What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2023-05-09 compared with 2022-11-08 · 111 added, 144 removed, 423 unchanged (38% of the section changed)

3 unchanged sentences

(In thousands)

September 30,

2023 December 31,

8 unchanged sentences

Other assets, net 2,897 3,580

Acquired intangible assets, net — 90

Goodwill 18,407 18,407

16 unchanged sentences

Common stock 482,551 481,229

Accumulated other comprehensive income (loss) 2,705 ( 468 )

Accumulated other comprehensive income 1,845 2,178

Accumulated deficit ( 460,381 ) ( 450,985 )

8 unchanged sentences

(In thousands, except per share data)

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

2022 2021 2022 2021

Three Months Ended March 31,

Revenue, net $ 9,966 $ 16,628

9 unchanged sentences

Loss before income taxes ( 9,700 ) ( 3,719 )

Provision (benefit) for income taxes ( 70 ) ( 9 ) 245 315

Provision for income taxes 34 403

Net loss ( 9,734 ) ( 4,122 )

Net income attributable to redeemable non-controlling interest — ( 232 ) ( 470 ) ( 232 )

Net (income) loss attributable to redeemable non-controlling interest 338 ( 470 )

Net loss attributable to Pixelworks Inc.

14 unchanged sentences

(In thousands)

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

2022 2021 2022 2021

Three Months Ended March 31,

Net loss $ ( 9,734 ) $ ( 4,122 )

2 unchanged sentences

Comprehensive loss ( 10,067 ) ( 4,274 )

comprehensive income attributable to redeemable non-controlling interest — ( 232 ) ( 470 ) ( 232 )

comprehensive (income) loss attributable to redeemable non-controlling interest 338 ( 470 )

Total comprehensive loss attributable to Pixelworks, Inc.

4 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 1,081 1,040

Deferred income tax expense (benefit) 396 ( 5 )

Reversal of uncertain tax positions ( 2 ) ( 121 )

Deferred income tax expense (benefit) — 364

Amortization of acquired intangible assets — 90

8 unchanged sentences

Cash flows from investing activities:

Purchases of licensed technology ( 1,415 ) —

Purchases of property and equipment ( 2,005 ) ( 540 )

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

Purchases of licensed technology — ( 517 )

Net cash used in investing activities ( 2,005 ) ( 1,057 )

3 unchanged sentences

Proceeds from issuance of common stock under employee equity incentive plans 156 217

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

Net proceeds from "at the market" equity offering — 333

Net cash provided by financing activities 14,530 ( 150 )

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Foreign currency translation adjustment — — ( 333 ) — ( 33 ) ( 366 )

Net loss attributable to Pixelworks, Inc.

— — — ( 4,592 ) — ( 4,592 )

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

Stock issued under employee equity incentive plans 233,860 — — — — —

Stock-based compensation expense — 1,695 — — — 1,695

Foreign currency translation adjustment — — 1,668 — — 1,668

Net loss attributable to Pixelworks, Inc.

— — — ( 5,008 ) — ( 5,008 )

Balance as of June 30, 2022 54,231,872 $ 478,605 $ 1,048 $ ( 444,555 ) $ — $ 35,098

Stock issued under employee equity incentive plans 604,167 170 — — — 170

Stock-based compensation expense — 1,294 — — — 1,294

Foreign currency translation adjustment — — 1,657 — — 1,657

Net proceeds from issuance of equity interest to non-controlling interest — — — — 14,596 14,596

Net loss attributable to Pixelworks, Inc.

— — — ( 4,496 ) — ( 4,496 )

Balance as of September 30, 2022 54,836,039 $ 480,069 $ 2,705 $ ( 449,051 ) $ 10,738 $ 44,461

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

Stock issued under employee equity incentive plans 1,133,479 1,063 — — — 1,063

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

Net income attributable to non-controlling interest — — — — ( 338 ) ( 338 )

Net loss attributable to Pixelworks, Inc.

1 unchanged sentence

Balance as of March 31, 2023 55,719,725 $ 482,551 $ 1,845 $ ( 460,381 ) $ 25,134 $ 49,149

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

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

Net loss attributable to Pixelworks, Inc.

