UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2021
or
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 000-30269
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PIXELWORKS, INC.
(Exact name of registrant as specified in its charter)
________________________________
Oregon
(State or other jurisdiction of incorporation or organization)
16760 Upper Boones Ferry Rd. Ste. 101
Portland , Oregon
(Address of principal executive offices)
91-1761992
(I.R.S. Employer Identification No.)
97224
(Zip Code)
503-601-4545
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.001 per share
Trading Symbol(s)
PXLW
Name of each exchange on which registered
The Nasdaq Global Market
Securities registered pursuant to Section 12(g) of the Act:
None
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or Section 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of
"large accelerated filer," "accelerated filer,", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Emerging growth company
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Accelerated filer
Smaller reporting company
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards
provided pursuant to Section 13(a) of the Exchange Act. Yes ☐ No ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section
404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the registrant's voting and non-voting common stock held by non-affiliates at June 30, 2021 was $172,650,121 based on the closing price of $3.41 per share of
common stock on the Nasdaq Global Market on June 30, 2021 (the last business day of the registrant's most recently completed second fiscal quarter). For purposes of this calculation, executive
officers and directors are considered affiliates as well as holders of more than 5% of the registrant's common stock known to the registrant. This determination of affiliate status is not a conclusive
determination for other purposes.
Number of shares of common stock of the registrant outstanding as of March 4, 2022: 53,966,262
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Documents Incorporated by Reference
Part III incorporates information by reference to the registrant’s definitive proxy statement, to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year
ended December 31, 2021.
1
SUMMARY RISK FACTORS
Our business is subject to varying degrees of risk and uncertainty. Investors should consider the risks and uncertainties summarized below, as well as the
risks and uncertainties discussed in Part I, Item 1A, “Risk Factors” of this Annual Report on Form 10-K. Investors should also refer to the other
information contained or incorporated by reference in this Annual Report on Form 10-K for the year ended December 31, 2021, including our consolidated
financial statements and related notes, and our other filings made from time to time with the Securities and Exchange Commission. Our business
operations could also be affected by factors that we currently consider to be immaterial or that are unknown to us at the present time. If any of these risks
occur, our business, financial condition, and results of operations could be materially and adversely affected, and the trading price of our common stock
could decline.
Our business is subject to the following principal risks and uncertainties:
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The ongoing effects of the COVID-19 pandemic could disrupt our business or the business of our customers or suppliers, and as such, may
adversely affect our financial condition.
The continued uncertain global economic environment and volatility in global credit and financial markets could materially and adversely affect
our business and results of operations.
If we fail to meet the evolving needs of our markets, identify new products, services or technologies, or successfully compete in our target
markets, our revenue and financial results will be adversely impacted.
• Our product strategy may not address the demands of our target customers and may not lead to increased revenue in a timely manner or at all,
which could materially adversely affect our results of operations and limit our ability to grow.
• Achieving design wins involves lengthy competitive selection processes that require us to incur significant expenditures prior to generating any
revenue or without any guarantee of any revenue related to this business. If we fail to generate revenue after incurring substantial expenses to
develop our products, our business and operating results would suffer.
If we fail to retain or attract the specialized technical and management personnel required to successfully operate our business, it could harm our
business and may result in lost sales and diversion of management resources.
•
• We have significantly fewer financial resources than most of our competitors, which limits our ability to implement new products or enhancements
to our current products, which in turn could adversely affect our future sales and financial condition.
If we are not profitable in the future, we may be unable to continue our operations.
•
• A significant amount of our revenue comes from a limited number of customers and distributors exposing us to increased credit risk and
subjecting our cash flow to the risk that any of our customers or distributors could decrease or cancel its orders.
• We generally do not have long-term purchase commitments from our customers and if our customers cancel or change their purchase
commitments, our revenue and operating results could suffer.
• Our revenue and operating results can fluctuate from period to period, which could cause our share price to decline.
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If we are unable to generate sufficient cash from operations and are forced to seek additional financing alternatives our working capital may be
adversely affected and our shareholders may experience dilution or our operations may be impaired.
• We license our intellectual property, which exposes us to risks of infringement or misappropriation, and may cause fluctuations in our operating
results.
• We face a number of risks as a result of the concentration of our operations and customers in Asia.
• Our operations in Asia expose us to heightened risks due to natural disasters.
• We face additional risks associated with our operations in China and our results of operations and financial position may be harmed by changes in
China's political, economic or social conditions or changes in U.S.-China relations.
• Our international operations expose us to risks resulting from the fluctuations of foreign currencies.
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If we are unable to maintain effective disclosure controls and internal controls over financial reporting, investors may lose confidence in the
accuracy and completeness of our financial reports, and the market price of our common stock may be materially and adversely affected.
• Our dependence on selling to distributors and integrators increases the complexity of managing our supply chain and may result in excess
inventory or inventory shortages.
• We may be unable to successfully manage any future growth, including the integration of any acquisition or equity investment, which could
disrupt our business and severely harm our financial condition.
Continued compliance with regulatory and accounting requirements will be challenging and will require significant resources.
Regulations related to conflict minerals may adversely impact our business.
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• Dependence on a limited number of sole-source, third-party manufacturers for our products exposes us to possible shortages based on low
manufacturing yield, errors in manufacturing, uncontrollable lead-times for manufacturing, capacity allocation, price increases with little notice,
volatile inventory levels and delays in product delivery, any of which could result in delays in satisfying customer demand, increased costs and
loss of revenue.
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• Our highly integrated products and high-speed mixed signal products are difficult to manufacture without defects and the existence of defects
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could result in increased costs, delays in the availability of our products, reduced sales of products or claims against us.
The development of new products is extremely complex and we may be unable to develop our new products in a timely manner, which could
result in a failure to obtain new design wins and/or maintain our current revenue levels.
Intense competition in our markets may reduce sales of our products, reduce our market share, decrease our gross profit and result in large losses.
If we are not able to respond to the rapid technological changes and evolving industry standards in the markets in which we compete, or seek to
compete, our products may become less desirable or obsolete.
• We use a customer-owned tooling process for manufacturing most of our products, which exposes us to the possibility of poor yields and
unacceptably high product costs.
• We depend on manufacturers of our semiconductor products not only to respond to changes in technology and industry standards but also to
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continue the manufacturing processes on which we rely.
Shortages of materials used in the manufacturing of our products and other key components of our customers’ products may increase our costs,
impair our ability to ship our products on time and delay our ability to sell our products.
Because of our long product development process and sales cycles, we may incur substantial costs before we earn associated revenue and
ultimately may not sell as many units of our products as we originally anticipated.
• Our developed software may be incompatible with industry standards and challenging and costly to implement, which could slow product
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development or cause us to lose customers and design wins.
The competitiveness and viability of our products could be harmed if necessary licenses of third-party technology are not available to us on terms
that are acceptable to us or at all.
• Our limited ability to protect our IP and proprietary rights could harm our competitive position by allowing our competitors to access our
proprietary technology and to introduce similar products.
• Our products are characterized by average selling prices that can decline over relatively short periods of time, which will negatively affect our
financial results unless we are able to reduce our product costs or introduce new products with higher average selling prices.
The cyclical nature of the semiconductor industry may lead to significant variances in the demand for our products and could harm our operations.
If we are unable to implement our strategy to expand our PRC operations, our ability to access capital, customers, and talent in China could suffer,
which in turn may materially and adversely affect our worldwide growth and revenue potential.
Even if we complete a listing on The Shanghai Exchange’s Science and Technology Innovation Board, known as the STAR Market (the
“Listing”), we may not achieve the results contemplated by our business strategy and our strategy for growth in the PRC may not result in
increases in the price of our common stock.
Pixelworks Semiconductor Technology (Shanghai) Co., Ltd’s (“PWSH”) status as a publicly traded company that is controlled, but less than
wholly owned, by Pixelworks could have an adverse effect on us.
The Listing is relatively new, and as a result, it is difficult to predict the effect of the proposed Listing, which may in turn negatively affect the
price of our common stock on the Nasdaq Global Market.
If the Listing is completed, Pixelworks and PWSH both will be public reporting companies, but each will be subject to separate, and potentially
inconsistent, accounting and disclosure requirements, which may lead to investor confusion or uncertainty that could cause decreased demand for,
or fluctuations in the price of, one or both of the companies’ publicly traded shares.
The price of our common stock has and may continue to fluctuate substantially.
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3
PIXELWORKS, INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2021
TABLE OF CONTENTS
Summary Risk Factors
Note regarding COVID-19
Business.
Risk Factors.
Unresolved Staff Comments.
Properties.
Legal Proceedings.
Mine Safety Disclosures.
PART I
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Reserved.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Quantitative and Qualitative Disclosures About Market Risk.
Financial Statements and Supplementary Data.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
Controls and Procedures.
Other Information.
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
PART III
Directors, Executive Officers and Corporate Governance.
Executive Compensation.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Certain Relationships and Related Transactions, and Director Independence.
Principal Accounting Fees and Services.
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 9C.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Item 16.
Exhibits, Financial Statement Schedules.
Form 10-K Summary.
PART IV
SIGNATURES
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7
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49
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NOTE REGARDING COVID-19
In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic, and the virus continues to exist in areas where we operate
and sell our products and services. Several public health organizations have recommended, and many local governments have implemented, certain
measures to slow and limit the transmission of the virus, including various social distancing ordinances, which has resulted in a significant deterioration of
economic conditions in many of the countries in which we operate.
The spread of COVID-19 has caused us to modify our business practices, including implementing work-from-home policies and restricting travel by our
employees. To date, our Shanghai and Shenzhen offices are operating with full in-person staffing, our offices and supply chain partners in Taiwan are fully
functional, and our offices in Japan and North America are fully operational, working both in-office and remotely.
COVID-19 may also affect the operations of our suppliers and customers, as their own workforces and operations are disrupted by the pandemic,
which could result in the interruption of our distribution system, temporary or long-term disruption in our supply chains, or delays in the delivery of our
product. While we expect the impacts of COVID-19 to be temporary, the disruptions caused by the virus have negatively affected our revenue and results
of operations in 2020 and 2021. For example, our revenues for fiscal year 2020 were lower than initially anticipated and our revenues for 2021 continued to
be negatively impacted by COVID-19.
The impact of the pandemic on our business, as well as the business of our suppliers and customers, and the additional measures that may be
needed in the future in response to it, including cost-saving measures, will depend on many factors beyond our control and knowledge. We will continually
monitor the situation to determine what actions may be necessary or appropriate to address the impact of the pandemic, which may include actions
mandated or recommended by federal, state or local authorities.
5
Forward-looking Statements
This Annual Report on Form 10-K, including Management’s Discussion and Analysis of Financial Condition and Results of Operation in Part II, Item 7,
contains "forward-looking statements" that are based on current expectations, estimates, beliefs, assumptions and projections about our business. Words
such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and variations of such words and similar expressions are intended to
identify such forward-looking statements. These statements are not guarantees of future performance and involve numerous risks, uncertainties and
assumptions that are difficult to predict. These forward-looking statements include statements regarding: the features, benefits and applications of our
technologies and products; market trends and changes, including in the video consumption, mobile, video and digital projection markets; our strategy,
including strategy regarding our products, technology, research and development, sales and marketing and acquisition and other growth opportunities; our
strategic plan of re-aligning our mobile, projector, and video delivery businesses and timing and expectations related thereto, including the Listing and
timing and benefits thereof, including improved access to new capital markets and the funding of our growth worldwide; our plans with respect to our
reinvestment of our earnings in China; amortization expectations; our expectations with respect to our co-development agreement and related costs and
expenses; the sufficiency of our working capital and need for, or ability to secure, financing; the success of our products; customer, distributor and
manufacturer concentration; current global economic challenges; exchange rate risk; our competitive advantages in research and development; levels of
inventory at distributors and customers; changes in customer ordering patterns or lead times; seasonality; expectations as to revenue associated with sales
into certain markets in 2022; cost expectations; backlog; future contractual obligations; competition; intellectual property; insufficient, excess or obsolete
inventory and variations in inventory valuation; income tax valuation allowance; net operating loss utilization; changes in accounting principles; and
internal controls. Factors which may cause actual results to vary materially from those contained in the forward-looking statements include, without
limitation: our ability to deliver new products in a timely fashion; our new product yield rates; changes in estimated product costs; product mix; the growth
of the markets we serve; supply of products from third-party foundries; failure or difficulty in achieving design wins; timely customer transition to new
product designs; competitive factors, such as rival chip architectures, introduction or traction by competing designs, or pricing pressures; litigation related
to our intellectual property rights; our limited financial resources; economic and political challenges due to operations in Asia; including any
governmental approvals; exchange rate fluctuations; failure to retain or attract qualified employees; the sufficiency of our intellectual property and patent
portfolio; fluctuations in foreign currencies; natural disasters, war or pandemics; the need for additional income tax valuation allowances; limitations on
net operating losses, as well as other risks identified in the risk factors contained in Part I, Item 1A of this Annual Report on Form 10-K. These forward-
looking statements speak only as of the date on which they are made, and we do not undertake any obligation to update any forward-looking statement to
reflect events or circumstances after the date of this Annual Report on Form 10-K. If we do update one or more forward-looking statements, you should not
conclude that we will make additional updates with respect thereto or with respect to other forward-looking statements. Except where the context otherwise
requires, in this Annual Report on Form 10-K, the terms "Pixelworks," the "Company," "we," "us" and "our" mean Pixelworks, Inc., an Oregon
corporation, and its wholly-owned subsidiaries.
6
Item 1.
Business.
Overview
PART I
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).
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. Our Topaz product line was one of the industry’s first single-chip SoC
for digital projection. We first introduced our motion estimation / motion compensation technology ("MEMC") for TVs and in recent years introduced a
mobile-optimized MEMC solution for smartphones, one of several unique features in our mobile-optimized X5 visual processor. 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 for a wide range of frame rates, shutter angles and display types.
Our solutions enable worldwide manufacturers to offer leading-edge consumer electronics and professional display products, as well as video delivery and
streaming solutions for content service providers. Our core visual display processing technology intelligently processes digital images and video from a
variety of sources and optimizes the content for a superior viewing experience. Our video coding technology reduces storage requirements, significantly
reduces bandwidth constraint issues and converts content between multiple formats to enable seamless delivery of video, including OTA streaming, while
also maintaining end-to-end content security.
Rapid growth in video and gaming consumption, combined with the move towards high frame rate / refresh rate displays, especially in mobile, is
increasing the demand for our visual processing and video delivery solutions. Our technologies can be applied to a wide range of devices from large-screen
projectors to cinematic big screens, to low-power mobile tablets, smartphones, high-quality video infrastructure equipment and streaming devices. Our
products are architected and optimized for power, cost, bandwidth, and overall system performance, according to the requirements of the specific
application. On occasion, we have also licensed our technology.
As of December 31, 2021, we held 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.
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 were completed before the end of 2021.
This plan will further enable PWSH to seek qualification to file an application for an initial public offering on the Shanghai Stock Exchange’s 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 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.
7
Key Markets
We target four key market segments with our products and solutions including:
Market
Products
Mobile (Smartphone, Gaming, Tablet)
Visual processors and software
Home Entertainment (TV, PVR, OTA, Projector)
XCode® transcoding solutions and visual processors
Content (Creation, Remastering, Delivery)
TrueCut® platform for content creators/video providers
Business and Education (Projectors)
Visual processors
Bridging the Performance Gap Between Content Formats and Device Capabilities
In recent years, display refresh rates for TVs, tablets and smartphones have been advancing faster than the ability of content formats to keep up. The refresh
rate, measured in Hertz ("Hz"), is the number of times per second the display updates the image on screen to convey motion. Today, TV displays generally
have a refresh rate of 120 Hz, while smartphones are now moving from 60 to 90 and 120 Hz. Despite this trend, the vast majority of produced video
content exists only in 24-25 frames per second ("FPS"), while most gaming and user generated content is at 30 FPS. While frame rates for new game
content is on the rise, the rendering, compute and thermal limits of today’s mobile processors often limit the effective frame rates to well below 60 FPS.
The resulting mismatch between low frame rate content and high refresh rate screens creates artifacts, such as judder and strobing, that degrade video
quality and destroy creative intent. The trend towards brighter, high dynamic range ("HDR") capable screens make these artifacts more noticeable to
viewers. Visual quality is further impeded by power constraints and changes in ambient lighting, particularly in mobile devices.
Our technologies and solutions efficiently bridge the quality gap and enable the visual storytelling that is richer and true to creative intent. In fact, our
TrueCut Motion Grading is the industry’s first solution to give filmmakers the ability to cinematically fine-tune motion blur, judder and frame-rate
appearance and is used as part of the creative process to empower filmmakers to shoot at any frame-rate, then deliver a cinematically tuned, broader set of
motion and frame rate appearances. While TrueCut technology enables creation of new content or remastering of existing content that preserves artistic
intent across screens, from cinema to home TVs to smartphones, our mobile display processors and software bridge the quality gap for all existing content
viewed on mobile devices, such as smartphones and tablets.
Display Trends
Display technologies have recently begun to transition from an era of higher resolutions, response times and frame rates, with lower power and thinner
form factors, to one focused on higher contrast, brightness and more colors.
In mobile devices, Apple Inc. has brought wide color gamut to many of their devices including the iPhone, iPad Pro, MacBook Pro and iMac. These
devices deliver the same color gamut used in digital cinema theatres ("DCI-P3"). Meanwhile, TV manufacturers including Samsung, TCL, Sony and LG
are bringing high contrast, high brightness or HDR TVs based on organic light emitting diodes ("OLED") and local-dimming liquid crystal display
("LCD") panels to the living room. Furthermore, some premium and mid-tier smartphones and tablets from Apple, Samsung, Sony, LG and Huawei now
include HDR as a standard feature.
Hardware improvements in color and contrast are of little value without content that can take advantage of them. In fact, a significant gap now exists
between the vast majority of video content available to consumers and these emerging display devices.
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Contrast and Brightness: Almost all movies available to consumers today use the "Rec.709" ITU standard format. This format defines brightness
levels up to around 100 "nits" (a standard measure of brightness), whereas HDR TVs are five to ten times brighter, from 540 nits upwards. Most
mobile devices support over 400 nits and sometimes over 600 nits.
Color Gamut: DCI-P3 has a 25% larger color gamut than Rec.709.
Frame Rate: TVs commonly display at 120 frames per second (120 Hz) and up to 240 Hz on more sophisticated higher-end models. Many
premium tier mobile displays were launched in 2020 with 120 Hz screens, which are quickly cascading down to lower price points. Some of the
gaming smartphones now have displays that run at up to 144 Hz.
8
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Resolution: TVs have achieved 4k resolutions (3840x2160) and mobile devices today can achieve up to 3440x1440 resolution, and while some
content is available in 4k resolution, most movies are only available in FHD or HD resolutions, which is typically 1920x1080 and 1280x720
respectively.
This gap between display capabilities and available content brings significant challenges to video display device manufacturers. Sophisticated video
processing is required to accurately reproduce the intended video on today’s displays. We help bridge this gap between the display capabilities and
available content with our visual processors and software and TrueCut® video platform for content creators and video providers.
Content formats are evolving to take advantage of these display improvements. For example, Dolby introduced the "Dolby Vision™" format for movies
and devices, in order to allow consumers to realize the benefits of HDR and wide color gamut. The industry standards body Society of Motion Picture &
Television Engineers released a format specification known as "HDR10" that similarly bridges the gap in contrast and color between content and devices.
The Ultra-HD Blu-ray disk format and streaming services such as Netflix and Amazon Video now support 4k HDR, aided by improved compression
standards such as H.265.
Managing many content formats across a rapidly evolving range of displays is a significant and growing challenge. Older content tends to not get upgraded
to the newer formats, yet consumers expect all content to display correctly. As the number of content formats grow, the technology of video processing
becomes increasingly complex.
Delivering the intent of the content creator requires sophisticated algorithms and hardware circuits. Frame-rate and motion incompatibilities require a
significantly higher level of processing and more sophisticated algorithms in order to avoid creating new problems. Most TVs today include frame-rate
conversion chips, but many reviewers complain about artifacts such as halos, breakup in the image and the so-called "soap opera effect". Unfortunately,
without frame-rate conversion, the video can appear to have judder and blur at levels that have increased substantially as a result of the improvements in
contrast, color and detail.
In addition to judder, high-resolution displays suffer from softness and smearing in motion sequences called motion blur. There are numerous causes of
motion blur. The materials used in constructing pixels on the display take a finite amount of time to transition from one state to another. If this time is too
long, the image does not update swiftly and motion sequences seem to smear or blur. For example, Hollywood movies, TV shows and other premium
content are usually authored at 24 frames per second or 24 Hz. At this frame rate, the brain can easily notice the transition from one frame to the next. As
the brain and eyes track objects in motion, they have to jump in discrete steps due to the low frame rate. This stop-start motion is perceived by the brain as
motion blur, reducing the visible clarity and fidelity of objects in motion. Additionally, when a motion sequence is played on a digital display device, the
new updated frame is drawn over the top of the still visible previous frame. This "hold" effect is perceived by the brain as blur.
Judder and motion blur artifacts are more noticeable on high contrast, wider gamut displays, regardless of screen size (for example, a 5-inch smartphone
screen viewed from ten inches away appears to be the same size as a 60-inch large screen TV viewed from ten feet away). Our advanced video display
processing provides original equipment manufacturers ("OEMs") with solutions that avoid or minimize these artifacts and help realize the potential of their
investment in high-resolution displays. We believe the most effective method for removing both judder and reducing blur is MEMC technology. This
technology is based on complex mathematical algorithms that insert additional, interpolated frames to create a new, faster sequence of frames that has
smooth, continuous motion. This technique works for virtually all types of panel technology.
Video Consumption Trend
With the advent of digital video, it has become possible to deliver video to consumers in an ever-increasing number of ways. Traditional delivery
mechanisms, such as over the air broadcasts, cable, satellite, DVDs and Blu-ray, are being supplemented with Internet streaming and download services.
With these new video delivery options comes the ability to offer more services and improved quality.
According to recent studies by Cisco Systems, Inc. ("Cisco"), video will constitute 82% of all global consumer Internet traffic by 2022. Global IP video
traffic and Internet video traffic will both grow four-fold from 2017 to 2022. Live Internet video will account for 17 percent of Internet video traffic by
2022. Live video will grow 15-fold from 2017 to 2022. This rapid increase in video consumption is being driven by a variety of connected digital video
devices and applications that allow consumers to easily create, share and consume video. In particular, mobile video consumption is rapidly expanding. The
"always on" and ease of use of mobile devices are helping to make them the preferred choice as the "first screen" for many consumers.
As more content becomes increasingly available via the Internet, consumers have more choices for how and where they can enjoy content. According to
Cisco, by 2022 there will be 9.4 billion connected mobile devices across the globe.
9
Video and Gaming Market for Mobile Devices
Mobile devices have become the dominant driver of video consumption and growth. According to the Q3 2019 Global Video Index report from Brightcove,
Inc., more than 62% of all video views are now on mobile devices. Video also continues to grow as a share of mobile traffic usage. According to the June
2020 Ericsson Mobility Report, video now constitutes 63% of global mobile traffic and will rise to a 76% share by 2025. The burgeoning global gaming
market is dominated by the smartphone segment, with 2.5 billion users, according to NewZoo1, a leading market intelligence service covering gaming,
mobile and eSports. In China alone, the number of mobile gamers is expected to reach 637 million with revenue of $32 billion by 2024, compared to $18.5
billion in 2019 – implying 73% growth over five years, according to Niko Partners’ May 2020 report, China Mobile Games Market.
Mobile display systems pose a number of unique challenges. Power is of primary importance, impacting form factor, cost and performance. As these
systems have added more functionality, new features have had to compete for battery life, internal bandwidth and space. The addition of high-resolution
displays has further increased the burden on these resources.
Using the same technology developed for large screen TVs is neither feasible nor desirable. The video display processing pipelines used in TVs consume
many watts of power and would be unsuitable for battery powered systems. In TVs, the size constraints on electronics are significantly less stringent when
compared to mobile systems. To furnish the mobile market with appropriate solutions, we have taken a holistic, system-wide view and re-invented its video
display processing technology to fit within the mobile constraints of battery life, bandwidth, form factor and performance. This approach has enabled us to
create technology that meets the power and size requirements of mobile as well as offering additional benefits such as reducing the bandwidth burden of
high-resolution video and freeing up more bandwidth for the CPU and GPU.
The mobile market today is primarily comprised of smartphones and tablets. Our technology addresses both of these markets.
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Smartphones. Smartphones have become a popular choice for many consumers. International Data Corporation ("IDC") estimates that 1.52 billion
smartphones will be sold in 2023. The resolution of smartphone displays is growing, while the color gamut and contrast is moving toward DCI-P3
and HDR. These improvements in displays actually exacerbate the quality issues of video playback, a growing problem as users increasingly use
their smartphones as their primary form of video consumption.
Tablets. The line between tablets and smartphones is becoming increasingly indistinct as more tablets are offering mobile connectivity and are
now available in sizes similar to those of smartphones. Tablets offer broad appeal to consumers. With the display being the salient component of
smartphones and tablets, and the rapidly increasing use of these devices for video consumption, we believe that the incorporation of video display
processing is the next logical step.
As 5G network coverage rapidly expands worldwide, the availability of 5G chipsets targeting smartphones priced as low as $200 in 2021, should
reinvigorate market growth given the increased speed and lower latency of the wireless connections. According to Counterpoint Research, 14% of
smartphones sold in the U.S. in August 2020 included 5G connectivity. In a recent 2020 report, IDC projected the smartphone market to return to a full
recovery by 2022 and that 5G smartphones would capture a 50% global share of shipments by 2023. In addition, service providers in some countries will
also utilize 5G networks to provide fixed wireless broadband. We further believe our compelling mobile display processing functionality, combined with
5G capability, will help motivate consumers to replace their 3G and 4G phones at a faster rate than occurred in the past two years. Finally, a new
smartphone category has emerged as top vendors have previewed foldable smartphones which serve as a phone, and a mini tablet when unfolded. As prices
for this capability inevitably come down, and further competition emerges, we believe this new category, along with the rollout of 5G networks, can
strengthen the mobile device market.
Business and Education Market for Digital Projectors
Increasingly affordable price points are driving continued adoption of digital projectors in business and education, as well as among consumers.
Technology improvements are helping to reduce the size and weight of projection devices while increasing their performance. Projector models range from
larger units designed to be permanently installed in a conference hall or other venue, to ultra-portable devices weighing fewer than two pounds for
maximum portability. According to PMA Research Limited, the worldwide front projector market shipped 8.5 million units in 2020 and is forecasted to
reach 12 million units by 2024.
The feature set of projection systems differs from that of a typical large-screen flat panel display such as a TV. This is primarily because the projector is a
sharing and collaboration device while the TV is designed for direct consumption of content.
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The front projection market serves several different areas such as business, education and home theater. Business users employ multimedia projectors to
display both still and video presentation materials from PCs and other sources. Requirements for the business market include portability, compatibility with
multiple software and hardware applications, and features that ensure simple operation. In education environments ranging from elementary schools to
university campuses, projectors help teachers integrate media-rich instruction into classrooms. Home theater projector systems can drive large-screen
displays for content consumption where flat panel displays are either economically not viable or physically incompatible for use.
Consistent with the trends of other consumer products, digital projectors are increasingly incorporating networking capabilities that enable the sharing of
video and other content among multiple devices. This, in turn, is enabling new use models for digital projection in both the education and business
environments. For example, one teacher can present the same material simultaneously in multiple classrooms, and students in different classrooms can
display and discuss their work. Such connectivity allows instant access to content and sharing of content, which promotes interaction and collaboration
among dispersed groups. In the business setting, this connectivity enables teleconferencing and the seamless sharing of content for more effective meetings.
Video Delivery Market for Home Entertainment
With the acquisition of ViXS Systems Inc. in August 2017, we expanded both our market presence and product portfolio. The video industry continues to
evolve and adopt new video standards such as High Efficiency Video Coding, 4K Ultra HD and HDR. The technical and processing demands of these
standards are complex and play directly into our core competencies. Our technologies for video delivery are highly integrated, low power and provide high
quality video processing, allowing seamless connectivity between devices while maintaining end-to-end content security.
The home entertainment sub-markets that we address with our video delivery products include:
• Consumer Products - OEMs and Original Design Manufacturers ("ODMs") design products for the consumer electronics segments.
• OTA - Over the Air applications for single, dual, and quad streaming requirements. End users who want to either "cut the cord" or supplement
their service offerings.
•
IP Streaming - Network streaming devices capable of content portability, and support for your own screen (phone and tablet devices), deployed
by service operators.
Consumer Products
High-resolution (UHD/4K), sustained bitrate decoding (100Mbit) and advanced video formats (HDR10, HDR10+) are key requirements for
advanced personal video recorder ("PVR") products sold in the Japanese market, where the end consumers rate video quality as a key acquisition
criteria. This advanced PVR market in Japan is experiencing growth as products move from 2K to UHD/4K formats. In addition, as the market
introduces new broadcast technologies, like Advanced Digital Satellite Broadcast ("ADSB") in Japan, and ATSC 3.0 in Korea and North America,
there are further growth opportunities in this market segment.
OTA
Subscribers to video content in the home are making changes and demanding choices. While content is freely available, if it is distributed over an
operator network, or even simply over IP, there is a monthly re-transmit fee that is charged to the consumer. As the number of video subscribers to
services such as cable TV has been declining, the monthly re-transmit fee has been increasing. These fee increases are leading more consumers to
‘cut the cord’ and replace their TV subscriptions with over the top ("OTT") video services and free OTA broadcast television. As part of their
OTA experience, consumers are starting to require multiple stream support of concurrent channels, so various devices can view different channels
at the same time.
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IP Streaming
Related to OTA applications, the service operators that want to provide their own choice to their video subscribers are taking advantage of our IP
Streaming applications. These re-use common platforms, and connect to the in-home infrastructure, either at the set top box level, or the Wi-Fi
router level. This provides a centralized place where the management, and distribution of content can occur.
For service operators, the benefits are:
Customer retention
Reduced use of network bandwidth for free OTA channels
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For consumers, the benefits are:
• One menu that provides aggregation of Linear, Video-on-Demand, OTT, and OTA content
•
Reduced monthly fees related to lower re-transmission fees
Core Technologies and Products
We have developed a portfolio of advanced video algorithms and IP to address a broad range of challenges in digital video. We believe our technologies
can significantly improve video quality and will become increasingly important as the popularity of video content consumption grows, and pixel densities,
screen size and image quality increase. Our products are designed with a flexible architecture that allows us to combine algorithms and functional blocks of
digital and mixed signal circuitry. Accordingly, our technologies can be implemented across multiple products, in combinations within single products and
can be applied to a broad range of applications including smartphones, tablets, and projectors. The majority of our products include one or more
technologies to provide optimal high-quality video display processing solutions to our customers, regardless of screen size.
Our core Video Display Processing technologies include:
• MotionEngine® MEMC. Our proprietary MEMC technology significantly improves the performance and viewing experience of any screen by
addressing problems such as judder and motion blur. Unlike competitive solutions it also reduces halo effects that are a byproduct of MEMC.
Halos are objectionable blurred regions that surround moving objects as the MEMC algorithms try to reconstruct missing image data caused by
the concealing and revealing of objects as they pass over or behind one another. Removing halos dramatically improves image quality and is of
particular importance on high-resolution displays where artifacts become more visible.
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AI Based Display Processing. The Pixelworks i6 processor dramatically improves video and image quality and sets a new standard for picture
quality on both LCD and OLED mobile displays with a new AI-driven architecture and dynamic refresh rate support for up to 144 Hz. Its
lightweight AI display inferencing augments the Company’s knowledge base, numerous real time inputs and fuzzy logic IP to adaptively and
intelligently optimize overall picture quality for video, games and photos at low power, including real time SDR-to-HDR conversion and AI
adaptive display.
Advanced Scaling. As display resolutions continue to increase, there is a need to convert lower resolution content to higher resolution in order to
display content properly. With the latest wave of high-resolution displays, the quality and quantity demands of scaling have increased significantly.
Artifacts become more noticeable on these types of displays as they distract from the realism effect. In addition, with the availability of high-
resolution content lagging behind the availability of high-resolution displays, high-quality scaling is required to ensure high resolution displays do
not suffer when compared to Full-HD displays of the same size. Our advanced scaling is designed to ensure that up-conversion of lower resolution
content is of the highest quality in maintaining the fidelity of image.
• Mobile Video Display Processing. We have developed innovative video display processing solutions that are designed to optimize power
consumption for mobile devices. Beyond MEMC and advanced scaling, these mobile solutions provide the kind of improvements in color,
contrast, sharpness and de-blur that are currently only found in high quality TVs today. Furthermore, this technology can reduce system power
consumption and extend battery life.
•
Transcoding/Decoding. Digital Delivery forms the bulk of not just video content, but all internet bandwidth today. However, throughout the entire
chain from inception to consumption, there are multiple variations in bitrate, resolution, and codecs used for both audio and video. Transcoding is
a fundamental technology used throughout this pipeline that leads to moving pictures viewed on TVs and mobile devices. The XCODE family of
ASICs has enabled many devices within this pipeline, from the racks in some service providers all the way down to the home user watching
broadcast OTA TV on a smartphone. XCODE technology provides solutions that deliver UHD Blu-ray PVRs with capability of transcoding
recorded content suitable for viewing on smartphones. The technology supports today’s broadcast standards, such as ATSC 1.0, DVB/T/T2/S/S2,
ISDB/T/S, and ADSB and is scalable to support upcoming broadcast standards such as ATSC 3.0.
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SDR to HDR Conversion. UHD video has standardized on a technology known as HDR to deliver higher dynamic range content. This has
resulted in several competing HDR deployments like HDR10, HLG and HDR10+ with support by multiple industry giants. Our HDR conversion
technology can not only convert between SDR (Standard Dynamic Range) and HDR10, it can also convert among HDR10, HLG and HDR10+
solving an interconnectivity problem between content formatted in one HDR format to Display devices that supports a different HDR standard.
Our product development strategy is to leverage our expertise in video display processing to address the evolving needs of our target markets. We plan to
continue to focus our development resources to maintain our position in these markets by providing leading edge solutions for the advanced digital
projection and video delivery markets and to enhance our video processing solutions for mobile markets. We deliver our technology in a variety of
offerings, which take the form of single-purpose chips, highly integrated SoCs that incorporate specialized software, full solutions incorporating software
and other tools and IP cores that allow our technology to be incorporated into third party solutions.
Our primary video display processor product categories include the following:
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ImageProcessor ICs. Our ImageProcessor ICs include embedded microprocessors, digital signal processing technology and software that control
the operations and signal processing within high-end display systems. ImageProcessor ICs were our first product offerings and continue to
comprise the majority of our business. We have continued to refine the architectures for optimal performance, manufacturing our products on
process technologies that align with our customers’ requirements. Additionally, we provide a software development environment and operating
system that enables our customers to more quickly develop and customize the "look and feel" of their products.
Video Co-Processor ICs. Products in this category work with an image processor to post-process video signals to enhance the performance or
feature set of the overall video solution (for example, by significantly reducing judder and motion blur). Our Video Co-Processor ICs can be used
with our ImageProcessor ICs or with image processing solutions from other manufacturers, and in most cases can be incorporated without
assistance from the supplier of the base image processor. This flexibility enables manufacturers to augment their existing or new designs to
enhance their video display products.
Transcoder ICs. Our Transcoder ICs include embedded microprocessors, digital signal processing technology and software that control the
operations and signal processing for converting multiple bitrates, resolutions and codecs to provide bandwidth efficient video transmissions based
on industry standard protocols. Our transcoder technology allows for single, dual and even quad streaming solutions for OTA products. Like our
other ICs, we have continued to refine the architectures for optimal performance, manufacturing our products on process technologies that align
with our customers’ requirements. Additionally, we provide a software development environment that enables our customers to more quickly
develop and customize their products.
Customers, Sales and Marketing
The key focus of our global sales and marketing strategy is to achieve design wins with industry leading branded manufacturers in our target markets and to
continue building strong customer relationships. Once a design win has been achieved, sales and marketing efforts are focused on building long-term
mutually beneficial business relationships with our customers by providing superior technology and reducing their costs, which complements our
customers’ product development objectives and meets their expectations for price-performance and time to market. Marketing efforts are focused on
building market-leading brand awareness and preference for our solutions.
We utilize direct sales and marketing resources in China, Japan, Taiwan, and the U.S. as well as indirect resources in several regions. In addition to sales
and marketing representatives, we have field application engineers who provide technical expertise and assistance to manufacturing customers on final
product development.
Our global distribution channel is multi-tiered and involves both direct and indirect distribution channels, as described below:
• Distributors. Distributors are resellers in local markets who provide engineering support and stock our semiconductors in direct relation to specific
manufacturing customer orders. Our distributors often have valuable and established relationships with our end customers, and in certain countries
it is customary to sell to distributors. While a distributor's payment to us is not dependent upon the distributor’s ability to resell the product or to
collect from the end customer, our distributors may provide longer payment terms to end customers than those we would offer. Sales to
distributors accounted for 56% and 49% of revenue in 2021 and 2020 respectively.
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One of our distributors, Tokyo Electron Device Ltd. represented more than 10% of revenue in each of 2021 and 2020, and accounted for more
than 10% of accounts receivable as of December 31, 2021. Another distributor, Upstar Technology Limited accounted for more than 10% of
revenue in 2021 and accounted for more than 10% of accounts receivable as of December 31, 2021 and 2020. No other distributor accounted for
more than 10% of revenue in 2021 and 2020 or represented more than 10% of accounts receivable as of December 31, 2021 or 2020.
We have distributor relationships in Japan, China, Europe, Korea, Taiwan and the U.S.
• Direct Relationships. We have established direct relationships with companies that manufacture high-end display systems. Some of our direct
relationships are supported by commission-based manufacturers’ representatives, who are independent sales agents that represent us in local
markets and provide engineering support but do not carry inventory. Revenue through direct relationships accounted for 44% and 51% of total
revenue in 2021 and 2020, respectively.
