What changed in this filing

/stocks — the workspaceLOADING

Item 1A. Risk Factors

2021-03-23 compared with 2020-03-12 · 191 added, 186 removed, 488 unchanged (44% of the section changed)

For ease of reference, we have divided these risks and uncertainties into the following general categories:

Risks related to our general business;

Summary Risk Factors;

General Risk Factors;

Risks Related to International Aspects of Our Business;

2 unchanged sentences

Risks Related to Compliance, Environmental Regulations and Other Legal Matters.

Risks Related to Our General Business

Silicon substrates (wafers) are significantly lower in cost compared to substrates made from specialty materials, and new silicon-based technologies could enable silicon-based substrates to replace specialty material based substrates for certain applications.

Summary Risk Factors

● Our NASDAQ stock price is volatile and our stock price could decline.

Unpredictable fluctuations in our operating results, changes and events in our end markets and global trends cause volatility in our stock price.

● COVID-19 or other contagious diseases may affect our business operations and financial performance.

Lack of supply of vaccines and resistance by some to be vaccinated could prolong COVID-19.

● Global economic and political conditions, including trade tariffs and restrictions from China, may have a negative impact on our business and financial results.

● Changes in China’s political, social, regulatory or economic environments may affect our financial performance.

● Our gross margin has fluctuated historically and may decline due to several factors.

Factors such as product mix, unit volume, yields and other manufacturing efficiencies can cause our gross margin to decrease or increase from quarter to quarter.

● The proposed Tongmei IPO on the STAR Market in China could fail to be completed.

This could result in investor disappointment and in failure to secure sufficient capital needed to take advantage of market opportunities for our products.

Our stock price could decline.

● The terms of the private equity raised by Tongmei in China grant each investor a right of redemption if Tongmei fails to achieve the IPO on or before December 31, 2022.

This could result in disgorging the cash that we raised from the investors.

● Defects in our products could diminish demand for our products.

Our ability to receive orders from tier one customers is contingent on producing wafer substrates of very high quality and deploying best practices in manufacturing.

We may not always be able to meet these requirements and we could then lose revenue.

● Difficulties in accurately estimating market demand could result in over-investing in equipment and capacity expansion or losing market share if we do not invest sufficiently.

● Attracting and retaining tier one customers requires that we succeed in our research and development programs.

Customers establish difficult to meet product specifications regarding defect densities, surface flatness diameter size and other specifications pushing the boundaries of material science.

We may not achieve these specifications.

● We are subject to foreign exchange gains and losses that materially impact our income statement.

Because we are a global company we are exposed to changes and swings in foreign exchange, particularly when currencies experience periods of volatility.

General Risk Factors

Silicon substrates (wafers) are significantly lower in cost compared to substrates made from specialty materials, such as those that we produce, and new silicon-based technologies could enable silicon-based substrates to replace specialty material-based substrates for certain applications.

Historically silicon wafers or substrates are less expensive than specialty material substrates, such as those that we produce.

5 unchanged sentences

If SOI or new silicon-based technologies gain more widespread market acceptance, or are used in more applications, our sales of specialty material-based substrates could be reduced and our business and operating results could be significantly and adversely affected.

The recent outbreak of a contagious disease may affect our business operations and financial performance.

Currently, a contagious disease originating in Wuhan, China called the coronavirus or COVID-19, has spread to other cities in China and to many other countries including the United States.

COVID-19 or other contagious diseases may affect our business operations and financial performance.

The spread of COVID-19 has impacted our operations and financial performance.

This outbreak has triggered references to the SARS outbreak, which occurred in 2003 and affected our business operations.

Any severe occurrence of an outbreak of a contagious disease such as the coronavirus, SARS, Avian Flu or Ebola may cause us or the government to temporarily close our manufacturing operations in China.

Any severe occurrence of an outbreak of a contagious disease such as COVID-19, SARS, Avian Flu or Ebola may cause us or the government to temporarily close our manufacturing operations in China.

In January 2020, virtually all companies in China were ordered to remain closed after the traditional Lunar New Year holiday ended, including our subsidiaries in China.

Similarly, if one or more of our key suppliers is required to close for an extended period, we might not have enough raw material inventories to continue manufacturing operations.

In addition, while we possess management skills among our China-based staff that enable us to maintain our manufacturing operations with minimal on-site supervision from our U.S.‑based staff, our business could also be harmed if travel to or from China and the United States is restricted or inadvisable or our key China-based employees are unable to work.

If our manufacturing operations were closed for a significant period, we could lose revenue and market share, which would depress our financial performance and could be difficult to recapture.

Finally, if one of our key customers is required to close for an extended period, we might not be able to ship product to them, our revenue would decline and our financial performance would suffer.

If there is a renewed surge of the COVID-19 pandemic in China, the Chinese government may require companies to close again.

If one or more of our key suppliers is required to close for an extended period, we might not have enough raw material inventories to continue manufacturing operations.

In addition, travel restrictions between China and the U.S.

have disrupted our normal movement to and from China and this has impacted our efficiency.

If COVID-19 vaccines are not widely available, our business operations may be affected negatively.

The outbreak has affected transportation and reduced the availability of air transport, caused port closures, and increased border controls and closures.

If our manufacturing operations were closed for a significant period or we experience difficulty in shipping our products, we could lose revenue and market share, which would depress our financial performance and could be difficult to recapture.

If one of our key customers is required to close for an extended period, this may delay the placement of new orders.

As a result, our revenue would decline.

Further, customers might default on their obligations to us.

In the first quarter of 2020 we observed an increase in our accounts receivable and believe this was the result of businesses slowing down and a general cautiousness due to the COVID-19 pandemic.

Such events would negatively impact our financial performance.

Our gross margin has fluctuated historically and may decline due to several factors.

Our gross margin has fluctuated from period to period as a result of increases or decreases in total revenue, unit volume, shifts in product mix, shifts in the cost of raw materials, costs related to the relocation of our gallium arsenide and germanium production lines, including costs related to the hiring additional manufacturing employees at our new locations, tariffs imposed by the U.S.

Our gross margin has fluctuated from period to period as a result of increases or decreases in total revenue, unit volume, shifts in product mix, shifts in the cost of raw materials, costs related to the relocation of our gallium arsenide and germanium production lines, including costs related to hiring additional manufacturing employees at our new locations, tariffs imposed by the U.S.

government, the introduction of new products, decreases in average selling prices for products, utilization of our manufacturing capacity, fluctuations in manufacturing yields and our ability to reduce product costs.

7 unchanged sentences

An important factor in our success is the extent to which we are able to utilize the available capacity in our manufacturing facilities.

A number of factors and circumstances may reduce utilization rates, including periods of industry overcapacity, low levels of customer orders, operating inefficiencies, mechanical failures and disruption of operations due to expansion, power interruptions, fire, flood, other natural disasters or calamities or government-ordered mandatory factory shutdowns.

