Exhibit 99.2
PIXELWORKS, INC. AND VIXS SYSTEMS INC.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
On May 18, 2017, Pixelworks, Inc. (“Pixelworks”) and ViXS Systems Inc. (“ViXS”) announced that they had entered into an Arrangement Agreement (the “Agreement”) for Pixelworks to acquire ViXS in exchange for Pixelworks stock (the “Acquisition”). The following unaudited pro forma condensed combined financial statements (the “Pro Forma Statements”) are based on the respective historical consolidated financial statements and the accompanying notes of Pixelworks and ViXS. The unaudited condensed combined statements of operations for the year ended December 31, 2016 and the three months ended March 31, 2017 were prepared to reflect the Acquisition as if it had been completed on January 1, 2016, and the condensed combined balance sheet was prepared to reflect the Acquisition as if it had been completed on March 31, 2017.
The Pro Forma Statements, although helpful in illustrating the financial characteristics of the Combined Company under one set of assumptions, do not reflect the benefits of any expected cost savings (or associated costs to achieve such savings), opportunities to earn additional revenue, or other factors that may result from the Acquisition and, accordingly, do not attempt to predict or suggest future results. The Pro Forma Statements also exclude the effects of costs associated with any restructuring or integration activities or asset dispositions resulting from the Acquisition, as they are not currently known, and to the extent they occur, are expected to be non-recurring and will not have been incurred at the closing date of the Acquisition. However, such costs could affect the Combined Company following the Acquisition in the period the costs are incurred or recorded. As a result, the pro forma financial information is not necessarily indicative of what the Combined Company’s financial condition or results of operations would have been had the Acquisition been completed on the applicable dates of this pro forma financial information. In addition, the pro forma financial information does not purport to project the future financial condition of the Combined Company.
The pro forma adjustments are described in the accompanying notes. Pro forma adjustments are those that are directly attributable to the transaction, are factually supported and, with respect to the unaudited pro forma condensed combined statements of operations, are expected to have a continuing effect on the consolidated results of operations of the Combined Company. The pro forma adjustments are based on the preliminary purchase price allocation and management’s estimates. Differences between the preliminary and final allocation could have a material effect on the Pro Forma Statements. The actual amounts recorded as of the completion of the Acquisition may differ materially from the information presented in these Pro Forma Statements as a result of several factors, including changes in net assets that may have occurred prior to completion of the Acquisition. Actual allocations will be based on final valuations, appraisals and other analyses of the fair value of the acquired assets and liabilities. The allocation will be finalized after the data necessary to complete the valuations, appraisals and other analyses are obtained and evaluated.
The Pro Forma Statements should be read in conjunction with:
• | The accompanying notes to the unaudited pro forma condensed combined financial statements; |
• | Pixelworks’ audited consolidated financial statements and related notes, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operation, contained in Pixelworks’ Annual Report on Form 10-K as of and for the year ended December 31, 2016; |
• | Pixelworks’ unaudited condensed consolidated financial statements and related notes, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operation, contained in Pixelworks’ Quarterly Report on Form 10-Q as of and for the three months ended March 31, 2017; |
