What changed in this filing

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Item 1A. Risk Factors

2021-11-09 compared with 2021-08-11 · 63 added, 18 removed, 530 unchanged (13% of the section changed)

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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 in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, including our consolidated financial statements and related notes, and our other filings made from time to time with the Securities and Exchange Commission ("SEC").

Investors should also refer to the other information contained in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, including our condensed 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

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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 for the first six months of 2021 represented 28% of revenue.

Sales to our top distributor for the first nine months of 2021 represented 28% of revenue.

Sales to our top distributor for the years ended December 31, 2020 and 2019 represented 23% and 28% of revenue, respectively.

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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%, 58% and 77% of revenue for the six months ended June 30, 2021 and the years ended December 31, 2020 and 2019, respectively.

As of June 30, 2021 and December 31, 2020, we had two accounts that each represented 10% or more of accounts receivable.

Additionally, revenue attributable to our top five end customers represented 78%, 58% and 77% of revenue for the nine months ended September 30, 2021 and the years ended December 31, 2020 and 2019, respectively.

As of September 30, 2021 and December 31, 2020, we had two accounts that each represented 10% or more of accounts receivable.

All of the orders included in our backlog are cancelable.

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Sales outside the U.S.

accounted for approximately 95%, 93% and 95% of revenue for the six months ended June 30, 2021 and the years ended December 31, 2020 and 2019, respectively.

accounted for approximately 96%, 93% and 95% of revenue for the nine months ended September 30, 2021 and the years ended December 31, 2020 and 2019, respectively.

We anticipate that sales outside the U.S.

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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.

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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.

From time to time, shortages of components and materials that are critical to the manufacture of our products and our customers’ products may occur.

Such critical components and materials include semiconductor wafers and packages, double data rate memory die, display components, analog-to-digital converters, digital receivers, video decoders and voltage regulators.

If material shortages occur, we may incur additional costs or be unable to ship our products to our customers in a timely fashion, both of which could harm our business and adversely affect our results of operations.

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.

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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 June 30, 2021, we held 335 patents and had 9 patent applications pending for protection of our significant technologies.

As of September 30, 2021, we held 334 patents and had 9 patent applications pending for protection of our significant technologies.

Competitors in both the U.S.

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We have experienced, and may continue to experience, periodic fluctuations in our financial results because of changes in industry-wide conditions.

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 Sci-Tech 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 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 investors, and it may not spend or invest those proceeds in a manner that results in our operating success or with which Pixelworks 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.

Completion of the Listing is currently planned to be completed in 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.

General Risks

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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 June 30, 2021, we sold an aggregate of 1,747,466 shares of our common stock under this at the market offering.

Through September 30, 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 will have a dilutive impact on our existing stockholders.

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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.

As of June 30, 2021, we were in compliance with these listing requirements.

As of September 30, 2021, we were in compliance with these listing requirements.

However, as recently as June 30, 2017, our total asset value was less than $50.0 million.

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(incorporated by reference to Exhibit 3.3 to the Company's Annual Report on Form 10-K filed on March 10, 2010).

10.02* Form of Capital Increase Agreement

10.02a Schedule identifying agreements substantially identical to the form of Agreement filed as Exhibit 10.02 hereto

10.1 Form of Performance-Based Restricted Stock Unit Agreement (incorporated by reference to the Current Report on Form 8-K filed on April 13, 2021).

10.1* 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).

10.02a Schedule identifying agreements substantially identical to the form of Agreement filed as Exhibit 10.02 hereto (incorporated by reference to Exhibit 10.02 to the Company’s Quarterly Report on Form 10-Q filed on August 11, 2021).

31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.

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__________________

* 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 under the Securities Act of 1933, as amended (the “Securities Act”) or 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 or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language contained in such filing, except to the extent specifically stated in such filing.

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PIXELWORKS, INC.

August 11, 2021 /s/ Elias N.

November 9, 2021 /s/ Elias N.

Vice President and Chief Financial Officer,

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1A. Risk Factors