What changed in this filing

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Item 1A. Risk Factors

2021-05-14 compared with 2020-11-06 · 116 added, 129 removed, 571 unchanged (30% 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;

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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 materia- 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 or require us to seek additional capital to redeem the Tongmei shares.

● 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.

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

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

To date, we believe we have limited the impact on our company.

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.

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

Also, 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 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.

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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.

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.

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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.

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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.

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● 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.

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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 ceased all crystal growth for gallium arsenide in our original manufacturing facility in Beijing and 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 now is transferring volume production of the wafer processing steps for gallium arsenide to Dingxing.

This process is ongoing.

Some of our larger, more sophisticated customers want to perform a site qualification and subsequently, work with us 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.

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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 wafer substrates.

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

This process is ongoing.

Some of our larger, more sophisticated customers want to perform a site qualification and subsequently work with us 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.

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.

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

In the nine months ended September 30, 2020 we paid approximately $850,000 in tariffs.

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.

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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.

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 outbreak of the COVID-19 virus is an additional cause of uncertainty.

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.

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If market conditions deteriorate, we may experience increased collection times and greater write-offs, either of which could have a material adverse effect on our profitability and our cash flow.

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.

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For example, during 2019 widespread political and economic instability and trade war concerns resulted in a general slowdown and our revenue decreased significantly.

Additionally, in the second half of 2016, manufacturers producing and selling passive optical network devices known as EPONs and GPONs experienced a slowdown in demand resulting in surplus inventory on hand.

Additionally, in the second half of 2016, manufacturers producing and selling passive optical network devices known as EPONs and GPONs experienced a slowdown in demand

resulting in surplus inventory on hand.

The slowdown persisted until late in 2017.

This resulted in a slowdown of sales

of our InP substrates used in the PON market.

This resulted in a slowdown of sales of our InP substrates used in the PON market.

We expect similar cycles of strong demand followed by lower demand will occur for various InP, GaAs or Ge substrates in the future.

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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 March 2019, we ceased to consolidate this company.

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 91.5% to 25%.

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.

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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.

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.

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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.

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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.

Our employees working remotely as a result of the current COVID-19 pandemic increases our vulnerability in this regard.

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.

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We may be unable to maintain or increase sales to our customers and sales of our products could decline.

Defects in our products could cause us to incur higher manufacturing costs and suffer product returns and additional service expenses, all of which could adversely impact our

operating results.

Defects in our products could cause us to incur higher manufacturing costs and suffer product returns and additional service expenses, all of which could adversely impact our operating results.

If new products developed by us contain defects when released, our customers may be dissatisfied and we may suffer negative publicity or customer claims against us, lose sales or experience delays in market acceptance of our new products.

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The timing, length and volatility of these cycles are difficult to predict.

The compound semiconductor industry has historically been cyclical due to sudden changes in demand, the amount of manufacturing capacity and changes in the technology employed in compound semiconductors.

The compound semiconductor

industry has historically been cyclical due to sudden changes in demand, the amount of manufacturing capacity and changes in the technology employed in compound semiconductors.

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.

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Our industry has in the past experienced periods of oversupply and that has resulted in significantly reduced prices for compound semiconductor devices and components, including our products, both as a result of general economic changes and overcapacity.

Oversupply causes greater price competition and can cause our revenue, gross

margins and net income to decline.

Oversupply causes greater price competition and can cause our revenue, gross margins and net income to decline.

During periods of weak demand, customers typically reduce purchases, delay delivery of products and/or cancel orders for our products.

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Most recently, 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.

The significant decline in the selling prices of raw materials which began in 2015 has weakened some of these companies and their losses have negatively impacted our financial results.

The significant decline in the selling prices of raw materials which began in 2015 has

weakened some of these companies and their losses have negatively impacted our financial results.

Further, the increasing concern and restrictions in China of hazardous chemicals and other hazardous elements could result in orders to shut down permanently, fines or other severe measures.

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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.

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Although we seek to maintain sufficient inventory levels of certain materials to guard against interruptions in supply and to meet our near term needs, we may experience shortages of certain key materials.

Some of our products and supplies have in the past and may in the future become obsolete while in inventory due to changing customer specifications, or become excess

inventory due to decreased demand for our products and an inability to sell the inventory within a foreseeable period.

Some of our products and supplies have in the past and may in the future become obsolete while in inventory due to changing customer specifications, or become excess inventory due to decreased demand for our products and an inability to sell the inventory within a foreseeable period.

This would result in charges that reduce our gross profit and gross margin.

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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.

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

For the nine months ended September 30, 2020, we paid approximately $850,000 in tariffs.

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.

Negotiations between the U.S.

and China could be impacted by the results of the U.S.

presidential election.

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.

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

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

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

To date, we believe we have limited the impact on our company.

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.

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

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

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

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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.

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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, terrorist acts, acts of war, natural disasters and epidemics or pandemics, such as COVID-19, 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.

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(v) changing and tightening environmental regulations;

(vi) political instability in regions where we have operations;

and (vii) trade wars may also affect our business, financial condition and results of operations.

(vi) political instability in regions where we have operations and (vii) trade wars may also affect our business, financial condition and results of operations.

Our dependence on international sales involves a number of risks, including:

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

The functional currency of our wholly-owned Chinese subsidiaries 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.

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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;

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● 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.

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.

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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.

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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 .

We expect that mandatory factory shutdowns will occur in the future.

Any failure on our part to comply with governmental regulations could result in the loss of our ability to manufacture our products.

Any failure on our part to comply with governmental

regulations could result in the loss of our ability to manufacture our products.

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.

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 now is transferring volume production of the wafer processing steps for gallium arsenide to our new manufacturing facility in Dingxing.

This is an ongoing process.

Some of our larger, more sophisticated customers want to perform a site qualification and subsequently work with us 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.

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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.

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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 ongoing 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.

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It is possible that pending or future United States or foreign patent applications made by us will not be approved, that our issued patents will not protect our intellectual property, or that third parties will challenge our ownership rights or the validity of our patents.

In addition, the laws of some foreign countries may not protect our proprietary rights to as great an extent as do the laws of the United States and it may be more difficult to monitor the use of our intellectual property.

In addition, the laws of some foreign countries may not protect our

proprietary rights to as great an extent as do the laws of the United States and it may be more difficult to monitor the use of our intellectual property.

Our competitors may be able to legitimately ascertain non-patented proprietary technology embedded in our systems.

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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.

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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 wafer substrates.

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 up wafer processing production, 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.

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Existing or future changes in laws or regulations in the United States and China may require us to incur significant expenditures or liabilities, or may restrict our operations.

In addition, our employees could be exposed to chemicals or other hazardous materials at our facilities and we may be subject to lawsuits seeking damages for wrongful death or personal injuries allegedly caused by exposure to chemicals or hazardous materials at our facilities.

In addition, our

employees could be exposed to chemicals or other hazardous materials at our facilities and we may be subject to lawsuits seeking damages for wrongful death or personal injuries allegedly caused by exposure to chemicals or hazardous materials at our facilities.

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.

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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