What changed in AXT INC's 10-K — 2022 vs 2023
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Paragraph-level year-over-year comparison of AXT INC's 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.
+327 added−308 removedSource: 10-K (2024-03-15) vs 10-K (2023-03-16)
Top changes in AXT INC's 2023 10-K
327 paragraphs added · 308 removed · 262 edited across 1 sections
- Item 1A. Risk Factors+327 / −308 · 262 edited
Item 1A. Risk Factors
Risk Factors — what could go wrong, per management
262 edited+65 added−46 removed299 unchanged
Item 1A. Risk Factors
Risk Factors — what could go wrong, per management
262 edited+65 added−46 removed299 unchanged
2022 filing
2023 filing
Biggest changeThe following table represents bank loans as of December 31, 2022 and 2021 (in thousands, except interest rate data): 61 Table of Contents Loan Interest December 31, December 31, Subsidiary Bank Detail Rate Start Date Due Date 2021 2022 Tongmei Bank of China (1) $ 1,405 3.9 % September-21 March-22 $ 1,573 $ - 1,050 3.9 % September-21 March-22 1,220 - 3,935 4.6 % January-22 January-23 - 4,059 2,108 2.7 % September-22 March-23 - 2,175 1,405 4.2 % April-22 April-23 - 1,450 Bank of Communications (2) 2,811 4.0 % September-21 September-22 3,144 - 1,405 4.0 % November-21 November-22 1,573 - 1,405 3.3 % January-22 January-23 - 1,450 1,405 3.3 % January-22 January-23 - 1,450 Bank of Communications (5) 1,450 3.3 % December-22 December-23 - 1,450 China Merchants Bank (3) 1,405 3.6 % December-21 December-22 1,573 - China Merchants Bank (5) 1,405 4.2 % December-21 December-22 1,573 - Bank of Beijing (4) 3,192 4.2 % May-22 May-23 - 3,292 Industrial Bank (5) 5,621 4.4 % June-22 June-23 - 5,798 2,811 4.4 % September-22 September-23 - 2,900 NingBo Bank (5) 1,405 4.8 % June-22 June-23 - 1,450 1,405 4.8 % August-22 August-23 - 1,450 1,405 4.8 % September-22 September-23 - 1,450 1,406 4.5 % November-22 November-23 - 1,450 2,900 4.5 % December-22 December-23 - 2,900 Industrial and Commercial Bank of China (5) 5,621 3.2 % September-22 July-23 - 5,800 NanJing Bank (5) 2,811 4.3 % September-22 September-23 - 2,899 1,265 4.3 % November-22 November-23 - 1,305 BoYu Industrial and Commercial Bank of China (6) 1,405 3.9 % December-21 December-22 1,573 - 1,450 2.8 % December-22 December-23 - 1,450 NingBo Bank (5) 703 4.8 % September-22 March-23 - 725 1,406 3.6 % November-22 May-23 - 1,450 $ 725 4.8 % December-22 June-23 - 725 Loan Balance $ 12,229 $ 47,078 Collateral for the above bank loans and line of credit (1) Baoding Tongmei’s land use rights and all of its buildings located at its facility in Dingxing, China.
Biggest changeThe following table represents bank loans as of December 31, 2023 and 2022 (in thousands, except interest rate data): 62 Table of Contents Loan Interest December 31, December 31, Subsidiary Bank Detail Rate Start Date Due Date 2022 2023 Tongmei Bank of China (1) $ 2,108 2.7 % September-22 March-23 $ 2,175 $ - 3,935 4.6 % January-22 January-23 4,059 - 1,405 4.2 % April-22 April-23 1,450 - Bank of China (5) 1,848 3.5 % January-23 January-24 - 1,795 2,184 2.8 % March-23 March-24 - 2,118 376 2.7 % September-23 September-24 - 386 876 3.5 % November-23 November-24 - 876 1,003 3.5 % November-23 November-24 - 1,003 Bank of China (3) 2,911 3.5 % January-23 January-24 - 2,825 Bank of Communications (2) 1,405 3.3 % January-22 January-23 1,450 - 1,405 3.3 % January-22 January-23 1,450 - Bank of Communications (5) 1,450 3.3 % December-22 December-23 1,450 - 1,455 3.3 % January-23 January-24 - 1,414 1,380 3.8 % May-23 May-24 - 1,414 1,373 3.8 % July-23 May-24 - 1,414 China Merchants Bank (5) 4,367 3.7 % January-23 January-24 - 4,235 Bank of Beijing (4) 3,192 4.2 % May-22 May-23 3,292 - 2,290 4.2 % January-23 January-24 - 2,220 3,541 3.2 % June-23 May-24 - 3,626 1,380 3.2 % June-23 February-24 - 1,414 1,414 3.0 % December-23 December-24 - 1,414 Industrial Bank (5) 5,621 4.4 % June-22 June-23 5,798 - 2,811 4.4 % September-22 September-23 2,900 - 2,757 4.3 % June-23 June-24 - 2,825 2,744 4.3 % July-23 July-24 - 2,825 2,744 4.3 % September-23 September-24 - 2,825 NingBo Bank (5) 1,405 4.8 % June-22 June-23 1,450 - 1,405 4.8 % August-22 August-23 1,450 - 1,405 4.8 % September-22 September-23 1,450 - 1,406 4.5 % November-22 November-23 1,450 - 2,900 4.5 % December-22 December-23 2,900 - 2,744 4.2 % August-23 September-24 - 2,820 1,271 4.3 % November-23 November-24 - 1,271 2,825 4.3 % December-23 December-24 - 2,825 Industrial and Commercial Bank of China (5) 5,621 3.2 % September-22 July-23 5,800 - 2,744 3.3 % September-23 September-24 - 2,825 NanJing Bank (5) 2,811 4.3 % September-22 September-23 2,899 - 1,265 4.3 % November-22 November-23 1,305 - 2,752 3.8 % October-23 October-24 - 2,752 BoYu Industrial and Commercial Bank of China (6) 1,450 2.8 % December-22 December-23 1,450 - 1,414 2.7 % December-23 December-24 - 1,414 Bank of China (5) 1,204 2.4 % January-23 January-24 - 849 NingBo Bank (5) 703 4.8 % September-22 March-23 725 - 1,406 3.6 % November-22 May-23 1,450 - 725 4.8 % December-22 June-23 725 - 1,414 3.3 % November-23 May-24 - 1,414 Industrial Bank (5) 688 3.6 % September-23 September-24 - 708 Bank of Communications (5) 1,414 3.0 % November-23 May-24 - 1,414 Loan Balance $ 47,078 $ 52,921 Collateral for the above bank loans and line of credit (1) Baoding Tongmei’s land use rights and all of its buildings located at its facility in Dingxing, China.