• | ViXS’ audited consolidated financial statements and related notes, as well as Management’s Discussion and Analysis, as at and for the fiscal year ended January 31, 2017; and |
• | ViXS’ unaudited consolidated financial statements and related notes, as well as Management’s Discussion and Analysis, as at and for the three months ended April 30, 2017. |
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
(In thousands and in U.S. dollars)
Pixelworks March 31, 2017 | ViXS April 30, 2017 (Adjusted) Note 4 | Pro Forma Adjustments Note 5 | Pro Forma Combined | ||||||||||
ASSETS | |||||||||||||
Current assets: | |||||||||||||
Cash and cash equivalents | $ | 19,640 | $ | 6,636 | — | $ | 26,276 | ||||||
Accounts receivable, net | 9,608 | 2,600 | — | 12,208 | |||||||||
Inventories | 2,478 | 1,576 | 3,023 | (a) | 7,077 | ||||||||
Prepaid expenses and other current assets | 5,258 | 787 | — | 6,045 | |||||||||
Total current assets | 36,984 | 11,599 | 3,023 | 51,606 | |||||||||
Property and equipment, net | 5,528 | 4,220 | (1,521 | ) | (b) | 8,227 | |||||||
Other assets, net | 760 | — | — | 760 | |||||||||
Goodwill | — | — | 11,613 | (c) | 11,613 | ||||||||
Intangible assets, net | — | — | 7,160 | (c) | 7,160 | ||||||||
Total assets | $ | 43,272 | $ | 15,819 | $ | 20,275 | $ | 79,366 | |||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||||
Current liabilities: | |||||||||||||
Accounts payable | $ | 1,225 | $ | 3,384 | — | $ | 4,609 | ||||||
Accrued liabilities and current portion of long-term liabilities | 14,187 | 1,502 | 2,016 | (d) | 17,705 | ||||||||
Current portion of income taxes payable | 460 | — | — | 460 | |||||||||
Short-term line of credit | — | 5,647 | — | 5,647 | |||||||||
Total current liabilities | 15,872 | 10,533 | 2,016 | 28,421 | |||||||||
Convertible debt | — | 5,649 | 452 | (e) | 6,101 | ||||||||
Long-term liabilities, net of current portion | 1,240 | 1,984 | (55 | ) | (f) | 3,169 | |||||||
Income taxes payable, net of current portion | 1,844 | — | — | 1,844 | |||||||||
Total liabilities | 18,956 | 18,166 | 2,413 | 39,535 | |||||||||
Shareholders’ equity | 24,316 | (2,347 | ) | 17,862 | (g) | 39,831 | |||||||
Total liabilities and shareholders’ equity | $ | 43,272 | $ | 15,819 | $ | 20,275 | $ | 79,366 |
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(In thousands, except per share data, and in U.S. dollars)
Pixelworks Three Months Ended March 31, 2017 | ViXS Three Months Ended April 30, 2017 (Adjusted) Note 4 | Pro Forma Adjustments Note 5 | Pro Forma Combined | ||||||||||
Revenue, net | $ | 22,710 | $ | 4,714 | — | $ | 27,424 | ||||||
Cost of revenue (1) | 10,318 | 2,751 | 204 | (a) | 13,273 | ||||||||
Gross profit | 12,392 | 1,963 | (204 | ) | 14,151 | ||||||||
Operating expenses: | |||||||||||||
Research and development (2) | 4,906 | 2,041 | (32 | ) | (a) | 6,915 | |||||||
Selling, general and administrative (3) | 4,139 | 2,307 | (209 | ) | (a) | 6,237 | |||||||
Total operating expenses | 9,045 | 4,348 | (241 | ) | 13,152 | ||||||||
Income (loss) from operations | 3,347 | (2,385 | ) | 37 | 999 | ||||||||
Other income (expense): | |||||||||||||
Sale of product line | — | 4,786 | — | 4,786 | |||||||||
Interest expense and other, net | (93 | ) | (131 | ) | — | (224 | ) | ||||||
Total other income (expense) | (93 | ) | 4,655 | — | 4,562 | ||||||||
Income before income taxes | 3,254 | 2,270 | 37 | 5,561 | |||||||||
Provision for income taxes | 433 | 10 | — | 443 | |||||||||
Net income | $ | 2,821 | $ | 2,260 | $ | 37 | $ | 5,118 | |||||
Net income per share: | |||||||||||||
Basic | $ | 0.10 | $ | 0.03 | $ | 0.16 | |||||||
Diluted | $ | 0.09 | $ | 0.03 | $ | 0.15 | |||||||
Weighted average shares outstanding: | |||||||||||||
Basic | 29,283 | 73,322 | 3,708 | (b) | 32,991 | ||||||||
Diluted | 31,146 | 73,322 | 3,708 | (b) | 34,854 | ||||||||
—————— | |||||||||||||
(1) Includes stock-based compensation | $ | 53 | — | — | $ | 53 | |||||||
(2) Includes stock-based compensation | 314 | 92 | (32 | ) | 374 | ||||||||
