What changed in this filing

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Item 1A. Risk Factors

2022-05-09 compared with 2021-11-12 · 152 added, 40 removed, 649 unchanged (23% 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 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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● 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.

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

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

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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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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.

In late March 2022, as a result of an outbreak of COVID-19, Shanghai was locked down and certain manufacturing facilities were required to close.

In April 2022, rising COVID-19 infections in Beijing may trigger a lockdown and our manufacturing facilities in Beijing may be required to close temporarily.

If there is a renewed surge of the COVID-19 pandemic in cities in which our PRC subsidiaries and PRC joint ventures are located, the Chinese government may require these 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.

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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.

These factors and other variables change from period to period and these fluctuations are expected to

continue in the future.

These factors and other variables change from period to period and these fluctuations are expected to continue in the future.

A recent example is that in the second quarter of 2019 our gross margin was 34.3% but it dropped to 21.0% in the fourth quarter of 2019 as a result of several of these factors.

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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.

In late March 2022, as a result of an outbreak of COVID-19, Shanghai was locked down and certain manufacturing facilities were required to close.

In April 2022, rising COVID-19 infections in Beijing may

trigger a lockdown and our manufacturing facilities in Beijing may be required to close temporarily.

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

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

Lower yields negatively impact our gross margin.

Lower yields negatively impact our gross

We have experienced product shipment delays and difficulties in achieving acceptable yields on both new and older products, and such delays and poor yields have adversely affected our operating results.

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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.

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.

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In late March 2022, as a result of an outbreak of COVID-19, Shanghai was locked down and certain manufacturing facilities were required to close.

In April 2022, rising COVID-19 infections in Beijing may trigger a lockdown and our manufacturing facilities in Beijing may be required to close temporarily.

If the government applies similar restrictions to us or requires mandatory factory shutdowns in the future, then such restrictions or shutdowns could have an adverse impact on our results of operations and our financial condition.

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In addition, from time to time, the Chinese government issues new regulations, which may require additional actions on our part to comply.

On February 27, 2015, the China State Administration of Work Safety updated its list of hazardous substances.

On February 27, 2015, the China State Administration of Work Safety updated its list of

hazardous substances.

The previous list, which was published in 2002, did not restrict the materials that we use in our wafers.

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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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The ongoing operation of our manufacturing and production facilities in China is critical to our ability to meet demand for our products.

If we are not able to use all or a significant portion of our facilities for prolonged periods for any reason, we would not be able to manufacture products for our customers.

If we are not able to use all or a significant portion of our facilities for prolonged periods for

any reason, we would not be able to manufacture products for our customers.

For example, a fire or explosion caused by our use of combustible chemicals, high furnace temperatures or, in the case of InP, high pressure during our manufacturing processes could render some of our facilities inoperable for an indefinite period of time.

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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 condensed consolidated financial statements.

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

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.

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As a result, our operating results would be adversely affected.

In addition, if we fail to meet the product qualification requirements of the customer, we may not have another opportunity to sell that product to that customer for many months or even years.

In addition, if we fail to meet the product qualification requirements of

the customer, we may not have another opportunity to sell that product to that customer for many months or even years.

In the current competitive climate, the average qualification and sales cycle for our products has lengthened even further and is expected to continue to make it difficult for us to forecast our future sales accurately.

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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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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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There may be embargos of ports or products, or destruction of shipments or our facilities, or attacks that affect our personnel.

There may be other potentially adverse effects on our operating results due to significant events that we cannot foresee.

There may be other potentially adverse effects on our operating results due to

significant events that we cannot foresee.

Since we perform all of our manufacturing operations in China, terrorist activity or threats against U.S.-owned enterprises are a particular concern 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.

All of our products are manufactured in the PRC by our PRC subsidiaries and PRC joint ventures.

We believe 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 in the U.S.

because we are a Delaware corporation with our principal corporate office in Fremont, California and the PRC laws and regulations that govern the listing of securities on a U.S.

securities exchange apply to PRC companies.

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.

We may also be pressured to delist our securities, which would force the holders to sell these securities and could result in a material adverse effect on the value of these securities.

We may face sanctions by the CSRC or other PRC central 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, delays in or restrictions on the repatriation of the proceeds from a public offering of securities in the U.S.

into the PRC, 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 businesses of our PRC subsidiaries and PRC joint ventures are subject to complex and rapidly evolving laws and regulations in the PRC, which can change quickly with little advance notice.

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.

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.

In the ordinary course of business, our PRC subsidiaries and PRC joint ventures require permits and licenses to operate in the PRC.

