What changed in this filing

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Item 1A. Risk Factors

2024-03-15 compared with 2023-03-16 · 251 added, 276 removed, 550 unchanged (49% of the section changed)

13 unchanged sentences

● COVID-19 or other contagious diseases may affect our business operations and financial performance.

Lack of supply of vaccines and resistance by some to be vaccinated could prolong COVID-19.

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

Lack of supply of current vaccines and resistance by some to be vaccinated could prolong COVID-19.

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

● Changes in China’s political, social, regulatory or economic environments may affect our financial performance.

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We may not always be able to meet these requirements and we could then lose revenue.

● Difficulties in accurately estimating market demand could result in over-investing in equipment and capacity expansion or losing market share if we do not invest sufficiently.

● Difficulties in accurately estimating market demand could result in over-investing in inventory, equipment and capacity expansion or losing market share if we do not invest sufficiently.

● Attracting and retaining tier one customers requires that we succeed in our research and development programs.

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● 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.

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If SOI or new silicon-based technologies gain more widespread market acceptance, or are used in more applications, our sales of specialty material-based substrates could be reduced and our business and operating results could be significantly and adversely affected.

COVID-19 or other contagious diseases may affect our business operations and financial performance.

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

This outbreak has triggered references to the SARS outbreak, which occurred in 2003 and affected our business operations.

Any severe occurrence of an outbreak of a contagious disease such as COVID-19, SARS, Avian Flu or Ebola may cause us or the government to temporarily close our manufacturing operations in China.

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.

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 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.

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.

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

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

If COVID-19 vaccines are not widely available or people choose not to be vaccinated, our business operations may be affected negatively.

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

If our manufacturing operations were closed for a significant period or we experience difficulty in shipping our products, we could lose revenue and market share, which would depress our financial performance and could be difficult to recapture.

If one of our key customers is required to close for an extended period, this may delay the placement of new orders.

As a result, our revenue would decline.

Further, customers might default on their obligations to us.

In the first quarter of 2020 we observed an increase in our accounts receivable and believe this was the result of businesses slowing down and a general cautiousness due to the COVID-19 pandemic.

Such events would negatively impact our financial performance.

Our gross margin has fluctuated historically and may decline due to several factors.

Our gross margin has fluctuated from period to period as a result of increases or decreases in total revenue, unit volume, shifts in product mix, shifts in the cost of raw materials, costs related to the relocation of our gallium arsenide and germanium production lines, including costs related to hiring additional manufacturing employees at our new locations, tariffs imposed by the U.S.

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.

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% 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.

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

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.

In addition, at some points in the last three years, the market price of gallium dropped below our per unit inventory cost and we incurred an inventory write down under the lower of cost or net realizable value accounting rules.

In addition, the market price of gallium dropped below our per unit inventory cost and we incurred an inventory write down under the lower of cost or net realizable value accounting rules.

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

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Severe air pollution in Beijing can trigger mandatory factory shutdowns.

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 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.

For example, in the first quarter of 2018, over 300 manufacturing companies, including Tongmei, were intermittently shut down by the local government for a total of ten days from February 27 to March 31, due to severe air pollution.

Further, we 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%.

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 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.

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In addition, lead times required by our customers are shrinking, which reduces our ability to forecast orders and properly balance our capacity utilization.

Global economic and political conditions, including trade tariffs, import-export restrictions, and other 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 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%.

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

In the years ended December 31, 2023, 2022 and 2021 we paid approximately $1.0 million, $3.3 million and $1.3 million, respectively, in tariffs.

The future impact of tariffs and trade wars is uncertain.

The economic and political conditions between China and the United States, in our view, create an unstable business environment.

The United States 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.

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

Government agencies in China may be encouraging and supporting the founding of new companies, the addition of new products in existing companies and more vertical integration within companies.

These factors 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 and U.S.

financial system may cause our customers to postpone deliveries.

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

Additionally, U.S.

bank failures may affect our customers.

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

The revenue growth and profitability of our business depends on the overall demand for our substrates.

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.

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 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.

Future tightening of credit markets and concerns regarding the availability of credit may make it more difficult for our customers to raise capital, whether debt or equity, to finance their purchases of capital equipment or of the products we sell.

Delays in our customers’ ability to obtain such financing, or the unavailability of such financing, would adversely affect our product sales and revenues and, therefore, harm our business and operating results.

predict the timing, duration of or effect on our business of any future economic downturn or the timing or strength of any subsequent recovery.

COVID-19 or other contagious diseases may affect our business operations and financial performance.

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

The outbreak of COVID has triggered references to the SARS outbreak, which occurred in 2003 and affected our business operations.

