What changed in this filing

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Item 1A. Risk Factors

2023-05-10 compared with 2022-11-10 · 120 added, 94 removed, 709 unchanged (23% of the section changed)

1 unchanged sentence

Summary Risk Factors;

General Risk Factors;

Risks Related to Our Business and Operations;

Risks Related to International Aspects of Our Business;

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● 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.

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

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We may not achieve these specifications.

● 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 condensed consolidated statements of operations.

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

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● 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

Risks Related to Our Business and Operations

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.

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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 Q2 2022, rising COVID-19 infections in Beijing resulted in concerns of a city-wide lockdown which could have required our manufacturing facilities in Beijing to close temporarily.

In the second quarter of 2022, rising COVID-19 infections in Beijing resulted in concerns of a city-wide lockdown which could have required our manufacturing facilities in Beijing to close temporarily.

Although some apartment complexes were locked down, there was no city-wide lockdown.

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.

In December 2022, the PRC government

ended its zero-COVID policy.

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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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.

Further, we do not control the prices at which our raw material companies sell their raw material products to third parties and we do not control their production process.

However, because we consolidate the results of two of these raw material companies with our own, any reduction in their gross margins could have a significant, adverse impact on our overall gross margins.

For example, 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.

Our raw material companies experience selling price volatility and purchase price volatility in acquiring base materials.

We consolidate the results of two of these raw material companies, and any reduction in their gross margins could have a significant, adverse impact on our overall gross margins.

One or more of our companies has in the past sold, and may in the future sell, raw materials at significantly reduced prices in order to gain volume sales or sales to new customers.

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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 Q2 2022, rising COVID-19 infections in Beijing resulted in concerns of a city-wide lockdown, which could have required our manufacturing facilities in Beijing to close temporarily.

In the second quarter of 2022, rising COVID-19 infections in Beijing resulted in concerns of a city-wide lockdown, which could have required our manufacturing facilities in Beijing to close temporarily.

Although some apartment complexes were locked down there was no city-wide lockdown.

In December 2022, the PRC government ended its zero-COVID policy.

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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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.

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%.

For example, in the three months ended March 31, 2023, our revenue dropped to $19.4 million and our gross margin was only 26.3%.

If we are unable to utilize the available capacity in our manufacturing facilities, we may need to implement a restructuring plan, which could have a material adverse effect on our revenue, our results of operations and our financial condition.

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, 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 China 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.

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.

An example where yield is of special concern is for our six-inch semi-conducting gallium arsenide substrates, which can be used for manufacturing industrial lasers and LED lighting.

These applications require very low defect densities, also called EPD, and our yields will be lower than the yields achieved for the same substrate when it will be used in other applications.

If we are unable to achieve the targeted quantity of low defect density substrates, then our manufacturing costs would increase and our gross margins would be negatively impacted.

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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 to the Tongzhou district where our original manufacturing facility is currently located.

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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.

All of this will require us to continue to diligently address the many details that arise at each of our 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.

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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 Q2l 2022, rising COVID-19 infections in Beijing resulted in concerns of a city-wide lockdown which could have required our manufacturing facilities in Beijing to close temporarily.

Although some apartment complexes were locked down, there was no city-wide lockdown.

In December 2022, the PRC government ended its zero-COVID policy.

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

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.

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 from China.

This pronouncement imposed tariffs on wafer substrates we imported into the United States.

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Approximately 12% of our revenue derives from importing our wafers into the United States.

In the first three quarters of 2022 we paid approximately $2.6 million 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.

In the first quarter of 2023 we paid approximately $447,000 in tariffs.

In the years ended December 31, 2022, 2021 and 2020 we paid approximately $3.3 million, $1.3 million and $1.3 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.

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

These factors could negatively impact our sales 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.

Uncertainties in the political, financial and credit markets and U.S.

financial system may cause our customers to postpone deliveries.

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

Additionally, U.S.

bank failures in 2023 may affect our customers.

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

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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.

For example, global business conditions deteriorated in the second half of 2022.

In the second quarter of 2022, our revenue totaled $39.5 million.

