What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2023-03-08 compared with 2022-03-09 · 167 added, 185 removed, 756 unchanged (32% of the section changed)

9 unchanged sentences

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders

To the Board of Directors and Shareholders

Pixelworks, Inc.

San Jose, California

Portland, Oregon

Opinion on the Consolidated Financial Statements

15 unchanged sentences

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.

We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

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• Determination of whether products and services are considered distinct performance obligations that should be accounted for separately versus together.

• Determination of stand-alone selling prices for each distinct performance obligation (i.e.

for IP license fee and support service fee that are sold together under IP licensing arrangements).

• Determination of stand-alone selling prices for each distinct performance obligation (i.e., for IP license fee and support service fee that are sold together under IP licensing arrangements).

• The pattern of delivery (i.e., timing of when revenue is recognized) for each distinct performance obligation.

43 unchanged sentences

Cash and cash equivalents $ 56,821 $ 61,587

Short-term marketable securities — 250

Accounts receivable, net 10,047 8,708

28 unchanged sentences

Accumulated deficit ( 450,985 ) ( 434,955 )

Total Pixelworks, Inc.

shareholders’ equity 32,422 40,221

Non-controlling interest 10,909 —

Total shareholders' equity 43,331 40,221

11 unchanged sentences

Selling, general and administrative (3) 22,177 20,445

Restructuring — 2,041

Total operating expenses 52,698 47,695

1 unchanged sentence

Interest income and other, net 700 457

Gain on loan extinguishment — 796

Total other income, net 457 805

Loss before income taxes ( 16,117 ) ( 19,545 )

Provision (benefit) for income taxes ( 133 ) 598

Benefit for income taxes ( 884 ) ( 133 )

Net loss ( 15,233 ) ( 19,412 )

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

Net income attributable to non-controlling interests and redeemable non-controlling interests ( 797 ) ( 409 )

Net loss attributable to Pixelworks, Inc.

6 unchanged sentences

Stock-based compensation 41 43

Restructuring — 173

(2) Includes stock-based compensation 2,351 2,363

8 unchanged sentences

Net loss $ ( 15,233 ) $ ( 19,412 )

Other comprehensive income (loss):

Other comprehensive loss:

Foreign currency translation adjustment

2,612 ( 520 )

Foreign pension adjustment

Tax effect of foreign pension adjustment ( 19 ) ( 1 )

Unrealized loss on available-for-sale securities

Comprehensive loss ( 12,587 ) ( 19,927 )

12 unchanged sentences

Depreciation and amortization 4,657 3,648

Amortization of acquired intangible assets 1,118 1,496

Deferred income tax expense (benefit) ( 768 ) 26

Reversal of uncertain tax positions ( 2,171 ) ( 2 )

Gain on loan extinguishment — ( 796 )

Accretion on short-term marketable securities — ( 4 )

Gain on sale of marketable securities — ( 4 )

Deferred income tax expense (benefit) 428 ( 768 )

Amortization of acquired intangible assets 90 1,118

Changes in operating assets and liabilities:

8 unchanged sentences

Purchases of property and equipment ( 1,592 ) ( 3,475 )

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

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

Purchases of licensed technology ( 1,415 ) —

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

Proceeds from sales and maturities of marketable securities — 250

Net cash used in investing activities ( 3,007 ) ( 3,225 )

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 non-controlling interest 10,738 —

Payments on asset financings ( 1,457 ) ( 1,195 )

Net proceeds from issuance of equity interest to certain entities owned by employees 1,407 12,329

Proceeds from issuances of common stock under employee equity incentive plans 387 1,282

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

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

Net proceeds from "at the market" equity offering — 320

Net proceeds from equity offering — 12,743

Net proceeds from private placement investment — 6,210

Proceeds from Paycheck Protection Program loan — 796

Net cash provided by financing activities 11,075 42,712

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

Net increase (decrease) in cash and cash equivalents ( 4,766 ) 30,330

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

1 unchanged sentence

Supplemental disclosure of cash flow information:

Cash paid for income taxes, net of refunds received $ 376 $ 397

Cash paid during the year for interest $ 196 $ 162

Cash paid for income taxes, net of refunds received 188 376

Non-cash investing and financing activities:

Acquisitions of property and equipment and other assets under extended payment terms $ 1,674 $ 1,229

Gain on loan extinguishment — ( 796 )

See accompanying notes to consolidated financial statements.