Severe air pollution in Beijing can trigger mandatory factory shutdowns.

For example, in the first quarter of 2018, over 300 manufacturing companies, including AXT, were intermittently shut down by the local government for a total of ten days from February 27 to March 31, due to severe air pollution.

Further, we are increasing capacity by adding two new sites, which may reduce our utilization rate and increase our depreciation charges, at least until we de-commission part of our Beijing site.

Further, we have increased capacity by adding two new sites and this could reduce our utilization rate and increase our depreciation charges.

Because many portions of our manufacturing costs are relatively fixed, high utilization rates are critical to our gross margins and operating results.

1 unchanged sentence

During periods of decreased demand, we have underutilized our manufacturing lines.

If we are unable to improve utilization levels at our facilities during periods of decreased demand and correctly manage capacity, the fixed expense levels will have an adverse effect on our business, financial condition and results of operations.

If we are unable to improve utilization levels at our facilities during periods of decreased demand and correctly manage capacity, the fixed expense

levels will have an adverse effect on our business, financial condition and results of operations.

For example, in the three months ended December 31, 2019, our revenue dropped to $18.4 million and our gross margin was only 21.0%.

1 unchanged sentence

For example, in 2013, we concluded that incoming orders were insufficient and that we were significantly underutilizing our factory capacity.

As a result, in February 2014, we announced a restructuring plan with respect to our wafer manufacturing company, Beijing Tongmei Xtal Technology Co., Ltd.

(“Tongmei”), in order to better align manufacturing capacity with demand.

As a result, in February 2014, we announced a restructuring plan with respect to our wafer manufacturing company, Tongmei, in order to better align manufacturing capacity with demand.

Under the restructuring plan, we recorded a charge of approximately $907,000 in the first quarter of 2014.

11 unchanged sentences

● equipment failure, power outages or variations in the manufacturing process.

A current example where yield is of special concern is for our six-inch semi-conducting gallium arsenide

substrates, which can be used for manufacturing opto-electronic devices in cell phones, enabling 3-D sensing.

An example where yield is of special concern is for our six-inch semi-conducting gallium arsenide substrates, which can be used for manufacturing opto-electronic devices in cell phones, enabling 3-D sensing.

This application requires very low defect densities, also called etch pit densities, or EPD, and our yields will be lower than the yields achieved for the same substrate when it will be used in other applications.

1 unchanged sentence

In addition, we may modify our process to meet a customer specification, but this can impact our yields.

If our yields decrease, our revenue could decline if we are unable to produce products to our customers’

requirements.

If our yields decrease, our revenue could decline if we are unable to produce products to our customers’ requirements.

At the same time, our manufacturing costs could remain fixed, or could increase.

4 unchanged sentences

This could lead to revenue loss and market share loss.

Risks exist in relocating our gallium arsenide and germanium manufacturing operations.

Risks exist in utilizing our new gallium arsenide manufacturing sites efficiently.

The Chinese government has imposed, and may impose in the future, manufacturing restrictions and regulations that require us to move part of our manufacturing operations to a different location or temporarily cease or limit manufacturing.

Such relocation, or other restrictions on manufacturing, could materially and adversely impact our results of operations and our financial condition.

The Beijing city government is moving its offices into the area where our original manufacturing facility is currently located and is in the process of moving thousands of government employees into this area.

The government has constructed showcase tower buildings and overseen the establishment of new apartment complexes, retail stores and restaurants.

An amusement park is being constructed within a few miles of our facility.

The Beijing city government is moving its offices to the Tongzhou district where our original manufacturing facility is currently located.

The city government is in the process of moving thousands of government employees into this area.

To create room and upgrade the district, the city instructed virtually all existing manufacturing companies, including AXT, to relocate all or some of their manufacturing lines.

We were instructed to move our gallium arsenide manufacturing line out of the area.

For reasons of manufacturing efficiency we elected to also move our germanium manufacturing line.

Our indium phosphide manufacturing line, as well as various administrative and sales functions, will remain primarily at our original site for the near future.

To mitigate our risks and maintain our production schedule, we moved our gallium arsenide equipment in stages.

By December 31, 2019, we have ceased all crystal growth for gallium arsenide in our original manufacturing facility in Beijing and have transferred 100% of our ingot production to our new manufacturing facility in Kazuo, a city approximately 250 miles from Beijing.

We have transferred our wafer processing equipment for gallium arsenide to our new manufacturing facility in Dingxing, a city approximately 75 miles from Beijing.

Our key focus is now transferring volume production of the wafer processing steps for gallium arsenide to Dingxing.

Some of our larger, more sophisticated customers want to perform a site qualification and subsequently, develop a plan to ramp up production at Dingxing.

The new facilities are intended to give us the long-term capacity and a new level of technological sophistication in our manufacturing capabilities to support the major trends that we believe are likely to drive demand for our products in the years ahead.

Customer qualification of the Dingxing site requires us to continue to diligently address the many details that arise at both of the new sites.

Although the relocation is largely completed and we are in volume production at the new sites, unforeseen manufacturing issues at the new sites could still occur.

Problems could occur as we add capacity or comply with strict guidelines as customers perform their qualifications.

All of this will require us to continue to diligently address the many details that arise at both of the new sites.

A failure to properly accomplish this could result in disruption to our production and have a material adverse impact on our revenue, our results of operations and our financial condition.

If we fail to meet the product qualification requirements of a customer, we may lose sales to that customer.

If we fail to meet the product qualification and volume requirements of a customer, we may lose sales to that customer.

Our reputation may also be damaged.

Any loss of sales could have a material adverse effect on our revenue, our results of operations and our financial condition.

We expect many of the key employees who are employed at our current manufacturing facility to relocate to the new sites or commute under a program we are developing.

There can be no assurances that the key employees will

A loss of key employees or our inability to hire qualified employees could disrupt our production, which could materially and adversely impact our results of operations and our financial condition.

Although we expect many of our employees to relocate to our new facilities, certain employees may choose not to relocate.

If we are unable to continue to employ those employees in our original manufacturing facility, we may be required to terminate those employees and could incur severance costs.

If the government does not assist us in this matter it could materially and adversely impact our results of operations and our financial condition.

Some of our key employees are relocating to our new manufacturing sites.

Travel restrictions within China resulting from COVID-19 have impacted their relocation and hindered commuting.

Certain employees may choose not to relocate.

If we are unable to continue to employ those key employees in our original manufacturing facility, we may be required to terminate those employees and could incur severance costs.

If the Chinese government does not assist us in this matter it could materially and adversely impact our results of operations and our financial condition.

Further, a loss of key employees or our inability to hire qualified employees could disrupt our production, which could materially and adversely impact our results of operations and our financial condition.

The Chinese government has in the past imposed temporary restrictions on manufacturing facilities, such as the restrictions imposed on polluting factories for the 2008 Olympics and the 2014 Asian Pacific Economic Cooperation event.