In the fourth quarter of 2022, our revenue declined to $26.8 million and in the first quarter of 2023, our revenue further declined to $19.4 million.

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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If any of our facilities are damaged by occurrences such as fire, explosion, power outage or natural disaster, we might not be able to manufacture our products.

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

The ongoing operation of our manufacturing and production facilities 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.

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.

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.

Actions outside of our control, such as earthquakes or other natural disasters, could also damage our facilities, rendering them inoperable.

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

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

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

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

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

More recently, global business conditions deteriorated in the second half of 2022.

In the second quarter of 2022, our revenue totaled $39.5 million.

In the fourth quarter of 2022 our revenue declined to $26.8 million and in the first quarter of 2023, our revenue further declined to $19.4 million.

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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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 the past, and negatively impacted our financial results.

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 2022 and 2021, the companies accounted for under the equity method of accounting contributed a gain of $6.0 million and $4.4 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.

However, 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.

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.

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 had a 25% ownership interest, writing down our investment to zero value.

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.

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The China central government has become increasingly concerned about environmental hazards.

Air pollution is a well-known problem in Beijing and other parts of China.

Air pollution has been a problem in Beijing and other parts of China.

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

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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.

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.

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

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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 raw material companies 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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Cyber-attacks could use fraud, trickery or other forms of deception.

A cyber-attack could expose us to a risk of loss or misuse of information, result in litigation and potential liability, damage our reputation or otherwise harm our business.

A cyber-attack could expose us to a risk of loss or misuse of information, result in litigation and potential liability, damage our reputation or otherwise harm our

In addition, the cost and operational consequences of implementing further data protection measures could be significant.

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We also need to sell our current products in increasing volumes to offset any decline in their average selling prices, and introduce new products, which we may not be able to do, or do on a timely basis.

In order to remain competitive, we must continually work to reduce the cost of manufacturing our products and improve our yields and manufacturing efficiencies.

In order to remain competitive, we must continually improve our processes, work to reduce the cost of manufacturing our products and improve our yields and manufacturing efficiencies.

Our efforts may not allow us to keep pace with competitive pricing pressures which could adversely affect our margins.

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

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

During this time, we may incur substantial expenses and expend selling, marketing and management efforts

while the customers evaluate our products.

These expenditures may not result in sales of our products.

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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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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.

This is an ongoing iterative research and development process performed by our China team in collaboration with our manufacturing managers.

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

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In the first quarter of 2017, we incurred an impairment charge of $313,000 against one of our partially owned suppliers, writing down our investment to zero value.

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.

A significant decline in the selling prices of raw materials began in 2015 and weakened some of these companies and their losses negatively impacted our financial results for several years.

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 lose any of our key suppliers, our manufacturing efforts could be significantly hampered and we could be prevented from timely producing and delivering products to our customers.

Prior to investing in our subsidiaries and joint ventures, we sometimes experienced delays obtaining critical raw materials and spare parts, including gallium, and we could experience such delays again in the future due to shortages of materials or for other reasons.

shortages of materials or for other reasons.

Delays in receiving equipment or materials could result in higher costs and cause us to delay or reduce production of our products.

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Some of our customers may be undercapitalized and cope with cash flow issues.

bank failures in 2023 may affect our customers.

Because of competitive market conditions, we may grant our customers extended payment terms when selling products to them.

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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.

Alternatively, a sudden decline in demand could result in holding too much inventory which occurred in the second half of 2022.

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.

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Countries such as the United States and China continue to be on alert for terrorist activity.

The potential near and long-term impact terrorist activities may have in regard to our suppliers, customers and markets for our products and the economy is uncertain.

The potential near and long-term impact terrorist activities may have in regards to our suppliers, customers and markets for our products and the economy is uncertain.

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.

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.

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.

Risks Related to International Aspects of Our Business

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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.

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.

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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.

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 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.

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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.

Dividends from within our corporate structure are subject to PRC withholding tax and SAFE approval.

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

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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 the years 2021, 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.

All of our wafer substrates are manufactured in China and in the years 2022, 2021 and 2020, approximately 14%, 10% and 10% of our revenue were generated by sales to customers in North America, primarily in the U.S,

respectively.