5 unchanged sentences

Income (Loss) Accumulated

Deficit Total

Deficit Non-Controlling Interest Total

Shareholders'

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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 )

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

Net loss attributable to Pixelworks, Inc.

3 unchanged sentences

Stock issued under employee equity incentive plans 1,746,050 387 — — — 387

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

Stock-based compensation expense — 5,198 — — — 5,198

Foreign currency translation adjustment — — 2,612 — — 2,612

Net proceeds from issuance of equity interest to non-controlling interest — — — — 10,738 10,738

Net income attributable to non-controlling interest — — — — 171 171

Net loss attributable to Pixelworks, Inc.

1 unchanged sentence

Foreign pension adjustment, net of tax of $ 19

— — 34 — — 34

Balance as of December 31, 2022 55,113,186 $ 481,229 $ 2,178 $ ( 450,985 ) $ 10,909 $ 43,331

5 unchanged sentences

Nature of Business

Pixelworks is a leading provider of high-performance and power-efficient visual processing solutions that bridge the gap between video content formats and rapidly advancing display capabilities.

We develop and market semiconductor and software solutions that enable consistently high-quality, authentic viewing experiences in a wide variety of applications from cinema to smartphones.

Our primary target markets include Mobile (smartphone, gaming and tablet), Home Entertainment (TV, personal video recorder ("PVR"), over-the-air ("OTA") and projector), Content (creation, remastering and delivery), and Business & Education (projector).

As of December 31, 2021, we had an intellectual property portfolio of 335 patents related to the visual display of digital image data.

We focus our research and development efforts on developing video algorithms that improve quality, and architectures that reduce system power, cost, bandwidth and increase overall system performance and device functionality.

We seek to expand our technology portfolio through internal development and co-development with business partners, and we continually evaluate acquisition opportunities and other ways to leverage our technology into other high-value markets.

Pixelworks was founded in 1997 and is incorporated under the laws of the state of Oregon.

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

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.

Pixelworks is a leading provider of high-performance and power-efficient visual processing semiconductor and software solutions that enable consistently high-quality and authentic viewing experiences in a wide variety of applications.

We define our primary target markets as Mobile (smartphone and tablet), Home & Enterprise (projectors, personal video recorders ("PVR"), and over-the-air ("OTA") streaming devices), and Cinema (creation, remastering, and delivery of digital video content).

Previously we classified our primary target markets as Mobile, Projector, Video Delivery and Cinema, but have since aggregated the Projector and Video Delivery categories into one called "Home & Enterprise".

Pixelworks has been a pioneer in visual processing technology for over 20 years.

We were one of the first companies to commercially launch a video System on Chip ("SoC") capable of deinterlacing 1080i HDTV signals and one of the first companies with a commercial dual-channel 1080i deinterlacer integrated circuit.

We launched one of the industry’s first single-chip SoCs for digital projection.

We were the first company to integrate motion estimation / motion compensation technology ("MEMC") as a mobile-optimized solution for smartphones.

In 2019, we introduced our Hollywood award-winning TrueCut® video platform, the industry’s first motion grading technology that allows fine tuning of motion appearance in cinematic content.

Our core visual processing technology intelligently processes digital images and video from a variety of sources and optimizes the content for a superior viewing experience.

Rapid growth in video and gaming consumption, combined with the move towards bright, high resolution, high frame rate and high refresh rate displays, especially in mobile, is increasing the demand for our solutions.

Our technologies can be applied across a wide range of applications:

cinema theaters, low-power mobile tablets, smartphones, streaming devices, and digital projectors for the home, school, or the workplace.

Our products are designed and optimized for power, cost, bandwidth, viewer experience, and overall system performance, according to the requirements of the specific application.

On occasion, we have also licensed our technology.

