PIXELWORKS, INC

NOTE 1: BASIS OF PRESENTATION

Nature of Business

Pixelworks, Inc. (the “Company” or “Pixelworks”) provides industry-leading content creation, video delivery and display processing solutions, and technology that enable highly authentic viewing experiences with superior visual quality across all screens, from cinema to smartphone and beyond. Pixelworks has been delivering image processing innovations to leading providers of consumer electronics, professional displays, and video streaming services for more than 20 years.

On January 6, 2026 (the “Closing Date”), the Company completed the previously announced sale (the “Sale”) of all of the shares of common stock of Pixelworks Semiconductor Technology (Shanghai) Co., Ltd. (“PWSH”) held by Pixelworks Semiconductor Technology Company, LLC, a wholly owned subsidiary of the Company (“Pixelworks LLC”), to Tiansui Xinyuan Technology (Shanghai) Co., Ltd. (the “Buyer”). The terms of the Sale were set forth in a Purchase Agreement dated as of October 15, 2025 (the “Purchase Agreement”), among the Company, PWSH, Pixelworks LLC, all other shareholders of PWSH except VeriSilicon Microelectronics (Shanghai) Co., Ltd. (each, a “Selling Shareholder"), and the Buyer. Each Selling Shareholder and VeriSilicon Microelectronics (Shanghai) Co., Ltd. (collectively, the “Minority Shareholders”) and Pixelworks LLC also entered into Support Agreements (the “Support Agreements”), and Pixelworks LLC, PWSH and each of the Minority Shareholders entered into a Termination and Release Agreement (the “Release Agreement”), in each case dated October 14, 2025. On the Closing Date: (i) Pixelworks LLC transferred to the Minority Shareholders shares of PWSH capital stock representing a total of approximately 29% of the total outstanding shares of PWSH capital stock; (ii) the Selling Shareholders sold and transferred all of their PWSH shares to the Buyer; (iii) Pixelworks LLC sold and transferred its remaining shares of PWSH capital stock, representing approximately 49% of the total outstanding shares of PWSH capital stock, to the Buyer; and (iv) the Buyer paid the Company approximately RMB 357,000, or approximately $51,000 in U.S. dollars, net of transaction costs and withholding taxes paid in China. The remaining transaction expenses incurred by the Company in connection with the Sale, not including compensation that has been paid to the Company’s executive officers and other employees, totaled approximately $1,000 in U.S. dollars. Additionally, approximately RMB 8,700, or approximately $1,200 in U.S. dollars, which was being held in an escrow account was released to the Company on March 31, 2026 due to the resolution of a tax matter in China.

The foregoing references to certain provisions of the Purchase Agreement, the Support Agreements and the Release Agreement are not complete and are subject to and qualified in their entirety by reference to the Purchase Agreement filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on October 15, 2025 (the “October 15 8-K”), the Amendment Agreement filed as Exhibit 10.2 to the October 15 8-K, and the form of Support Agreement, together with the form of Termination and Release Agreement attached to the form of Support Agreement as Exhibit A, filed as Exhibit 10.3 to the October 15 8-K. The Company’s definitive proxy statement filed with the SEC on October 27, 2025, includes additional information under the heading “Principal Terms and Conditions of the Purchase Agreement”, which description is incorporated herein by reference.

As a result of the Sale, Pixelworks no longer operates a semiconductor business, which included the businesses that it previously described as “Mobile” (smartphone and tablet) and “Home & Enterprise” (projectors, personal video recorders, and over-the-air streaming devices). Following the Sale, the Company is focused on developing and licensing cinematic visualization solutions, including its flagship TrueCut Motion TM platform. For more information regarding the events leading up to the Sale, and about the Mobile and Home & Enterprise businesses, see Item 1 under the heading “Overview” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2024, filed with the SEC on March 13, 2025 (the “2024 10-K”).