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 from China.

This pronouncement imposed tariffs on wafer substrates we imported into the United States.

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

In the first quarter of 2023 we paid approximately $447,000 in tariffs.

In the years 2022, 2021 and 2020, we paid approximately $3.3 million, $1.3 million and $1.3 million, respectively, in tariffs.

In the first three quarters of 2022 we paid approximately $2.6 million 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.

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.

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

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

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

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

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

In addition, we may incur increases in costs and other adverse business consequences, including loss of revenue or decreased gross margins, due to changes in tariffs, import or export restrictions, further trade barriers, or unexpected changes in regulatory requirements.

In addition, we may incur increases in costs and other adverse business consequences, including losses of customers and revenue or decreased gross margins, due to changes in tariffs, import or export restrictions, further trade barriers, or unexpected changes in regulatory requirements.

For example, in July 2012, we received notice of retroactive value-added taxes (VATs) levied by the tax authorities in China, which applied for the period from July 1, 2011 to June 30, 2012.

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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 Q2 2022, rising COVID-19 infections in Beijing resulted in concerns of a city-wide lockdown, which could have required our manufacturing facilities in Beijing to close temporarily.

Although some apartment complexes were locked down there was no city-wide lockdown.

In December 2022, the PRC government ended its zero-COVID policy.

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.

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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.

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 and U.S.

financial system, increasing national debt and fiscal concerns in various regions and the adoption and availability of fiscal and monetary stimulus measures to counteract the impact of the COVID-19 pandemic, pose challenges to our industry.

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

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

In addition, tariffs, trade restrictions, trade wars, high levels of inflation, rising interest rates, the Russian invasion of Ukraine, Brexit, heightened tensions between the U.S.

and China, and U.S.

bank failures in 2023, among other factors, are creating an unstable environment and can disrupt or restrict commerce.

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

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and international laws and regulations, including U.S.

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.

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

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

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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 statement of operations.

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

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

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

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

For example, in 2022, we incurred a foreign exchange gain of $1.6 million and 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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● 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;

● new or changing PRC regulations and policies regarding data security and oversight by the CAC 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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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.

The Beijing municipal government’s decision to move to the Tongzhou district, the original location of our China 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.

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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.

Although we have operations in China, a jurisdiction where the PCAOB was, until recently, 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 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 prevented 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 becomes 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.

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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.

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 its 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.

The SEC did not list AXT, Inc.

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

On December 15, 2022, the PCAOB vacated its 2021 determinations that the positions taken by authorities in the PRC and Hong Kong prevented it from inspecting and investigating completely registered public accounting firms headquartered in those jurisdictions.

As a result, the SEC will not provisionally or conclusively identify an issuer as a Commission-Identified Issuer if it files an annual report with an audit report issued by a registered public accounting firm headquartered in either jurisdiction on or after December 15, 2022, until such time as the PCAOB issues a new determination.

The SEC will continue to include any Commission-Identified Issuer on the provisional or conclusive list if they filed an annual report with an audit report issued by a registered public accounting firm headquartered in mainland China and Hong Kong prior to the PCAOB’s decision to vacate its 2021 determinations.

While an agreement has been reached 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.

If the PRC authorities do not fully perform their obligations under the agreement with the PCAOB in the future, or if authorities in the PRC otherwise take positions that render the PCAOB unable to inspect or investigate completely registered public accounting firms headquartered in the PRC and Hong Kong, the PCAOB will make determinations under the HFCA Act.

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

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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 the IPO fails to pass the audit of the Shanghai Stock Exchange, is not approved by the Chinese Securities Regulatory Commission (“CSRC”) or Tongmei cancels the IPO application.

The aggregate redemption amount is approximately $49 million.

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

Subject to review and approval by the CSRC and other authorities, Tongmei expects to accomplish this goal in the fourth quarter of 2022.

Subject to review and approval by the CSRC and other authorities, Tongmei expects to accomplish this goal in the coming months.

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

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A substantial percentage of our operating expenses are fixed, and we may be unable to adjust spending to compensate for an unexpected shortfall in revenue.