(3) Includes stock-based compensation | 422 | 154 | (119 | ) | 457 |
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(In thousands, except per share data, and in U.S. dollars)
Pixelworks Year Ended December 31, 2016 | ViXS Year Ended January 31, 2017 (Adjusted) Note 4 | Pro Forma Adjustments Note 5 | Pro Forma Combined | |||||||||
Revenue, net | $ | 53,390 | $ | 28,519 | — | $ | 81,909 | |||||
Cost of revenue (1) | 28,322 | 18,747 | 930 | (a) | 47,999 | |||||||
Gross profit | 25,068 | 9,772 | (930 | ) | 33,910 | |||||||
Operating expenses: | ||||||||||||
Research and development (2) | 19,036 | 14,374 | (113 | ) | (a) | 33,297 | ||||||
Selling, general and administrative (3) | 13,770 | 8,265 | (146 | ) | (a) | 21,889 | ||||||
Restructuring | 2,608 | — | — | 2,608 | ||||||||
Total operating expenses | 35,414 | 22,639 | (259 | ) | 57,794 | |||||||
Loss from operations | (10,346 | ) | (12,867 | ) | (671 | ) | (23,884 | ) | ||||
Interest expense and other, net | (406 | ) | (518 | ) | — | (924 | ) | |||||
Loss before income taxes | (10,752 | ) | (13,385 | ) | (671 | ) | (24,808 | ) | ||||
Provision for income taxes | 355 | 102 | — | 457 | ||||||||
Net loss | (11,107 | ) | (13,487 | ) | (671 | ) | (25,265 | ) | ||||
Net loss per share: | ||||||||||||
Basic | $ | (0.39 | ) | $ | (0.22 | ) | $ | (0.79 | ) | |||
Diluted | $ | (0.39 | ) | $ | (0.22 | ) | $ | (0.79 | ) | |||
Weighted average shares outstanding: | ||||||||||||
Basic | 28,276 | 62,285 | 3,708 | (b) | 31,984 | |||||||
Diluted | 28,276 | 62,285 | 3,708 | (b) | 31,984 | |||||||
—————— | ||||||||||||
(1) Includes: | ||||||||||||
Restructuring | $ | 1,784 | — | — | $ | 1,784 | ||||||
Stock-based compensation | 190 | — | — | 190 | ||||||||
(2) Includes stock-based compensation | 1,600 | 381 | (113 | ) | 1,868 | |||||||
(3) Includes stock-based compensation | 872 | 776 | (621 | ) | 1,027 |
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(In thousands, except share and per share data, and in U.S. dollars)
NOTE 1. BASIS OF PRO FORMA PRESENTATION
Description of Transaction
Pursuant to the Agreement, on August 2, 2017, Pixelworks acquired all of the outstanding common shares of ViXS for an aggregate purchase price of 3,708,263 shares of Pixelworks’ common stock. Additionally, all restricted stock units of ViXS which were unvested and outstanding as of August 2, 2017 were replaced with 202,043 new grants of restricted stock units of Pixelworks common stock.
Fiscal Year Ends
Pixelworks’ fiscal year ends on December 31, and ViXS’ fiscal year ends on January 31. Due to the difference in each entity’s fiscal year end, the pro forma consolidated statements of operations are based on (a) Pixelworks’ audited consolidated statement of operations for the year ended December 31, 2016 and ViXS’ audited consolidated statement of loss and comprehensive loss for the year ended January 31, 2017, and (b) Pixelworks’ unaudited consolidated statement of operations for the three months ended March 31, 2017 and ViXS’ unaudited consolidated statement income and comprehensive income for the three months ended April 30, 2017.
Pro Forma Adjustments and Presentation Adjustments
The Pro Forma Statements were prepared using the acquisition method of accounting in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805 “Business Combinations” (“ASC 805”) with Pixelworks considered the accounting acquirer of ViXS. Under the acquisition method of accounting, the assets and liabilities of ViXS, as of the effective date of the Acquisition, will be recorded by Pixelworks at their respective fair values and the excess of the Acquisition consideration over the fair value of ViXS’ net assets will be allocated to goodwill. The unaudited condensed combined statements of operations for the year ended December 31, 2016 and the three months ended March 31, 2017 were prepared to reflect the Acquisition as if it had been completed on January 1, 2016, and the condensed combined balance sheet was prepared to reflect the Acquisition as if it had been completed on March 31, 2017.