9 unchanged sentences

The new list added gallium arsenide.

As a result of the newly published list, we were instructed to obtain a permit to continue to manufacture our gallium arsenide substrate wafers.

The Beijing municipal authority accepted our permit application in May 2015, but has not issued to us the requisite permit while we continue to execute our plan to relocate our gallium arsenide production.

If our application is denied in the future before we complete our relocation, then our gallium arsenide production could be disrupted, which could materially and adversely impact our results of operations and our financial condition.

Customers may require that they re-qualify our gallium arsenide wafer substrates or the new sites as a result of relocating our gallium arsenide manufacturing line.

As required by the Beijing city government we are relocating gallium arsenide production so that it is not within Beijing.

To mitigate our risks and maintain our production schedule, we moved our gallium arsenide equipment in stages.

By December 31, 2019 all crystal growth for gallium arsenide was closed in Beijing and 100% of our ingot production is now in Kazuo, a city approximately 250 miles from Beijing.

Wafer processing equipment for gallium arsenide has been moved to Dingxing, a city approximately 75 miles from Beijing.

Our key focus is now transferring volume production of the wafer processing steps for gallium arsenide to Dingxing.

Some of our larger, more sophisticated customers want to perform a site qualification and subsequently make a plan to ramp up at Dingxing.

Customer qualification of the Dingxing site requires us to continue to diligently address the many details that arise at both of the new sites.

A failure to properly accomplish this could result in disruption to our production and have a material adverse impact on our revenue, our results of operations and our financial condition.

As a result of the newly published list, we were required to seek additional permits.

Additional customers may require that they re-qualify our gallium arsenide wafer substrates or our new sites as a result of relocating our gallium arsenide manufacturing lines.

Although some of our largest customers have qualified our new sites there may still be some who will decide to go through the qualification process.

If we fail to meet the product qualification requirements of a customer, we may lose sales to that customer.

5 unchanged sentences

The initial tariff rate was 10% and subsequently was increased to 25%.

Approximately

10% of our revenue derives from importing our wafers into the United States.

In the year 2019 we paid approximately $735,000 in tariffs.

Approximately 10% of our revenue derives from importing our wafers into the United States.

In the years 2020 and 2019 we paid approximately $1.3 million and $0.7 million, respectively, in tariffs.

The future impact of tariffs and trade wars is uncertain.

The economic and political conditions between China and the United States, in our view, create an unstable business environment.

The United States has restricted access by certain Chinese technology companies to items produced domestically and abroad from U.S.

technology and software, which may impact our ability to grow our revenue .

Trade restrictions against China have resulted in a greater determination within China to be self-sufficient and produce more goods domestically.

Government agencies in China may be encouraging and supporting the founding of new companies, the addition of new products in existing companies and more vertical integration within companies.

These factors could eventually result in lower revenue from sales of our wafer substrates in China.

In 2019 these factors resulted in lower revenue from sales of our wafer substrates in China.

Our operations and financial results depend on worldwide economic and political conditions and their impact on levels of business spending, which has deteriorated significantly in many countries and regions.

Uncertainties in the political, financial and credit markets may cause our customers to postpone deliveries.

The COVID-19 virus is an additional cause of uncertainty.

Delays in the placement of new orders and extended uncertainties may reduce future sales of our products and services.

4 unchanged sentences

Future tightening of credit markets and concerns regarding the availability of credit may make it more difficult for our customers to raise capital, whether debt or equity, to finance their purchases of capital equipment or of the products we sell.

Delays in our customers’

ability to obtain such financing, or the unavailability of such financing, would adversely affect our product sales and revenues and, therefore, harm our business and operating results.

Delays in our customers’ ability to obtain such financing, or the unavailability of such financing, would adversely affect our product sales and revenues and, therefore, harm our business and operating results.

We cannot predict the timing, duration of or effect on our business of any future economic downturn or the timing or strength of any subsequent recovery.

8 unchanged sentences

In addition, a waste water pipe was damaged resulting in a halt to wafer processing for four days until the pipe could be repaired.

We were able to rotate key furnace hardware and use some of the 6-inch capacity for smaller diameter crystal growth production to mitigate the impact of the fire and resume production.

We were able to rotate key furnace hardware and use

some of the 6-inch capacity for smaller diameter crystal growth production to mitigate the impact of the fire and resume production.

If we are unable to recover from a fire or natural disaster, our business and operating results could be materially and adversely affected.

1 unchanged sentence

Our products are used to produce components for electronic and opto-electronic products.

Accordingly, demand for our products is subject to the demand for end-user applications which utilize our products, as well as factors affecting the ability of the manufacturers downstream in our supply chain to introduce and market their products successfully,

● worldwide economic and political conditions and their impact on levels of business spending;

13 unchanged sentences

For example, the average selling prices for 4N gallium and for germanium were driven down by oversupply in recent years , and negatively impacted our financial results.

In 2019, 2018 and 2017, the companies accounted for under the equity method of accounting contributed a loss of $1.9 million, $1.1 million and $1.7 million, respectively, to our consolidated financial statements.

In 2020, the companies accounted for under the equity method of accounting contributed a gain of $0.1 million to our consolidated financial statements.

In 2019 and 2018, the companies accounted for under the equity method of accounting contributed a loss of $1.9 million and $1.1 million, respectively, to our consolidated financial statements.

Further, in several quarters over the past three years, one of our consolidated subsidiaries incurred a lower of cost or net realizable value inventory write down, which negatively impacted our consolidated gross margin.

In the first quarter of 2019, we incurred an impairment charge of $1.1 million for a germanium materials company in China in which we have a 25% ownership interest, writing down our investment to zero value.

If the pricing environment remains stressed by oversupply and our joint venture companies cannot reduce their production costs, then the reduced average selling prices of the raw materials produced by our joint venture companies will have a continuing adverse impact on our revenue, gross margins and net profit.

Problems incurred in our raw material joint venture companies or investment partners could result in a material adverse impact on our financial condition or results of operations.

We have invested in raw material joint venture companies in China that produce materials, including 99.99% pure gallium (4N Ga), high purity gallium (7N Ga), arsenic, germanium, germanium dioxide, pyrolytic boron nitride (pBN) crucibles and boron oxide (B2O3).

If the pricing environment remains stressed by oversupply and our raw material companies cannot reduce their production costs, then the reduced average selling prices of the raw materials will have a continuing adverse impact on our revenue, gross margins and net profit.

Problems incurred in our raw material companies or our investment partners could result in a material adverse impact on our financial condition or results of operations.

We have invested in raw material companies in China that produce materials, including 99.99% pure gallium (4N Ga), high purity gallium (6N and 7N Ga), arsenic, germanium, germanium dioxide, pyrolytic boron nitride (pBN) crucibles and boron oxide (B2O3).