— — — ( 4,382 ) — ( 4,382 )

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

Balance as of December 31, 2021 53,367,136 $ 475,644 $ ( 468 ) $ ( 434,955 ) $ — $ 40,221

Stock issued under employee equity incentive plans 630,876 217 — — — 217

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

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

2 unchanged sentences

— — — ( 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

See accompanying notes to condensed consolidated financial statements.

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Nature of Business

Pixelworks, Inc.

(together with our subsidiaries, the “Company”, "Pixelworks", “we”, “our” or “us”) is a leading provider of high-performance and power-efficient visual processing solutions that bridge the gap between video content formats and rapidly advancing display capabilities.

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

Our primary target markets include mobile (smartphone and tablet), projector (business, education and home entertainment), video delivery (personal video recorder ("PVR") and over-the-air) and cinema (content creation, remastering and video streaming).

As of September 30, 2022, we had an intellectual property portfolio of 297 patents related to the visual display of digital image data.

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.

As of March 31, 2023, we had an intellectual property portfolio of 286 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.

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 13:

Redeemable Non-Controlling Interest and Equity Interest of PWSH Sold to Employees" and "Note 14:

Non-Controlling Interest", 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 the second half of 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.

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").

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.

The steps involved in this strategic re-alignment of our businesses have been completed.

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

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

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

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

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

Condensed Consolidated Financial Statements

The financial information included herein for the three and nine months ended September 30, 2022 and 2021 is prepared in accordance with U.S.

The financial information included herein for the three months ended March 31, 2023 and 2022 is prepared in accordance with U.S.

generally accepted accounting principles ("U.S.

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The financial information as of December 31, 2022 is derived from our audited consolidated financial statements and notes thereto for the fiscal year ended December 31, 2022, included in Item 8 of our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 8, 2023, and should be read in conjunction with such consolidated financial statements.

The results of operations for the three and nine months ended September 30, 2022 and 2021 are not necessarily indicative of the results expected for future periods or for the entire fiscal year ending December 31, 2022.

The results of operations for the three months ended March 31, 2023 and 2022 are not necessarily indicative of the results expected for future periods or for the entire fiscal year ending December 31, 2023.

Recent Accounting Pronouncements

In December 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 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 was permitted.

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

The Company’s recently adopted accounting pronouncements are disclosed in Note 2.

Summary of Significant Accounting Policies" in Part II, Item 8 of our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 8, 2023.

We did not adopt any new accounting pronouncements during the three months ended March 31, 2023.

Use of Estimates

8 unchanged sentences

Accounts receivable are stated net of an allowance for doubtful accounts, which is maintained for estimated losses that may result from the inability of our customers to make required payments.

Accounts receivable consist of the following:

September 30,

Accounts receivable net, consist of the following:

2023 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 $ 77 $ 36

Reductions credited ( 10 ) ( 15 )

Additions charged (reductions credited) ( 39 ) 27

Balance at end of period $ 38 $ 63

1 unchanged sentence

Inventories consist of the following:

September 30,

2023 December 31,

4 unchanged sentences

Property and equipment, net consists of the following:

September 30,

2023 December 31,

5 unchanged sentences

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

September 30,

2023 December 31,

5 unchanged sentences

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 $ 0 and $ 90 for the three and nine months ended September 30, 2022, respectively, $ 0 and $ 72 were included in cost of revenue for the three and nine months ended September 30, 2022, respectively, and $ 0 and $ 18 were included in selling, general and administrative for the three and nine months ended September 30, 2022, respectively, in the condensed consolidated statements of operations.

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

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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, 2022.

There were no such triggering events requiring a goodwill impairment assessment during the three months ended March 31, 2023.

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,

2023 December 31,

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Current portion of accrued liabilities for asset financings 1,423 876

Accrued interest payable 270 361

Deferred revenue 185 230

Accrued interest payable 140 246

Accrued commissions and royalties 56 210

Deferred research and development reimbursement — 1,838

Liability for warranty returns 22 15

Other 2,136 2,249

Accrued liabilities and current portion of long-term liabilities $ 8,254 $ 8,849

Deferred research and development reimbursement is related to the co-development agreement discussed in "Note 7:

Research and Development".