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.
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.
Our industry is characterized by high demand and intense competition for talent, and the turnover rate can be high. We compete for qualified management and other personnel with other specialty material companies and semiconductor companies. Our employees could leave our company with little or no prior notice and would be free to work for a competitor.
Our industry is characterized by high demand and intense competition for talent, and the turnover rate can be high. We compete for qualified management and other personnel with other specialty material companies and semiconductor companies. Our employees could leave the Company with little or no prior notice and would be free to work for a competitor.
The PRC central government may also exert more control over offerings conducted overseas and/or foreign investment in China-based issuers, which could result in a material change in our operations and/or the value of our common stock.
The PRC central government may also exert more control over offerings conducted overseas and/or foreign investment in China-based issuers, which could result in a material change in our operations and/or the value of our common stock.
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. 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.
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 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.
We are subject to foreign exchange gains and losses that may materially impact our consolidated statements of operations. We are subject to foreign exchange gains and losses that may materially impact our statements of operations.
We are subject to foreign exchange gains and losses that may materially impact our consolidated statements of operations. We are subject to foreign exchange gains and losses that may materially impact our consolidated statements of operations.
Revenue from customers in Europe decreased in 2022 by 10.7%, primarily due to lower demand for GaAs used in LED applications, Ge wafer substrates and pBN crucibles sold by one of our consolidated subsidiaries, partially offset by increased demand for InP wafer substrates.
Revenue from customers in Europe decreased in 2022 by 10.7%, primarily due to lower demand for GaAs wafer substrates used in LED applications, Ge wafer substrates and pBN crucibles sold by one of our consolidated subsidiaries, partially offset by increased demand for InP wafer substrates.
By the terms of the Series A preferred stock, so long as any shares of Series A preferred stock are outstanding, neither the Company nor any subsidiary of the Company shall redeem, repurchase or otherwise acquire any shares of common stock, unless all accrued dividends on the Series A preferred stock have been paid.
By the terms of the Series A preferred stock, so long as any shares of Series A preferred stock are outstanding, neither the Company nor any subsidiary of the Company shall redeem, repurchase or otherwise acquire any shares of common stock, unless all accrued dividends on the Series A preferred stock have been paid.
The aggregate redemption amount is approximately $49 million. Tongmei submitted its IPO application to the Shanghai Stock Exchange, and it was formally accepted for review on January 10, 2022. The Shanghai Stock Exchange approved the IPO application on July 12, 2022. On August 1, 2022, the CSRC accepted for review Tongmei’s IPO application.
The aggregate redemption amount is approximately $49 million. Tongmei submitted its IPO application to the Shanghai Stock Exchange, and it was formally accepted for review on January 10, 2022. The Shanghai Stock Exchange approved the IPO application on July 12, 2022. On August 1, 2022, the CSRC accepted for review Tongmei’s IPO application.
We monitor our investments for impairment and record reductions in carrying value when events or changes in circumstances indicate that the carrying value may not be recoverable.
We monitor our investments for impairment and record reductions in carrying value when events or changes in circumstances indicate that the carrying value may not be recoverable.
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. ● Attracting and retaining tier one customers requires that we succeed in our research and development programs.
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 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.
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.
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.
