What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2022-05-10 compared with 2021-11-09 · 69 added, 193 removed, 409 unchanged (39% of the section changed)

3 unchanged sentences

(In thousands)

September 30,

2022 December 31,

1 unchanged sentence

Cash and cash equivalents $ 55,162 $ 61,587

Short-term marketable securities — 250

Accounts receivable, net 8,564 8,708

8 unchanged sentences

Total assets $ 100,352 $ 106,600

LIABILITIES AND SHAREHOLDERS’ EQUITY

LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST AND SHAREHOLDERS' EQUITY

Current liabilities:

13 unchanged sentences

Common stock 476,910 475,644

Accumulated other comprehensive income (loss) ( 33 ) 47

Accumulated other comprehensive loss ( 620 ) ( 468 )

Accumulated deficit ( 439,547 ) ( 434,955 )

5 unchanged sentences

(In thousands, except per share data)

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

2021 2020 2021 2020

Three Months Ended March 31,

Revenue, net $ 16,628 $ 9,270

4 unchanged sentences

Selling, general and administrative (3) 5,484 4,854

Restructuring — 1,430 — 2,022

Total operating expenses 12,644 11,639

Loss from operations ( 3,881 ) ( 7,914 )

Interest income (expense) and other, net 54 ( 28 ) 292 2

Total other income (expense), net 54 ( 28 ) 292 2

Interest income and other, net 162 56

Total other income, net 162 56

Loss before income taxes ( 3,719 ) ( 7,858 )

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

Provision for income taxes 403 217

Net loss ( 4,122 ) ( 8,075 )

8 unchanged sentences

Stock-based compensation 8 79

Restructuring — 166 — 166

(2) Includes stock-based compensation 583 581

6 unchanged sentences

(In thousands)

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

2021 2020 2021 2020

Three Months Ended March 31,

Net loss $ ( 4,122 ) $ ( 8,075 )

1 unchanged sentence

Foreign currency translation adjustment ( 152 ) —

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

Comprehensive loss ( 4,274 ) ( 8,075 )

6 unchanged sentences

(In thousands)

Nine Months Ended September 30,

Three Months Ended March 31,

Cash flows from operating activities:

3 unchanged sentences

Depreciation and amortization 1,040 1,016

Amortization of acquired intangible assets 847 1,122

Deferred income tax expense (benefit) 364 ( 10 )

Reversal of uncertain tax positions ( 121 ) ( 2 )

Accretion on short-term marketable securities — ( 6 )

Gain on sale of marketable securities — ( 4 )

Amortization of acquired intangible assets 90 305

Changes in operating assets and liabilities:

8 unchanged sentences

Purchases of property and equipment ( 540 ) ( 243 )

Proceeds from sales and maturities of short-term marketable securities 250 7,748

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

Purchases of licensed technology ( 517 ) —

Proceeds from sales and maturities of short-term marketable securities — 250

Net cash provided by (used in) investing activities ( 1,057 ) 7

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 ( 367 ) ( 239 )

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 in cash and cash equivalents 35,302 8,805

Proceeds from issuance of common stock under employee equity incentive plans 217 1,063

Net cash provided by (used in) financing activities ( 150 ) 824

Net decrease in cash and cash equivalents ( 6,425 ) ( 5,820 )

Cash and cash equivalents, beginning of period 61,587 31,257

3 unchanged sentences

Cash paid during the period for interest 41 32

Non-cash investing and financing activities:

Acquisitions of property and equipment and other

assets under extended payment terms 958 1,392

See accompanying notes to condensed consolidated financial statements.

11 unchanged sentences

Stock-based compensation expense — 1,049 — — 1,049

Net loss — — — ( 8,075 ) ( 8,075 )

Balance as of March 31, 2021 52,212,421 $ 470,452 $ 47 $ ( 423,209 ) $ 47,290

Stock issued under employee equity incentive plans 140,143 — — — —

Stock-based compensation expense — 1,506 — — 1,506

Net loss — — — ( 4,382 ) ( 4,382 )

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 — — ( 152 ) — ( 152 )

1 unchanged sentence

— — — ( 4,592 ) ( 4,592 )

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

Balance as of March 31, 2022 53,998,012 $ 476,910 $ ( 620 ) $ ( 439,547 ) $ 36,743

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

1 unchanged sentence

Stock-based compensation expense — 1,432 — — 1,432

Unrealized loss on available for sale securities — — ( 6 ) — ( 6 )

Net loss — — — ( 5,399 ) ( 5,399 )

Net loss attributable to Pixelworks, Inc.

— — — ( 8,075 ) ( 8,075 )

Balance as of March 31, 2021 52,212,421 $ 470,452 $ 47 $ ( 423,209 ) $ 47,290

"At the market" equity offering 803,528 2,474 — — 2,474

Stock issued under employee equity incentive plans 167,100 12 — — 12

Stock-based compensation expense — 2,243 — — 2,243

Unrealized gain on available for sale securities — — 7 — 7

Net loss — — — ( 6,552 ) ( 6,552 )

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

"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.

8 unchanged sentences

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 September 30, 2021, we had an intellectual property portfolio of 334 patents related to the visual display of digital image data.

As of March 31, 2022, 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.

7 unchanged sentences

for the mobile, projector, and video delivery businesses.

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

Most of these steps were completed in 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”).

4 unchanged sentences

Condensed Consolidated Financial Statements

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.

The financial information included herein for the three months ended March 31, 2022 and 2021 is prepared in accordance with U.S.

generally accepted accounting principles ("U.S.

2 unchanged sentences

The financial information as of December 31, 2021 is derived from our audited consolidated financial statements and notes thereto for the fiscal year ended December 31, 2021, included in Item 8 of our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 9, 2022, and should be read in conjunction with such consolidated financial statements.

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.

The results of operations for the three months ended March 31, 2022 and 2021 are not necessarily indicative of the results expected for future periods or for the entire fiscal year ending December 31, 2022.

Recent Accounting Pronouncements

2 unchanged sentences

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 became effective for us on January 1, 2021.

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.

2018-18, Collaborative Arrangements:

Clarifying the Interaction Between Topic 808 and Topic 606 ("ASU 2018-18").

ASU 2018-18 requires transactions in collaborative arrangements to be accounted for under ASC 606 if the counterparty is a customer for a good or service (or bundle of goods and services) that is a distinct unit of account.

The amendment also precludes entities from presenting consideration from transactions with a collaborator that is not a customer together with revenue recognized from contracts with customers.

ASU 2018-18 became effective for us on January 1, 2020.

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

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

10 unchanged sentences

Accounts receivable consist of the following:

September 30,

2022 December 31,

3 unchanged sentences

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

Nine Months Ended

September 30,

Three Months Ended

Balance at beginning of period $ 36 $ 41

3 unchanged sentences

Inventories consist of the following:

September 30,

2022 December 31,

4 unchanged sentences

Property and equipment, net consists of the following:

September 30,

2022 December 31,

5 unchanged sentences

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

September 30,

2022 December 31,

4 unchanged sentences

Acquired intangible assets, net $ — $ 90

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 $ 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

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

Conditions that would trigger an impairment assessment include, but are not limited to, past, current, or expected cash flow or operating losses associated with the asset.

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

Developed technology and customer relationships were fully amortized as of March 31, 2022, tradename was fully amortized as of March 31, 2019 and backlog was fully amortized as of September 30, 2018.

Amortization expense for intangible assets was $ 90 for the three months ended March 31, 2022, $ 72 was included in cost of revenue and $ 18 was included in selling, general and administrative for the three months ended March 31, 2022, in the condensed consolidated statements of operations.

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 nine months ended September 30, 2021.

There were no such triggering events requiring a goodwill impairment assessment during the three months ended March 31, 2022.

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,

2022 December 31,

Deferred research and development reimbursement $ 4,542 $ —

Accrued payroll and related liabilities $ 2,501 $ 3,490

Operating lease liabilities, current 2,330 2,439

Deferred research and development reimbursement 855 1,838

Current portion of accrued liabilities for asset financings 799 1,077

2 unchanged sentences

Deferred revenue 220 50

Accrued costs related to restructuring — 630

Other 2,464 4,049

6 unchanged sentences

The change in deferred revenue is as follows:

Nine Months Ended

September 30,

Three Months Ended

Deferred revenue:

3 unchanged sentences

Balance at end of period $ 220 $ 120

Short-Term Line of Credit

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.

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

Due to their repayment terms, non-formula advances did not provide us with usable liquidity.

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 under the Revolving Line.

MARKETABLE SECURITIES AND FAIR VALUE MEASUREMENTS

Marketable Securities

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:

Cost Unrealized Gain (Loss) Fair Value

Short-term marketable securities:

As of December 31, 2020:

Corporate debt securities 253 ( 3 ) 250

$ 253 $ ( 3 ) $ 250

Unrealized holding gains and losses were recorded in accumulated other comprehensive income, a component of shareholders’ equity, in the condensed consolidated balance sheets.

FAIR VALUE MEASUREMENTS

4 unchanged sentences

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 September 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 March 31, 2022 and December 31, 2021:

Level 1 Level 2 Level 3 Total

As of September 30, 2021:

As of March 31, 2022:

Cash equivalents:

3 unchanged sentences

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

Short-term marketable securities:

Corporate debt securities — 250 — 250

We primarily use the market approach to determine the fair value of our financial assets.

1 unchanged sentence

We have currently chosen not to elect the fair value option for any items that are not already required to be measured at fair value in accordance with U.S.

RESTRUCTURINGS

In August 2020, we executed a restructuring plan to make the operation of the Company more efficient (the "August 2020 Plan").

The August 2020 Plan included an approximately 14 % reduction in workforce, primarily in the areas of operations, research and development, sales and marketing.

In January 2020, we executed a restructuring plan to make the operation of the Company more efficient (the "January 2020 Plan").

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

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:

Employee severance and benefits

$ — $ 1,430 $ — $ 2,022

— 1,430 — 2,022

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

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

September 30, 2021

Employee severance and benefits

$ 630 $ — $ ( 630 ) $ —

Accrued costs related to restructuring

$ 630 $ — $ ( 630 ) $ —

We determine if an arrangement is a lease at inception.

8 unchanged sentences

Supplemental information related to lease expense and valuation of the ROU assets and lease liabilities was as follows:

Three Months Ended Nine Months Ended

September 30, September 30,

2021 2020 2021 2020

Three Months Ended

Operating lease cost:

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

Nine Months Ended

September 30,

Three Months Ended

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

3 unchanged sentences

Weighted average discount rate 5.00 % 4.90 %

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

Future minimum lease payments under non-cancellable leases as of March 31, 2022 were as follows:

Operating Lease Payments

Three months ending December 31, 2021 $ 548

Nine months ending December 31, 2022 $ 1,939

Years ending December 31:

3 unchanged sentences

Total operating lease liabilities $ 4,665

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

As of March 31, 2022, 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.

25 unchanged sentences

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 nine months ended September 30, 2021 and 2020:

Three Months Ended Nine Months Ended

September 30, September 30,

2021 2020 2021 2020

The following table provides information about disaggregated revenue based on the preceding categories for the three months ended March 31, 2022 and 2021:

Three Months Ended

IC sales $ 16,456 $ 8,637

9 unchanged sentences

We have not identified any material costs incurred associated with obtaining a contract with a customer which would meet the criteria to be capitalized, therefore, these costs are expensed as incurred.

The aggregate amount of the transaction price allocated to unsatisfied performance obligations with an original expected duration of greater than one year is $ 60 , which we expect to recognize ratably over the next 6 months .

There is no amount of transaction price allocated to unsatisfied performance obligations with an original expected duration of greater than one year.

INTEREST INCOME AND OTHER, NET

Interest income and other, consists of the following:

Three Months Ended Nine Months Ended

September 30, September 30,

2021 2020 2021 2020

Three Months Ended

Interest income $ 130 $ 5

Other income 45 65

Interest expense ( 13 ) ( 14 )

Interest income 28 9 38 81

Total interest income and other, net $ 162 $ 56

5 unchanged sentences

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 .

During the first quarter of 2022 and the first quarter of 2021, we recognized offsets to research and development expense of $ 983 and zero , respectively.

The provision for income taxes during the 2022 and 2021 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 nine months of 2021 and 2020, respectively.

We recorded a benefit for the reversal of previously recorded foreign tax contingencies of $ 121 and $ 2 during the first three months of 2022 and 2021, respectively.

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

3 unchanged sentences

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.

As of March 31, 2022 and December 31, 2021, the amount of our uncertain tax positions was a liability of $ 2,380 and $ 2,493 , respectively, as well as a contra deferred tax asset of $ 1,384 and $ 1,254 , respectively.

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

5 unchanged sentences

The following table sets forth the computation of basic and diluted net loss per share (in thousands, except per share data):

Three Months Ended Nine Months Ended

September 30, September 30,

2021 2020 2021 2020

Three Months Ended

$ ( 4,122 ) $ ( 8,075 )

7 unchanged sentences

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 numerator adjustments include an allocation of PWSH income to the redeemable non-controlling interests (which consists of adjusting the interest to its redemption value based on the terms provided in the Supplemental Agreement and Side Letter (defined in Note 13 below)) 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.