Pro forma adjustments are those that are directly attributable to the Acquisition, are factually supported and, with respect to the unaudited pro forma condensed combined statements of operations, are expected to have a continuing effect on consolidated results of operations of the Combined Company. Pro forma adjustments do not include any cost savings from operating efficiencies, synergies, asset dispositions or other restructurings that could result from the Acquisition. The pro forma adjustments have been developed based on management’s assumptions and estimates, including assumptions and estimates relating to the consideration paid and the allocation thereof to the assets acquired and liabilities assumed from ViXS based on preliminary estimates of fair value. The final purchase price allocation will differ from that reflected in the Pro Forma Statements. The Pro Forma Statements are provided for illustrative purposes only, and do not purport to represent what the actual consolidated results of operations or the consolidated financial position of the Combined Company would have been had the Acquisition occurred on the applicable dates, nor are they necessarily indicative of future consolidated results of operations or financial position.
ViXS’ historical consolidated financial statements were prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board, which differ in certain respects from the accounting principles generally accepted in the United States of America (“U.S. GAAP”). Pixelworks performed a preliminary review of ViXS’ accounting policies, based primarily on publicly available information, to determine whether any adjustments were necessary to ensure comparability in the pro forma unaudited condensed combined financial statements. As a result of this review, adjustments were made to ViXS’ historical financial statements to estimate the conversion from IFRS to U.S. GAAP, and certain presentation adjustments were made to ViXS’ historical financial statements to conform to Pixelworks’ accounting presentation. As more information becomes available, Pixelworks will perform a more detailed review of ViXS’ accounting policies. As a result of that review, differences may be identified between the accounting policies of the two companies that, when conformed, could have a material effect on the unaudited pro forma condensed combined financial statements.
NOTE 2. PRELIMINARY ESTIMATED PURCHASE PRICE
The total preliminary estimated purchase price for the transaction is approximately, $17,531, as follows:
Value of Pixelworks common shares to be issued to ViXS shareholders | (1) | $ | 16,873 | |
Value of Pixelworks restricted stock to be issued to holders of ViXS restricted stock units | (2) | 658 | ||
Total consideration transferred | $ | 17,531 |
(1) Equals 3,708,263 shares issued by Pixelworks multiplied by Pixelworks’ closing share price on August 2, 2017, of $4.55.
(2) In accordance with applicable accounting guidance, the fair value of replacement equity awards attributable to pre-combination service is recorded as part of the consideration transferred in the Acquisition, while the fair value of replacement awards attributable to post-combination service is recorded separately from the Acquisition and recognized as compensation cost over the remaining post-combination service period. The portion of ViXS equity awards attributable to pre-combination and post-combination service is estimated based on the ratio of the service period rendered as of August 2, 2017 to the total service period. The fair value of awards attributed to pre-combination service was recognized as a component of the purchase price. The impact of post-combination compensation costs have been recorded as adjustments to the unaudited pro forma condensed combined statements of operations.
NOTE 3. PRELIMINARY ESTIMATED PURCHASE PRICE ALLOCATION
Under the acquisition method of accounting, the total purchase price is allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of the date of the Acquisition. The pro forma purchase price allocation below has been developed based on preliminary estimates of fair value using the adjusted historical financial statements of ViXS as of April 30, 2017. Pixelworks has not completed the detailed valuation studies necessary to arrive at the required fair values of ViXS’ assets and liabilities. Therefore, the following allocation of the purchase price to acquired intangible assets is based on preliminary fair value estimates and subject to final management analysis, with the assistance of third party valuation advisors. The estimated intangible asset values and their useful lives could be affected by a variety of factors that may become known to Pixelworks only upon access to additional information and/or changes in these factors that may occur prior to the effective time of the Acquisition.