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

Reverse Stock Split

On June 6, 2025, the Company effected a one-for-twelve reverse stock split of the Company’s common stock (the "Reverse Stock Split"). As a result of the Reverse Stock Split, every twelve shares of the Company's Common Stock issued or outstanding were automatically reclassified into one new share of common stock. Proportionate adjustments were also made to the exercise prices and the number of shares underlying the Company’s outstanding equity awards, as applicable, as well as to the number of shares issuable under the Company’s equity incentive plans and certain existing agreements. The Reverse Stock Split did not decrease the number of authorized shares of common stock or otherwise affect the par value of the common stock. No fractional shares were issued in connection with the Reverse Stock Split. Shareholders who would have otherwise been entitled to receive fractional shares were entitled to have their fractional shares rounded up to the next whole number share quantity. All shares of the Company’s common stock, per-share data and related information included in the accompanying condensed consolidated financial statements and the accompanying notes have been retroactively adjusted as though the Reverse Stock Split had been effected prior to all periods presented.

Condensed Consolidated Financial Statements

The financial information included herein for the three and six months ended June 30, 2026 and 2025 is prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") and is unaudited. Such information reflects all adjustments, consisting of only normal recurring adjustments, that are, in the opinion of management, necessary for a fair presentation of our condensed consolidated financial statements for these interim periods. The financial information as of December 31, 2025 is derived from our audited consolidated financial statements and notes thereto for the fiscal year ended December 31, 2025, included in Item 8 of our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 12, 2026 and should be read in conjunction with such consolidated financial statements.

The results of operations for the three and six months ended June 30, 2026 and 2025 are not necessarily indicative of the results expected for future periods or for the entire fiscal year ending December 31, 2026.

Significant Accounting Policies

There have been no material changes to our significant accounting policies disclosed in "Note 2: Summary of Significant Accounting Policies", of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2025.

Recent Accounting Pronouncements

In October 2023, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2023-06, Disclosure Improvements—Codification Amendments ("ASU 2023-06") in Response to the SEC's Disclosure Update and Simplification Initiative. We are currently evaluating the impact of ASU 2023-06 on our consolidated financial statements and related disclosures and have not yet determined the effect of adoption, if any.

In December 2025, the FASB issued ASU No. 2025-11, Interim Reporting (Topic 270): Narrow-Scope Improvements("ASU 2025-11"), which clarifies and enhances interim reporting disclosure requirements. ASU 2025-11 will become effective for us in the year ending December 31, 2027. We are currently evaluating the impact of ASU 2025-11 on our consolidated financial statements and related disclosures and have not yet determined the effect of adoption, if any.

In December 2023, the FASB issued ASU No. 2023-09, Improvements To Income Tax Disclosures("ASU 2023-09"), which focuses on the rate reconciliation and income taxes paid. ASU No. 2023-09 requires public business entities to disclose, on an annual basis, specific categories in the effective tax rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold. In addition, ASU No. 2023-09 requires companies to disclose further information about income taxes paid. The standard is effective for annual periods beginning after December 15, 2024, and may be applied prospectively or retrospectively. We adopted the ASU prospectively for the period ended December 31, 2025, adoption of the ASU has affected only our disclosures and does not impact our results of operations or financial condition.

In November 2024, the FASB issued ASU No. 2024-03, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures ("ASU 2024-03"), requiring disclosures of certain additional expense information on an annual and interim basis, including, among other items, the amounts of purchases of inventory, employee compensation, depreciation and intangible asset amortization included within each income statement expense caption, as applicable. ASU 2024-03 will become effective for us in the year ending December 31, 2027. We are evaluating the impact that the adoption of ASU 2024-03 will have on our financial position, results of operations and cash flows.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and judgments that affect amounts reported in the financial statements and accompanying notes. As of June 30, 2026, our significant estimates and judgments include those related to revenue recognition, useful lives and recoverability of equipment and other long-lived assets, valuation of share-based payments, income taxes, litigation and other contingencies. As of June 30, 2025, we also considered valuation of excess and obsolete inventory and valuation of goodwill to require significant estimates and judgments. The actual results experienced could differ materially from our estimates.