We have direct relationships with companies falling into the following three classifications:
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•
Integrators. Integrators are OEMs who build display devices based on specifications provided by branded suppliers.
Branded Manufacturers. Branded manufacturers are globally recognized manufacturers who develop display device specifications and
manufacture, market and distribute display devices either directly or through resellers to end-users.
Branded Suppliers. Branded suppliers are globally recognized suppliers who develop display device specifications and then source them
from integrators, typically in Asia, and distribute them either directly or through resellers to end-users.
Revenue attributable to our top five end customers together represented 76% and 58% of revenue in 2021 and 2020, respectively. End customers include
customers who purchase directly from us as well as customers who purchase products indirectly through distributors. Sales to Seiko Epson Corporation
represented more than 10% of revenue in each of 2021 and 2020, and accounted for more than 10% of accounts receivable as of December 31, 2021 and
2020. Sales to vivo Communication Technology Co. Ltd. represented more than 10% of revenue in 2021. No other end customer accounted for more than
10% of revenue in 2021 and 2020 or represented more than 10% of accounts receivable as of December 31, 2021 or 2020.
Seasonality
Our business is subject to seasonality related to the markets we serve and the location of our customers. For example, we have historically experienced
higher revenue from the digital projector market in the third quarter of the year, and lower revenue in the first quarter of the year, as our Japanese customers
reduce inventories in anticipation of their March 31 fiscal year end.
Geographic Distribution of Sales
Sales outside the U.S. accounted for approximately 97% and 93% of revenue in 2021 and 2020 respectively.
Financial information regarding our domestic and foreign operations is presented in "Note 14. Segment Information" in Part II, Item 8 of this Annual
Report on Form 10-K.
Backlog
Our sales are made pursuant to customer purchase orders for delivery of standard products. The volume of product actually purchased by our customers, as
well as shipment schedules, are subject to frequent revisions that reflect changes in both the customers’ needs and product availability. In light of industry
practice and our own experience, we do not believe that backlog as of any particular date is indicative of future results.
Competition
The semiconductor industry is intensely competitive. Further, the markets for higher performance display and projection devices, including the markets for
mobile devices, digital projectors and other applications demanding high quality video, are characterized by rapid technological change, evolving industry
standards, compressed product life cycles and declining average selling prices. We believe the principal competitive factors in our markets include product
performance, time to market, cost, functional versatility provided by software, customer relationships and reputation, patented innovative designs, levels of
product integration, compliance with industry standards and system design cost. We believe we compete favorably with respect to these factors.
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Our current products face competition from developers of application processors and specialized display controllers designed by merchant chip vendors,
our customers, potential customers and display panel vendors. Additionally, new alternative display processing technologies and industry standards may
emerge that compete with technologies we offer.
We also compete with specialized and diversified electronics and semiconductor companies that offer display processors or scaling components including:
Actions Microelectronics Co., Ltd., ARM Holdings PLC, Dolby Laboratories, Inc., Egis Technology Inc., Hisilicon Technologies Co., Ltd., i-Chips
Technology Inc., Lattice Semiconductor Corporation, MediaTek Inc., Novatek Microelectronics Corp., NVIDIA Corporation, Qualcomm Incorporated,
Realtek Semiconductor Corp., Renesas Electronics America Inc., Socionext Inc., Solomon Systech (International) Ltd., STMicroelectronics N.V., Sunplus
Technology Co., Ltd., Synaptics Incorporated, Texas Instruments Incorporated, Unisoc Communications, Inc., and other companies. Potential and current
competitors may include diversified semiconductor manufacturers and the semiconductor divisions or affiliates of some of our customers, including: Apple
Inc., Broadcom Inc., LG Electronics, Inc., MegaChips Corporation, Mitsubishi Digital Electronics America, Inc., NEC Corporation, Panasonic
Corporation, Samsung Electronics Co., Ltd., Socionext Inc., ON Semiconductor Corporation, Seiko Epson Corporation, Sharp Electronics Corporation,
Sony Corporation, and Toshiba America, Inc. In addition, start-up companies may seek to compete in our markets.
Research and Development
Low power research and development efforts are focused on the development of our solutions for the mobile device, digital projector and video delivery
markets. Our development efforts are focused on pursuing higher levels of video performance, integration and new features in order to provide our
customers with solutions that enable them to introduce market leading products and help lower final systems costs.
We have invested, and expect to continue to invest, significant resources in research and development activities. Our research and development expenses
were $27.3 million and $25.0 million in 2021 and 2020, respectively. During 2021, we received a reimbursement related to a co-development arrangement
with a customer for costs incurred in connection with our development of an integrated circuit ("IC") product. As a result of the reimbursement, our overall
research and development expense was reduced by $4.0 million in 2021. There were no reductions to research and development expense related to co-
development arrangements in 2020.
Manufacturing
Within the semiconductor industry we are known as a "fabless" company, meaning that we do not manufacture the semiconductors that we design and
develop, but instead contract with a limited number of foundries and assembly and test vendors to produce all of our wafers and for completion of finished
products. The fabless approach allows us to concentrate our resources on product design and development where we believe we have greater competitive
advantages.
See "Risk Factors" in Part I, Item 1A of this Annual Report on Form 10-K for information on risks related to our manufacturing strategy and processes.
Intellectual Property
We protect our projector, mobile, video delivery and TrueCut businesses with a combination of nondisclosure agreements and patent, copyright, trademark
and trade secret laws to protect the algorithms, design and architecture of our technology. As of December 31, 2021, we held 335 patents and have 9 patent
applications pending, compared to 338 patents and 9 patent applications pending as of December 31, 2020. The patents we hold relate generally to
improvements in the visual display of digital image data including, but not limited to, improvements in image scaling, image correction, automatic image
optimization and video signal processing for digital displays. Our U.S. and foreign patents are generally enforceable for 20 years from the date they were
filed. Accordingly, our issued patents have from approximately 1 to 18 years remaining in their respective term, depending on their filing dates. We believe
that the remaining term of our patents is adequate relative to the expected lives of our related products.
We intend to seek patent protection for other significant technologies that we have already developed and expect to seek patent protection for future
products and technologies as necessary. Patents may not be issued as a result of any pending applications and any claims allowed under issued patents may
be insufficiently broad to protect our technology. Existing or future patents may be invalidated, diluted, circumvented, challenged or licensed to others.
Furthermore, the laws of certain foreign countries in which our products are or may be developed, manufactured or sold, including various countries in
Asia, may not protect our products or intellectual property rights in the same manner and to the same extent as do the laws of the U.S. and, thus, make the
possibility of piracy of our technology and products more likely in these countries.
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The semiconductor industry is characterized by vigorous protection of intellectual property rights, which have resulted in significant and often protracted
and expensive litigation. We, our customers or our foundries from time to time may be notified of claims that we may be infringing patents or other
intellectual property rights owned by third parties. Litigation by or against us relating to patent infringement or other intellectual property matters could
result in significant expense to us and divert the efforts of our technical and management personnel, whether or not such litigation results in a determination
favorable to us. In the event of an adverse result in any such litigation, we could be required to pay substantial damages, cease the manufacture, use and
sale of infringing products, expend significant resources to develop non-infringing technology, discontinue the use of certain processes or obtain licenses to
the infringing technology. We may not be able to settle any alleged patent infringement claim through a cross-licensing arrangement. In the event any third
party made a valid claim against us, our customers or our foundries, and a license was not made available to us on terms that are acceptable to us or at all,
we would be adversely affected.
See "Risk Factors" in Part I, Item 1A, and "Note 11. Commitments and Contingencies" in Part II, Item 8 of this Annual Report on Form 10-K for
information on various risks related to intellectual property.
Environmental Matters
Environmental laws and regulations are complex, change frequently and have tended to become more stringent over time. We have incurred, and may
continue to incur, significant expenditures to comply with these laws and regulations and we may incur additional capital expenditures and asset
impairments to ensure that our products and our vendors’ products are in compliance with these regulations. We would be subject to significant penalties
for failure to comply with these laws and regulations.
See "Risk Factors" in Part I, Item 1A of this Annual Report on Form 10-K for information on various environmental risks.
Employees
As of December 31, 2021, we had a total of 217 employees, the majority of which were full-time, compared to 197 employees as of December 31, 2020.
Corporate Information
Pixelworks was founded in 1997 and is incorporated under the laws of the state of Oregon. Our stock is traded on the Nasdaq Global Market under the
symbol "PXLW".
Availability of Securities and Exchange Commission Filings
We make available through our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to
those reports and any filings filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act of 1934, free of charge as soon as reasonably
practicable after we electronically file or furnish such material with the Securities and Exchange Commission ("SEC"). Our Internet address is
www.pixelworks.com. The content on, or that can be accessed through, our website is not incorporated by reference into this filing. Our committee charters
and code of ethics are also available free of charge on our website.
The SEC maintains an Internet site at http://www.sec.gov that contains our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K and amendments to those reports, if any, or other filings filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, proxy and
information statements.
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Item 1A.
Risk Factors.
The following risks could materially and adversely affect our business, financial condition, and results of operations, and the trading price of our common
stock could decline. These risk factors do not identify all of the risks that we face. Our business operations could also be affected by factors that we
currently consider to be immaterial or that are unknown to us at the present time. Investors should also refer to the other information contained or
incorporated by reference in this Annual Report on Form 10-K for the year ended December 31, 2021, including our consolidated financial statements and
related notes, and our other filings made from time to time with the Securities and Exchange Commission ("SEC").
Risks Related to COVID-19
The ongoing effects of the COVID-19 pandemic could disrupt our business or the business of our customers or suppliers, and as such, may adversely
affect our financial condition.
Our business, the businesses of our customers, and the businesses of our suppliers could be materially and adversely affected by the effects of the COVID-
19 pandemic and the related governmental, business and community responses to it. Additionally, the economies and financial markets of many countries
have been impacted by the pandemic, and the longevity and significance of the resulting economic impact is currently unknown. A significant economic
downturn could materially and adversely affect our end customers, and thus could negatively impact demand for our products and our operating results.
In response to the COVID-19 pandemic, many state governments in the U.S. issued restrictive orders, including “shelter in place” or “stay at home” orders,
that restricted its residents from leaving their homes or returning to work. At Pixelworks, our offices in Japan and North America are currently operating in
office and remotely. The potential future impact of any “stay at home” orders or other similar COVID-related restraints on movement, may adversely
impact the efficiency and effectiveness of our organization, as well as the operations of our suppliers and customers. We face additional risks and
challenges related to having a portion of our workforce working from home, including added pressure on our IT systems and the security of our network,
and new challenges as our team adjusts to online collaboration. Additionally, our sales team may not be able to make sales calls to current and potential
customers at the same volume as they did prior to the outbreak of the pandemic as they juggle varying competing interests. Also, our ability to make in-
person sales calls may be affected in areas with stay at home orders or other restrictions in place, which may, in turn, affect our revenues.
The outbreak of COVID-19 may put additional pressures on our supply chain, including temporary or long-term disruption or delays. If the impact of an
outbreak continues for an extended period, it could adversely impact our supply chain and the growth of our revenues. COVID-19 may result in supply
shortages of our products or our ability to import, export or sell product to customers in both the U.S. and international markets. Any decrease, limitations
or delays on our ability to import, export, or sell our products would harm our business.
The continued uncertain global economic environment and volatility in global credit and financial markets could materially and adversely affect our
business and results of operations.
The state of the global economy continues to be uncertain. As a result of these conditions, our manufacturers, vendors and customers might experience
deterioration of their businesses, cash flow shortages and difficulty obtaining financing, which could result in interruptions or delays in the performance of
any contracts, reductions and delays in customer purchases, delays in or the inability of customers to obtain financing to purchase our products, and
bankruptcy of customers. Furthermore, the constraints in the capital and credit markets, may limit the ability of our customers to meet their liquidity needs,
which could result in an impairment of their ability to make timely payments to us and reduce their demand for our products, adversely impacting our
results of operations and cash flows. This environment has also made it difficult for us to accurately forecast and plan future business activities.
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Company Specific Risks
If we fail to meet the evolving needs of our markets, identify new products, services or technologies, or successfully compete in our target markets, our
revenue and financial results will be adversely impacted.
Pixelworks designs, develops and markets visual processing and advanced media processing solutions in the mobile video, digital projection and video
delivery markets. Our success depends to a significant extent on our ability to meet the evolving needs of these markets and to enhance our existing
products, solutions and technologies. In addition, our success depends on our ability to identify emerging industry trends and to develop new products,
solutions and technologies. Our existing markets and products and new markets and products may require a considerable investment of technical, financial,
compliance, sales and marketing resources.
We cannot assure you that our strategic direction will result in innovative products and technologies that provide value to our customers and partners. If we
fail to anticipate the changing needs of our target markets and emerging technology trends, or adapt that strategy as market conditions evolve, in a timely
manner to exploit potential market opportunities our business will be harmed. In addition, if demand for products and solutions from these markets is below
our expectations, if we fail to achieve consumer or market acceptance of them or if we are not able to develop these products and solutions in a cost
effective or efficient manner, we may not realize benefits from our strategy.
Our target markets remain extremely competitive, and we expect competition to intensify as current competitors expand their product and/or service
offerings, industry standards continue to evolve and new competitors enter these markets. If we are unable to successfully compete in our target markets,
demand for our products, solutions and technologies could decrease, which would cause our revenue to decline and our financial results to suffer.
Our product strategy, which is targeted at markets demanding superior video and digital image quality as well as efficient video delivery, may not
address the demands of our target customers and may not lead to increased revenue in a timely manner or at all, which could materially adversely
affect our results of operations and limit our ability to grow.
We have adopted a product strategy that focuses on our core competencies in visual display processing and delivering high levels of video and digital
image quality. With this strategy, we continue to make further investments in the development of our image processor architecture for the digital projector
market, with particular focus on adding increased performance and functionality. For the mobile device market, our strategy focuses on implementing our
intellectual property ("IP") to improve the video performance of our customers’ image processors through the use of our MotionEngine® advanced video
co-processor integrated circuits. This strategy is designed to address the needs of the high-resolution and high-quality segment of these markets. Such
markets may not develop or may take longer to develop than we expect. We cannot assure you that the products we are developing will adequately address
the demands of our target customers, or that we will be able to produce our new products at costs that enable us to price these products competitively.
Achieving design wins involves lengthy competitive selection processes that require us to incur significant expenditures prior to generating any revenue
or without any guarantee of any revenue related to this business. If we fail to generate revenue after incurring substantial expenses to develop our
products, our business and operating results would suffer.
We must achieve "design wins" that enable us to sell our semiconductor solutions for use in our customers’ products. These competitive selection processes
typically are lengthy and can require us to incur significant research and development expenditures and dedicate scarce engineering resources in pursuit of
a single customer opportunity. We may not achieve a design win and may never generate any revenue despite incurring significant research and
development expenditures. This could cause us to lose revenue and require us to write off obsolete inventory and could weaken our position in future
competitive selection processes.
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Even if our product strategy is properly targeted, we cannot assure you that the products we are developing will lead to an increase in revenue from new
design wins. To achieve design wins, we must design and deliver cost-effective, innovative and integrated semiconductors that overcome the significant
costs associated with qualifying a new supplier and which make developers reluctant to change component sources. Additionally, potential developers may
be unwilling to select our products due to concerns over our financial strength. Further, design wins do not necessarily result in developers ordering large
volumes of our products. Developers can choose at any time to discontinue using our products in their designs or product development efforts. A design
win is not a binding commitment by a developer to purchase our products, but rather a decision by a developer to use our products in its design process.
Even if our products are chosen to be incorporated into a developer’s products, we may still not realize significant revenue from the developer if its
products are not commercially successful or it chooses to qualify, or incorporate the products, of a second source. Additionally, even if our product strategy
is successful at achieving design wins and increasing our revenue, we may continue to incur operating losses due to the significant research and
development costs that are required to develop competitive products for the digital projection market and mobile market.
System security and data protection breaches, as well as cyber-attacks, could disrupt our operations, reduce our expected revenue and increase our
expenses, which could adversely affect our stock price and damage our reputation.
Security breaches, computer malware and cyber-attacks have become more prevalent and sophisticated in recent years. These attacks have occurred on our
systems in the past and are expected to occur in the future. Experienced computer programmers, hackers and employees may be able to penetrate our
security controls and misappropriate or compromise our confidential information, or that of our employees or third parties. These attacks may create system
disruptions or cause shutdowns. For portions of our IT infrastructure, including business management and communication software products, we rely on
products and services provided by third parties. These providers may also experience breaches and attacks to their products which may impact our systems.
Data security breaches may also result from non-technical means, such as actions by an employee with access to our systems.
Actual or perceived breaches of our security measures or the accidental loss, inadvertent disclosure or unapproved dissemination of proprietary information
or sensitive or confidential data about us, our partners, our customers or third parties could expose the parties affected to a risk of loss, or misuse of this
information, resulting in litigation and potential liability, damage to our brand and reputation or other harm to our business. Our efforts to prevent and
overcome these challenges could increase our expenses and may not be successful. We may experience interruptions, delays, cessation of service and loss
of existing or potential customers. Such disruptions could adversely impact our ability to fulfill orders and interrupt other critical functions. Delayed sales,
lower margins or lost customers as a result of these disruptions could adversely affect our financial results, stock price and reputation.
If we fail to retain or attract the specialized technical and management personnel required to successfully operate our business, it could harm our
business and may result in lost sales and diversion of management resources.
Our success depends on the continued services of our executive officers and other key management, engineering, and sales and marketing personnel and on
our ability to continue to attract, retain and motivate qualified personnel. Competition for skilled engineers and management personnel is intense within our
industry, and we may not be successful in hiring and retaining qualified individuals. For example, we have experienced, and may continue to experience,
difficulty and increased compensation expense in order to hire and retain qualified engineering personnel in our Shanghai design center. The loss of, or
inability to hire, key personnel could limit our ability to develop new products and adapt existing products to our customers’ requirements, and may result
in lost sales and a diversion of management resources. Any transition in our senior management team may involve a diversion of resources and
management attention, be disruptive to our daily operations or impact public or market perception, any of which could have a negative impact on our
business or stock price.
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We may not fully realize the estimated savings from our restructurings in a timely manner or at all, and our restructuring programs may result in
business disruptions and decrease productivity. Any of the foregoing would negatively affect our financial condition and results of operations.
From time to time, we may have the need to execute restructuring plans to make the operation of the Company more efficient. We may not be able to
implement our restructuring programs as planned, and we may need to take additional measures to fulfill the objectives of our restructuring. The anticipated
expenses associated with our restructuring programs may differ from or exceed our expectations, and we might not be able to realize the full amount of
estimated savings from the restructuring programs in a timely manner or at all. Additionally, our restructuring plans may result in business disruptions or
decreases in productivity. As a result, our restructuring plans could have an adverse impact on our financial condition or results of operations.
We have significantly fewer financial resources than most of our competitors, which limits our ability to implement new products or enhancements to
our current products and may require us to implement additional future restructuring plans, which in turn could adversely affect our future sales and
financial condition.
Financial resource constraints could limit our ability to execute our product strategy or require us to implement additional restructuring plans, particularly if
we are unable to generate sufficient cash from operations or obtain additional sources of financing. Any future restructuring actions may slow our
development of new or enhanced products by limiting our research and development and engineering activities. Our cash balances are also lower than those
of our competitors, which may limit our ability to develop competitive new products on a timely basis or at all. If we are unable to successfully introduce
new or enhanced products, our sales, operating results and financial condition will be adversely affected.
If we are not profitable in the future, we may be unable to continue our operations.
We have incurred operating losses each fiscal year since 2010 and have an accumulated deficit of $435.0 million as of December 31, 2021. If and when we
achieve profitability depends upon a number of factors, including our ability to develop and market innovative products, accurately estimate inventory
needs, contract effectively for manufacturing capacity and maintain sufficient funds to finance our activities. We cannot assure our investors that we will
ever achieve annual profitability, or that we will be able to maintain profitability if achieved. If we are not profitable in the future, we may be unable to
continue our operations.
A significant amount of our revenue comes from a limited number of customers and distributors and from time to time we may enter into exclusive
deals with customers, exposing us to increased credit risk and subjecting our cash flow to the risk that any of our customers or distributors could
decrease or cancel its orders.
The display manufacturing market is highly concentrated and we are, and will continue to be, dependent on a limited number of customers and distributors
for a substantial portion of our revenue. Sales to our top distributor represented 27% and 7% of revenue for the years ended December 31, 2021 and 2020,
respectively. If any of our distributors ceases to do business with us, it may be difficult for us to find adequate replacements, and even if we do, it may take
some time. The loss of any of our top distributors could negatively affect our results of operations. Additionally, revenue attributable to our top five end
customers represented 76% and 58% of revenue for the years ended December 31, 2021 and 2020, respectively. As of December 31, 2021, we had three
accounts that each represented 10% or more of accounts receivable. As of December 31, 2020, we had two accounts that each represented 10% or more of
accounts receivable. Orders included in our backlog may be fully or partially cancelable. A reduction, delay or cancellation of orders from one or more of
our significant customers, or a decision by one or more of our significant customers to select products manufactured by a competitor or to use its own
internally-developed semiconductors, would significantly and negatively impact our revenue. Further, the concentration of our accounts receivable with a
limited number of customers increases our credit risk. The failure of these customers to pay their balances, or any customer to pay future outstanding
balances, would result in an operating expense and reduce our cash flows.
We generally do not have long-term purchase commitments from our customers and if our customers cancel or change their purchase commitments,
our revenue and operating results could suffer.
Substantially all of our sales to date have been made on a purchase order basis. We generally do not have long-term commitments with our customers. As a
result, our customers may cancel, change or delay product purchase commitments, which could cause our revenue to decline and materially and adversely
affect our results of operations.
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Our revenue and operating results can fluctuate from period to period, which could cause our share price to decline.
Our revenue and operating results have fluctuated in the past and may fluctuate from period to period in the future due to a variety of factors, many of
which are beyond our control. Factors that may contribute to these fluctuations include those described in this "Risk Factors" section of this report, such as
the timing, changes in or cancellation of orders by customers, market acceptance of our products and our customers’ products and the timing and extent of
product development costs. Additionally, our business is subject to seasonality related to the markets we serve and the location of our customers. For
example, we have historically experienced higher revenue from the digital projector market in the third quarter of the year, and lower revenue in the first
quarter of the year. As a result of these and other factors, the results of any prior quarterly or annual periods should not be relied upon as indications of our
future revenue or operating performance. Fluctuations in our revenue and operating results could cause our share price to decline.
If we are unable to generate sufficient cash from operations and are forced to seek additional financing alternatives, or in the event we acquire or make
an investment in companies that complement our business, our working capital may be adversely affected and our shareholders may experience
dilution or our operations may be impaired.
We may be unable to generate or sustain positive cash flow from operating activities and would then be required to use existing cash and cash equivalents
to support our working capital and other cash requirements. Additionally, from time to time, we may evaluate acquisitions of, or investments in, businesses,
products or technologies that complement our business. Any transactions, if consummated, may consume a material portion of our working capital or
require the issuance of equity securities that may result in dilution to existing shareholders. If additional funds are required to support our working capital
requirements, acquisitions or other purposes, we may seek to raise funds through debt and equity financing or from other sources. If we raise additional
funds through the issuance of equity or convertible debt securities, the percentage ownership of our shareholders could be significantly diluted, and these
newly-issued securities may have rights, preferences or privileges senior to those of existing shareholders. If we raise additional funds by obtaining loans
from third parties, the terms of those financing arrangements may include negative covenants or other restrictions on our business that could impair our
operating flexibility, and would also require us to incur interest expense. We can provide no assurance that additional financing will be available at all or, if
available, that we would be able to obtain additional financing on terms favorable to us.
We license our intellectual property, which exposes us to risks of infringement or misappropriation, and may cause fluctuations in our operating
results.
We have licensed certain intellectual property to third parties and may enter into additional license arrangements in the future. We cannot assure you,
however, that others will be interested in licensing our intellectual property on commercially favorable terms or at all. We also cannot ensure that licensees
will honor agreed-upon market restrictions, not infringe upon or misappropriate our intellectual property or maintain the confidentiality of our proprietary
information.
IP license agreements are complex and earning and recognizing revenue under these agreements depends upon many factors, including completion of
milestones, allocation of values to delivered items and customer acceptances. Many of these factors require significant judgments. Also, generating revenue
from these arrangements is a lengthy and complex process that may last beyond the period in which efforts begin and, once an agreement is in place, the
timing of revenue recognition may depend on events such as customer acceptance of deliverables, achievement of milestones, our ability to track and report
progress on contracts, customer commercialization of the licensed technology and other factors, any or all of which may or may not be achieved. The
accounting rules associated with recognizing revenue from these transactions are complex and subject to interpretation. Due to these factors, the amount of
licensing revenue recognized in any period, if any, and our results of operations, may differ significantly from our expectations.
Finally, because licensing revenue typically has a higher margin compared to product sales, licensing revenue can have a disproportionate impact on our
gross profit and results of operations. There is no assurance that we will be able to maintain a consistent level of licensing revenue or mix of licensing
revenue and revenue from product sales, which could result in wide fluctuations in our results of operations from period to period, making it difficult to
accurately measure the performance of our business.
Our net operating loss carryforwards may be limited or they may expire before utilization.
As of December 31, 2021, we had federal, state and foreign net operating loss carryforwards of approximately $166.4 million, $6.8 million, and $39.5
million respectively, which will begin to expire in 2022. These net operating loss carryforwards may be used to offset future taxable income and thereby
reduce our income taxes otherwise payable. However, we cannot assure you that we will have taxable income in the future before all or a portion of these
net operating loss carryforwards expire.
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Additionally, our federal net operating losses may be limited by Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"), which
imposes an annual limit on the ability of a corporation that undergoes an "ownership change" to use its net operating loss carryforwards to reduce its tax
liability. An ownership change is generally defined as a greater than 50% increase in equity ownership by 5% shareholders in any three-year period. In the
event of certain changes in our shareholder base, we may at some time in the future experience an "ownership change" and the use of our federal net
operating loss carryforwards may be limited. In addition, the Tax Cuts and Jobs Act (the "TCJA"), limits the deduction for net operating loss carryforwards
to 80 percent of taxable income for losses arising in taxable years beginning after December 31, 2020.
We face a number of risks as a result of the concentration of our operations and customers in Asia.
Many of our customers are located in Japan, China, or Taiwan. Sales outside the U.S. accounted for approximately 97% and 93% of revenue for the years
ended December 31, 2021 and 2020, respectively. We anticipate that sales outside the U.S. will continue to account for a substantial portion of our revenue
in future periods. In addition, customers who incorporate our products into their products sell a substantial portion of their products outside of the U.S. All
of our products are also manufactured outside of the U.S. and most of our current manufacturers are located in Taiwan. Furthermore, most of our
employees are located in China, Japan and Taiwan. Our Asian operations require significant management attention and resources, and we are subject to
many risks associated with operations in Asia, including, but not limited to:
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outbreaks of health epidemics in China or other parts of Asia, including COVID-19;
difficulties in managing international distributors and manufacturers due to varying time zones, languages and business customs;
compliance with U.S. laws affecting operations outside of the U.S., such as the Foreign Corrupt Practices Act;
reduced or limited protection of our IP, particularly in software, which is more prone to design piracy;
difficulties in collecting outstanding accounts receivable balances;
changes in tax rates, tax laws and the interpretation of those laws;
difficulties regarding timing and availability of export and import licenses;
ensuring that we obtain complete and accurate information from our Asian operations to make proper disclosures in the United States;
political and economic instability;
difficulties in maintaining sales representatives outside of the U.S. that are knowledgeable about our industry and products;
changes in the regulatory environment in China, Japan and Taiwan that may significantly impact purchases of our products by our customers or
our customers’ sales of their own products;
imposition of new tariffs, quotas, trade barriers and similar trade restrictions on our sales;
varying employment and labor laws; and
greater vulnerability to infrastructure and labor disruptions than in established markets.
Any of these factors could require a disproportionate share of management’s attention, result in increased costs or decreased revenues, and could materially
affect our product sales, financial condition and results of operations.
Our operations in Asia expose us to heightened risks due to natural disasters.
The risk of natural disasters in the Pacific Rim region is significant. Natural disasters in countries where our manufacturers or customers are located could
result in disruption of our manufacturers’ and customers’ operations, resulting in significant delays in shipment of, or significant reductions in orders for,
our products. There can be no assurance that we can locate additional manufacturing capacity or markets on favorable terms, or find new customers, in a
timely manner, if at all. Natural disasters in this region could also result in:
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reduced end user demand due to the economic impact of any natural disaster;
a disruption to the global supply chain for products manufactured in areas affected by natural disasters that are included in products purchased
either by us or by our customers;
an increase in the cost of products that we purchase due to reduced supply; and
other unforeseen impacts as a result of the uncertainty resulting from a natural disaster.
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We face additional risks associated with our operations in China and our results of operations and financial position may be harmed by changes in
China's political, economic or social conditions or changes in U.S.-China relations.
We have, and expect to continue to have, significant operations in China. The economy of China differs from the economies of many countries in important
respects such as structure, government involvement, level of development, growth rate, capital reinvestment, allocation of resources, self-sufficiency, rate
of inflation, foreign currency flows and balance of payments position, among others. There can be no assurance that China’s economic policies will be
consistent or effective and our results of operations and financial position may be harmed by changes in China’s political, economic or social conditions.
Additionally, the political and economic relationship between the U.S. and China is uncertain, and any changes in policy as a result may adversely affect
our business. For example, if China were to take action against the United States in response to actual or perceived political or economic threats or changes
in policy, such as the detainment of Americans traveling on business, our operations could be adversely affected.
Additionally, our Chinese subsidiary is considered a foreign-invested enterprise and is subject to laws and regulations applicable to foreign investment in
China and, in particular, laws applicable to foreign-invested enterprises. For example, China's government imposes control over the convertibility of RMB
into foreign currencies, which can cause difficulties converting cash held in RMB to other currencies. While the overall effect of legislation over the past
two decades has significantly enhanced the protections afforded to various foreign investments in China, China has not developed a fully integrated legal
system, and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. Because these laws and
regulations are relatively new, and published court decisions are limited and nonbinding in nature, the interpretation and enforcement of these laws and
regulations involve uncertainties. In addition, China's legal system is based in part on government policies and internal rules, some of which are not
published on a timely basis or at all, which may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until
after the violation occurs. Any administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources
and management attention. Further, since Chinese administrative and court authorities have significant discretion in interpreting and implementing statutory
and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings. These uncertainties may also impede our
ability to enforce the contracts entered into by our Chinese subsidiary and could materially and adversely affect our business and results of operations.
Our international operations expose us to risks resulting from the fluctuations of foreign currencies.
We are exposed to risks resulting from the fluctuations of foreign currencies, primarily those of Japan, Taiwan, China and Canada. We sell our products to
OEMs that incorporate our products into other products that they sell outside of the U.S. While sales of our products to OEMs are denominated in U.S.
dollars, the products sold by OEMs are denominated in foreign currencies. Accordingly, any strengthening of the U.S. dollar against these foreign
currencies will increase the foreign currency price equivalent of our products, which could lead to a change in the competitive nature of these products in
the marketplace. This, in turn, could lead to a reduction in revenue.
In addition, a portion of our operating expenses, such as employee salaries and foreign income taxes, are denominated in foreign currencies. Accordingly,
our operating results are affected by changes in the exchange rate between the U.S. dollar and those currencies. Any future strengthening of those
currencies against the U.S. dollar will negatively impact our operating results by increasing our operating expenses as measured in U.S. dollars.
We may engage in financial hedging techniques in the future as part of a strategy to address potential foreign currency exchange rate fluctuations. These
hedging techniques, however, may not be successful at reducing our exposure to foreign currency exchange rate fluctuations and may increase costs and
administrative complexity.
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Failure to comply with anti-bribery, anti-corruption, and anti-money laundering laws could subject us to penalties and other adverse consequences.
We are subject to the Foreign Corrupt Practices Act ("FCPA") and other anti-corruption, anti-bribery and anti-money laundering laws in various
jurisdictions. From time to time, we may leverage third parties to help conduct our businesses abroad. We and our third-party intermediaries may have
direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities and may be held liable for the
corrupt or other illegal activities of these third-party business partners and intermediaries, our employees, representatives, contractors, channel partners, and
agents, even if we do not explicitly authorize such activities. While we have policies and procedures to address compliance with such laws, we cannot
assure you that all of our employees and agents will not take actions in violation of our policies and applicable law, for which we may be ultimately held
responsible. Any violation of the FCPA or other applicable anti-bribery, anti-corruption laws, and anti-money laundering laws could result in whistleblower
complaints, adverse media coverage, investigations, loss of export privileges, severe criminal or civil sanctions, or suspension or debarment from U.S.
government contracts, all of which may have an adverse effect on our reputation, our business, results of operations and financial condition.
Our reported financial results may be materially and adversely affected by changes in accounting principles generally accepted in the United States.
Generally accepted accounting principles in the United Sates are subject to interpretation by the Financial Accounting Standards Board ("FASB"), the SEC,
and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a
significant effect on our reported financial results and could materially and adversely affect the transactions completed before the announcement of a
change. Additionally, the adoption of new or revised accounting principles may require that we make significant changes to our systems, processes and
controls.
If we are unable to maintain effective disclosure controls and internal controls over financial reporting, investors may lose confidence in the accuracy
and completeness of our financial reports, and the market price of our common stock may be materially and adversely affected.
If we are unable to maintain effective disclosure controls and internal controls over financial reporting, investors may lose confidence in the accuracy and
completeness of our financial reports. For example, in the second quarter of 2019, we identified a material weakness in our internal controls over financial
reporting related to the review of aged liabilities for possible extinguishment due to the expiration of the statute of limitation, which was remediated as of
December 31, 2019. Additionally, if any new internal control procedures which may be adopted or our existing internal control procedures are deemed
inadequate, or if we identify additional material weaknesses in our disclosure controls or internal controls over financial reporting in the future, we will be
unable to assert that our internal controls are effective. If we are unable to do so, or if our auditors are unable to attest to the effectiveness of our internal
controls, we could lose investor confidence in the accuracy and completeness of our financial reports, which would cause the price of our common stock to
decline.
As we have limited insurance coverage, any incurred liability resulting from uncovered claims could adversely affect our financial condition and
results of operations.
Our insurance policies may not be adequate to fully offset losses from covered incidents, and we do not have coverage for certain losses. For example, we
do not have earthquake insurance related to our Asian operations because adequate coverage is not offered at economically justifiable rates. If our
insurance coverage is inadequate to protect us against catastrophic losses, any uncovered losses could adversely affect our financial condition and results of
operations.
Our dependence on selling to distributors and integrators increases the complexity of managing our supply chain and may result in excess inventory or
inventory shortages.
Selling to distributors and OEMs that build display devices based on specifications provided by branded suppliers, also referred to as integrators, reduces
our ability to forecast sales accurately and increases the complexity of our business. Our sales are generally made on the basis of customer purchase orders
rather than long-term purchase commitments. Our distributors, integrators and customers may cancel or defer purchase orders at any time, but we must
order wafer inventory from our contract manufacturers three to four months in advance.
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The estimates we use for our advance orders from contract manufacturers are based, in part, on reports of inventory levels and production forecasts from
our distributors and integrators, which act as intermediaries between us and the companies using our products. This process requires us to make numerous
assumptions concerning demand and to rely on the accuracy of the reports and forecasts of our distributors and integrators, each of which may introduce
error into our estimates of inventory requirements. Our failure to manage this challenge could result in excess inventory or inventory shortages that could
materially impact our operating results or limit the ability of companies using our semiconductors to deliver their products. If we overestimate demand for
our products, it could lead to significant charges for obsolete inventory. On the other hand, if we underestimate demand, we could forego revenue
opportunities, lose market share and damage our customer relationships.
We may be unable to successfully manage any future growth, including the integration of any acquisition or equity investment, which could disrupt our
business and severely harm our financial condition.
If we fail to effectively manage any future internal growth, our operating expenses may increase more rapidly than our revenue, adversely affecting our
financial condition and results of operations. To manage any future growth effectively in a rapidly evolving market, we must be able to maintain and
improve our operational and financial systems, train and manage our employee base and attract and retain qualified personnel with relevant experience. We
could spend substantial amounts of time and money in connection with expansion efforts for which we may not realize any profit. Our systems, procedures,
controls or financial resources may not be adequate to support our operations and we may not be able to grow quickly enough to exploit potential market
opportunities. In addition, we may not be able to successfully integrate the businesses, products, technologies or personnel of any entity that we might
acquire in the future, or we may fail to realize the anticipated benefits of any such acquisition. The successful integration of any acquired business as well
as the retention of personnel may require significant attention from our management and could divert resources from our existing business, which in turn
could have an adverse effect on our business operations. Acquired assets or businesses may not achieve the anticipated benefits we expect due to a number
of factors including: unanticipated costs or liabilities associated with such acquisition, including in the case of acquisitions we may make outside of the
United States, difficulty in operating in foreign countries or complying with foreign regulatory requirements, incurrence of acquisition-related costs, harm
to our relationships with existing customers as a result of such acquisition, harm to our brand and reputation, the loss of key employees in the acquired
businesses, use of resources that are needed in other parts of our business, and use of substantial portions of our available cash to consummate any such
acquisition. Any failure to successfully integrate any entity we may acquire or any failure to achieve the anticipated benefits of any such acquisition could
disrupt our business and seriously harm our financial condition.
Continued compliance with regulatory and accounting requirements will be challenging and will require significant resources.
We spend a significant amount of management time and external resources to comply with changing laws, regulations and standards relating to corporate
governance and public disclosure, including evolving SEC rules and regulations, Nasdaq Global Market rules, the Dodd-Frank Wall Street Reform and
Consumer Protection Act and the Sarbanes-Oxley Act of 2002, which requires management’s annual review and evaluation of internal control over
financial reporting. Failure to comply with these laws and rules could lead to investigation by regulatory authorities, de-listing from the Nasdaq Global
Market, or penalties imposed on us.
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Regulations related to conflict minerals may adversely impact our business.