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

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The change in deferred revenue is as follows:

Nine Months Ended

September 30,

Three Months Ended

Deferred revenue:

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Valuations based on unobservable inputs in which there is little or no market data available, which require the reporting entity to develop its own assumptions.

The following table presents information about our assets measured at fair value on a recurring basis in the condensed consolidated balance sheets as of September 30, 2022 and December 31, 2021:

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, 2023 and December 31, 2022:

Level 1 Level 2 Level 3 Total

As of September 30, 2022:

As of March 31, 2023:

Cash equivalents:

Certificates of deposit $ 11,000 $ — $ — $ 11,000

Money market funds 4,634 — — 4,634

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

Certificates of deposit 5,000 — — 5,000

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

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We determine if an arrangement is a lease at inception.

Operating leases are included in operating lease right-of-use (“ROU”) assets, other current liabilities, and operating lease liabilities in our condensed consolidated balance sheets.

Operating leases are included in operating lease right-of-use (“ROU”) assets, accrued liabilities and current portion of long-term liabilities, and operating lease liabilities in our condensed consolidated balance sheets.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease.

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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,

2022 2021 2022 2021

Three Months Ended

Operating lease cost:

$ 659 $ 657 $ 2,004 $ 1,943

Nine Months Ended

September 30,

Three Months Ended

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

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Weighted average discount rate 6.72 % 5.00 %

Future minimum lease payments under non-cancellable leases as of September 30, 2022 were as follows:

Future minimum lease payments under non-cancellable leases as of March 31, 2023 were as follows:

Operating Lease Payments

Three months ending December 31, 2022 $ 488

Nine months ending December 31, 2023 $ 1,656

Years ending December 31:

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Total operating lease liabilities $ 5,707

As of September 30, 2022, we had $707 in operating lease liabilities that had not commenced.

As of March 31, 2023, we had $ 2,726 in operating lease liabilities that had not commenced.

Revenue is recognized when control of the promised good or service is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.

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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 three and nine months ended September 30, 2022 and 2021:

Three Months Ended Nine Months Ended

September 30, September 30,

2022 2021 2022 2021

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 three months ended March 31, 2023 and 2022:

Three Months Ended

IC sales $ 9,680 $ 16,456

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Total revenues $ 9,966 $ 16,628

IC sales by end market:

Three Months Ended

Mobile market $ 3,063 $ 5,572

Home & Enterprise market 6,617 10,884

Total IC sales $ 9,680 $ 16,456

For segment information, including revenue by geographic region, see "Note 10:

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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 during the three months ended March 31, 2023 and 2022, and was therefore included in the engineering, services, license revenue and other category within the Mobile market.

INTEREST INCOME AND OTHER, NET

Interest income and other, consists of the following:

Three Months Ended Nine Months Ended

September 30, September 30,

2022 2021 2022 2021

Three Months Ended

Interest income $ 508 $ 130

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

We recognized offsets to research and development expense of $ 0 and $ 1,300 during the three months ended September 30, 2022 and 2021, respectively and $ 1,838 and $ 1,300 during the nine months ended September 30, 2022 and 2021, respectively.

During the first quarter of 2023 and the first quarter of 2022, we recognized offsets to research and development expense of zero and $ 983 , respectively.

The provision for income taxes during the 2023 and 2022 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 $ 121 and $ 2 during the first nine months of 2022 and 2021, respectively.

We recorded a benefit for the reversal of previously recorded foreign tax contingencies of $ 2 and $ 121 during the first three months of 2023 and 2022, respectively.

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

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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, 2022 and December 31, 2021, the amount of our uncertain tax positions was a liability of $ 2,167 and $ 2,493 , respectively, as well as a contra deferred tax asset of $ 1,384 and $ 1,254 , respectively.

As of March 31, 2023 and December 31, 2022, the amount of our uncertain tax positions was a liability of $ 379 and $ 1,643 , respectively, as well as a contra deferred tax asset of $ 1,470 and $ 1,353 , respectively.

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

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

Three Months Ended Nine Months Ended

September 30, September 30,

2022 2021 2022 2021

Three Months Ended

$ ( 9,734 ) $ ( 4,122 )

Net income attributable to redeemable non-controlling interest — ( 232 ) ( 470 ) ( 232 )

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

Net (income) loss attributable to redeemable non-controlling interest 338 ( 470 )

Net loss attributable to Pixelworks, Inc.

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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, when applicable, 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 interests 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.

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.

Potentially dilutive common shares from employee equity incentive plans are determined by applying the treasury stock method to the assumed exercise of outstanding stock options, the assumed vesting of outstanding restricted stock units, and the assumed issuance of common stock under the employee stock purchase plan

The following shares were excluded from the calculation of diluted net loss per share as their effect would have been anti-dilutive (in thousands):

Three Months Ended Nine Months Ended

September 30, September 30,

2022 2021 2022 2021

Three Months Ended

Employee equity incentive plans 3,891 3,780

2 unchanged sentences

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

We generate our revenue from three broad product markets:

the projector market, the mobile market and the video delivery market.

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

Revenue by geographic region, is as follows:

Three Months Ended Nine Months Ended

September 30, September 30,

2022 2021 2022 2021

Three Months Ended

Japan $ 5,559 $ 7,399

China 3,926 7,131

United States 648 176 1,736 1,359

Taiwan 421 1,164

Korea 50 50 50 66

Europe — — 76 71

United States 60 858

$ 9,966 $ 16,628

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The percentage of revenue attributable to our distributors, top five end customers, and individual distributors or end customers that represented 10% or more of revenue in at least one of the periods presented, is as follows:

Three Months Ended Nine Months Ended

September 30, September 30,

2022 2021 2022 2021

Three Months Ended

Distributors:

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Distributor B 13 % 12 %

Distributor C 2 % 13 % 5 % 9 %

End customers:

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End customer D — % 32 %

End customer E 2 % 11 % 5 % 8 %

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,

2023 December 31,

Account W 39 % 27 %

Account X 33 % 31 %

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

We have not made any payments under these agreements in the past, and as of September 30, 2022, we have not incurred any material liabilities arising from these indemnification obligations.

We have not made any payments under these agreements in the past, and as of March 31, 2023, we have not incurred any material liabilities arising from these indemnification obligations.

In the future, however, such obligations could materially impact our results of operations.

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

As of September 30, 2022, $ 361 is included in accrued liabilities and current portion of long-term liabilities in our condensed consolidated balance sheets.

As of March 31, 2023, $ 249 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 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”).

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.

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

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.

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.

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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.

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.

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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.

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.

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

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

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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.

The Supplemental Agreement does not remove the obligation 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 the 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.

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public company.

The components of the change in redeemable non-controlling interests for the nine months ended September 30, 2022 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, 2023 are presented in the following table (in thousands):

Carrying Value of Redeemable Non-Controlling Interest as of January 1, 2023

Net income attributable to redeemable non-controlling interest 470

Effect of foreign currency translation attributable to redeemable non-controlling interest 366

Carrying Value of Redeemable Non-Controlling Interest as of September 30, 2022

Carrying Value of Redeemable Non-Controlling Interest as of March 31, 2023

NON-CONTROLLING INTEREST

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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.

Following the closing, the Company continues to hold 80.87 % of 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.

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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;

(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 the 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.

The process of going public on the STAR Board is a lengthy process that involves several periods of review.

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

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 99,000 RMB, approximately $ 14,596 (net of issuance costs) at closing, in exchange for an equity interest in PWSH of 2.76 %, based on a pre-money value of PWSH of 3,500,000 RMB, approximately $ 501,400 .

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 the 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.

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

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Increase in additional paid-in capital 14,742

Net income (loss) attributable to non-controlling interest ( 338 )

Closing and direct costs incurred ( 146 )

Carrying Value of Permanent Equity Non-Controlling Interest as of September 30, 2022

Effect of foreign currency translation attributable to non-controlling interest ( 33 )

Carrying Value of Permanent Equity Non-Controlling Interest as of March 31, 2023

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