Discontinued Operations

On December 20, 2025, our board of directors adopted resolutions by unanimous written consent directing the Company’s management to take all necessary steps to complete the sale of PWSH, at which time all of the held-for-sale criteria of the businesses operated by PWSH (the Mobile and the Home & Enterprise businesses) were met. The results of operations of the PWSH businesses have been presented as discontinued operations, as the Sale represents a strategic shift that has had a major effect on our operations and financial results. Throughout this report, the condensed consolidated statement of operations for all periods presented has been adjusted to reflect the presentation of the PWSH businesses as discontinued operations, which we discuss further in "Note 2: Discontinued Operations". The Notes below relate only to our continuing operations unless otherwise noted.

NOTE 2: DISCONTINUED OPERATIONS

On January 6, 2026, the Company completed the sale of all of the shares of common stock of PWSH. The assets and liabilities of PWSH met the accounting criteria to be classified as held for sale and were aggregated and reported on separate lines of the Condensed Consolidated Balance Sheet as of December 31, 2025. Additionally, PWSH has been reported as a discontinued operation in the Condensed Consolidated Statements of Operations for all periods presented. During the three months ended March 31, 2026, the Sale resulted in net cash proceeds of $51,261 and an after-tax gain on the Sale of $85,153. The operating results and cash flows of PWSH were immaterial for the period from January 1, 2026 through the closing date of January 6, 2026.

The financial results of PWSH are presented as income (loss) from discontinued operations, net of income taxes on our condensed consolidated statement of operations for the three and six months ended June 30, 2025. The following table presents financial results of PWSH:

The following table summarizes the carrying amounts of the major classes of assets and related liabilities classified as held for sale in discontinued operations:

The following table presents significant non-cash items and capital expenditures of discontinued operations for the periods presented:

Goodwill

Goodwill resulted from the acquisition of ViXS Systems, Inc. in 2017, whereby we recorded goodwill of $18,407 that was classified as an asset held for sale as of December 31, 2025. Following the Sale on January 6, 2026, goodwill is no longer classified as an asset of Pixelworks Inc.

NOTE 3: BALANCE SHEET COMPONENTS

Property and Equipment, Net

Property and equipment, net consists of the following:

Accrued Liabilities and Current Portion of Long-Term Liabilities

Accrued liabilities and current portion of long-term liabilities consist of the following:

Shareholders’ Equity

Our board of directors approved a share repurchase program on March 30, 2026, under which our Chief Executive Officer and Chief Financial Officer, or either of them, are authorized to direct the purchase of up to $5,000 of our common stock over atwo-year period beginning May 15, 2026. The repurchased shares are recorded as part of treasury stock and are accounted for under the cost method. We repurchased 464 shares for $3,192 in the second quarter of 2026.

NOTE 4: 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: Valuations based on quoted prices in active markets for identical assets and liabilities.

Level 2: Valuations based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3: Valuations based on unobservable inputs in which there is little or no market data available, which require the reporting entity to develop its own assumptions.

The following table presents information about our assets measured at fair value on a recurring basis in the condensed consolidated balance sheets as of June 30, 2026 and December 31, 2025:

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

NOTE 5: RESTRUCTURING

In the first quarter of 2026, we executed a restructuring plan to eliminate several positions that were no longer necessary after the Sale (the "2026 Plan"). The 2026 Plan included an approximately 43% reduction in workforce associated with our continuing operations, in the areas of operations, research and development, sales, marketing and administration.

Total restructuring expense included in our condensed consolidated statements of operations for the three and six month periods ended June 30, 2026 and 2025 is comprised of the following:

The following is a roll forward of the accrued liabilities related to restructuring for the six month period ended June 30, 2026:

NOTE 6: LEASES

We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, accrued liabilities and current portion of long-term liabilities, and operating lease liabilities in our condensed consolidated balance sheets.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. 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 primarily for office buildings. Our leases have remaining lease terms ofone year totwo years. Supplemental information related to lease expense and valuation of the ROU assets and lease liabilities was as follows:

Future minimum lease payments under non-cancellable leases as of June 30, 2026 were as follows:

As of June 30, 2026, we hadno operating lease liabilities that had not commenced.

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:

Services- We enter into contracts for professional services to use our technology to produce TrueCut Motion versions of cinematic titles. We identify each performance obligation at contract inception. The professional services contract generally includes project deliverables specified by the customer and the performance obligations are generally combined into one deliverable, with the pricing for services stated at a fixed amount. Services provided under these agreements generally result in the transfer of control over time; therefore, we recognize revenue based on the proportion of labor hours expended to the total hours expected to complete the contract performance obligation.