We purchase a portion of the materials produced by these companies for our use and they sell the remainder of their production to third parties.

Our ownership and the ownership held by one of the joint venture companies range from 100% to 20%.

We consolidate the companies in which we have a majority or controlling financial interest and employ equity accounting for the companies in which we have a smaller ownership interest.

2 unchanged sentences

In some facilities, we share access to certain functions, including water, hazardous waste treatment or air quality treatment.

If a partner in any of these ventures experiences problems with its operations, or deliberately withholds or

disrupts services, disruptions in the operations of our companies could occur, having a material adverse effect on the financial condition and results of operation in these companies, and correspondingly on our financial condition or results of operations.

For example, since gallium is a by-product of aluminum, our raw gallium joint venture in China, which is housed in and receives services from an affiliated aluminum plant, could generate lower production and shipments of gallium as a result of reduced services provided by the aluminum plant.

If a partner in any of these ventures experiences problems with its operations, or deliberately withholds or disrupts services, disruptions in the operations of our companies could occur, having a material adverse effect on the financial condition and results of operation in these companies, and correspondingly on our financial condition or results of operations.

For example, since gallium is a by-product of aluminum, our raw gallium company in China, which is housed in and receives services from an affiliated aluminum plant, could generate lower production and shipments of gallium as a result of reduced services provided by the aluminum plant.

Accordingly, in order to meet customer supply obligations, our supply chain may have to source materials from another independent third-party supplier, resulting in higher costs and reduced gross margin.

2 unchanged sentences

In days of severe air pollution, the government has ordered manufacturing companies to stop all production.

The central government is also tightening control over hazardous chemicals and other hazardous elements such as arsenic, which is produced by two of our unconsolidated joint venture companies.

The central government is also tightening control over hazardous chemicals and other hazardous elements such as arsenic, which is produced by two of our raw material companies.

Further, the central government encourages employees to report to the appropriate regulatory agencies possible safety or environmental violations, but there may not be actual violations.

Regular use in the normal course of business of hazardous chemicals or hazardous elements or a company’s failure to meet the ever-tightening standards for control of hazardous chemicals or hazardous elements could result in orders to shut down permanently, fines or other severe measures.

Any such orders directed at one of our joint venture companies could result in impairment charges if the company is forced to close its business, cease operations or incurs fines or operating losses, which would have a material adverse effect on our financial results.

Any such orders directed at one of our raw material companies could result in impairment charges if the company is forced to close its business, cease operations or incurs fines or operating losses, which would have a material adverse effect on our financial results.

Further, if any of our joint venture companies or investment partners with which our joint ventures share facilities is deemed to have violated applicable laws, rules or regulations governing the use, storage, discharge or disposal of hazardous chemicals, the operations of that joint venture could be adversely affected and we could be subject to substantial liability for clean-up efforts, personal injury, fines or suspension or termination of our joint venture’s operations.

Employees working for our joint ventures or any of the other investment partners could bring litigation against us as a result of actions taken at the joint venture or investment partner facilities, even though we are not directly controlling those operations.

Further, some of our raw material companies share facilities with our raw material investment partners.

If either company is deemed to have violated applicable laws, rules or regulations governing the use, storage, discharge or disposal of hazardous chemicals, their operations could be adversely affected and we could be subject to substantial liability for clean-up efforts, personal injury, fines or suspension or termination of operations.

Employees working for these companies could bring litigation against us even though we are not directly controlling those operations.

While we would expect to defend ourselves vigorously in any litigation that is brought against us, litigation is inherently uncertain and it is possible that our business, financial condition, results of operations or cash flows could be affected.

Even if we are not deemed responsible for the actions of the joint ventures or investment partners, litigation could be costly, time consuming to defend and divert management attention;

Even if we are not deemed responsible for the actions of the raw material companies or investment partners, litigation could be costly, time consuming to defend and divert management attention;

in addition, if we are deemed to be the most financially viable of the partners, plaintiffs may decide to pursue us for damages.

5 unchanged sentences

Sumitomo and JX also compete with us in the InP market.

If we are unable to compete effectively, our revenue may decrease and we may not maintain profitability.

unable to compete effectively, our revenue may decrease and we may not maintain profitability.

We face many competitors that have a number of significant advantages over us, including:

13 unchanged sentences

We face a risk that experienced computer programmers and hackers may be able to penetrate our network security and misappropriate or compromise our confidential and proprietary information, potentially without being detected.

Computer programmers and hackers also may be able to develop and deploy viruses, worms, and other malicious software programs that attack our information technology infrastructure.

Computer programmers and hackers also may be able to develop and deploy viruses, worms, and other malicious software programs that attack our information technology infrastructure and demand a ransom payment.

The costs to us to eliminate or alleviate cyber or other security problems, bugs, viruses, worms, malicious software programs and security vulnerabilities could be significant, and our efforts to address these problems may not be successful and could result in interruptions and delays that may impede our sales, manufacturing, distribution, accounting or other critical functions.

12 unchanged sentences

It is possible that the pace of the decline of average selling prices could accelerate beyond these levels for certain products in a commoditizing market.

We anticipate that average selling prices will decrease in the future in response to the unstable demand environment, price reductions by competitors, or by other factors, including pricing pressures from significant

When our average selling prices decline, our revenue and gross profit decline, unless we are able to sell more products or reduce the cost to manufacture our products.

13 unchanged sentences

New customers typically place orders with us for our substrate products three months to a year or more after our initial contact with them.

The sale of our products is subject to our customers’

lengthy internal evaluation and approval processes.

The sale of our products is subject to our customers’ lengthy internal evaluation and approval processes.

During this time, we may incur substantial expenses and expend selling, marketing and management efforts while the customers evaluate our products.

16 unchanged sentences

A downturn can result in lower unit volumes and rapid erosion of average selling prices.

The semiconductor industry has experienced significant downturns, often in connection with, or in anticipation of, maturing product cycles of both semiconductor companies’

and their customers’

products or a decline in general economic conditions.

The semiconductor industry has experienced significant downturns, often in connection with, or in anticipation of, maturing product cycles of both semiconductor companies’ and their customers’ products or a decline in general economic conditions.

This may adversely affect our results of operations and the value of our business.

4 unchanged sentences

The rate of changes in demand, including end demand, is high, and the effect of these changes upon us occurs quickly, exacerbating the volatility of these cycles.

These changes have affected the timing and amounts of customers’

purchases and investments in new technology.

These changes have affected the timing and amounts of customers’ purchases and investments in new technology.

These industry cycles create pressure on our revenue, gross margin and net income.

10 unchanged sentences

Our success depends on our ability to offer new product features, improved performance characteristics and new products, such as larger diameter substrates, low defect density substrates, thicker or thinner substrates, substrates with extreme surface flatness specifications, substrates that are manufactured with a doped crystal growth process or substrates that incorporate leading technology and other technological advances.