As a result, any delay in generating revenue could cause our operating results to fall below the expectations of market analysts or investors, which could also cause our stock price to decline.

As a result, any delay in generating revenue could cause our

operating results to fall below the expectations of market analysts or investors, which could also cause our stock price to decline.

If our operating results and financial performance do not meet the guidance that we have provided to the public, our stock price may decline.

We provide public guidance on our expected operating and financial results.

Although we believe that this guidance provides our stockholders, investors and analysts with a better understanding of our expectations for the future, such guidance is comprised of forward-looking statements subject to the risks and uncertainties described in this report and in our other public filings and public statements.

Although we believe that this guidance provides our stockholders, investors and analysts with a better understanding of our expectations for the future, such guidance is comprised of forward-looking statements subject to the risks and uncertainties described in this Quarterly Report on Form 10-Q and in our other public filings and public statements.

Our actual results may not meet the guidance we have provided.

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The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future.

issuance of shares of preferred stock could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock.

The issuance of shares of preferred stock could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock.

We have no present intention to issue additional shares of preferred stock.

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● the division of our Board of Directors into three separate classes, each with three-year terms;

● the right of our board to elect a director to fill a space created by a board vacancy or the expansion of the board;

● the ability of our board to alter our amended and restated bylaws;

● the requirement that only our board or the holders of at least 10% of our outstanding shares may call a special meeting of our stockholders.

● the right of our Board of Directors to elect a director to fill a space created by a board vacancy or the expansion of the board;

● the ability of our Board of Directors to alter our amended and restated bylaws;

● the requirement that only our Board of Directors or the holders of at least 10% of our outstanding shares may call a special meeting of our stockholders.

Furthermore, because we are incorporated in Delaware, we are subject to the provisions of Section 203 of the Delaware General Corporation Law.

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Our common stock is listed on The Nasdaq Global Select Market.

The bid price of our common stock has in the past closed below the $1.00 minimum per share bid price required for continued inclusion on The Nasdaq Global Select Market under Marketplace Rule 5450(a).

The bid price of our common stock has in the past closed below the $1.00 minimum per share bid price required for continued inclusion on The Nasdaq Global Select

Market under Marketplace Rule 5450(a).

If the bid price of our common stock remains below $1.00 per share for thirty consecutive business days, we could be subject to delisting from the Nasdaq Global Select Market.

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federal net operating loss carryforwards of approximately $31.9 million.

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

We have net operating loss carryforwards of approximately $21,000, primarily in the state of California, as of December 31, 2022.

We do not expect to utilize the loss carryforwards in the next several years unless Tongmei pays a dividend.

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

In general, an “ownership change” occurs if there is a cumulative change in our ownership by “5% shareholders” that exceeds 50

percentage points over a rolling three-year period.

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

Similar rules may apply under state tax laws.

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

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

For example, in 2020, we and a competitor entered into a cross license and covenant agreement, which has a term that began on January 1, 2020 and expires on December 31, 2029.

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

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If we, or any of our partially owned supply chain companies, fail to comply with environmental and safety regulations, we may be subject to significant fines or forced to cease our operations.

and use of our products, the use of hazardous materials, the operation of our facilities, and the use of our real property.

We are subject to federal, state and local environmental and safety laws and regulations in all of our operating locations, including laws and regulations of China, such as laws and regulations related to the development, manufacture and use of our products, the use of hazardous materials, the operation of our facilities, and the use of our real property.

These laws and regulations govern the use, storage, discharge and disposal of hazardous materials during manufacturing, research and development, and sales demonstrations.

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Other current and/or former employees could bring litigation against us in the future.

Although we have in place engineering, administrative and personnel protective equipment programs to address these issues, our ability to expand or continue to operate our present locations could be restricted or we could be required to acquire costly remediation equipment or incur other significant expenses if we were found liable for failure to comply with environmental and safety regulations.

to acquire costly remediation equipment or incur other significant expenses if we were found liable for failure to comply with environmental and safety regulations.

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.

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

or (2) our management does not timely assess the adequacy

of such internal control, we could be subject to regulatory sanctions and the public’s perception of us may be adversely impacted.

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

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

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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