We expect that mandatory factory shutdowns will occur in the future. If the frequency of such shutdowns increases, especially at the end of a quarter, or if the total number of days of shutdowns prevents us from producing enough wafers to ship, then these shutdowns will have a material adverse effect on our manufacturing output, revenue and factory utilization.
We expect that mandatory factory shutdowns may occur in the future. If the frequency of such shutdowns increases, especially at the end of a quarter, or if the total number of days of shutdowns prevents us from producing enough wafers to ship, then these shutdowns will have a material adverse effect on our manufacturing output, revenue and factory utilization.
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. Trade restrictions against China have resulted in a greater determination within China to be self-sufficient and produce more goods domestically.
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.
We expect that mandatory factory shutdowns will occur in the future. If the frequency of such shutdowns increases, especially at the end of a quarter, or if the total number of days of shutdowns prevents us from producing enough wafers to ship, then the shutdowns will have a material adverse effect on our manufacturing output, revenue and factory utilization.
We expect that mandatory factory shutdowns may occur in the future. If the frequency of such shutdowns increases, especially at the end of a quarter, or if the total number of days of shutdowns prevents us from producing enough wafers to ship, then the shutdowns will have a material adverse effect on our manufacturing output, revenue and factory utilization.
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.
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.
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.
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 company established by a former employee in China that is supplying semi-conducting GaAs wafers to the LED market.
The 883,000 shares of Series A preferred stock issued and outstanding as of December 31, 2022 are valued at $3,532,000 and are non-voting and non-convertible preferred stock with a 5.0% cumulative annual dividend rate payable when declared by our board of directors, and a $4.00 per share liquidation preference over common stock that must be paid before any distribution is made to the holders of our common stock.
The 883,000 shares of Series A preferred stock issued and outstanding as of December 31, 2023 are valued at $3,532,000 and are non-voting and non-convertible preferred stock with a 5.0% cumulative annual dividend rate payable when declared by our Board of Directors, and a $4.00 per share liquidation preference over common stock that must be paid before any distribution is made to the holders of our common stock.
Summary Risk Factors ● We are subject to a number of unique legal and operational risks associated with our corporate structure. ● The PRC central government may intervene in or influence our PRC operations at any time and the rules and regulations in China can change quickly with little advance notice. 19 Table of Contents ● Although the audit report included in this Annual Report is prepared by an independent registered public accounting firm who is currently inspected fully by the Public Company Accounting Oversight Board (the “PCAOB”), there is no guarantee that future audit reports will be prepared by an independent registered public accounting firm that is completely inspected by the PCAOB . ● Our NASDAQ stock price is volatile and our stock price could decline.
Summary Risk Factors ● We are subject to a number of unique legal and operational risks associated with our corporate structure. ● The PRC central government may intervene in or influence our PRC operations at any time and the rules and regulations in China can change quickly with little advance notice. ● Although the audit report included in this Annual Report is prepared by an independent registered public accounting firm who is currently inspected fully by the Public Company Accounting Oversight Board (the “PCAOB”), there is no guarantee that future audit reports will be prepared by an independent registered public accounting firm that is completely inspected by the PCAOB . ● Our NASDAQ stock price is volatile and our stock price could decline.
Another severe or prolonged economic downturn could result in a variety of risks to our business, including: ● increased volatility in our stock price; ● increased volatility in foreign currency exchange rates; ● delays in, or curtailment of, purchasing decisions by our customers or potential customers; ● increased credit risk associated with our customers or potential customers, particularly those that may operate in industries most affected by the economic downturn; and ● impairment of our tangible or intangible assets.
Another severe or prolonged economic downturn could result in a variety of risks to our business, including: ● inventory corrections; ● increased volatility in our stock price; ● increased volatility in foreign currency exchange rates; ● delays in, or curtailment of, purchasing decisions by our customers or potential customers; ● increased credit risk associated with our customers or potential customers, particularly those that may operate in industries most affected by the economic downturn; and ● impairment of our tangible or intangible assets.
The $8.1 million increase in wafer substrate sales was led by strong demand for InP wafer substrates for 5G applications, data center upgrades (silicon photonics) and consumer related applications, partially offset by lower demand for our GaAs wafer substrates as the result of decreased demand for LED products, industrial lasers and other applications requiring low defect densities in the wafer substrate and Ge wafer substrates decreased primarily as a result of lower demand from our customers in China.
The $8.1 million increase in wafer substrate sales was the result of strong demand for InP wafer substrates for 5G applications, data center upgrades (silicon photonics) and consumer related applications, partially offset by lower demand for our GaAs wafer substrates as the result of decreased demand for LED products, industrial lasers and other applications requiring low defect densities in the wafer substrate and lower demand for our Ge wafer substrates from our customers in China.
In the first quarter of 2018, from February 27 to March 31 over 300 manufacturing companies, including AXT, 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.
In the first quarter of 2018, from February 27 to March 31 over 300 manufacturing companies, including Tongmei, 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.