New products must meet customer needs and compete effectively on quality, price and performance.

New products must meet customer

needs and compete effectively on quality, price and performance.

The markets for our products are characterized by rapid technological change, changing customer needs and evolving industry standards.

4 unchanged sentences

Further, the costs involved in researching, developing and engineering new products could be greater than anticipated.

If we fail to offer new products or product enhancements or fail to achieve higher quality products, we may not generate sufficient revenue to offset our development costs and other expenses or meet our customers’

requirements.

We have made and may continue to make strategic investments in raw materials suppliers, which may not be successful and may result in the loss of all or part of our investment.

15 unchanged sentences

If we have to delay or reduce production, we could fail to meet customer delivery schedules and our revenue and operating results could suffer.

We may not be able to identify or form additional complementary joint ventures.

We may not be able to identify or form additional complementary raw material joint ventures.

We might invest in additional joint venture companies in order to remain competitive in our marketplace and ensure a supply of critical raw materials.

1 unchanged sentence

Further, geopolitical tensions and trade wars could result in government agencies blocking such new joint ventures.

New joint ventures could require cash investments or cause us to incur additional liabilities or other expenses, any of which could adversely affect our financial condition and operating results.

New joint ventures could require cash investments or cause us to

incur additional liabilities or other expenses, any of which could adversely affect our financial condition and operating results.

The financial condition of our customers may affect their ability to pay amounts owed to us.

2 unchanged sentences

Subsequent to our fulfilling an order, some customers have been unable to make payments when due, reducing our cash balances and causing us to incur charges to allow for a possibility that some accounts might not be paid.

We have had some customers file for bankruptcy.

We observed an increase in our accounts receivable in the first quarter of 2020 and believe this has resulted from work stoppages, shelter-in-place orders and general cautiousness due to the COVID-19 pandemic.

In the past we, have had some customers file for bankruptcy.

If our customers do not pay amounts owed to us then we will incur charges that would reduce our earnings.

15 unchanged sentences

Any future unexpected changes in demand or increases in costs of production that cause us to take additional charges for un-saleable, obsolete or excess inventory, or to reduce inventory values, would adversely affect our results of operations.

Financial market volatility and adverse changes in the domestic, global, political and economic environment could have a significant adverse impact on our business, financial condition and operating results.

We are subject to the risks arising from adverse changes and uncertainty in domestic and global economies.

Currently China’s economy is slowing and this could impact our financial performance.

In addition, tariffs, trade restrictions, trade wars and Brexit are creating an unstable environment and can disrupt or restrict commerce.

Although we remain well-capitalized, the cost and availability of funds may be adversely affected by illiquid credit markets.

Volatility in U.S.

and international markets and economies may adversely affect our liquidity, financial condition and profitability.

Another severe or prolonged economic downturn could result in a variety of risks to our business, including:

increased volatility in our stock price;

increased volatility in foreign currency exchange rates;

delays in, or curtailment of, purchasing decisions by our customers or potential customers;

increased credit risk associated with our customers or potential customers, particularly those that may operate in industries most affected by the economic downturn;

impairment of our tangible or intangible assets.

In the past, most recently in the fourth quarter of 2018 and continuing in 2019, we experienced delays in

customer purchasing decisions and disruptions in a normal volume of customer orders that we believe were in part due to the uncertainties in the global economy, resulting in an adverse impact on consumer spending.

During challenging and uncertain economic times and in tight credit markets, many customers delay or reduce technology purchases.

Should similar events occur again, our business and operating results could be significantly and adversely affected.

The effect of terrorist threats and actions on the general economy could decrease our revenue.

15 unchanged sentences

Enhanced trade tariffs, import restrictions, export restrictions, Chinese regulations or other trade barriers may materially harm our business.

All of our wafer substrates are manufactured in China and in 2019, approximately 10% of our revenue was generated by sales to customers in North America, primarily in the U.S.

All of our wafer substrates are manufactured in China and in the years 2020 and 2019, approximately 10% of our revenue was generated by sales to customers in North America, primarily in the U.S.

In September 2018, the Trump Administration announced a list of thousands of categories of goods that became subject to tariffs when imported into the United States.

1 unchanged sentence

The initial tariff rate was 10% and subsequently was increased to 25%.

Approximately 10% of our revenue derives from importing our wafers into the United States.

In the year 2019 we paid approximately $735,000 in tariffs.

In the years 2020 and 2019 we paid approximately $1.3 million and $0.7 million, respectively, in tariffs.

The future impact of tariffs and trade wars is uncertain.

We may be required to raise prices, which may result in the loss of customers and our business, financial condition and results of operations may be materially harmed.

Additionally, the Trump Administration continues to signal that it may alter trade agreements and terms between China and the United States, including limiting trade with China, and may impose additional tariffs on imports from China.

It is possible that our business could be adversely impacted by retaliatory trade measures taken by China or other countries in response to existing or future tariffs, which could cause us to raise prices or make changes to our operations, which could materially harm our business, financial condition and results of operations.

Additionally, it is possible that our business could be adversely impacted by retaliatory trade measures taken by China or other countries in response to existing or future tariffs, which could cause us to raise prices or make changes to our operations, which could materially harm our business, financial condition and results of operations.

The economic and political conditions between China and the United States, in our view, create an unstable business environment.

The United States government has restricted access by certain Chinese technology companies to items produced domestically and abroad from U.S.

technology and software, which may impact our ability to grow our revenue .

Trade restrictions against China have resulted in a greater determination within China to be self-sufficient and produce more goods domestically.

Government agencies in China may be encouraging and supporting the founding of new companies, the addition of new products in existing companies and more vertical integration within

These factors could eventually result in lower revenue from sales of our wafer substrates in China.

Government agencies in China may be encouraging and supporting the founding of new companies, the addition of new products in existing companies and more vertical integration within companies.

These factors have resulted in lower revenue from sales of our wafer substrates in China.

Further, the continued threats of tariffs and other trade restrictions could have a generally disruptive impact on the global economy and, therefore, negatively impact our sales.

5 unchanged sentences

Any such changes could directly and materially adversely impact our financial results and general business condition.

The spread of COVID-19 has affected our business operations and financial performance.

The spread of COVID-19 has impacted our operations and financial performance.

This outbreak has triggered references to the SARS outbreak, which occurred in 2003 and affected our business operations.

Any severe occurrence of an outbreak of a contagious disease such as COVID-19, SARS, Avian Flu or Ebola may cause us or the government to temporarily close our manufacturing operations in China.

In January 2020, virtually all companies in China were ordered to remain closed after the traditional Lunar New Year holiday ended, including our subsidiaries in China.

If there is a renewed surge of the COVID-19 pandemic in China, the Chinese government may require companies to close again.

If one or more of our key suppliers is required to close for an extended period, we might not have enough raw material inventories to continue manufacturing operations.