Any severe occurrence of an outbreak of a contagious disease such as COVID-19, SARS, Avian Flu or Ebola may cause us or the government to temporarily close our manufacturing operations in China.

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.

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.

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

were disrupted and this impacted our efficiency.

In the future, if our manufacturing operations were closed for a significant period or we experience difficulty in shipping our products, we could lose revenue and market share, which would depress our financial performance and could be difficult to recapture.

If one of our key customers is required to close for an extended period, this may delay the placement of new orders.

As a result, our revenue would decline.

If we have low product yields, the shipment of our products may be delayed and our product cost and operating results may be adversely impacted.

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This could lead to revenue loss and market share loss.

Risks exist in utilizing our gallium arsenide manufacturing sites efficiently.

The Beijing city government is moving its offices to the Tongzhou district where our original manufacturing facility is currently located.

The city government is in the process of moving thousands of government employees into this area.

To create room and upgrade the district, the city instructed virtually all existing manufacturing companies, including AXT, to relocate all or some of their manufacturing lines.

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

Although the relocation is completed and we are in volume production at the new sites, unforeseen manufacturing issues at the new sites could still occur.

Problems could occur as we add capacity or comply with strict guidelines as customers perform their qualifications.

Problems incurred in our raw material companies or our investment partners could result in a material adverse impact on our financial condition or results of operations.

We have invested in raw material companies in China that produce materials, including 99.99% pure gallium (4N Ga), high purity gallium (6N and 7N Ga), arsenic, germanium, germanium dioxide, pyrolytic boron nitride (pBN) crucibles and boron oxide (B2O3).

We purchase a portion of the materials produced by these companies for our use and they sell the remainder of their production to third parties.

We consolidate the companies in which we have a majority or controlling financial interest and employ equity accounting for the companies in which we have a smaller ownership interest.

Several of these companies occupy space within larger facilities owned and/or operated by one of the other investment partners.

Several of these partners are engaged in other manufacturing activities at or near the same facility.

In some facilities, we share access to certain functions, including water, hazardous waste treatment or air quality treatment.

If a partner in any of these ventures experiences problems with its operations, or deliberately withholds or disrupts services, disruptions in the operations of our companies could occur, having a material adverse effect on the financial condition and results of operation in these companies, and correspondingly on our financial condition or results of operations.

For example, since gallium is a by-product of aluminum, our raw gallium company in China, which is housed in and receives services from an affiliated aluminum plant, could generate lower production and shipments of gallium as a result of reduced services provided by the aluminum plant.

Accordingly, in order to meet customer supply obligations, our supply chain may have to source materials from another independent third-party supplier, resulting in higher costs and reduced gross margin.

The China central government has tightened control over hazardous chemicals and other hazardous materials.

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 materials or a company’s failure to meet the ever-tightening standards for control of hazardous chemicals or hazardous materials could result in orders to shut down permanently, fines or other severe measures.

Any such orders directed at one of our raw material companies could result in impairment charges if the company is forced to close its business, cease operations or incurs fines or operating losses, which would have a material adverse effect on our financial results.

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

If either company is deemed to have violated applicable laws, rules or regulations governing the use, storage, discharge or disposal of hazardous chemicals, their operations could be adversely affected and we could be subject to substantial liability for clean-up efforts, personal injury, fines or suspension or termination of operations.

Employees working for these companies could bring litigation against us even though we are not directly controlling those operations.

While we would expect to defend ourselves vigorously in any litigation that is brought against us, litigation is inherently uncertain and it is possible that our business, financial condition, results of operations or cash flows could be affected.

Even if we are not deemed responsible for the actions of the 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.

Unforeseen manufacturing issues and restrictions at the new manufacturing sites could occur.

In 2015, the Beijing city government announced its decision to move most of its offices to the Tongzhou district where our original manufacturing facility is currently located.

The Beijing city government has moved thousands of government employees into this district.

To create room and upgrade the district, the government instructed virtually all existing manufacturing companies, including Tongmei, to relocate all or some of their manufacturing lines.

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

Although the relocation is completed and we are in volume production at the new sites, unforeseen manufacturing issues and restrictions at the new sites could occur.

Problems could occur as we add capacity or comply

with strict guidelines as customers perform their qualifications.

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

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Any loss of sales could have a material adverse effect on our revenue, our results of operations and our financial condition.

Some of our key employees are relocating to our new manufacturing sites.

Travel restrictions within China resulting from COVID-19 have impacted their relocation and hindered commuting.

Certain employees may choose not to relocate.

If we are unable to continue to employ those key employees in our original manufacturing facility, we may be required to terminate those employees and could incur severance costs.

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.