During the third quarter of 2021, we engaged in a strategic plan to re-align our Mobile and Home & Enterprise businesses to improve their focus on their Asia-centered customers and employee stakeholders.

Our subsidiary, Pixelworks Semiconductor Technology (Shanghai) Co., Ltd.

(or "PWSH"), now operates these businesses as a full profit-and-loss center underneath Pixelworks.

In connection with this strategic plan, the Company and PWSH closed three separate financing transactions in 2021 and 2022, which are further described in "Note 14:

Redeemable Non-Controlling Interest and Equity Interest of PWSH Sold to Employees", "Note 15:

Non-Controlling Interest" and "Note 17:

Subsequent Events", which are incorporated by reference into this section.

PWSH is in the process of preparing to file an application for an initial public offering of PWSH shares on the Shanghai Stock Exchange’s Science 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 PWSH’s growth worldwide.

We presently intend to qualify PWSH to apply for the Listing in 2023.

The process of going public on the STAR Market is lengthy and includes several periods of review by various government agencies of the People’s Republic of China (“PRC”), such as the Shanghai Stock Exchange and the China Securities Regulatory Commission (“CSRC”).

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

The listing of PWSH on the STAR Market will not change the status of PXLW as a U.S.

public company.

We are neither a PRC operating company nor do we conduct our operations in China through the use of variable interest entities.

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

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We classify all cash and highly liquid investments with original maturities of three months or less at the date of purchase as cash and cash equivalents.

Cash equivalents, which as of December 31, 2021 and 2020 consisted of U.S.

denominated money market funds, totaled $ 15,254 and $ 23,832 as of December 31, 2021 and 2020, respectively.

Cash equivalents totaled $ 18,836 and $ 15,254 as of December 31, 2022 and 2021, respectively and consisted of U.S.

denominated money market funds and certificates of deposit.

Marketable Securities

8 unchanged sentences

Past due status is based on invoice date and terms specific to each customer.

Inventories consist of finished goods and work-in-process, and are stated at the lower of standard cost (which approximates actual cost on a first-in, first-out basis) or market (net realizable value).

Inventories consist of finished goods and work-in-process, and are stated at the lower of standard cost (which approximates actual cost on a first-in, first-out basis) or net realizable value.

Property and Equipment

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Recent Accounting Pronouncements

In December 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No.

In December 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No.

2019-12, Simplifying the Accounting for Income Taxes ("ASU 2019-12").

ASU 2019-12 removes certain exceptions to the general principles in Accounting Standards Codification ("ASC") 740 and also clarifies and amends existing guidance to provide for more consistent application.

ASU 2019-12 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.

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 year 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.

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Acquired intangible assets, net $ — $ 90

Intangible assets are amortized over the following estimated useful lives:

developed technology and customer relationships, 3 to 5 years;

tradename and backlog, 6 to 18 months.

Backlog was fully amortized as of December 31, 2018 and tradename was fully amortized as of December 31, 2019.

Amortization expense for intangible assets was $ 1,118 for the year ended December 31, 2021, with $ 899 included in cost of revenue and $ 219 included in selling, general and administrative on the consolidated statements of operations.

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

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 as of December 31, 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 year ended December 31, 2022, $ 72 was included in cost of revenue and $ 18 was included in selling, general and administrative for the year ended December 31, 2022, in the condensed consolidated statements of operations.

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

4 unchanged sentences

Operating lease liability, current 1,391 2,439

Deferred research and development reimbursement 1,838 —

Current portion of accrued liabilities for asset financings 876 1,077

Accrued interest payable 246 361

Accrued commissions and royalties 259 474

Deferred revenue 230 50

Accrued costs related to restructuring — 630

Accrued commissions and royalties 210 259

Liability for warranty returns 15 —

Deferred research and development reimbursement — 1,838

Other 2,249 4,049

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Balance at end of period $ 230 $ 50

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 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 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.

The Loan is subject to forgiveness to the extent proceeds are used for payroll costs, including payments required to continue group health care benefits, and certain rent, utility, and mortgage interest expenses (collectively, “Qualifying Expenses”), pursuant to the terms and limitations of the PPP.

We used the Loan amount for Qualifying Expenses.