In addition, travel restrictions between China and the U.S.

have disrupted our normal movement to and from China and this has impacted our efficiency.

The outbreak has affected transportation and reduced the availability of air transport, caused port closures, and increased border controls and closures.

If one of our key customers is required to close for an extended period this may delay the placement of new orders.

As a result, our revenue would decline.

Further, customers might default on their obligations to us.

In the first quarter of 2020 we observed an increase in our accounts receivable and believe this is the result of businesses slowing down and a general cautiousness due to the COVID-19 pandemic.

Such events would negatively impact our financial performance.

We are subject to the risks arising from adverse changes and uncertainty in domestic and global economies.

Uncertain global economic and political conditions or low or negative growth in China, Europe or the United States, along with volatility in the financial markets, increasing national debt and fiscal concerns in various regions and the adoption and availability of fiscal and monetary stimulus measures to counteract the impact of the COVID-19 pandemic, pose challenges to our industry.

Currently China’s economy is slowing and this could impact our financial performance.

In addition, tariffs, trade restrictions, trade wars and Brexit are creating an unstable environment and can disrupt or restrict commerce.

Although we remain well-capitalized, the cost and availability of funds may be adversely affected by illiquid credit markets.

Volatility in U.S.

and international markets and economies may adversely affect our liquidity, financial condition and profitability.

Another severe or prolonged economic downturn could result in a variety of risks to our business, including:

● increased volatility in our stock price;

● increased volatility in foreign currency exchange rates;

● delays in, or curtailment of, purchasing decisions by our customers or potential customers;

● increased credit risk associated with our customers or potential customers, particularly those that may operate in industries most affected by the economic downturn;

● impairment of our tangible or intangible assets.

In the past, most recently in the fourth quarter of 2018 and continuing in 2019, we experienced delays in customer purchasing decisions and disruptions in a normal volume of customer orders that we believe were in part due to the uncertainties in the global economy, resulting in an adverse impact on consumer spending.

During challenging and uncertain economic times and in tight credit markets, many customers delay or reduce technology purchases.

Should similar events occur again, our business and operating results could be significantly and adversely affected.

We derive a significant portion of our revenue from international sales, and our ability to sustain and increase our international sales involves significant risks.

Approximately 90% of our revenue is from international sales.

We expect that sales to customers outside the United States, particularly sales to customers in Japan, Taiwan and China, will continue to represent a significant portion of our revenue.

We expect that sales to customers outside the United States, particularly sales to customers in Japan, Taiwan, Europe and China, will continue to represent a significant portion of our revenue.

Therefore, our revenue growth depends significantly on the expansion of our international sales and operations.

3 unchanged sentences

export restrictions, fluctuations in interest and currency exchange rates, the ability to provide sufficient levels of technical support in different locations, cultural differences and perceptions of U.S.

companies, shipping delays and terrorist acts or acts of war, among other risks.

companies, shipping delays and terrorist acts or acts of war, natural disasters and epidemics or pandemics, such as COVID-19, among other risks.

Many of these challenges are present in China, which represents a large potential market for semiconductor devices.

15 unchanged sentences

Most of our sales are denominated in U.S.

dollars, except for sales to our Chinese customers which are

denominated in renminbi and our Japanese customers which are denominated in Japanese yen.

dollars, except for sales to our Chinese customers which are denominated in renminbi and our Japanese customers which are denominated in Japanese yen.

We also have some small sales denominated in Euro.

1 unchanged sentence

dollar could increase the price of our products in non-U.S.

markets and make our products more expensive than competitors’

products in these markets.

markets and make our products more expensive than competitors’ products in these markets.

We are subject to foreign exchange gains and losses that materially impact our income statement.

1 unchanged sentence

For example, in 2020 we incurred a loss of $411,000.

The functional currency of our wholly-owned Chinese subsidiary and our partially-owned joint venture companies is the Chinese renminbi, the local currency.

The functional currency of our companies in China is the Chinese renminbi, the local currency.

We can incur foreign exchange gains or losses when we pay dollars to one of our China-based companies or a third-party supplier in China.

Similarly, if a company in China pays renminbi into one of our bank accounts transacting in dollars the renminbi will be converted to dollars and we can incur a foreign exchange gain or loss.

Hedging renminbi will be considered in the future but it is complicated by the number of companies involved, the diversity of transactions and restrictions imposed by the banking system in China.

Hedging renminbi will be considered in

the future but it is complicated by the number of companies involved, the diversity of transactions and restrictions imposed by the banking system in China.

Sales to Japanese customers are denominated in Japanese yen.

2 unchanged sentences

This has been problematic in the past and, therefore, we instituted a foreign currency hedging program dealing with yen which has mitigated the problem.

Joint venture companies in China bring certain risks.

Since our wholly-owned subsidiaries and all of our partially-owned companies reside in China, their activities could subject us to a number of risks associated with conducting operations internationally, including:

Joint venture raw material companies in China bring certain risks.

Since our consolidated subsidiaries and all of our joint venture raw material companies reside in China, their activities could subject us to a number of risks associated with conducting operations internationally, including:

● unexpected changes in regulatory requirements that may limit our ability to manufacture, export the products of these companies or sell into particular jurisdictions or impose multiple conflicting tax laws and regulations;

8 unchanged sentences

● nationalization of foreign-owned assets, including intellectual property.

Uncertainty regarding the United States’

foreign policy under the current administration could disrupt our business.

We manufacture our substrates in China and, in 2019, approximately 90% of our sales were to customers located outside of the United States.

Further, we have partial ownership of raw material companies in China as part of

our supply chain.

The United States’

current foreign policy has created uncertainty and caution in the international business community, resulting in disruptions in manufacturing, import/export, trade tariffs, sales, investments and other business activity.

Uncertainty regarding the United States’ foreign policy, particularly with regards to China, could disrupt our business.

We manufacture our substrates in China and, in 2020, approximately 90% of our sales were to customers located outside the United States.

Further, we have partial ownership of raw material companies in China as part of our supply chain.

The United States’ current foreign policy has created uncertainty and caution in the international business community, resulting in disruptions in manufacturing, import/export, trade tariffs, sales, investments and other business activity.

Such disruptions have had an adverse impact on our financial performance and could continue in the future.

4 unchanged sentences

If the government were to place additional restrictions on the transportation of materials, then our ability to transport our raw materials or products could be limited and result in manufacturing delays or bottlenecks at shipping ports, affecting our ability to deliver products to our customers.

During periods of such restrictions, we may increase our stock of critical materials (such as arsenic, gallium and other items) for use during the period that these restrictions are likely to last, which will increase our use of cash and increase our inventory level.

periods of such restrictions, we may increase our stock of critical materials (such as arsenic, gallium and other items) for use during the period that these restrictions are likely to last, which will increase our use of cash and increase our inventory level.

