What changed in this filing

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Item 1A. Risk Factors

2022-03-15 compared with 2021-03-23 · 114 added, 35 removed, 644 unchanged (19% of the section changed)

7 unchanged sentences

Summary Risk Factors

● We are subject to a number of unique legal and operational risks associated with our corporate structure.

● The PRC central government may intervene in or influence our PRC operations at any time and the rules and regulations in China can change quickly with little advance notice.

● Although the audit report included in this Annual Report is prepared by an independent registered public accounting firm who is currently inspected fully by the Public Company Accounting Oversight Board (the “PCAOB”), there is no guarantee that future audit reports will be prepared by an independent registered public accounting firm that is completely inspected by the PCAOB .

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

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● 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.

● The Chinese central government is increasingly aware of air pollution and other forms of environmental pollution and their reform efforts can impact our manufacturing, including intermittent mandatory shutdowns.

Shutdowns or underutilizing our manufacturing facilities may result in declines in our gross margins.

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

● If China places restrictions on freight and transportation routes and on ports of entry and departure this could result in shipping delays or increased costs for shipping.

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

● Our gross margin has fluctuated historically and may decline or increase 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.

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

● Joint venture raw material companies in China bring certain risks.

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

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

General Risk Factors

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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.

If COVID-19 vaccines are not widely available or people choose not to be vaccinated, 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.

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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%.

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

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.

Although the relocation is 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.

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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.

In the years 2021, 2020 and 2019 we paid approximately $1.3 million, $1.3 million and $0.7 million, respectively, in tariffs.

The future impact of tariffs and trade wars is uncertain.

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Because the end users of our products are primarily large companies whose businesses fluctuate with general economic and business conditions, a softening of demand for products that use our substrates, caused by a weakening economy, may result in decreased revenue.

Customers may find themselves facing excess inventory from earlier purchases, and may defer or reconsider purchasing products due to the downturn in their business and in the general economy.

Customers may find themselves facing excess inventory from earlier purchases, and may defer or reconsider purchasing products due to the downturn in their business and in the

general economy.

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.

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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.

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● the inability of such manufacturers to sell their products if they infringe third-party intellectual property rights.

If demand for the end-user applications for which our products are used decreases, or if manufacturers downstream in our supply chain are unable to develop, market and sell their products, demand for our products will decrease.

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

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Although the companies in our vertically integrated supply chain have historically made a positive contribution to our financial performance, when the average selling prices for the raw materials produced decline, this results in a negative impact on our revenue, gross margin and profitability.

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 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.

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

In 2021 and 2020, the companies accounted for under the equity method of accounting contributed a gain of $4.4 million and $0.1 million, respectively, to our consolidated financial statements.

In 2019, the companies accounted for under the equity method of accounting contributed a loss of $1.9 million 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.

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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 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.

adverse effect on our financial results.

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.

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

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

If we are 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:

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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 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.

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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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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.

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Each of our raw material supply chain companies could also be impacted by environmental related orders from the central government.

Although we are a Delaware corporation and are neither a PRC operating company nor do we conduct our operations in China through the use of VIEs, in the event we inadvertently concluded that we do not require any permissions or approvals from the CSRC or other PRC central government authorities to complete a public offering of securities or applicable laws, regulations, or interpretations change, we may be required to obtain such permissions or approvals to complete such a public offering of securities.

We are a Delaware corporation and are neither a PRC operating company nor do we conduct our operations in China through the use of VIEs.

Accordingly, we do not require any permissions or approvals from the CSRC or other PRC government authorities to complete a public offering of securities in the U.S.

However, in the event that we inadvertently concluded that such permission or approvals are not required or applicable laws, regulations, or interpretations change and we are required to obtain such permissions or approvals in the future and we fail to obtain such permissions or approvals, then we may not be able to complete a public offering of securities in the U.S.

face sanctions by the CSRC or other PRC government authorities or pressure from the PRC government in various business matters for failure to obtain such permissions or approvals.

These sanctions or pressure may include fines and penalties on our operations in China, limitations on our operating privileges in China, restrictions on or prohibition of the payments or remittance of dividends by our subsidiaries in China, or other actions that could have a material and adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our common stock.

The PRC central government may intervene in or influence our PRC operations at any time and the rules and regulations in China can change quickly with little advance notice.

The PRC central government may also exert more control over offerings conducted overseas and/or foreign investment in China-based issuers, which could result in a material change in our operations and/or the value of our common stock .