The preliminary estimated intangible assets consist of developed technology, customer relationships, and trade name. The estimated useful lives range between one and five years and are detailed in the schedule below. The estimated fair values of the intangibles were based primarily on current estimates of ViXS’ expected future cash flows and may change as estimates and assumptions are refined. Additional intangible asset classes may be identified as the valuation process continues. A 10% change in the amount allocated to identifiable intangible assets would increase or decrease annual amortization expense by approximately $179.
The excess of the purchase price over the tangible and identifiable intangible assets acquired and liabilities assumed has been allocated to goodwill. The actual amounts recorded when the final valuation is complete may differ materially from the pro forma amounts presented below:
Total preliminary purchase price | $ | 17,531 | ||||
Estimated fair value of net tangible assets acquired and liabilities assumed: | ||||||
Cash and cash equivalents | $ | 6,636 | ||||
Accounts receivable | 2,600 | |||||
Inventories | 4,599 | |||||
Prepaid expenses and other current assets | 787 | |||||
Property and equipment | 2,699 | |||||
Accounts payable, accrued liabilities and other current liabilities | (4,886 | ) | ||||
Revolving bank loan payable | (5,647 | ) | ||||
Convertible debentures | (6,101 | ) | ||||
Other long-term liabilities | (1,929 | ) | ||||
(1,242 | ) | |||||
Estimated fair value of identifiable intangible assets acquired: | ||||||
Developed technology | 5,600 | |||||
Customer relationships | 1,370 | |||||
Trade name | 190 | |||||
7,160 | ||||||
Estimated goodwill | $ | 11,613 |
Tangible assets acquired and liabilities assumed
The fair value of tangible assets acquired (with the exception of inventory and production assets) and liabilities assumed are based on the adjusted historical balance sheet of ViXS as of April 30, 2017, and approximate fair value. The inventory balance incorporates an estimated step-up based on a preliminary valuation performed as of April 30, 2017. This step-up is subject to further review by management. The final allocation of the purchase price may also include an adjustment to bring ViXS historical property and equipment balance to fair value.
Identifiable intangible assets
The preliminary fair value of the acquired developed technology was determined based on an income approach using the multi-period excess earnings method. The preliminary value of the acquired customer relationships was determined based on a cost approach. The preliminary fair value of the acquired trade name was determined based on an income approach using the relief from royalty method. These estimates are based on a preliminary valuation and are subject to further review by management. The following table sets forth the components of these intangible assets and their estimated useful lives:
Fair Value | Estimated Useful Life (Years) | |||
Developed technology | $ | 5,600 | 3 - 5 | |
Customer relationships | 1,370 | 3 - 5 | ||
Trade name | 190 | 1.5 |
NOTE 4. ADJUSTMENTS TO VIXS’ FINANCIAL STATEMENTS
The following IFRS to U.S. GAAP and presentation adjustments have been made to ViXS’ Consolidated Statement of Income for the three months ending April 30, 2017 to conform to Pixelworks’ presentation:
ViXS Unadjusted IFRS | Revenue Recognition Note 4a | Other Income and Expense Note 4b | Intangible and Other Assets Note 4c | Fair Value Adjustments Note 4d | ViXS Adjusted U.S. GAAP | |||||||||||||
Revenue, net | $ | 4,812 | $ | (98 | ) | — | — | — | $ | 4,714 | ||||||||
Cost of revenue | 3,286 | (62 | ) | — | (473 | ) | — | 2,751 | ||||||||||
Gross profit | 1,526 | (36 | ) | — | 473 | — | 1,963 | |||||||||||
Operating expenses: | ||||||||||||||||||
Research and development | 2,041 | — | — | — | — | 2,041 | ||||||||||||