The SEC has adopted disclosure and reporting rules intended to improve transparency and accountability concerning the supply of certain minerals, known
as conflict minerals, originating from the Democratic Republic of Congo ("DRC") and adjoining countries. These rules require us to conduct a reasonable
inquiry to determine the origin of certain materials used in our products and disclose whether our products use any materials containing conflict minerals
originating from the DRC and adjoining countries. Since we do not own or operate a semiconductor fabrication facility and do not manufacture our
products internally, we are dependent on the information provided by third-party foundries and production facilities regarding the materials used and the
supply chains for the materials. Further, there are costs associated with complying with these rules, including costs incurred to conduct inquiries to
determine the sources of any materials containing conflict minerals used in our products, to fulfill our reporting requirements and to develop and implement
potential changes to products, processes or sources of supply if it is determined that our products contain or use any conflict minerals from the DRC or
adjoining countries. The implementation of these rules could also affect the sourcing, supply and pricing of materials used in our products. For example,
there may only be a limited number of suppliers offering “conflict free” materials and we cannot be sure that we will be able to obtain necessary "conflict
free" materials from such suppliers in sufficient quantities or at reasonable prices. In addition, we may face reputational challenges if we determine that any
of our products contain minerals that are not conflict free or if we are unable to sufficiently verify the origins for all materials containing conflict minerals
used in our products through the procedures we may implement.
Our effective income tax rate is subject to unanticipated changes in, or different interpretations of, tax rules and regulations, and forecasting our
effective income tax rate is complex and subject to uncertainty.
As a global company, we are subject to taxation by a number of taxing authorities and as such, our tax rates vary among the jurisdictions in which we
operate. Unanticipated changes in our tax rates could affect our future results of operations. Our effective tax rates could be adversely affected by changes
in the mix of earnings in countries with differing statutory tax rates, changes in tax laws or the interpretation of tax laws either in the U.S. or abroad, or by
changes in the valuation of our deferred tax assets and liabilities. The ultimate outcomes of any future tax audits are uncertain, and we can give no
assurance as to whether an adverse result from one or more of them would have a material effect on our operating results and financial position.
The computation of income tax expense is complex as it is based on the laws of numerous tax jurisdictions and requires significant judgment on the
application of complicated rules governing accounting for tax provisions under U.S. generally accepted accounting principles. Income tax expense for
interim quarters is based on our forecasted tax rate for the year, which includes forward looking financial projections, including the expectations of profit
and loss by jurisdiction, and contains numerous assumptions. For these reasons, our tax rate may be materially different than our forecast.
We rely upon certain critical information systems for the operation of our business, and the failure of any critical information system may result in
serious harm to our business.
We maintain and rely upon certain critical information systems for the effective operation of our business. These information systems include
telecommunications, the Internet, our corporate intranet, various computer hardware and software applications, network communications and e-mail. These
information systems are subject to attacks, failures and access denials from a number of potential sources including viruses, destructive or inadequate code,
power failures, and physical damage to computers, communication lines and networking equipment. To the extent that these information systems are under
our control, we have implemented security procedures, such as virus protection software and firewall monitoring, to address the outlined risks. Security
procedures for information systems cannot be guaranteed to be failsafe and our inability to use or access these information systems at critical times could
compromise the timely and efficient operation of our business. Additionally, any compromise of our information security could result in the unauthorized
publication of our confidential business or proprietary information, cause an interruption in our operations, result in the unauthorized release of customer or
employee data, result in a violation of privacy or other laws, or expose us to a risk of litigation or damage our reputation, any or all of which could harm
our business and operating results.
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Environmental laws and regulations may cause us to incur significant expenditures to comply with applicable laws and regulations, and we may be
assessed considerable penalties for noncompliance.
We are subject to numerous environmental laws and regulations. Compliance with current or future environmental laws and regulations could require us to
incur substantial expenses which could harm our business, financial condition and results of operations. We have worked, and will continue to work, with
our suppliers and customers to ensure that our products are compliant with enacted laws and regulations. Failure by us or our contract manufacturers to
comply with such legislation could result in customers refusing to purchase our products and could subject us to significant monetary penalties in
connection with a violation, either of which would have a material adverse effect on our business, financial condition and results of operations.
Increasing attention on environmental, social and governance (ESG) matters may have a negative impact on our business, impose additional costs on
us, and expose us to additional risks.
Companies are facing increasing attention from investors, customers, partners, consumers and other stakeholders relating to ESG matters, including
environmental stewardship, social responsibility, diversity and inclusion, racial justice and workplace conduct. In addition, organizations that provide
information to investors on corporate governance and related matters have developed ratings processes for evaluating companies on their approach to ESG
matters. Such ratings are used by some investors to inform their investment and voting decisions. Unfavorable ESG ratings may lead to negative investor
sentiment toward the Company, which could have a negative impact on our stock price and our access to and costs of capital.
We have established corporate social responsibility programs aligned with sound environmental, social and governance principles. These programs reflect
our current initiatives and are not guarantees that we will be able to achieve them. Our ability to successfully execute these initiatives and accurately report
our progress presents numerous operational, financial, legal, reputational and other risks, many of which are outside our control, and all of which could
have a material negative impact on our business. Additionally, the implementation of these initiatives imposes additional costs on us. If our ESG initiatives
fail to satisfy investors, customers, partners and our other stakeholders, our reputation, our ability to sell products and services to customers, our ability to
attract or retain employees, and our attractiveness as an investment, business partner or acquirer could be negatively impacted. Similarly, our failure or
perceived failure to pursue or fulfill our goals, targets and objectives or to satisfy various reporting standards within the timelines we announce, or at all,
could also have similar negative impacts and expose us to government enforcement actions and private litigation.
Company Risks Related to the Semiconductor Industry and Our Markets
Dependence on a limited number of sole-source, third-party manufacturers for our products exposes us to possible shortages based on low
manufacturing yield, errors in manufacturing, uncontrollable lead-times for manufacturing, capacity allocation, price increases with little notice,
volatile inventory levels and delays in product delivery, any of which could result in delays in satisfying customer demand, increased costs and loss of
revenue.
We do not own or operate a semiconductor fabrication facility and do not have the resources to manufacture our products internally. We rely on a limited
number of foundries and assembly and test vendors to produce all of our wafers and for completion of finished products. Our wafers are not fabricated at
more than one foundry at any given time and our wafers typically are designed to be fabricated in a specific process at only one foundry. Sole sourcing each
product increases our dependence on our suppliers. We have limited control over delivery schedules, quality assurance, manufacturing yields, potential
errors in manufacturing and production costs. We do not have long-term supply contracts with our third-party manufacturers, so they are not obligated to
supply us with products for any specific period of time, quantity or price, except as may be provided in a particular purchase order. Our suppliers can
increase the prices of the products we purchase from them with little notice, which may cause us to increase the prices to our customers and harm our
competitiveness. Because our requirements represent only a small portion of the total production capacity of our contract manufacturers, they could
reallocate capacity to other customers during periods of high demand for our products, as they have done in the past. We expect this may occur again in the
future.
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Establishing a relationship with a new contract manufacturer in the event of delays or increased prices would be costly and burdensome. The lead time to
make such a change would be at least nine months, and the estimated time for us to adapt a product’s design to a particular contract manufacturer’s process
is at least four months. Additionally, we have chosen, and may continue to choose new foundries to manufacture our wafers which in turn, may require us
to modify our design methodology flow for the process technology and intellectual property cores of the new foundry. If we have to qualify a new foundry
or packaging, assembly and testing supplier for any of our products or if we are unable to obtain our products from our contract manufacturers on schedule,
at costs that are acceptable to us, or at all, we could incur significant delays in shipping products, our ability to satisfy customer demand could be harmed,
our revenue from the sale of products may be lost or delayed and our customer relationships and ability to obtain future design wins could be damaged.
Shortages of materials used in the manufacturing of our products and other key components of our customers’ products may increase our costs, impair
our ability to ship our products on time and delay our ability to sell our products.
We are currently facing shortages of components and materials that are critical to the manufacture of our products and our customers’ products. Such
critical components and materials may include semiconductor wafers and packages, double data rate memory die, display components, analog-to-digital
converters, digital receivers, video decoders and voltage regulators. These shortages are resulting in additional costs to us and we may be unable to ship our
products to our customers in a timely fashion, both of these factors could harm our business and adversely affect our results of operations.
Our highly integrated products and high-speed mixed signal products are difficult to manufacture without defects and the existence of defects could
result in increased costs, delays in the availability of our products, reduced sales of products or claims against us.
The manufacture of semiconductors is a complex process and it is often difficult for semiconductor foundries to produce semiconductors free of defects.
Because many of our products are more highly integrated than other semiconductors and incorporate mixed signal analog and digital signal processing,
multi-chip modules and embedded memory technology, they are even more difficult to produce without defects. Defective products can be caused by
design or manufacturing difficulties. Identifying quality problems can be performed only by analyzing and testing our semiconductors in a system after
they have been manufactured. The difficulty in identifying defects is compounded because the process technology is unique to each of the multiple
semiconductor foundries we contract with to manufacture our products. Despite testing by both our customers and us, errors or performance problems may
be found in existing or new semiconductors. Failure to achieve defect-free products may result in increased costs and delays in the availability of our
products. Defects may also divert the attention of our engineering personnel from our product development efforts to find and correct the issue, which
would delay our product development efforts.
Additionally, customers could seek damages from us for their losses, and shipments of defective products may harm our reputation with our customers. If a
product liability claim is brought against us, the cost of defending the claim could be significant and would divert the efforts of our technical and
management personnel and harm our business. Further, our business liability insurance may be inadequate or future coverage may be unavailable on
acceptable terms, which could adversely impact our financial results.
We experience a small number of semiconductor field failures infrequently in certain customer applications that required us to institute additional testing.
As a result of these field failures, we have incurred warranty costs due to customers returning potentially affected products and have experienced reductions
in revenues due to delays in production. Our customers have also experienced delays in receiving product shipments from us that resulted in the loss of
revenue and profits. Additionally, shipments of defective products could cause us to lose customers or to incur significant replacement costs, either of
which would harm our reputation and our business. Any defects, errors or bugs could also interrupt or delay sales of our new products to our customers,
which would adversely affect our financial results.
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The development of new products is extremely complex and we may be unable to develop our new products in a timely manner, which could result in a
failure to obtain new design wins and/or maintain our current revenue levels.
In addition to the inherent difficulty of designing complex integrated circuits, product development delays may result from:
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difficulties in hiring and retaining necessary technical personnel;
difficulties in reallocating engineering resources and overcoming resource limitations;
difficulties with contract manufacturers;
changes to product specifications and customer requirements;
changes to market or competitive product requirements; and
unanticipated engineering complexities.
If we are not successful in the timely development of new products, we may fail to obtain new design wins and our financial results will be adversely
affected.
Intense competition in our markets may reduce sales of our products, reduce our market share, decrease our gross profit and result in large losses.
We compete with specialized and diversified electronics and semiconductor companies that offer display processors or scaling components including:
Actions Microelectronics Co., Ltd., ARM Holdings PLC, Dolby Laboratories, Inc., Egis Technology Inc., Hisilicon Technologies Co., Ltd., i-Chips
Technology Inc., Lattice Semiconductor Corporation, MediaTek Inc., Novatek Microelectronics Corp., NVIDIA Corporation, Qualcomm Incorporated,
Realtek Semiconductor Corp., Renesas Electronics America Inc., Socionext Inc., Solomon Systech (International) Ltd., STMicroelectronics N.V., Sunplus
Technology Co., Ltd., Synaptics Incorporated, Texas Instruments Incorporated, Unisoc Communications, Inc., and other companies. Potential and current
competitors may include diversified semiconductor manufacturers and the semiconductor divisions or affiliates of some of our customers, including: Apple
Inc., Broadcom Inc., LG Electronics, Inc., MegaChips Corporation, Mitsubishi Digital Electronics America, Inc., NEC Corporation, Panasonic
Corporation, Samsung Electronics Co., Ltd., Socionext Inc., ON Semiconductor Corporation, Seiko Epson Corporation, Sharp Electronics Corporation,
Sony Corporation, and Toshiba America, Inc. In addition, start-up companies may seek to compete in our markets.
Many of our competitors have longer operating histories and greater resources to support development and marketing efforts than we do. Some of our
competitors operate their own fabrication facilities. These competitors may be able to react more quickly and devote more resources to efforts that compete
directly with our own. Additionally, any consolidation in the semiconductor industry may impact our competitive position. Our current or potential
customers have developed, and may continue to develop, their own proprietary technologies and become our competitors. Increased competition from both
competitors and our customers’ internal development efforts could harm our business, financial condition and results of operations by, for example,
increasing pressure on our profit margin or causing us to lose sales opportunities. For example, frame rate conversion technology similar to that used in our
line of MotionEngine® advanced video co-processors continues to be integrated into the SoC and display timing controller products of our competitors. We
cannot assure you that we can compete successfully against current or potential competitors.
If we are not able to respond to the rapid technological changes and evolving industry standards in the markets in which we compete, or seek to
compete, our products may become less desirable or obsolete.
The markets in which we compete or seek to compete are subject to rapid technological change and miniaturization capabilities, frequent new product
introductions, changing customer requirements for new products and features and evolving industry standards. The introduction of new technologies and
emergence of new industry standards could render our products less desirable or obsolete, which could harm our business and significantly decrease our
revenue. Examples of changing industry standards include the growing use of broadband to deliver video content, increased display resolution and size,
faster screen refresh rates, video capability such as High Dynamic Range, the proliferation of new display devices and the drive to network display devices
together. Our failure to predict market needs accurately or to timely develop new competitively priced products or product enhancements that incorporate
new industry standards and technologies, including integrated circuits with increasing levels of integration and new features, using smaller geometry
process technologies, may harm market acceptance and sales of our products.
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Our products are incorporated into our customers’ products, which have different parts and specifications and utilize multiple protocols that allow them to
be compatible with specific computers, video standards and other devices. If our customers’ products are not compatible with these protocols and
standards, consumers will return, or not purchase these products and the markets for our customers’ products could be significantly reduced. Additionally,
if the technology used by our customers becomes less competitive due to cost, customer preferences or other factors relative to alternative technologies,
sales of our products could decline.
We use a customer-owned tooling process for manufacturing most of our products, which exposes us to the possibility of poor yields and unacceptably
high product costs.
We build most of our products on a customer-owned tooling basis, whereby we directly contract the manufacture of our products, including wafer
production, assembly and testing. As a result, we are subject to increased risks arising from wafer manufacturing yields and risks associated with
coordination of the manufacturing, assembly and testing process. Poor product yields result in higher product costs, which could make our products less
competitive if we increase our prices to compensate for our higher costs or could result in lower gross profit margins if we do not increase our prices.
We depend on manufacturers of our semiconductor products not only to respond to changes in technology and industry standards but also to continue
the manufacturing processes on which we rely.
To respond effectively to changes in technology and industry standards, we depend on our contracted foundries to implement advanced semiconductor
technologies and our operations could be adversely affected if those technologies are unavailable, delayed or inefficiently implemented. In order to increase
performance and functionality and reduce the size of our products, we are continuously developing new products using advanced technologies that further
miniaturize semiconductors and we are dependent on our foundries to develop and provide access to the advanced processes that enable such
miniaturization. We cannot be certain that future advanced manufacturing processes will be implemented without difficulties, delays or increased expenses.
Our business, financial condition and results of operations could be materially adversely affected if advanced manufacturing processes are unavailable to
us, substantially delayed or inefficiently implemented.
Creating the capacity for new technological changes may cause manufacturers to discontinue older manufacturing processes in favor of newer ones. We
must then either retire the affected part or port (develop) a new version of the part that can be manufactured with a newer process technology. In the event
that a manufacturing process is discontinued, our current suppliers may be unwilling or unable to manufacture our current products. We may not be able to
place last time buy orders for the old technology or find alternate manufacturers of our products to allow us to continue to produce products with the older
technology while we expend the significant costs for research and development and time to migrate to new, more advanced processes.
Because of our long product development process and sales cycles, we may incur substantial costs before we earn associated revenue and ultimately
may not sell as many units of our products as we originally anticipated.
We develop products based on anticipated market and customer requirements and incur substantial product development expenditures, which can include
the payment of large up-front, third-party license fees and royalties, prior to generating the associated revenue. Our work under these projects is technically
challenging and places considerable demands on our limited resources, particularly on our most senior engineering talent. Additionally, the transition to
smaller geometry process technologies continues to significantly increase the cost and complexity of new product development, particularly with regards to
tooling, software tools, third party IP and engineering resources. Because the development of our products incorporates not only our complex and evolving
technology, but also our customers’ specific requirements, a lengthy sales process is often required before potential customers begin the technical
evaluation of our products. Our customers typically perform numerous tests and extensively evaluate our products before incorporating them into their
systems. The time required for testing, evaluation and design of our products into a customer’s system can take nine months or more. It can take an
additional nine months or longer before a customer commences volume shipments of systems that incorporate our products, if at all. Because of the lengthy
development and sales cycles, we will experience delays between the time we incur expenditures for research and development, sales and marketing and
inventory and the time we generate revenue, if any, from these expenditures.
Furthermore, we have entered into and may in the future enter into, co-development agreements that do not guarantee future sales volumes and limit our
ability to sell the developed products to other customers. The exclusive nature of these development agreements increases our dependence on individual
customers, particularly since we are limited in the number of products we are able to develop at any one time.
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If actual sales volumes for a particular product are substantially less than originally anticipated, we may experience large write-offs of capitalized license
fees, software development tools, product masks, inventories or other capitalized or deferred product-related costs, any of which would negatively affect
our operating results.
Our developed software may be incompatible with industry standards and challenging and costly to implement, which could slow product development
or cause us to lose customers and design wins.
We provide our customers with software development tools and with software that provides basic functionality for our integrated circuits and enables
enhanced connectivity of our customers’ products. Software development is a complex process and we are dependent on software development languages
and operating systems from vendors that may limit our ability to design software in a timely manner. Also, as software tools and interfaces change rapidly,
new software languages introduced to the market may be incompatible with our existing systems and tools, requiring significant engineering efforts to
migrate our existing systems in order to be compatible with those new languages. Software development disruptions could slow our product development
or cause us to lose customers and design wins. The integration of software with our products adds complexity, may extend our internal development
programs and could impact our customers’ development schedules. This complexity requires increased coordination between hardware and software
development schedules and increases our operating expenses without a corresponding increase in product revenue. This additional level of complexity
lengthens the sales cycle and may result in customers selecting competitive products requiring less software integration.
The competitiveness and viability of our products could be harmed if necessary licenses of third-party technology are not available to us on terms that
are acceptable to us or at all.
We license technology from independent third parties that is incorporated into our products or product enhancements. Future products or product
enhancements may require additional third-party licenses that may not be available to us on terms that are acceptable to us or at all. In addition, in the event
of a change in control of one of our licensors, it may become difficult to maintain access to its licensed technology. If we are unable to obtain or maintain
any third-party license required to develop new products and product enhancements, we may have to obtain substitute technology with lower quality or
performance standards, or at greater cost, either of which could seriously harm the competitiveness of our products.
Our limited ability to protect our IP and proprietary rights could harm our competitive position by allowing our competitors to access our proprietary
technology and to introduce similar products.
Our ability to compete effectively with other companies depends, in part, on our ability to maintain the proprietary nature of our technology, including our
semiconductor designs and software code. We provide the computer programming code for our software to customers in connection with their product
development efforts, thereby increasing the risk that customers will misappropriate our proprietary software. We rely on a combination of patent, copyright,
trademark and trade secret laws, as well as nondisclosure agreements and other methods, to help protect our proprietary technologies. As of December 31,
2021, we held 335 patents and had 9 patent applications pending for protection of our significant technologies. Competitors in both the U.S. and foreign
countries, many of whom have substantially greater resources than we do, may apply for and obtain patents that will prevent, limit or interfere with our
ability to make and sell our products, or they may develop similar technology independently or design around our patents. Effective patent, copyright,
trademark and trade secret protection may be unavailable or limited in foreign countries and, thus, make the possibility of piracy of our technology and
products more likely in these countries.
We cannot assure you that the degree of protection offered by patent or trade secret laws will be sufficient. Furthermore, we cannot assure you that any
patents will be issued as a result of any pending applications or that any claims allowed under issued patents will be sufficiently broad to protect our
technology. We may incur significant costs to stop others from infringing our patents. In addition, it is possible that existing or future patents may be
invalidated, diluted, circumvented, challenged or licensed to others.
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Others may bring infringement or indemnification actions against us that could be time-consuming and expensive to defend.
We may become subject to claims involving patents or other intellectual property rights. In recent years, there has been significant litigation in the U.S. and
in other jurisdictions involving patents and other intellectual property rights. This litigation is particularly prevalent in the semiconductor industry, in which
a number of companies aggressively use their patent portfolios to bring infringement claims. In recent years, there has been an increase in the filing of so-
called "nuisance suits," alleging infringement of intellectual property rights. These claims may be asserted initially or as counterclaims in response to
claims made by a company alleging infringement of intellectual property rights. These suits pressure defendants into entering settlement arrangements to
quickly dispose of such suits, regardless of merit. We may also face claims brought by companies that are organized solely to hold and enforce patents. In
addition, we may be required to indemnify our customers against IP claims related to their usage of our products as certain of our agreements include
indemnification provisions from third parties relating to our intellectual property.
IP claims could subject us to significant liability for damages and invalidate our proprietary rights. Responding to such claims, regardless of their merit, can
be time-consuming, result in costly litigation, divert management’s attention and resources and cause us to incur significant expenses. As each claim is
evaluated, we may consider the desirability of entering into settlement or licensing agreements. No assurance can be given that settlements will occur or
that licenses can be obtained on acceptable terms or that litigation will not occur. In the event there is a temporary or permanent injunction entered
prohibiting us from marketing or selling certain of our products, or a successful claim of infringement against us requiring us to pay damages or royalties to
a third-party and we fail to develop or license a substitute technology, our business, results of operations or financial condition could be materially
adversely affected. Any IP litigation or claims also could force us to do one or more of the following:
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stop selling products using technology that contains the allegedly infringing IP;
attempt to obtain a license to the relevant IP, which may not be available on terms that are acceptable to us or at all;
attempt to redesign those products that contain the allegedly infringing IP; or
pay damages for past infringement claims that are determined to be valid or which are arrived at in settlement of such litigation or threatened
litigation.
If we are forced to take any of the foregoing actions, we may incur significant additional costs or be unable to manufacture and sell our products, which
could seriously harm our business. In addition, we may not be able to develop, license or acquire non-infringing technology under reasonable terms. These
developments could result in an inability to compete for customers or otherwise adversely affect our results of operations.
Our products are characterized by average selling prices that can decline over relatively short periods of time, which will negatively affect our financial
results unless we are able to reduce our product costs or introduce new products with higher average selling prices.
Average selling prices for our products can decline over relatively short periods of time, while many of our product costs are relatively fixed. When our
average selling prices decline, our gross profit declines unless we are able to sell more units or reduce the cost to manufacture our products. We have
experienced declines in our average selling prices and expect that we will continue to experience them in the future, although we cannot predict when they
may occur or how severe they will be. Our financial results will suffer if we are unable to offset any reductions in our average selling prices by increasing
our sales volumes, reducing our costs, adding new features to our existing products or developing new or enhanced products in a timely manner with higher
selling prices or gross profits.
The cyclical nature of the semiconductor industry may lead to significant variances in the demand for our products and could harm our operations.
In the past, the semiconductor industry has been characterized by significant downturns and wide fluctuations in supply and demand. Also, the industry has
experienced significant fluctuations in anticipation of changes in general economic conditions, including economic conditions in Asia, Europe and North
America. The cyclical nature of the semiconductor industry has also led to significant variances in product demand and production capacity. We have
experienced, and may continue to experience, periodic fluctuations in our financial results because of changes in industry-wide conditions.
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Risks Related to Our Strategic Plan and STAR Market Listing
If we are unable to implement our strategy to expand our PRC operations, including the positioning of our subsidiary to qualify and seek an initial
public offering on the STAR Market, our ability to access capital, customers, and talent in China could suffer, which in turn may materially and
adversely affect our worldwide growth and revenue potential.
In August 2021 we announced our strategic plan to transform our existing subsidiary, Pixelworks Semiconductor Technology (Shanghai) Co., Ltd
(“PWSH”) into a profit center for our mobile, projector, and video delivery businesses to improve our access to capital, customers, and talent in China. As
part of this strategic plan, we intend to qualify PWSH to file an application for an initial public offering on the Shanghai Stock Exchange’s Science
Technology Innovation Board, known as the STAR Market (the “Listing”) to further improve our access to capital markets and to fund growth. We may not
be successful in the implementation of our strategic plan, and we may not be able to complete the Listing for a number of reasons, including those related
to the risks we face associated with our operations in China as detailed separately above, many of which are outside our control. With respect to the Listing,
PWSH must succeed in obtaining PRC governmental approvals required to permit the Listing, and one or more of those approvals may be denied, or
significantly delayed, by the PRC regulators for reasons outside our control or unknown to us, or may be conditioned on requirements that we deem would
result in an undue burden or material adverse impact on our business. Similarly, the Listing application may be denied or delayed by the Shanghai Stock
Exchange in its discretion. Further, the COVID‑19 outbreak, the tensions between the United States and China, or other geopolitical forces, including war,
could negatively impact our currently planned projects and investments in the PRC, including the Listing.
Additionally, pursuant to our Capital Increase Agreement, PWSH agreed to attempt to complete all requirements to qualify for a Listing such that the
Listing is consummated prior to a certain date (for the private equity and strategic investors ("Investors"), June 30, 2024, and for the employee-owned
entities (“ESOP”), December 31, 2024). If PWSH has not consummated the Listing before those dates, or if it seriously violates certain other restructuring
actions required by the Capital Increase Agreement such that a Listing by such dates becomes impossible, the respective purchasers may elect to require
that PWSH repurchase the purchaser’s respective equity interest for a price equal to the initial purchase price paid by the purchaser plus annual simple
interest (for the Investors, at a rate of 3%; for the ESOP, at a rate of 5%). As noted above, various elements in the Listing process are outside our control or
may be subject to conditions that are unacceptable to us, and if we fail to obtain the Listing, the provisions of the Capital Increase Agreement would require
a use of PWSH cash for purposes not otherwise planned for, which in turn would negatively impact our plans for growth and the cash position of PWSH.
If we are unable to successfully implement our strategic plan, including the Listing, we may not realize the advantages to our PRC operations contemplated
by our business strategy, including improving our access to capital markets, customers, and talent in China. Because it may be several years before we
know whether the Listing will be completed, we may, in the interim, forego or postpone other alternative actions to strengthen our market position and
operations in the PRC.
PRC companies are critical to the global semiconductor industry, and our current business is substantially concentrated in the PRC market. Our inability to
build, or any delay in growing, our PRC-based operations over the next several years would materially and adversely limit our operations and operating
results, including our revenue growth. In addition, during that time, the process underlying the Listing could result in significant diversion of management
time as well as substantial out-of-pocket costs, which could further impair our ability to expand our business.
Even if we complete the Listing, we may not achieve the results contemplated by our business strategy and our strategy for growth in the PRC may not
result in increases in the price of our common stock.
We cannot assure you that, even if the Listing is completed, we will realize any or all of our anticipated benefits of the Listing. Our completion of the
Listing may not have the anticipated effects of providing access to new capital markets or strengthening our market position and operations in the PRC. If
the Listing is completed, PWSH will have broad discretion in the use of the proceeds from the initial sales of shares to PWSH investors, and it may not
spend or invest those proceeds in a manner that results in our operating success or with which Pixelworks, Inc. common shareholders agree. Our failure to
successfully leverage the completion of the Listing to enhance our access to new capital markets and expand our PRC business could result in a decrease in
the price of our common stock, and we cannot assure you that the success of PWSH will have an associated positive effect on the price of our common
stock.
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Completion of the Listing is currently planned for 2023, but there can be no assurances that the Listing will occur in that timeframe, if at all. In the interim,
PWSH may require additional funding from Pixelworks to augment its PRC operations, and we cannot give any assurance that such capital will be
available from Pixelworks on terms acceptable to us. Any such inability to obtain funds from Pixelworks or other sources may impair the ability of PWSH
to grow its operations, which could have a material adverse effect on our consolidated operating results and on the price of our common stock.
PWSH’s status as a publicly traded company that is controlled, but less than wholly owned, by Pixelworks could have an adverse effect on us.
PWSH is not currently a wholly owned subsidiary of Pixelworks, and following the Listing, other holders may hold as much as 20% of the subsidiary. The
interests of PWSH may diverge from the interests of Pixelworks and its other subsidiaries in the future. We may face conflicts of interest in managing,
financing, or engaging in transactions with PWSH, or allocating business opportunities between our subsidiaries, including future arrangements for
operating subsidiaries other than PWSH to license and use our intellectual property.
Pixelworks will retain majority ownership of PWSH after the Listing, but PWSH will be managed by a separate board of directors and officers and those
directors and officers will owe fiduciary duties to the various stakeholders of PWSH, including shareholders other than Pixelworks. In the operation of
PWSH’s business, there may be situations that arise whereby the directors and officers of PWSH, in the exercise of their fiduciary duties, take actions that
may be contrary to the best interests of Pixelworks or its shareholders. Additionally, because PWSH will be managed by a separate board of directors and
officers, our organizational structure will become more complex, which may in turn require substantial financial, operational, and management resources.
In the future, PWSH may issue options, restricted shares, and other forms of share-based compensation to its directors, officers, and employees, which
could dilute Pixelworks’ ownership in PWSH. In addition, PWSH may engage in capital raising activities in the future that could further dilute Pixelworks’
ownership interest.
The STAR Market is relatively new, and as a result, it is difficult to predict the effect of the proposed Listing, which may in turn negatively affect the
price of our common stock on the Nasdaq Global Market.
The China Securities Regulatory Commission, or the CSRC, initially launched the STAR Market in June 2019 and trading on that market began in July
2019. No assurance can be given regarding the effect of the Listing on the market price of PWSH shares or on the price of our common stock on the
Nasdaq Global Market. The market price of the PWSH shares and Pixelworks common stock may be volatile or may decline for reasons other than the risk
and uncertainties described above, as the result of investor negativity or uncertainty with respect to the proposed Listing.
If the Listing is completed, Pixelworks and PWSH both will be public reporting companies, but each will be subject to separate, and potentially
inconsistent, accounting and disclosure requirements, which may lead to investor confusion or uncertainty that could cause decreased demand for, or
fluctuations in the price of, one or both of the companies’ publicly traded shares.
If PWSH completes the Listing, it will be subject to accounting, disclosure, and other regulatory requirements of the STAR Market. At the same time,
Pixelworks will remain subject to accounting, disclosure, and other regulatory requirements of the SEC and the Nasdaq Global Market. As a result,
Pixelworks and PWSH periodically will disclose information simultaneously pursuant to differing laws and regulations. The information disclosed by the
two companies will differ, and may differ materially from time to time, due to the distinct, and potentially inconsistent, accounting standards applicable to
the two companies and disclosure requirements imposed by securities regulatory authorities, as well as differences in language, culture, and expression
habit, in composition of investors in the United States and PRC, and in the capital markets of the United States and the PRC. Differing disclosures could
lead to confusion or uncertainty among investors in the publicly traded shares of one or both companies. Differences between the price of PWSH shares on
the STAR Market and the price of Pixelworks common stock on Nasdaq Global Market could lead to increased volatility, as some investors seek to
arbitrage price differences. Additionally, news about PWSH may affect the price of Pixelworks’ common stock, and vice versa, creating additional
uncertainty and volatility.
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General Risks
The price of our common stock has and may continue to fluctuate substantially.
Our stock price and the stock prices of technology companies similar to Pixelworks have been highly volatile. The price of our common stock may decline
and the value of our shareholders' investment may be reduced regardless of our performance.
The daily trading volume of our common stock has historically been relatively low, although, in the three most recent years, trading volume increased
compared to historical levels. As a result of the historically low volume, our shareholders may be unable to sell significant quantities of common stock in
the public trading markets without a significant reduction in the price of our common shares. Additionally, market fluctuations, as well as general economic
and political conditions, including recessions, interest rate changes or international currency fluctuations, may negatively impact the market price of our
common stock. Other factors that could negatively impact our stock price include:
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actual or anticipated fluctuations in our operating results;
changes in or failure to meet expectations as to our future financial performance;
changes in or failure to meet financial estimates of securities analysts;
announcements by us or our competitors of technological innovations, design wins, contracts, standards, acquisitions or divestitures;
the operating and stock price performance of other comparable companies;
issuances or proposed issuances of equity, debt or other securities by us, or sales of securities by our security holders; and
changes in market valuations of other technology companies.
Any inability or perceived inability of investors to realize a gain on an investment in our common stock could have an adverse effect on our business,
financial condition and results of operations by potentially limiting our ability to retain our customers, to attract and retain qualified employees and to raise
capital. In addition, in the past, following periods of volatility in the overall market and the market price of a particular company's securities, securities
class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a
diversion of our management's attention and resources.
The interest of our current or potential significant shareholders may conflict with other shareholders and they may attempt to effect changes or acquire
control, which could adversely affect our results of operations and financial condition.
Our shareholders may from time to time engage in proxy solicitations, advance shareholder proposals, acquire control or otherwise attempt to effect
changes, including by directly voting their shares on shareholder proposals. Campaigns by shareholders to effect changes at publicly traded companies are
sometimes led by investors seeking to increase short-term shareholder value through actions such as financial restructuring, increased debt, special
dividends, stock repurchases or sales of assets or the entire company. Responding to proxy contests and other actions by activist shareholders can be costly
and time-consuming, disrupting our operations and diverting the attention of our Board of Directors and senior management from the pursuit of business
strategies. Additionally, uncertainty over our direction and leadership may negatively impact our relationship with our customers and make it more difficult
to attract and retain qualified personnel and business partners. As a result, shareholder campaigns could adversely affect our results of operations and
financial condition.
35
Future sales of our equity could result in significant dilution to our existing shareholders and depress the market price of our common stock.
It is likely that we will need to seek additional capital in the future and from time to time. If this financing is obtained through the issuance of equity
securities, debt convertible into equity securities, options or warrants to acquire equity securities or similar instruments or securities, our existing
shareholders will experience dilution in their ownership percentage upon the issuance, conversion or exercise of such securities and such dilution could be
significant. For example, in December 2020, we completed a private placement of 3,200,000 shares of common stock to certain accredited investors at a
purchase price of $2.071 per share. The issuance and sale of the shares in the private placement had a dilutive impact on our existing stockholders.
Additionally, also in December 2020, we completed the sale of 4,900,000 shares of common stock in an underwritten registered offering and an additional
735,000 shares were issued pursuant to the 30-day over-allotment option exercised by the underwriter, at a price to the public of $2.45 per share.
Additionally, pursuant to our “at the market” equity offering program, we may sell shares of our common stock having aggregate sales proceeds of up to
$25 million from time to time through Cowen and Company, LLC, as our agent. Through December 31, 2021, we sold an aggregate of 1,808,484 shares of
our common stock under this at the market offering. The issuance and sale of additional shares of our common stock pursuant to our “at the market” equity
offering program or otherwise will have a dilutive impact on our existing stockholders. Additionally, any new equity securities issued by us could have
rights, preferences or privileges senior to those of our common stock. Further, the issuance and sale of, or the perception that we may issue and sell,
additional shares of common stock pursuant to our “at the market” equity offering program or an additional private placement or another offering could
have the effect of depressing the market price of our common stock or increasing the volatility thereof.
Any issuance by us or sales of our securities by our security holders, including by any of our affiliates, or the perception that such issuances or sales could
occur, could negatively impact the market price of our securities. For example, a number of shareholders own significant blocks of our common stock. If
one or more of these large shareholders were to sell large portions of their holdings in a relatively short time, for liquidity or other reasons, the prevailing
market price of our common stock could be negatively affected. This could result in further potential dilution to our existing shareholders and the
impairment of our ability to raise capital through the sale of equity, debt or other securities.
We may be unable to maintain compliance with Nasdaq Marketplace Rules which could cause our common stock to be delisted from the Nasdaq Global
Market. This could result in the lack of a market for our common stock, cause a decrease in the value of our common stock, and adversely affect our
business, financial condition and results of operations.
Under the Nasdaq Marketplace Rules our common stock must maintain a minimum price of $1.00 per share for continued inclusion on the Nasdaq Global
Market. Our stock price was previously below $1.00 on May 6, 2009 and was $1.22 on February 12, 2016 and we cannot guarantee that our stock price will
remain at or above $1.00 per share. If the price again drops below $1.00 per share, our stock could become subject to delisting, and we may seek
shareholder approval for a reverse stock split, which in turn could produce adverse effects and may not result in a long-term or permanent increase in the
price of our common stock. Further, for continued listing on the Nasdaq Global Market we must have at least 400 total shareholders.
In addition to the minimum $1.00 per share and 400 total shareholders requirements, the Nasdaq Global Market has other continued listing requirements,
and we must meet all of the criteria under at least one of the following three standards: (i) a minimum of $50.0 million in total asset value and $50.0 million
in revenues in the latest fiscal year or in two of the last three fiscal years, at least 1.1 million publicly held shares and at least $15 million in market value of
publicly held shares and at least four registered and active market makers (as such term is defined by the Nasdaq Marketplace Rules); ; (ii) a minimum of
$50.0 million in market value of listed securities, at least 1.1 million publicly held shares and at least $15.0 million in market value of publicly held shares
and at least four registered and active market makers; or (iii) a minimum of $10.0 million in shareholders' equity, at least 750,000 publicly held shares and
at least $5 million in market value of publicly held shares and at least two registered and active market makers. As of December 31, 2021, we were in
compliance with these listing requirements. Our stock price is volatile and we believe that we continue to remain susceptible to the market value of our
listed securities and/or the market value of our publicly held securities falling below $50.0 million and $15.0 million, respectively. Accordingly, we cannot
assure you that we will be able to continue to comply with Nasdaq Global Market’s listing requirements. Should we be unable to remain in compliance
with these requirements, our stock could become subject to delisting.