As of December 31, 2022, we do not have any outstanding purchase orders that will incur a penalty if canceled by the Company. Recent Accounting Pronouncements Recent accounting pronouncements are detailed in Note 1 to our consolidated financial statements included in this Annual Report on Form 10-K. Item 7A.
As of December 31, 2023, we do not have any outstanding purchase orders that will incur a penalty if canceled by the Company. Recent Accounting Pronouncements Recent accounting pronouncements are detailed in Note 1 to our consolidated financial statements included in this Annual Report on Form 10-K. Item 7A.
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 is an additional cause of uncertainty.
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.
Assets held for sale are carried at the lower of carrying value or estimated net realizable value. We had no “Assets held for sale” or any impairment of long-lived assets on the consolidated balance sheets as of December 31, 2022 and 2021. Stock-Based Compensation We account for stock-based compensation in accordance with ASC Topic 718, Stock-based Compensation .
Assets held for sale are carried at the lower of carrying value or estimated net realizable value. We had no “Assets held for sale” or any impairment of long-lived assets on the consolidated balance sheets as of December 31, 2023 and 2022. Stock-Based Compensation We account for stock-based compensation in accordance with ASC Topic 718, Stock-based Compensation .
To manage our business effectively, we may need to implement additional management information systems, further develop our operating, administrative, financial and accounting systems and controls, add experienced senior level managers, and maintain close coordination among our executive, engineering, accounting, marketing, sales and operations organizations. Item 1B. Unresolved Staff Comments None. Item 2.
To manage our business effectively, we may need to implement additional management information systems, further develop our operating, administrative, financial and accounting systems and controls, add experienced senior level managers, and maintain close coordination among our executive, engineering, accounting, marketing, sales and operations organizations. Item 1B. Unresolved Staff Comments None. Item 1C.
Properties Our principal properties as of March 12, 2023 are as follows: Square Location Feet Principal Use Ownership Fremont, CA 19,467 Administration Operating lease, expires November 2023 Beijing, China 141,524 Production and Administration Owned by AXT / Tongmei DingXing, China 193,621 Production Owned by AXT / Tongmei Kazuo, China 528,390 Production Owned by AXT / Tongmei Kazuo, China 75,703 Production and Administration Owned by Beijing BoYu Semiconductor Vessel Craftwork Technology Co., Ltd.* Tianjin, China 146,012 Production and Administration Owned by Beijing BoYu Semiconductor Vessel Craftwork Technology Co., Ltd., * Kazuo, China 190,597 Production Owned by ChaoYang JinMei Gallium Ltd.,* * Raw material companies consolidated in our consolidated financial statements.
Properties Our principal properties as of March 12, 2024 are as follows: Square Location Feet Principal Use Ownership Fremont, CA 19,467 Administration Operating lease, expires November 2028 Beijing, China 141,524 Production and Administration Owned by AXT / Tongmei DingXing, China 193,621 Production Owned by AXT / Tongmei Kazuo, China 528,390 Production Owned by AXT / Tongmei Kazuo, China 75,703 Production and Administration Owned by Beijing BoYu Semiconductor Vessel Craftwork Technology Co., Ltd.* Tianjin, China 146,012 Production and Administration Owned by Beijing BoYu Semiconductor Vessel Craftwork Technology Co., Ltd., * Kazuo, China 190,597 Production Owned by ChaoYang JinMei Gallium Ltd.,* * Raw material companies consolidated in our consolidated financial statements.
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 21 Table of Contents product costs.
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.
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. This occurred in the second half of 2022.
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.
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.
Severe air pollution in Beijing can trigger mandatory factory shutdowns. 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.
These efforts have impacted manufacturing companies through mandatory shutdowns, increased inspections and regulatory reforms. In the fourth quarter of 2017, many manufacturing companies in the greater Beijing area, including AXT, were instructed by the local government to cease most manufacturing for several days until the air quality improved.
These efforts have impacted manufacturing companies through mandatory shutdowns, increased inspections and regulatory reforms. In the fourth quarter of 2017, many manufacturing companies in the greater Beijing area, including Tongmei, were instructed by the local government to cease most manufacturing for several days until the air quality improved.
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. We expensed the retroactive VATs of approximately $1.3 million in the quarter ended June 30, 2012, which resulted in a decrease in our gross margins.
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. We expensed the retroactive VATs of approximately $1.3 million in the quarter ended June 30, 2012, which resulted in a decrease in our gross margins.
During 2013 and 2015, we repurchased shares of our outstanding common stock. As of December 31, 2015, the Series A preferred stock had cumulative dividends of $2.9 million and we include such cumulative dividends in “Accrued liabilities” in our consolidated balance sheets . No shares were repurchased during 2022, 2021 and 2020 under this program.
During 2013 and 2015, we repurchased shares of our outstanding common stock. As of December 31, 2015, the Series A preferred stock had cumulative dividends of $2.9 million and we include such cumulative dividends in “Accrued liabilities” in our consolidated balance sheets . No shares were repurchased during 2023, 2022 and 2021 under this program.