Any of these restrictions could materially and adversely impact our results of operations and our financial condition.

4 unchanged sentences

If we are unable to continue to achieve customer qualifications for our products, or if we are unable to control product quality, customers may not increase purchases of our products, our China facilities will become underutilized, and we will be unable to achieve revenue growth.

Changes in China’s political, social, regulatory or economic environments may affect our financial performance.

Our financial performance may be affected by changes in China’s political, social, regulatory or economic environments.

Changes in China’s political, social, regulatory or economic environments may affect our financial performance.

Our financial performance may be affected by changes in China’s political, social, regulatory or economic environments.

The role of the Chinese central and local governments in the Chinese economy is significant.

The Beijing municipal government’s decision to move to the Tongzhou district, the original location of our manufacturing company, resulted in the city instructing virtually all existing manufacturing companies, including AXT, to relocate all or some of their manufacturing lines.

We were instructed to move our gallium arsenide manufacturing line out of the area.

Chinese policies toward hazardous materials, including arsenic, environmental controls, air pollution, economic liberalization, laws and policies affecting technology companies, foreign investment, currency exchange rates, taxation structure and other matters could change, resulting in greater restrictions on our ability to do business and operate our manufacturing facilities in China.

3 unchanged sentences

In days of severe air pollution the government has ordered manufacturing companies to stop all production.

For example, in the fourth quarter of 2017 many manufacturing companies in the greater Beijing area, including AXT, were instructed by the local government to cease most manufacturing for several days until the air quality improved.

In the first quarter of 2018, from February 27 to March 31, over 300 manufacturing companies, including us, were again intermittently shut down by the local government for a total of ten days due to severe air pollution.

For example, in the first quarter of 2018, from February 27 to March 31, over 300 manufacturing companies, including us, were again intermittently shut down by the local government for a total of ten days due to severe air pollution.

Our shipments were delayed and our revenue for the quarter was negatively impacted .

2 unchanged sentences

Further, any imposition of surcharges or any increase in Chinese tax rates or reduction or elimination of Chinese tax benefits could hurt our financial results.

An important example of some of these factors is seen in a change underway in Beijing.

The government has constructed showcase tower

buildings and overseen the establishment of new apartment complexes, retail stores and restaurants.

An amusement park is being constructed within a few miles of our facility.

To create room and upgrade the district, the city instructed virtually all existing manufacturing companies, including AXT, to relocate all or some of their manufacturing lines.

We were instructed to move our gallium arsenide manufacturing.

For reasons of manufacturing efficiency we elected to also move our germanium manufacturing line.

Some of our larger, more sophisticated customers want to perform a site qualification and subsequently make a plan to ramp up production at Dingxing.

Customer qualification of the Dingxing site requires us to continue to diligently address the many details that arise at both of the new sites.

A failure to properly accomplish this could result in disruption to our production and have a material adverse impact on our revenue, our results of operations and our financial condition.

If we fail to meet the product qualification requirements of a customer, we may lose sales to that customer.

Our reputation may also be damaged.

Any loss of sales could have a material adverse effect on our revenue, our results of operations and our financial condition.

Our international operations are exposed to potential adverse tax consequence in China.

5 unchanged sentences

Various taxing agencies in China are increasingly focused on tax reform and other legislative action to increase tax revenue.

In addition to risks regarding income tax we have in the past been retroactively assessed value added taxes (“VAT”

or sales tax) and such VAT assessments could occur again in the future.

In addition to risks regarding income tax we have in the past been retroactively assessed value added taxes (“VAT” or sales tax) and such VAT assessments could occur again in the future.

If there are power shortages in China, we may have to temporarily close our China operations, which would adversely impact our ability to manufacture our products and meet customer orders, and would result in reduced revenue.

1 unchanged sentence

Instability in electrical supply has caused sporadic outages among residential and commercial consumers causing the Chinese government to implement tough measures to ease the energy shortage.

If further problems with power shortages occur in the future, we may be required to make temporary closures of our operations or of our subsidiary and joint venture operations.

If further problems with power shortages occur in the future, we may be required to make temporary closures of our operations or of our subsidiary and joint venture raw material companies.

We may be unable to manufacture our products and would then be unable to meet customer orders except from finished goods inventory on hand.

1 unchanged sentence

In addition, if power is shut off at any of our facilities at any time, either voluntarily or as a result of unplanned brownouts, during certain phases of our manufacturing process including our crystal growth phase, the work in process may be ruined and rendered unusable, causing us to incur costs that will not be covered by revenue, and negatively impacting our cost of revenue and gross margins.

The recent outbreak of a contagious disease may affect our business operations and financial performance.

Currently, a contagious disease originating in Wuhan, China called the coronavirus or COVID-19 has spread to other cities in China and to many other countries including the United States.

This has triggered references to the SARS outbreak which occurred in 2003 and affected our business operations.

In January 2020, virtually all companies in China were ordered to remain closed after the traditional Lunar New Year holiday ended, including our subsidiaries in China.

Similarly, if one or more of our key suppliers is required to close for an extended period, we might not have enough raw material inventories to continue our manufacturing operations.

In addition, while we possess management skills among our China-based staff that enable us to maintain our manufacturing operations with minimal on-site supervision from our U.S.‑based staff, our

business could also be harmed if travel to or from China and the United States is restricted or inadvisable or our key China-based employees are unable to work.

If our manufacturing operations were closed for a significant period, we could lose revenue and market share, which would depress our financial performance and could be difficult to recapture.

Finally, if one of our key customers is required to close for an extended period, we might not be able to ship product to them, our revenue would decline and our financial performance would suffer.

Risks Related to Our Financial Results and Capital Structure

We may utilize our cash balances for relocation, expansion, or to offset a business downturn resulting in the decline of our existing cash, cash equivalents and investment balances, and if we need additional capital, those funds may not be available on acceptable terms, or at all.

Our liquidity is affected by many factors including among others, the relocation of our gallium arsenide manufacturing operations, the extent to which we pursue on-going capital expenditures, the build out of the sites at Dingxing and Kazuo, the level of our production, the level of profits or losses, and other factors related to the uncertainties of the industry and global economies.

Our capital expenditures and any negative cash flow effects of these other factors will draw down our cash reserves, which could adversely affect our financial condition, require us to incur debt, reduce our value and possibly impinge our ability to raise debt and equity funding in the future, at a time when we might need to raise additional cash or elect to raise additional cash.

We may utilize our cash balances for relocating manufacturing lines, adding capacity, acquiring state-of-the-art equipment or offsetting a business downturn resulting in the decline of our existing cash and if we need additional capital, funds may not be available on acceptable terms, or at all.

Our liquidity is affected by many factors including among others, the relocation of our gallium arsenide manufacturing lines, the expansion of our capacity to meet market demand, the acquisition of state-of-the-art equipment, other capital expenditures, operating activities, the effect of exchange rate changes and other factors related to the uncertainties of the industry and global economies.