The PRC central government is a single party form of government with virtually unlimited authority and power to intervene in or influence commercial operations in China.

There are uncertainties regarding the enforcement by the PRC central government of laws in China and the rules and regulations in China can change quickly with little advance notice.

In the past, we have experienced such intervention or influence by the PRC central government and a change in the rules and regulations in China when we were instructed by the Beijing municipal government to relocate our gallium arsenide manufacturing facility in Beijing and expect that such intervention or influence or change in the rules and regulations in China could occur in the future.

Any such intervention or influence or change in the rules and regulations in China could result in a material change in our PRC operations and/or the value of our common stock.

The PRC central government may also seek to significantly limit or completely hinder our ability to offer or continue to offer our securities to investors and cause the value of such securities to significantly decline or be worthless.

Dividends from within Our Corporate Structure.

Occasionally, one of our PRC subsidiaries or PRC raw material joint ventures declares and pays a dividend.

These dividends generally occur when the PRC joint venture declares a dividend for all of its shareholders.

We have no current intentions to distribute to our investors earnings under our corporate structure.

Dividends paid to the Company are subject to a 10% PRC withholding tax.

The Company is required to obtain approval from the State Administration of Foreign Exchange (“SAFE”) to transfer funds in or out of the PRC.

SAFE requires a valid agreement to approve the transfers, which are processed through a bank.

Other than PRC foreign exchange restrictions, the Company is not subject to any PRC restrictions and limitations on its ability to distribute earnings from its businesses.

If SAFE approval is denied the dividend payable to the Company would be owed but would not be paid.

Our PRC subsidiaries and PRC joint ventures are subject to data security oversight.

Our PRC subsidiaries and PRC joint ventures are subject to oversight by the Cyberspace Administration of China (the “CAC”) regarding data security.

Except for routine personal information necessary to process payroll and other benefits and emergency contact information, our PRC subsidiaries and PRC joint ventures do not collect or maintain personal information.

Although we are neither a PRC operating company nor do we conduct our operations in China through the use of VIEs, cybersecurity is increasingly a focus of the central government and the CAC could require AXT to comply with PRC cybersecurity regulations, which could cause us to make changes to our operations that could materially harm our business, financial condition and results of operations.

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

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

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

In the years 2021, 2020 and 2019 we paid

approximately $1.3 million, $1.3 million and $0.7 million, respectively, in tariffs.

The future impact of tariffs and trade wars is uncertain.

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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.

pose challenges to our industry.

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

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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.

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

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

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

We are subject to foreign exchange gains and losses that may materially impact our statements of operations.

For example, in 2021 and 2020 we incurred foreign exchange losses of $434,000 and $411,000, respectively.

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

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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.

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● difficulties in protecting our intellectual property rights, particularly in countries where the laws and practices do not protect proprietary rights to as great an extent as do the laws and practices of the United States;

● changing laws and policies affecting economic liberalization, foreign investment, currency convertibility or exchange rates, taxation or employment;

● new or changing laws and policies affecting economic liberalization, foreign investment, currency convertibility or exchange rates, taxation or employment;

● new or changing PRC regulations and policies regarding data security and oversight by the Cyberspace Administration of China of our consolidated subsidiaries and all of our joint venture raw material companies;

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

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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.

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.

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.

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

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We have observed a growing fluidity and tightening of regulations concerning hazardous materials, other environmental controls and air pollution.

The Chinese government could revoke, terminate or suspend our operating licenses for reasons related to environmental control over the use of hazardous materials, air pollution, labor complaints, national security and similar reasons without compensation to us.

The Chinese government could revoke, terminate or suspend our

operating licenses for reasons related to environmental control over the use of hazardous materials, air pollution, labor complaints, national security and similar reasons without compensation to us.

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.

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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.

Although the audit report is prepared by an independent registered public accounting firm who is currently inspected fully by the PCAOB, there is no guarantee that future audit reports will be prepared by an independent registered public accounting firm that is completely inspected by the PCAOB.

Our independent registered public accounting firm, BPM LLP, is registered with the PCAOB and is subject to regular inspections by the PCAOB to assess its compliance with the applicable professional standards.

Although we have operations in China, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Chinese government authorities, our auditor is currently inspected fully by the PCAOB.

Inspections of other an independent registered public accounting firms conducted by the PCAOB outside China have at times identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality.

The lack of PCAOB inspections of audit work undertaken in China prevents the PCAOB from regularly evaluating independent registered public accounting firms’ audits and their quality control procedures.