License Revenue - We enter into license agreements related to the distribution and display of TrueCut Motion content, and on occasion related to the use of our TrueCut Motion software by a customer or a third party. Fees under these agreements generally include license fees or royalty fees relating to our IP and support service fees. 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.

The majority of revenue in 2025 and 2026 related to the category of services.

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

Contract Balances

Our contract balances include accounts receivable and deferred revenue.

Payment terms and conditions for goods and services provided vary by contract; however, payment is generally required within 30 to 60 days of invoicing.

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 Company has elected the practical expedient of not accounting for significant financing components if the period between revenue recognition and when the customer pays for the product or service is one year or less. The aggregate amount of the transaction price allocated to unsatisfied performance obligations with an original expected duration of greater than one year iszero.

Contract assets and contract liabilities recorded on the condensed consolidated balance sheets related to continuing operations were immaterial as of June 30, 2026 and December 31, 2025.

NOTE 8: INCOME TAXES

The provision for income taxes during the 2026 and 2025 periods is primarily comprised of current and deferred tax expense in profitable cost-plus foreign jurisdictions, accruals for tax contingencies in foreign jurisdictions and benefits for the reversal of previously recorded foreign tax contingencies due to the expiration of the applicable statutes of limitation. We recorded a benefit for the reversal of previously recorded foreign tax contingencies of $87 and $261 during the first six months of 2026 and 2025, respectively.

As we do not believe that it is more likely than not that we will realize a benefit from our U.S. net deferred tax assets, including net operating losses, we continue to provide a full valuation allowance against essentially all of those assets, therefore, we do not incur significant domestic deferred income tax expense or benefit. In connection with the anticipated closure of our Taiwan subsidiary, we have recorded a valuation allowance against our Taiwan net deferred tax assets as of June 30, 2026. We have not recorded a valuation allowance against our other net deferred tax assets, as we believe that it is more likely than not that we will realize a benefit from those assets.

As of June 30, 2026 and December 31, 2025, the amount of our uncertain tax positions was a liability of $19 and $106, respectively, as well as a contra deferred tax asset of $1,361 and $1,320, respectively. A number of years may elapse before an uncertain tax position is resolved by settlement or statute of limitation. Settlement of any particular positions 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 our unrecognized tax benefits and associated interest and penalties of approximately $19 within the next 12 months due to the expiration of statutes of limitations in foreign jurisdictions. We recognize interest and penalties related to the uncertain tax positions in income tax expense in our consolidated statements of operations.

NOTE 9: INCOME (LOSS) PER SHARE

The following table sets forth the computation of basic and diluted net income (loss) per share:

Basic and diluted earnings (loss) per share was computed by dividing the net loss by the weighted-average number of common shares outstanding for the period. For the three and six months ended June 30, 2025, the numerator adjustments include an allocation of PWSH income to the non-controlling interests, the redeemable non-controlling interests and the employee owned entities. The equity interest associated with the employee-owned entities are considered participating securities at PWSH and will be allocated income, however, they are not required to fund losses, and therefore, no allocations of losses will be made to the employee owned entities in periods of loss at PWSH. All minority interests were derecognized in the Sale completed on January 6, 2026 and therefore no allocation of income has been made to non-controlling interests, redeemable non-controlling interests or employee owned entities for the three or six months ended June 30, 2026. 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 income (loss) per share as their effect would have been anti-dilutive:

NOTE 10: SEGMENT INFORMATION

Following the Sale, we continue to operate inone segment consisting of licensing and services for content creation, remastering and video streaming, and display of cinematic video. We generate our revenue primarily from services provided for remastering content and from licensing. The chief operating decision maker, or CODM, is our CEO. The CODM assesses performance for the operating segment and decides how to allocate resources based on net income (loss) that is also reported on the Consolidated Statement of Operations.