Such permits and licenses include permits to use hazardous materials in manufacturing operations.

From time to time, the PRC government issues new regulations, which may require additional actions on the part of our PRC subsidiaries and PRC joint ventures to comply.

For example, on February 27, 2015, the China State Administration of Work Safety updated its list of hazardous substances.

The previous list, which was published in 2002, did not restrict the materials that we use in our wafers.

The new list added gallium arsenide.

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

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 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 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 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.

All of our products are manufactured in the PRC by our PRC subsidiaries and PRC joint ventures.

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.

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.

to raise prices or make changes to our operations, which could materially harm our business, financial condition and results of operations.

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, 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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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.

In late March 2022, as a result of an outbreak of COVID-19, Shanghai was locked down and certain manufacturing facilities were required to close.

In April 2022, rising COVID-19 infections in Beijing may trigger a lockdown and our manufacturing facilities in Beijing may be required to close temporarily.

If there is a renewed surge of the COVID-19 pandemic in cities in which our PRC subsidiaries and PRC joint ventures are located, 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.

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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.

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.

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Volatility in U.S.

and international markets and economies may adversely affect our liquidity,

financial condition and profitability.

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:

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

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

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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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.

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.

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.

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.

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.

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

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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 that 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, 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 independent registered public accounting firm 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 independent registered public accounting 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 is or become located in China, such work papers may 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 non-U.S.

independent registered 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 HFCA Act, which includes requirements for the SEC to identify issuers whose audit work is performed by independent registered public accounting firms that the PCAOB is unable to inspect or investigate completely because of a restriction imposed by a non-U.S.

authority in the independent registered public accounting firms’ 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 independent registered public accounting 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 18, 2021, the SEC adopted interim final rules to implement the HFCA Act, which requires the SEC to identify certain issuers that filed annual reports with audit reports issued by registered public accounting firms located in foreign jurisdictions and that the PCAOB is unable to inspect or investigate completely because of a position taken by an authority in those jurisdictions (the “Commission-Identified Issuers”).

Specifically, the SEC implemented the submission and disclosure requirements of the HFCA Act.

On December 2, 2021, the SEC issued amendments to finalize the interim final rules.

Further, the SEC established procedures to identify Commission-Identified Issuers and prohibit the trading of the securities of Commission-Identified Issuers as required by the HFCA Act.

We will be required to comply with these rules if the SEC identifies us as a Commission-Identified Issuer.

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

stock exchanges if we are determined to be a Commission-Identified Issuer 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 the issuer is determined to be a Commission-Identified Issuer for two consecutive years instead of three.

On December 15, 2021, the Accelerating Holding Foreign Companies Accountable Act was introduced to the U.S.

House of Representatives.

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 independent registered public accounting firms located in a non-U.S.

jurisdiction because of a position taken by one or more authorities in that jurisdiction and was approved by the SEC on November 5, 2021.

On December 16, 2021, the PCAOB issued a report on its determinations that the PCAOB is unable to inspect or investigate completely registered public accounting firms headquartered in the PRC and Hong Kong because of positions taken by PRC authorities in those jurisdictions.

Beginning in March 2022, the SEC listed companies on either its conclusive list of issuers identified under the HFCA Act or provisional list of issuers identified under the HFCA Act.

Companies listed on the SEC’s conclusive list of issuers identified under the HFCA Act are determined to be Commission-Identified Issuers.

The SEC did not list AXT,

on either its conclusive list of issuers identified under the HFCA Act or provisional list of issuers identified under the HFCA Act.

While we believe that there has been dialogue among the CSRC, the SEC and the PCAOB regarding the inspection of PCAOB-independent registered public 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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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.

The aggregate redemption amount is approximately $49 million.

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 fourth quarter of 2021 or in the first quarter of 2022.

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 Shanghai Stock Exchange provided comments to the formal application in March 2022 and Tongmei filed an amended application to address the comments on April 14, 2022.

The Shanghai Stock Exchange accepted for review the amended application on April 18, 2022 and provided comments to the amended application on April 26, 2022.

The Shanghai Stock Exchange has not yet approved the formal 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.

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

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

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federal net operating loss carryforwards of approximately $43.5 million.

We have utilized net operating losses for certain states.

In June 2020, California's Governor signed AB 85 suspending California net operating loss utilization, effective for tax years 2020, 2021 and 2022.

As of September 30, 2021, we have approximately $122,000 in net operating loss carryforwards.

We have utilized all state net operating losses, primarily in the state of California, as of December 31, 2021.

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.

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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