As a result, to the extent that any component of our independent

registered public accounting firm’s work papers are or become located in China, such work papers will not be subject to inspection by the PCAOB.

As a result, investors would be deprived of such PCAOB inspections, which could result in limitations or restrictions to our access of the U.S.

capital markets.

As part of a continued regulatory focus in the United States on access to audit and other information currently protected by national law, in particular PRC laws, in June 2019, a bipartisan group of lawmakers introduced bills in both houses of the U.S.

Congress which, if passed, would require the SEC to maintain a list of issuers for which PCAOB is not able to inspect or investigate the audit work performed by a foreign public accounting firm completely.

The proposed Ensuring Quality Information and Transparency for Abroad-Based Listings on our Exchanges Act prescribes increased disclosure requirements for these issuers and, beginning in 2025, the delisting from U.S.

national securities exchanges such as the Nasdaq Global Select Market of issuers included on the SEC’s list for three consecutive years.

It is unclear if this proposed legislation will be enacted.

Furthermore, there have been recent deliberations within the U.S.

government regarding potentially limiting or restricting companies based in China from accessing U.S.

capital markets.

On May 20, 2020, the U.S.

Senate passed the Holding Foreign Companies Accountable Act (the “HFCA Act”), which includes requirements for the SEC to identify issuers whose audit work is performed by auditors that the PCAOB is unable to inspect or investigate completely because of a restriction imposed by a non-U.S.

authority in the auditor’s local jurisdiction.

House of Representatives passed the HFCA Act on December 2, 2020, and the HFCA Act was signed into law on December 18, 2020.

Additionally, in July 2020, the U.S.

President’s Working Group on Financial Markets issued recommendations for actions that can be taken by the executive branch, the SEC, the PCAOB or other federal agencies and department with respect to Chinese companies listed on U.S.

stock exchanges and their audit firms, in an effort to protect investors in the United States.

In response, on November 23, 2020, the SEC issued guidance highlighting certain risks (and their implications to U.S.

investors) associated with investments in issuers based in China and summarizing enhanced disclosures the SEC recommends issuers based in China make regarding such risks.

On March 24, 2021, the SEC adopted interim final rules relating to the implementation of certain disclosure and documentation requirements of the HFCA Act.

We will be required to comply with these rules if the SEC identifies us as having a “non-inspection” year (as defined in the interim final rules) under a process to be subsequently established by the SEC.

The SEC is assessing how to implement other requirements of the HFCA Act, including the listing and trading prohibition requirements described above.

Under the HFCA Act, our securities may be prohibited from trading on the Nasdaq Global Select Market or other U.S.

stock exchanges if our auditor is not inspected by the PCAOB for three consecutive years, and this ultimately could result in our common stock being delisted.

Furthermore, on June 22, 2021, the U.S.

Senate passed the Accelerating Holding Foreign Companies Accountable Act, which, if enacted, would amend the HFCA Act and require the SEC to prohibit an issuer’s securities from trading on any U.S.

stock exchanges if its auditor is not subject to PCAOB inspections for two consecutive years instead of three.

On September 22, 2021, the PCAOB adopted a final rule implementing the HFCA Act, which provides a framework for the PCAOB to use when determining, as contemplated under the HFCA Act, whether the PCAOB is unable to inspect or investigate completely registered public accounting firms located in a foreign jurisdiction because of a position taken by one or more authorities in that jurisdiction and was approved by the SEC on November 5, 2021.

While we believe that there has been dialogue among the CSRC, the SEC and the PCAOB regarding the inspection of PCAOB-registered accounting firms in China, there can be no assurance that we will be able to comply with requirements imposed by U.S.

Delisting of our common stock would force holders of our common stock to sell their shares.

The market price of our common stock could be adversely affected as a result of anticipated negative impacts of these executive or legislative actions upon, as well as negative investor sentiment towards, companies with operations in China that are listed in the United States, regardless of whether these executive or legislative actions are implemented and regardless of our actual operating performance.

Risks Related to Our Financial Results and Capital Structure

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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.

On January 10, 2022, the Shanghai Stock Exchange accepted for review the formal application of Tongmei to list its shares in an IPO on the STAR Market.

If the Shanghai Stock Exchange approves the formal application, then the Shanghai Stock Exchange will forward it to the CSRC for review.

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.

Tongmei does not expect to complete the IPO until second half of 2022.

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

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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 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.

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

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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-K

Item 1A. Risk Factors