What changed in this filing

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Item 1A. Risk Factors

2023-11-09 compared with 2023-08-09 · 37 added, 37 removed, 795 unchanged (9% of the section changed)

75 unchanged sentences

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

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.

For example, in the third quarter of 2022 our gross margin was 42.0% but it dropped to 10.7.0% in the third quarter of 2023 as a result of several of these factors.

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

16 unchanged sentences

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

For example, in the three months ended June 30, 2023, our revenue dropped to $18.6 million and our gross margin was only 9.2%.

For example, in the three months ended September 30, 2023, our revenue dropped to $17.4 million and our gross margin was only 10.7%.

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.

69 unchanged sentences

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

In the first half of 2023 we paid approximately $701,000 in tariffs.

In the first three quarters of 2023 we paid approximately $768,000 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.

18 unchanged sentences

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 second quarter of 2023, our revenue further declined to $18.6 million.

In the fourth quarter of 2022, our revenue declined to $26.8 million and in the third quarter of 2023, our revenue further declined to $17.4 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.

4 unchanged sentences

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.

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.

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

19 unchanged sentences

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.

More recently, global business conditions deteriorated, beginning 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 second quarter of 2023, our revenue further declined to $18.6 million.

In the fourth quarter of 2022 our revenue declined to $26.8 million, in the second quarter of 2023, our revenue declined to $18.6 million and in the third quarter of 2023, our revenue further declined to $17.4 million.

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

Our revenue, gross margins and profitability can be hurt if the average sales price of the various raw materials in our partially owned companies decreases.

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.

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.

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.

25 unchanged sentences

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;

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.

25 unchanged sentences

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

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.

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

24 unchanged sentences

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

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

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

while the customers evaluate our products.

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

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.

51 unchanged sentences

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.

During the second quarter of 2023, JiYa assessed one of its equity investments was fully impaired, leading it to write the asset down to zero.

This resulted in a $754,000 impairment charge in our financial results for the quarter ended June 30, 2023.

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.

4 unchanged sentences

We generally purchase these materials through standard purchase orders and not pursuant to long-term supply contracts, and no supplier guarantees supply of raw materials or equipment to us.

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.

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

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

29 unchanged sentences

We have in the past had to take inventory valuation and impairment charges.

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

Any future unexpected changes in demand or increases in costs of production that

cause us to take additional charges for un-saleable, obsolete or excess inventory, or to reduce inventory values, would adversely affect our results of operations.

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

40 unchanged sentences

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

On July 3, 2023, China adopted new export control regulations on gallium- and germanium-related materials, effective as of August 1, 2023, which require Tongmei to proceed to immediately seek permits from the applicable Chinese authorities to export gallium and germanium substrate products.

Indium phosphide substrates are not included in the new export control regulations, and, therefore, exports of indium phosphide will not require export approvals as part of these regulations.

While Tongmei has received its initial China export permits to resume shipping gallium arsenide and germanium substrates to certain customers, there can be no assurances that Tongmei will continue to receive China export permits to resume shipping gallium arsenide and germanium substrates to other customers or that China will not adopt additional export control regulations that affect our business, financial condition and results of operations.

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.

2 unchanged sentences

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

In the first half of 2023 we paid approximately $701,000 in tariffs.

In the first three quarters of 2023 we paid approximately $768,000 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.

9 unchanged sentences

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 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..

In addition, 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.

29 unchanged sentences

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.

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.

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.

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

12 unchanged sentences

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

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.

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

and China, and U.S.

17 unchanged sentences

All of our manufacturing facilities and most of our suppliers are also located outside the United States.

Managing our overseas operations presents challenges, including periodic regional economic downturns, trade balance issues, threats of trade wars, varying business conditions and demands, political instability, variations in enforcement of intellectual property and contract rights in different jurisdictions, differences in the ability to develop relationships with

suppliers and other local businesses, changes in U.S.

and international laws and regulations, including U.S.

48 unchanged sentences

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

We manufacture our substrates in China and, in the first half of 2023, approximately 88% of our sales were to customers located outside the United States.

We manufacture our substrates in China and, in the nine months ended September 30, 2023, approximately 91% of our sales were to customers located outside the United States.

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

176 unchanged sentences

Other companies may hold or obtain patents on inventions or may otherwise claim proprietary rights to technology necessary to our business.

The markets in which we compete are comprised of competitors that in some cases hold substantial patent portfolios covering aspects of products that could be similar to ours.

The markets in which we compete are comprised of competitors that in some cases

hold substantial patent portfolios covering aspects of products that could be similar to ours.

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

We may incur expenses to

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

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 a cross license and covenant agreement, which has a term that began on January 1, 2020 and expires on December 31, 2029.

24 unchanged sentences

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

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

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

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

32 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1A. Risk Factors