36
If our common stock is delisted, trading of the stock will most likely take place on an over-the-counter market established for unlisted securities. An
investor is likely to find it less convenient to sell, or to obtain accurate quotations in seeking to buy, our common stock on an over-the-counter market, and
many investors may not buy or sell our common stock due to difficulty in accessing over-the-counter markets, or due to policies preventing them from
trading in securities not listed on a national exchange or other reasons. For these reasons and others, delisting would adversely affect the liquidity, trading
volume and price of our common stock, causing the value of an investment in us to decrease and having an adverse effect on our business, financial
condition and results of operations by limiting our ability to attract and retain qualified executives and employees and limiting our ability to raise capital.
The anti-takeover provisions of Oregon law and in our articles of incorporation could adversely affect the rights of the holders of our common stock,
including by preventing a sale or takeover of us at a price or prices favorable to the holders of our common stock.
Provisions of our articles of incorporation and bylaws and provisions of Oregon law may have the effect of delaying or preventing a merger or acquisition
of us, making a merger or acquisition of us less desirable to a potential acquirer or preventing a change in our management, even if our shareholders
consider the merger, acquisition or change in management favorable or if doing so would benefit our shareholders. In addition, these provisions could limit
the price that investors would be willing to pay in the future for shares of our common stock. The following are examples of such provisions:
•
•
if the number of directors is fixed by the board at eight or more, our board of directors is divided into three classes serving staggered terms, which
would make it more difficult for a group of shareholders to quickly replace a majority of directors;
our board of directors is authorized, without prior shareholder approval, to create and issue preferred stock with voting or other rights or
preferences that could impede the success of any attempt to acquire us or to effect a change of control, commonly referred to as "blank check"
preferred stock;
• members of our board of directors can be removed only for cause and at a meeting of shareholders called expressly for that purpose, by the vote of
75 percent of the votes then entitled to be cast for the election of directors;
•
our board of directors may alter our bylaws without obtaining shareholder approval; and shareholders are required to provide advance notice for
nominations for election to the board of directors or for proposing matters to be acted upon at a shareholder meeting;
• Oregon law permits our board to consider other factors beyond stockholder value in evaluating any acquisition offer (so-called "expanded
constituency" provisions); and
•
a supermajority (67%) vote of shareholders is required to approve certain fundamental transactions.
Item 1B.
Unresolved Staff Comments.
Not applicable.
37
Item 2.
Properties.
We lease facilities around the world to house our engineering, sales, customer support, administrative and operations functions. We do not own any of our
facilities. As of December 31, 2021, our major facilities consisted of the following:
Location
China
Toronto
California
Taiwan
Oregon
Japan
Function(s)
Engineering; sales;
customer support
Engineering; administration
Administration;
engineering; sales
Customer support; sales;
operations; engineering
Administration
Sales; customer support
Square Feet Utilized
36,000
12,000
10,000
16,000
5,000
3,000
Lease Expiration
Various dates
through
March 2023
March 2027
September 2024
Various dates through May
2023
December 2024
January 2023
Item 3.
Legal Proceedings.
We are subject to legal matters that arise from time to time in the ordinary course of our business. Although we currently believe that resolving such
matters, individually or in the aggregate, will not have a material adverse effect on our financial position, our results of operations, or our cash flows, these
matters are subject to inherent uncertainties and our view of these matters may change in the future.
Item 4.
Mine Safety Disclosures.
Not Applicable.
38
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market for Registrant’s Common Equity and Related Stockholder Matters
Our common stock is listed for trading on the Nasdaq Global Market under the symbol "PXLW". Our stock began trading on May 19, 2000.
As of March 4, 2022, there were 114 shareholders of record of our common stock and the last per share sales price of the common stock on that date was
$2.96. The number of beneficial owners of our common stock is substantially greater than the number of shareholders of record because a significant
portion of our outstanding common stock is held in broker "street name" for the benefit of individual investors.
Item 6.
Reserved.
39
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.
COVID-19
In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic, and the virus continues to exist in areas where we operate
and sell our products and services. Several public health organizations have recommended, and many local governments have implemented, certain
measures to slow and limit the transmission of the virus, including various social distancing ordinances, which has resulted in a significant deterioration of
economic conditions in many of the countries in which we operate.
The spread of COVID-19 has caused us to modify our business practices, including implementing work-from-home policies and restricting travel by our
employees.
The impact of the pandemic on the global economy and on our business, as well as on the business of our suppliers and customers, and the measures that
may be needed in the future in response to it, will depend on many factors beyond our control and knowledge. We will continually monitor the situation to
determine what actions may be necessary or appropriate to address the impact of the pandemic, which may include actions mandated or recommended by
federal, state or local authorities. While we expect the impacts of COVID-19 to be temporary, the disruptions caused by the virus have negatively affected
our revenue and results of operations in 2020 and 2021. For example, our revenues for fiscal year 2020 were lower than initially anticipated and our
revenues for 2021 continued to be negatively impacted by COVID-19.
Overview
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).
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. Our Topaz product line was one of the industry’s first single-chip SoC
for digital projection. We first introduced our motion estimation / motion compensation technology ("MEMC") for TVs and in recent years introduced a
mobile-optimized MEMC solution for smartphones, one of several unique features in the mobile-optimized Iris visual processor. 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 for a wide range of frame rates, shutter angles and display types.
Our solutions enable worldwide manufacturers to offer leading-edge consumer electronics and professional display products, as well as video delivery and
streaming solutions for content service providers. Our core visual display processing technology intelligently processes digital images and video from a
variety of sources and optimizes the content for a superior viewing experience. Our video coding technology reduces storage requirements, significantly
reduces bandwidth constraint issues and converts content between multiple formats to enable seamless delivery of video, including OTA streaming, while
also maintaining end-to-end content security.
Rapid growth in video consumption, combined with the move towards high frame rate / refresh rate displays, especially in mobile, is increasing the demand
for our visual processing and video delivery solutions. Our technologies can be applied to a wide range of devices from large-screen projectors to cinematic
big screens, to low-power mobile tablets and smartphones, to high-quality video infrastructure equipment and streaming devices. Our products are
architected and optimized for power, cost, bandwidth, 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, projector, and video delivery businesses to improve their focus on
the Asia-centered customers and employee stakeholders of those businesses. The global center of the mobile, projector, and video delivery businesses
continues to be in Asia, and the steps taken by us to date and going forward are intended to improve our ability to access capital, customers, and talent. We
have operated our primary R&D center in Asia for over 15 years and feel that the time is right to take advantage of that existing footprint and develop
PWSH as a full profit-and-loss center underneath Pixelworks, Inc., for the mobile, projector, and video delivery businesses. Most of these steps were
completed before the end of 2021.
40
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 our growth worldwide. We presently intend to qualify PWSH to apply for the Listing so that the Listing is
consummated in 2023. The process of going public on the STAR Market includes several periods of review and, therefore, is a lengthy process. There is no
guarantee that PWSH will be approved for a Listing at any point in the future.
As of 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").
Historically, significant portions of our revenue have been generated by sales to a relatively small number of end customers and distributors. We sell our
products worldwide through a direct sales force, distributors and manufacturers’ representatives. We sell to distributors in China, Europe, Japan, Korea,
Southeast Asia, Taiwan and the U.S. Our distributors often provide engineering support to our end customers and often have valuable and established
relationships with our end customers. In certain countries in which we operate, it is customary to sell to distributors. While distributor payment to us is not
dependent upon the distributor’s ability to resell the product or to collect from the end customer, the distributors may provide longer payment terms to end
customers than those we would offer.
Significant portions of our products are sold overseas. Sales outside the U.S. accounted for approximately 97% and 93% of revenue in 2021 and 2020,
respectively. Our integrators, branded manufacturers and branded suppliers incorporate our products into systems that are sold worldwide. The majority of
our revenue to date has been denominated in U.S. dollars.
Seasonality
Our business is subject to seasonality related to the markets we serve and the location of our customers. For example, we have historically experienced
higher revenue from the digital projector market in the third quarter of the year, and lower revenue in the first quarter of the year, as our Japanese customers
reduce inventories in anticipation of their March 31 fiscal year end.
41
Results of Operations
For the year ended December 31, 2021 compared with year ended December 31, 2020.
Revenue, net
Net revenue was as follows (in thousands):
Revenue, net
Net revenue increased $14.2 million, or 35%, from 2020 to 2021.
Year ended December 31,
2020
2021
2021 v. 2020
$ change
% change
$
55,102 $
40,855 $
14,247
35 %
Revenue recorded in 2021 consisted of $50.8 million in revenue from the sale of IC products and $4.3 million in revenue related to engineering services,
license revenue and other. Revenue recorded in 2020 consisted of $39.2 million in revenue from the sale of IC products and $1.7 million in revenue related
to engineering services, license revenue and other.
The increase in IC revenue is due to a significant increase in unit sales into the mobile market and an increase in unit sales into the digital projector market
as we experienced increased demand in the mobile market and sustained recovery in the digital projector market.
The increase in revenue related to engineering services, license revenue and other is primarily due to the recognition of license revenue during 2021.
Cost of revenue and gross profit
Cost of revenue and gross profit were as follows (in thousands):
1
Direct product costs and related overhead
Amortization of acquired developed technology
2
Inventory charges
Stock-based compensation
Restructuring
Total cost of revenue
Gross profit
Year ended December 31,
2021
% of
revenue
2020
% of
revenue
$
$
$
25,987
899
480
43
—
27,409
27,693
47 % $
2
1
0
0
50 % $
50 % $
18,807
1,192
66
432
173
20,670
20,185
46 %
3
0
1
0
51 %
49 %
1
2
Includes purchased materials, assembly, test, labor, employee benefits and royalties.
Includes charges to reduce inventory to lower of cost or net realizable value and a benefit for sales of previously written down inventory.
Gross profit margin increased to 50% in 2021 compared to 49% in 2020, primarily due to high margin license revenue recorded, more absorption of fixed
overhead costs due to increased revenue and decreased amortization of acquired developed technology. These favorable increases to gross profit margin
were partially offset by an unfavorable impact to gross profit margin due to a significant increase in sales into the mobile market compared to the
comparable period.
Pixelworks’ gross profit margin is subject to variability based on changes in revenue levels, product mix, average selling prices, startup costs, restructuring
charges, amortization related to acquired developed technology and the timing and execution of manufacturing ramps as well as other factors.
42
Research and development
Research and development expense includes compensation and related costs for personnel, development-related expenses including non-recurring
engineering and fees for outside services, depreciation and amortization, expensed equipment, facilities and information technology expense allocations
and travel and related expenses.
Co-Development Agreement
During the third quarter of 2021, we entered into a best-efforts co-development agreement with a customer to defray a portion of the research and
development expenses we expect to incur in connection with our development of an integrated circuit product. We expect our development costs to exceed
the amounts received from the customer, and although we expect to sell units of the product to the customer, there is no commitment or agreement from the
customer for such sales at this time. Additionally, we retain ownership of any modifications or improvements to our pre-existing intellectual property and
may use such improvements in products sold to other customers.
Under the co-development agreement, $5.8 million was payable by the customer within 60 days of the date of the agreement and three additional payments
of $2.2 million, $1.3 million and $1.3 million are each payable upon completion of certain development milestones. As amounts become due and payable,
they are offset against research and development expense on a pro rata basis. During the year ended December 31, 2021, we recognized an offset to
research and development expense of approximately $4.0 million.
Research and development expense was as follows (in thousands):
Research and development
Year ended December 31,
2020
2021
2021 v. 2020
$ change
% change
$
27,250 $
25,040 $
2,210
9 %
Research and development expense increased $2.2 million, or 9%, from 2020 to 2021. The increase was primarily due to an increase in compensation
expense due to a COVID-19 relief benefit received in China in 2020 that was not received in 2021, as well as annual merit salary increases and an
increased management bonus accrual. 2021 also included an increase in non-recurring engineering expense due to the timing of development activities.
This increase was largely offset by a benefit related to the co-development agreement.
Selling, general and administrative
Selling, general and administrative expense includes compensation and related costs for personnel, sales commissions, allocations for facilities and
information technology expenses, travel, outside services and other general expenses incurred in our sales, marketing, customer support, management, legal
and other professional and administrative support functions.
Selling, general and administrative expense was as follows (in thousands):
Selling, general and administrative
$
20,445 $
19,840 $
605
3 %
Selling, general and administrative expense increased $0.6 million, or 3%, from 2020 to 2021. The increase was primarily due to increases in accounting
and legal fees incurred related to our strategic plan with our PWSH subsidiary as well as an increase in compensation expense due to annual merit salary
increases and an increased management bonus accrual. These increases were partially offset by a decrease in stock-based compensation expense due to the
timing of awards granted.
Year ended December 31,
2020
2021
2021 v. 2020
$ change
% change
43
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.
Restructuring expense was as follows (in thousands):
Employee severance and benefits
Total restructuring expense
Included in cost of revenue
Included in operating expenses
During 2021, we did not record any restructuring expense.
Year ended December 31,
2021
2020
— $
— $
— $
—
2,214
2,214
173
2,041
$
$
$
During 2020, we recorded $1.6 million in restructuring expense related to the August 2020 Plan and $0.6 million in restructuring expense related to the
January 2020 Plan. The January 2020 Plan was complete in the first quarter of 2020 and we did not incur any further charges related to the January 2020
Plan after the first quarter of 2020. The August 2020 Plan was complete in the fourth quarter of 2020 and we did not incur any further expenses related to
the August 2020 Plan after the fourth quarter of 2020.
Interest income and other, net
Interest income and other, net, consisted of the following (in thousands):
Other income
Interest income
Interest expense
Total interest income and other, net
44
Year ended December 31,
2021
2020
246 $
211
—
457 $
161
87
(239)
9
$
$
Provision (benefit) for income taxes
The provision (benefit) for income taxes was as follows (in thousands):
Provision (benefit) for income taxes
Year ended December 31,
2021
2020
$
(133) $
598
The income tax benefit of $0.1 million recorded for the year ended December 31, 2021 is primarily comprised of current tax expense of approximately $0.6
million for our profitable cost-plus foreign jurisdictions and accruals for tax contingencies in foreign jurisdictions offset by a deferred tax benefit of
approximately $0.7 million primarily associated with recognition of Canadian deferred tax assets. Included in current tax expense is a tax benefit of $0.6
million associated with the reversal of withholding taxes on our China earnings as we now plan to reinvest these earnings indefinitely, which resulted from
the changes made in the third quarter of 2021 related to our strategic plan with our PWSH subsidiary. Also included in current tax expense is $0.8 million
of expense resulting from the revaluation of our uncertain tax position in China to the statutory tax rate as we no longer qualify for the tax holiday we were
under.
The income tax expense recorded for the year ended December 31, 2020 is primarily comprised of $0.6 million in current and deferred tax expense for our
profitable cost-plus foreign jurisdictions and accruals for tax contingencies in foreign jurisdictions, partially offset by the reversal of previously recorded
tax contingencies due to the expiration of the applicable statute of limitations.
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 $0.6 million of our Canadian net deferred tax assets as we are more likely than not to realize a benefit from these assets in a future period. We
have not provided a valuation allowance against our other foreign net deferred tax assets as we have concluded it is more likely than not that we will realize
a benefit from these assets in a future period because our subsidiaries in these jurisdictions are cost-plus taxpayers.
As of December 31, 2021, we have federal, state and foreign net operating loss carryforwards of approximately $166.4 million, $6.8 million, and $39.5
million respectively, which will begin expiring in 2022. As of December 31, 2021, we have available federal, state and foreign research and
experimentation tax credit carryforwards of approximately $7.8 million, $5.0 million and $24.3 million respectively. The federal and state tax credits will
begin expiring in 2022 while the foreign tax 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 $120.9 million. We have a general foreign tax credit of
$0.1 million, which will begin expiring in 2022. Our ability to utilize our federal net operating losses may be limited by Section 382 of the Internal
Revenue Code of 1986, as amended, which imposes an annual limit on the ability of a corporation that undergoes an "ownership change" to use its net
operating loss carryforwards to reduce its tax liability. An ownership change is generally defined as a greater than 50% increase in equity ownership by 5%
shareholders in any three-year period.
45
Liquidity and Capital Resources
Cash and cash equivalents
Total cash and cash equivalents increased $30.3 million from $31.3 million at December 31, 2020 to $61.6 million at December 31, 2021. Short-term
marketable securities decreased $0.3 million from $0.3 million at December 31, 2020 to zero at December 31, 2021. The net increase in cash, cash
equivalents and short-term marketable securities of $30.0 million was the result of $42.3 million in proceeds from equity interests issued to the redeemable
non-controlling interest and certain entities owned by employees, $1.3 million in proceeds from the issuances of common stock under our employee equity
incentive plans and $0.3 million in net proceeds from our "at the market" equity offering. These increases were partially offset by $9.2 million used in
operating activities, $3.5 million used for purchases of property and equipment and $1.2 million used for payments on other asset financings.
As of December 31, 2021, our cash and cash equivalents balance consisted of $46.3 million in cash and $15.3 million in cash equivalents held in U.S.
dollar denominated money market funds. Our investment policy requires that our portfolio maintains a weighted average maturity of less than 12 months.
Additionally, no maturities can extend beyond 24 months and concentrations with individual securities are limited. At the time of purchase, short-term
credit rating must be rated at least A-2 / P-2 / F-2 by at least two Nationally Recognized Statistical Rating Organizations ("NRSRO") and securities of
issuers with a long-term credit rating must be rated at least A or A3 by at least two NRSROs. Our investment policy is reviewed at least annually by our
Audit Committee.
Accounts receivable, net
Accounts receivable, net increased to $8.7 million at December 31, 2021 from $4.7 million at December 31, 2020. Average number of days sales
outstanding increased to 47 days at December 31, 2021 from 44 days at December 31, 2020. The increase in accounts receivable was due to normal
fluctuations in the timing of sales and customer receipts within the fourth quarter of 2021, and the fourth quarter of 2020.
Inventories
Inventories decreased to $1.5 million at December 31, 2021 from $2.4 million at December 31, 2020. Inventory turnover increased to 19.5 at December 31,
2021 from 6.0 at December 31, 2020 primarily due to lower average inventory balances and higher cost of goods sold during the fourth quarter of 2021
compared to the fourth quarter of 2020. Inventory turnover is calculated based on annualized quarterly operating results and average inventory balances
during the quarter.
Capital resources
At the Market Offering
On June 5, 2020, we entered into a sales agreement (the "Sales Agreement") with Cowen and Company, LLC ("Cowen"), pursuant to which we may issue
and sell shares of the Company's common stock, par value $0.001 per share, having an aggregate offering price of up to $25.0 million, from time to time,
through an "at the market" equity offering program under which Cowen will act as sales agent. Under the Sales Agreement, Cowen may sell the shares by
methods deemed to be an "at the market offering" as defined in Rule 415(a)(4) promulgated under the Securities Act of 1933, as amended, including sales
made by means of ordinary brokers’ transactions on the Nasdaq Global Market or on any other existing trading market for the common stock or otherwise
at market prices prevailing at the time of sale, in block transactions, or as otherwise directed by us. We pay Cowen a commission equal to three percent
(3.0%) of the gross sales proceeds of any common stock sold through Cowen under the Sales Agreement. The Sales Agreement may be terminated by us
upon prior notice to Cowen or by Cowen upon prior notice to us, or at any time under certain circumstances, including but not limited to the occurrence of
a material adverse change in the Company. We are not obligated to sell any shares under the Sales Agreement.
During the year ended December 31, 2020, we sold an aggregate of 1,747,466 shares of our common stock under this at the market offering, resulting in
aggregate net proceeds to us of approximately $4.4 million, and gross proceeds of approximately $4.9 million and paid Cowen commissions and fees of
approximately $0.2 million, and other expenses of $0.3 million.
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 $0.3 million, and gross proceeds of approximately $0.4 million, and paid Cowen commissions and fees and
other expenses of approximately $0.1 million.
46
Capital Increase Agreement
We have entered into a Capital Increase Agreement pursuant to which our subsidiary PWSH, received net proceeds from the sale of its securities pursuant
thereto in an amount of RMB 279.7 million ($42.3 million USD). Additional information is provided in "Note 15: Redeemable Non-Controlling Interest
and Equity Interest of PWSH Sold to Employees", which is incorporated by reference into this section.
Liquidity
As of December 31, 2021, our cash, cash equivalents and short-term marketable securities balance of $61.6 million was highly liquid. We currently
anticipate that our existing working capital will be adequate to fund our operating, investing and financing needs for the twelve months following our 2021
fiscal year end and beyond. We may pursue financing arrangements including the issuance of debt or equity securities or reduce expenditures, or both, to
meet the Company’s cash requirements, including in the longer term. There is no assurance that, if required, we will be able to raise additional capital or
reduce discretionary spending to provide the required liquidity which, in turn, may have an adverse effect on our results of operations, financial position
and cash flows.
From time to time, we evaluate acquisitions of businesses, products or technologies that complement our business. Any transactions, if consummated, may
consume a material portion of our working capital or require the issuance of equity securities that may result in dilution to existing shareholders. Our ability
to generate cash from operations is also subject to substantial risks described in Part I, “Item 1A., Risk Factors.” If any of these risks occur, we may be
unable to generate or sustain positive cash flow from operating activities. We would then be required to use existing cash and cash equivalents to support
our working capital and other cash requirements. If additional funds are required to support our working capital requirements, acquisitions or other
purposes, we may seek to raise funds through debt financing, equity financing or from other sources. If we raise additional funds through the issuance of
equity or convertible debt securities, the percentage ownership of our shareholders could be significantly diluted, and these newly-issued securities may
have rights, preferences or privileges senior to those of existing shareholders. If we raise additional funds by obtaining loans from third parties, the terms of
those financing arrangements may include negative covenants or other restrictions on our business that could impair our operating flexibility, and would
also require us to incur interest expense. We can provide no assurance that additional financing will be available at all or, if available, that we would be able
to obtain additional financing on terms favorable to us.
Contractual Payment Obligations
A summary of our contractual obligations as of December 31, 2021 is as follows:
Contractual Obligation
Operating leases
Estimated purchase commitments to contract manufacturers
Payments on accrued balances related to asset financings
Other purchase obligations and commitments
1
Total
Total
5,724 $
6,598
1,498
619
14,439 $
$
$
Payments Due By Period
Less than
1 year
1-3 years
3-5 years
More than 5
years
2,652 $
6,598
1,133
275
10,658 $
2,253 $
—
365
344
2,962 $
728 $
—
—
—
728 $
91
—
—
—
91
1
We are unable to reliably estimate the timing of future payments related to uncertain tax positions and repatriation of foreign earnings; therefore,
$3.1 million of income taxes payable has been excluded from the table above.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and judgments that
affect the amounts reported. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, inventories, property and
equipment, impairment of long-lived assets, valuation of goodwill, valuation of share-based payments, income taxes, litigation and other contingencies. We
base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may
differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated
financial statements:
47
Revenue Recognition - 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. Our principal revenue generating activities consist of the following:
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. 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. We generally satisfy our single performance obligation upon
shipment of the goods to the customer and recognize revenue at a point in time upon shipment of the underlying product.
Our shipments are subject to limited return rights subject to our limited warranty for our products sold. In addition, we may provide other
credits to certain customers pursuant to price protection and stock rotation rights, all of which are considered variable consideration when
estimating the amount of revenue to recognize. We use the “most likely amount” method to determine the amount of consideration to which
we are entitled. Our estimate of variable consideration is reassessed at the end of each reporting period based on changes in facts and
circumstances. Historically, returns and credits have not been material.
Engineering Services - We enter into contracts for professional engineering services that include software development and customization.
We identify each performance obligation in our engineering services agreements ("ESAs") at contract inception. The ESA generally
includes project deliverables specified by the customer. The performance obligations in the ESA are generally combined into one
deliverable, with the pricing for services stated at a fixed amount. Services provided under the ESA generally result in the transfer of
control over time. We recognize revenue on ESAs based on the proportion of labor hours expended to the total hours expected to complete
the contract performance obligation. ESAs could include substantive customer acceptance provisions. In ESAs that include substantive
customer acceptance provisions, we recognize revenue upon customer acceptance.
License Revenue - On occasion, we derive revenue from the license of our internally developed intellectual property ("IP"). Additionally,
for certain IP license agreements, royalties are collected as customers sell their own products that incorporate our IP. IP licensing
agreements that we enter into generally provide licensees the right to incorporate our IP components in their products with terms and
conditions that vary by licensee. Fees under these agreements generally include license fees or royalty fees relating to our IP and support
service fees, resulting in two performance obligations. We evaluate each performance obligation, which generally results in the transfer of
control at a point in time for the license fee and over time for support services. Royalties are recognized as revenue is earned, generally
when the customer sells its products that incorporate our IP.
Other - From time-to-time, we enter into arrangements for other revenue generating activities, such as providing technical support services
to customers through technical support agreements. In each circumstance, we evaluate such arrangements for our performance obligations
which generally results in the transfer of control for such services over time. Historically, such arrangements have not been material to our
operating results.
Inventory Valuation. We value inventory at the lower of cost or net realizable value. In addition, we write down any obsolete, unmarketable or otherwise
impaired inventory to net realizable value. The determination of obsolete or excess inventory requires us to estimate the future demand for our products.
The estimate of future demand is compared to inventory levels to determine the amount, if any, of obsolete or excess inventory. If actual market conditions
are less favorable than those we projected at the time the inventory was written down, additional inventory write-downs may be required. Inventory
valuation is re-evaluated on a quarterly basis.
Useful Lives and Recoverability of Equipment and Other Long-Lived Assets. We evaluate the recoverability of equipment and other assets, including
identifiable intangible assets, whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If there
is an indicator of impairment, we prepare an estimate of future, undiscounted cash flows expected to result from the use of each asset and its eventual
disposition. If these cash flows are less than the carrying value of the asset, we adjust the carrying amount of the asset to its estimated fair value. We have
concluded that the carrying value of our long-lived assets is recoverable as of December 31, 2021.
Goodwill. Goodwill is not amortized, rather tested, at least annually, for impairment at a reporting unit level. Impairment of goodwill is the condition that
exists when the carrying amount of a reporting unit that includes goodwill exceeds its fair value. A goodwill impairment loss is recognized for the amount
that the carrying amount of the reporting unit, including goodwill, exceeds its fair value, limited to the total amount of goodwill allocated to that reporting
unit. If the fair value of a reporting unit exceeds the carrying amount, goodwill of the reporting unit is not considered impaired.
48
We evaluate impairment using the guidance set forth in FASB Accounting Standards Update No. 2017-04, Intangibles-Goodwill and Other (Topic 350):
Simplifying the Test for Goodwill Impairment ("ASU 2017-04") which states that an entity may first assess qualitative factors to determine whether it is
necessary to perform the quantitative goodwill impairment test. If determined to be necessary, the quantitative impairment test shall be used to identify
goodwill impairment and measure the amount of goodwill impairment loss to be recognized. An entity has an unconditional option to bypass the qualitative
assessment for any reporting unit in any period and proceed directly to the quantitative goodwill impairment test. Accordingly, we have elected to bypass
the qualitative assessment and proceed directly to the quantitative goodwill impairment test. We tested goodwill for impairment under the quantitative
goodwill impairment test during the fourth quarter and concluded that goodwill was not impaired.
Stock-Based Compensation. Stock-based compensation expense is measured at the grant date, based on the estimated fair value of the award using the
Black-Scholes option pricing model for stock options and market price for restricted stock units. The use of the Black-Scholes option pricing model,
requires certain estimates, including expected term of options granted, the method of calculating expected volatilities and the risk-free interest rate used in
the option-pricing model. The resulting calculated fair value of stock options is recognized as compensation expense over the requisite service period,
which is generally the vesting period. When there are changes to the assumptions used in the option-pricing model, including fluctuations in the market
price of our common stock, there will be variations in the calculated fair value of our future stock option awards, which results in variation in the stock-
based compensation expensed recognized. Additionally, any modification of an award that increases its fair value will require us to recognize additional
expense.
Income Taxes. We record deferred income taxes for temporary differences between the amount of assets and liabilities for financial and tax reporting
purposes and we record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. We also regularly
conduct a comprehensive review of our uncertain tax positions. In this regard, an uncertain tax position represents our expected treatment of a tax position
taken in a filed tax return, or planned to be taken in a future tax return, that has not been reflected in measuring income tax expense for financial reporting
purposes. Until these positions are sustained by the taxing authorities, we do not recognize the tax benefits resulting from such positions and report the tax
effects for uncertain tax positions in our consolidated balance sheets.
Recent Accounting Pronouncements
See "Note 2: Summary of Significant Accounting Policies" in Part II, Item 8 of this Form 10-K for a description of recent accounting pronouncements,
including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements.
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk.
Not applicable.
Item 8.
Financial Statements and Supplementary Data.
The following financial statements and reports are included in Item 8:
Report of Independent Registered Public Accounting Firm (PCAOB ID: 32)
Consolidated Balance Sheets as of December 31, 2021 and 2020
Consolidated Statements of Operations for the years ended December 31, 2021 and 2020
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2021 and 2020
Consolidated Statements of Cash Flows for the years ended December 31, 2021 and 2020
Consolidated Statements of Shareholders' Equity for the years ended December 31, 2021 and 2020
Notes to Consolidated Financial Statements
49
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Pixelworks, Inc.
San Jose, California
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Pixelworks, Inc. and its subsidiaries (the Company) as of December 31, 2021 and 2020,
and the related consolidated statements of operations, comprehensive loss, shareholders' equity, and cash flows for each of the two years ended December
31, 2021, and the related notes (collectively referred to as the consolidated financial statements).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of
December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the two years ended December 31, 2021 in conformity with
accounting principles generally accepted in the United States of America.
Basis for Opinion
The Company's management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on the Company's
consolidated financial statements. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States)
("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not
required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain
an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal
control over financial reporting. Accordingly, we express no such opinion.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our
audits provides a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were
communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial
statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any
way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing
separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
50
_____________________________________________________________________________________________
Revenue Recognition — Refer to Note 2 to the Consolidated Financial Statements
____________________________________________________________________________
Critical Audit Matter Description
The Company recognizes revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration the
Company expects to receive in exchange for those products or services. The Company's contract may contain one or more performance obligations,
including hardware, professional engineering services, internally developed intellectual property ("IP") and technical support services.
Significant judgment is exercised by the Company in determining revenue recognition for these customer agreements, and includes the following:
• 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).
•
•
The pattern of delivery (i.e., timing of when revenue is recognized) for each distinct performance obligation.
Estimation of variable consideration when determining the amount of revenue to recognize, primarily on product sale arrangements (e.g., customer
credits pursuant to price protection rights, stock rotation rights and limited return rights).
Given these factors, the related audit effort in evaluating management's judgments in determining revenue recognition for these customer agreements was
extensive and required a high degree of auditor judgment.
____________________________________________________________________________
How the Critical Audit Matter Was Addressed in the Audit
Our principal audit procedures related to the Company's revenue recognition for these customer agreements included the following:
• We selected a sample of customer agreements and performed the following procedures:
◦ Obtained and read contract source documents for each selection, including master agreements, and other documents that were part of the
◦
◦
agreement to identify significant terms.
Tested management's identification of significant terms for completeness, including the identification of distinct performance obligations
and variable consideration.
Assessed the terms in the customer agreement and evaluated the appropriateness of management's application of their accounting
policies, along with their use of estimates, in the determination of revenue recognition conclusions.
• We evaluated the reasonableness of management's estimate of stand-alone selling prices for products and services that are not sold separately.
• We evaluated the reasonableness and accuracy of management's judgements and estimates used in accounting for customer credits pursuant to
price protection rights, stock rotation rights and limited return rights ("variable consideration"). This included testing management's estimate of
calculating expected credits issued to customers and determining whether such credits were completely and accurately reserved as of December
31, 2021.
We tested the mathematical accuracy of management's calculations of revenue and the associated timing of recognizing the related revenue subject to any
constraints in the consolidated financial statements.
51
_____________________________________________________________________________________________
Inventory Valuation— Refer to Note 2 to the Financial Statements
____________________________________________________________________________
Critical Audit Matter Description
The Company computes inventory cost on a first-in-first out basis and applies judgment in determining the forecast for products and the valuation of
inventories. The Company assesses inventory at each reporting date in order to assert that it is recorded at net realizable value, giving consideration to,
among other factors: whether the product is valued at the lower of cost or net realizable value; and the estimation of excess and obsolete inventory or that
which is not of saleable quality. Most of the Company's inventory provisions are based on the Company's inventory levels and future product purchase
commitments compared to assumptions about future demand and market conditions.
Significant judgment is exercised by the Company to determine inventory carrying value adjustments, specifically the provisions for excess or obsolete
inventories, and includes the following:
• Developing assumptions such as forecasts of future sales quantities, which are sensitive to the competitiveness of product offerings, customer
requirements, and product life cycles.
• Applying management judgment on not reserving certain inventory units (e.g. in case they are items that can be used for Return Merchandise
Authorization "RMA"/warranty purpose).
Given these factors and assumptions are forward-looking and could be affected by future economic and market conditions, the related audit effort to
evaluate management's inventory valuation adjustments was extensive and required a high degree of auditor judgment.
____________________________________________________________________________
How the Critical Audit Matter Was Addressed in the Audit
Our principal audit procedures related to the Company's inventory valuation methodology included the following:
• We selected a sample of inventory items and performed the following procedures:
◦
Tested the mathematical accuracy of the schedule by comparing the quantities and carrying value of on-hand inventories to related unit
sales, both historical and forecasted.
◦ Assessed and tested the reasonableness of the significant assumptions (e.g., sales and marketing forecast, build plans, RMA requirements,
◦
usage and open sales-orders).
Inquired with the management team and evaluated the adequacy of management's sales forecasts by analyzing potential technological
changes in line with product life cycles and/or identified alternative customer uses.
Assessed whether there were any potential sources of contrary information, including historical forecast accuracy or history of significant revisions to
previously recorded inventory valuation adjustments, and performed sensitivity analyses over significant assumptions to evaluate the changes in inventory
valuation that would result from changes in the assumptions.
/s/ Armanino
LLP
We have served as the Company’s auditor since 2020.
San Ramon, California
March 9, 2022
52
PIXELWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
ASSETS
December 31,
2021
2020
Current assets:
Cash and cash equivalents
Short-term marketable securities
Accounts receivable, net
Inventories
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Operating lease right-of-use assets
Other assets, net
Acquired intangible assets, net
Goodwill
Total assets
LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable
Accrued liabilities and current portion of long-term liabilities
Current portion of income taxes payable
Total current liabilities
Long-term liabilities, net of current portion
Deposit liability
Operating lease liabilities, net of current portion
Income taxes payable, net of current portion
Total liabilities
Commitments and contingencies (Note 11)
Redeemable non-controlling interest
Shareholders' equity:
Preferred stock, $0.001 par value, 50,000,000 shares authorized, none issued
Common stock, $0.001 par value; 250,000,000 shares authorized, 53,367,136 and 51,078,942 shares issued
and outstanding as of December 31, 2021 and 2020, respectively.
Accumulated other comprehensive income (loss)
Accumulated deficit
Total shareholders' equity
Total liabilities, redeemable non-controlling interest and shareholders' equity
See accompanying notes to consolidated financial statements.
53
$
$
$
$
61,587 $
—
8,708
1,469
2,732
74,496
5,656
4,789
3,162
90
18,407
106,600 $
2,747 $
13,563
128
16,438
519
12,716
2,853
2,948
35,474
30,905
—
31,257
250
4,672
2,445
1,010
39,634
5,103
6,606
1,081
1,207
18,407
72,038
995
9,452
147
10,594
1,007
—
5,088
2,479
19,168
—
—
475,644
(468)
(434,955)
40,221
106,600 $
467,957
47
(415,134)
52,870
72,038
PIXELWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Revenue, net
Cost of revenue (1)
Gross profit
Operating expenses:
Research and development (2)
Selling, general and administrative (3)
Restructuring
Total operating expenses
Loss from operations
Interest income and other, net
Gain on loan extinguishment
Total other income, net
Loss before income taxes
Provision (benefit) for income taxes
Net loss
Less: Net income attributable to redeemable non-controlling interest
Net loss attributable to Pixelworks, Inc.
Net loss attributable to Pixelworks, Inc. per share - basic and diluted
Weighted average shares outstanding - basic and diluted
(1) Includes:
Amortization of acquired intangible assets
Stock-based compensation
Restructuring
(2) Includes stock-based compensation
(3) Includes:
Stock-based compensation
Amortization of acquired intangible assets
$
$
$
Year Ended December 31,
2021
2020
55,102 $
27,409
27,693
27,250
20,445
—
47,695
(20,002)
457
—
457
(19,545)
(133)
(19,412)
(409)
(19,821) $
(0.38) $
52,509
899
43
—
2,363
3,678
219
40,855
20,670
20,185
25,040
19,840
2,041
46,921
(26,736)
9
796
805
(25,931)
598
(26,529)
—
(26,529)
(0.65)
40,712
1,192
432
173
2,943
4,296
304
See accompanying notes to consolidated financial statements.
54
PIXELWORKS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
Net loss
Other comprehensive income (loss):
Foreign currency translation adjustment
Foreign pension adjustment
Tax effect of foreign pension adjustment
Unrealized loss on available-for-sale securities
Comprehensive loss
Less: comprehensive income attributable to redeemable non-controlling interest
Total comprehensive loss attributable to Pixelworks, Inc.
See accompanying notes to consolidated financial statements.
Year Ended December 31,
2021
2020
$
(19,412) $
(26,529)
(520)
6
(1)
—
(19,927)
(409)
(20,336) $
—
48
(10)
(3)
(26,494)
—
(26,494)
$
55
PIXELWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation
Depreciation and amortization
Amortization of acquired intangible assets
Deferred income tax expense (benefit)
Reversal of uncertain tax positions
Gain on loan extinguishment
Accretion on short-term marketable securities
Gain on sale of marketable securities
Other
Changes in operating assets and liabilities:
Accounts receivable, net
Inventories
Prepaid expenses and other current and long-term assets, net
Accounts payable
Accrued current and long-term liabilities
Income taxes payable
Net cash used in operating activities
Cash flows from investing activities:
Purchases of property and equipment
Proceeds from sales and maturities of marketable securities
Purchases of available-for-sale marketable securities
Purchases of licensed technology
Cash flows from financing activities:
Net cash provided by (used in) investing activities
Net proceeds from issuance of equity interest to redeemable non-controlling interest
Net proceeds from issuance of equity interest to certain entities owned by employees
Proceeds from issuances of common stock under employee equity incentive plans
Payments on asset financings
Net proceeds from "at the market" equity offering
Net proceeds from equity offering
Net proceeds from private placement investment
Proceeds from Paycheck Protection Program loan
Net cash provided by financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplemental disclosure of cash flow information:
Cash paid for income taxes, net of refunds received
Cash paid during the year for interest
Non-cash investing and financing activities:
Acquisitions of property and equipment and other assets under extended payment terms
Gain on loan extinguishment
See accompanying notes to consolidated financial statements.