Selling, general and administrative | 2,261 | (36 | ) | 82 | — | — | 2,307 | |||||||||||
Total operating expenses | 4,302 | (36 | ) | 82 | — | — | 4,348 | |||||||||||
Loss from operations | (2,776 | ) | — | (82 | ) | 473 | — | (2,385 | ) | |||||||||
Other income (expense): | ||||||||||||||||||
Gain on sale of product line | 4,786 | — | — | — | — | 4,786 | ||||||||||||
Interest expense and other income, net | (792 | ) | — | 82 | (85 | ) | 664 | (131 | ) | |||||||||
Total other income (expense): | 3,994 | — | 82 | (85 | ) | 664 | 4,655 | |||||||||||
Income before income taxes | 1,218 | — | — | 388 | 664 | 2,270 | ||||||||||||
Provision for income taxes | 10 | — | — | — | — | 10 | ||||||||||||
Net income | $ | 1,208 | $ | — | $ | — | $ | 388 | $ | 664 | $ | 2,260 | ||||||
Net income per share: | ||||||||||||||||||
Basic | $ | 0.02 | $ | 0.03 | ||||||||||||||
Diluted | $ | 0.02 | $ | 0.03 | ||||||||||||||
Weighted average shares outstanding: | ||||||||||||||||||
Basic | 73,322 | 73,322 | ||||||||||||||||
Diluted | 73,322 | 73,322 |
The following IFRS to U.S. GAAP and reclassification adjustments have been made to ViXS’ Consolidated Statement of Loss for the year ended January 31, 2017 to conform to Pixelworks’ presentation:
ViXS Unadjusted IFRS | Revenue Recognition Note 4a | Other Income and Expense Note 4b | Intangible and Other Assets Note 4c | Fair Value Adjustments Note 4d | ViXS Adjusted U.S. GAAP | |||||||||||||
Revenue, net | $ | 29,513 | $ | (994 | ) | — | — | — | $ | 28,519 | ||||||||
Cost of revenue | 20,649 | (560 | ) | — | (1,342 | ) | — | 18,747 | ||||||||||
Gross profit | 8,864 | (434 | ) | — | 1,342 | — | 9,772 | |||||||||||
Operating expenses: | ||||||||||||||||||
Research and development | 11,977 | (289 | ) | — | 2,686 | — | 14,374 | |||||||||||
Selling, general and administrative | 8,070 | (145 | ) | 340 | — | — | 8,265 | |||||||||||
Total operating expenses | 20,047 | (434 | ) | 340 | 2,686 | — | 22,639 | |||||||||||
Loss from operations | (11,183 | ) | — | (340 | ) | (1,344 | ) | — | (12,867 | ) | ||||||||
Interest expense and other income, net | 329 | — | 340 | (19 | ) | (1,168 | ) | (518 | ) | |||||||||
Loss before income taxes | (10,854 | ) | — | — | (1,363 | ) | (1,168 | ) | (13,385 | ) | ||||||||
Provision for income taxes | 102 | — | — | — | — | 102 | ||||||||||||
Net loss | $ | (10,956 | ) | $ | — | $ | — | $ | (1,363 | ) | $ | (1,168 | ) | $ | (13,487 | ) | ||
Net loss per share: | ||||||||||||||||||
Basic | $ | (0.17 | ) | $ | (0.22 | ) | ||||||||||||
Diluted | $ | (0.17 | ) | $ | (0.22 | ) | ||||||||||||
Weighted average shares outstanding: | ||||||||||||||||||
Basic | 62,285 | 62,285 | ||||||||||||||||
Diluted | 62,285 | 62,285 |
The following IFRS to U.S. GAAP adjustments and reclassification adjustments have been made to ViXS’ April 30, 2017 Balance Sheet to conform to Pixelworks’ presentation:
ViXS Unadjusted IFRS | Intangible and Other Assets Note 4c | Fair Value Adjustments Note 4d | ViXS Adjusted U.S. GAAP | |||||||||
ASSETS | ||||||||||||
Current assets: | ||||||||||||
Cash and cash equivalents | $ | 6,636 | — | — | $ | 6,636 | ||||||
Restricted cash | 125 | — | — | 125 | ||||||||
Accounts receivable, net | 2,600 | — | — | 2,600 | ||||||||
Other amounts receivable | 486 | — | — | 486 | ||||||||
Inventories | 1,576 | — | — | 1,576 | ||||||||
Prepaid expenses and other current assets | 412 | (236 | ) | — | 176 | |||||||
Total current assets | 11,835 | (236 | ) | — | 11,599 | |||||||
Property and equipment, net | 2,236 | 1,984 | — | 4,220 | ||||||||
Other assets, net | 6,792 | (6,792 | ) | — | — | |||||||
Total assets | $ | 20,863 | $ | (5,044 | ) | $ | — | $ | 15,819 | |||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||
Current liabilities: | ||||||||||||
Accounts payable | $ | 3,384 | — | — | $ | 3,384 | ||||||
Accrued liabilities and current portion of long-term liabilities | — | 842 | — | 842 | ||||||||
Deferred revenue | 348 | — | — | 348 | ||||||||
Current portion of repayable government assistance | 312 | — | — | 312 | ||||||||
Short-term line of credit | 5,647 | — | — | 5,647 | ||||||||
Total current liabilities | 9,691 | 842 | — | 10,533 | ||||||||
Long-term liabilities, net of current portion | ||||||||||||
Convertible debt | 5,475 | — | 174 | 5,649 | ||||||||
Warrant liability | 4 | — | 51 | 55 | ||||||||
Repayable government assistance, net of current portion | 853 | — | — | 853 | ||||||||
Long-term liabilities, net of current portion | 125 | 951 | — | 1,076 | ||||||||
Total liabilities | 16,148 | 1,793 | 225 | 18,166 | ||||||||
Shareholders’ equity | 4,715 | (6,837 | ) | (225 | ) | (2,347 | ) | |||||
Total liabilities and shareholders’ equity | $ | 20,863 | $ | (5,044 | ) | $ | — | $ | 15,819 |
The financial information above illustrates the impact of estimated adjustments to ViXS’ financial statements prepared in accordance with IFRS, in order to present them on a basis consistent with Pixelworks’ accounting presentation and policies under U.S. GAAP. These adjustments reflect Pixelworks’ best estimates based upon the information currently available, and are subject to change once more detailed information is obtained.
4a. Revenue recognition
This adjustment conforms ViXS’ revenue recognition for development agreements and sales through distributors to Pixelworks’ policy and U.S. GAAP.
4b. Other income and expense
This adjustment conforms ViXS’ presentation of foreign currency transaction gains and losses and certain financing and tax expenses to Pixelworks’ policy and U.S. GAAP.
4c. Intangible and other assets
This adjustment conforms ViXS’ accounting for licensed third party intellectual property and licensed software tools to Pixelworks’ policy and U.S. GAAP.
4d. Fair value adjustments
ViXS records fair value adjustments in its statement of operations for certain financial liabilities, including its convertible debt. Pixelworks does not currently believe it will record fair value adjustments on the convertible debt after the initial fair value recorded at closing of the Acquisition. Therefore the fair value adjustment associated with this liability is eliminated above. Final analysis regarding the accounting for this obligation is still pending, and this adjustment is subject to change once the analysis is complete.
NOTE 5. UNAUDITED PRO FORMA ADJUSTMENTS
The following is a description of the unaudited pro forma adjustments reflected in the Pro Forma Statements:
Balance Sheet
a. Inventories
The pro forma adjustment of $3,023 reflects the step-up in value of ViXS’ work-in-process and finished goods inventory to fair value. The increased valuation of the inventory will increase cost of goods sold as the acquired inventory is sold after the closing date of the Acquisition. There is no continuing effect of the acquired inventory adjustment on the combined operating results and, as such, this adjustment is not included in the unaudited pro forma condensed combined statements of operations.
The fair value of work-in-process inventory is equal to the estimated selling price less the sum of (a) costs to complete the manufacturing process, (b) costs of selling effort, and (c) a reasonable profit margin for completion of the manufacturing process and selling effort. The fair value of finished goods inventory is equal to the estimated selling price less the sum of (a) costs of selling effort, and (b) a reasonable profit margin for the selling effort.
b. Property and equipment
The pro forma adjustment of ($1,521) reflects the elimination of production assets on ViXS’ balance sheet that are subsumed into the acquired developed technology intangible asset in the purchase price allocation. The data necessary to book a fair value adjustment to ViXS’ remaining property and equipment is not yet available. The final purchase price allocation may include a fair value adjustment to ViXS’ remaining property and equipment.