The CODM regularly reviews the Consolidated Statements of Operations and a disaggregation of operating expenses, of which the significant expenses are related to employee base compensation. Employee base compensation included in operating expenses associated with continuing operations was $2,080 and $2,362 for the six months ended June 30, 2026 and June 30, 2025, respectively. Other segment items include restructuring, outside services, depreciation and amortization, accounting and legal fees, and other expenses. Other segment items included in operating expenses associated with continuing operations was $6,486 and $3,346 for the six months ended June 30, 2026 and June 30, 2025, respectively. The CODM does not regularly review segment assets to make decisions regarding the allocation of resources, and as such the Company has not included assets.

Geographic Information

Revenue attributable to continuing operations all originated in the geographic region of Australia. Substantially all of the Company’s long‑lived assets are located in the United States.

Significant Customers

We had one customer that represented 10% or more of revenue in the three and six months ended June 30, 2026 and one customer that represented 10% or more of revenue in the three and six months ended June 30, 2025.

NOTE 11: RISKS AND UNCERTAINTIES

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.

NOTE 12: COMMITMENTS AND CONTINGENCIES

Indemnifications

Certain of our agreements include 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 June 30, 2026, we have not incurred any material liabilities arising from these indemnification obligations. In the future, however, such obligations could materially impact our results of operations.

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 13: REDEEMABLE NON-CONTROLLING INTEREST AND EQUITY INTEREST OF PWSH SOLD TO EMPLOYEES

Redeemable Non-Controlling Interest ("RNCI")

On August 9, 2021, Pixelworks and 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 “2021 ESOP” and together with the Investors, the “Capital Contributors”). Pursuant to the capital increase agreement, the Investors invested approximately $30,844 in exchange for a redeemable non-controlling equity interest of 10.45% of PWSH and the 2021 ESOP invested approximately $12,329 in exchange for a redeemable non-controlling equity interest representing 5.95% of PWSH (the “2021 ESOP Interests”).

Each Investor had the right to require PWSH to redeem its entire equity interest at the original purchase price plus 3% annual interest if PWSH did not consummate an initial public offering on the STAR Market (the "Listing") on or before June 30, 2024. Pursuant to this provision and as the RNCI was redeemable upon an event outside of the Company’s control based solely on passage of time, the RNCI is classified as temporary equity in the consolidated balance sheets. The RNCI was initially recorded at fair value, net of issuance costs, and subsequently remeasured to its redemption value. The Company elected to accrete changes in the redemption value from the issuance date through the earliest redemption date of June 30, 2024 using the interest method. In addition, as the RNCI is denominated in RMB, it is revalued to USD at each reporting period with changes in the carrying value attributable to foreign currency recorded in accumulated other comprehensive income in the consolidated balance sheets.

On March 24, 2022, Pixelworks and PWSH entered into a supplemental agreement to the capital increase agreement with the Capital Contributors, which removed the 3% annual interest previously provided in connection with the redemption option. In addition, the parties entered into a side letter, pursuant to which, in the event of a change in control of Pixelworks or PWSH, Pixelworks would ensure that the definitive agreement includes a post-closing repurchase covenant that requires the successor entity to repurchase, upon the request of a Capital Contributor, all of PWSH equity held by such Capital Contributor at the original purchase price plus a 20% premium. Following the execution of the supplemental agreement, the RNCI continued to be classified as temporary equity; however, it was no longer subject to accretion as the interest is removed. Until the Sale on January 6, 2026, the Company continued to measure the RNCI at an amount at least equal to its redemption value, which equaled its original purchase price, and to allocate profits to the RNCI based on its ownership in PWSH.

The change in RNCI for the six months ended June 30, 2026 are presented in the following table:

Equity Interest of PWSH Sold to Employees

On December 21, 2022, Pixelworks and PWSH entered into another capital increase agreement with an entity owned by certain of the employees of PWSH (the “2022 ESOP,” and together with the 2021 ESOP, the “ESOP”). The 2022 ESOP invested approximately $1,407 in exchange for a redeemable non-controlling equity interest representing 0.54%, of PWSH (the “2022 ESOP Interests,” and together with the 2021 ESOP Interests, the “ESOP Interests”).