56
Year Ended December 31,
2021
2020
$
(19,412) $
(26,529)
6,084
3,648
1,118
(768)
(2)
—
—
—
10
(4,036)
976
(46)
1,282
1,537
452
(9,157)
(3,475)
250
—
—
(3,225)
29,976
12,329
1,282
(1,195)
320
—
—
—
42,712
30,330
31,257
61,587 $
376 $
162
1,229 $
—
7,853
3,737
1,496
26
(88)
(796)
(4)
(4)
9
6,243
2,956
3,295
166
(2,361)
290
(3,711)
(2,637)
8,229
(1,500)
(152)
3,940
—
—
600
(1,007)
4,429
12,743
6,210
796
23,771
24,000
7,257
31,257
397
217
1,495
(796)
$
$
$
PIXELWORKS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except share data)
Balance as of December 31, 2019
Stock issued under employee equity incentive plans
Equity offering
Private placement investment
"At the market" equity offering
Stock-based compensation expense
Unrealized loss on available-for-sale securities
Net loss attributable to Pixelworks, Inc.
Foreign pension adjustment, net of tax of $10
Balance as of December 31, 2020
Stock issued under employee equity incentive plans
"At the market" equity offering
Stock-based compensation expense
Foreign currency translation adjustment
Net loss attributable to Pixelworks, Inc.
Foreign pension adjustment, net of tax of $1
Balance as of December 31, 2021
Common Stock
Shares
Amount
Accumulated
Other
Comprehensive
Income (Loss)
Accumulated
Deficit
Total
Shareholders'
Equity
38,434,488
2,061,988
5,635,000
3,200,000
1,747,466
—
—
—
—
51,078,942
2,227,176
61,018
—
—
—
—
53,367,136
$
436,122
600
12,743
6,210
4,429
7,853
—
—
—
467,957
1,282
321
6,084
—
—
—
475,644
$
12
—
—
—
—
—
(3)
—
38
47
—
—
—
(520)
—
5
(468)
$
(388,605)
—
—
—
—
—
—
(26,529)
—
(415,134)
—
—
—
—
(19,821)
—
(434,955)
$
47,529
600
12,743
6,210
4,429
7,853
(3)
(26,529)
38
52,870
1,282
321
6,084
(520)
(19,821)
5
40,221
See accompanying notes to consolidated financial statements.
57
PIXELWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
NOTE 1. BASIS OF PRESENTATION
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. There is no
guarantee that PWSH will be approved for a Listing at any point in the future.
Our consolidated financial statements include the accounts of Pixelworks and its subsidiaries. Intercompany accounts and transactions have been
eliminated. All foreign subsidiaries use the U.S. dollar as the functional currency, and as a result, transaction gains and losses are included in the
consolidated statements of operations. Transaction (gains) and losses were $(258) and $419 for the years ended December 31, 2021 and 2020, respectively.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles ("U.S. GAAP") requires us to make
estimates and judgments that affect amounts reported in the financial statements and accompanying notes. Our significant estimates and judgments include
those related to revenue recognition, valuation of excess and obsolete inventory, lives and recoverability of equipment and other long-lived assets, valuation
of goodwill, stock-based compensation and income taxes. The actual results experienced could differ materially from our estimates.
58
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
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.
Marketable Securities
Our investments in marketable securities are classified as available-for-sale. Available-for-sale securities are stated at fair value based on quoted market
prices with unrealized holding gains or losses, net of tax, included in accumulated other comprehensive income, a component of shareholders’ equity. The
cost of securities sold is based on the specific identification method.
Accounts Receivable
Accounts receivable are recorded at invoiced amount and do not bear interest when recorded or accrue interest when past due. We maintain an allowance
for doubtful accounts for estimated losses that may result from the inability of our customers to make required payments. At the end of each reporting
period, we estimate the allowance for doubtful accounts based on an account-by-account risk analysis of outstanding receivable balances. The
determination to write-off specific accounts receivable balances is made based on the likelihood of collection and past due status. Past due status is based
on invoice date and terms specific to each customer.
Inventories
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).
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization is calculated on a straight-line basis over the estimated useful life of the assets
which are generally as follows:
Software
Equipment, furniture and fixtures
Tooling
Leasehold improvements
Lesser of 3 years or contractual license term
2 years
2 to 4 years
Lesser of lease term or estimated useful life
The cost of property and equipment repairs and maintenance is expensed as incurred.
Licensed Technology
We have capitalized licensed technology assets in other long-term assets. These assets are stated at cost and are amortized on a straight-line basis over the
term of the license or the estimated life of the asset, if the license is not contractually limited, which is generally two to five years.
Useful Lives and Recoverability of Equipment and Other Long-Lived Assets
We evaluate the remaining useful life and recoverability of equipment and other assets, including identifiable intangible assets, whenever events or changes
in circumstances indicate that the carrying amount of the assets may not be recoverable. If there is an indicator of impairment, we prepare an estimate of
future, undiscounted cash flows expected to result from the use of each asset and its eventual disposition. If these cash flows are less than the carrying value
of the asset, we adjust the carrying amount of the asset to its estimated fair value. We have concluded that the carrying value of our long-lived assets is
recoverable as of December 31, 2021.
59
Goodwill
Goodwill is not amortized, rather it is tested, at least annually, for impairment at a reporting unit level. Impairment of goodwill is the condition that exists
when the carrying amount of a reporting unit that includes goodwill exceeds its fair value. A goodwill impairment loss is recognized for the amount that the
carrying amount of the reporting unit, including goodwill, exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit. If
the fair value of a reporting unit exceeds the carrying amount, goodwill of the reporting unit is not considered impaired.
We evaluate impairment using the guidance set forth in FASB Accounting Standards Update No. 2017-04, Intangibles-Goodwill and Other (Topic 350):
Simplifying the Test for Goodwill Impairment ("ASU 2017-04") which states that an entity may first assess qualitative factors to determine whether it is
necessary to perform the quantitative goodwill impairment test. If determined to be necessary, the quantitative impairment test shall be used to identify
goodwill impairment and measure the amount of goodwill impairment loss to be recognized. An entity has an unconditional option to bypass the qualitative
assessment for any reporting unit in any period and proceed directly to the quantitative goodwill impairment test. Accordingly, we have elected to bypass
the qualitative assessment and proceed directly to the quantitative goodwill impairment test. We tested goodwill for impairment under the quantitative
goodwill impairment test during the fourth quarter of 2021 and concluded that goodwill was not impaired.
Warranty Program
We warrant that our products will be free from defects in material and workmanship for a period of twelve months from delivery. Warranty repairs are
guaranteed for the remainder of the original warranty period. Our warranty is limited to repairing or replacing products, or refunding the purchase price. At
the end of each reporting period, we estimate a reserve for warranty returns based on historical experience and knowledge of any applicable events or
transactions. The reserve for warranty returns is included in accrued liabilities in our consolidated balance sheets.
Stock-Based Compensation
We currently sponsor a stock incentive plan that allows for issuance of employee stock options and restricted stock awards, including restricted stock units.
We also have an employee stock purchase plan for all eligible employees. The fair value of share-based payment awards is expensed straight-line over the
requisite service period, which is generally the vesting period, for the entire award. Additionally, any modification of an award that increases its fair value
will require us to recognize additional expense.
The fair value of our stock option grants and purchase rights under our employee stock purchase plan are estimated as of the grant date using the Black-
Scholes option pricing model which is affected by our estimates of the risk free interest rate, our expected dividend yield, expected term and the expected
share price volatility of our common shares over the expected term. The fair value of our restricted stock awards are based on the market value of our stock
on the date of grant.
Research and Development
Costs associated with research and development activities are expensed as incurred, except for items with alternate future uses which are capitalized and
depreciated over their estimated useful lives.
On occasion, we enter into co-development arrangements with current or prospective customers to defray a portion of the research and development
expenses we expect to incur in connection with our development of an IC product. As amounts become due and payable, they are offset against research
and development expense on a pro-rata basis.
Income Taxes
We account for income taxes under the asset and liability method. This approach requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of temporary differences between financial statement carrying amounts and tax bases of assets and liabilities. Deferred
tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. We establish a valuation allowance to reduce deferred tax assets if it is "more likely than not" that a portion or all of the asset
will not be realized in future tax returns.
An uncertain tax position represents treatment of a tax position taken in a filed tax return, or planned to be taken in a future tax return, that has not been
reflected in measuring income tax expense for financial reporting purposes. Until these positions are sustained by the taxing authorities, we do not
recognize the tax benefits resulting from such positions and report the tax effects for uncertain tax positions in our consolidated balance sheets.
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Risks and Uncertainties
Concentration of Suppliers
We do not own or operate a semiconductor fabrication facility and do not have the resources to manufacture our products internally. We rely on a limited
number of foundries and assembly and test vendors to produce all of our wafers and for completion of finished products. We do not have any long-term
agreements with any of these suppliers. In light of these dependencies, it is reasonably possible that failure to perform by one of these suppliers could have
a severe impact on our results of operations. Additionally, the concentration of these vendors within Taiwan and the People’s Republic of China increases
our risk of supply disruption due to natural disasters, economic instability, political unrest or other regional disturbances.
Risk of Technological Change
The markets in which we compete, or seek to compete, are subject to rapid technological change, frequent new product introductions, changing customer
requirements for new products and features, and evolving industry standards. The introduction of new technologies and the emergence of new industry
standards could render our products less desirable or obsolete, which could harm our business.
Concentrations of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist of cash equivalents and accounts receivable. We limit our exposure
to credit risk associated with cash equivalent balances by holding our funds in high quality, highly liquid money market accounts. We limit our exposure to
credit risk associated with accounts receivable by carefully evaluating creditworthiness before offering terms to customers.
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 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. The adoption of ASU 2018-18 did not have a material impact on our financial position, results of
operations and cash flows.
61
NOTE 3. BALANCE SHEET COMPONENTS
Accounts Receivable, Net
Accounts receivable consists of the following:
Accounts receivable, gross
Allowance for doubtful accounts
Accounts receivable, net
The following is a summary of the change in our allowance for doubtful accounts:
Balance at beginning of year
Additions charged (reductions credited)
Balance at end of year
Inventories
Inventories consist of the following:
Finished goods
Work-in-process
Inventories
December 31,
2021
2020
8,744 $
(36)
8,708 $
4,713
(41)
4,672
Year Ended December 31,
2021
2020
41 $
(5)
36 $
23
18
41
December 31,
2021
2020
461 $
1,008
1,469 $
1,775
670
2,445
$
$
$
$
$
$
We recorded inventory write-downs of $488 and $95 for the years ended December 31, 2021 and 2020, respectively. The inventory write-downs were for
lower of cost or net realizable value and excess and obsolescence exposure. The inventory write-downs were offset by sales of previously written-down
inventory of $9 and $29 for the years ended December 31, 2021 and 2020, respectively.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of current prepaid expenses, deposits, income taxes receivable and other receivables.
62
Property and Equipment, Net
Property and equipment consists of the following:
Equipment, furniture and fixtures
Tooling
Software
Leasehold improvements
Accumulated depreciation and amortization
Property and equipment, net
December 31,
2021
2020
$
$
9,463 $
5,749
5,230
1,375
21,817
(16,161)
5,656 $
8,889
6,298
5,711
1,393
22,291
(17,188)
5,103
Software amortization was $1,214 and $1,174 for the years ended December 31, 2021 and 2020, respectively. Depreciation and amortization expense for
equipment, furniture, fixtures, tooling and leasehold improvements was $2,281 and $2,227 for the years ended December 31, 2021 and 2020, respectively.
Other Assets, Net
Other assets consist primarily of deposits, deferred tax assets and licensed technology. Amortization of licensed technology was $153 and $336 for the
years ended December 31, 2021 and 2020, respectively.
Acquired Intangible Assets, Net
In connection with the Acquisition, we recorded certain identifiable intangible assets. Acquired intangible assets resulting from this transaction consist of
the following:
Developed technology
Customer relationships
Backlog and tradename
Less: accumulated amortization
Acquired intangible assets, net
December 31,
2021
2020
$
$
5,050 $
1,270
410
6,730
(6,640)
90 $
5,050
1,270
410
6,730
(5,523)
1,207
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.
63
Goodwill
Goodwill resulted from the Acquisition, whereby we recorded goodwill of $18,407. See Note 2: "Summary of Significant Accounting Policies" for
information on our assessment of goodwill impairment.
Accrued Liabilities and Current Portion of Long-Term Liabilities
Accrued liabilities and current portion of long-term liabilities consist of the following:
Accrued payroll and related liabilities
Operating lease liability, current
Deferred research and development reimbursement
Current portion of accrued liabilities for asset financings
Accrued interest payable
Accrued commissions and royalties
Deferred revenue
Accrued costs related to restructuring
Other
Accrued liabilities and current portion of long-term liabilities
The following is a summary of the change in deferred revenue:
Deferred revenue:
Balance at beginning of period
Revenue recognized
Revenue deferred
Balance at end of period
Short-Term Line of Credit
December 31,
2021
2020
3,490 $
2,439
1,838
1,077
361
259
50
—
4,049
13,563 $
Year Ended December 31,
2021
2020
179 $
(1,127)
998
50 $
2,867
2,039
—
786
429
474
179
630
2,048
9,452
146
(902)
935
179
$
$
$
$
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
64
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.
NOTE 4. 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:
Short-term marketable securities:
As of December 31, 2020:
Corporate debt securities
Cost
Unrealized Gain
(Loss)
Fair Value
$
$
253
253
$
$
(3)
(3)
$
$
250
250
Unrealized holding gains and losses are recorded in accumulated other comprehensive income, a component of shareholders’ equity, in the consolidated
balance sheets.
65
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. Three levels of inputs may be used to measure fair value:
Level 1:
Level 2:
Level 3:
Valuations based on quoted prices in active markets for identical assets and liabilities.
Valuations based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or
indirectly.
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 and liabilities measured at fair value on a recurring basis in the consolidated balance sheets as of
December 31, 2021 and 2020:
Level 1
Level 2
Level 3
Total
As of December 31, 2021:
Assets:
Cash equivalents:
Money market funds
As of December 31, 2020:
Assets:
Cash equivalents:
Money market funds
Short-term marketable securities:
Corporate debt securities
$
$
15,254 $
— $
— $
15,254
23,832 $
— $
—
250
—
—
23,832
250
We primarily use the market approach to determine the fair value of our financial instruments. The fair value of our current assets and liabilities, including
accounts receivable and accounts payable approximates the carrying value due to the short-term nature of these balances. 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. GAAP.
66
NOTE 5. 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 approximately4% 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:
Cost of revenue — restructuring:
Employee severance and benefits
Operating expenses — restructuring:
Employee severance and benefits
Total restructuring expense
Year Ended December 31,
2021
2020
$
$
$
— $
—
— $
—
— $
173
173
2,041
2,041
2,214
The following is a rollforward of the accrued liabilities related to restructuring for the year ended December 31, 2021:
Employee severance and benefits
Accrued costs related to restructuring
NOTE 6. LEASES
Balance as of December
31, 2020
$
$
630 $
630 $
Expensed
Payments
Balance as of December
31, 2021
— $
— $
(630) $
(630) $
—
—
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 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. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the
lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at
commencement date in determining the present value of lease payments. Operating lease ROU assets also exclude lease incentives received. For purposes
of calculating operating lease liabilities, lease terms may be deemed to include options to extend or terminate the lease when it is reasonably certain that the
Company will exercise that option.
We have operating leases for office buildings and one vehicle. Our leases have remaining lease terms of 1 year to 6 years. Supplemental information related
to lease expense and valuation of the ROU assets and lease liabilities was as follows:
Operating lease cost
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
Leased assets obtained in exchange for new operating lease liabilities
Weighted average remaining lease term (in years)
Weighted average discount rate
67
Year Ended
December 31, 2021
Year Ended
December 31, 2020
$
2,622
$
2,809
629
2.95
4.96 %
2,721
2,816
3,535
3.76
4.99 %
Future minimum lease payments under non-cancellable leases as of December 31, 2021 were as follows:
Operating Lease Payments
Years ending December 31:
2022
2023
2024
2025
2026
Thereafter
Total operating lease payments
Less imputed interest
Total operating lease liabilities
As of December 31, 2021, the Company had no operating lease liabilities that had not commenced.
68
$
$
2,652
1,376
877
364
364
91
5,724
(432)
5,292
NOTE 7. REVENUE
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. Our principal revenue generating activities consist of the following:
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. 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. We generally satisfy our single performance
obligation upon shipment of the goods to the customer and recognize revenue at a point in time upon shipment of the underlying product.
Our shipments are subject to limited return rights subject to our limited warranty for our products sold. In addition, we may provide other
credits to certain customers pursuant to price protection and stock rotation rights, all of which are considered variable consideration when
estimating the amount of revenue to recognize. We use the “most likely amount” method to determine the amount of consideration to
which we are entitled. Our estimate of variable consideration is reassessed at the end of each reporting period based on changes in facts
and circumstances. Historically, returns and credits have not been material.
Engineering Services - We enter into contracts for professional engineering services that include software development and
customization. We identify each performance obligation in our engineering services agreements (“ESAs”) at contract inception. The ESA
generally includes project deliverables specified by the customer. The performance obligations in the ESA are generally combined into
one deliverable, with the pricing for services stated at a fixed amount. Services provided under the ESA generally result in the transfer of
control over time. We recognize revenue on ESAs based on the proportion of labor hours expended to the total hours expected to
complete the contract performance obligation. ESAs could include substantive customer acceptance provisions. In ESAs that include
substantive customer acceptance provisions, we recognize revenue upon customer acceptance.
License Revenue - On occasion, we derive revenue from the license of our internally developed intellectual property ("IP"). Additionally,
for certain IP license agreements, royalties are collected as customers sell their own products that incorporate our IP. IP licensing
agreements that we enter into generally provide licensees the right to incorporate our IP components in their products with terms and
conditions that vary by licensee. Fees under these agreements generally include license fees or royalty fees relating to our IP and support
service fees, resulting in two performance obligations. We evaluate each performance obligation, which generally results in the transfer of
control at a point in time for the license fee and over time for support services. Royalties are recognized as revenue is earned, generally
when the customer sells its products that incorporate our IP.
Other - From time-to-time, we enter into arrangements for other revenue generating activities, such as providing technical support
services to customers through technical support agreements. In each circumstance, we evaluate such arrangements for our performance
obligations which generally results in the transfer of control for such services over time. 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:
IC sales
Engineering services, license and other
Total revenues
Year ended December 31,
2021
2020
$
$
50,807 $
4,295
55,102 $
39,205
1,650
40,855
For segment information, including revenue by geographic region, see "Note 14. Segment Information".
Our contract balances include accounts receivable, deferred revenue and our liability for warranty returns. For information concerning these contract
balances, see "Note 3. Balance Sheet Components".
Payment terms and conditions for goods and services provided vary by contract; however, payment is generally required within 30 to 60 days of invoicing.
69
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.
NOTE 8. INTEREST INCOME AND OTHER, NET
Interest income and other, consists of the following:
Other income
Interest income
Interest expense
Total interest income and other, net
NOTE 9. RESEARCH AND DEVELOPMENT
Year Ended December 31,
2021
2020
246 $
211
—
457 $
161
87
(239)
9
$
$
During the third quarter of 2021, we entered into a best-efforts co-development agreement with a customer to defray a portion of the research and
development expenses we expect to incur in connection with our development of an integrated circuit product. We expect our development costs to exceed
the amounts received from the customer, and although we expect to sell units of the product to the customer, there is no commitment or agreement from the
customer for such sales at this time. Additionally, we retain ownership of any modifications or improvements to our pre-existing intellectual property and
may use such improvements in products sold to other customers.
Under the co-development agreement, $5,800 was payable by the customer within 60 days of the date of the agreement and three additional payments of
$2,200, $1,300 and $1,300 are each payable upon completion of certain development milestones. As amounts become due and payable, they are offset
against research and development expense on a pro rata basis. During the year ended December 31, 2021, we recognized an offset to research and
development expense of $3,962.
NOTE 10. INCOME TAXES
Current and Deferred Income Tax Expense
Domestic and foreign pre-tax loss is as follows:
Domestic
Foreign
Domestic and foreign pre-tax loss
Income tax expense attributable to operations is comprised of the following:
Current:
Federal
State
Foreign
Total current
Deferred:
Foreign
Total deferred
Income tax expense (benefit)
70
Year Ended December 31,
2021
2020
(10,967) $
(8,578)
(19,545) $
(25,590)
(341)
(25,931)
Year Ended December 31,
2021
2020
(27) $
19
643
635
(768)
(768)
(133) $
(74)
3
643
572
26
26
598
$
$
$
$
The reconciliation of the U.S. federal statutory income tax rate to our effective income tax rate is as follows:
Federal statutory rate
Corporate restructuring
Change in valuation allowance
Expiration of tax attributes
Tax contingencies, net of reversals
Impact of foreign earnings
Permanent items
Research and development credits
Stock-based compensation
Other
Effective income tax rate
Year Ended December 31,
2021
2020
21 %
(38)
24
(6)
(5)
3
4
2
(1)
(3)
1 %
21 %
—
—
(14)
—
(7)
(1)
1
(2)
—
(2)%
Deferred Tax Assets, Liabilities and Valuation Allowance
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts for income tax purposes. Significant components of our deferred tax assets and liabilities are as follows:
Deferred tax assets:
Research and experimentation credit and deduction carryforwards
Net operating loss carryforwards
Depreciation and amortization
Deferred stock-based compensation
Reserves and accrued expenses
Foreign tax credit carryforwards
Other
Total gross deferred tax assets
Deferred tax liabilities:
Other
Total gross deferred tax liabilities
Less valuation allowance
Net deferred tax assets
December 31,
2021
2020
$
62,771 $
45,985
5,664
994
992
208
1,451
118,065
(812)
(812)
(116,372)
$
881 $
65,772
50,917
2,282
1,158
145
275
2,074
122,623
(1,526)
(1,526)
(120,981)
116
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. We have not
provided a valuation allowance against our other foreign net deferred tax assets as we have concluded it is more likely than not that we will realize a benefit
from these assets in a future period because our subsidiaries in these jurisdictions are cost-plus taxpayers. The net valuation allowance decreased $4,609 for
the year ended December 31, 2021 and decreased $24 for the year ended December 31, 2020.
As of December 31, 2021, we had federal, state and foreign net operating loss carryforwards of $166,448, $6,756 and $39,450 respectively, which will
begin to expire in 2022 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. The federal and state tax credits will
begin expiring in 2022 while the foreign credits have an indefinite life. In addition, our Canadian subsidiary has unclaimed scientific and experimental
expenditures to be
71
carried forward and applied against future income in Canada of approximately $120,906. We have a general foreign tax credit of $118 which will begin to
expire in 2022.
Our ability to utilize our federal net operating losses may be limited by Section 382 of the Internal Revenue Code of 1986, as amended, which imposes an
annual limit on the ability of a corporation that undergoes an "ownership change" to use its net operating loss carryforwards to reduce its tax liability. An
ownership change is generally defined as a greater than 50% increase in equity ownership by 5% shareholders in any three-year period.
We are not indefinitely reinvested in the earnings of our subsidiaries in Canada, Japan and Taiwan and have accrued tax on the future repatriation of cash
for jurisdictions where withholding taxes would apply. We are no longer indefinitely reinvested in our China subsidiary and have reversed our previous
accrual of $620 as a result of changes to our operating plan and implementation of our China intellectual property strategy.
Uncertain Tax Positions
We have recorded tax liabilities to address potential exposures involving positions that could be challenged by taxing authorities. As of December 31, 2021,
the amount of our uncertain tax positions was a liability of $2,493 and a reduction to deferred tax assets of $1,254. As of December 31, 2020, the amount of
our uncertain tax positions was a liability of $1,610 and a reduction to deferred tax assets of $1,189.
The following is a summary of the change in our liability for uncertain tax positions and interest and penalties:
Uncertain tax positions:
Balance at beginning of year
Accrual for positions taken in a prior year
Accrual for positions taken in current year
Reversals due to lapse of statute of limitations
Balance at end of year
Interest and penalties:
Balance at beginning of year
Accrual for positions taken in prior year
Accrual for positions taken in current year
Reversals due to lapse of statute of limitations
Balance at end of year
2021
2020
$
$
$
$
2,711 $
825
121
(11)
3,646 $
88 $
16
—
(3)
101 $
2,569
24
192
(74)
2,711
85
18
—
(15)
88
During the years ended December 31, 2021 and 2020 we recognized $16 and $18, respectively, of interest and penalties in income tax expense in our
consolidated statements of operations.
We file income tax returns in the U.S. and various foreign jurisdictions. A number of years may elapse before an uncertain tax position is resolved by
settlement or statute of limitations. Settlement of any particular position could require the use of cash. If the uncertain tax positions we have accrued for are
sustained by the taxing authorities in our favor, the reduction of the liability will reduce our effective tax rate. We reasonably expect reductions in the
liability for unrecognized tax benefits and interest and penalties of approximately $97 within the next twelve months due to the expiration of statutes of
limitation in federal, state and foreign jurisdictions.
We are no longer subject to U.S. federal, state, and foreign examinations for years before 2018, 2017 and 2014, respectively. Our net operating loss and tax
credit carryforwards from all years may be subject to adjustment for three years following the year in which utilized. We do not anticipate that any potential
tax adjustments will have a significant impact on our financial position or results of operations.
We were not subject to, nor have we received any notice of, income tax examinations in any jurisdiction as of December 31, 2021.
72
NOTE 11. COMMITMENTS AND CONTINGENCIES
Royalties
We license technology from third parties and have agreed to pay certain suppliers a royalty based on the number of chips sold or manufactured, the net
sales price of the chips containing the licensed technology or a fixed non-cancelable fee. Royalty expense is recognized based on our estimated average unit
cost for royalty contracts with non-cancelable prepayments and the stated contractual per unit rate for all other agreements. Royalty expense was $225 and
$242 for the years ended December 31, 2021 and 2020, respectively, which is included in cost of revenue in our consolidated statements of operations.
401(k) Plan
We sponsor a 401(k) plan for eligible employees. Participants may defer a percentage of their annual compensation on a pre-tax basis, not to exceed the
dollar limit that is set by law. A discretionary matching contribution by the Company is allowed and is equal to a uniform percentage of the amount of
salary reduction elected to be deferred, which percentage will be determined each year by the Company. We made contributions of $55 and $48 to the
401(k) plan during the years ended December 31, 2021 and 2020, respectively.
Software licenses
We acquire rights to use certain software engineer design tools under software licenses.
As of December 31, 2021, future minimum payments under non-cancelable software licenses are as follows:
Year Ending December 31,
2022
2023
Less: Interest component
Present value of minimum software license payments
Less: Current portion
Long-term portion of obligations
Other Contractual Obligation
Software licenses
1,133
365
1,498
(65)
1,433
(1,077)
356
$
$
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. The scheduled payments are made on a quarterly basis and end in January 2024.
$504 and $499 are included in accrued liabilities and current portion of long-term liabilities in our consolidated balance sheet as of December 31, 2021 and
2020, respectively. $57 and $268 are included in long-term liabilities, net of current portion in our consolidated balance sheets as of December 31, 2021
and 2020, respectively.
Contract Manufacturers
In the normal course of business, we commit to purchase products from our contract manufacturers to be delivered within the next 90 days. In certain
situations, should we cancel an order, we could be required to pay cancellation fees. Such obligations could impact our immediate results of operations but
would not materially affect our business.
Indemnifications
Certain of our agreements include limited indemnification provisions for claims from third-parties relating to our intellectual property. 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 December 31, 2021, we have not incurred any material liabilities arising from these indemnification obligations. In the future, however,
such obligations could immediately impact our results of operations but are not expected to materially affect our business.
73
Legal Proceedings
We are subject to legal matters that arise from time to time in the ordinary course of our business. Although we currently believe that resolving such
matters, individually or in the aggregate, will not have a material adverse effect on our financial position, our results of operations, or our cash flows, these
matters are subject to inherent uncertainties and our view of these matters may change in the future.
NOTE 12. EARNINGS PER SHARE
Basic earnings per share amounts are computed based on the weighted average number of common shares outstanding. Diluted weighted average shares
outstanding include the weighted average number of common shares outstanding plus potentially dilutive common shares outstanding during the period.
The following schedule reconciles the computation of basic and diluted net loss per share (in thousands, except per share data):
Net loss
Less: Net income attributable to redeemable non-controlling interest
Less: Net income attributable to certain entities owned by employees
Net loss attributable to Pixelworks Inc. - for purposes of earnings per share calculation
Weighted average shares outstanding - basic and diluted
Net loss attributable to Pixelworks, Inc. per share - basic and diluted
Year Ended December 31,
2021
2020
(19,412) $
(409)
(198)
(20,019) $
52,509
(0.38) $
(26,529)
—
—
(26,529)
40,712
(0.65)
$
$
$
Basic and diluted earnings (loss) per share was computed by dividing the net income (loss) by the weighted-average number of common shares outstanding
for the period. The numerator adjustments include an allocation of PWSH income to the redeemable non-controlling interests and the employee owned
entities. The equity interest associated with the employee-owned entities are considered participating securities at PWSH and will be allocated income,
however, they are not required to fund losses, and therefore, no allocations of losses will be made to the employee owned entities in periods of loss at
PWSH. Potentially dilutive common shares from employee equity incentive plans are determined by applying the treasury stock method to the assumed
exercise of outstanding stock options, the assumed vesting of outstanding restricted stock units, and the assumed issuance of common stock under the
employee stock purchase plan.
The following shares were excluded from the calculation of diluted net loss per share as their effect would have been anti-dilutive (in thousands):
Employee equity incentive plans
Year Ended December 31,
2021
2020
3,832
4,148
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.
74
NOTE 13. SHAREHOLDERS’ EQUITY
Preferred Stock
The Company is authorized to issue 50,000,000 shares of preferred stock with a par value of $0.001 per share. The Board of Directors is authorized to fix
or alter the rights, preferences, privileges and restrictions granted to, or imposed on, each series of preferred stock. There were no shares of preferred stock
issued as of December 31, 2021 and 2020.
Common Stock
The Company is authorized to issue 250,000,000 shares of common stock with a par value of $0.001 per share. 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
On June 5, 2020, we entered into a sales agreement (the "Sales Agreement") with Cowen and Company, LLC ("Cowen"), pursuant to which we may issue
and sell shares of the Company's common stock, par value $0.001 per share, having an aggregate offering price of up to $25,000, from time to time,
through an "at the market" equity offering program under which Cowen will act as sales agent. Under the Sales Agreement, Cowen may sell the shares by
methods deemed to be an "at the market offering" as defined in Rule 415(a)(4) promulgated under the Securities Act of 1933, as amended, including sales
made by means of ordinary brokers’ transactions on the Nasdaq Global Market or on any other existing trading market for the common stock or otherwise
at market prices prevailing at the time of sale, in block transactions, or as otherwise directed by the Company. We pay Cowen a commission equal to three
percent (3.0%) of the gross sales proceeds of any common stock sold through Cowen under the Sales Agreement. The Sales Agreement may be terminated
by us upon prior notice to Cowen or by Cowen upon prior notice to us, or at any time under certain circumstances, including but not limited to the
occurrence of a material adverse change in the Company. We are not obligated to sell any shares under the Sales Agreement.
During the year ended December 31, 2020, we sold an aggregate of 1,747,466 shares of our common stock under this at the market offering, resulting in
aggregate net proceeds to us of approximately $4,429.
During the year ended December 31, 2021, we sold an aggregate of 61,018 shares of our common stock under this at the market offering, resulting in
aggregate net proceeds to us of approximately $321.
Employee Equity Incentive Plans
On May 23, 2006, our shareholders approved the adoption of the Pixelworks, Inc. 2006 Stock Incentive Plan (the "2006 Plan"). The 2006 Plan has since
been amended and restated on certain occasions, most recently on May 10, 2021 when our shareholders approved an increase to the total number of
authorized shares to 22,683,333 shares. As of December 31, 2021, 2,105,497 shares were available for grant under the 2006 Plan.
Stock Options
The contractual life of newly issued stock option awards is six years. Our new hire vesting schedule provides that each option becomes exercisable at a rate
of 25% on the first anniversary date of the grant and 2.083% on the last day of every month thereafter for a total of 36 additional increments. Our merit
vesting schedule provides that merit-type awards become exercisable monthly over a period of three years.
75
The following is a summary of stock option activity:
Options outstanding as of December 31, 2020:
Granted
Exercised
Canceled and forfeited
Expired
Options outstanding as of December 31, 2021:
Number of
shares
Weighted
average
exercise
price
719,067 $
—
(352,375)
(500)
(11,583)
354,609 $
The following table summarizes information about options outstanding as of December 31, 2021:
Range of exercise prices
$2.00 - $2.00
2.46 - 2.46
2.79- 6.05
$2.00 - $6.05
Number
outstanding as of
December 31,
2021
Options Outstanding
Weighted
average
remaining
contractual
life
Options Exercisable
Weighted
average
exercise
price
Number
exercisable as of
December 31,
2021
Weighted
average
exercise
price
237,500
109,109
8,000
354,609
4.79 $
1.67
2.08
3.77 $
2.00
3.40
6.05
2.52
159,500 $
97,521
7,667
264,688 $
2.53
—
2.47
4.56
4.51
2.52
2.00
3.33
6.05
2.61
During the years ended December 31, 2021 and 2020 the total intrinsic value of options exercised was $445 and $28, respectively, for which no income tax
benefit has been recorded because a full valuation allowance has been provided for our U.S. deferred tax assets. As of December 31, 2021, options
outstanding had a total intrinsic value of $684.
Options outstanding that have vested and are expected to vest as of December 31, 2021 are as follows:
Vested
Expected to vest
Total
Restricted Stock
Number of
shares
264,688 $
88,517
353,205 $
Weighted
average
exercise
price
Weighted
average
remaining
contractual
term
2.61
2.26
2.52
Aggregate
intrinsic
value
491
190
681
3.48 $
4.64
3.77 $
The 2006 Plan provides for the issuance of restricted stock, including restricted stock units. During the years ended December 31, 2021 and 2020 we
granted 2,123,844 and 2,137,317 shares, respectively, of restricted stock with a weighted average grant date fair value of $3.70 and $3.42 per share,
respectively.
The following is a summary of restricted stock activity:
Unvested at December 31, 2020:
Granted
Vested
Canceled
Unvested at December 31, 2021:
Expected to vest after December 31, 2021
76
Number of
shares
Weighted average grant
date fair value
3,176,605 $
2,123,844
(1,715,624)
(268,790)
3,316,035 $
3,090,192 $
3.68
3.70
3.67
3.84
3.69
3.68
Employee Stock Purchase Plans
On May 18, 2010, our shareholders approved the adoption of the 2010 Pixelworks, Inc. Employee Stock Purchase Plan (the "ESPP") for U.S. employees
and for certain foreign subsidiary employees. The ESPP provides for separate offering periods commencing on February 1 and August 1, with the first
offering period beginning August 1, 2010. Each offering period continues for a period of 18 months with purchases every six months. Each eligible
employee may purchase up to 3,000 shares of stock on each purchase date, with a maximum annual purchase amount of $25. The purchase price is equal to
85% of the lesser of the fair market value of the shares on the offering date or on the purchase date. On May 15, 2020 the ESPP was amended when our
shareholders approved an increase to the total number of shares of common stock reserved for issuance to 3,300,000. During the years ended December 31,
2021 and 2020, we issued 159,177 and 202,019 shares, respectively for proceeds of $411 and $529, respectively, under the ESPP.
Stock-Based Compensation Expense
The fair value of stock-based compensation was determined using the Black-Scholes option pricing model and the following weighted average
assumptions:
Stock Option Plans:
Risk free interest rate
Expected dividend yield
Expected term (in years)
Volatility
Employee Stock Purchase Plan:
Risk free interest rate
Expected dividend yield
Expected term (in years)
Volatility
Year Ended December 31,
2021
2020
0 %
0 %
0
0 %
0.12 %
0 %
1.17
75 %
2.00 %
0 %
3.75
64 %
0.79 %
0 %
1.05
65 %
There were no options granted during the year ended December 31, 2021. The weighted average fair value of options granted during the year ended
December 31, 2020 was $0.93. The risk free interest rate is estimated using an average of treasury bill interest rates. The expected dividend yield is zero as
we have not paid any dividends to date and do not expect to pay dividends in the future. Expected volatility is estimated based on the historical volatility of
our common stock over the expected term as this represents our best estimate of future volatility. The contractual life of newly issued stock options is six
years, and we have elected to use the "simplified method" to estimate expected term. Under the simplified method, an option's expected term is calculated
as the average of its vesting period and original contractual life. The expected term of ESPP purchase rights is based on the estimated weighted average
time to purchase.
As of December 31, 2021, unrecognized stock-based compensation expense is $5,560, which is expected to be recognized as stock-based compensation
expense over a weighted average period of 1.12 years.
77
NOTE 14. 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.
Geographic Information
Revenue by geographic region, was as follows:
Japan
China
Taiwan
U.S.
