earnings of our subsidiaries in Canada, Japan and Taiwan and have accrued tax on the future repatriation of cash for jurisdictions where withholding taxes would apply .

We are no longer indefinitely reinvested in our China subsidiary and have reversed our previous accrual of $ 620 as a result of changes to our operating plan and implementation of our China intellectual property strategy.

Uncertain Tax Positions

68 unchanged sentences

Net loss $ ( 19,412 ) $ ( 26,529 )

Net income attributable to redeemable non-controlling interest ( 409 ) —

Net income attributable to certain entities owned by employees ( 198 ) —

Net loss attributable to Pixelworks Inc.

- for purposes of earnings per share calculation $ ( 20,019 ) $ ( 26,529 )

Weighted average shares outstanding - basic and diluted 52,509 40,712

Net loss per share - basic and diluted $ ( 0.65 ) $ ( 0.24 )

Net loss attributable to Pixelworks, Inc.

per share - basic and diluted $ ( 0.38 ) $ ( 0.65 )

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):

25 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 $ 4,429 .

During the year ended December 31, 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 $ 321 .

Employee Equity Incentive Plans

1 unchanged sentence

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.

The 2006 Plan has since been amended and restated on certain occasions, most recently on May 10, 2021 when our shareholders approved an increase to the total number of authorized shares to 22,683,333 shares.

As of December 31, 2021, 2,105,497 shares were available for grant under the 2006 Plan.

7 unchanged sentences

719,067 $ 2.53

Granted 234,000 2.00

Exercised ( 352,375 ) 2.47

63 unchanged sentences

Volatility 75 % 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.

There were no options granted during the year ended December 31, 2021.

The weighted average fair value of options granted during the year ended December 31, 2020 was $ 0.93 .

The risk free interest rate is estimated using an average of treasury bill interest rates.

8 unchanged sentences

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

Substantially all of our assets are located in the U.S.

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

Geographic Information

13 unchanged sentences

Distributor A 27 % 7 %

Distributor B 13 % 23 %

End Customers:

7 unchanged sentences

Account Z 15 % 7 %

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 loss on the condensed consolidated balance sheets.

The ESOP entities invested approximately $ 12,329 in exchange for a redeemable non-controlling equity interest representing 5.95 % 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 year ended December 31, 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 409

Effect of foreign currency translation attributable to redeemable non-controlling interest 520

Carrying Value of Redeemable NCI as of December 31, 2021

QUARTERLY FINANCIAL DATA (UNAUDITED)

5 unchanged sentences

Loss before income taxes ( 7,858 ) ( 4,275 ) ( 3,850 ) ( 3,562 )

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 )

Net loss attributable to Pixelworks Inc.

( 8,075 ) ( 4,382 ) ( 4,073 ) ( 3,291 )

Net loss attributable to Pixelworks Inc.

per share - basic and diluted ( 0.16 ) ( 0.08 ) ( 0.08 ) ( 0.06 )

Revenue, net $ 13,774 $ 9,253 $ 8,190 $ 9,638

1 unchanged sentence

Loss from operations ( 5,277 ) ( 6,421 ) ( 8,137 ) ( 6,901 )

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 )

Loss before income taxes ( 5,223 ) ( 6,445 ) ( 8,165 ) ( 6,098 )

Net loss attributable to Pixelworks Inc.

( 5,399 ) ( 6,552 ) ( 8,139 ) ( 6,439 )

Net loss attributable to Pixelworks Inc.

per share - basic and diluted ( 0.14 ) ( 0.17 ) ( 0.20 ) ( 0.15 )

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

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-K

Item 8. Financial Statements and Supplementary Data