Such matters could draw down our cash reserves, which could adversely affect our financial condition, require us to incur debt, reduce our value and possibly impinge our ability to raise debt and equity funding in the future, at a time when we might need to raise additional cash or elect to raise additional cash.

Accordingly, there can be no assurance that events will not require us to seek additional capital or, if required, that such capital would be available on terms acceptable to us, if at all.

The terms of the private equity raised in China as a first step toward an IPO on the STAR Market grant each Investor a right of redemption if Tongmei fails to achieve its IPO.

Pursuant to the Capital Investment Agreements with the Investors, each Investor has the right to require AXT to redeem any or all Tongmei shares held by such Investor at the original purchase price paid by such Investor, without interest, in the event of a material adverse change or if Tongmei does not achieve its IPO on or before December 31, 2022.

This right is suspended when Tongmei submits its formal application to the CSRC.

Tongmei currently plans to submit its formal application to the CSRC in the third quarter of 2021.

However, if on December 31, 2022 the IPO application has been submitted and accepted by the CSRC or the stock exchange and such submission remains under review, then the date when such investor is entitled to exercise such redemption right shall be deferred to a date when such submission is rejected by the CSRC or stock exchange, or the date when Tongmei withdraws its IPO application.

The process of going public on the STAR Market includes several periods of review and is therefore a lengthy process.

Tongmei does not expect to complete the IPO until mid-2022.

The listing of Tongmei on China’s STAR Market will not change the status of AXT as a U.S.

public company.

There can be no assurances that Tongmei will complete its IPO by December 31, 2022 or at all.

In the event that investors exercise their redemption rights, we may be required to seek additional capital in order to redeem their Tongmei shares and there would be no assurances that such capital would be available on terms acceptable to us, if at all.

Any redemptions could have a material adverse effect on our business, financial condition and results of operations.

Unpredictable fluctuations in our operating results could disappoint analysts or our investors, which could cause our stock price to decline.

5 unchanged sentences

● fluctuation of our manufacturing yields;

decreases in the prices of our or our competitors’

● decreases in the prices of our or our competitors’ products;

● fluctuations in demand for our products;

41 unchanged sentences

We have utilized all state net operating losses, primarily in the state of California, as of December 31, 2020.

Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership change,”

the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes, such as research tax credits, to offset its post-change income and taxes may be limited.

In general, an “ownership change”

occurs if there is a cumulative change in our ownership by “5% shareholders”

that exceeds 50 percentage points over a rolling three-year period.

Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes, such as research tax credits, to offset its post-change income and taxes may be limited.

In general, an “ownership change” occurs if there is a cumulative change in our ownership by “5% shareholders” that exceeds 50 percentage points over a rolling three-year period.

Similar rules may apply under state tax laws.

6 unchanged sentences

We could become subject to claims that we are infringing patent, trademark, copyright or other proprietary rights of others.

We may incur expenses to defend ourselves against such claims or enter into cross license agreements that require us to pay royalty payments to resolve such claims.

For example, in 2020, we and a competitor entered into the Cross License Agreement, which has a term that began on January 1, 2020 and expires on December 31, 2029.

We have in the past been involved in lawsuits alleging patent infringement, and could in the future be involved in similar litigation.

For example, we entered into a royalty agreement with Sumitomo in 2011 to settle its claim of patent infringement, which resulted in AXT paying royalties for a worldwide, nonexclusive, royalty bearing, irrevocable license to certain patents.

The agreement expired as of December 31, 2018.

In January 2020, we agreed to enter into a cross license and covenant agreement with Sumitomo that will expire December 31, 2029 and includes annual payments by us to Sumitomo over a 10-year period.

If we are unable to protect our intellectual property, including our non-patented proprietary process technology, we may lose valuable assets or incur costly litigation.

We rely on a combination of patents, copyrights, trademarks, trade secrets and trade secret laws, non-disclosure

agreements and other intellectual property protection methods to protect our proprietary technology.

We rely on a combination of patents, copyrights, trademarks, trade secrets and trade secret laws, non-disclosure agreements and other intellectual property protection methods to protect our proprietary technology.

We believe that our internal, non-patented proprietary process technology methods, systems and processes are a valuable and critical element of our intellectual property.

20 unchanged sentences

These efforts have impacted manufacturing companies through mandatory shutdowns, increased inspections and regulatory reforms.

In the fourth quarter of 2017, many manufacturing companies in the greater Beijing area, including AXT, were instructed by the local government to cease most manufacturing for several days until the air quality improved.

In the first quarter of 2018, from February 27 to March 31 over 300 manufacturing companies were again intermittently shut down by the local government for a total of ten days, or 30 percent of the remaining calendar days, due to severe air pollution.

8 unchanged sentences

The new list added gallium arsenide.

As a result of the newly published list, we were instructed to obtain a permit to continue to manufacture our gallium arsenide substrate wafers.

The Beijing municipal authority accepted our permit application in May 2015, but has not yet issued to us the requisite permit while we continue to show good faith in relocating our gallium arsenide production.

If our application is denied in the future before we complete customer qualifications and ramp wafer processing volume, then our gallium arsenide production could be disrupted, which could materially and adversely impact our results of operations and our financial condition.

As a result of the newly published list, we were required to seek additional permits.

We could be subject to suits for personal injuries caused by hazardous materials.

5 unchanged sentences

Litigation is inherently uncertain and while we would expect to defend ourselves vigorously, it is possible that our business, financial condition, results of operations or cash flows could be affected in any particular period by litigation pending and any additional litigation brought against us.

In addition, future litigation could divert management’s attention from our business and operations, causing our business and financial results to suffer.

We could incur defense or settlement costs in excess of the insurance covering these litigation matters, or that could result in significant judgments against us or cause us to incur costly settlements, in excess of our insurance limits.

In addition, future litigation could divert management’s attention from our business and operations, causing our business and financial results to suffer.

incur defense or settlement costs in excess of the insurance covering these litigation matters, or that could result in significant judgments against us or cause us to incur costly settlements, in excess of our insurance limits.

We are subject to internal control evaluations and attestation requirements of Section 404 of the Sarbanes-Oxley Act.

2 unchanged sentences

(1) we fail to maintain effective internal control over financial reporting;

or (2) our management does not timely assess the adequacy of such internal control, we could be subject to regulatory sanctions and the public’s perception of us may be adversely impacted.

We need to continue to improve or implement our systems, procedures and controls.

We rely on certain manual processes for data collection and information processing, as do our joint venture companies.

We rely on certain manual processes for data collection and information processing, as do our joint venture raw material companies.

If we fail to manage these procedures properly or fail to effectively manage a transition from manual processes to automated processes, our systems and controls may be disrupted.

2 unchanged sentences

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-K

Item 1A. Risk Factors