Europe
Korea
Significant Customers
Year Ended December 31,
2021
2020
$
$
27,001 $
23,977
2,142
1,624
242
116
55,102 $
26,554
8,935
1,668
3,057
333
308
40,855
The percentage of revenue attributable to our distributors, top five end customers, and individual distributors or end customers that represented more than
10% of revenue in at least one of the periods presented, is as follows:
Distributors:
All distributors
Distributor A
Distributor B
1
End Customers:
Top five end customers
End customer A
End customer B
Year Ended December 31,
2021
2020
56 %
27 %
13 %
76 %
35 %
22 %
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 X
Account Y
Account Z
December 31,
2021
2020
41 %
27 %
15 %
78
49 %
7 %
23 %
58 %
40 %
5 %
39 %
20 %
7 %
NOTE 15. REDEEMABLE NON-CONTROLLING INTEREST AND EQUITY INTEREST OF PWSH SOLD TO EMPLOYEES
During the third quarter of 2021, Pixelworks, Inc. and our subsidiary, PWSH, entered into a Capital Increase Agreement with certain private equity and
strategic investors based in China (collectively, the “Investors”) and certain entities which collectively are owned by approximately 75% of the employees
of PWSH and its subsidiaries (collectively, the “ESOP”). The ESOP entities do not qualify as Employee Share Ownership Programs under IRC 4975(e)(7),
but function as a qualified ESOP and hold an equity ownership in trust for employees.
The Investors invested approximately $30,844 in exchange for a redeemable non-controlling equity interest of 10.45% of PWSH. The Investors will have a
liquidation preference in PWSH, a right to co-sell their interest in PWSH along with the Company on the same terms and conditions as the Company, a
right to participate on a pro rata basis in any future financing rounds of PWSH, and the Company’s agreement while it remains an owner of PWSH and for
two (2) years thereafter to not compete with the business of PWSH, nor solicit or otherwise cause any of PWSH’s core employees or customers to end their
relationship with PWSH. These rights all expire upon initial public offering on the STAR Market. Each Investor has the right to require PWSH to redeem
the entire equity interest held by such Investor, at the original purchase price paid plus 3% annual interest, if PWSH does not consummate an initial public
offering on the STAR Market on or before June 30, 2024. Based on this contingency, the initial carrying amount of the redeemable non-controlling interests
was recorded at fair value on the date of issuance of PWSH equity interests, net of issuance costs and presented in temporary equity on the condensed
consolidated balance sheets. The Company has elected to accrete changes in the redemption value of the redeemable non-controlling interests from the
issuance date through the earliest redemption date of June 30, 2024 using the interest method. Because the redeemable non-controlling interest is
denominated in RMB, it will be revalued to USD at the end of each reporting period, with the changes in carrying value attributable to foreign currency
being reflected within accumulated other comprehensive loss on the condensed consolidated balance sheets.
The ESOP entities invested approximately $12,329 in exchange for a redeemable non-controlling equity interest representing 5.95% of PWSH, which
includes a discount of 30% from the valuation paid by the Investors. Each of the ESOP entities has the right to require PWSH to redeem the entire equity
interest held by such ESOP entities at the original purchase price paid plus 5% annual interest, if PWSH does not achieve its Listing on or before December
31, 2024. Because the ESOP entities are owned by employees of PWSH and its subsidiaries and employees are required to render service until either the
initial public offering on the STAR Market or repurchase date, the equity interest owned by the ESOP entities will be accounted for under ASC 718
(Compensation - Stock Compensation). The initial carrying amount of the investment has been recorded as a long-term deposit liability on the condensed
consolidated balance sheets as the initial public offering cannot be considered probable at this time. We will recognize the periodic interest component of
the award as compensation expense and accrete the long-term deposit liability to its redemption value as of December 31, 2024. Because the long-term
deposit liability is denominated in RMB and is considered a monetary liability as defined in ASC 255 (Changing Prices), it will be revalued to USD at the
end of each reporting period, with the changes in carrying value recorded as foreign currency gain/loss in our condensed consolidated statements of
operations.
The process of going public on the STAR Market includes several periods of review and is therefore a lengthy process. There can be no assurances that
PWSH will complete the Listing by June 30, 2024, or at all. In the event Pixelworks, Inc. is required to redeem the entire equity interest held by the
Investors or the ESOP entities, we may be required to seek additional capital in order to redeem their PWSH shares and there would be no assurances that
such capital would be available on terms acceptable to us, if at all. Any redemptions could have a material adverse effect on our business, financial
condition and results of operations. The listing of PWSH on China's STAR Market will not change our status as a U.S. public company.
The components of the change in redeemable non-controlling interests for the year ended December 31, 2021 are presented in the following table (in
thousands):
Carrying Value of Redeemable NCI as of January 1, 2021
Increase in non-controlling interest due to issuance of stock
Closing costs incurred
Net income attributable to redeemable non-controlling interest
Effect of foreign currency translation attributable to redeemable non-controlling interest
Carrying Value of Redeemable NCI as of December 31, 2021
$
$
—
30,844
(868)
409
520
30,905
79
NOTE 16. QUARTERLY FINANCIAL DATA (UNAUDITED)
2021
Revenue, net
Gross profit
Loss from operations
Loss before income taxes
Net loss attributable to Pixelworks Inc.
Net loss attributable to Pixelworks Inc. per share - basic and diluted
2020
Revenue, net
Gross profit
Loss from operations
Loss before income taxes
Net loss attributable to Pixelworks Inc.
Net loss attributable to Pixelworks Inc. per share - basic and diluted
$
$
March 31
June 30
September 30
December 31
Quarterly Period Ended
9,270 $
3,725
(7,914)
(7,858)
(8,075)
(0.16)
13,774 $
6,775
(5,277)
(5,223)
(5,399)
(0.14)
14,050 $
7,110
(4,457)
(4,275)
(4,382)
(0.08)
9,253 $
5,049
(6,421)
(6,445)
(6,552)
(0.17)
15,196 $
7,985
(3,904)
(3,850)
(4,073)
(0.08)
8,190 $
3,976
(8,137)
(8,165)
(8,139)
(0.20)
16,586
8,873
(3,727)
(3,562)
(3,291)
(0.06)
9,638
4,385
(6,901)
(6,098)
(6,439)
(0.15)
Item 9.
None.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
Item 9A.
Controls and Procedures.
Disclosure Controls and Procedures
As of the end of the period covered by this report, we conducted an evaluation under the supervision and with the participation of our Chief Executive
Officer (our Principal Executive Officer) and Chief Financial Officer (our Principal Accounting and Financial Officer) of our disclosure controls and
procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")). Based on this
evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2021, our disclosure controls and procedures were
effective to ensure that information required to be disclosed in our periodic reports filed or submitted under the Securities Exchange Act is (i) recorded,
processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and (ii) accumulated
and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding disclosure.
80
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining a system of internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with U.S. generally accepted accounting principles ("U.S. GAAP"). All internal control systems, no matter
how well designed, have inherent limitations.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, under the
oversight of our Board of Directors, we evaluated the effectiveness of our internal control over financial reporting as of December 31, 2021, the last day of
our fiscal year. This evaluation was based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on our assessment, management has concluded that our internal control over financial reporting was
effective as of the end of the fiscal year to provide reasonable assurances regarding the reliability of financial reporting and the preparation of financial
statements for external reporting purposes in accordance with U.S. GAAP.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting
for external purposes in accordance with U.S. GAAP. A company’s internal control over financial reporting includes those policies and procedures that:
•
•
•
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP,
and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate. Accordingly, even effective internal control over financial reporting can only provide
reasonable assurance of achieving its control objectives.
Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021 has not been audited by
the Company’s independent registered public accounting firm. Management’s report is not subject to attestation by the Company’s independent registered
public accounting firm pursuant to the rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in
this Annual Report.
Changes in Internal Control Over Financial Reporting
There were no changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred
during the fourth quarter of 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Other Information.
Not applicable.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
81
PART III
Item 10.
Directors, Executive Officers and Corporate Governance.
Information required by Item 10 with respect to our directors and executive officers will be set forth under the captions "Proposal No. 1: Election of
Directors - Director Nominees for Election" and "Information about our Executive Officers" in our Proxy Statement for our 2022 Annual Meeting of
Shareholders (the "2022 Proxy Statement") to be filed within 120 days after December 31, 2021 and pursuant to Regulation 14A and is incorporated herein
by reference.
Item 405 of Regulation S-K calls for disclosure of any known late filing or failure by an insider to file a report required by Section 16(a) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). To the extent disclosure for delinquent reports is being made, it can be found under the caption
"Delinquent Section 16(a) Reports" in the 2022 Proxy Statement and is herein incorporated by reference.
We have adopted a Code of Business Conduct and Ethics that applies to all directors and employees, including our Chief Executive Officer (our Principal
Executive Officer) and our Chief Financial Officer (our Principal Accounting and Financial Officer). We have also adopted a Code of Ethics for Senior or
Designated Financial Personnel (the "Code of Ethics for Senior or Designated Financial Personnel") that applies to our Chief Executive Officer (our
Principal Executive Officer), our Chief Financial Officer (our Principal Accounting and Financial Officer) and other designated financial personnel. The
Code of Business Conduct and Ethics and the Code of Ethics for Senior or Designated Financial Personnel are each available on our website free of charge
at www.pixelworks.com. We intend to disclose any changes in or waivers from our Code of Business Conduct and Ethics or Code of Ethics for Senior or
Designated Financial Personnel by posting such information on our website at www.pixelworks.com or by filing a Current Report on Form 8-K.
We have a separately designated standing audit committee established in accordance with the Securities Exchange Act of 1934. The members of the audit
committee are Daniel Heneghan, Chairman, C. Scott Gibson and Richard Sanquini. The audit committee has the responsibility and authority described in
the Pixelworks, Inc. Charter of the Audit Committee of the Board of Directors, which has been approved by our board of directors. A copy of the audit
committee charter is available on our website at www.pixelworks.com. Our board of directors has determined that Mr. Heneghan, Mr. Gibson and Mr.
Sanquini meet the independence requirements set forth in Rule 10A-3(b)(1) under the Exchange Act and in the applicable rules of Nasdaq. In addition, our
board of directors has determined that Mr. Heneghan, Mr. Gibson and Mr. Sanquini each qualify as an audit committee financial expert as defined by
Securities and Exchange Commission rules.
Item 11.
Executive Compensation.
Information required by Item 11 with respect to executive compensation will be included under the captions "Compensation Committee Report",
"Executive Compensation" and "Information About Our Board of Directors - Director Compensation" in our 2022 Proxy Statement and is incorporated
herein by reference.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Information required by Item 12 with respect to security ownership of certain beneficial owners and management and related stockholder matters will be
included under the captions "Security Ownership of Certain Beneficial Owners and Management" and "Information about our Equity Compensation Plans"
in our 2022 Proxy Statement and is incorporated herein by reference.
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
Information required by Item 13 with respect to certain relationships and related transactions and director independence will be included under the captions
"Certain Relationships and Related Transactions" and "Information About Our Board of Directors" in our 2022 Proxy Statement and is incorporated herein
by reference.
Item 14.
Principal Accounting Fees and Services.
Information required by Item 14 with respect to principal accounting fees and services will be set forth under the caption "Information About Our
Independent Registered Public Accounting Firm" in our 2022 Proxy Statement and is incorporated herein by reference.
82
PART IV
Item 15.
Exhibits, Financial Statement Schedules.
(a) 1. Financial Statements.
The following financial statements are included in Item 8 Financial Statements and Supplementary Data:
Report of Independent Registered Public Accounting Firm (PCAOB ID: 32)
Consolidated Balance Sheets as of December 31, 2021 and 2020
Consolidated Statements of Operations for the years ended December 31, 2021 and 2020
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2021 and 2020
Consolidated Statements of Cash Flows for the years ended December 31, 2021 and 2020
Consolidated Statements of Shareholders' Equity for the years ended December 31, 2021 and 2020
Notes to Consolidated Financial Statements
(a) 2. Financial Statement Schedules.
All schedules have been omitted because the required information is included in the consolidated financial statements or the notes thereto, or is not
applicable or required.
(a) 3. Exhibits.
The exhibits listed below are either filed with this report or incorporated by reference into this report.
Exhibit
Number
3.1
3.2
4.1
Sixth Amended and Restated Articles of Incorporation of Pixelworks, Inc., as amended
Description
Second Amended and Restated Bylaws of Pixelworks, Inc. (incorporated by reference to Exhibit 3.3 to the Company’s Annual Report on
Form 10-K filed March 10, 2010).
Description of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934 (incorporated by reference to Exhibit 4.1
to the Company's Annual Report on Form 10-K filed on March 11, 2020).
10.1+
Form of Indemnity Agreement between Pixelworks, Inc. and each of the members of the Board and Haley Aman, the Company’s Chief
Financial Officer. (incorporated by reference to Exhibit 10.1 to the Company’s Annual Report on Form 10-K filed on March 14, 2018).
10.2+
Pixelworks, Inc. Amended and Restated 2010 Employee Stock Purchase Plan.
10.3+
Pixelworks, Inc. Amended and Restated 2006 Stock Incentive Plan.
10.4+
10.5+
10.6+
Pixelworks, Inc. Amended and Restated 2006 Stock Incentive Plan, Terms and Conditions of Restricted Stock Awards (incorporated by
reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed on May 7, 2009).
Pixelworks, Inc. Amended and Restated 2006 Stock Incentive Plan, Terms and Conditions of Option Grants (incorporated by reference to
Exhibit 10.9 to the Company's Annual Report on Form 10-K filed March 8, 2012).
Pixelworks, Inc. Amended and Restated 2006 Stock Incentive Plan, Terms and Conditions of Director Stock Unit Awards (incorporated by
reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed on November 4, 2010).
83
10.7+
10.8+
Pixelworks, Inc. Amended and Restated 2006 Stock Incentive Plan, Terms and Conditions of Restricted Stock Unit Award. (incorporated by
reference to Exhibit 10.8 to the Company’s Annual Report on Form 10-K filed on March 4, 2015).
Form of Performance-Based Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Current Report
on Form 8-K filed on April 13, 2021).
10.9+
Summary of Pixelworks 2021 Non-Employee Director Compensation.
10.10+
Form of Pixelworks, Inc. Senior Management Bonus Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on
Form 8-K filed December 31, 2009).
10.11+
Offer Letter with Todd A. DeBonis dated December 9, 2015 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on
Form 8-K filed on February 2, 2016).
10.12+
Change of Control Severance Agreement effective January 4, 2016, by and between Pixelworks, Inc. and Todd A. DeBonis (incorporated by
reference to Exhibit 10.18 to the Company's Annual Report on Form 10-K filed March 8, 2017).
10.13+
Amended and Restated Change of Control and Severance Agreement by and between Pixelworks, Inc. and Todd A. Debonis, dated April 11,
2019 (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on April 15, 2019).
10.14+
Form of Addendum to Change of Control Agreement for Officers (incorporated by reference to Exhibit 10.1 to the Company's Current
Report on Form 8-K filed on May 23, 2014).
10.15+
Executive Compensation Recovery Policy, adopted April 11, 2019 by the Pixelworks, Inc. Board of Directors (incorporated by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K filed on April 15, 2019).
10.16+
Offer Letter with Elias Nader (incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K filed with the SEC
on September 16, 2019).
10.17+
Change of Control and Severance Agreement with Elias Nader (incorporated by reference to Exhibit 10.2 of the Registrant's Current Report
on Form 8-K filed with the SEC on September 16, 2019).
10.18
10.19
10.20
10.21
Office Lease Agreement dated December 2005, by and between CA-The Concourse Limited Partnership and Pixelworks, Inc. (incorporated
by reference to Exhibit 10.42 to the Company’s Annual Report on Form 10-K filed March 13, 2006).
Office Lease Agreement dated September 10, 2008 and commencing December 1, 2008 by and between Pixelworks, Inc. and Durham Plaza,
LLC (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed on November 7, 2008).
First Amendment to Office Lease Agreement, dated April 16, 2013, by and between CA-The Concourse Limited Partnership and Pixelworks,
Inc. (incorporated by reference to Exhibit 10.19 to the Company’s Annual Report on Form 10-K filed on March 4, 2015).
Second Amendment to Office Lease Agreement, dated July 25, 2018, by and between Hudson Concourse, LLC, and Pixelworks, Inc.
(incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on November 9, 2018).
84
10.22
10.23
10.24
10.25
10.26
10.27
10.28
21
23.1
24.1
31.1
31.2
First Amendment to Lease, dated July 1, 2013, by and between Durham Plaza, LLC and Pixelworks, Inc. (incorporated by reference to
Exhibit 10.20 to the Company’s Annual Report on Form 10-K filed on March 4, 2015).
Second Amendment to Lease, dated May 18, 2016, by and between Kalberer Company and Pixelworks, Inc. (incorporated by reference to
Exhibit 10.25 to the Company's Annual Report on Form 10-K filed on March 8, 2017).
Third Amendment to Lease, dated January 30, 2019, by and between Kalberer Company and Pixelworks, Inc. (incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed on May 10, 2019).
Sales Agreement, dated June 5, 2020, between Pixelworks, inc. and Cowen and Company, LLC (incorporated by reference to Exhibit 1.1 to
the Company’s Current Report on Form 8-K filed on June 5, 2020).
Amended and Restated Securities Purchase Agreement dated December 4, 2020, between the Company and the investors named therein.
(incorporated by reference to Exhibit 10.39 to the Company's Annual Report on Form 10-K filed on March 10, 2021).
Form of Capital Increase Agreement (incorporated by reference to Exhibit 10.02 to the Company’s Quarterly Report on Form 10-Q filed on
August 11, 2021).
Schedule identifying agreements substantially identical to the form of Agreement in Exhibit 10.43 hereto (incorporated by reference to
Exhibit 10.02a to the Company’s Quarterly Report on Form 10-Q filed on August 11, 2021).
Subsidiaries of Pixelworks, Inc.
Consent of Armanino LLP.
Power of Attorney (see page 85 of this Form 10-K).
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).
32.1**
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).
32.2**
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
85
101.LAB
XBRL Taxonomy Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
+
*
**
Indicates a management contract or compensation arrangement.
Certain schedules and exhibits to this agreement have been omitted pursuant to Item 601(b) of Regulation S-K. The registrant hereby undertakes to
furnish supplementally a copy of any omitted schedule or exhibit to such agreement to the SEC upon request.
Exhibits 32.1 and 32.2 are being furnished and shall not be deemed to be "filed" for purposes of Section 18 of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), or otherwise subject to the liability of that section, nor shall such exhibits be deemed to be incorporated by
reference in any registration statement or other document filed under the Securities Act of 1933, as amended, or the Exchange Act, except as
otherwise stated in such filing.
86
(b) Exhibits.
See Item 15 (a) (3) above.
(c) Financial Statement Schedules.
See Item 15 (a) (2) above.
Item 16. Form 10-K Summary.
Not applicable.
87
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Dated: March 9, 2022
By:
PIXELWORKS, INC.
/s/ Todd A. DeBonis
Todd A. DeBonis
President and Chief Executive Officer
(Principal Executive Officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Todd A. DeBonis and Haley F.
Aman, and each of them, his true and lawful attorneys-in-fact, each with full power of substitution, for him or her in any and all capacities, to sign any
amendments to this report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact or their substitute or substitutes may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
Signature
Title
Date
/s/ Todd A. DeBonis
Todd A. DeBonis
/s/ Haley F. Aman
Haley F. Aman
/s/ Richard L. Sanquini
Richard L. Sanquini
/s/ Amy Bunszel
Amy Bunszel
/s/ C. Scott Gibson
C. Scott Gibson
/s/ Daniel J. Heneghan
Daniel J. Heneghan
/s/ David J. Tupman
David J. Tupman
President and Chief Executive Officer
(Principal Executive Officer)
Chief Financial Officer (Principal Accounting and Financial Officer)
Chairman of the Board
Director
Director
Director
Director
88
March 9, 2022
March 9, 2022
March 9, 2022
March 9, 2022
March 9, 2022
March 9, 2022
March 9, 2022
Exhibit 3.1
SIXTH AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
PIXELWORKS, INC.
Pursuant to the Oregon Business Corporation Act (ORS Chapter 60), Pixelworks, Inc. hereby adopts the following Sixth Amended and Restated
Articles of Incorporation, which shall supersede the heretofore existing Fifth Restated Articles of Incorporation and all previous amendment and
restatements thereof.
The name of the Corporation is Pixelworks, Inc.
ARTICLE 1.
NAME.
ARTICLE 2.
SHARES AND RIGHTS THEREOF GENERALLY.
2.1 Authorized Stock. The aggregate number of shares which the corporation shall have authority to issue is 250,000,000 shares of common
stock with a par value of $0.001 per share (“Common Stock”) , and 50,000,000 shares of preferred stock with a par value of $0.001 per share (Preferred
Stock”).
2.2 Rights of Common Stock. The shares of common stock have unlimited voting rights and are entitled to receive the net assets of the
Corporation on dissolution, subject to rights of the Preferred Stock.
2.3 Authority to Designate Series Preferred. The Board of Directors is hereby authorized to fix or alter the rights, preferences, privileges
and restrictions granted to or imposed upon additional series of Preferred Stock, and the number of shares constituting any such series and the designation
thereof, or of any of them. Subject to compliance with applicable protective voting rights or consent rights which have been or may be granted to the
Preferred Stock or any series thereof herein, by law, or in Articles of Amendment adopted by the Board of Directors (“Protective Provisions”), but
notwithstanding any other rights of the Preferred Stock or any series thereof, the rights, privileges, preferences and restrictions of any such additional series
may be subordinated to, made pari passu with (including, without limitation, inclusion in provisions with respect to liquidation and acquisition preferences,
redemption and/or approval of matters by vote or written consent), or made senior to any of those of any present or future class of series of Preferred or
Common Stock. Subject to compliance with applicable Protective Provisions, the Board of Directors is also authorized to increase or decrease the number
of shares of any series, prior or subsequent to the issue of that series, but not below the number of shares of such series then outstanding. In case the
number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of
the resolution originally fixing the number of shares of such series.
ARTICLE 3.
DIRECTORS.
3.1 Number of Directors. The number of directors of the Corporation shall be not less than three nor more than twelve, and within such
limits, the exact number shall be fixed and increased or decreased from time to time by resolution of the Board of Directors.
3.2 Election of Directors. If the number of directors is fixed by the Board of Directors at six or more, the directors shall be divided into three
classes designated Class I, Class II and Class III, each class to be as nearly equal in number as possible. At the next annual meeting of shareholders
following that designation (“First Meeting”), directors of all three classes shall be elected. The term of office of Class I directors shall expire at the first
annual meeting of shareholders following their election. The terms of Class II directors shall expire at the second annual meeting of shareholders following
their election. The terms of the Class III directors shall expire at the third annual meeting of shareholders following their election. At each annual meeting
of shareholders after the
Exhibit 3.1
First Meeting, each class of directors elected to succeed those directors whose terms expire shall be elected to serve for three-year terms and until their
successors are elected and qualified, so that the term of one class of directors will expire each year. When the number of directors is changed within the
limits provided herein, any newly created directorships, or any decrease in directorships, shall be so apportioned among the classes as to make all classes as
nearly equal as possible, provided that no decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent
directors.
3.3 Removal. All or any number of the directors of the Corporation may be removed only for cause and at a meeting of shareholders called
expressly for that purpose, by the vote of 75 percent of the votes then entitled to be cast for the election of directors. Cause for removal shall be deemed to
exist only if the director whose removal is proposed has engaged in criminal conduct or has engaged in fraudulent or dishonest conduct or gross abuse of
authority or discretion with respect to the Corporation. At any meeting of shareholders at which one or more directors are removed, a majority of votes then
entitled to be cast for the election of directors may fill any vacancy created by such removal. If any vacancy created by removal of a director is not filled
by the shareholders at the meeting at which the removal is effected, such vacancy may be filled by a majority vote of the remaining directors.
3.4 Amendment of Article. The provisions of this Article3 may not be amended, altered, changed or repealed in any respect unless such
action is approved by the affirmative vote of not less than 75 percent of the votes then entitled to be cast for election of directors.
ARTICLE 4.
EXCLUSION OF DIRECTOR LIABILITY.
No director of the Corporation shall be personally liable to the Corporation or its shareholders for monetary damages for conduct as a director;
provided that this Article4 shall not eliminate the liability of a director for any act or omission for which such elimination of liability is not permitted under
the Oregon Business Corporation Act. No amendment to the Oregon Business Corporation Act that further limits the acts or omissions for which
elimination of liability is permitted shall affect the liability of a director for any act or omission that occurs prior to the effective date of such amendment.
ARTICLE 5.
INDEMNIFICATION OF DIRECTORS, OFFICERS, & FIDUCIARIES.
5.1 Indemnification. The Corporation shall indemnify to the fullest extent not prohibited by law any person who was or is a party or is
threatened to be made a party to any Proceeding (as defined below) against all expenses (including attorney fees), judgments, fines, and amounts paid in
settlement actually and reasonably incurred by the person in connection with such Proceeding.
5.2 Advancement of Expenses. Expenses incurred by a director or officer of the Corporation in defending a Proceeding shall in all cases be
paid by the Corporation in advance of the final disposition of such Proceeding at the written request of such person, if the person:
5.2.1 furnishes the Corporation a written affirmation of the person’s good faith belief that such person has met the standard of conduct
described in the Oregon Business Corporation Act or is entitled to be indemnified by the Corporation under any other
indemnification rights granted by the Corporation to such person; and
5.2.2 furnishes the Corporation a written undertaking to repay such advance to the extent it is ultimately determined by a court that
such person is not entitled to be indemnified by the Corporation under this Article 5 or under any other indemnification rights
granted by the Corporation to such person.
Exhibit 3.1
Such advances shall be made without regard to the person’s ability to repay such advances and without regard to the person’s ultimate entitlement
to indemnification under this Article 5 or otherwise.
5.3 Definition of Proceeding. The term “Proceeding” shall include any threatened, pending, or completed action, suit, or proceeding,
whether brought in the right of the corporation or otherwise and whether of a civil, criminal, administrative, or investigative nature, in which a person may
be or may have been involved as a party or otherwise by reason of the fact that the person is or was a director or officer of the corporation or a fiduciary
within the meaning of the Employee Retirement Income Security Act of 1974 with respect to any employee benefit plan of the corporation, or is or was
serving at the request of the corporation as a director, officer, or fiduciary of an employee benefit plan of another corporation, partnership, joint venture,
trust, or other enterprise, whether or not serving in such capacity at the time any liability or expense is incurred for which indemnification or advancement
of expenses can be provided under this Article 5.
5.4 Non-Exclusivity and Continuity of Rights. This Article 5: (i) shall not be deemed exclusive of any other rights to which those
indemnified may be entitled under any statute, agreement, general or specific action of the board of directors, vote of shareholders or otherwise, both as to
action in the official capacity of the person indemnified and as to action in another capacity while holding office, (ii)shall continue as to a person who has
ceased to be a director or officer, (iii)shall inure to the benefit of the heirs, executors, and administrators of such person, and (iv)shall extend to all claims
for indemnification or advancement of expenses made after the adoption of this Article 5.
5.5 Amendments. Any repeal of this Article 5 shall only be prospective and no repeal or modification hereof shall adversely affect the rights
under this Article 5 in effect at the time of the alleged occurrence of any action or omission to act that is the cause of any Proceeding.
ARTICLE 6.
SHAREHOLDER APPROVAL OF CERTAIN CORPORATE ACTIONS.
No agreement of merger or consolidation of this corporation which requires shareholder approval under the Oregon Business Corporation Act
shall be approved or become effective unless the holders of not less than sixty-seven percent (67%) of the outstanding shares of the corporation entitled to
vote thereon shall vote for the adoption of the agreement. This corporation shall not sell, lease or exchange all or substantially all of its property and assets
unless the holders of not less than sixty-seven percent (67%) of the outstanding shares of the corporation entitled to vote thereon shall vote for such sale,
lease or exchange. Dissolution or liquidation of the corporation shall require the prior approval of holders of not less than sixty-seven percent (67%) of the
outstanding shares of the corporation entitled to vote thereon.
Exhibit 3.1
FIRST AMENDMENT TO
SIXTH AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
PIXELWORKS, INC.
Article 2 of the Sixth Amended and Restated Articles of Incorporation (the “Restated Articles”) of Pixelworks, Inc. is hereby amended by the
addition of the following Section 2.4:
2.4 Preferred Stock Designation. One series of Preferred Stock shall be designated “Special Voting Share Series Preferred Stock,” and shall
consist of one (1) share (the “Special Voting Share”). Special Voting Share Series Preferred Stock has an Issue Price of $0.001 per share. The relative
rights, preferences and limitations of the Special Voting Share Series Preferred Stock are as follows:
a. Dividends. Neither the holder nor, if different, the owner of the Special Voting Share shall be entitled to receive dividends in its
capacity as holder or owner thereof.
b. Voting Right. The holder of record of the Special Voting Share shall be entitled to all of the voting rights, including the right to
vote in person or by proxy, of the Special Voting Share on any matters, questions, proposals or propositions whatsoever that may properly come before the
stockholders of the Corporation at a meeting of the Corporation or in connection with a consent of the Corporation.
c. Liquidation Preference. In the event of any voluntary or involuntary liquidation, dissolution or winding-up of the Corporation,
the holder of the Special Voting Share shall be entitled to be paid out of the assets of the Corporation available for distribution to the stockholders, an
amount equal to $0.001 before any payment shall be made to the holders of Common Stock or any other class or series of stock ranking on liquidation
junior to the Special Voting Share as to distribution of assets upon liquidation, dissolution or winding-up.
d. Ranking. The Special Voting Share shall, with respect to rights on liquidation, dissolution and winding up, rank (i) pari passu
with the Common Stock and (ii) junior to any other class or series of capital stock of the Corporation.
e. Redemption. The Special Voting Share shall not be subject to redemption except that at such time as no exchangeable shares
(“Exchangeable Shares”) of Jaldi Semiconductor Corp. (“Jaldi”) (other than Exchangeable Shares owned by the Corporation and its affiliates) shall be
outstanding and no shares of stock, debt, options or other agreements which could give rise to the issuance of any Exchangeable Shares to any person
(other than the Corporation and its affiliates) shall exist, the Special Voting Share shall automatically be redeemed and cancelled, for an amount equal to
$0.001 due and payable upon such redemption. Upon any such redemption or other purchase or acquisition of the Special Voting Share by the Corporation,
the Special Voting Share shall be deemed retired and cancelled and may not be reissued.
f. Other Provisions. Pursuant to the terms of an agreement (the “Voting and Share Trust Agreement”) to be entered into between
the Corporation, Pixelworks Nova Scotia Company, Jaldi and CIBC Mellon Trust Company (the “Trustee”), as such agreement may be amended, modified
or supplemented from time to time (the “Trust Agreement”):
Exchangeable Shares, issue any other additional shares of the same series as the Special Voting Shares Series Preferred Stock;
(A) during the term of the Trust Agreement, the Corporation may not, without the consent of the holders of the
(B) with respect to all meetings of stockholders of the Corporation at which holders of the Corporation’s Common Stock
are entitled to vote (each a “Meeting”) and with respect to any written consents, to the extent permitted by the Articles and by-laws of the Corporation,
sought by the Corporation from its stockholders, including the holders of Common Stock (each a “ Consent”), the Special Voting Share shall vote
Exhibit 3.1
together with the Common Stock as a single class and subject to (C) shall have the identical voting rights to those of the Common Stock;
(C) the Special Voting Share entitles the holder of record to a number of votes in respect of a Meeting or in respect of a
Consent equal to the number of Exchangeable Shares (as defined by the Trust Agreement) outstanding on the record date for determining stockholders
entitled to vote at the applicable Meeting or in connection with the applicable Consent, from time to time (other than Exchangeable Shares held by the
Corporation and its affiliates);
(D) the Trustee shall exercise the votes held by the Special Voting Share pursuant to and in accordance with the Trust
Agreement;
Agreement; and
(E) the voting rights attached to the Special Voting Share shall terminate pursuant to and in accordance with the Trust
limitations and restrictions, of such Special Voting Share shall be as otherwise provided in the Trust Agreement.
(F) the powers, designations and preferences, participating, optional and other special rights, and the qualifications
Exhibit 3.1
SECOND AMENDMENT TO
SIXTH AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
PIXELWORKS, INC.
Section 3.2 of the Sixth Amended and Restated Articles of Incorporation, as amended (the “Restated Articles”) of Pixelworks, Inc. is hereby
replaced in its entirety by the following Section 3.2:
3.2 NUMBER AND QUALIFICATION. The number of directors of the Corporation shall be not less than three nor more than twelve, and
within such limits, the exact number shall be fixed and increased or decreased from time to time by resolution of the Board of Directors. If the number of
directors is fixed by the Board of Directors at seven or less, the directors shall hold office until the next Annual Meeting of shareholders and until their
successors have been elected and qualified. If the number of directors is fixed by the Board of Directors at eight or more, the directors shall be divided into
three classes designated Class I, Class II and Class III, each class to be as nearly equal in number as possible. At the next Annual Meeting of shareholders
following that designation (“First Meeting”), directors of all three classes shall be elected. The term of office of Class I directors shall expire at the first
Annual Meeting of shareholders following their election. The terms of Class II directors shall expire at the second Annual Meeting of shareholders
following their election. The terms of the Class III directors shall expire at the third Annual Meeting of shareholders following their election. At each
Annual Meeting of shareholders after the First Meeting, each class of directors elected to succeed those directors whose terms expire shall be elected to
serve for three-year terms and until their successors are elected and qualified, so that the term of one class of directors will expire each year. When the
number of directors is changed within the limits provided herein, any newly created directorships, or any decrease in directorships, shall be so apportioned
among the classes as to make all classes as nearly equal as possible, provided that no decrease in the number of directors constituting the Board of
Directors shall shorten the term of any incumbent directors. Directors need not be residents of the State of Oregon or shareholders of the Corporation.
Exhibit 3.1
THIRD AMENDMENT TO
SIXTH AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
PIXELWORKS, INC.
Pursuant to the Oregon Business Corporation Act (ORS Chapter 60), Pixelworks, Inc. (the “Corporation”) hereby adopts the following Third Amendment
to its Sixth Amended and Restated Articles of Incorporation.
1. Section 2.5 is added to ARTICLE 2. to read as follows:
2.5 Reverse Stock Split. Effective as of June 4, 2008 at 12:01 am, each three (3) shares of Common Stock, $.001 par value per share (the “Old
Common Stock”), then issued and outstanding shall automatically be combined into one (1) share of Common Stock, $.001 par value per share (the “New
Common Stock”), of the Corporation without any further action by the holders of such shares of Old Common Stock.
a. Fractional Shares. Any fractional shares resulting from that exchange will not be issued, but will be paid out in cash equal to such fraction
multiplied by the closing trading price of the Corporation’s Common Stock on the Nasdaq Global Market or the Nasdaq Capital Market, as the case may
be, on the trading day immediately before the Effective Date.
b. Effect of Old Certificates. Each stock certificate representing shares of Old Common Stock shall thereafter represent that number of shares of
New Common Stock into which the shares of Old Common Stock represented by such certificate shall have been combined.
c. Exchange. Each person holding of record a stock certificate or certificates that represented shares of Old Common Stock shall receive, upon
surrender of such certificate or certificates, a new certificate or certificates evidencing and representing the number of shares of New Common Stock to
which such person is entitled, or, at the discretion of the Corporation and unless otherwise instructed by such holder, book-entry shares in lieu of a new
certificate or certificates evidencing and representing the number of whole shares of New Common Stock to which such person is entitled, under the
foregoing reclassification and combination,
d. Rights of New Common Stock. The New Common Stock issued in this exchange shall have the same rights, preferences and privileges as the
Common Stock (as defined below).
2. Section 3.2 of ARTICLE 3. is amended by deleting the first sentence thereof.
Exhibit 10.2
PIXELWORKS, INC.
2010 EMPLOYEE STOCK PURCHASE PLAN
1.
PURPOSE
The purpose of this Plan is to assist Eligible Employees in acquiring a stock ownership interest in the Corporation, at a favorable price and upon
favorable terms, pursuant to a plan which is intended to qualify as an “employee stock purchase plan” under Section 423 of the Code. This Plan is
also intended to encourage Eligible Employees to remain in the employ of the Corporation or a Participating Subsidiary and to provide them with
an additional incentive to advance the best interests of the Corporation.
2.
DEFINITIONS
Capitalized terms used herein which are not otherwise defined shall have the following meanings.
“Account” means the bookkeeping account maintained by the Corporation, or by a recordkeeper on behalf of the Corporation, for a
Participant pursuant to Section 7(a).
“Board” means the Board of Directors of the Corporation.
“Code” means the U.S. Internal Revenue Code of 1986, as amended from time to time.
“Commission” means the U.S. Securities and Exchange Commission.
“Committee” means the committee appointed by the Board to administer this Plan pursuant to Section 12.
“Common Stock” means the common stock, par value $0.001 per share, of the Corporation, and such other securities or property as may
become the subject of Options pursuant to an adjustment made under Section 17.
“Compensation” means an Eligible Employee’s regular earnings and shall not include any overtime pay, sick pay, shift differential, shift
premium, vacation pay, cash incentive compensation, commissions or cash bonuses. Compensation also includes any amounts
contributed as salary reduction contributions to a plan qualifying under Section 401(k), 125 or 129 of the Code. Any other form of
remuneration is excluded from Compensation, including (but not limited to) the following: prizes, awards, relocation or housing
allowances, stock option exercises, stock appreciation right payments, the vesting or grant of restricted stock, the payment of stock units,
performance awards, auto allowances, tuition reimbursement, perquisites, non-cash compensation and other forms of imputed income.
Notwithstanding the foregoing, Compensation shall not include any amounts deferred under or paid from any nonqualified deferred
compensation plan maintained by the Corporation or any Subsidiary.
“Contributions” means the bookkeeping amounts credited to the Account of a Participant pursuant to this Plan, equal in amount to the
amount of Compensation that the Participant has elected to contribute for the purchase of Common Stock under and in accordance with
this Plan.
“Corporation” means Pixelworks, Inc., an Oregon corporation, and its successors.
“Effective Date” means the date on which this Plan is initially approved by the shareholders of the Corporation.
Exhibit 10.2
“Eligible Employee” means any employee of the Corporation, or of any Subsidiary which has been designated in writing by the
Committee as a “Participating Subsidiary.” Notwithstanding the foregoing, “Eligible Employee” shall not include any employee whose
customary employment is twenty (20) hours or less per week.