If we, or any of our partially owned supply chain companies, fail to comply with applicable regulations, we could be subject to substantial liability for clean-up efforts, personal injury, fines or suspension or be forced to close or temporarily cease our operations, and/or suspend or terminate the development, 44 Table of Contents manufacture or use of certain of our products, the use of our facilities, or the use of our real property, each of which could have a material adverse effect on our business, financial condition and results of operations.
If we, or any of our partially owned supply chain companies, fail to comply with applicable regulations, we could be subject to substantial liability for clean-up efforts, personal injury, fines or suspension or be forced to close or temporarily cease our operations, and/or suspend or terminate the development, manufacture or use of certain of our products, the use of our facilities, or the use of our real property, each of which could have a material adverse effect on our business, financial condition and results of operations.
Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, has assessed the effectiveness of our internal control over financial reporting as of December 31, 2022 based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, has assessed the effectiveness of our internal control over financial reporting as of December 31, 2023 based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Our products are manufactured using complex crystal growth and wafer processing technologies, and the number of usable wafer substrates we produce can fluctuate as a result of many factors, including: ● poor control of furnace temperature and pressure; 22 Table of Contents ● impurities in the materials used; ● contamination of the manufacturing environment; ● quality control and inconsistency in quality levels; ● lack of automation and inconsistent processing requiring manual manufacturing steps; ● substrate breakage during the manufacturing process; and ● equipment failure, power outages or variations in the manufacturing process.
Our products are manufactured using complex crystal growth and wafer processing technologies, and the number of usable wafer substrates we produce can fluctuate as a result of many factors, including: ● poor control of furnace temperature and pressure; ● impurities in the materials used; ● contamination of the manufacturing environment; ● quality control and inconsistency in quality levels; ● lack of automation and inconsistent processing requiring manual manufacturing steps; ● substrate breakage during the manufacturing process; and ● equipment failure, power outages or variations in the manufacturing process.
These Level 2 instruments require more management judgment and subjectivity compared to Level 1 instruments, including: ● Determining which instruments are most comparable to the instrument being priced requires management to identify a sample of similar securities based on the coupon rates, maturity, issuer, credit rating, and instrument type, and subjectively select an individual security or multiple securities that are deemed most similar to the security being priced. 51 Table of Contents ● Determining which model-derived valuations to use in determining fair value requires management judgment.
These Level 2 instruments require more management judgment and subjectivity compared to Level 1 instruments, including: ● Determining which instruments are most comparable to the instrument being priced requires management to identify a sample of similar securities based on the coupon rates, maturity, issuer, credit rating, and instrument type, and subjectively select an individual security or multiple securities that are deemed most similar to the security being priced. ● Determining which model-derived valuations to use in determining fair value requires management judgment.
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. These expenditures may not result in sales of our products.
The sale of our products is subject to our customers’ lengthy internal evaluation and qualification processes. 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.
The following are some examples of these provisions: ● the division of our board of directors into three separate classes, each with three-year terms; 42 Table of Contents ● 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; and ● 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 following are some examples of these provisions: ● the division of our Board of Directors into three separate classes, each with three-year terms; ● 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; and ● 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.
These provisions prohibit us from engaging in any business combination with any interested stockholder (a stockholder who owns 15% or more of our outstanding voting stock) for a period of three years following the time that such stockholder became an interested stockholder, unless: ● 66 2 / 3 % of the shares of voting stock not owned by the interested stockholder approve the merger or combination, or ● the board of directors approves the merger or combination or the transaction which resulted in the stockholder becoming an interested stockholder.
These provisions prohibit us from engaging in any business combination with any interested stockholder (a stockholder who owns 15% or more of our outstanding voting stock) for a period of three years following the time that such stockholder became an interested stockholder, unless: ● 66 2 / 3 % of the shares of voting stock not owned by the interested stockholder approve the merger or combination, or 41 Table of Contents ● the Board of Directors approves the merger or combination or the transaction which resulted in the stockholder becoming an interested stockholder.
Revenue is recognized when control of the promised goods is transferred to our customer, which is either upon shipment from our dock, receipt at the customer’s dock, or removal from consignment inventory at the customer’s location, in an amount that reflects the consideration we expect to be entitled to receive in exchange for those goods. 49 Table of Contents We have elected to account for shipping and handling as activities to fulfill the promise to transfer the goods.
Revenue is recognized when control of the promised goods is transferred to our customer, which is either upon shipment from our dock, receipt at the customer’s dock, or removal from consignment inventory at the customer’s location, in an amount that reflects the consideration we expect to be entitled to receive in exchange for those goods. We have elected to account for shipping and handling as activities to fulfill the promise to transfer the goods.
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.
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.
This could result in the formation of new competitors that would compete against our 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. Like most technology companies, we could be targeted in cyber-attacks.
This could result in the formation of new competitors that would compete against the Company and adversely affect our financial results. 25 Table of Contents 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. Like most technology companies, we could be targeted in cyber-attacks.
