ACQUISITION

On August 2, 2017, we acquired 100% of the outstanding shares of ViXS Systems, Inc. (“ViXS”), a Canadian corporation (the "Acquisition"). We issued 0.04836 of a share of our common stock in exchange for each share of ViXS common stock outstanding and for certain ViXS restricted stock units which were vested simultaneously with closing.

ViXS designs and develops advanced video processing semiconductor solutions. The acquisition of ViXS added families of video processor components for consumer applications and cloud, video delivery and infrastructure markets, along with a companion family of networking components to our solutions. These factors contributed to establishing the purchase price and supported the premium paid over the fair value of the tangible and intangible assets acquired.

The aggregate purchase price for ViXS was $16,975 and consisted of $16,316 related to the issuance of 3,586,021 shares of our common stock plus $659 related to: (i) the issuance of 202,043 unvested restricted stock units, in exchange for ViXS’ unvested restricted stock units, plus (ii) the issuance of 122,242 shares to a holder of ViXS restricted stock units which were vested simultaneously with closing. The purchase price calculations were based on the closing price of our common stock on the day the transaction closed.

The ViXS chief executive officer (the "CEO") was terminated in connection with the closing of the transaction. As a result, we recognized expense of $1,115, which consisted of $800 related to a severance agreement, payable over 24 months, and $315 related to accelerated vesting of the CEO’s ViXS restricted stock units which were exchanged for Pixelworks common stock at closing. Such amount is included within selling, general and administrative within our consolidated statement of operations for the year ended December 31, 2017.

The purchase price was preliminarily allocated to the assets and liabilities based on fair values as follows:



Purchase price			$	16,975
Less net liabilities assumed:
Assets acquired:
Cash and cash equivalents	1,901
Accounts receivable	968
Inventories	3,175
Property and equipment	964
Other assets	1,562
Identifiable intangible assets	6,730
Liabilities assumed:
Accounts payable	(1,736	)
Accrued liabilities and other current liabilities	(2,832	)
Revolving bank loan	(4,046	)
Convertible debt	(6,485	)
Other noncurrent liabilities	(1,633	)	(1,432		)
Goodwill			$	18,407

The allocation of purchase price consideration to assets and liabilities is not yet finalized. The preliminary allocation of the purchase price was based upon preliminary estimates and assumptions that are subject to change within the measurement period (up to one year from the acquisition date). Below are the significant valuations that were performed associated with the acquisition which were based upon preliminary estimates:


•	We performed a valuation of the convertible debt. We assigned value of $4,762 to convertible debt, consisting of the contractual amount of $6,068 offset by a debt discount of $1,306, and $1,723 related to the embedded conversion feature. No other features of the debt were assigned value at the acquisition date.


•	We performed a valuation of acquired intangible assets. We have preliminarily assigned $5,050 of the purchase price to acquired developed technology with estimated lives of 5 years or less, $1,270 to customer relationships with estimated lives of 3 years or less, and $410 to backlog and trademark with estimated lives of 2 years or less. ViXS had no in-process research and development.


•	We recorded an inventory step-up of $2,191 to record inventory at fair value. We are recognizing this within cost of goods sold as the inventory is sold which we expect to be over a period of approximately 12 months.

During the fourth quarter, after further analysis of estimates and assumptions associated with the acquired ViXS inventory, we reduced the value of acquired inventory by $386 with a corresponding increase to goodwill.

We preliminarily recorded gross deferred tax assets of $62,992, subject to a valuation allowance of $62,972 to recognize book basis and tax basis differences of various balance sheet assets and liabilities and corporate tax attributes acquired.

The goodwill resulting from this transaction is not deductible for tax purposes.

The results of ViXS’ operations are included in our consolidated statement of operations beginning on the date of acquisition. ViXS revenue of $4,489 and net loss of $(6,729), which included $1,920 in restructuring charges, (see Note 7: "Restructurings") and $3,633 of non-cash amortization of acquisition and debt related items are included in our consolidated statement of operations for the year ended December 31, 2017.

The following table reflects the unaudited pro forma results of Pixelworks and ViXS as if the merger had taken place as of January 1, 2016:



	Year Ended
	December 31,
	2017			2016
Revenue, net	$	90,764		$	81,909
Net loss	$	(3,733	)	$	(25,234	)
Net loss per share:
Basic	$	(0.11	)	$	(0.79	)
Diluted	$	(0.11	)	$	(0.79	)
Weighted average shares outstanding:
Basic	33,670			31,984
Diluted	33,670			31,984

The unaudited pro forma net loss presented above includes adjustments for amortization of acquired intangible assets and other assets, and stock-based compensation as these items are expected to have a continuing effect on the consolidated results of operations of the combined company. The unaudited pro forma net income (loss) presented above does not reflect amortization of the mark-up of acquired inventory to fair value, or acquisition-related costs of $3,010 for the year ended December 31, 2017, as they are not reflective of the ongoing operations of the combined entities. Net loss reported for the year ended December 31, 2017 includes a $4,785 gain ViXS recognized on the sale of a product line during the period.

The pro-forma information does not necessarily reflect the actual results that would have occurred, nor is it necessarily indicative of future results of operations of the combined companies.