c. Goodwill and other intangible assets
See Note 3 for estimated allocation of purchase price to goodwill and other intangible assets. The pro forma purchase price allocation is preliminary as final valuation procedures have not yet been completed, and therefore the final valuation could differ significantly from the current estimate. The pro forma presentation assumes that the historical values of ViXS’ tangible assets (with the exception of inventory and production assets) and liabilities (with the exception of convertible debt) as of April 30, 2017 approximate fair value. Inventory incorporates an estimated fair value step-up based upon a preliminary valuation performed as of April 30, 2017, and convertible debt includes a fair value adjustment as of April 30, 2017. Additionally, the allocation of the purchase price to acquired intangible assets is preliminary and subject to the final outcome of management’s analysis to be conducted with the assistance of valuation advisors. The residual amount of the purchase price has been allocated to goodwill. The actual amount recorded when the valuation is finalized may differ materially from the pro forma presentation herein.
d. Accrued liabilities and current portion of long-term liabilities
The pro forma accrued liabilities include an adjustment of $2,016 reflecting the estimated unpaid non-recurring merger-related costs (that are not reflected in the historical financial statements of either Pixelworks or ViXS) such as legal fees, fairness opinion fees, accounting fees, valuation fees and other expenses associated with the Acquisition, which Pixelworks and ViXS expect to incur. While presented in the unaudited pro forma condensed combined balance sheet, these costs have been excluded from the unaudited pro forma condensed combined statements of operations as there is no continuing effect of such costs.
e. Convertible debt
The pro forma adjustment of $452 adjusts the convertible debt to fair value as of April 30, 2017.
f. Long-term liabilities, net of current portion
All warrants outstanding to purchase ViXS common shares were are out-of-the-money and cancelled at the close of the Acquisition. The pro forma adjustment of ($55) removes the warrant liability from ViXS’ balance sheet.
g. Shareholders’ equity
The historical shareholders’ equity of ViXS was eliminated at closing of the Acquisition. Pixelworks issued approximately $16,873 of common stock as part of the purchase consideration, and estimates the value of replacement restricted stock units to be $658. Refer to Note 2 for a discussion of the determination of the estimated preliminary purchase price which includes how the common stock and restricted stock units were valued.
The calculation of the pro forma adjustment to total shareholders’ equity is as follows:
Elimination of pre-Acquisition ViXS adjusted equity balances | $ | 2,347 | |
Impact of Pixelworks shares and restricted stock units to be issued | 17,531 | ||
Estimated transaction costs | (2,016 | ) | |
$ | 17,862 |
Statements of Operations
a. Cost of goods sold, Research and development, and Selling, general and administrative
The pro forma adjustments reflect the elimination of ViXS historical amortization expense, amortization of acquired intangibles, recognition of post combination stock compensation expense, and elimination of Acquisition related transaction costs. Acquisition related transaction costs are eliminated in the Pro Forma Condensed Combined Statements of Operations as they have no continuing impact on the combined results of operations. Detail of these adjustments is as follows:
Three months ended March 31, 2017: | Cost of goods sold | Research and development | Selling, general and administrative | |||||||||
Elimination of ViXS historical amortization expense | $ | (125 | ) | — | — | |||||||
Amortization of acquired intangible assets | 329 | — | 119 | |||||||||
Incremental postcombination stock compensation expense | — | (32 | ) | (119 | ) | |||||||
Elimination of transaction costs | — | — | (209 | ) | ||||||||
Pro forma adjustment | $ | 204 | $ | (32 | ) | $ | (209 | ) | ||||
Year ended December 31, 2016 | Cost of goods sold | Research and development | Selling, general and administrative | |||||||||
Elimination of ViXS historical amortization expense | $ | (384 | ) | — | — | |||||||
Amortization of acquired intangible assets | 1,314 | — | 475 | |||||||||
Incremental postcombination stock compensation expense | — | (113 | ) | (621 | ) | |||||||
Pro forma adjustment | $ | 930 | $ | (113 | ) | $ | (146 | ) |
b. Basic and diluted shares
The pro forma adjustment reflects the number of shares Pixelworks’ issued at the close of the Acquisition.