Net cash used in operating activities of $8.8 million for 2022 was primarily comprised of net change in operating assets and liabilities of $35.2 million, gain on equity method investments of $6.0 million offset in part by our net income of $18.7 million, adjustment of non-cash items of depreciation and amortization of $8.1 million, stock-based compensation of $4.0 million, return of equity method investments (dividends) of $1.6 million, and amortization of marketable securities premium of $0.1 million.
Net cash used in operating activities of $8.8 million for 2022 was primarily comprised of net change in operating assets and liabilities of $35.2 million, gain on equity method investments of $6.0 million offset in part by our net income of $18.7 million, adjustment of non-cash items of depreciation and amortization of $8.1 million, stock-based compensation of $4.0 million, return of equity method investments (dividends) of $1.6 million, and amortization of 59 Table of Contents marketable securities premium of $0.1 million.
We believe that we do not require any permissions or approvals from the CSRC or other PRC central government authorities to complete a public offering of securities in the U.S. because we are a Delaware corporation with our principal corporate office in Fremont, California and the PRC laws and regulations that govern the listing of 32 Table of Contents securities on a U.S. securities exchange apply to PRC companies.
We believe that we do not require any permissions or approvals from the CSRC or other PRC central government authorities to complete a public offering of securities in the U.S. because we are a Delaware corporation with our principal corporate office in Fremont, California and the PRC laws and regulations that govern the listing of securities on a U.S. securities exchange apply to PRC companies.
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.
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.
The listing of Tongmei on the STAR Market will not change the status of AXT as a U.S. public company. There can be no assurances that Tongmei will complete its IPO in 2023 or at all.
The listing of Tongmei on the STAR Market will not change the status of AXT as a U.S. public company. There can be no assurances that Tongmei will complete its IPO in 2024 or at all.
The credit risk in our accounts receivable is mitigated by our credit evaluation process and the geographical dispersion of sales transactions. Two customers accounted for more than 10% of our accounts receivable as of December 31, 2022 and no customer accounted for more than 10% of our accounts receivable as of December 31, 2021.
The credit risk in our accounts receivable is mitigated by our credit evaluation process and the geographical dispersion of sales transactions. No customer accounted for more than 10% of our accounts receivable as of December 31, 2023 and two customers accounted for more than 10% of our accounts receivable as of December 31, 2022.
Our quarterly and annual revenue and operating results have varied significantly in the past and may vary significantly in the future due to a number of factors, including: ● our ability to develop, manufacture and deliver high quality products in a timely and cost-effective manner; ● unforeseen disruptions at our new sites; ● disruptions in manufacturing if air pollution, or other environmental hazards, or outbreaks of contagious diseases causes the Chinese government to order work stoppages; ● fluctuation of our manufacturing yields; 41 Table of Contents ● decreases in the prices of our or our competitors’ products; ● fluctuations in demand for our products; ● the volume and timing of orders from our customers, and cancellations, push-outs and delays of customer orders once booked; ● decline in general economic conditions or downturns in the industry in which we compete; ● expansion of our manufacturing capacity; ● expansion of our operations in China; ● limited availability and increased cost of raw materials; ● costs incurred in connection with any future acquisitions of businesses or technologies; and ● increases in our expenses, including expenses for research and development.
Our quarterly and annual revenue and operating results have varied significantly in the past and may vary significantly in the future due to a number of factors, including: ● inventory corrections within the technology sector; ● our ability to develop, manufacture and deliver high quality products in a timely and cost-effective manner; ● unforeseen disruptions at our new sites; ● disruptions in manufacturing if air pollution, or other environmental hazards, or outbreaks of contagious diseases causes the Chinese government to order work stoppages; ● fluctuation of our manufacturing yields; ● decreases in the prices of our or our competitors’ products; ● fluctuations in demand for our products; ● the volume and timing of orders from our customers, and cancellations, push-outs and delays of customer orders once booked; ● decline in general economic conditions or downturns in the industry in which we compete; ● expansion of our manufacturing capacity; ● expansion of our operations in China; ● limited availability and increased cost of raw materials; 40 Table of Contents ● costs incurred in connection with any future acquisitions of businesses or technologies; and ● increases in our expenses, including expenses for research and development.
Pursuant to the Capital Investment Agreements with the Investors, each Investor has the right to require AXT to redeem any or all 60 Table of Contents 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 CSRC or Tongmei cancels the IPO application.
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 CSRC or Tongmei cancels the IPO application.
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.
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.
As of December 31, 2022 and 2021, the net change in fair value from the placement of the hedge to settlement at each month end during the quarter had a de minimis impact to the consolidated results.
As of December 31, 2023 and 2022, the net change in fair value from the placement of the hedge to settlement at each month end during the quarter had a de minimis impact to the consolidated results.
Management has concluded that our internal control over financial reporting was effective as of December 31, 2022. The Company’s internal control over financial reporting as of December 31, 2022 has been audited by BPM, the independent registered public accounting firm who also audited the Company’s financial statements.