1 unchanged sentence

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 Nine Months Ended

September 30, September 30,

2021 2020 2021 2020

Three Months Ended

Employee equity incentive plans 3,780 3,886

5 unchanged sentences

Revenue by geographic region, is as follows:

Three Months Ended Nine Months Ended

September 30, September 30,

2021 2020 2021 2020

Three Months Ended

Japan $ 7,399 $ 3,544

2 unchanged sentences

United States 858 766

Korea 50 275 66 308

Europe — 70 71 260

$ 16,628 $ 9,270

1 unchanged sentence

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 Nine Months Ended

September 30, September 30,

2021 2020 2021 2020

Three Months Ended

Distributors:

2 unchanged sentences

Distributor B 12 % 8 %

Distributor C 13 % 5 % 9 % 3 %

End customers:

3 unchanged sentences

End customer C 1 % 20 %

End customer D — % 10 % — % 6 %

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,

2022 December 31,

Account W 30 % 27 %

Account X 29 % 41 %

Account Y 12 % 15 %

Account Z 11 % 4 %

RISKS AND UNCERTAINTIES

26 unchanged sentences

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

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.

As of March 31, 2022, $ 513 is included in accrued liabilities and current portion of long-term liabilities 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”).

During the third quarter of 2021, Pixelworks 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”) (together, the “Investors” and the “ESOP” are referred to below as the “Capital Contributors”).

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.

Under the Capital Increase Agreement, during the third quarter of 2021, the Investors invested approximately $ 30,844 in exchange for a redeemable non-controlling equity interest of 10.45 % of PWSH and 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.

The agreement further provided that the Capital Contributors 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.

On March 24, 2022, Pixelworks and our subsidiary, PWSH, entered into a Supplemental Agreement to the Capital Increase Agreement (the “Supplemental Agreement”) with the Capital Contributors.

The Supplemental Agreement, among other things, deletes the interest that was to accrue on the redemption obligation of affiliated entities of PWSH, and adds a provision that will suspend the redemption obligation on the date PWSH files its initial public offering listing documents pending the approval of such documents by the applicable authorities.

The suspension ends if PWSH withdraws the listing application or such application is finally rejected, at which point the redemption obligation will once again become effective with a deadline of the later of the date of the withdrawal/rejection and June 30, 2024.

In connection with the Supplemental Agreement, on March 24, 2022, Pixelworks and the Capital Contributors entered into a Side Letter to the Capital Increase Agreement (“Side Letter”) which provides that, in the event of a change in control of Pixelworks, Pixelworks shall ensure that the definitive agreement related to such transaction includes a post-closing repurchase covenant that requires the successor entity in such transaction to repurchase all of PWSH’s equity held by a Capital Contributor at the original subscription price plus 20 % upon the request of the Capital Contributor within 60 days after (a) the change in control;

or (b) if PWSH fails to consummate its initial public offering by June 30, 2024, because Pixelworks decides against pursuing the offering.

If PWSH continues to diligently pursue the application but the initial public offering still fails to launch by June 30, 2024, the redemption obligation of the Supplemental Agreement would instead apply.

The Side Letter terminates on the launch date of PWSH’s initial public offering.

Prior to entering into the Supplemental Agreement, each Investor had 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 did 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.

Until the interest that was to accrue on the redeemable non-controlling interest was deleted with the Supplemental Agreement, the Company had 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 (as the non-controlling interest was probable of becoming redeemable upon the passage of time for the original issuance price plus 3 % annual interest).

After entering into the Supplemental Agreement, the redeemable non-controlling interest will no longer accrete up to a redemption amount because the interest component has been removed.

The Investors will continue to hold PWSH equity and be considered as a redeemable non-controlling interest, however, the redeemable non-controlling interest is only probable of becoming redeemable upon the passage of time for its original issuance price.

Therefore, until the redemption feature expires, we will only allocate profits to the redeemable non-controlling interest and continue to recognize the non-controlling interest at an amount at least equal to its redemption value.

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.

3 unchanged sentences

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 Supplemental Agreement does not remove the obligation of PWSH to repurchase the ESOP interests if PWSH fails to consummate an initial public offering by December 31, 2024 along with the 5 % annual simple interest.

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.

In the event Pixelworks 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.

1 unchanged sentence

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):

The components of the change in redeemable non-controlling interests for the three months ended March 31, 2022 are presented in the following table (in thousands):

Carrying Value of Redeemable NCI as of January 1, 2022

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

Closing costs incurred ( 868 )

Net income attributable to redeemable non-controlling interest 470

Effect of foreign currency translation attributable to redeemable non-controlling interest 152

Carrying Value of Redeemable NCI as of September 30, 2021

Carrying Value of Redeemable NCI as of March 31, 2022

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