“Exchange Act” means the U.S. Securities Exchange Act of 1934, as amended from time to time.
“Fair Market Value” on any date means:
(a) if the Common Stock is listed or admitted to trade on a national securities exchange, the closing price of a share of Common Stock
on such date on the principal national securities exchange on which the Common Stock is so listed or admitted to trade, or, if
there is no trading of the Common Stock on such date, then the closing price of a share of Common Stock on such exchange on
the next preceding date on which there was trading in the shares of Common Stock;
(b) in the absence of exchange data required to determine Fair Market Value pursuant to the foregoing, the value as established by the
Committee as of the relevant time for purposes of this Plan.
“Grant Date” means, with respect to an Offering Period, the first day of that Offering Period.
“Individual Limit” has the meaning given to such term in Section 4(b).
“Offering Period” means the period of eighteen (18) consecutive months commencing on each Grant Date as provided in Section 5;
provided, however, that the Committee may declare, as it deems appropriate and in advance of the applicable Offering Period, a shorter
(not to be less than three months) Offering Period or a longer (not to exceed 27 months) Offering Period.
“Option” means the stock option to acquire shares of Common Stock granted to a Participant pursuant to Section 8.
“Option Price” means the per share exercise price of an Option as determined in accordance with Section 8(b).
“Parent” means any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation in which
each corporation (other than the Corporation) owns stock possessing 50% or more of the total combined voting power of all classes of
stock in one or more of the other corporations in the chain.
“Participant” means an Eligible Employee who has elected to participate in this Plan and who has filed a valid and effective
Subscription Agreement to make Contributions pursuant to Section 6.
“Participating Subsidiary” shall have the meaning given to such term in Section 19(c).
“Plan” means this Pixelworks, Inc. Employee Stock Purchase Plan, as it may be amended or restated from time to time.
“Purchase Date” means, with respect to a Purchase Period, the last day of that Purchase Period.
“Purchase Period” has the meaning set forth in Section 5.
“Subscription Agreement ” means the written agreement filed by an Eligible Employee with the Corporation pursuant to Section 6 to
participate in this Plan.
“Subsidiary” means any corporation (other than the Corporation) in an unbroken chain of corporations (beginning with the Corporation)
in which each corporation (other than the last corporation) owns stock
Exhibit 10.2
possessing 50% or more of the total combined voting power of all classes of stock in one or more of the other corporations in the chain.
3.
ELIGIBILITY
Any person employed as an Eligible Employee as of the beginning of any given Offering Period (and who is not a Participant in any Offering
Period then in effect) shall be eligible to participate in such Offering Period, subject to the Eligible Employee satisfying the requirements of
Section 6.
4.
STOCK SUBJECT TO THIS PLAN; SHARE LIMITATIONS
(a)
(b)
Aggregate Share Limit. Subject to the provisions of Section 17, the capital stock that may be delivered under this Plan will be shares of
the Corporation’s authorized but unissued Common Stock. The maximum number of shares of Common Stock that may be delivered
pursuant to Options granted under this Plan is 3,300,000 shares, subject to adjustments pursuant to Section 17.
Individual Share Limit. The maximum number of shares of Common Stock that any one individual may acquire upon exercise of his or
her Option with respect to any one Purchase Period is 3,000, subject to adjustments pursuant to Section 17 (the “Individual Limit”). The
Committee may amend the Individual Limit, effective no earlier than the first Purchase Period commencing after the adoption of such
amendment, without shareholder approval.
(c) Shares Not Actually Delivered. Shares that are subject to or underlie Options, which for any reason are cancelled or terminated, are forfeited,
fail to vest, or for any other reason are not paid or delivered under this Plan shall again, except to the extent prohibited by law, be
available for subsequent Options under this Plan.
5.
OFFERING AND PURCHASE PERIODS
(a) Offering Periods. During the term of this Plan, the Corporation will grant Options to purchase shares of Common Stock in each Offering
Period to all Participants in that Offering Period. Unless otherwise specified by the Committee in advance of a particular Offering Period,
each Offering Period will be of eighteen (18) months duration, with the first such Offering Period to commence on August 1, 2010, and a
new Offering Period shall commence on each February 1 or August 1 thereafter such that more than one Offering Period may be in effect
at any one time; provided, however, that no Eligible Employee may be a Participant in, or hold an outstanding Option with respect to,
more than one Offering Period at any one time. In the event that the Fair Market Value of the Common Stock on any Purchase Date
during an Offering Period is lower than the Fair Market Value of the Common Stock on the Grant Date of that Offering Period, that
Offering Period will terminate on such Purchase Date, and each Participant in such terminated Offering Period will be automatically
enrolled in the new Offering Period that commences on the February 1 or August 1, as applicable, that immediately follows such
Purchase Date. Each Option shall become effective on the Grant Date of the Offering Period with respect to which the Option is granted.
The term of each Option shall be the duration of the related Offering Period and shall end on the Purchase Date for the third and final
Purchase Period of that Offering Period. Offering Periods shall continue until this Plan is terminated in accordance with Section 18 or 19,
or, if earlier, until no shares of Common Stock remain available for Options pursuant to Section 4.
(b) Purchase Periods. Unless otherwise specified by the Committee in advance of a particular Offering Period, each Offering Period will consist
of three (3) Purchase Periods, and each Purchase Period will be of six (6) months duration. Purchase Periods shall commence each
February 1 and August 1 and shall end the immediately following July 31 or January 31, respectively.
6.
PARTICIPATION
(a)
Enrollment. An Eligible Employee may become a participant in this Plan by completing a Subscription Agreement on a form approved
by and in a manner prescribed by the Committee (or its delegate). To become
Exhibit 10.2
(b)
(c)
effective, a Subscription Agreement must be signed by the Eligible Employee and be filed with the Corporation at the time specified by
the Committee, but in all cases prior to the start of the Offering Period with respect to which it is to become effective, and must set forth a
whole percentage (or, if the Committee so provides, a stated amount) of the Eligible Employee’s Compensation to be credited to the
Participant’s Account as Contributions each pay period.
Contribution Limits. Notwithstanding the foregoing, a Participant may not elect to contribute less than one percent (1%) nor more than
ten percent (10%) (or such other limit as the Committee may establish prior to the start of the applicable Offering Period) of his or her
Compensation during any one pay period as Plan Contributions. The Committee also may prescribe other limits, rules or procedures for
Contributions.
Content and Duration of Subscription Agreements. Subscription Agreements shall contain the Eligible Employee’s authorization and
consent to the Corporation’s withholding from his or her Compensation the amount of his or her Contributions. An Eligible Employee’s
Subscription Agreement, and his or her participation election and withholding consent thereon, shall remain valid for all Offering Periods
until (1) the Eligible Employee’s participation terminates pursuant to the terms hereof, (2) the Eligible Employee files a new Subscription
Agreement that becomes effective, or (3) the Committee requires that a new Subscription Agreement be executed and filed with the
Corporation.
7.
METHOD OF PAYMENT OF CONTRIBUTIONS
(a)
(b)
(c)
(d)
(e)
Participation Accounts. The Corporation shall maintain on its books, or cause to be maintained by a recordkeeper, an Account in the
name of each Participant. The percentage of Compensation elected to be applied as Contributions by a Participant shall be deducted from
such Participant’s Compensation on each payday during the period for payroll deductions set forth below and such payroll deductions
shall be credited to that Participant’s Account as soon as administratively practicable after such date. A Participant may not make any
additional payments to his or her Account. A Participant’s Account shall be reduced by any amounts used to pay the Option Price of
shares acquired, or by any other amounts distributed pursuant to the terms hereof.
Payroll Deductions. Subject to such other rules as the Committee may adopt, payroll deductions with respect to an Offering Period shall
commence as of the first day of the payroll period which coincides with or immediately follows the applicable Grant Date and shall end
on the last date of the payroll period which coincides with or immediately precedes the applicable Purchase Date, unless sooner
terminated by the Participant as provided in Section 7(d) or until his or her participation terminates pursuant to Section 11.
Changes in Contribution Elections for Next Purchase Period. A Participant may discontinue, increase, or decrease the level of his or her
Contributions (within the Plan limits) by completing and filing with the Corporation, on such terms as the Committee (or its delegate)
may prescribe, a new Subscription Agreement which indicates such election. Subject to any other timing requirements that the
Committee may impose, an election pursuant to this Section 7(c) shall be effective with the first Purchase Period that commences after
the Corporation’s receipt of such election. Except as contemplated by Section 7(d) and 7(e), changes in Contribution levels may not take
effect during a Purchase Period. Other modifications or suspensions of Subscription Agreements are not permitted.
Withdrawal During an Offering Period. A Participant may terminate his or her Contributions during an Offering Period (and receive a
distribution of the balance of his or her Account in accordance with Section 11) by completing and filing with the Corporation, in such
form and on such terms as the Committee (or its delegate) may prescribe, a written withdrawal form which shall be signed by the
Participant. Such termination shall be effective as soon as administratively practicable after its receipt by the Corporation. A withdrawal
election pursuant to this Section 7(d) with respect to an Offering Period shall only be effective for a particular Purchase Period, however,
if it is received by the Corporation prior to the Purchase Date of that Purchase Period (or such earlier deadline that the Committee may
reasonably require to process the withdrawal prior to the applicable Purchase Date). Partial withdrawals of Accounts are not permitted.
Discontinuance of Contributions During a Purchase Period. A Participant may discontinue his or her Contributions at any time during a
Purchase Period by completing and filing with the Corporation, on such
Exhibit 10.2
terms as the Committee (or its delegate) may prescribe, a new Subscription Agreement which indicates such election. If a Participant
elects to discontinue his or her Contributions pursuant to this Section 7(e), the Contributions previously credited to the Participant’s
Account for that Purchase Period shall be used to exercise the Participant’s Option as of the applicable Purchase Date in accordance with
Section 9 (unless the Participant makes a timely withdrawal election in accordance with Section 7(d), in which case such Participant’s
Account shall be paid to him or her in cash in accordance with Section 11(a)).
Leaves of Absence. During leaves of absence approved by the Corporation or a Participating Subsidiary and meeting the requirements of
Regulation Section 1.421-1(h)(2) under the Code, a Participant may continue participation in this Plan by cash payments to the
Corporation on his normal paydays equal to the reduction in his Plan Contributions caused by his leave.
(f)
8.
GRANT OF OPTION
(a)
(b)
(c)
Grant Date; Number of Shares. On each Grant Date, each Eligible Employee who is a Participant during that Offering Period shall be
granted an Option to purchase a number of shares of Common Stock. The Option shall be exercised on each Purchase Date that occurs
during that Offering Period. The number of shares of Common Stock to be purchased upon exercise of the Option on each Purchase Date
shall be determined by dividing the Participant’s Account balance as of that Purchase Date by the Option Price, subject to the limits of
Section 8(c).
Option Price. The Option Price per share of the shares subject to an Option for a Purchase Period shall be the lesser of: (i) 85% of the
Fair Market Value of a Share on the Grant Date of the Offering Period to which the Purchase Period relates; or (ii) 85% of the Fair
Market Value of a Share on the Purchase Date of that Purchase Period; provided, however, that the Committee may provide prior to the
start of any Purchase Period that the Option Price for that Purchase Period shall be determined by applying a discount amount (not to
exceed 15%) to either (1) the Fair Market Value of a share of Common Stock on the Grant Date of the Offering Period to which the
Purchase Period relates, or (2) the Fair Market Value of a share of Common Stock on the Purchase Date of that Purchase Period, or (3)
the lesser of the Fair Market Value of a share of Common Stock on the Grant Date of the Offering Period to which the Purchase Period
relates or the Fair Market Value of a share of Common Stock on the Purchase Date of that Purchase Period. Notwithstanding anything to
the contrary in the preceding provisions of this Section 8(b), in no event shall the Option Price per share be less than the par value of a
share of Common Stock.
Limits on Share Purchases. Notwithstanding anything else contained herein, the maximum number of shares subject to an Option for an
Offering Period shall be subject to the Individual Limit in effect on the Grant Date of that Offering Period (subject to adjustment pursuant
to Section 17) and any person who is otherwise an Eligible Employee shall not be granted any Option (or any Option granted shall be
subject to compliance with the following limitations) or other right to purchase shares under this Plan to the extent:
(1) it would, if exercised, cause the person to own stock (within the meaning of Section 423(b)(3) of the Code) possessing 5%
or more of the total combined voting power or value of all classes of stock of the Corporation, or of any Parent, or of
any Subsidiary; or
(2) such Option causes such individual to have rights to purchase stock under this Plan and any other plan of the Corporation,
any Parent, or any Subsidiary which is qualified under Section 423 of the Code which accrue at a rate which exceeds
$25,000 of the fair market value of the stock of the Corporation, of any Parent, or of any Subsidiary (determined at the
time the right to purchase such stock is granted, before giving effect to any discounted purchase price under any such
plan) for each calendar year in which such right is outstanding at any time.
For purposes of the foregoing, a right to purchase stock accrues when it first become exercisable during the calendar year. In determining
whether the stock ownership of an Eligible Employee equals or exceeds the 5% limit set forth above, the rules of Section 424(d) of the
Code (relating to attribution of stock ownership) shall
Exhibit 10.2
apply, and stock which the Eligible Employee may purchase under outstanding options shall be treated as stock owned by the Eligible
Employee.
9.
EXERCISE OF OPTION
(a)
(b)
Purchase of Shares. Unless a Participant withdraws pursuant to Section 7(d) or the Participant’s Plan participation is terminated as
provided in Section 11, his or her Option for the purchase of shares shall be exercised automatically on each Purchase Date for that
Offering Period, without any further action on the Participant’s part, and the maximum number of whole shares of Common Stock subject
to such Option (subject to the limits of Section 8(c)) shall be purchased at the Option Price with the balance of such Participant’s
Account.
Account Balance Remaining After Purchase. If any amount which is not sufficient to purchase a whole share remains in a Participant’s
Account after the exercise of his or her Option on the Purchase Date: (1) such amount shall be credited to such Participant’s Account for
the next Purchase Period, if he or she is then a Participant; or (2) if such Participant is not a Participant in the next Purchase Period, or if
the Committee so elects, such amount shall be refunded to such Participant as soon as administratively practicable after such date. If the
share limit of Section 4(a) is reached, any amount that remains in a Participant’s Account after the exercise of his or her Option on the
Purchase Date to purchase the number of shares that he or she is allocated shall be refunded to the Participant as soon as administratively
practicable after such date. If any amount which exceeds the limits of Section 8(c)(1) remains in a Participant’s Account after the exercise
of his or her Option on the Purchase Date, such amount shall be refunded to the Participant as soon as administratively practicable after
such date. The Participant’s Account shall be reduced on a dollar-for-dollar basis by any amount used to purchase shares hereunder or any
amount refunded to the Participant.
10.
DELIVERY OF SHARES
As soon as administratively practicable after the Purchase Date, the Corporation shall, in its discretion, either deliver to each Participant a
certificate representing the shares of Common Stock purchased upon exercise of his or her Option, provide for the crediting of such shares in book
entry form in the name of the Participant, or provide for an alternative arrangement for the delivery of such shares to a broker or recordkeeping
service for the benefit of the Participant. In the event the Corporation is required to obtain from any commission or agency authority to issue any
such certificate or otherwise deliver such shares, the Corporation will seek to obtain such authority. If the Corporation is unable to obtain from any
such commission or agency authority which counsel for the Corporation deems necessary for the lawful issuance of any such certificate or other
delivery of such shares, or if for any other reason the Corporation cannot issue or deliver shares of Common Stock and satisfy Section 21, the
Corporation shall be relieved from liability to any Participant except that the Corporation shall return to each Participant to whom such shares
cannot be issued or delivered the amount of the balance credited to his or her Account that would have otherwise been used for the purchase of
such shares.
11.
TERMINATION OF EMPLOYMENT; CHANGE IN ELIGIBLE STATUS
(a)
(b)
General. Except as provided in Section 11(b) below, if a Participant ceases to be an Eligible Employee for any reason (including, without
limitation, due to the Participant’s death, disability, quit, resignation or retirement, or due to a layoff or other termination of employment
with or without cause), or if the Participant elects to withdraw from the Plan pursuant to Section 7(d), at any time prior to the last day of
an Offering Period in which he or she participates, such Participant’s Account shall be paid to him or her (or, in the event of the
Participant’s death, to the person or persons entitled thereto under Section 13) in cash, and such Participant’s Option and participation in
the Plan shall automatically terminate as of the time that the Participant ceased to be an Eligible Employee.
Change in Eligible Status; Leave. If a Participant (1) ceases to be an Eligible Employee during a Purchase Period but remains an
employee of the Corporation or a Subsidiary through the Purchase Date for that Purchase Period (for example, and without limitation,
due to a change in the Participant’s employer from the
Exhibit 10.2
Corporation or a Participating Subsidiary to a non-Participating Subsidiary, if the Participant’s employer ceases to maintain the Plan as a
Participating Subsidiary but otherwise continues as a Subsidiary, or if the Participant’s customary level of employment no longer satisfies
the requirements set forth in the definition of Eligible Employee), or (2) during a Purchase Period commences a sick leave, military leave,
or other leave of absence approved by the Corporation or a Participating Subsidiary, and the leave meets the requirements of Treasury
Regulation Section 1.421-1(h)(2) and the Participant is an employee of the Corporation or a Subsidiary or on such leave as of the
applicable Purchase Date, such Participant’s Contributions shall cease (subject to Section 7(d) and Section 7(f)), and the Contributions
previously credited to the Participant’s Account for that Purchase Period shall be used to exercise the Participant’s Option as of the
applicable Purchase Date in accordance with Section 9 (unless the Participant makes a timely withdrawal election in accordance with
Section 7(d), in which case such Participant’s Account shall be paid to him or her in cash in accordance with Section 11(a)).
Re-Enrollment. A Participant’s termination from Plan participation precludes the Participant from again participating in this Plan during
that Offering Period. However, such termination shall not have any effect upon his or her ability to participate in any succeeding Offering
Period, provided that the applicable eligibility and participation requirements are again then met. A Participant’s termination from Plan
participation shall be deemed to be a revocation of that Participant’s Subscription Agreement and such Participant must file a new
Subscription Agreement to resume Plan participation in any succeeding Offering Period.
Change in Subsidiary Status. For purposes of this Plan, if a Subsidiary ceases to be a Subsidiary, each person employed by that
Subsidiary will be deemed to have terminated employment for purposes of this Plan, unless the person continues as an employee of the
Corporation or another Subsidiary.
(c)
(d)
12.
ADMINISTRATION
(a)
(b)
(c)
The Committee. The Board shall appoint the Committee, which shall be composed of not less than two members of the Board. The Board
may, at any time, increase or decrease the number of members of the Committee, may remove from membership on the Committee all or
any portion of its members, and may appoint such person or persons as it desires to fill any vacancy existing on the Committee, whether
caused by removal, resignation, or otherwise. The Board may also, at any time, assume the administration of all or a part of this Plan, in
which case references (or relevant references in the event the Board assumes the administration of only certain aspects of this Plan) to the
“Committee” shall be deemed to be references to the Board. Action of the Committee with respect to this Plan shall be taken pursuant to
a majority vote or by the unanimous written consent of its members. No member of the Committee shall be entitled to act on or decide
any matter relating solely to himself or herself or solely to any of his or her rights or benefits under this Plan.
Powers and Duties of the Committee. Subject to the express provisions of this Plan, the Committee shall supervise and administer this
Plan and shall have the full authority and discretion: (1) to construe and interpret this Plan and any agreements defining the rights and
obligations of the Corporation, any Subsidiary, and Participants under this Plan; (2) to further define the terms used in this Plan; (3) to
prescribe, amend and rescind rules and regulations relating to the administration of this Plan (including, without limitation, deadlines for
making elections or for providing any notices contemplated by this Plan, which deadlines may be more restrictive than any deadlines
otherwise contemplated by this Plan); and (4) to make all other determinations and take such other action as contemplated by this Plan or
as may be necessary or advisable for the administration of this Plan or the effectuation of its purposes. Notwithstanding anything else
contained in this Plan to the contrary, the Committee may also adopt rules, procedures or sub-plans applicable to particular Subsidiaries
or locations, which sub-plans may be designed to be outside the scope of Section 423 of the Code and need not comply with the
otherwise applicable provisions of this Plan.
Decisions of the Committee are Binding. Any action taken by, or inaction of, the Corporation, any Subsidiary, the Board or the
Committee relating or pursuant to this Plan and within its authority hereunder or under applicable law shall be within the absolute
discretion of that entity or body and shall be conclusive and binding upon all persons.
Exhibit 10.2
(d)
(e)
(f)
Indemnification. Neither the Board nor any Committee, nor any member thereof or person acting at the direction thereof, shall be liable
for any act, omission, interpretation, construction or determination made in good faith in connection with this Plan, and all such persons
shall be entitled to indemnification and reimbursement by the Corporation in respect of any claim, loss, damage or expense (including,
without limitation, attorneys’ fees) arising or resulting therefrom to the fullest extent permitted by law and/or under any directors and
officers liability insurance coverage that may be in effect from time to time.
Reliance on Experts. In making any determination or in taking or not taking any action under this Plan, the Committee or the Board, as
the case may be, may obtain and may rely upon the advice of experts, including professional advisors to the Corporation. No director,
officer or agent of the Corporation or any Participating Subsidiary shall be liable for any such action or determination taken or made or
omitted in good faith.
Delegation. The Committee may delegate ministerial, non-discretionary functions to individuals who are officers or employees of the
Corporation or a Subsidiary.
13.
DESIGNATION OF BENEFICIARY
If the Committee permits beneficiary designations with respect to this Plan, then each Participant may file, on a form and in a manner prescribed
by the Committee (or its delegate), a written designation of a beneficiary who is to receive any shares or cash from or with respect to such
Participant’s Account under this Plan in the event of such Participant’s death. If a Participant is married and the designated beneficiary is not
solely his or her spouse, spousal consent shall be required for such designation to be effective unless it is established (to the satisfaction of the
Committee or its delegate) that there is no spouse or that the spouse cannot be located. The Committee may rely on the last designation of a
beneficiary filed by a Participant in accordance with this Plan. Beneficiary designations may be changed by the Participant (and his or her spouse,
if required) at any time on forms provided and in the manner prescribed by the Committee (or its delegate).
If a Participant dies with no validly designated beneficiary under this Plan who is living at the time of such Participant’s death (or in the event the
Committee does not permit beneficiary designations under this Plan), the Corporation shall deliver all shares and/or cash payable pursuant to the
terms hereof to the executor or administrator of the estate of the Participant, or if no such executor or administrator has been appointed, the
Corporation, in its discretion, may deliver such shares and/or cash to the spouse or to any one or more dependents or relatives of the Participant, or
if no spouse, dependent or relative is known to the Corporation, then to such other person as the Corporation may designate.
If a Participant’s death occurs before the end of an Offering Period or subsequent to the end of an Offering Period but prior to the delivery to him
or her or for his or her benefit of any shares deliverable under the terms of this Plan, and the Corporation has notice of the Participant’s death, then
any shares purchased for that Offering Period and any remaining balance of such Participant’s Account shall be paid to such beneficiary (or such
other person entitled to such payment pursuant to this Section 13). If the Committee permits beneficiary designations with respect to this Plan, any
such designation shall have no effect with respect to shares purchased and actually delivered (or credited, as the case may be) to or for the benefit
of the Participant.
14.
TRANSFERABILITY
Neither Contributions credited to a Participant’s Account nor any Options or rights with respect to the exercise of Options or right to receive
shares under this Plan may be anticipated, alienated, encumbered, assigned, transferred, pledged or otherwise disposed of in any way (other than
by will, the laws of descent and distribution, or as provided in Section 13) by the Participant. Any such attempt at anticipation, alienation,
encumbrance, assignment, transfer, pledge or other disposition shall be without effect and all amounts shall be paid and all shares shall be
delivered in accordance with the provisions of this Plan. Amounts payable or shares deliverable pursuant to this Plan shall be paid or delivered
only to (or credited in the name of, as the case may be) the Participant or, in the event of the Participant’s death, the Participant’s beneficiary
pursuant to Section 13.
Exhibit 10.2
15.
USE OF FUNDS; INTEREST
All Contributions received or held by the Corporation under this Plan will be included in the general assets of the Corporation and may be used for
any corporate purpose. Notwithstanding anything else contained herein to the contrary, no interest will be paid to any Participant or credited to his
or her Account under this Plan (in respect of Account balances, refunds of Account balances, or otherwise). Amounts payable under this Plan shall
be payable in shares of Common Stock or from the general assets of the Corporation and, except for any shares that may be reserved on the books
of the Corporation for issuance with respect to this Plan, no special or separate reserve, fund or deposit shall be made to assure payment of
amounts that may be due with respect to this Plan.
16.
REPORTS
Statements shall be provided (either electronically or in written form, as the Committee may provide from time to time) to Participants as soon as
administratively practicable following each Purchase Date. Each Participant’s statement shall set forth, as of such Purchase Date, that Participant’s
Account balance immediately prior to the exercise of his or her Option, the Option Price, the number of whole shares purchased and his or her
remaining Account balance, if any.
17.
ADJUSTMENTS OF AND CHANGES IN THE STOCK
Upon or in contemplation of any reclassification, recapitalization, stock split (including a stock split in the form of a stock dividend), or reverse
stock split; any merger, combination, consolidation, or other reorganization; split-up, spin-off, or any similar extraordinary dividend distribution in
respect of the Common Stock (whether in the form of securities or property); any exchange of Common Stock or other securities of the
Corporation, or any similar, unusual or extraordinary corporate transaction in respect of the Common Stock; or a sale of substantially all the assets
of the Corporation as an entirety occurs; then the Committee shall equitably and proportionately adjust (1) the number and type of shares or the
number and type of other securities that thereafter may be made the subject of Options (including the specific maxima and numbers of shares set
forth elsewhere in this Plan), (2) the number, amount and type of shares (or other securities or property) subject to any or all outstanding Options,
(3) the Option Price of any or all outstanding Options, and/or (4) the securities, cash or other property deliverable upon exercise of any
outstanding Options, in each case to the extent necessary to preserve (but not increase) the level of incentives intended by this Plan and the then-
outstanding Options.
Upon the occurrence of any event described in the preceding paragraph, or any other event in which the Corporation does not survive (or does not
survive as a public company in respect of its Common Stock); then the Committee may make provision for a cash payment or for the substitution
or exchange of any or all outstanding Options for cash, securities or property to be delivered to the holders of any or all outstanding Options based
upon the distribution or consideration payable to holders of the Common Stock upon or in respect of such event.
The Committee may adopt such valuation methodologies for outstanding Options as it deems reasonable in the event of a cash or property
settlement and, without limitation on other methodologies, may base such settlement solely upon the excess (if any) of the amount payable upon or
in respect of such event over the Option Price of the Option.
In any of such events, the Committee may take such action sufficiently prior to such event to the extent that the Committee deems the action
necessary to permit the Participant to realize the benefits intended to be conveyed with respect to the underlying shares in the same manner as is or
will be available to shareholders generally.
18.
POSSIBLE EARLY TERMINATION OF PLAN AND OPTIONS
Upon a dissolution or liquidation of the Corporation, or any other event described in Section 17 that the Corporation does not survive or does not
survive as a publicly-traded company in respect of its Common Stock, as the case may be, this Plan and, if prior to the last day of an Offering
Period, any outstanding Option granted with respect to that Offering Period shall terminate, subject to any provision that has been expressly made
by the Board for the survival,
Exhibit 10.2
substitution, assumption, exchange or other settlement of this Plan and Options. In the event a Participant’s Option is terminated pursuant to this
Section 18 without a provision having been made by the Board for a substitution, exchange or other settlement of the Option, such Participant’s
Account shall be paid to him or her in cash without interest.
19.
TERM OF PLAN; AMENDMENT OR TERMINATION
(a)
(b)
(c)
Effective Date; Termination. Subject to Section 19(b), this Plan shall become effective as of the Effective Date. No new Offering Periods
shall commence on or after the tenth anniversary of the Effective Date, and this Plan shall terminate as of the Purchase Date on or
immediately following such date unless sooner terminated pursuant to Section 18 or this Section 19. In the event that during a particular
Purchase Period all of the shares of Common Stock made available under this Plan are subscribed prior to the expiration of this Plan, this
Plan and all outstanding Options hereunder shall terminate at the end of that Purchase Period and the shares available shall be allocated
for purchase by Participants in that Purchase Period on a pro-rata basis determined with respect to Participants’ Account balances.
Board Amendment Authority. The Board may, at any time, terminate or, from time to time, amend, modify or suspend this Plan, in whole
or in part and without notice. Shareholder approval for any amendment or modification shall not be required, except to the extent
required by law or applicable stock exchange rules, or required under Section 423 of the Code in order to preserve the intended tax
consequences of this Plan. No Options may be granted during any suspension of this Plan or after the termination of this Plan, but the
Committee will retain jurisdiction as to Options then outstanding in accordance with the terms of this Plan. No amendment, modification,
or termination pursuant to this Section 19(b) shall, without written consent of the Participant, affect in any manner materially adverse to
the Participant any rights or benefits of such Participant or obligations of the Corporation under any Option granted under this Plan prior
to the effective date of such change. Changes contemplated by Section 17 or Section 18 shall not be deemed to constitute changes or
amendments requiring Participant consent.
Certain Additional Committee Authority. Notwithstanding the amendment provisions of Section 19(b) and without limiting the Board’s
authority thereunder and without limiting the Committee’s authority pursuant to any other provision of this Plan, the Committee shall
have the right (1) to designate from time to time the Subsidiaries whose employees may be eligible to participate in this Plan (including,
without limitation, any Subsidiary that may first become such after the date shareholders first approve this Plan) (each a “Participating
Subsidiary”), and (2) to change the service and other qualification requirements set forth under the definition of Eligible Employee in
Section 2 (subject to the requirements of Section 423(b) of the Code and applicable rules and regulations thereunder). Any such change
shall not take effect earlier than the first Purchase Period that starts on or after the effective date of such change. Any such change shall
not require shareholder approval.
20.
NOTICES
All notices or other communications by a Participant to the Corporation contemplated by this Plan shall be deemed to have been duly given when
received in the form and manner specified by the Committee (or its delegate) at the location, or by the person, designated by the Committee (or its
delegate) for that purpose.
21.
CONDITIONS UPON ISSUANCE OF SHARES
This Plan, the granting of Options under this Plan and the offer, issuance and delivery of shares of Common Stock are subject to compliance with
all applicable federal and state laws, rules and regulations (including but not limited to state and federal securities laws) and to such approvals by
any listing, regulatory or governmental authority as may, in the opinion of counsel for the Corporation, be necessary or advisable in connection
therewith. The person acquiring any securities under this Plan will, if requested by the Corporation and as a condition precedent to the exercise of
his or her Option, provide such assurances and representations to the Corporation as the Committee may deem necessary or desirable to assure
compliance with all applicable legal requirements.
Exhibit 10.2
22.
PLAN CONSTRUCTION
(a)
(b)
(c)
Section 16. It is the intent of the Corporation that transactions involving Options under this Plan (other than “Discretionary Transactions”
as that term is defined in Rule 16b-3(b)(1) promulgated by the Commission under Section 16 of the Exchange Act, to the extent there are
any Discretionary Transactions under this Plan), in the case of Participants who are or may be subject to the prohibitions of Section 16 of
the Exchange Act, satisfy the requirements for exemption under Rule 16b-3(c) promulgated by the Commission under Section 16 of the
Exchange Act to the maximum extent possible. Notwithstanding the foregoing, the Corporation shall have no liability to any Participant
for Section 16 consequences of Options or other events with respect to this Plan.
Section 423. Except as the Committee may expressly provide in the case of one or more sub-plans adopted pursuant to Section 12(b), this
Plan and Options are intended to qualify under Section 423 of the Code. Accordingly, all Participants are to have the same rights and
privileges (within the meaning of Section 423(b)(5) of the Code and except as not required thereunder to qualify this Plan under Section
423) under this Plan, subject to differences in Compensation among Participants and subject to the Contribution and share limits of this
Plan.
Interpretation. If any provision of this Plan or of any Option would otherwise frustrate or conflict with the intents expressed above, that
provision to the extent possible shall be interpreted so as to avoid such conflict. If the conflict remains irreconcilable, the Committee may
disregard the provision if it concludes that to do so furthers the interest of the Corporation and is consistent with the purposes of this Plan
as to such persons in the circumstances.
23.
EMPLOYEES’ RIGHTS
(a)
(b)
(c)
No Employment Rights. Nothing in this Plan (or in any Subscription Agreement or other document related to this Plan) will confer upon
any Eligible Employee or Participant any right to continue in the employ or other service of the Corporation or any Subsidiary, constitute
any contract or agreement of employment or other service or effect an employee’s status as an employee at will, nor shall interfere in any
way with the right of the Corporation or any Subsidiary to change such person’s compensation or other benefits or to terminate his or her
employment or other service, with or without cause. Nothing contained in this Section 23(a), however, is intended to adversely affect any
express independent right of any such person under a separate employment or service contract other than a Subscription Agreement.
No Rights to Assets of the Company. No Participant or other person will have any right, title or interest in any fund or in any specific asset
(including shares of Common Stock) of the Corporation or any Subsidiary by reason of any Option hereunder. Neither the provisions of
this Plan (or of any Subscription Agreement or other document related to this Plan), nor the creation or adoption of this Plan, nor any
action taken pursuant to the provisions of this Plan will create, or be construed to create, a trust of any kind or a fiduciary relationship
between the Corporation or any Subsidiary and any Participant, Beneficiary or other person. To the extent that a Participant, Beneficiary
or other person acquires a right to receive payment pursuant to this Plan, such right will be no greater than the right of any unsecured
general creditor of the Corporation.
No Shareholder Rights. A Participant will not be entitled to any privilege of stock ownership as to any shares of Common Stock not
actually delivered to and held of record by the Participant. No adjustment will be made for dividends or other rights as a shareholder for
which a record date is prior to such date of delivery.
24.
MISCELLANEOUS
(a)
(b)
Governing Law. This Plan, the Options, Subscription Agreements and other documents related to this Plan shall be governed by, and
construed in accordance with, the laws of the State of Oregon.
Severability. If any provision shall be held by a court of competent jurisdiction to be invalid and unenforceable, the remaining provisions
of this Plan shall continue in effect.
Exhibit 10.2
(c)
(d)
Captions and Headings. Captions and headings are given to the sections of this Plan solely as a convenience to facilitate reference. Such
captions and headings shall not be deemed in any way material or relevant to the construction of interpretation of this Plan or any
provision hereof.
No Effect on Other Plans or Corporate Authority. The adoption of this Plan shall not affect any other Corporation or Subsidiary
compensation or incentive plans in effect. Nothing in this Plan will limit or be deemed to limit the authority of the Board or Committee
(1) to establish any other forms of incentives or compensation for employees of the Corporation or any Subsidiary (with or without
reference to the Common Stock), or (2) to grant or assume options (outside the scope of and in addition to those contemplated by this
Plan) in connection with any proper corporate purpose; to the extent consistent with any other plan or authority. Benefits received by a
Participant under an Option granted pursuant to this Plan shall not be deemed a part of the Participant’s compensation for purposes of the
determination of benefits under any other employee welfare or benefit plans or arrangements, if any, provided by the Corporation or any
Subsidiary, except where the Committee or the Board (or the Board of Directors of the Subsidiary that sponsors such plan or
arrangement, as applicable) expressly otherwise provides or authorizes in writing.
25.
TAX WITHHOLDING
Notwithstanding anything else contained in this Plan herein to the contrary, the Corporation may deduct from a Participant’s Account balance as of
a Purchase Date, before the exercise of the Participant’s Option is given effect on such date, the amount of taxes (if any) which the Corporation
reasonably determines it or any Subsidiary may be required to withhold with respect to such exercise. In such event, the maximum number of
whole shares subject to such Option (subject to the other limits set forth in this Plan) shall be purchased at the Option Price with the balance of the
Participant’s Account (after reduction for the tax withholding amount).
Should the Corporation for any reason be unable, or elect not to, satisfy its or any Subsidiary’s tax withholding obligations in the manner
described in the preceding paragraph with respect to a Participant’s exercise of an Option, or should the Corporation or any Subsidiary reasonably
determine that it or an affiliated entity has a tax withholding obligation with respect to a disposition of shares acquired pursuant to the exercise of
an Option prior to satisfaction of the holding period requirements of Section 423 of the Code, the Corporation or Subsidiary, as the case may be,
shall have the right at its option to (1) require the Participant to pay or provide for payment of the amount of any taxes which the Corporation or
Subsidiary reasonably determines that it or any affiliate is required to withhold with respect to such event or (2) deduct from any amount
otherwise payable to or for the account of the Participant the amount of any taxes which the Corporation or Subsidiary reasonably determines that
it or any affiliate is required to withhold with respect to such event.
26.
NOTICE OF SALE
Any person who has acquired shares under this Plan shall give prompt written notice to the Corporation of any sale or other transfer of the shares
if such sale or transfer occurs (1) within the two-year period after the Grant Date of the Offering Period with respect to which such shares were
acquired, or (2) within the twelve-month period after the Purchase Date of the Purchase Period with respect to which such shares were acquired.
Exhibit 10.3
PIXELWORKS, INC.
AMENDED AND RESTATED 2006 STOCK INCENTIVE PLAN
1. Purposes of the Plan. The purposes of this Stock Incentive Plan are to attract, retain and reward individuals who can and do contribute to
the Company's success by providing Employees and Consultants an opportunity to share in the equity of the Company and to more closely
align their interests with the Company and its shareholders.
2. Definitions. As used herein, the following definitions shall apply:
2.1. Administrator” shall mean the Board or any of its Committees appointed to administer the Plan, in accordance with Section 4.1.
2.2. “Award” shall mean an award of an Option, SAR or Sale of Shares under the Plan.
2.3. “Award Agreement” shall mean a written agreement between the Company and a Grantee evidencing the terms and conditions of
an individual Award grant. The Award Agreement is subject to the terms and conditions of the Plan.