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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To reduce air pollution in Beijing, the Chinese government has sometimes limited the construction of new, or expansion of existing, facilities by manufacturing companies in the Beijing area or required mandatory factory shutdowns.

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.

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.

If the government applies 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.

Our ability to supply current or new orders could be significantly impacted.

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

Additional customers may require that they re-qualify our gallium arsenide wafer substrates or our new sites as a result of relocating our gallium arsenide manufacturing lines.

Although some of our largest customers have qualified our new sites there may still be some who will decide to go through the qualification process.

If we fail to meet the product qualification requirements of a customer, we may lose sales to that customer.

Our reputation may also be damaged.

Any loss of sales could have a material adverse effect on our revenue, our results of operations and our financial condition.

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 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%.

Approximately 14% of our revenue derives from importing our wafers into the United States.

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.

The economic and political conditions between China and the United States, in our view, create an unstable business environment.

The United States 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.

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

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.

This could negatively impact our sales in China.

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, recent U.S.

bank failures may affect our customers.

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

The revenue growth and profitability of our business depends on the overall demand for our substrates.

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.

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.

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.

We cannot predict the timing, duration of or effect on our business of any future economic downturn or the timing or strength of any subsequent recovery.

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 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.

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

If we are unable to operate our facilities and manufacture our products, we would lose customers and revenue and our business would be harmed.

On the evening of March 15, 2017, an electrical short-circuit fire occurred at our Beijing manufacturing facility.

The electrical power supply supporting 2-inch, 3-inch and 4-inch gallium arsenide and germanium crystal growth was damaged and production in that area was stopped.

In addition, a wastewater pipe was damaged resulting in a halt to wafer processing for four days until the pipe could be repaired.

We were able to rotate key furnace hardware and use some of the 6-inch capacity for smaller diameter crystal growth production to mitigate the impact of the fire and resume production.

If we are unable to recover from a fire or natural disaster, our business and operating results could be materially and adversely affected.

Demand for our products may decrease if demand for the end-user applications decrease or if manufacturers downstream in our supply chain experience difficulty manufacturing, marketing or selling their products.

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, 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:

Accordingly, demand for our products is subject to the demand for end-user applications, including certain consumer applications, which utilize our products.

For example, we have developed an 8-inch gallium arsenide wafer targeting an application in a consumer product.

Our customer recently informed us that its end-user customer has cancelled its project.

Production of the intended product was scheduled to begin in 2025.

While there may be other end users, this particular cancellation is the loss of a potentially high-volume sales opportunity.

Other factors affecting the ability of the manufacturers downstream in our supply chain to introduce and market their products successfully, include:

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

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

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

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

demand resulting in surplus inventory on hand.

The slowdown persisted until late in 2017.

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

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 general, many companies purchased more inventory than needed, in part due to fears of shortages resulting from COVID.

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.

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.

Our financial performance can be hurt if there are unfavorable financial results in any of our raw material companies.

The raw material companies in our vertically integrated supply chain have historically made a positive contribution to our financial performance.

However, if there are unfavorable changes in revenue, average selling prices, gross margins or operating expenses in one or more of the consolidated companies, then this can result in a negative impact on our consolidated revenue, gross margin and profitability.

If the companies are accounted for under the equity method, then these changes can result in a reduction in Equity in Income of Unconsolidated Joint Venture Companies.

In 2023 and 2022, the companies accounted for under the equity method of accounting contributed a gain of $1.9 million and $6.0 million, respectively, to our 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 consolidated financial statements.

Further, in several quarters over the past three years, one of our consolidated subsidiaries incurred a lower of cost or net realizable value inventory write down, which negatively impacted our consolidated gross margin.

In the first quarter of 2019, we incurred an impairment charge of $1.1 million for a germanium materials company in China in which we have a 25% ownership interest, writing down our investment to zero value.

If the pricing environment remains stressed by oversupply and our raw material companies cannot reduce their production costs, then the reduced average selling prices of the raw materials will have a continuing adverse impact on our revenue, gross margins and net profit.

Problems incurred in our raw material companies or our investment partners could result in a material adverse impact on our financial condition or results of operations.

We purchase a portion of the materials produced by these companies for our use and they sell the remainder of their production to third parties.

We consolidate the companies in which we have a majority or controlling financial interest and employ equity accounting for the companies in which we have a smaller ownership interest.

Several of these companies occupy space within larger facilities owned and/or operated by one of the other investment partners.

Several of these partners are engaged in other manufacturing activities at or near the same facility.

In some facilities, we share access to certain functions, including water, hazardous waste treatment or air quality treatment.

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

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.

The central government is also tightening control over hazardous

chemicals and other hazardous elements such as arsenic, which is produced by two of our raw material companies.