Management has concluded that our internal control over financial reporting was effective as of December 31, 2023. The Company’s internal control over financial reporting as of December 31, 2023 has been audited by BPM, the independent registered public accounting firm who also audited the Company’s financial statements.
However, we may not be able to identify additional complementary joint venture opportunities or, even once opportunities are identified, we may not be able to reach agreement on the terms of the business venture with the other investment partners. Further, geopolitical tensions and trade wars could result in government agencies blocking such new joint ventures.
However, we may not be able to identify additional complementary joint 29 Table of Contents venture opportunities or, even once opportunities are identified, we may not be able to reach agreement on the terms of the business venture with the other investment partners. Further, geopolitical tensions and trade wars could result in government agencies blocking such new joint ventures.
The increase in research and development expenses in 2021 was primarily due to higher development expenses for 8-inch GaAs and 6-inch InP wafer substrates and the development of new features for certain of our GaAs and InP wafer substrates, new product testing and personnel-related expenses.
The increase in research and development expenses in 2022 was primarily due to higher development expenses for 8-inch GaAs and 6-inch InP wafer substrates, the development of new features for certain of our GaAs and InP wafer substrates and new product testing and personnel-related expenses.
If: (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. 45 Table of Contents We need to continue to improve or implement our systems, procedures and controls.
If: (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. We need to continue to improve or implement our systems, procedures and controls.
As of December 31, 2022 the net change in fair value from the placement of the hedge to settlement at each month end during the quarter had a de minimis impact to the consolidated results.
As of December 31, 2023 the net change in fair value from the placement of the hedge to settlement at each month end during the quarter had a de minimis impact to the consolidated results.
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.
Additionally, in the second half of 2016, manufacturers producing and selling passive optical network devices known as EPONs and GPONs experienced a slowdown in 24 Table of Contents 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.
The total investment targeted by AXT in Kazuo is approximately $15 million in value, assets and capital. Purchase Obligations with Penalties for Cancellation In the normal course of business, we issue purchase orders to various suppliers. In certain cases, we may incur a penalty if we cancel the purchase order.
The total investment targeted by AXT in Kazuo is approximately $15 million in value, assets and capital. 64 Table of Contents Purchase Obligations with Penalties for Cancellation In the normal course of business, we issue purchase orders to various suppliers. In certain cases, we may incur a penalty if we cancel the purchase order.
We expect that mandatory factory shutdowns will occur in the future. Any failure on our part to comply with governmental regulations could result in the loss of our ability to manufacture our products.
We expect that mandatory factory shutdowns may occur in the future. Any failure on our part to comply with governmental regulations could result in the loss of our ability to manufacture our products.
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.
The economic and political conditions between China and the United States, in our view, create an unstable business environment. 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 maintain or grow our revenue.
We believe that our internal, non-patented proprietary process technology methods, systems and processes are a valuable and critical element of our intellectual property. We must establish and maintain safeguards to avoid the theft of these processes. Our ability to establish and maintain a position of technology leadership also depends on the skills of our development personnel.
We believe that our 42 Table of Contents internal, non-patented proprietary process technology methods, systems and processes are a valuable and critical element of our intellectual property. We must establish and maintain safeguards to avoid the theft of these processes. Our ability to establish and maintain a position of technology leadership also depends on the skills of our development personnel.
In the years 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. 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.
In the years 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. 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.
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. ● Changes in China’s political, social, regulatory or economic environments may affect our financial performance. ● The Chinese central government is increasingly aware of air pollution and other forms of environmental pollution and their reform efforts can impact our manufacturing, including intermittent mandatory shutdowns.
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. ● The Chinese central government is increasingly aware of air pollution and other forms of environmental pollution and their reform efforts can impact our manufacturing, including intermittent mandatory shutdowns.
Because the end 24 Table of Contents 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.
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.
Under the HFCA Act, our securities may be prohibited from trading on the Nasdaq Global Select Market or other U.S. stock exchanges if we are determined to be a Commission-Identified Issuer for three consecutive years, and this ultimately could result in our common stock being delisted. Furthermore, on June 22, 2021, the U.S.
Under the HFCA Act, our securities may be prohibited from trading on the Nasdaq Global Select Market or other U.S. stock exchanges if we are determined to be a Commission-Identified 38 Table of Contents Issuer for three consecutive years, and this ultimately could result in our common stock being delisted. Furthermore, on June 22, 2021, the U.S.
Share-based awards granted include stock options and restricted stock awards. We utilize the Black-Scholes option pricing model to estimate the grant date fair value of stock options, which requires the input of highly subjective assumptions, including estimating stock price volatility and expected term.
Share-based awards granted include stock options and restricted stock awards. We utilize the Black-Scholes option 52 Table of Contents pricing model to estimate the grant date fair value of stock options, which requires the input of highly subjective assumptions, including estimating stock price volatility and expected term.
These investments are classified as other assets in the consolidated balance sheets and accounted for under either the equity or cost method, depending on whether we have the ability to exercise significant influence over their operations or financial decisions.
These investments are classified as other assets in the consolidated balance sheets and accounted for under either the equity or fair value method, depending on whether we have the ability to exercise significant influence over their operations or financial decisions.