2.4. “Board” shall mean the Board of Directors of the Company.
2.5. “Code” shall mean the Internal Revenue Code of 1986, as amended.
2.6. “Committee” shall mean a committee appointed by the Board in accordance with Section 4.1 of the Plan.
2.7. “Common Stock” shall mean the common stock of the Company.
2.8. “Company” shall mean Pixelworks, Inc., an Oregon corporation.
2.9. “Consultant” shall mean any non-Employee who is engaged by the Company or any Parent or Subsidiary to render consulting
services and is compensated for such consulting services and any Director of the Company whether compensated for such services or not.
2.10. “Continuous Status as an Employee or Consultant” shall mean the absence of any interruption or termination of service as an
Employee or Consultant. Continuous Status as an Employee or Consultant shall not be considered interrupted in the case of: (i) any sick
leave, military leave, or any other leave of absence approved by the Company; provided, however, that for purposes of Incentive Stock
Options, any such leave is for a period of not more than ninety days or reemployment upon the expiration of such leave is guaranteed by
contract or statute, provided, further, that on the ninety-first day of such leave (where re-employment is not guaranteed by contract or statute)
the Grantee's Incentive Stock Option shall automatically convert to a Nonqualified Stock Option; or (ii) transfers between locations of the
Company or between the Company, its Parent, its Subsidiaries or its successor.
2.11. “Director” shall mean a member of the Board.
2.12. “Disability” shall mean total and permanent disability as defined in Section 22(e)(3) of the Code.
2.13. “Employee” shall mean any person, including Officers and Directors, employed by the Company or any Parent or Subsidiary.
Neither the payment of a director's fee by the Company nor service as a Director or Consultant shall be sufficient to constitute “employment”
by the Company.
Exhibit 10.3
2.14. “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.
2.15. “Fair Market Value” shall mean, as of any date, the value of a Share determined as follows:
2.15.1. If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the
Nasdaq National Market or the Nasdaq SmallCap Market of the Nasdaq Stock Market, Fair Market Value shall be the closing sales price for a
Share (or the closing bid, if no sales were reported) as quoted on such exchange or system on the date of determination, as reported in The
Wall Street Journal or such other source as the Administrator deems reliable; provided, if the date of determination does not fall on a day on
which the Common Stock has traded on such securities exchange or market system, the date on which the Fair Market Value shall be
established shall be the last day on which the Common Stock was so traded prior to the date of determination, or such other appropriate day
as shall be determined by the Administrator, in its sole discretion;
2.15.2. If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, Fair Market Value
shall be the mean between the high bid and low asked prices for a Share on the date of determination, as reported in The Wall Street Journal
or such other source as the Administrator deems reliable; provided, if the date of determination does not fall on a day on which the Common
Stock has been so quoted, the date on which the Fair Market Value shall be established shall be the last day on which the Common Stock was
so quoted prior to the date of determination, or such other appropriate day as shall be determined by the Administrator, in its sole discretion;
2.15.3. In the absence of an established market for the Common Stock, the Fair Market Value of a Share shall be determined in good
faith by the Administrator.
2.16. “Grantee” shall mean an Employee or Consultant who has been granted an Award hereunder, or the permitted successor or legal
representative of such Employee or Consultant.
2.17. “Incentive Stock Option” shall mean an Option intended to qualify as an incentive stock option within the meaning of
Section 422 of the Code.
2.18. “Nonqualified Stock Option” shall mean an Option not intended to qualify as an incentive stock option within the meaning of
Section 422 of the Code.
2.19. “Notice of Grant” shall mean a written notice evidencing certain terms and conditions of an individual Award. The Notice of
Grant is part of the Award Agreement.
2.20. “Officer” shall mean a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the
rules and regulations promulgated thereunder.
2.21. “Option” shall mean an Incentive Stock Option or a Nonqualified Stock Option granted pursuant to the Plan.
2.22. “Optioned Stock” shall mean the Shares subject to an Option or Stock Appreciation Right.
2.23. “Parent” shall mean a “parent corporation,” whether now or hereafter existing, as defined in Section 424(e) of the Code.
2.24. “Performance Criteria” shall mean a formula or standard determined at the discretion of the Administrator with respect to a
Performance Period utilizing one or more of the following factors, whether in absolute terms or relative to the performance of one or more
similarly situated companies or a published index: (i) operating income, operating cash flow and operating expense; (ii) earnings before
interest, taxes, depreciation and
Exhibit 10.3
amortization; (iii) earnings; (iv) cash flow; (v) market share; (vi) sales; (vii) revenue; (viii) profits before interest and taxes; (ix) expenses; (x)
cost of goods sold; (xi) profit/loss or profit margin; (xii) working capital; (xiii) return on capital, equity or assets; (xiv) earnings per share;
(xv) economic value added; (xvi) stock price; (xvii) price/earnings ratio; (xviii) debt or debt-to-equity; (xix) accounts receivable; (xx)
writeoffs; (xxi) cash; (xxii) assets; (xxiii) liquidity; (xxiv) operations; (xxv) intellectual property (e.g., patents); (xxvi) product development;
(xxvii) regulatory activity; (xxviii) manufacturing, production or inventory; (xxix) mergers and acquisitions or divestitures; (xxx) financings;
(xxxi) total shareholder return; and/or (xxxii) any other performance factor selected by the Administrator. Performance Criteria may be
established on a Company-wide basis or with respect to one or more business units, divisions, or Subsidiaries. When establishing
Performance Criteria for a Performance Period, the Administrator may exclude any or all “extraordinary items” as determined under U.S.
generally accepted accounting principles including, without limitation, the charges or costs associated with restructurings of the Company or
any Subsidiary, discontinued operations, other unusual or non-recurring items, and the cumulative effects of accounting changes. The
Administrator may also adjust the Performance Criteria for any Performance Period as it deems equitable in recognition of unusual or non-
recurring events affecting the Company, changes in applicable tax laws or accounting principles, or such other factors as the Administrator
may determine.
2.25. “Performance Period” shall mean the period selected by the Administrator during which performance is measured for the
purpose of determining the extent to which an Award subject to Performance Criteria has been earned.
2.26. “Plan” shall mean this Amended and Restated 2006 Stock Incentive Plan.
2.27. “Rule 16b-3” shall mean Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being
exercised with respect to the Plan.
2.28. “Sale” or “Sold” shall include, with respect to the sale of Shares under the Plan, the sale of Shares for any form of consideration
specified in Section 8.2, as well as a grant of Shares for consideration in the form of past or future services. For purposes of clarity, a “Sale”
of Shares or Shares “Sold” shall include, without limitation, awards of stock bonuses, restricted stock, stock units, performance stock,
performance units or similar rights to acquire Shares, whether upon the passage of time, the occurrence of one or more events, the
satisfaction of Performance Criteria or other conditions, or any combination thereof.
2.29. “Share” shall mean a share of the Common Stock, as adjusted in accordance with Section 11 of the Plan.
2.30. “Stock Appreciation Right” or “SAR” shall mean a right to receive from the Company, with respect to each Share as to which
the SAR is exercised, payment in an amount equal to the excess of the Share's Fair Market Value on the exercise date over its Fair Market
Value on the date the SAR was granted. Such payment will be made solely in Shares valued at Fair Market Value on the exercise date.
2.31. “Subsidiary” shall mean a “subsidiary corporation,” whether now or hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan.
3.1. Subject to the provisions of Section 3.2 below and the provisions of Section 11 of the Plan, the maximum aggregate number of
Shares which may be subject to Awards under the Plan is 22,683,333 shares. (All share limits in the Plan are presented after giving effect to
the Company's 1-for-3 stock split in June 2008.) The Shares may be authorized, but unissued, or reacquired Common Stock. Shares issued in
respect of any “full-value award” granted under the Plan shall be counted against the foregoing share limit for the Plan as 1.33 shares for
every one share issued in connection with such award. (For example, if a stock bonus of 100 shares of Common Stock is granted
Exhibit 10.3
under the Plan, 133 shares shall be charged against the share limit in connection with that award.) For this purpose, a “full-value award”
means any Award under the Plan that is not an Option or SAR.
3.2. If an Option or SAR should expire, or become unexercisable for any reason, or is otherwise terminated or forfeited, without having
been exercised in full, the Optioned Stock which was subject thereto shall, unless the Plan shall have been terminated, become available for
future Option or SAR grants and/or Sales under the Plan. If any Shares issued pursuant to a Sale or exercise of an Option or SAR shall be
reacquired, canceled or forfeited for any reason, such Shares shall become available for future Option or SAR grants and/or Sales under the
Plan, unless the Plan shall have been terminated. If any reacquired, canceled or forfeited Shares were originally issued upon exercise of an
Incentive Stock Option, then once so reacquired, canceled or forfeited, such Shares shall not be considered to have been issued for purposes
of applying the limitation set forth in Section 3.3 below. Notwithstanding the foregoing, the following shares of Stock may not again be made
available for issuance as awards under the Plan: (i) shares of Stock not issued or delivered as a result of the net settlement of an outstanding
Option or SAR, (ii) shares of Stock used to pay the exercise price or withholding taxes related to an outstanding award, or (iii) shares of
Stock repurchased on the open market with the proceeds of the exercise price of an Option.
3.3. Notwithstanding any other provision of this Section 3, but subject to the adjustment provisions of Section 11.1 of the Plan, the
maximum number of Shares that may be issued upon the exercise of Incentive Stock Options shall be 22,683,333.
4. Administration of the Plan.
4.1. Procedure.
4.1.1. Multiple Administrative Committees. If permitted by Rule 16b-3, the Plan may be administered by different Committees with
respect to Directors, Officers who are not Directors, and Employees who are neither Directors nor Officers.
4.1.2. Administration With Respect to Directors and Officers Subject to Section 16(b). With respect to Award grants to Employees
who are also Officers or Directors subject to Section 16(b) of the Exchange Act, the Plan shall be administered by (A) the Board, if the Board
may administer the Plan in compliance with the rules governing a plan intended to qualify as a discretionary plan under Rule 16b-3, or (B) a
Committee designated by the Board to administer the Plan, which Committee shall be constituted to comply with the rules, if any, governing
a plan intended to qualify as a discretionary plan under Rule 16b-3. Once appointed, such Committee shall continue to serve in its designated
capacity until otherwise directed by the Board. From time to time the Board may increase the size of the Committee and appoint additional
members, remove members (with or without cause) and substitute new members, fill vacancies (however caused), and remove all members
of the Committee and thereafter directly administer the Plan, all to the extent permitted by the rules, if any, governing a plan intended to
qualify as a discretionary plan under Rule 16b-3. With respect to persons subject to Section 16 of the Exchange Act, transactions under the
Plan are intended to comply with all applicable conditions of Rule 16b-3. To the extent any provision of the Plan or action by the
Administrator fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Administrator.
4.1.3. Administration With Respect to Other Persons. With respect to Award grants to Employees or Consultants who are neither
Directors nor Officers of the Company, the Plan shall be administered by the Board or a Committee designated by the Board, which
Committee shall be constituted to satisfy the legal requirements relating to the administration of stock option plans under applicable
corporate and securities laws and the Code. Once appointed, such Committee shall serve in its designated capacity until otherwise directed by
the Board. The Board may increase the size of the Committee and appoint additional members, remove members (with or without
Exhibit 10.3
cause) and substitute new members, fill vacancies (however caused), and remove all members of the Committee and thereafter directly
administer the Plan, all to the extent permitted by the legal requirements relating to the administration of stock option plans under state
corporate and securities laws and the Code.
4.2. Powers of the Administrator. Subject to the provisions of the Plan, and in the case of a Committee, subject to the specific duties
delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion:
4.2.1. to grant Awards or SARs;
4.2.2. to authorize Sales of Shares hereunder;
4.2.3. to determine, upon review of relevant information, the Fair Market Value of a Share;
4.2.4. to determine the exercise/purchase price per Share of Options or SARs to be granted or Shares to be Sold, which
exercise/purchase price shall be determined in accordance with Section 8.1 of the Plan;
4.2.5. to determine the Employees or Consultants to whom, and the time or times at which, Options or SARs shall be granted and the
number of Shares to be represented by each Option or SAR;
4.2.6. to determine the Employees or Consultants to whom, and the time or times at which, Shares shall be Sold and the number of
Shares to be Sold;
4.2.7. to administer and interpret the Plan;
4.2.8. to prescribe, amend and rescind rules and regulations relating to the Plan;
4.2.9. to determine the terms and provisions of each Option or SAR granted (which need not be identical) and, with the consent of the
holder thereof, modify or amend each Option or SAR;
4.2.10. to determine the terms and provisions of each Sale of Shares (which need not be identical) and, with the consent of the
purchaser thereof, modify or amend each Sale;
4.2.11. to accelerate (with the consent of the Grantee) the exercise date of any Option;
4.2.12. to accelerate (with the consent of the Grantee or purchaser of Shares) the vesting restrictions applicable to Shares Sold or
Options or SARs granted under the Plan;
4.2.13. to authorize any person to execute on behalf of the Company any instrument required to effectuate the grant of an Option, SAR
or Sale of Shares previously granted or authorized by the Administrator;
4.2.14. to determine the transfer or vesting restrictions, repurchase rights or other restrictions applicable to Shares issued under the Plan;
4.2.15. to establish, on a case-by-case basis, different terms and conditions pertaining to exercise or vesting rights upon termination of
employment, but only at the time of an Option or SAR grant or Sale of Shares;
4.2.16. to approve forms for use under the Plan; and
4.2.17. to make all other determinations deemed necessary or advisable for the administration of the Plan.
Notwithstanding any other provision herein, except in connection with a corporate transaction involving the Company (including, without
limitation, any stock dividend, stock split, extraordinary cash dividend,
Exhibit 10.3
recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination, or exchange of shares), the terms of outstanding
awards may not be amended to reduce the exercise price of outstanding Options or SARs or cancel outstanding Options or SARs in exchange
for cash, other awards or Options or SARs with an exercise price that is less than the exercise price of the original Options or SARs without
shareholder approval.
4.3. Effect of Administrator's Decision. All decisions, determinations and interpretations of the Administrator shall be final and
binding on all Grantees and any other holders of any Shares Sold under the Plan.
5. Eligibility.
5.1. Persons Eligible. Awards may be granted only to Employees and Consultants. Incentive Stock Options may be granted only to
Employees. An Employee or Consultant who has been granted an Award may, if he or she is otherwise eligible, be granted additional
Awards.
5.2. ISO Limitation. To the extent that the aggregate Fair Market Value of Shares subject to a Grantee's Incentive Stock Options
granted by the Company, any Parent or Subsidiary which become exercisable for the first time during any calendar year (under all plans of
the Company or any Parent or Subsidiary) exceeds $100,000, such excess Options shall be treated as Nonqualified Stock Options. For
purposes of this Section 5.2, Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market
Value of the Shares shall be determined as of the time of grant.
5.3. Section 5.2 Limitations. Section 5.2 of the Plan shall apply only to an Option evidenced by an Award Agreement which sets forth
the intention of the Company and the Grantee that such Option shall qualify as an Incentive Stock Option. Section 5.2 of the Plan shall not
apply to any Option evidenced by an Award Agreement which sets forth the intention of the Company and the Grantee that such Option shall
be a Nonqualified Stock Option.
5.4. No Right to Continued Employment. The Plan shall not confer upon any Grantee any right with respect to continuation of
employment or consulting relationship with the Company, nor shall it interfere in any way with his or her right or the Company's right to
terminate their employment or consulting relationship at any time, with or without cause.
5.5. Other Limitations. The following limitations shall apply to grants of Options or SARs to Employees:
5.5.1. No Employee shall be granted, in any fiscal year of the Company, Options or SARs to acquire more than 250,000 Shares.
5.5.2. In connection with his or her initial employment, an Employee may be granted Options or SARs for up to an additional 250,000
Shares which shall not count against the limit set forth in subsection 5.5.1 above.
5.5.3. The foregoing limitations shall be adjusted proportionately in connection with any change in the Company's capitalization as
described in Section 11.
6. Term of Plan. The Plan shall become effective upon the earlier to occur of its adoption by the Board or its approval by the shareholders of
the Company as described in Section 17 of the Plan. It shall continue in effect for a term of ten (10) years, unless sooner terminated under
Section 13 of the Plan. However, if the Company's shareholders approve an increase in the number of Shares available for issuance under
section 3.1, such increase shall be deemed the adoption of a new plan with respect to the increased number of Shares, which may be issued
for a term of ten (10) years following the date of such increase.
Exhibit 10.3
7. Term of Options and SARs. The term of each Option and SAR shall be stated in the Notice of Grant; provided, however, that in no event
shall the term of any Option or SAR exceed six (6) years from the date of grant. However, in the case of an Incentive Stock Option granted to
a Grantee who, on the date the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the voting power
of all classes of stock of the Company or any Parent or Subsidiary, the term of the Incentive Stock Option shall be five (5) years from the date
of grant thereof or such shorter term as may be provided in the Notice of Grant.
8. Exercise/Purchase Price and Consideration.
8.1. Exercise/Purchase Price. The per Share exercise/purchase price for the Shares to be issued pursuant to exercise of an Option or
SAR or a Sale of Shares shall be such price as is determined by the Administrator, but shall be subject to the following:
8.1.1. In the case of an Incentive Stock Option
(1) granted to an Employee who, at the time of the grant of such Incentive Stock Option, owns more than ten percent (10%) of the
voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be at least one hundred ten
percent (110%) of the Fair Market Value on the date of the grant.
(2) granted to any other Employee, the per Share exercise price shall be at least one hundred percent (100%) of the Fair Market
Value on the date of grant.
8.1.2. In the case of a Nonqualified Stock Option, SAR or Sale, the per Share exercise/purchase price shall be at least one hundred
percent (100%) of the Fair Market Value on the date of grant or Sale, as the case may be.
8.2. Consideration. The consideration to be paid for the Shares to be issued upon exercise of an Option or pursuant to a Sale, including
the method of payment, shall be determined by the Administrator. In the case of an Incentive Stock Option, the Administrator shall determine
the acceptable form of consideration at the time of grant. Such consideration may consist of:
8.2.1. cash;
8.2.2. check;
8.2.3. promissory note;
8.2.4. transfer to the Company of Shares which
(1) in the case of Shares acquired upon exercise of an Option, have been owned by the Grantee for more than six months on the date of
transfer, and
(2) have a Fair Market Value on the date of transfer equal to the aggregate exercise price of the Shares to be acquired;
8.2.5. if and so long as the Common Stock is registered under Section 12(b) or 12(g) of the Exchange Act, delivery of a properly
executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company the amount of sale or loan
proceeds required to pay the exercise price;
8.2.6. such other consideration and method of payment for the issuance of Shares to the extent permitted by legal requirements relating
to the administration of stock option plans and issuances of capital stock under applicable corporate and securities laws and the Code; or
Exhibit 10.3
8.2.7. any combination of the foregoing methods of payment.
If the Fair Market Value of the number of whole Shares transferred or the number of whole Shares surrendered is less than the total
exercise price of the Option, the shortfall must be made up in cash or by check. Notwithstanding the foregoing provisions of this Section 8.2,
the consideration for Shares to be issued pursuant to a Sale may not include, in whole or in part, the consideration set forth in subsection
8.2.5 above.
9. Exercise of Option or SAR.
9.1. Procedure for Exercise; Rights as a Shareholder. Any Option or SAR granted hereunder shall be exercisable at such times and
under such conditions as determined by the Administrator, including Performance Criteria with respect to the Company and/or the Grantee,
and as shall be permissible under the terms of the Plan.
An Option or SAR may not be exercised for a fraction of a Share. If the exercise of a SAR would result in the issuance of a fractional
Share, the Shares to be issued shall be rounded to the nearest whole Share.
An Option or SAR shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance
with the terms of the Option or SAR by the Grantee and full payment for the Shares with respect to which the Option is exercised has been
received by the Company. Full payment may, as authorized by the Administrator, consist of any consideration and method of payment
allowable under the Award Agreement and Section 8.2 of the Plan. Each Grantee who exercises an Option or SAR shall, upon notification of
the amount due (if any) and prior to or concurrent with delivery of the certificate representing the Shares, pay to the Company amounts
necessary to satisfy applicable federal, state and local tax withholding requirements. A Grantee must also provide a duly executed copy of
any stock transfer agreement then in effect and determined to be applicable by the Administrator. Until the issuance (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing
such Shares, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock
represented by such stock certificate, notwithstanding the exercise of the Option or SAR. No adjustment will be made for a dividend or other
right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 11 of the Plan. Subject to
section 3, exercise of an Option or settlement of a SAR shall decrease the number of Shares thereafter available, both for purposes of the Plan
and for issuance under the Option or SAR by the number of Shares issued upon such exercise.
9.2. Termination of Employment or Consulting Relationship. In the event that a Grantee's Continuous Status as an Employee or
Consultant terminates (other than upon the Grantee's death or Disability), the Grantee may exercise his or her Option or SAR, but only within
such period of time as is determined by the Administrator, and only to the extent that the Grantee was entitled to exercise it at the date of
termination (but in no event later than the expiration of the term of such Option or SAR as set forth in the Notice of Grant). In the case of an
Incentive Stock Option, the Administrator shall determine such period of time (in no event to exceed three (3) months from the date of
termination) when the Option is granted. If, at the date of termination, the Grantee is not entitled to exercise his or her entire Option or SAR,
the unexercisable portion of the Option or SAR shall, unless otherwise expressly provided by the Administrator, terminate on the date of such
termination and the Shares covered by such portion shall revert to the Plan. If, after termination, the Grantee does not exercise the remaining
portion of his or her Option or SAR within the time specified by the Administrator, such portion of the Option or SAR shall terminate, and
the Shares covered by such portion shall revert to the Plan.
9.3. Disability of Grantee. In the event that a Grantee's Continuous Status as an Employee or Consultant terminates as a result of the
Grantee's Disability, the Grantee may exercise his or her Option or SAR at any time within twelve (12) months from the date of such
termination, but only to the extent that the Grantee was entitled to
Exhibit 10.3
exercise it at the date of such termination (but in no event later than the expiration of the term of such Option or SAR as set forth in the
Notice of Grant). If, at the date of termination, the Grantee is not entitled to exercise his or her entire Option or SAR, the unexercisable
portion of the Option or SAR shall, unless otherwise expressly provided by the Administrator, terminate on the date of such termination and
the Shares covered by such portion shall revert to the Plan. If, after termination, the Grantee does not exercise the remaining portion of his or
her Option or SAR within the time specified herein, such portion of the Option or SAR shall terminate, and the Shares covered by such
portion shall revert to the Plan.
9.4. Death of Grantee. In the event of the death of a Grantee, the Option or SAR may be exercised at any time within twelve
(12) months following the date of death (but in no event later than the expiration of the term of such Option or SAR as set forth in the Notice
of Grant), by the Grantee's estate or by a person who acquired the right to exercise the Option or SAR by bequest or inheritance, but only to
the extent that the Grantee was entitled to exercise the Option or SAR at the date of death. If, at the time of death, the Grantee was not
entitled to exercise his or her entire Option or SAR, the unexercisable portion of the Option or SAR shall, unless otherwise expressly
provided by the Administrator, terminate on the date of such termination and the Shares covered by such portion shall revert to the Plan. If,
after death, the Grantee's estate or a person who acquired the right to exercise the Option or SAR by bequest or inheritance does not exercise
the remaining portion of the Option or SAR within the time specified herein, such portion of the Option or SAR shall terminate, and the
Shares covered by such portion shall revert to the Plan.
9.5. Rule 16b-3. Options or SARs, as well as Sales of Shares, granted to persons subject to Section 16(b) of the Exchange Act must
comply with Rule 16b-3 and shall contain such additional conditions or restrictions as may be required thereunder to qualify for the
maximum exemption from Section 16 of the Exchange Act with respect to Plan transactions.
10. Nontransferability of Awards. Except as otherwise specifically provided in the Award Agreement, an Award may not be sold, pledged,
assigned, hypothecated, transferred or disposed of in any manner other than by will, or by the laws of descent and distribution, and may be
exercised during the lifetime of the Grantee only by the Grantee or, if incapacitated, by his or her legal guardian or legal representative.
11. Adjustments Upon Changes in Capitalization or Merger.
11.1. Changes in Capitalization. Subject to any required action by the shareholders of the Company, the number of shares of Common
Stock covered by each outstanding Award and the number of shares of Common Stock which have been authorized for issuance under the
Plan but as to which no Awards have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Award,
as well as the price per share of Common Stock covered by each such outstanding Award, shall be proportionately adjusted for any increase
or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without
receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be
deemed to have been “effected without receipt of consideration.” Such adjustment shall be made by the Administrator, whose determination
in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of
any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of Shares subject to an Award.
Exhibit 10.3
11.2. Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, each outstanding Award will
terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Administrator. The
Administrator may, in the exercise of its sole discretion in such instances, declare that any Award shall terminate as of a date fixed by the
Board and, in the case of Options and SARs, give each Grantee the right to exercise Grantee's Option or SAR as to all or any part of the
Optioned Stock subject to the Option or SAR, including Shares as to which the Option or SAR would not otherwise be exercisable.
11.3. Merger or Asset Sale. Except as otherwise provided in an Award Agreement, in the event of a proposed sale of all or
substantially all of the assets of the Company, or the merger of the Company with or into another corporation, each outstanding Award shall
be assumed or an equivalent award shall be substituted by such successor corporation or a Parent or Subsidiary of such successor corporation,
unless the Administrator determines, in the exercise of its sole discretion and in lieu of such assumption or substitution, that, in the case of
Options and SARs, each Grantee shall have the right to exercise the Grantee's Options or SARs as to all or any part of the Optioned Stock
subject to the Option or SAR, including Shares as to which the Option or SAR would not otherwise be exercisable. If the Administrator
determines that an Option or SAR shall be exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the
Administrator shall notify the Grantee that the Option or SAR shall be so exercisable for a period of thirty (30) days from the date of such
notice or such shorter period as the Administrator may specify in the notice, and the Option or SAR will terminate upon the expiration of
such period. For the purposes of this paragraph, the Option or SAR shall be considered assumed or substituted if, following the merger or
sale of assets, the Option or SAR confers the right to purchase, for each Share of Optioned Stock subject to the Option or SAR immediately
prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of
assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of
consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such
consideration received in the merger or sale of assets was not solely common stock of the successor corporation or its Parent, the
Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the
Option or SAR, for each Share of Optioned Stock subject to the Option or SAR, to be solely common stock of the successor corporation or
its Parent substantially equal in Fair Market Value to the per share consideration received by holders of Common Stock in the merger or sale
of assets. The determination of such substantial equality of value of consideration shall be made by the Administrator and its determination
shall be conclusive and binding.
12. Time of Granting Awards. The date of grant of an Award shall, for all purposes, be the date on which the Administrator makes the
determination granting such Award (or such later date as the Administrator may establish at the time of granting the Award). Notice of the
determination shall be given to each Grantee within a reasonable time after the date of such grant.
13. Amendment and Termination of the Plan.
13.1. Amendment and Termination. The Board may amend or terminate the Plan from time to time in such respects as the Board may
deem advisable.
13.2. Shareholder Approval. The Company shall obtain shareholder approval of any Plan amendment to the extent necessary and
desirable to comply with Rule 16b-3 or with Section 422 of the Code (or any successor rule or statute or other applicable law, rule or
regulation, including the requirements of any exchange or quotation system on which the Common Stock is listed or quoted). Such
shareholder approval, if required, shall be obtained in such a manner and to such a degree as is required by the applicable law, rule or
regulation.
Exhibit 10.3
13.3. Effect of Amendment or Termination. Any such amendment or termination of the Plan shall not affect Awards already granted,
and such Awards shall remain in full force and effect as if this Plan had not been amended or terminated, unless mutually agreed otherwise
between the Grantee and the Administrator, which agreement must be in writing and signed by the Grantee and the Administrator.
14. Conditions Upon Issuance of Shares. Shares shall not be issued pursuant to the exercise of an Option, SAR or a Sale unless the exercise
of such Option, SAR or consummation of the Sale and the issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, applicable state securities laws, the
Exchange Act, the rules and regulations promulgated thereunder, and the requirements of any stock exchange (including Nasdaq) upon which
the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance.
15. Reservation of Shares. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as
shall be sufficient to satisfy the requirements of the Plan.
16. Liability of Company.
16.1. Inability to Obtain Authority. Inability of the Company to obtain authority from any regulatory body having jurisdiction, which
authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the
Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been
obtained.
As a condition to the exercise of an Option or SAR or a Sale, the Company may require the person exercising such Option or SAR or to
whom Shares are being Sold to represent and warrant at the time of any such exercise or Sale that the Shares are being purchased only for
investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a
representation is required by any of the aforementioned relevant provisions of law.
16.2. Grants Exceeding Allotted Shares. If the grant of an Award causes the aggregate number of Shares previously issued under the
Plan and subject to then-outstanding Awards under the Plan to exceed, as of the date of grant, the number of Shares which may be issued
under the Plan without additional shareholder approval, such Award shall be void with respect to such excess Shares, unless shareholder
approval of an amendment sufficiently increasing the number of Shares subject to the Plan is timely obtained in accordance with Section 13
of the Plan.
17. Shareholder Approval. Continuance of the Plan shall be subject to approval by the shareholders of the Company within twelve
(12) months before or after the date the Plan is adopted. Such shareholder approval shall be obtained in the manner and to the degree required
under applicable federal and state law.
18. Tax Withholding. Upon any exercise, vesting, or payment of any Award, or upon the disposition of shares of Common Stock acquired
pursuant to the exercise of an Incentive Stock Option prior to satisfaction of the holding period requirements of Section 422 of the Code, or
upon any other tax withholding event with respect to any award, the Company or one of its Subsidiaries shall have the right at its option to:
(a) require the Grantee (or the Grantee's personal representative or beneficiary, as the case may be) to pay or provide for payment of at
least the minimum amount of any taxes which the Company or one of its Subsidiaries may be required to withhold with respect to such
Award event or payment; or
(b) deduct from any amount otherwise payable in cash (whether related to the Award or otherwise) to the Grantee (or the Grantee's
personal representative or beneficiary, as the case may be) the minimum amount of any taxes which the Company or one of its
Subsidiaries may be required to withhold with respect to such
Exhibit 10.3
Award event or payment, except to the extent additional withholding does not result in adverse accounting treatment to the Company.
In any case where a tax is required to be withheld in connection with the delivery of shares of Common Stock under the Plan, the
Administrator may in its sole discretion (subject to Section 14) require or grant (either at the time of the Award or thereafter) to the Grantee
the right to elect, pursuant to such rules and subject to such conditions as the Administrator may establish, that the Company reduce the
number of shares to be delivered by (or otherwise reacquire) the appropriate number of shares, valued in a consistent manner at their Fair
Market Value or at the sales price in accordance with authorized procedures for cashless exercises, necessary to satisfy the minimum
applicable withholding obligation on exercise, vesting or payment. In no event shall the shares withheld exceed the minimum whole number
of shares required for tax withholding under applicable law.
19. Plan Not Funded. Awards payable under the Plan shall be payable in shares or from the general assets of the Company, and no special or
separate reserve, fund or deposit shall be made to assure payment of such awards. No Grantee, beneficiary or other person shall have any
right, title or interest in any fund or in any specific asset (including shares of Common Stock, except as expressly otherwise provided) of the
Company or one of its Subsidiaries by reason of any Award hereunder. Neither the provisions of the Plan (or of any related documents), nor
the creation or adoption of the Plan, nor any action taken pursuant to the provisions of the Plan shall create, or be construed to create, a trust
of any kind or a fiduciary relationship between the Company or one of its Subsidiaries and any Grantee, beneficiary or other person. To the
extent that a Grantee, beneficiary or other person acquires a right to receive payment pursuant to any Award hereunder, such right shall be no
greater than the right of any unsecured general creditor of the Company.
20. Privileges of Stock Ownership. Except as otherwise expressly authorized by the Administrator, a Grantee shall not be entitled to any
privilege of stock ownership as to any shares of Common Stock not actually delivered to and held of record by the participant. Except as
expressly required by Section 11.1 or otherwise expressly provided by the Administrator, no adjustment will be made for dividends or other
rights as a shareholder for which a record date is prior to such date of delivery.
21. Governing Law; Severability; Headings. The Plan, the Awards, all documents evidencing awards and all other related documents shall
be governed by, and construed in accordance with the laws of the State of Oregon. If a court of competent jurisdiction holds any provision
invalid and unenforceable, the remaining provisions of the Plan shall continue in effect. Captions and headings are given to the sections and
subsections of the Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to
the construction or interpretation of the Plan or any provision thereof.
22. No Corporate Action Restriction. The existence of the Plan, the Award Agreements and the Awards granted hereunder shall not limit,
affect or restrict in any way the right or power of the Board or the shareholders of the Company to make or authorize: (a) any adjustment,
recapitalization, reorganization or other change in the capital structure or business of the Company or any Subsidiary, (b) any merger,
amalgamation, consolidation or change in the ownership of the Company or any Subsidiary, (c) any issue of bonds, debentures, capital,
preferred or prior preference stock ahead of or affecting the capital stock (or the rights thereof) of the Company or any Subsidiary, (d) any
dissolution or liquidation of the Company or any Subsidiary, (e) any sale or transfer of all or any part of the assets or business of the
Company or any Subsidiary, or (f) any other corporate act or proceeding by the Company or any Subsidiary. No participant, beneficiary or
any other person shall have any claim under any award or award agreement against any member of the Board or the Administrator, or the
Company or any employees, officers or agents of the Company or any Subsidiary, as a result of any such action.
Exhibit 10.3
23. Stock Retention Requirement for Executive Officers. The Award Agreement providing for an Award under the Plan to a participant
who is the principal executive officer, principal financial officer or chief operating officer, if any, of the Company shall provide that the
participant shall continue to hold the Shares issued in connection with the Award (net of Shares withheld or disposed of to pay applicable
income and employment taxes due by the participant) for a period of twelve (12) months following the later of the date of issuance of the
Shares to the participant or, in the case of Shares issued as restricted stock, the date of vesting of such Shares. This holding period
requirement shall cease to apply (i) following the participant’s termination of employment with the Company, (ii) at such time as the
participant has met such share ownership guidelines as may be adopted by the Board and as are applicable to the participant, or (iii) the
occurrence of an event described in Section 11.3 (relating to a Merger or Asset Sale) or similar event involving the sale of the Company.
Exhibit 10.9
Summary of Pixelworks Non-Employee Director Compensation
General Board Service - Cash
General Board Service - Equity
Committee Member Service - Additional Annual
Fees
Annual Retainer: $40,000
Initial grant upon election or appointment: $74,000 fair value in stock options (based on Black-
Scholes valuation assumptions consistent with the Company’s financial reporting obligations and 30-
day average stock price) with a six year term vesting 25% on the first anniversary of the grant date,
and ratably on a monthly basis thereafter for the next three years, subject to acceleration on change of
control
Annual grant at annual meeting of shareholders: $74,000 fair value in RSUs (based on 30-day average
stock price) vesting on first to occur of (1) the day before the next annual meeting of the Company’s
shareholders that follows the grant date, or (2) the first anniversary of the grant date, subject to
acceleration on change of control
Committee member annual fees:
Audit: $8,000 (paid quarterly)
Comp: $5,000 (paid quarterly)
Corp Gov/Nom: $3,000 (paid quarterly)
Committee Chair Service - Additional Annual Fees Committee Chair fees:
Chairman of the Board
Audit: $19,000 (paid quarterly)
Comp: $10,000 (paid quarterly)
Corp Gov/Nom: $7,500 (paid quarterly)
Additional annual retainer: $28,000
Subsidiaries of Pixelworks, Inc.
Exhibit 21
Equator Technologies, Inc. — a Delaware corporation
ViXS USA, Inc. – a Delaware corporation
Pixelworks Semiconductor Technology (Shanghai) Co. Ltd. — a China company
Pixelworks Japan Inc. — a Japan company
Pixelworks Semiconductor Technology (Taiwan) Inc. — a Taiwan company
Pixelworks Semiconductor Technology (Shanghai) Co. Ltd. Shenzhen Branch Office No. 1 – a China company
Pixelworks Hong Kong Limited (Hong Kong) – a Hong Kong company
Pixelworks Semiconductor Technology California LLC (California) – a California company
ViXS Systems Inc. dba Pixelworks Canada (Canada) – a Canadian company
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-256606, 333-239466, 333-233210, 333-227352,
333-219418, 333-212650, 333-205856, 333-197644, 333-190037, 333-182701, 333-168175, 333-161125, 333-152945 and 333-136553) and Form S-3
(Nos. 333-249934, 333-221239 and 333-221238) of Pixelworks, Inc. and subsidiaries of our report dated March 9, 2022 relating to the consolidated
financial statements appearing in this Form 10-K for the year ended December 31, 2021.
/s/ Armanino LLP
San Ramon, California
March 9, 2022
Exhibit 31.1
I, Todd A. DeBonis, certify that:
CERTIFICATION
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Pixelworks, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) for the registrant and have:
a.
b.
c.
d.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected or is reasonably
likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a.
b.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal
control over financial reporting.
Date: March 9, 2022
By:
/s/ Todd A. DeBonis
Todd A. DeBonis
President and Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
I, Haley F. Aman, certify that:
CERTIFICATION
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Pixelworks, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) for the registrant and have:
a.
b.
c.
d.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected or is reasonably
likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a.
b.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal
control over financial reporting.
Date: March 9, 2022
By:
/s/ Haley F. Aman
Haley F. Aman
Chief Financial Officer (Principal Financial Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of Pixelworks, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2021 as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I, Todd A. DeBonis, President and Chief Executive Officer of the Company,
certify, pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350), as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, that:
1.
2.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
By:
/s/ Todd A. DeBonis
Todd A. DeBonis
President and Chief Executive Officer
(Principal Executive Officer)
Date:
March 9, 2022
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report of Pixelworks, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2021 as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I, Haley F. Aman, Chief Financial Officer of the Company, certify, pursuant to
Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350), as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:
1.
2.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
By:
/s/ Haley F. Aman
Haley F. Aman
Chief Financial Officer (Principal Financial Officer)
Date:
March 9, 2022