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

MARKETABLE SECURITIES AND FAIR VALUE MEASUREMENTS

Marketable Securities

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

Short-term marketable securities:

As of December 31, 2020:

Corporate debt securities $ 253 $ ( 3 ) $ 250

$ 253 $ ( 3 ) $ 250

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

FAIR VALUE MEASUREMENTS

Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

8 unchanged sentences

Money market funds $ 18,836 $ — $ — $ 18,836

Certificates of deposit 5,000 — — 5,000

As of December 31, 2021:

1 unchanged sentence

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 instruments.

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 statement of operations for the years ended December 31, 2021 and 2020 is comprised of the following:

Year Ended December 31,

Cost of revenue — restructuring:

Employee severance and benefits

Operating expenses — restructuring:

Employee severance and benefits

Total restructuring expense $ — $ 2,214

The following is a rollforward of the accrued liabilities related to restructuring for the year ended December 31, 2021:

Balance as of December 31, 2020 Expensed Payments

Balance as of December 31, 2021

Employee severance and benefits

$ 630 $ — $ ( 630 ) $ —

Accrued costs related to restructuring

$ 630 $ — $ ( 630 ) $ —

We determine if an arrangement is a lease at inception.

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

Year Ended Year Ended

December 31, 2021 December 31, 2020

Year Ended December 31,

Operating lease cost $ 2,657 $ 2,622

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Years ending December 31:

Thereafter 91

Total operating lease payments 3,842

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Product Sales - We sell integrated circuit products, also known as “chips” or “ICs”, based upon a customer purchase order, which includes a fixed price per unit.

ICs are sold into two target end markets:

Mobile and Home & Enterprise.

We have elected to account for shipping and handling as activities to fulfill the promise to transfer the goods, and not evaluate whether these activities are promised services to the customer.

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Historically, such arrangements have not been material to our operating results.

The following table provides information about disaggregated revenue based on the preceding categories for the years ended December 31, 2021 and 2020:

The following table provides information about disaggregated revenue based on the preceding categories, with IC sales disaggregated further into net revenue from external customers for each group of similar products, for the years ended December 31, 2022 and 2021:

Year ended December 31,

2 unchanged sentences

Total revenues $ 70,146 $ 55,102

IC sales by end market:

Year ended December 31,

Mobile market $ 21,160 $ 16,113

Home & Enterprise market 47,008 34,694

Total IC sales $ 68,168 $ 50,807

For segment information, including revenue by geographic region, see "Note 13.

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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 $ 30 , which we expect to recognize ratably over the next 3 months.

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

Revenue related to the Cinema market was not material in 2022 or 2021 and was therefore included in the engineering services, license revenue and other category within the Mobile market.

INTEREST INCOME AND OTHER, NET

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Total interest income and other, net $ 700 $ 457

The increase in interest income in 2022 compared to 2021 is due to increased interest earned on our cash and cash equivalents balance due to our increased average cash balance throughout the year in 2022 compared to 2021.

RESEARCH AND DEVELOPMENT

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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 .

We recognized offsets to research and development expense of $ 4,338 and $ 3,962 during the years ended December 31, 2022 and 2021, respectively.

Current and Deferred Income Tax Expense

4 unchanged sentences

Domestic and foreign pre-tax loss $ ( 16,117 ) $ ( 19,545 )

Income tax expense attributable to operations is comprised of the following:

Income tax expense (benefit) attributable to operations is comprised of the following:

Year Ended December 31,

2 unchanged sentences

Total current ( 1,312 ) 635

Federal ( 364 ) —

Foreign 792 ( 768 )

Total deferred 428 ( 768 )

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

Income tax benefit $ ( 884 ) $ ( 133 )

The reconciliation of the U.S.

2 unchanged sentences

Federal statutory rate 21 % 21 %

Corporate restructuring ( 38 ) —

Impact of foreign earnings ( 27 ) 3

Change in valuation allowance 28 24

Expiration of tax attributes ( 6 ) ( 14 )

Tax contingencies, net of reversals 13 ( 5 )

Impact of foreign earnings 3 ( 7 )

Corporate restructuring ( 11 ) ( 38 )

Expiration of tax attributes ( 12 ) ( 6 )

Permanent items ( 2 ) 4

10 unchanged sentences

Depreciation and amortization 5,568 5,664

Deferred stock-based compensation 994 1,158

Reserves and accrued expenses 1,000 992

Deferred stock-based compensation 821 994

Foreign tax credit carryforwards 163 208

2 unchanged sentences

Deferred tax liabilities:

Foreign earnings ( 212 ) —

Other ( 620 ) ( 812 )

3 unchanged sentences

We continue to record a full valuation allowance against our U.S.

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.

and China net deferred tax assets as of December 31, 2022 and 2021, as it is not more likely than not that we will realize a benefit from these assets in a future period.

In the fourth quarter of 2021, we released a portion of the valuation allowance against our Canadian deferred tax assets in conjunction with forecasted income within our Canada subsidiary.

During the year ended December 31, 2022, our Canadian subsidiary generated taxable profits which were able to be offset by our Canadian deferred tax assets.

As of December 31, 2022, a valuation allowance against our remaining net Canadian deferred tax assets was established as future utilization is uncertain based upon updated projections of income within our Canada Subsidiary.

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.

1 unchanged sentence

As of December 31, 2022, we had federal, state and foreign net operating loss carryforwards of $ 154,992 , $ 9,600 and $ 42,668 respectively, which will begin to expire in 2024 with $ 31,705 of our federal net operating loss carryforward lasting indefinitely.

As of December 31, 2021, we had available federal, state and foreign research and experimentation tax credit carryforwards of $ 7,823 , $ 4,993 , and $ 24,252 respectively.

As of December 31, 2022, we had available federal, state and foreign research and experimentation tax credit carryforwards of

$ 6,747 , $ 5,173 , and $ 21,850 respectively.

The federal and state tax credits will begin expiring in 2023 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 $ 120,906 .

In addition, our Canadian subsidiary has unclaimed scientific and experimental expenditures to be carried forward and applied against future income in Canada of approximately $ 120,277 .

We have a general foreign tax credit of $ 84 which will begin to expire in 2023.

2 unchanged sentences

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.

The Tax Cuts and Jobs Act ("TCJA") was enacted on December 22, 2017.

Included in the TCJA is the requirement to capitalize and amortize research and experimental expenditures starting with the first tax year after December 31, 2021.

The required capitalization and amortization of these costs resulted in an increase to our taxable income before utilization of our operating loss carryforward.

The capitalization did not have a significant impact to our income tax benefit in the current year.

Uncertain Tax Positions

8 unchanged sentences

Reversals due to lapse of statute of limitations ( 97 ) ( 11 )

Reversals due to positions taken in the current year ( 1,809 ) —

Balance at end of year $ 1,643 $ 3,646

6 unchanged sentences

During the years ended December 31, 2022 and 2021 we recognized $ 11 and $ 16 , respectively, of interest and penalties in income tax expense in our consolidated statements of operations.

During the year ended December 31, 2022, our China subsidiary settled a portion of the outstanding intercompany debt with the US parent, Pixelworks, Inc.

The portion that was not able to be settled was forgiven and was recognized as taxable income in China.

We previously accrued for a long term liability in the event that the full amount of the intercompany debt would be recognized as taxable income in China.

The related uncertain tax position was reversed as a part of the settlement of the intercompany debt.

We file income tax returns in the U.S.

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Other Contractual Obligation

As part of the Acquisition, we acquired debt associated with an agreement with the Government of Canada called Technology Partnerships Canada ("TPC").

As part of the TPC agreement, ViXS Systems Inc.

was provided funding to assist in research and development expenses of which a portion was later required to be repaid because the conditions for repayment were met.

As part of the acquisition of ViXS Systems, Inc.

("ViXS") in 2017, we acquired debt associated with an agreement with the Government of Canada called Technology Partnerships Canada ("TPC").

As part of the TPC agreement, ViXS was provided funding to assist in research and development expenses of which a portion was later required to be repaid because the conditions for repayment were met.

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

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Indemnifications

Certain of our agreements include limited indemnification provisions for claims from third-parties relating to our intellectual property.

Certain of our agreements include limited indemnification provisions for claims from third-parties relating to our products and technology.

It is not possible for us to predict the maximum potential amount of future payments or indemnification costs under these or similar agreements due to the conditional nature of our obligations and the unique facts and circumstances involved in each particular agreement.

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Net loss $ ( 15,233 ) $ ( 19,412 )

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

Net income attributable to non-controlling interests and redeemable non-controlling interests ( 797 ) ( 409 )

Net income attributable to certain entities owned by employees ( 89 ) ( 198 )

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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 non-controlling interests, 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.

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Shareholders of common stock have unlimited voting rights and are entitled to receive the net assets of the Company upon dissolution, subject to the rights of the preferred shareholders, if any.

Equity Offering

On December 14, 2020, we completed the sale of 4,900,000 shares of common stock in an underwritten registered offering.

On December 16, 2020, an additional 735,000 shares were issued pursuant to the 30 -day over-allotment option exercised by the underwriter.

With the over-allotment shares, a total of 5,635,000 shares of common stock were sold in the offering at a price to the public of $ 2.45 per share.

Net proceeds to the Company, after deducting underwriting discounts, commissions, and other expenses, were approximately $ 12,743 .

Private Placement Investment

On December 7, 2020, we completed a private placement of 724,288 shares of common stock to a certain accredited investor at a purchase price of $ 2.071 per share.

On December 15, 2020, we completed a private placement of 2,475,712 shares of common stock to a certain accredited investor at a purchase price of $ 2.071 .

Net proceeds to the Company, after deducting commissions and other expenses, were approximately $ 6,210 .

At the Market Offering

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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 .

There was no activity under this at the market offering during the year ended December 31, 2022.

Employee Equity Incentive Plans

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354,609 $ 2.52

Granted 108,891 1.97

Exercised — —

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Volatility 104 % 75 %

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 weighted average fair value of options granted during the years ended December 31, 2022 and 2021 was $ 1.19 and $ 0.00 , respectively.

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

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SEGMENT INFORMATION

We have identified a single operating segment:

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

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

We operate in one segment:

the design, development, marketing and sale of IC solutions for use in electronic display devices.

We generate our revenue from two broad product markets:

the Mobile market and the Home & Enterprise market.

The chief operating decision maker, or CODM, is our CEO.

Our CODM evaluates financial performance and allocates resources using financial information reported on a company-wide basis.

The Cinema market does not contribute material revenue and is therefore being included in this one segment.

Geographic Information

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Taiwan 3,032 2,142

Europe 242 333

Korea 277 116

Europe 150 242

$ 70,146 $ 55,102

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End customer B 14 % 22 %

End customer C 13 % 8 %

1 End customers include customers who purchase directly from us, as well as customers who purchase our products indirectly through distributors.

Each of the following accounts represented 10% or more of total accounts receivable in at least one of the periods presented:

Account W 31 % 41 %

Account X 27 % 27 %

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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.

During the third quarter of 2021, Pixelworks and our subsidiary, PWSH, entered into a capital increase agreement (the "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 do qualify as employee share ownership plans qualified under the laws of China, under which the employees hold a pro rata share of an ESOP partnership entity that then holds an equity ownership in trust for employees.

Under the Capital Increase Agreement, during 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 $ 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.

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 Pixelworks on the same terms and conditions as Pixelworks, a right to participate on a pro rata basis in any future financing rounds of PWSH, and Pixelworks’ 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.

Prior to entering into a certain 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.

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.

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).

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 (the “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.

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.

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.

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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.

On December 21, 2022, the Company and its subsidiary, PWSH, entered into a capital increase agreement (the “CIA”) with Jing Xin Ying (Shanghai) Management Consulting Partnership (Limited Partnership), an entity owned by certain of the employees of PWSH (the “ESOP”).

The ESOP invested approximately $ 1,407 in exchange for an equity interest in PWSH of 0.54 %, based on a pre-money valuation of PWSH of RMB 1,750,000 ($ 251,256 USD), which includes a discount of 50 %.

The CIA provides that if there is a change in control of PWSH that closes prior to its filing an application for the Listing, each capital contributor would be entitled to a minimum return of 10% on the price they paid for their respective equity interest, payable by Company in cash at the close of the change in control transaction, with such right terminating automatically upon the filing by PWSH of the Listing.

The ESOP has a redemption right that is identical to that held by the other ESOP investors from the financing round that closed in 2021:

if the Listing is not consummated prior December 31, 2024, the 2022 ESOP may elect to require a repurchase of its respective equity interest for a price equal to the initial purchase price paid plus annual simple interest at a rate of 5 %.

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.

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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 626

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Carrying Value of Redeemable NCI as of December 31, 2022

NON-CONTROLLING INTEREST

On August 15, 2022, the Company entered into an Equity Transfer Agreement with certain private equity investors based in China (Hainan Qixin Investment Partnership (Limited Partnership) and Suzhou Saixiang Equity Investment Partnership (Limited Partnership)) (collectively, the “Purchasers”).

Under this agreement, the Purchasers agreed to pay to the Company, subject to customary closing conditions, a total of 87,500 RMB, approximately $ 10,738 (net of issuance costs) at closing, in exchange for a 2.74 % equity interest in PWSH.

The Company incurred costs related to the sale of equity in PWSH of $ 275 paid to a third party for assisting in the transaction close as well as 8,408 RMB to fulfill Chinese withholding tax requirements.

Both of these costs are direct and incremental and related to the sale of equity in PWSH and as such will be included as costs that reduce proceeds and carrying amount of the NCI in the Company’s balance sheet.

The Equity Transfer Agreement provides the Purchasers with some additional rights:

(1) if there is a change in control of PWSH that closes prior to its filing an application for a listing on the STAR Board of the Shanghai Stock Exchange (the “Listing Application”), each Purchaser would be entitled to a minimum return of 10 % on the price they paid for their respective equity interest, payable by Company in cash at the close of the change in control transaction, with such right terminating automatically upon the filing by PWSH of the Listing Application;

and (2) the Company would cause PWSH to give each Purchaser a right to participate on a pro rata basis in any future financing rounds of PWSH, which right also would expire on the filing of a Listing Application.

When the Company’s relative ownership interest in PWSH changes, adjustments to non-controlling interest and paid-in capital, tax effected, will occur.

Because these changes in the ownership interest in PWSH do not result in a change of control, the transactions are accounted for as equity transactions under ASC Topic 810, (-Consolidations), which requires that any differences between the carrying value of the Company’s interest in PWSH and the fair value of the consideration received are recognized directly in equity and attributed to the controlling interest.

Additionally, there are no substantive profit-sharing arrangements that would cause distributions to be other than pro rata.

Therefore, profits and losses are attributed to the common shareholders of PWSH and non-controlling interest pro rata based on ownership interests in PWSH.

The following table reconciles the initial investment by the Purchasers and the carrying value of their non-controlling interest as of the Closing Date (as defined in the Equity Transfer Agreement):

Carrying Value of Permanent Equity Non-Controlling Interest as of January 1, 2022

Increase in additional paid-in capital 12,184

Closing and direct costs incurred ( 1,446 )

Net income attributable to non-controlling interest 171

Carrying Value of Permanent Equity Non-Controlling Interest as of December 31, 2022

QUARTERLY FINANCIAL DATA (UNAUDITED)

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

SUBSEQUENT EVENTS

On December 21, 2022, the Company and its subsidiary, PWSH, entered into a capital increase agreement (the “CIA”) with certain private equity investors based in China who have agreed to pay a total of RMB 100,000 ($ 14,300 USD) in exchange for an equity interest in PWSH of 2.76 %, based on a pre-money value of PWSH of RMB 3,500,000 ($ 501,400 USD).

This transaction closed in February 2023.

The CIA provides that if there is a change in control of PWSH that closes prior to its filing an application for the Listing, each capital contributor would be entitled to a minimum return of 10 % on the price they paid for their respective equity interest, payable by Company in cash at the close of the change in control transaction, with such right terminating automatically upon the filing by PWSH of the Listing.

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