If we are unable to improve utilization levels at our facilities during periods of decreased demand and correctly manage capacity, the fixed expense levels will have an adverse effect on our business, financial condition and results of operations.
If we are unable to improve utilization levels at our facilities during periods of decreased demand and correctly manage capacity, the fixed 20 Table of Contents expense levels will have an adverse effect on our business, financial condition and results of operations.
If SAFE approval is denied the dividend payable to the Company would be owed but would not be paid. 33 Table of Contents Our PRC subsidiaries and PRC joint ventures are subject to data security oversight. Our PRC subsidiaries and PRC joint ventures are subject to oversight by the Cyberspace Administration of China (the “CAC”) regarding data security.
If SAFE approval is denied the dividend payable to the Company would be owed but would not be paid. Our PRC subsidiaries and PRC joint ventures are subject to data security oversight. Our PRC subsidiaries and PRC joint ventures are subject to oversight by the Cyberspace Administration of China (the “CAC”) regarding data security.
As such, sales commissions and other related expenses are expensed as incurred, given that the expected period of benefit is less than one year. Accounts Receivable and Allowance for Doubtful Accounts Accounts receivable are recorded at the invoiced amount and are not interest bearing.
As such, sales commissions and other related expenses are expensed as incurred, given that the expected period of benefit is less than one year. Accounts Receivable and Allowance for Credit Losses Accounts receivable are recorded at the invoiced amount and are not interest bearing.
We routinely evaluate the levels of our inventory in light of current market conditions in order to identify excess and obsolete inventory, and we provide a 50 Table of Contents reserve for certain inventories based upon the age and quality of the product and the projections for sale of the completed products.
We routinely evaluate the levels of our inventory in light of current market conditions in order to identify excess and obsolete inventory, and we provide a reserve for certain inventories based upon the age and quality of the product and the projections for sale of the completed products.
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 27 Table of Contents self-sufficient and produce more goods domestically.
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.
ASC 740 also requires that deferred tax assets be 52 Table of Contents reduced by a valuation allowance if it is more likely than not that a portion of the deferred tax asset will not be realized. Our deferred tax assets have been reduced to zero by valuation allowance.
ASC 740 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that a portion of the deferred tax asset will not be realized. Our deferred tax assets have been reduced to zero by valuation allowance.
In the future we may experience foreign exchange losses on our non-functional currency denominated receivables and payables to the extent that we have not mitigated our exposure. Foreign exchange losses could have a materially adverse effect on our operating results and cash flows. 63 Table of Contents Our product sales to Japanese customers are typically invoiced in Japanese yen.
In the future we may experience foreign exchange losses on our non-functional currency denominated receivables and payables to the extent that we have not mitigated our exposure. Foreign exchange losses could have a materially adverse effect on our operating results and cash flows. Our product sales to Japanese customers are typically invoiced in Japanese yen.
Although we remain well-capitalized, the cost and availability of funds may be adversely affected by illiquid credit markets. Volatility in U.S. and international markets and economies may adversely affect our liquidity, financial condition and profitability.
Although we remain well-capitalized, the cost and availability of funds may be adversely affected by illiquid credit markets. Volatility in U.S. and international markets and economies may adversely 33 Table of Contents affect our liquidity, financial condition and profitability.
We do not have significant influence over every one of these companies and in some we have made only a strategic, minority investment.
We may not have significant influence over every one of these companies and in some we have made only a strategic, minority investment.
The $35.2 million net change in operating assets and liabilities primarily resulted from a $31.4 million increase in inventories, a $5.5 million decrease in accounts payable, a $3.5 million increase 58 Table of Contents in prepaid expenses and other current assets, a $2.1 million decrease in accrued liabilities, and a $0.5 million increase in other assets offset in part by a $4.5 million decrease in accounts receivable and a $3.3 million increase in other long-term liabilities, including royalties.
The $35.2 million net change in operating assets and liabilities primarily resulted from a $31.4 million increase in inventories, a $5.5 million decrease in accounts payable, a $3.5 million increase in prepaid expenses and other current assets, a $2.1 million decrease in accrued liabilities, and a $0.5 million increase in other assets offset in part by a $4.5 million decrease in accounts receivable and a $3.3 million increase in other long-term liabilities, including royalties.
The loss of any of these individuals or our ability to attract or retain qualified personnel could adversely affect our business. 31 Table of Contents Our results of operations may suffer if we do not effectively manage our inventory.
The loss of any of these individuals or our ability to attract or retain qualified personnel could adversely affect our business. Our results of operations may suffer if we do not effectively manage our inventory.
Investments in our unconsolidated joint venture raw material companies are classified as other assets and accounted for under either the equity or cost method, depending on whether we have the ability to exercise significant influence over their operations or financial decisions.
Investments in our unconsolidated PRC joint venture raw material companies are classified as other assets and accounted for under either the equity or fair value method, depending on whether we have the ability to exercise significant influence over their operations or financial decisions.
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