Further, the central government encourages employees to report to the appropriate regulatory agencies possible safety or environmental violations, but there may not be actual violations.

Regular use in the normal course of business of hazardous chemicals or hazardous elements or a company’s failure to meet the ever-tightening standards for control of hazardous chemicals or hazardous elements could result in orders to shut down permanently, fines or other severe measures.

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

Employees working for these companies could bring litigation against us even though we are not directly controlling those operations.

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.

In 2023, the total includes impairment charges of $1.9 million.

The last time the companies accounted for under the equity method of accounting contributed a loss was 2019 with a loss of $1.9 million.

Intense competition in the markets for our products could prevent us from increasing revenue and achieving profitability.

The markets for our products are intensely competitive.

We face competition for our wafer substrate products from other manufacturers of substrates, such as Sumitomo, JX, Freiberger, Umicore, and CCTC, and from companies, such as Qorvo and Skyworks, that are actively considering alternative materials to GaAs and marketing semiconductor devices using these alternative materials.

We believe that at least two of our major competitors are shipping high volumes of GaAs substrates manufactured using a process similar to our VGF process technology.

Other competitors may develop and begin using similar technology.

We face competition for our wafer substrate products from other manufacturers of substrates, such as Sumitomo, JX, Freiberger, Umicore, Vital and CCTC, and from companies, such as Qorvo and Skyworks, that are actively considering alternative materials to GaAs and marketing semiconductor devices using these alternative materials.

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

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Competitive pressures have resulted in reductions in the prices of our products, and continued or increased competition could reduce our market share, require us to further reduce the prices of our products, affect our ability to recover costs and result in reduced gross margins and profitability.

In addition, new competitors have and may continue to emerge, such as a crystal growing company established by a former employee in China that is supplying semi-conducting GaAs wafers to the LED market.

In addition, new competitors have and may continue to emerge, such as a company established by a former employee in China that is supplying semi-conducting GaAs wafers to the LED market.

Competition from sources such as this could increase, particularly if these competitors are able to obtain large capital investments.

Further, recent trade tensions between China and the United States have resulted in a greater determination within China to be

self-sufficient and produce more goods domestically.

This could result in the formation of new competitors that would compete against our company and adversely affect our financial results.

Further, recent trade tensions between China and the United States have resulted in a greater determination within China to be self-sufficient and produce more goods domestically.

This could result in the formation of new competitors that would compete against the Company and adversely affect our financial results.

Cyber-attacks, system security risks and data protection issues could disrupt our internal operations and cause a reduction in revenue, increase in expenses, negatively impact our results of operation or result in other adverse consequences.

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There is no assurance that any changes effected by us will result in sufficient cost reductions to allow us to reduce the price of our products to remain competitive or improve our gross margins.

The loss of one or more of our tier one substrate customers would significantly hurt our operating results.

From time to time, sales to one or more of our tier one customers individually represent more than 10% of our revenue and if we were to lose a major customer the loss would negatively impact our revenue.

Our customers are not obligated to purchase a specified quantity of our products or to provide us with binding forecasts of product purchases.

In addition, our customers may reduce, delay or cancel orders.

In the past, we have experienced a slowdown in bookings, significant push-outs and cancellation of orders from customers.

If we lose a major customer or if a customer cancels, reduces or delays orders, our revenue would decline.

In addition, customers that have accounted for significant revenue in the past may not continue to generate revenue for us in any future period.

Any loss of customers or any delay in scheduled shipments of our products could cause revenue to fall below our expectations and the expectations of market analysts or investors, causing our stock price to decline.

We have made and may continue to make strategic investments in raw materials suppliers, which may not be successful and may result in the loss of all or part of our investment.

We have made direct investments or investments through our subsidiaries in raw material suppliers in China, which provide us with opportunities to gain supplies of key raw materials that are important to our substrate business.

These affiliates each have a market beyond that provided by us.

We may not have significant influence over every one of these companies and in some we have made only a strategic, minority investment.

We may not be successful in achieving the financial, technological or commercial advantage upon which any given investment is premised, and we could end up losing all or part of our investment which would have a negative impact on our results of operations.

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, one of our equity investments assessed one of its equity investments was fully impaired, leading to a $754,000 impairment charge in our financial results for the second quarter of 2023.

In the fourth quarter of 2023, we divested another equity investment, incurring a net impairment charge of $1.1 million.

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 materials could result in orders to shut down permanently, fines or other severe measures.

Any such orders directed at one of our joint venture companies could result in impairment charges if the company is forced to close its business, cease operations or incurs fines, or operating losses, which would have a material adverse effect on our financial results.