Each holder of ESOP Interests had the right to require PWSH to redeem its entire equity interest at the original purchase price plus 5% annual interest if PWSH did not consummate a Listing on or before December 31, 2024. The Supplemental Agreement did not remove or amend this provision. In addition, the December 2022 capital increase agreement provided that, in the event of a change in control of PWSH prior to the filing of its application for the Listing, each capital contributor would be entitled to a minimum return of 10% on its original purchase price, payable by Pixelworks in cash from the proceeds of such change in control following its closing.

Because the ESOP Interests are owned by employees of PWSH and its subsidiaries and employees are required to render service until either the Listing or repurchase date, the ESOP Interests are classified as a long-term deposit liability under ASC 718. The Company accretes the long-term deposit liability to its redemption value and records the periodic interests as compensation expense. As the ESOP Interests are denominated in RMB and considered a monetary liability under ASC 255, they are revalued to USD at each reporting period with changes in the carrying value attributable to foreign currency recorded as foreign currency gain or loss in consolidated statements of operations.

Support Agreement and Modification

In connection with the Sale, Pixelworks, PWSH and the Minority Shareholders, including the Investors, ESOP, and NCI holder (see "Note 14: Non-Controlling Interest"), entered into the Support Agreement on October 14, 2025. Pursuant to the Support Agreement and contingent upon the closing of the Sale, Pixelworks agreed to transfer to the Minority Shareholders shares of PWSH capital stock representing a total of approximately 29% of the total outstanding shares of PWSH immediately prior to the Sale. In exchange, the Minority Shareholders agreed to release Pixelworks from all existing rights, including the rights to receive a minimum 10% or 20% return in connection with a change of control of Pixelworks or PWSH, as described above. The contingent share transfer and right release is considered a modification to the redeemable non-controlling equity interest and NCI (see "Note 14: Non-Controlling Interest"), which reflects a negotiated settlement between Pixelworks and the Minority Shareholders in connection with the Sale. The additional shares to be transferred were intended to provide adequate compensation to the Minority Shareholders for the forfeiture of their existing contractual rights. Accordingly, the modification did not result in a material change to the fair value of RNCI or NCI (see "Note 14: Non-Controlling Interest"). See "Note 1 Basis of Presentation” and "Note 2: Discontinued Operations” for the details of the Sale. Upon the completion of the Sale, the RNCI, ESOP Interests and NCI (see "Note 14: Non-Controlling Interest") were derecognized as a result of the deconsolidation of PWSH.

NOTE 14: NON-CONTROLLING INTEREST

On August 15, 2022, Pixelworks and PWSH entered into an equity transfer agreement with certain private equity investors based in China. Pursuant to the equity transfer agreement, the Purchasers paid approximately $10,738, net of issuance costs, in exchange for a 2.74% equity interest in PWSH (the “August 2022 NCI”). In addition, as part of the capital increase agreement entered into on December 21, 2022, as described in "Note 13: Redeemable Non-Controlling Interest and Equity Interest of PWSH Sold to Employees," certain private equity investors paid approximately $14,596, net of issuance costs, in exchange for a 2.76%, equity interest in PWSH (the “December 2022 NCI,” and together with the August 2022 NCI, the “NCI”).

The equity transfer agreement provides a right consistent with that set forth in the December 2022 capital increase agreement, as described in "Note 13: Redeemable Non-Controlling Interest and Equity Interest of PWSH Sold to Employees," pursuant to which, in the event of a change in control of PWSH prior to the filing of its application for the Listing, each NCI holder would be entitled to a minimum return of 10% on its original purchase price, payable by Pixelworks in cash from the proceeds of such change in control following its closing.

The Company allocates profits and losses between common shareholders and NCI holders based on their relative ownership interests. In addition, as the NCI is denominated in RMB, it is revalued to USD at each reporting period with changes in the carrying value attributable to foreign currency recorded in accumulated other comprehensive income in the consolidated balance sheets.

See "Note 13: Redeemable Non-Controlling Interest and Equity Interest of PWSH Sold to Employees" for a discussion of the Support Agreement entered into among Pixelworks, PWSH and the Minority Shareholders in connection with the Sale. Upon the completion of the Sale, the RNCI, ESOP Interests and NCI were derecognized as a result of the deconsolidation of PWSH.

The change in NCI for the six months ended June 30, 2026 is presented in the following table: