What changed in this filing

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Item 1. Financial Statements

2020-08-07 compared with 2020-05-08 · 426 added, 388 removed, 916 unchanged (47% of the section changed)

Financial Statements (unaudited)

CONDENSED CONSOLIDATED BALANCE SHEET S

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except per share data)

2 unchanged sentences

Short-term investments

Accounts receivable, net of allowances of $34 as of March 31, 2020 and December 31, 2019

Accounts receivable, net of allowances of $ 77 and $ 34 as of June 30, 2020 and December 31, 2019

Prepaid expenses and other current assets

Total current assets

Long-term investments

Property, plant and equipment, net

Operating lease right-of-use assets

LIABILITIES AND STOCKHOLDERS’

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

7 unchanged sentences

Commitments and contingencies (Note 12)

Stockholders’

Stockholders’ equity:

Preferred stock Series A, $ 0.001 par value;

2,000 shares authorized;

883 shares issued and outstanding as of March 31, 2020 and December 31, 2019 (Liquidation preference of $7,213 and $7,169 as of March 31, 2020 and December 31, 2019)

883 shares issued and outstanding as of June 30, 2020 and December 31, 2019 (Liquidation preference of $ 7,257 and $ 7,169 as of June 30, 2020 and December 31, 2019)

Common stock, $ 0.001 par value;

70,000 shares authorized;

40,827 and 40,632 shares issued and outstanding as of March 31, 2020 and December 31, 2019

40,889 and 40,632 shares issued and outstanding as of June 30, 2020 and December 31, 2019

Additional paid-in capital

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Total AXT, Inc.

stockholders’

stockholders’ equity

Noncontrolling interests

Total stockholders’

Total liabilities and stockholders’

Total stockholders’ equity

Total liabilities and stockholders’ equity

See accompanying notes to condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATION S

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except per share data)

Three Months Ended

Six Months Ended

Cost of revenue

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Interest income (expense), net

Equity in loss of unconsolidated joint ventures

Equity in income (loss) of unconsolidated joint ventures

Other income (expense), net

Income (loss) before provision for income taxes

Income before provision for income taxes

Provision for income taxes

Net income (loss)

Net income attributable to noncontrolling interests

Net loss attributable to AXT, Inc.

Net income attributable to AXT, Inc.

per common share:

Basic and diluted

Weighted-average number of common shares outstanding:

Basic and diluted

See accompanying notes to condensed consolidated financial statements.

2 unchanged sentences

Three Months Ended

Net income (loss)

Six Months Ended

Other comprehensive income (loss), net of tax:

7 unchanged sentences

See accompanying notes to condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW S

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

Six Months Ended

Cash flows from operating activities:

Net income (loss)

Adjustments to reconcile net income (loss) to net cash used in operating activities:

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

2 unchanged sentences

Stock-based compensation

Provision for doubtful accounts

Loss on disposal of equipment

1 unchanged sentence

Loss from equity method investments, net

Return on equity method investments

Changes in operating assets and liabilities:

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Other long-term liabilities, including royalties

Net cash used in operating activities

Net cash provided by operating activities

Cash flows from investing activities:

Purchases of property, plant and equipment

Purchases of available-for-sale debt securities

Proceeds from sales and maturities of available-for-sale debt securities

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Proceeds from sale of previously consolidated subsidiary shares

Consideration paid to repurchase subsidiary shares from noncontrolling interests

Proceeds from short-term loan

Dividends paid by joint ventures to their minority shareholders

Net cash provided by financing activities

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Cash and cash equivalents at the end of the year

Supplemental disclosure of non-cash flow information:

Consideration payable to repurchase subsidiary shares from noncontrolling interests, included in accrued liabilities

Reduction of noncontrolling interests in excess (deficit) of total consideration paid and payable in connection with the repurchase of subsidiary shares from noncontrolling interests

See accompanying notes to condensed consolidated financial statements.

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The accompanying condensed consolidated financial statements of AXT, Inc.

(“AXT,”

the “Company,”

“we,”

“us,”

and “our”

refer to AXT, Inc.

and all of its consolidated subsidiaries) are unaudited, and have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.

(“AXT,” the “Company,” “we,” “us,” and “our” refer to AXT, Inc.

Accordingly, this interim quarterly financial report does not include all disclosures required by US GAAP.

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Actual results could differ materially from those estimates.

The results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results to be expected in the future or for the full fiscal year.

It is recommended that these condensed consolidated financial statements be read in conjunction with our consolidated financial statements and the notes thereto included in our 2019 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 12, 2020.

The results of operations for the three and six months ended June 30, 2020 are not necessarily indicative of the results to be expected in the future or for the full fiscal year.

The condensed consolidated financial statements include the accounts of AXT, our wholly-owned subsidiaries, Beijing Tongmei Xtal Technology Co., Ltd.

(“Tongmei”), Baoding Tongmei Xtal Technology Co., Ltd.

(“Tongmei Baoding”), ChaoYang Tongmei Xtal Technology Co., Ltd.

(“Tongmei ChaoYang”), ChaoYang LiMei Semiconductor Technology Co., Ltd.

(“LiMei ChaoYang”), Nanjing JinMei Gallium Co., Ltd.

(“JinMei”), ChaoYang JinMei Gallium Ltd.

(“Tongmei”), Baoding Tongmei Xtal Technology Co., Ltd.

(“Tongmei Baoding”), ChaoYang Tongmei Xtal Technology Co., Ltd.

(“Tongmei ChaoYang”), ChaoYang LiMei Semiconductor Technology Co., Ltd.

(“LiMei ChaoYang”), Nanjing JinMei Gallium Co., Ltd.

(“JinMei”), ChaoYang JinMei Gallium Ltd.

and MaAnShan JinMei Gallium Ltd., and, except as discussed below and in Note 7, our majority-owned subsidiary, Beijing BoYu Semiconductor Vessel Craftwork Technology Co., Ltd.

(“BoYu”).

Tongmei Baoding is located in the city of Dingxing, China.

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Investments in business entities in which we do not have controlling interests, but have the ability to exercise significant influence over operating and financial policies (generally 20-50% ownership), are accounted for by the equity method.

As of March 31, 2020 and December 31, 2019, we have five companies accounted for by the equity method.

As of June 30, 2020 and December 31, 2019, we have five companies accounted for by the equity method.

For the majority-owned subsidiary that we consolidate, we reflect the portion we do not own as noncontrolling interests on our condensed consolidated balance sheets in stockholders' equity and in our condensed consolidated statements of operations.

When market conditions are warranted, we intend to construct facilities at the LiMei ChaoYang location to provide us with additional production capacity.

For the quarter ended March 31, 2020, expenses associated with LiMei ChaoYang had a de minimis impact on the condensed consolidated financial statements.

As discussed in Note 7, “Investments in Privately-Held Companies”, effective as of March 11, 2019 we reduced our ownership in Beijing JiYa Semiconductor Material Co., Ltd.

(“JiYa”) from 46% to 39% by selling a portion of our JiYa shares to our investor partner, which is also JiYa’s landlord.

As a result of this transaction, our investor partner became the largest shareholder of JiYa and assumed the right to appoint the general manager of JiYa and thereby exercised greater control over JiYa’s long-term strategic direction.

Further, although our Chief Executive Officer remains on the board, as of March 11, 2019, he was no longer the chairman of JiYa’s board of directors and our Chief Financial Officer was no longer a member of JiYa’s board of financial supervisors.

Therefore, we deconsolidated JiYa from our consolidated financial statements as of March 11, 2019 in accordance with Accounting Standards Codification

(“ASC”) Topic 810 Consolidation (“ASC 810”).

For the three and six months ended June 30, 2020, expenses associated with LiMei ChaoYang had a de minimis impact on the condensed consolidated financial statements.

As discussed in Note 7, “Investments in Privately-Held Companies”, effective as of March 11, 2019 we reduced our ownership in Beijing JiYa Semiconductor Material Co., Ltd.

(“JiYa”) from 46 % to 39 % by selling a portion of our JiYa shares to our investor partner, which is also JiYa’s landlord.

Therefore, we deconsolidated JiYa

from our consolidated financial statements as of March 11, 2019 in accordance with Accounting Standards Codification (“ASC”) Topic 810 Consolidation (“ASC 810”).

As of March 12, 2019, we accounted for our retained investment in JiYa under the equity method of accounting, as we continue to exercise significant influence.

Our condensed consolidated balance sheet as of December 31, 2019, as reported, does not include the assets and liabilities of JiYa since we deconsolidated JiYa as of March 11, 2019.

Our unaudited condensed consolidated statement of operations for the three months ended March 31, 2019 includes JiYa’s results for the period through March 11, 2019.

Our unaudited condensed consolidated statement of operations for the six months ended June 30, 2019 includes JiYa’s results for the period through March 11, 2019.

As discussed in Note 7, in May 2019, we purchased the remaining 3 % ownership interest of JinMei from retiring members of the JinMei management team for approximately $ 413,000 .

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Our investments consist of instruments with original maturities of more than three months.

As of March 31, 2020 and December 31, 2019, our cash, cash equivalents and debt investments are classified as follows (in thousands):

March 31, 2020

As of June 30, 2020 and December 31, 2019, our cash, cash equivalents and debt investments are classified as follows (in thousands):

June 30, 2020

December 31, 2019

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Certificates of deposit with original maturities of more than three months.

Classified as “Short-term investments”

in our condensed consolidated balance sheets.

Classified as “Long-term investments”

in our condensed consolidated balance sheets.

Classified as “Short-term investments” in our condensed consolidated balance sheets.

Classified as “Long-term investments” in our condensed consolidated balance sheets.

We manage our debt investments as a single portfolio of highly marketable securities that is intended to be available to meet our current cash requirements.

Certificates of deposit and corporate bonds are typically held until maturity.

The gross unrealized losses related to our portfolio of available-for-sale debt securities were immaterial, and primarily due to normal market fluctuations and not due to increased credit risk or other valuation concerns.

We have determined that the gross unrealized losses on our available-for-sale debt securities as of March 31, 2020 are temporary in nature and we believe that it is probable the principal and interest will be collected in accordance with the contractual

Historically, the gross unrealized losses related to our portfolio of available-for-sale debt securities were immaterial, and primarily due to normal market fluctuations and not due to increased credit risk or other valuation concerns.

There were no gross unrealized losses on our available-for-sale debt securities as of June 30, 2020, and

historically, such gross unrealized losses have been temporary in nature and we believe that it is probable the principal and interest will be collected in accordance with the contractual terms.

We review our debt investment portfolio at least quarterly, or when there are changes in credit risks or other potential valuation concerns, to identify and evaluate whether an allowance for credit losses or impairment would be necessary.

Factors considered in determining whether a loss is temporary include the magnitude of the decline in market value, the length of time the market value has been below cost (or adjusted cost), credit quality, and our ability and intent to hold the securities for a period of time sufficient to allow for any anticipated recovery in market value.

A portion of our debt investments would generate a loss if we sold them on March 31, 2020.

The following table summarizes the fair value and gross unrealized losses related to available-for-sale debt securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of March 31, 2020 (in thousands):

In Loss Position

Loss Position

As of March 31, 2020

Corporate bonds

Total in loss position

None of our debt investments would generate a loss if we sold them on June 30, 2020.

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We have made strategic investments in private companies located in China in order to gain access at a competitive cost to raw materials that are critical to our substrate business (see Note 7).

The investment balances for the non-consolidated companies are accounted for under the equity method and included in “Other assets”

in the condensed consolidated balance sheets and totaled $5.8 million and $6.0 million as of March 31, 2020 and December 31, 2019, respectively.

As of March 31, 2020, there were five companies accounted for under the equity method.

There were no impairment charges in the three months ended March 31, 2020.

The three months ended March 31, 2019 include an impairment charge of $1.1 million for one of our minority investments (see Note 7).

The investment balances for the non-consolidated companies are accounted for under the equity method and included in “Other assets” in the condensed consolidated balance sheets and totaled $ 5.6 million and $ 6.0 million as of June 30, 2020 and December 31, 2019, respectively.

As of June 30, 2020, there were five companies accounted for under the equity method.

There were no impairment charges in the three and six months ended June 30, 2020.

The six months ended June 30, 2019 include an impairment charge of $ 1.1 million for one of our minority investments (see Note 7).

There were no impairment charges in the three months ended June 30, 2019.

Fair Value Measurements

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We review our debt investment portfolio for credit loss at least quarterly or when there are changes in credit risk or other potential valuation concerns.

As of March 31, 2020 and December 31, 2019, the total unrealized loss, net of tax, included in accumulated other comprehensive loss was immaterial.

As of June 30, 2020 and December 31, 2019, the total unrealized loss, net of tax, included in accumulated other comprehensive loss was immaterial.

We believe it is probable the principal and interest will be collected in accordance with the contractual terms, and the unrealized loss on these securities was due to normal market fluctuations, and not due to increased credit risk or other valuation concerns.

ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), establishes three levels of inputs that may be used to measure fair value.

Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets of the asset or identical assets.

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Level 3 instrument valuations are obtained from unobservable inputs in which there is little or no market data, which require us to develop our own assumptions.

On a recurring basis,

we measure certain financial assets and liabilities at fair value, primarily consisting of our short-term and long-term debt investments.

On a recurring basis, we measure certain financial assets and liabilities at fair value, primarily consisting of our short-term and long-term debt investments.

The type of instrument valued based on quoted market prices in active markets include our money market funds, which are generally classified within Level 1 of the fair value hierarchy.

We classify our available-for-sale debt securities including certificates of deposit and corporate bonds as having Level 2 inputs.

The valuation techniques used to measure the fair value of these financial instruments having Level 2 inputs were derived from bank statements, quoted market prices, broker or dealer statements or quotations, or alternative pricing sources with reasonable levels of price transparency.

The valuation techniques used to measure the fair value of these financial instruments having Level 2 inputs were derived from bank statements, quoted

market prices, broker or dealer statements or quotations, or alternative pricing sources with reasonable levels of price transparency.

We place short-term foreign currency hedges that are intended to offset the potential cash exposure related to fluctuations in the exchange rate between the United States dollar and Japanese yen.

We measure the fair value of these foreign currency hedges at each month end and quarter end using current exchange rates and in accordance with US GAAP.

At quarter end, any foreign currency hedges not settled are netted in “Accrued liabilities”

on the condensed consolidated balance sheet and classified as Level 3 assets and liabilities.

As of March 31, 2020, 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 on the condensed consolidated results.

There were no changes in valuation techniques or related inputs in the three months ended March 31, 2020.

There have been no transfers between fair value measurements levels during the three months ended March 31, 2020.

The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis in accordance with ASC 820 as of March 31, 2020 (in thousands):

At quarter end, any foreign currency hedges not settled are netted in “Accrued liabilities” on the condensed consolidated balance sheet and classified as Level 3 assets and liabilities.

As of June 30, 2020, 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 on the condensed consolidated results.

There were no changes in valuation techniques or related inputs in the three and six months ended June 30, 2020.

There have been no transfers between fair value measurements levels during the three and six months ended June 30, 2020.

The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis in accordance with ASC 820 as of June 30, 2020 (in thousands):

Quoted Prices in

4 unchanged sentences

Observable Inputs

March 31, 2020

June 30, 2020

Cash equivalents and investments:

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One such investment is a 25 % ownership interest in a germanium materials company in China.

After receiving such company’s preliminary first quarter 2019 financial results in early April 2019 and its projections for significant losses going forward, we determined that this asset was fully impaired and wrote the asset balance down to zero.

This resulted in a $ 1.1 million impairment charge in our first quarter 2019 financial results.

Except as mentioned above, we did not record other-than-temporary impairment charges for the remainder of these investments during the three months ended March 31, 2020 and 2019, respectively.

Except as mentioned above, we did not record other-than-temporary impairment charges for the remainder of these investments during the three and six months ended June 30, 2020 and 2019, respectively.

The components of inventories are summarized below (in thousands):

2 unchanged sentences

Finished goods

As of March 31, 2020 and December 31, 2019, carrying values of inventories were net of inventory reserves of $16.6 million and $16.4 million, respectively, for excess and obsolete inventory and $97,000 and $91,000, respectively, for lower of cost or net realizable value reserves.

As of June 30, 2020 and December 31, 2019, carrying values of inventories were net of inventory reserves of $ 16.6 million and $ 16.4 million, respectively, for excess and obsolete inventory and $ 121,000 and $ 91,000 , respectively, for lower of cost or net realizable value reserves.

Property, Plant and Equipment, Net

8 unchanged sentences

Construction in progress

As of March 31, 2020, the balance of construction in progress was $63.3 million, of which $50.2 million was related to our buildings in our new Dingxing and Kazuo locations, $3.6 million was for manufacturing equipment purchases not yet placed in service and $9.5 million was for our construction in progress for our other consolidated subsidiaries.

As of June 30, 2020, the balance of construction in progress was $ 66.3 million, of which $ 53.1 million was related to our buildings in our new Dingxing and Kazuo locations, $ 3.7 million was for manufacturing equipment purchases not yet placed in service and $ 9.5 million was for our construction in progress for our other consolidated subsidiaries.

As of December 31, 2019, the balance of construction in progress was $ 61.8 million, of which $ 48.8 million was for our buildings in our new Dingxing and Kazuo locations, $ 3.4 million was for manufacturing equipment purchases not yet placed in service and $ 9.6 million was for our construction in progress at our other consolidated subsidiaries.

We reviewed our estimates of the useful lives of our property, plant and equipment.

From time to time we review our estimates of the useful lives of our property, plant and equipment.

As a result of the review, we determined a portion of our manufacturing equipment was lasting longer than the estimate previously established for the respective useful lives.

Where appropriate, we extended the useful life of the manufacturing equipment in our

accounting records.

Where appropriate, we extended the useful life of the manufacturing equipment in our accounting records.

In addition, the useful life of our buildings located in China was extended to better align with industry standards.

The changes in our estimate of the useful life, effective January 1, 2020, were made in order to remain consistent with US GAAP regarding management estimates.

The effect of the change in the useful lives decreased our manufacturing costs by approximately $0.3 million and decreased our basic and diluted net loss per share by approximately $0.01 for the quarter ended March 31, 2020 as a result of lower depreciation expense.

The effect of the change in the useful lives decreased our manufacturing costs for the three and six months ended June 30, 2020 by approximately $ 0.3 million and $ 0.6 million, respectively, and increased our basic and diluted net income per share by approximately $ 0.01 and $ 0.02 , respectively, as a result of lower depreciation expense.

Accrued Liabilities

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Payable in connection with land restoration of Nanjing JinMei factory

Payable in connection with construction

Accrued income taxes

Advance from customers

Accrued professional services

Current portion of operating lease liabilities

Accrued product warranty

Accrued professional services

Current portion of royalty payments

Accrued income taxes

Other tax payable

Accrual for sales returns

Payable in connection with repurchase of subsidiaries shares

Other tax payable

Other personnel-related costs

Accrual for sales returns

Payable in connection with construction

Other accrued liabilities

Related Party Transactions

Effective as of March 11, 2019, we reduced our ownership in JiYa from 46% to 39% by selling a portion of our JiYa shares to our investor partner, which is also JiYa’s landlord.

Effective as of March 11, 2019, we reduced our ownership in JiYa from 46 % to 39 % by selling a portion of our JiYa shares to our investor partner, which is also JiYa’s landlord.

Based on an independent third party valuation analysis, we sold these shares for $ 366,000 .

Previously, we were the largest shareholder of JiYa and as such, we had the right to appoint the general manager of JiYa and the ability to exercise control in substance over JiYa’s long-term strategic direction.

Further, our Chief Executive Officer was the chairman of JiYa’s board of directors and our Chief Financial Officer was a member of JiYa’s board of financial supervisors.

As a result of this transaction, our investor partner, Shanxi Aluminum Industrial Co., Ltd.

became the largest shareholder of JiYa and assumed the right to appoint the general manager of JiYa and thereby exercised greater control over JiYa’s long-term strategic direction.

Further, although our Chief Executive Officer remains on the board, as of March 11, 2019, he was no longer chairman of JiYa’s board of directors and our Chief Financial Officer was no longer on JiYa’s board of financial supervisors.

Previously, we accounted for JiYa’s financial performance under the consolidation method of accounting.

As a result of the changes, we began to account for JiYa’s financial performance under the equity method of accounting.

became the largest shareholder of JiYa and assumed the right to appoint the general manager of JiYa and thereby exercised greater control over JiYa’s long-term strategic direction.

Previously, we accounted for JiYa’s financial performance under the consolidation method of accounting.

As a result of the changes, we began to account for JiYa’s financial performance under the equity method of accounting.

Therefore, we deconsolidated JiYa from our consolidated financial statements as of March 11, 2019 in accordance with ASC 810.

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JinMei bills the customers and remits the receipts, net of its portions of sales commission, to this equity investment entity.

For the three months ended March 31,

2020 and 2019, JinMei has recorded $0 and $0 income from agency sales, respectively, which were included in “Other income (expense), net”

in the condensed consolidated statements of operations.

For the three months ended June 30, 2020 and 2019, JinMei has recorded $ 0 and $ 0 income from agency sales, respectively.

For the six months ended June 30, 2020 and 2019, JinMei has recorded $ 0 and $ 0 income from agency sales, respectively, which were included in “Other income (expense), net” in the condensed consolidated statements of operations.

In March 2012, Tongmei, entered into an operating lease for the land it owns with our consolidated joint venture, BoYu.

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Tongmei ChaoYang purchases raw materials from one of our equity investment entities, Donghai County Dongfang High Purity Electronic Materials Co., Ltd., for production in the ordinary course of business.

As of March 31, 2020 and December 31, 2019, amounts payable of $0 and $0, respectively, were included in “Accounts payable”

in our condensed consolidated balance sheets.

As of June 30, 2020 and December 31, 2019, amounts payable of $ 126,000 and $ 0 , respectively, were included in “Accounts payable” in our condensed consolidated balance sheets.

Tongmei ChaoYang also purchases raw materials from one of our equity investment entities, Emei Shan Jiamei Materials Co., Ltd.

(“JiaMei”), for production in the ordinary course of business.

As of March 31, 2020 and December 31, 2019, amounts payable of $0 and $0, respectively, were included in “Accounts payable”

in our condensed consolidated balance sheets.

(“JiaMei”), for production in the ordinary course of business.

As of June 30, 2020 and December 31, 2019, amounts payable of $ 0 and $ 0 , respectively, were included in “Accounts payable” in our condensed consolidated balance sheets.

Tongmei and Tongmei ChaoYang also purchase raw materials from one of our equity investment entities, Xilingol Tongli Germanium Refine Co., Ltd.

(“Tongli”), for production in the ordinary course of business.

As of March 31, 2020 and December 31, 2019, amounts payable of $0 and $0, respectively, were included in “Accounts payable”

in our condensed consolidated balance sheets.

(“Tongli”), for production in the ordinary course of business.

As of June 30, 2020 and December 31, 2019, amounts payable of $ 0 and $ 0 , respectively, were included in “Accounts payable” in our condensed consolidated balance sheets.

In July 2017, Tongmei, provided an inter-company loan to JinMei in the amount of $ 768,000 in preparation for the acquisition of the land use rights and the construction of a new building.

The inter-company loan carries an interest rate of 4.9 % per annum.

The principle is due in three installments between December 2021 and December 2023 while the interest is due in December of each year .

As of March 31, 2020, JinMei repaid principal and interest totaling $481,000 to Tongmei.

As of March 31, 2020 and December 31, 2019, the remaining balance of principal and interest totaled $283,000 and $285,000, respectively.

The principal is due in three installments between December 2021 and December 2023 while the interest is due in December of each year .

As of June 30, 2020, JinMei repaid principal and interest totaling $ 483,000 to Tongmei.

As of June 30, 2020 and December 31, 2019, the remaining balance of principal and interest totaled $ 287,000 and $ 285,000 , respectively.

JinMei is in the process of relocating its headquarters and manufacturing operations to the city of Kazuo, located in the province of Liaoning near the Inner Mongolia Autonomous Region, near our own location.

In April 2016, our consolidated joint venture, BoYu, provided a personal loan of $ 177,000 to one of its executive employees.

This loan is secured by the officer’s shares in BoYu.

The loan bears interest at 2.75 % per annum.

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Principal and accrued interest are due on December 31, 2024.

As of March 31, 2020 and December 31, 2019 , the balances, including both principal and accrued interest, were $586,000 and $449,000, respectively, and included in “Other assets”

in our condensed consolidated balance sheets.

As of June 30, 2020 and December 31, 2019 , the balances, including both principal and accrued interest, were $ 591,000 and $ 449,000 , respectively, and included in “Other assets” in our condensed consolidated balance sheets.

On November 2, 2017, our consolidated joint venture, BoYu, raised additional capital in the amount of $ 2 million in cash from a third-party investor through the issuance of shares equivalent to 10 % ownership of BoYu.

This third-party investor is an immediate family member of the owner of one of BoYu's customers.

For the three months ended March 31, 2020 and 2019, BoYu has recorded $254,000 and $38,000, respectively, in revenue from this customer.

As of March 31, 2020 and December 31, 2019, amounts receivable of $235,000 and $12,000, respectively, were included in “Accounts receivable”

in our condensed consolidated balance sheets.

For the three months ended June 30, 2020 and 2019, BoYu has recorded $ 12,000 and $ 19,000 , respectively, in revenue from this customer.

For the six months ended June 30, 2020 and 2019, BoYu has recorded $ 0.3 million and $ 0.1 million, respectively, in revenue from this customer.

As of June 30, 2020 and December 31, 2019, amounts receivable of $ 0 and $ 12,000 , respectively, were included in “Accounts receivable” in our condensed consolidated balance sheets.

Our Related Party Transactions Policy seeks to prohibit all conflicts of interest in transactions between related parties and us, unless they have been approved by our Board of Directors.

This policy applies to all of our

employees, directors, and our consolidated subsidiaries.

This policy applies to all of our employees, directors, and our consolidated subsidiaries.

Our executive officers retain board seats on the board of directors of the companies in which we have invested in our China joint ventures.

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These companies form part of our overall supply chain.

As of March 31, 2020, the investments are summarized below (in thousands):

As of June 30, 2020, the investments are summarized below (in thousands):

Investment Balance as of

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As a result, our ownership of JinMei increased from 97 % to 100 %.

Effective as of March 11, 2019, we reduced our ownership in JiYa from 46% to 39% by selling a portion of our JiYa shares to our investor partner, which is also JiYa’s landlord.

Effective as of March 11, 2019, we reduced our ownership in JiYa from 46 % to 39 % by selling a portion of our JiYa shares to our investor partner, which is also JiYa’s landlord.

Based on an independent third party valuation analysis, we sold these shares for $ 366,000 .

Previously, we were the largest shareholder and, as such, we had the right to appoint the general manager of JiYa and the ability to exercise control in substance over JiYa’s long-term strategic direction.

Further, our Chief Executive Officer was the chairman of JiYa’s board of directors and our Chief Financial Officer was a member of JiYa’s board of financial supervisors.

As a result of this transaction, our investor partner, Shanxi Aluminum Industrial Co., Ltd., became the largest shareholder and assumed the right to appoint the general manager and thereby exercised greater control over JiYa’s long-term strategic direction.

Further, although our Chief Executive Officer remains on the board, as of March 11, 2019 he was no longer the chairman of JiYa’s board of directors and our Chief Financial Officer was no longer a member of JiYa’s board of financial supervisors.

Previously, we accounted for JiYa’s financial performance under the consolidation method of accounting.

As a result of the changes we began to account for JiYa’s financial performance under the equity method of accounting.

Further, our Chief Executive Officer was the chairman of JiYa’s board of directors and our Chief Financial Officer was a member of JiYa’s board of financial supervisors.

Previously, we accounted for JiYa’s financial performance under the consolidation method of accounting.

As a result of the changes we began to account for JiYa’s financial performance under the equity method of accounting.

Therefore, we deconsolidated JiYa from our consolidated financial statements as of March 11, 2019 in accordance with ASC 810.

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JiYa continues to be a related party to us after deconsolidation, whom we may purchase raw materials from for production in the ordinary course of business from time to time.

We recorded a gain on the deconsolidation of JiYa of $175,000 as a component of “Equity in loss of unconsolidated joint ventures”

for the three months ended March 31, 2019 in the condensed consolidated statement of operations and comprehensive income (loss).

On the date of deconsolidation, the fair value of the Company’s investment

in JiYa exceeded the Company’s share of the net assets of JiYa, which generated the gain.

We recorded a gain on the deconsolidation of JiYa of $ 175,000 as a component of “Equity in loss of unconsolidated joint ventures” for the three months ended March 31, 2019 in the condensed consolidated statement of operations and comprehensive income (loss).

On the date of deconsolidation, the fair value of the Company’s investment in JiYa exceeded the Company’s share of the net assets of JiYa, which generated the gain.

As of March 12, 2019, we recorded our investment in JiYa at a fair value of $ 2,040,000 , which was based on an independent third party valuation analysis.

The valuation is based on the asset-based approach.

The market-based approach is not deemed appropriate due to lack of availability of market data for comparable companies on the open market and the discounted cash flow approach is not deemed reliable because of the difficulty in predicting the future profitability of JiYa due to the volatility of the gallium market, the concentration of customers and the significant accumulated losses of JiYa.

The asset-based approach examines the value of a company’s assets net of its liabilities to derive a value for the equity holders.

The market-based approach is not deemed appropriate due

to lack of availability of market data for comparable companies on the open market and the discounted cash flow approach is not deemed reliable because of the difficulty in predicting the future profitability of JiYa due to the volatility of the gallium market, the concentration of customers and the significant accumulated losses of JiYa.

The asset-based approach examines the value of a company’s assets net of its liabilities to derive a value for the equity holders.

The gain on deconsolidation includes the following:

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On June 15, 2018, we paid the first installment of $ 163,000 .

In May 2019, we paid the second installment of $1.2 million as the relocation of JinMei’s headquarters and manufacturing operations was nearly complete, which had been previously included in “Accrued liabilities”

in our condensed consolidated balance sheets.

In May 2019, we paid the second installment of $ 1.2 million as the relocation of JinMei’s headquarters and manufacturing operations was nearly complete, which had been previously included in “Accrued liabilities” in our condensed consolidated balance sheets.

As a result, our ownership of JinMei increased from 83 % to 95 %.

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In May 2019, we purchased the remaining 3 % ownership interest from retiring members of the JinMei management team for approximately $ 413,000 .

We paid approximately $262,000 in May 2019 and plan to pay the remainder of approximately $151,000 at a date to be determined by both parties.

We paid approximately $ 73,000 and $ 262,000 in April 2020 and May 2019, respectively, and plan to pay the remainder of approximately $ 78,000 at a date to be determined by both parties.

As a result, our ownership of JinMei increased from 97 % to 100 %.

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Decisions concerning their respective short-term strategy and operations, ordinary course of business capital expenditures and sales of finished product, are made by local management with regular guidance and input from us.

During the three months ended March 31, 2020 and 2019, the consolidated joint ventures, before eliminating inter-company transactions, generated income of $1.1 million and $0.7 million, respectively, of which gains of $395,000 and $81,000, respectively, were allocated to noncontrolling interests, resulting in a reduction of $0.7 million and $0.6 million, respectively, to our net loss.

Our unaudited condensed consolidated statements of operations for the three months ended March 31, 2019 include JiYa’s results for the period through March 11, 2019.

For AXT’s minority investment entities that are not consolidated, the investment balances are included in “Other assets”

in our condensed consolidated balance sheets and totaled $5.8 million and $6.0 million as of March 31, 2020 and December 31, 2019, respectively.

During the three months ended June 30, 2020 and 2019, the consolidated joint ventures, before eliminating inter-company transactions, generated income of $ 1.6 million and $ 0.8 million, respectively, of which gains of $ 0.6 million and $ 0.3 million, respectively, were allocated to noncontrolling interests, resulting in an increase of $ 1.0 million and $ 0.5 million, respectively, to our net income.

During the six months ended June 30, 2020 and 2019, the consolidated joint ventures, before eliminating inter-company transactions, generated income of $ 2.7 million and $ 1.5 million, respectively, of which gains of $ 1.0 million and $ 0.4 million, respectively, were allocated to noncontrolling interests, resulting in an increase of $ 1.7 million and $ 1.1 million respectively, to our net income.

Our unaudited condensed consolidated statements of operations for the six months ended June 30, 2019 include JiYa’s results for the period through March 11, 2019.

For AXT’s minority investment entities that are not consolidated, the investment balances are included in “Other assets” in our condensed consolidated balance sheets and totaled $ 5.6 million and $ 6.0 million as of June 30, 2020 and December 31, 2019, respectively.

Our respective ownership interests in each of these companies are 46 %, 39 %, 25 %, 25 % and 25 %.

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Such projected losses would fully deplete our asset investment balance for this company in 2019.

The Company is experiencing significant disruptions due to upgrades and repairs required to comply with stronger environmental regulations in China.

This company is experiencing significant disruptions due to upgrades and repairs required to comply with stronger environmental regulations in China.

As a result, we determined that this asset was fully impaired and wrote the asset balance down to zero .

This resulted in a $ 1.1 million impairment charge in our first quarter 2019 financial results.

AXT’s minority investment entities are not consolidated and are accounted for under the equity method.

Excluding one fully impaired entity, the equity entities had the following summarized income information (in thousands) for the three months ended March 31, 2020 and 2019:

AXT’s minority investment entities are not consolidated and are accounted for under the equity method.

Excluding one fully impaired entity, the equity entities had the following summarized income information (in thousands) for the three and six months ended June 30, 2020 and 2019:

Three Months Ended

Gross profit (loss)

Six Months Ended

Operating income (loss)

Net income (loss)

Our portion of the income and losses, including impairment charges, from these minority investment entities that are not consolidated and are accounted for under the equity method was a loss of $120,000 and $1.6 million, respectively, for the three months ended March 31, 2020 and 2019.

Stockholders’

Condensed Consolidated Statements of Changes in Stockholders’

Our portion of the income and losses from these minority investment entities that are not consolidated and are accounted for under the equity method was a loss of $ 168,000 and an income of $ 8,000 , respectively, for the three months ended June 30, 2020 and 2019.

Our portion of the income and losses, including impairment charges, from these minority investment entities that are not consolidated and are accounted for under the equity method was a loss of $ 0.3 million and $ 1.6 million, respectively, for the six months ended June 30, 2020 and 2019.

Stockholders’ Equity

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(in thousands)

The changes in stockholders’

equity by component for the three months ended March 31, 2020 are as follows:

The changes in stockholders’ equity by component for the three and six months ended June 30, 2020 are as follows:

Comprehensive

Stockholders’

Noncontrolling

Stockholders’

Paid-In Capital

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Balance as of March 31, 2020

The changes in stockholders’

equity by component for the three months ended March 31, 2019 are as follows:

Common stock options exercised

Stock-based compensation

Net dividend declared by joint ventures

Other comprehensive income

Balance as of June 30, 2020

The changes in stockholders’ equity by component for the three and six months ended June 30, 2019 are as follows:

Comprehensive

Stockholders’

Noncontrolling

Stockholders’

Paid-In Capital

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Balance as of March 31, 2019

Except as shown above related to the deconsolidation of a subsidiary, there were no reclassification adjustments from accumulated other comprehensive income (loss) for the three months ended March 31, 2020 and 2019 .

Common stock options exercised

Purchase of subsidiary shares from noncontrolling interests

Stock-based compensation

Other comprehensive loss

Balance as of June 30, 2019

Stock Repurchase Program

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No shares were repurchased from 2016 through 2019.

During the three months ended March 31, 2020, we did not repurchase any shares under the approved stock repurchase program.

As of March 31, 2020, approximately $2.7 million remained available for future repurchases under this program.

During the three and six months ended June 30, 2020, we did not repurchase any shares under the approved stock repurchase program.

As of June 30, 2020, approximately $ 2.7 million remained available for future repurchases under this program.

Currently, we do not plan to repurchase additional shares.

Stock-Based Compensation

We account for stock-based compensation in accordance with the provisions of ASC Topic 718, Compensation-Stock Compensation (“ASC 718”), which established accounting for stock-based awards exchanged for employee services.

Stock-based compensation cost is measured at each grant date, based on the fair value of the award, and is recognized as expense over the employee’s requisite service period of the award.

All of our stock compensation is accounted for as an equity instrument.

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Three Months Ended

Six Months Ended

Cost of revenue

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Tax effect on stock-based compensation

Net effect on net income (loss)

As of March 31, 2020, the unamortized compensation costs related to unvested stock options granted to employees under our stock option plan was approximately $1.3 million, net of estimated forfeitures of $106,000.

Net effect on net income

As of June 30, 2020, the unamortized compensation costs related to unvested stock options granted to employees under our stock option plan was approximately $ 1.1 million, net of estimated forfeitures of $ 93,000 .

These costs will be amortized on a straight-line basis over a weighted-average period of approximately 2.6 years and will be adjusted for subsequent changes in estimated forfeitures.

We did not capitalize any stock-based compensation to inventory as of March 31, 2020 and December 31, 2019 due to the immateriality of the amount.

We did not capitalize any stock-based compensation to inventory as of June 30, 2020 and December 31, 2019 due to the immateriality of the amount.

We estimate the fair value of stock options using the Black-Scholes valuation model, consistent with the provisions of ASC 718.

There were no options granted in the three months ended March 31, 2020 and 2019.

The following table summarizes the stock option transactions during the three months ended March 31, 2020 (in thousands, except per share data):

There were no options granted in the three and six months ended June 30, 2020 and 2019.

The following table summarizes the stock option transactions during the six months ended June 30, 2020 (in thousands, except per share data):

Stock Options

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Canceled and expired

Balance as of March 31, 2020

Options vested as of March 31, 2020 and unvested options expected to vest, net of forfeitures

Options exercisable as of March 31, 2020

The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on our closing price of $3.21 on March 31, 2020, which would have been received by the option holder had all option holders exercised their options on that date.

Balance as of June 30, 2020

Options vested as of June 30, 2020 and unvested options expected to vest, net of forfeitures

Options exercisable as of June 30, 2020

The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on our closing price of $ 4.76 on June 30, 2020, which would have been received by the option holder had all option holders exercised their options on that date.

Restricted stock awards

A summary of activity related to restricted stock awards for the three months ended March 31, 2020 is presented below (in thousands, except per share data):

A summary of activity related to restricted stock awards for the six months ended June 30, 2020 is presented below (in thousands, except per share data):

Weighted-Average

Non-vested as of January 1, 2020

Non-vested as of March 31, 2020

As of March 31, 2020, the unamortized compensation costs related to unvested restricted stock awards was approximately $3.8 million, which is to be amortized on a straight-line basis over a weighted-average period of approximately 1.4 years.

Non-vested as of June 30, 2020

As of June 30, 2020, the unamortized compensation costs related to unvested restricted stock awards was approximately $ 3.5 million, which is to be amortized on a straight-line basis over a weighted-average period of approximately 1.3 years.

Net Income (Loss) Per Share

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Three Months Ended

Net loss attributable to AXT, Inc.

Six Months Ended

Net income attributable to AXT, Inc.

Preferred stock dividends

Net loss available to common stockholders

Denominator for basic net loss per share - weighted-average common shares

Net income available to common stockholders

Denominator for basic net income per share - weighted-average common shares

Effect of dilutive securities:

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Restricted stock awards

Denominator for dilutive net loss per common shares

Net loss attributable to AXT, Inc.

Denominator for dilutive net income per common shares

Net income attributable to AXT, Inc.

per common share:

Options excluded from diluted net loss per share as the impact is anti-dilutive

Restricted stock excluded from diluted net loss per share as the impact is anti-dilutive

The 883,000 shares of $0.001 par value Series A preferred stock issued and outstanding as of March 31, 2020 and December 31, 2019, valued at $3,532,000, are non-voting and non-convertible preferred stock with a 5.0% cumulative annual dividend rate payable when declared by the board of directors and a $4 per share liquidation preference over common stock, which must be paid before any distribution is made to common stockholders.

Options excluded from diluted net income per share as the impact is anti-dilutive

Restricted stock excluded from diluted net income per share as the impact is anti-dilutive

The 883,000 shares of $ 0.001 par value Series A preferred stock issued and outstanding as of June 30, 2020 and December 31, 2019, valued at $ 3,532,000 , are non-voting and non-convertible preferred stock with a 5.0 % cumulative annual dividend rate payable when declared by the board of directors and a $ 4 per share liquidation preference over common stock, which must be paid before any distribution is made to common stockholders.

These preferred shares were issued to Lyte Optronics, Inc.

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Three Months Ended

Six Months Ended

Product Type:

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Three Months Ended

Six Months Ended

Geographical region:

Asia Pacific (excluding China, Taiwan and Japan)

Europe (primarily Germany)

North America (primarily the United States)

Asia Pacific (excluding China, Taiwan and Japan)

Long-lived assets consist primarily of property, plant and equipment and operating lease right-of-use assets, and are attributed to the geographic location in which they are located.

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Significant Customers

Two customers, Landmark and Osram, represented 17% and 15%, respectively, of our revenue for the three months ended March 31, 2020 while two customers, Haisi Optoelectronics and Landmark, represented 12% and 11%, respectively, of our revenue for the three months ended March 31, 2019.

Our top five customers, although not the same five customers for each period, represented 49% and 40% of our revenue for the three months ended March 31, 2020 and 2019, respectively.

We perform ongoing credit evaluations of our customers’

financial condition, and limit the amount of credit extended when deemed necessary, but generally do not require collateral.

Three customers accounted for 20%, 13% and 12% of our accounts receivable balance as of March 31, 2020 , and three customers accounted for 14%, 13% and 12% of our accounts receivable as of December 31, 2019.

One customer, Landmark, represented 10 % of our revenue for the three months ended June 30, 2020 while two customers, Haisi Optoelectronics and Landmark, represented 18 % and 15 %, respectively, of our revenue for the three months ended June 30, 2019.

Our top five customers, although not the same five customers for each period, represented 30 % and 48 % of our revenue for the three months ended June 30, 2020 and 2019, respectively.

Two customers, Landmark and Osram Opto, represented 13 % and 11 % , respectively, of our revenue for the six months ended June 30, 2020 while two customers, Haisi Optoelectronics and Landmark, represented 15 % and 13 % , respectively, of our revenue for the six months ended June 30, 2019.

Our top five customers, although not the same five customers for each period, represented 39 % and 43 % of our revenue for the six months ended June 30, 2020 and 2019, respectively.

We perform ongoing credit evaluations of our customers’ financial condition, and limit the amount of credit extended when deemed necessary, but generally do not require collateral.

Two customers accounted for 13 % and 12 % of our accounts receivable balance as of June 30, 2020 , and three customers accounted for 14 %, 13 % and 12 % of our accounts receivable as of December 31, 2019.

Commitments and Contingencies

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to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified;

and to obtain directors’

and officers’

insurance if available on reasonable terms, which we currently have in place.

and to obtain directors’ and officers’ insurance if available on reasonable terms, which we currently have in place.

Product Warranty

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On a quarterly basis, we review the accrued balances and update the historical warranty cost trends.

The following table reflects the change in our warranty accrual which is included in “Accrued liabilities”

on the condensed consolidated balance sheets, during the three months ended March 31, 2020 and 2019 (in thousands):

The following table reflects the change in our warranty accrual which is included in “Accrued liabilities” on the condensed consolidated balance sheets, during the three and six months ended June 30, 2020 and 2019 (in thousands):

Three Months Ended

Six Months Ended

Beginning accrued product warranty

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Contractual Obligations

In 2020, we and a competitor entered into a cross license and covenant agreement (the “Cross License Agreement”), which has a term that begins on January 1, 2020 and expires on December 31, 2029.

In 2020, we and a competitor entered into a cross license and covenant agreement (the “Cross License Agreement”), which has a term that began on January 1, 2020 and expires on December 31, 2029.

The Cross License Agreement is a fixed-cost cross license and not a variable-cost cross license that is based on revenue or units.

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However, the agreement does state that each party has a right to seek from the other party compensation for losses.

Under certain conditions, the Dingxing local government may purchase the land and building at the appraised value.

Under certain conditions, the Dingxing local

government may purchase the land and building at the appraised value.

We believe that such cooperation agreements are normal, customary and usual in China and that the future valuation is flexible.

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In certain cases, we may incur a penalty if we cancel the purchase order.

As of March 31, 2020, we do not have any outstanding purchase orders that will incur a penalty if cancelled by the Company.

As of June 30, 2020, we do not have any outstanding purchase orders that will incur a penalty if cancelled by the Company.

Legal Proceedings

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Other Income (Expense), Net

Other income (expense), net for the quarter ended March 31, 2020, includes a grant of $1.4 million from a provincial government agency as an award for relocating to its province.

In addition, we incurred a foreign currency transaction exchange loss of $43,000 and $56,000 for the three months ended March 31, 2020 and 2019, respectively.

We account for income taxes in accordance with ASC Topic 740, Income Taxes (“ASC 740”), which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities.

Other income (expense), net for the three and six months ended June 30, 2020, includes a grant of $ 1.6 million and $ 3.0 million, respectively, from a Chinese provincial government agency as an award for relocating to its province.

In addition, we incurred a foreign currency transaction exchange gain of $ 51,000 and loss of $ 24,000 for the three months ended June 30, 2020 and 2019, respectively.

We incurred a foreign currency transaction exchange gain of $ 9,000 and loss of $ 80,000 for the six months ended June 30, 2020 and 2019, respectively.

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.

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We recognize interest and penalties related to uncertain tax positions in income tax expense.

Income tax expense for the three months ended March 31, 2020 includes no interest and penalties.

As of March 31, 2020, we have no accrued interest and penalties related to uncertain tax positions.

Income tax expense for the three and six months ended June 30, 2020 includes no interest and penalties.

As of June 30, 2020, we have no accrued interest and penalties related to uncertain tax positions.

We file income tax returns in the U.S.

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Currently, there is no tax audit in any of the jurisdictions and we do not expect there will be any significant change to this.

Provision for income taxes for the three months ended March 31, 2020 was mostly related to our wholly owned China subsidiaries and our one partially owned subsidiary in China.

Provision for income taxes for the three and six months ended June 30, 2020 was mostly related to our wholly owned China subsidiaries and our one partially owned subsidiary in China.

Besides the state tax liabilities, no income taxes or benefits have been provided for U.S.

operations for the three months ended March 31, 2020 due to the loss in the U.S.

operations for the three and six months ended June 30, 2020 due to the loss in the U.S.

and the uncertainty of generating future profit in the U.S., which has resulted in our deferred tax assets being fully reserved.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was passed into law.

The CARES Act includes several significant business tax provisions including modification to the taxable income limitation for utilization of net operating losses (“NOLs”) incurred in 2018, 2019 and 2020 and the ability to carry back NOLs from those years for a period of up to five years, an increase to the limitation on deductibility of certain business interest expense, bonus depreciation for purchases of qualified improvement property and special deductions on certain corporate charitable contributions.

The Company analyzed the provisions of the CARES Act and determined there was no effect on its provision for the current period and will continue to evaluate the impact, if any, the CARES Act may have on the Company’s condensed consolidated financial statements and disclosures.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was passed into law.

NOLs from those years for a period of up to five years, an increase to the limitation on deductibility of certain business interest expense, bonus depreciation for purchases of qualified improvement property and special deductions on certain corporate charitable contributions.

On June 29, 2020, California Governor Gavin Newsom signed Assembly Bill 85 (“AB 85”) into law as part of the California 2020 Budget Act, which temporarily suspends the use of California net operating losses and imposes a cap on the amount of business incentive tax credits that companies can utilize against their net income for tax years 2020, 2021, and 2022.

We analyzed the provisions of AB 85 and determined there was no impact on our provision for income taxes for the current period and will continue to evaluate the impact, if any, AB 85 may have on the Company’s condensed consolidated financial statements and disclosures .

Revenue Recognition

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Our products are typically sold pursuant to purchase orders placed by our customers, and our terms and conditions of sale do not require customer acceptance.

We account for a contract with a customer when there is a legally enforceable contract, which could be the customer’s purchase order, the rights of the parties are identified, the contract has commercial terms, and collectibility of the contract consideration is probable.

The majority of our contracts have a single performance obligation to transfer products and are short term in nature, usually less than six months.

Our revenue is measured based on the consideration specified in the contract with each customer in exchange for transferring products that are generally based upon a negotiated, formula, list or fixed price.

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.

Shipping and handling fees billed to customers in a sales transaction are recorded as an offset to shipping and handling

Shipping and handling fees billed to customers in a sales transaction are recorded as an offset to shipping and handling expenses.

Sales taxes and value added taxes in foreign jurisdictions that are collected from customers and remitted to governmental authorities are accounted for on a net basis and, therefore, are excluded from revenue.

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We believe the fair value of our accounts receivable approximate its carrying value due to its short maturities and nominal credit risk.

We do not have any material contract assets as of March 31, 2020.

The following table reflects the contract liabilities balance as of March 31, 2020 and December 31, 2019 (in thousands):

We do not have any material contract assets as of June 30, 2020.

The following table reflects the contract liabilities balance as of June 30, 2020 and December 31, 2019 (in thousands):

Contract liabilities

During the three months ended March 31, 2020, the Company recognized $0.2 million of revenue that was included in the contract balances as of December 31, 2019.

During the three and six months ended June 30, 2020, the Company recognized $ 25,000 and $ 234,000 , respectively, of revenue that was included in the contract balances as of December 31, 2019.

Disaggregated Revenue

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Bank Loans and Line of Credit

On November 6, 2018, the Company entered into a Credit Agreement (the “Credit Agreement”), by and between the Company and Wells Fargo Bank, National Association (“Wells Fargo Bank”), which established a $10 million secured revolving line of credit with a $1.0 million letter of credit sublimit facility.

On November 6, 2018, the Company entered into a Credit Agreement (the “Credit Agreement”), by and between the Company and Wells Fargo Bank, National Association (“Wells Fargo Bank”), which established a $ 10 million secured revolving line of credit with a $ 1.0 million letter of credit sublimit facility.

The revolving credit facility is collateralized by substantially all of the assets of the Company located within the United States, subject to certain exceptions.

The commitments under the Credit Agreement expire on November 30, 2020 and any loans thereunder will bear interest at a rate based on the daily one-month London Inter-bank Offered Rate (“LIBOR”) for the applicable interest period plus a margin of 2.00%.

On February 5, 2020, the Company entered into the First Amendment to Credit Agreement (the “First Amendment”), by and between the Company and Wells Fargo Bank, which reduced the $10 million secured revolving line of credit under the Credit Agreement to $7 million.

On February 5, 2020, the Company entered into the First Amendment to Credit Agreement (the “First Amendment”), by and between the Company and Wells Fargo Bank, which reduced the $ 10 million secured revolving line of credit under the Credit Agreement to $ 7 million.

The commitments under the Credit Agreement, as amended by the First Amendment, expire on November 30, 2020 and any loans thereunder will bear interest at a rate based on the daily one-month LIBOR for the applicable interest period plus a margin of 2.5 % .

As of March 31, 2020, no loans or letters of credit were outstanding under the Credit Agreement, as amended by the First Amendment.

As of June 30, 2020, no loans or letters of credit were outstanding under the Credit Agreement, as amended by the First Amendment.

On August 9, 2019, Tongmei entered into a credit facility with the Bank of China with a $ 5.8 million line of credit at an annual interest rate of approximately 0.4 % over the average interest rate quoted by the National Interbank Funding Center.

Accrued interest is calculated monthly and paid quarterly.

The annual interest rate was approximately 4.7% as of March 31, 2020.

The credit facility is collateralized by Tongmei Baoding’s land use rights and all of its buildings located at its facility in Dingxing.

The annual interest rate was approximately 4.7 % as of June 30, 2020.

The credit facility is collateralized by Tongmei Baoding’s land use rights and all of its buildings located at its facility in Dingxing.

The primary intended use of the credit facility is for general purposes, which may include working capital and other corporate expenses.

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On September 12, 2019 Tongmei borrowed an additional $ 2.8 million against the credit facility.

The repayment of the full amount is due on September 12, 2020, unless the parties agree to a renewal.

As of March 31, 2020, $5.6 million was included in “Bank loan”

in our condensed consolidated balance sheets.

In February 2020, our majority-owned subsidiary, BoYu, entered into a credit facility with the Industrial and Commercial Bank of China (“ICBC”) with a $1.4 million line of credit at an annual interest rate of approximately 0.15% over the Loan Prime Rate.

The repayment of the full amount is due on September 12, 2020.

As of June 30, 2020, $ 5.7 million was included in “Bank loan” in our condensed consolidated balance sheets.

Upon the respective maturities, Tongmei intends to apply for renewals.

In February 2020, our majority-owned subsidiary, BoYu, entered into a credit facility with the Industrial and Commercial Bank of China (“ICBC”) with a $ 1.4 million line of credit at an annual interest rate of approximately 0.15 % over the loan prime rate.

Accrued interest is calculated monthly and paid quarterly.

The annual interest rate was approximately 4.3% as of March 31, 2020.

The credit facility is collateralized by BoYu’s land use rights and its building located at its facility in Tianjin, China and BoYu’s accounts receivable.

The annual interest rate was approximately 4.3 % as of June 30, 2020.

The credit facility is collateralized by BoYu’s land use rights and its building located at its facility in Tianjin, China and BoYu’s accounts receivable.

The primary intended use of the credit facility is for general purposes, which may include working capital and other corporate expenses.

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The repayment of the full amount is due in March 2021.

As of March 31, 2020, $0.4 million was included in “Bank loan”

in our condensed consolidated balance sheets.

As of June 30, 2020, $ 0.4 million was included in “Bank loan” in our condensed consolidated balance sheets.

We lease certain equipment, office space, warehouse and facilities under long-term operating leases expiring at various dates through July 2029.

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The remainder relate to our lease agreement for our facility in Fremont, California with approximately 19,467 square feet, which expires in 2020.

Under the terms of the facility lease agreement, in May 2020, we will have the option to extend the term of the lease for an additional three years.

We are reasonably certain to exercise the option in the future.

Under the terms of the facility lease agreement, in May 2020, we were granted an extension to the term of the lease for an additional three years .

There are no variable lease payments, residual value guarantees or any restrictions or covenants imposed by the facility lease.

All other operating leases have a term of 12 months or less.

On January 1, 2019, we adopted Accounting Standard Update 2016-02, Leases (Topic 842) (“ASC 842”), which requires the recognition of the right-of-use assets and related operating and finance lease liabilities on the balance sheet.

As permitted by ASC 842, we elected the adoption date of January 1, 2019, which is the date of initial application.

As a result, the consolidated balance sheet prior to January 1, 2019 was not restated, continues to be reported under ASC Topic 840, Leases , (“ASC 840”), which did not require the recognition of operating lease liabilities on the balance sheet, and is not comparative.

Under ASC 842, all leases are required to be recorded on the balance sheet and are classified as either operating leases or finance leases.

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Leases are classified as either finance leases or operating leases.

A lease is classified as a finance lease if any

one of the following criteria are met:

A lease is classified as a finance lease if any one of the following criteria are met:

the lease transfers ownership of the asset by the end of the lease term, the lease contains an option to purchase the asset that is reasonably certain to be exercised, the lease term is for a major part of the remaining useful life of the asset or the present value of the lease payments equals or exceeds substantially all of the fair value of the asset.

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All right-of-use assets are reviewed for impairment.

The lease liability is initially measured at the present value of the lease payments, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, our secured incremental borrowing rate for the same term as the underlying lease.

The lease liability is initially measured at the present value

of the lease payments, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, our secured incremental borrowing rate for the same term as the underlying lease.

Lease payments included in the measurement of the lease liability comprise the following:

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The effect of short-term leases on our right-of-use asset and lease liability was not material.

As of March 31, 2020, the maturities of our operating lease liabilities (excluding short-term leases) are as follows (in thousands):

As of June 30, 2020, the maturities of our operating lease liabilities (excluding short-term leases) are as follows (in thousands):

Maturity of Lease Liabilities

7 unchanged sentences

Supplemental cash flow information related to leases where we are the lessee is as follows (in thousands):

Three Months Ended

Six Months Ended

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases

Supplemental noncash information on lease liabilities arising from obtaining right-of-use assets:

Leased assets obtained in exchange for new operating lease liabilities

The components of lease expense are as follows (in thousands) within our condensed consolidated statements of operations:

Three Months Ended

Six Months Ended

Operating lease

1 unchanged sentence

Recent Accounting Pronouncements

Accounting Standard Update (“ASU”) No.

2016-13, Financial Instruments-Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”) was issued in June 2016.

Under ASU 2016-13, existing guidance on reporting credit losses for trade and other receivables and available for sale debt securities have been replaced with a new forward-looking “expected loss”

model that has resulted in the earlier recognition of allowances for losses.

Our adoption of ASU 2016-13 and its subsequent series of amendments during the quarter ended March 31, 2020 using the modified retrospective transition approach did not result in a material impact on our condensed consolidated financial statements.

Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”) was issued in June 2016.

Our adoption of ASU 2016-13 and its subsequent series of amendments during the three and six months ended June 30, 2020 using the modified retrospective transition approach did not result in a material impact on our condensed consolidated financial statements.

As part of our assessment of the adequacy of our allowances for credit losses, we consider a number of factors including, but not limited to, customer credit ratings, bankruptcy filings, published or estimated credit default rates, age of receivables, adequacy of our allowance for doubtful accounts and expected loss rates.

MANAGEMENT’S DISCUSSIO N AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

Statements relating to our expectations regarding results of operations, market and customer demand for our products, customer qualifications of our products, our ability to expand our markets or increase sales, emerging applications using chips or devices fabricated on our substrates, the development of new products, applications, enhancements or technologies, the life cycles of our products and applications, product yields and gross margins, expense levels, the impact of the adoption of certain accounting pronouncements, our investments in capital projects, our ability to relocate our gallium arsenide production line in a timely and orderly manner, our estimated construction and relocation costs, including potential severance costs, with respect to the relocation of our gallium arsenide production line, our ability to have customers re-qualify substrates from our new manufacturing location in Dingxing, China, our ability to utilize or increase our manufacturing capacity, and our belief that we have adequate cash and investments to meet our needs over the next 12 months are forward-looking statements.

Words such as “expects,”

“anticipates,”

“intends,”

“plans,”

“believes,”

“seeks,”

“estimates,”

“goals,”

“should,”

“continues,”

“would,”

“could”

and similar expressions or variations of such words are intended to identify forward‑looking statements, but are not the exclusive means of identifying forward‑looking statements in this quarterly report.

Statements relating to our expectations regarding results of operations, market and customer demand for our products, customer qualifications of our products, our ability to expand our markets or increase sales, emerging applications using chips or devices fabricated on our substrates, the development of new products, applications, enhancements or technologies, the life cycles of our products and applications, product yields and gross margins, expense levels, the impact of the adoption of certain accounting pronouncements, our investments in capital projects, our ability to relocate our gallium arsenide production line in a timely and orderly manner, ramping production at our new sites, our estimated construction and relocation costs, including potential severance costs, with respect to the relocation of our gallium arsenide production line, our ability to have customers re-qualify substrates from our new manufacturing location in Dingxing, China, our ability to utilize or increase our manufacturing capacity, and our belief that we have adequate cash and investments to meet our needs over the next 12 months are forward-looking statements.

Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “goals,” “should,” “continues,” “would,” “could” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this quarterly report.

Additionally, statements concerning future matters such as our strategy and plans, industry trends and the impact of trends, tariffs and trade wars, the potential or expected impact of the COVID-19 pandemic on our business, results of operations and financial condition, mandatory factory shutdowns in China, policies and regulations in China and economic cycles on our business are forward-looking statements.

All forward-looking statements are based upon management’s views as of the date of this quarterly report and are subject to risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated in such forward-looking statements.

Such risks and uncertainties include those set forth under the section entitled “Risk Factors”

in Item 1A below, as well as those discussed elsewhere in this quarterly report, and identify important factors that could disrupt or injure our business or cause actual results to differ materially from those predicted in any such forward-looking statements.

Such risks and uncertainties include those set forth under the section entitled “Risk Factors” in Item 1A below, as well as those discussed elsewhere in this quarterly report, and identify important factors that could disrupt or injure our business or cause actual results to differ materially from those predicted in any such forward-looking statements.

These forward-looking statements are not guarantees of future performance.

2 unchanged sentences

We undertake no obligation to revise or update any forward-looking statements in order to reflect any development, event or circumstance that may arise after the date of this report.

This discussion should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2019 and the condensed consolidated financial statements included elsewhere in this report.

(“AXT”, “the company”, “we,”

“us,”

and “our”

refer to AXT, Inc.

(“AXT”, “the company”, “we,” “us,” and “our” refer to AXT, Inc.

and its consolidated subsidiaries) is a worldwide materials science company that develops and produces high-performance compound and single element semiconductor substrates, also known as wafers.

Our consolidated subsidiaries produce and sell certain raw materials some of which are used in our substrate manufacturing process and some of which are sold to other companies.

Our wafer substrates are used when a typical silicon substrate wafer cannot meet the performance requirements of a semiconductor or optoelectronic device.

Our wafer substrates are used when a typical silicon wafer substrate cannot meet the performance requirements of a semiconductor or optoelectronic device.

The dominant substrates used in producing semiconductor chips and other electronic circuits are made from silicon.

31 unchanged sentences

Indium Phosphide

2”, 3”, 4”

• Data center connectivity using light/lasers

• 5G communications

• Fiber optic lasers and detectors

• Passive Optical Networks (PONs)

Data center connectivity using light/lasers

• Silicon photonics

1 unchanged sentence

• High efficiency terrestrial solar cells (CPV)

RF amplifier and switching

• RF amplifier and switching (military wireless & 5G)

• Infrared light-emitting diode (LEDs) motion control

1 unchanged sentence

Gallium Arsenide

1”, 2”, 3”, 4”, 5”, 6”

Power amplifiers for wireless devices

1”, 2”, 3”, 4”, 5”, 6”

• Wi-Fi devices

(GaAs - semi-insulating)

Direct broadcast television

• IoT devices

• High-performance transistors

• Direct broadcast television

• Power amplifiers for wireless devices

• Satellite communications

1 unchanged sentence

Gallium Arsenide

1”, 2”, 3”, 4”, 5", 6”

3-D sensing using VCSELs

(GaAs - semi-conducting)

Data center communication using VCSELs

1”, 2”, 3”, 4”, 5", 6”

• High brightness LEDs

Near-infrared sensors

(GaAs - semi-conducting)

• Printer head lasers and LEDs

• 3-D sensing using VCSELs

• Data center communication using VCSELs

• Sensors for industrial robotics/Near-infrared sensors

• Laser machining, cutting and drilling

1 unchanged sentence

• High efficiency solar cells for drones and automobiles

• Other lasers

• Night vision goggles

2”, 4”, 6”

• Satellite solar cells

20 unchanged sentences

• Used when growing epitaxial layers in Molecular Beam Epitaxy (MBE) reactors

We manufacture all of our products in the People’s Republic of China (PRC or China), which generally has favorable costs for facilities and labor compared with comparable facilities in the United States, Europe or Japan.

Our supply chain includes partial ownership of raw material companies in China (subsidiaries/joint ventures).

14 unchanged sentences

To mitigate our risks and maintain our production schedule, we moved our gallium arsenide equipment in stages.

As of December 31, 2019, we have ceased all crystal growth for gallium arsenide in our original manufacturing facility in Beijing and have transferred 100% of our ingot production to our new manufacturing facility in Kazuo, a city approximately 250 miles from Beijing.

As of December 31, 2019, we ceased all crystal growth for gallium arsenide in our original manufacturing facility in Beijing and transferred 100% of our ingot production to our new manufacturing facility in Kazuo, a city approximately 250 miles from Beijing.

We have transferred our wafer processing equipment for gallium arsenide to our new manufacturing facility in Dingxing, a city approximately 75 miles from Beijing.

Our key focus is now transferring volume production of the wafer processing steps for gallium arsenide to Dingxing.

Some of our larger, more sophisticated customers want to perform a site qualification and subsequently develop a plan to ramp up production at Dingxing.

Our key focus now is transferring volume production of the wafer processing steps for gallium arsenide to Dingxing.

This process is ongoing.

Some of our larger, more sophisticated customers want to perform a site qualification and subsequently work with us to ramp up production at Dingxing.

One of our largest gallium arsenide customers has already qualified our new manufacturing sites for volume production.

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

For the three months ended March 31, 2020, we paid approximately $190,000 in tariffs.

For the six months ended June 30, 2020, we paid approximately $470,000 in tariffs.

In 2019, we paid approximately $735,000 in tariffs.

14 unchanged sentences

Our products are typically sold pursuant to purchase orders placed by our customers, and our terms and conditions of sale do not require customer acceptance.

The majority of our contracts have a single performance obligation to transfer products and are short term in nature, usually less than six months.

Accounts Receivable and Allowance for Doubtful Accounts

11 unchanged sentences

Uncollectible receivables are recorded as bad debt expense when a credit loss is expected through the establishment of an allowance, which would then be written off when all efforts to collect have been exhausted and recoveries are recognized when they are received.

As of March 31, 2020 and December 31, 2019, our accounts receivable, net balance was $23.6 million and $19.0 million, respectively, which was net of an allowance for doubtful accounts of $34,000 and $34,000, respectively.

As of June 30, 2020 and December 31, 2019, our accounts receivable, net balance was $19.8 million and $19.0 million, respectively, which was net of an allowance for doubtful accounts of $77,000 and $34,000, respectively.

If actual uncollectible accounts differ substantially from our estimates, revisions to the estimated allowance for doubtful accounts would be required, which could have a material impact on our financial results for the future periods.

1 unchanged sentence

Upon adoption, on January 1, 2018, of the new revenue recognition guidance, ASC Topic 606, we reclassified our sales returns reserve to accrued liabilities.

As of March 31, 2020 and December 31, 2019, the balance was $13,000 and $26,000, respectively.

As of June 30, 2020 and December 31, 2019, the balance was $90,000 and $26,000, respectively.

Warranty Reserve

1 unchanged sentence

Warranty costs are accrued at the time revenue is recognized.

As of March 31, 2020 and December 31, 2019, accrued product warranties totaled $362,000 and $387,000, respectively.

The increase in accrued product warranties is primarily attributable to increased claims for quality issues experienced by customers.

As of June 30, 2020 and December 31, 2019, accrued product warranties totaled $352,000 and $387,000, respectively.

The decrease in accrued product warranties is primarily attributable to decreased claims for quality issues experienced by customers.

If actual warranty costs or pending new claims differ substantially from our estimates, revisions to the estimated warranty liability would be required, which could have a material impact on our financial condition and results of operations for future periods.

4 unchanged sentences

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 valuation allowance for certain inventories based upon the age and quality of the product and the projections for sale of the completed products.

As of March 31, 2020 and December 31, 2019, we had an inventory reserve of $16.6 million and $16.4 million, respectively, for excess and obsolete inventory and $97,000 and $91,000, respectively, for lower of cost or net realizable value reserves.

As of June 30, 2020 and December 31, 2019, we had an inventory reserve of $16.6 million and $16.4 million, respectively, for excess and obsolete inventory and $121,000 and $91,000, respectively, for lower of cost or net realizable value reserves.

If actual demand for our products were to be substantially lower than estimated, additional inventory adjustments for excess or obsolete inventory might be required, which could have a material impact on our business, financial condition and results of operations.

7 unchanged sentences

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.

Determination of impairment is highly subjective and is based on a number of factors, including an assessment of the strength of each company’s management, the length of time and extent to which the fair value has been less than our cost basis, the financial condition and near-term prospects of the company, fundamental changes to the business prospects of the company, share prices of subsequent offerings, and our intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in our carrying value.

For the year ended December 31, 2019, we recorded an impairment charge of $1.1 million for a germanium materials company in China in which we have a 25% ownership interest.

Except as mentioned above, there

were no impairment charges for the remainder of these investments during the three months ended March 31, 2020 and 2019.

were no impairment charges for the remainder of these investments during the three and six months ended June 30, 2020 and 2019.

Fair Value of Investments

11 unchanged sentences

We measure the fair value of these foreign currency hedges at each month end and quarter end using current exchange rates and in accordance with generally accepted accounting principles.

At quarter end any foreign currency hedges not settled are netted in “Accrued liabilities”

on the condensed consolidated balance sheet and classified as Level 3 assets and liabilities.

As of March 31, 2020, 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.

There have been no transfers between fair value measurement levels during the three months ended March 31, 2020 and 2019.

At quarter end any foreign currency hedges not settled are netted in “Accrued liabilities” on the condensed consolidated balance sheet and classified as Level 3 assets and liabilities.

As of June 30, 2020, 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.

There have been no transfers between fair value measurement levels during the three and six months ended June 30, 2020 and 2019.

Impairment of Long-Lived Assets

1 unchanged sentence

When events and circumstances indicate that long-lived assets may be impaired, we compare the carrying value of the long-lived assets to the projection of future undiscounted cash flows attributable to these assets.

In the event that the carrying value exceeds the future undiscounted cash flows, we record an impairment charge against income equal to the excess of the carrying value over the assets’

In the event that the carrying value exceeds the future undiscounted cash flows, we record an impairment charge against income equal to the excess of the carrying value over the assets’ fair value.

Fair values are determined based on quoted market values, discounted cash flows or internal and external appraisals, as applicable.

1 unchanged sentence

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 condensed consolidated balance sheets as of March 31, 2020 and December 31, 2019.

We had no “Assets held for sale” or any impairment of long-lived assets on the condensed consolidated balance sheets as of June 30, 2020 and December 31, 2019.

Stock-based Compensation

10 unchanged sentences

Stock-based compensation expense is recorded in cost of revenue, research and development, and selling, general and administrative expenses.

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.

2 unchanged sentences

The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws, particularly in foreign countries such as China.

See Note 14—“Income Taxes”

in the notes to condensed consolidated financial statements for additional information.

Change in Accounting Estimate –

Useful Life of Equipment and Facilities

We reviewed our estimates of the useful lives of our property, plant and equipment.

See Note 14—“Income Taxes” in the notes to condensed consolidated financial statements for additional information.

Change in Accounting Estimate – Useful Life of Equipment and Facilities

From time to time we review our estimates of the useful lives of our property, plant and equipment.

As a result of the review, we determined a portion of our manufacturing equipment was lasting longer than the estimate previously established for the respective useful lives.

2 unchanged sentences

The changes in our estimate of the useful life, effective January 1, 2020, were made in order to remain consistent with US GAAP regarding management estimates.

The effect of the change in the useful lives decreased our manufacturing costs for the three and six months ended June 30, 2020 by approximately $0.3 million and $0.6 million, respectively, and increased our basic and diluted net income per share by approximately $0.01 and $0.02, respectively, as a result of lower depreciation expense.

Impact of the COVID-19 Pandemic

1 unchanged sentence

In March 2020, the President of the United States declared the COVID-19 outbreak a national emergency.

For much of the quarter ended March 31, 2020, our manufacturing facilities in China were operating at reduced staffing levels to limit the risk of COVID-19 exposure for our employees.

Recently, the

Chinese government mandates have evolved, allowing us to return to full staffing levels at all three manufacturing locations in China.

While we are unable to accurately predict the full impact COVID-19 will have due to numerous uncertainties, including the severity of the disease, the duration of the outbreak, and actions that may be taken by government authorities, we believe that the COVID-19 pandemic could have a material adverse impact on our business, consolidated results of operations and financial condition in the near term.

For much of the three months ended March 31, 2020, our manufacturing facilities in

China were operating at reduced staffing levels to limit the risk of COVID-19 exposure for our employees.

The Chinese government mandates have evolved, allowing us to return to full staffing levels at all three manufacturing locations in China.

We are unable to accurately predict the full impact of the COVID-19 pandemic due to numerous uncertainties, including the severity of the disease, the duration of the outbreak, the effect of the outbreak on transportation, such as reduced availability of air transport, port closures, and increased border controls or closures, the impact of the outbreak on our customers and additional actions that may be taken by government authorities to contain the outbreak, such as travel restrictions between China and the U.S.

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

As a result of these factors, we believe that the COVID-19 pandemic could have a material adverse impact on our business, consolidated results of operations and financial condition in the near term.

Results of Operations

Three Months Ended

Six Months Ended

Product Type:

($ in thousands)

Raw materials and other

Total revenue

Revenue increased $0.5 million, or 2.5%, to $20.7 million for the three months ended March 31, 2020 from $20.2 million for the three months ended March 31, 2019.

The substrates revenue increase for the three months ended March 31, 2020 as compared to the same period in 2019 was primarily the result of increased demand for our Ge wafer substrates, partially offset by lower demand for our GaAs wafer substrates.

Raw m aterials sales increased $0.4 million, or 11.6%, to $3.8 million for the three months ended March 31, 2020 as compared to the same period in 2019.

The raw materials revenue increase for the three months ended March 31, 2020 as compared to the same period in 2019, was primarily the result of an increase in sales of refined gallium resulting from stronger market demand.

Revenue decreased $2.7 million, or 10.7%, to $22.1 million for the three months ended June 30, 2020 from $24.8 million for the three months ended June 30, 2019.

The substrate revenue decrease for the three months ended June 30, 2020 as compared to the same period in 2019 was the result of a large order from a single customer in the second quarter of 2019 which was not repeated in the second quarter of 2020.

This was partially offset by higher demand for our GaAs wafer substrates in the second quarter of 2020.

Raw m aterials sales increased $1.1 million, or 25.3%, to $5.3 million for the three months ended June 30, 2020 as compared to the same period in 2019.

The raw materials revenue increase for the three months ended June 30, 2020 as compared to the same period in 2019, was primarily the result of an increase in sales of refined gallium and pBN crucibles resulting from stronger market demand.

Revenue decreased $2.1 million, or 4.8%, to $42.9 million for the six months ended June 30, 2020 from $45.0 million for the six months ended June 30, 2019.

The substrate revenue decrease for the six months ended June 30, 2020 as compared to the same period in 2019 was primarily the result of a large order from a single customer in the first half of 2019 which was not repeated in the first half of 2020, partially offset by increased revenue for both our GaAs and Ge wafer substrates.

Raw m aterials sales increased $1.5 million, or 19.1%, to $9.1 million for the six months ended June 30, 2020 as compared to the same period in 2019.

The raw materials revenue increase for the six months ended June 30, 2020 as compared to the same period in 2019, was primarily the result of an increase in sales of refined gallium and pBN crucibles resulting from stronger market demand.

Revenue by Geographic Region

Three Months Ended

($ in thousands)

Europe (primarily Germany)

% of total revenue

1 unchanged sentence

% of total revenue

Asia Pacific (excluding China, Taiwan and Japan)

% of total revenue

Europe (primarily Germany)

% of total revenue

North America (primarily the United States)

% of total revenue

Total revenue

Revenue in China decreased by $1.9 million for the three months ended June 30, 2020, primarily due to lower demand for our Ge wafer substrates.

Revenue in Asia Pacific decreased by $1.0 million primarily due to decreased demand for pBN crucibles sold by one of our consolidated subsidiaries.

Revenue in Europe decreased $0.5 million primarily due to decreased demand for GaAs and InP wafer substrates partially offset by increased demand for pBN crucibles sold by one of our consolidated subsidiaries.

Revenue in North America increased by $0.9 million due to higher demand for our InP and GaAs wafer substrates.

Six Months Ended

($ in thousands)

% of total revenue

Asia Pacific (excluding China, Taiwan and Japan)

% of total revenue

Europe (primarily Germany)

% of total revenue

North America (primarily the United States)

% of total revenue

Total revenue

Revenue in China decreased by $2.4 million for the three months ended March 31, 2020, primarily due to lower demand for our Ge wafer substrates.

Revenue in Taiwan increased by $2.2 million primarily due to increased demand for InP wafer substrates.

Revenue in Europe increased $1.8 million primarily due to increased demand for Ge wafer substrates.

Revenue in North America decreased by $0.8 million due to lower demand for our GaAs wafer substrates.

Revenue in China decreased by $4.3 million for the six months ended June 30, 2020, primarily due to lower demand for our InP wafer substrates partially offset by increase in demand for refined gallium.

We believe at least some of this reduction is a result of the geopolitical tensions between China and the U.S.

Revenue in Taiwan increased by $1.9 million primarily due to increased demand for InP and GaAs wafer substrates.

Revenue in Europe increased $1.3 million primarily due to increased demand for Ge wafer substrates and pBN crucibles sold by one of our consolidated subsidiaries partially offset by lower demand for InP wafer substrates.

Revenue in Asia Pacific decreased by $0.9 million due to lower demand for our GaAs wafer substrates and pBN crucibles.

Three Months Ended

Six Months Ended

($ in thousands)

Gross Margin %

Gross profit decreased $1.2 million, or 17.5%, to $5.5 million for the three months ended March 31, 2020 from $6.7 million for the three months ended March 31, 2019.

The decrease in gross profit is attributed to a change in product mix and less efficient manufacturing yields as a result of the relocation process.

Gross profit decreased $1.7 million, or 20.4%, to $6.8 million for the three months ended June 30, 2020 from $8.5 million for the three months ended June 30, 2019.

The decrease in gross profit is attributed to lower revenue, a change in product mix and less efficient manufacturing yields as a result of the relocation process.

Gross profit decreased $2.9 million, or 19.2%, to $12.3 million for the six months ended June 30, 2020 from $15.2 million for the six months ended June 30, 2019.

The decrease in gross profit is attributed to lower revenue, a change in product mix and less efficient manufacturing yields as a result of the relocation process.

Selling, General and Administrative Expenses

Three Months Ended

Six Months Ended

($ in thousands)

Selling, general and administrative expenses

% of total revenue

Selling, general and administrative expenses increased $26,000, or 0.6%, to $4.7 million for the three months ended March 31, 2020 from $4.7 million for the three months ended March 31, 2019.

The higher selling, general and administrative expenses were primarily from higher personnel-related, outside commissions and legal expenses partially offset by lower license and fees and travel related expenses.

Selling, general and administrative expenses decreased $22,000, or 0.5%, to $4.7 million for the three months ended June 30, 2020 from $4.8 million for the three months ended June 30, 2019.

The lower selling, general and administrative expenses were primarily from lower travel-related expenses driven by the COVID-19 pandemic partially offset by higher personnel-related and professional service expenses.

Selling, general and administrative expenses increased $4,000, or 0.0%, to $9.5 million for the six months ended June 30, 2020 from $9.5 million for the six months ended June 30, 2019.

The higher selling, general and administrative expenses were primarily from higher personnel-related, outside commissions and legal expenses offset by lower license and fees and travel-related expenses driven by the COVID-19 pandemic.

Research and Development

Three Months Ended

Six Months Ended

($ in thousands)

Research and development

% of total revenue

Research and development expenses increased $61,000, or 4.5%, to $1.4 million for the three months ended March 31, 2020 from $1.3 million for the three months ended March 31, 2019.

The increase in research and development expenses for the three months ended March 31, 2020 was primarily due to higher expense in our new product testing, partially offset by lower personnel related expenses.

Research and development expenses increased $144,000, or 10.3%, to $1.5 million for the three months ended June 30, 2020 from $1.4 million for the three months ended June 30, 2019.

The increase in research and development expenses for the three months ended June 30, 2020 was primarily due to higher expense in our new product testing and personnel-related expenses partially offset by lower travel-related expenses driven by COVID-19.

Research and development expenses increased $205,000, or 7.5%, to $3.0 million for the six months ended June 30, 2020 from $2.7 million for the six months ended June 30, 2019.

The increase in research and development expenses for the six months ended June 30, 2020 was primarily due to higher expense in our new product testing and personnel-related expenses partially offset by lower facility-related and travel-related expenses driven by the COVID-19 pandemic.

Interest Income (Expense), Net

Three Months Ended

Six Months Ended

($ in thousands)

Interest income (expense), net

% of total revenue

Interest income (expense), net decreased $124,000 or 130.5% for the three months ended March 31, 2020 as compared to the same period in 2019.

Interest income (expense), net decreased $118,000 or 149.4% for the three months ended June 30, 2020 as compared to the same period in 2019.

Interest income (expense), net decreased primarily due to a reduction in the amount of cash and cash equivalents held by us and interest expense incurred by Tongmei under the Credit Facility.

Equity in Loss of Unconsolidated Joint Ventures

Interest income (expense), net decreased $242,000 or 139.1% for the six months ended June 30, 2020 as compared to the same period in 2019.

Interest income (expense), net decreased primarily due to a reduction in the amount of cash and cash equivalents held by us, lower interest rates and interest expense incurred by Tongmei under the Credit Facility.

Equity in Income (Loss) of Unconsolidated Joint Ventures

Three Months Ended

Six Months Ended

Equity in Income (Loss)

Equity in Loss

($ in thousands)

Equity in loss of unconsolidated joint ventures

($ in thousands)

Equity in income (loss) of unconsolidated joint ventures

% of total revenue

The equity in loss of unconsolidated joint venture companies was a loss of $120,000 for the three months ended March 31, 2020 as compared to a loss of $1.5 million for the three months ended March 31, 2019.

The equity in income (loss) of unconsolidated joint venture companies was a loss of $168,000 for the three months ended June 30, 2020 as compared to a gain of $8,000 for the three months ended June 30, 2019.

The current quarter loss is primarily due to poor financial results of two raw gallium companies.

The $1.5 million aggregate loss for the three months ended March 31, 2019 includes an impairment charge of $1.1 million for a germanium materials company in China in which we have a 25% ownership interest (See Note 7) and the poor financial results of two raw gallium companies.

The equity in loss of unconsolidated joint venture companies was a loss of $288,000 for the six months ended June 30, 2020 as compared to a loss of $1.4 million for the six months ended June 30, 2019.

The current year six month loss is primarily due to poor financial results of two raw gallium companies.

The $1.4 million aggregate loss for the six months ended June 30, 2019 includes an impairment charge of $1.1 million for a germanium materials company in China in which we have a 25% ownership interest (See Note 7) and the poor financial results of two raw gallium companies.

Other Income (Expense), Net

Three Months Ended

Six Months Ended

Other Income (Expense)

($ in thousands)

Other income (expense), net

% of total revenue

Other income (expense), net increased $1.5 million to an income of $1.4 million for the three months ended March 31, 2020 from an expense of $134,000 for the three months ended March 31, 2019.

Other income (expense), net increased primarily due to a grant of $1.4 million received from a provincial government agency as an award for relocating to its province.

Other income (expense), net increased $1.7 million to an income of $1.6 million for the three months ended June 30, 2020 from an expense of $90,000 for the three months ended June 30, 2019.

Other income (expense), net increased primarily due to a grant of $1.6 million received from a Chinese provincial government agency as an award for relocating to its province.

Other income (expense), net increased $3.2 million to an income of $3.0 million for the six months ended June 30, 2020 from an expense of $224,000 for the six months ended June 30, 2019.

Other income (expense), net increased primarily due to grants totaling $3.0 million received from a Chinese provincial government agency as an award for relocating to its province.

Provision for Income Taxes

Three Months Ended

Six Months Ended

($ in thousands)

Provision for income taxes

% of total revenue

Provision for income taxes for the three months ended March 31, 2020 was $366,000, which was primarily related to higher profits in China.

Provision for income taxes for the three and six months ended June 30, 2020 was $920,000 and $1.3 million, respectively, which was primarily related to higher profits in China and a tax on a rebate we received from a purchase of land use rights when we began the relocation.

No income taxes, except certain state tax, or benefits have been provided for our U.S.

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Due to our uncertainty regarding our future profitability in the U.S., we recorded a full valuation allowance against our net deferred tax assets of $20 million in 2019, $20 million in 2018 and $22 million in 2017.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was passed into law.

The CARES Act includes several significant business tax provisions, including modification to the taxable income limitation for utilization of net operating losses (“NOLs”) incurred in 2018, 2019 and 2020 and the ability to carry back NOLs from those years for a period of up to five years, an increase to the limitation on deductibility of certain business interest expense, bonus depreciation for purchases of qualified improvement property, and special deductions on certain corporate charitable contributions.

We analyzed the provisions of the CARES Act and determined there was

no effect on our provision for income taxes for the current period and will continue to evaluate the impact, if any, the CARES Act may have on the Company’s condensed consolidated financial statements and disclosures.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was passed into law.

We analyzed the provisions of the CARES Act and determined there was no effect on our provision for income taxes for the current period and will continue to evaluate the impact, if any, the CARES Act may have on the Company’s condensed consolidated financial statements and disclosures.

Net Income Attributable to Noncontrolling Interests

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Net income attributable to

Six Months Ended

Net income attributable to

Noncontrolling interests

($ in thousands)

Net income attributable to noncontrolling interests

% of total revenue

Net income attributable to noncontrolling interests increased $314,000 or 387.7% to $395,000 for the three months ended March 31, 2020 from $81,000 for the three months ended March 31, 2019 primarily due to higher profitability from our consolidated joint venture operations in China.

Net income attributable to noncontrolling interests increased $311,000 or 108.4% to $598,000 for the three months ended June 30, 2020 from $287,000 for the three months ended June 30, 2019 primarily due to higher profitability from our consolidated joint venture operations in China.

Net income attributable to noncontrolling interests increased $625,000 or 169.8% to $993,000 for the six months ended June 30, 2020 from $368,000 for the six months ended June 30, 2019 primarily due to higher profitability from our consolidated joint venture operations in China.

Liquidity and Capital Resources

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government securities, certificates of deposit and investment-grade corporate notes and bonds.

As of March 31, 2020, our principal source of liquidity was $28.8 million, which consisted of cash and cash equivalents of $20.1 million and investments of $8.7 million.

In the three months ended March 31, 2020, cash and cash equivalents decreased by $6.8 million and short-term investments decreased by $0.7 million.

The decrease in cash and cash equivalents of $6.8 million in the three months ended March 31, 2020 was primarily due to net cash used in operating activities of $6.1 million, net cash used in investing activities of $1.4 million and the effect of exchange rate changes of $0.1 million, partially offset by net cash provided by financing activities of $0.8 million.

As of March 31, 2020, we and our consolidated joint ventures held approximately $11.2 million in cash and investments in foreign bank accounts.

As of June 30, 2020, our principal source of liquidity was $32.5 million, which consisted of cash and cash equivalents of $26.5 million and investments of $6.0 million.

In the six months ended June 30, 2020, cash and cash equivalents decreased by $0.4 million and investments decreased by $3.5 million.

The decrease in cash and cash equivalents of $0.4 million in the six months ended June 30, 2020 was primarily due to net cash used in investing activities of $3.0 million and the effect of exchange rate changes of $0.2 million, partially offset by net cash provided by operating activities of $2.0 million and financing activities of $0.8 million.

As of June 30, 2020, we and our consolidated joint ventures held approximately $13.4 million in cash and investments in foreign bank accounts.

This consisted of $11.3 million held by our wholly-owned subsidiaries in China and $2.1 million held by our partially-owned consolidated subsidiary in China.

As of March 31, 2019, our principal source of liquidity was $34.1 million, which consisted of cash and cash equivalents of $21.1 million and short-term investments of $13.1 million.

In the three months ended March 31, 2019, cash and cash equivalents increased by $4.5 million and short-term and long-term investments decreased by $9.8 million.

The increase in cash and cash equivalents of $4.5 million in the three months ended March 31, 2019 was primarily due to net cash provided by investing activities of $6.9 million, net cash provided by financing activities of $0.4 million and the effect of exchange rate changes of $0.1 million, partially offset by net cash used in operating activities of $2.9 million.

As of March 31, 2019, we and our consolidated joint ventures held approximately $11.4 million in cash and investments in foreign bank accounts.

This consisted of $6.4 million held by our wholly-owned subsidiaries in China and $5.0 million held by our two partially-owned consolidated subsidiaries in China.

Net cash used in operating activities of $6.1 million for the three months ended March 31, 2020 was primarily comprised of a net change of $8.1 million in operating assets and liabilities, partially offset by net income of $0.2 million, the adjustment for non-cash items of depreciation and amortization of $1.0 million, stock-based compensation of $0.6 million and loss on equity method investments of $0.1 million.

Net cash used in operating activities of $2.9 million for the three months ended March 31, 2019 was primarily comprised of a net loss of $1.0 million, an adjustment for a non-cash item of $0.2 million gain from the deconsolidation of a subsidiary and a net change of $5.4 million in operating assets and liabilities, partially offset by the adjustment for non-cash items of depreciation and amortization of $1.5 million, impairment charge on equity investment of $1.1 million, stock based compensation of $0.6 million and loss on equity method investments of $0.6 million.

Net cash used in investing activities of $1.4 million for the three months ended March 31, 2020 was primarily from the purchase of property, plant and equipment of $2.1 million, partially offset by proceeds from sales and maturities of available-for-sale debt securities of $0.7 million.

Net cash provided by investing activities of $6.9 million for the three months ended March 31, 2019 was primarily from the proceeds from sales and maturities of available-for-sale debt securities of $9.8 million, partially offset by purchase of property, plant and equipment of $2.9 million.

Net cash provided by financing activities was $0.8 million for the three months ended March 31, 2020, which consisted of proceeds from short-term borrowings of $0.4 million and proceeds from common stock exercised of $0.4 million.

Net cash provided by financing activities was $0.4 million for the three months ended March 31, 2019, which consisted of net proceeds of $366,000 on the sale of previously consolidated subsidiary shares.

As of June 30, 2019, our principal source of liquidity was $37.5 million, which consisted of cash and cash equivalents of $28.7 million and investments of $8.8 million.

In the six months ended June 30, 2019, cash and cash equivalents increased by $12.2 million and short-term and long-term investments decreased by $14.1 million.

The increase in cash and cash equivalents of $12.2 million in the six months ended June 30, 2019 was primarily due to net cash provided by investing activities of $5.9 million, net cash provided by operating activities of $6.0 million, net cash provided by financing activities of $0.3 million and the effect of exchange rate changes of $23,000.

As of June 30, 2019, we and our consolidated joint ventures held approximately $18.0 million in cash and investments in foreign bank accounts.

This consists of $15.0 million held by our wholly-owned subsidiaries in China and $3.0 million held by our partially-owned consolidated subsidiary in China.

Net cash provided by operating activities of $2.0 million for the six months ended June 30, 2020 was primarily comprised of a net income before income attributable to non-controlling interest of $1.2 million, the adjustment for non-cash items of depreciation and amortization of $2.0 million, stock-based compensation of $1.3 million and loss on equity method investments of $0.3 million, partially offset by a net change of $2.8 million in operating assets and liabilities.

Net cash provided by operating activities of $6.0 million for the six months ended June 30, 2019 was primarily comprised of a net income before income attributable to non-controlling interest of $0.7 million, return on equity method investments of $0.4 million, the adjustment for non-cash items of depreciation and amortization of $2.8 million, impairment charge on equity investment of $1.1 million, stock-based compensation of $1.1 million and loss on equity method investments of $0.6 million, partially offset by an adjustment for a non-cash item of $0.2 million gain from the deconsolidation of a subsidiary and a net change of $0.6 million in operating assets and liabilities.

Net cash used in investing activities of $3.0 million for the six months ended June 30, 2020 was primarily from the purchase of property, plant and equipment of $6.5 million, partially offset by proceeds from sales and maturities of available-for-sale debt securities of $3.5 million.

Net cash provided by investing activities of $5.9 million for the six months ended June 30, 2019 was primarily from the proceeds from sales and maturities of available-for-sale securities of $16.6 million, partially offset by purchase of property, plant and equipment of $8.2 million and purchase of available for sale securities of $2.5 million.

Net cash provided by financing activities was $0.8 million for the six months ended June 30, 2020, which consisted of proceeds from short-term borrowings of $0.4 million and proceeds from common stock exercised of $0.5 million, partially offset by dividends paid by joint ventures to their minority shareholders of $0.1 million.

Net cash provided by financing activities was $0.3 million for the six months ended June 30, 2019, which consisted of net proceeds of $0.4 million on the sale of previously consolidated subsidiary shares and proceeds from common stock exercised of $0.2 million, partially offset by consideration paid in cash to repurchase subsidiary shares from noncontrolling interests of $0.3 million.

On October 27, 2014, our Board of Directors approved a stock repurchase program pursuant to which we may repurchase up to $5.0 million of our outstanding common stock.

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Since 2015, no shares were repurchased under this program.

During three months ended March 31, 2020, we did not repurchase any shares under the approved stock repurchase program.

As of March 31, 2020, approximately $2.7 million remained available for future repurchases under this program.

During the six months ended June 30, 2020, we did not repurchase any shares under the approved stock repurchase program.

As of June 30, 2020, approximately $2.7 million remained available for future repurchases under this program.

Currently, we do not plan to repurchase additional shares.

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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 condensed consolidated balance sheets .

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 condensed consolidated balance sheets .

At the time we pay this accrued liability, our cash and cash equivalents will be reduced.

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To mitigate our risks and maintain our production schedule, we moved our gallium arsenide equipment in stages.

We transferred our wafer processing equipment for gallium arsenide to our new manufacturing facility in Dingxing, a city approximately 75 miles from Beijing.

Our key focus is now transferring volume production of the wafer processing steps for gallium arsenide to Dingxing.

Our key focus now is transferring volume production of the wafer processing steps for gallium arsenide to Dingxing.

This process is ongoing.

We expect to spend approximately $5 million in capital expenditures for our gallium arsenide manufacturing line in 2020 and are considering additional investments in our indium phosphide manufacturing line.

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The inter-company loan carries an interest rate of 4.9% per annum and is due on June 30, 2023.

As of March 31, 2020, JinMei repaid principal and interest totaling $481,000 to Tongmei.

As of March 31, 2020, the

remaining balance of principal and interest totaled $283,000.

As of June 30, 2020, JinMei repaid principal and interest totaling $483,000 to Tongmei.

As of June 30, 2020, the remaining balance of principal and interest totaled $287,000.

BoYu, our consolidated pBN crucible joint venture will invest approximately $4.0 million to $4.5 million.

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The commitments under the Credit Agreement expire on November 30, 2020 and any loans thereunder will bear interest at a rate based on the daily one-month LIBOR for the applicable interest period plus a margin of 2.00%.

As of December 31, 2019, no loans or letters of credit were outstanding under the Credit Agreement.

As of December 31,

2019, no loans or letters of credit were outstanding under the Credit Agreement.

On February 5, 2020, the Company entered into the First Amendment, which reduced the $10 million secured revolving line of credit under the Credit Agreement to $7 million.

As of March 31, 2020, no loans or letters of credit were outstanding under the Credit Agreement, as amended by the First Amendment.

As of June 30, 2020, no loans or letters of credit were outstanding under the Credit Agreement, as amended by the First Amendment.

On August 9, 2019, Tongmei entered into a credit facility with the Bank of China with a $5.8 million line of credit at an annual interest rate of approximately 0.4% over the average interest rate quoted by the National Interbank Funding Center.

Accrued interest is calculated monthly and paid quarterly.

The annual interest rate was approximately 4.7% as of March 31, 2020.

The credit facility is collateralized by Tongmei Baoding’s land use rights and all of its buildings located at its facility in Dingxing.

The annual interest rate was approximately 4.7% as of June 30, 2020.

The credit facility is collateralized by Tongmei Baoding’s land use rights and all of its buildings located at its facility in Dingxing.

The primary intended use of the credit facility is for general purposes, which may include working capital and other corporate expenses.

Tongmei borrowed $2.8 million against the credit facility.

Tongmei initially borrowed $2.8 million against the credit facility.

The repayment of the full amount is due on August 9, 2020.

On September 12, 2019 Tongmei borrowed an additional $2.8 million against the credit facility.

The repayment of the full amount is due on September 12, 2020, unless the parties agree to a renewal.

As of March 31, 2020, $5.6 million was included in “Bank loan”

in our condensed consolidated balance sheets.

The repayment of the full amount is due on September 12, 2020.

As of June 30, 2020, $5.7 million was included in “Bank loan” in our condensed consolidated balance sheets.

Upon the respective maturities, Tongmei intends to apply for renewals.

Accrued interest is calculated monthly and paid quarterly.

The annual interest rate was approximately 4.3% as of March 31, 2020.

The credit facility is collateralized by BoYu’s land use rights and its building located at its facility in Tianjin, China and BoYu’s accounts receivable.

The annual interest rate was approximately 4.3% as of June 30, 2020.

The credit facility is collateralized by BoYu’s land use rights and its building located at its facility in Tianjin, China and BoYu’s accounts receivable.

The primary intended use of the credit facility is for general purposes, which may include working capital and other corporate expenses.

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The repayment of the full amount is due in March 2021.

As of March 31, 2020, $0.4 million was included in “Bank loan”

in our condensed consolidated balance sheets.

As of June 30, 2020, $0.4 million was included in “Bank loan” in our condensed consolidated balance sheets.

We believe that we have adequate cash and investments to meet our operating needs over the next twelve months.

If our sales decrease, however, our ability to generate cash from operations will be adversely affected which could adversely affect our future liquidity, require us to use cash at a more rapid rate than expected, and require us to seek additional capital.

Cash from operations could be affected by various risks and uncertainties, including, but not limited to those set forth below under Item 1A “Risk Factors”.

Contract to Purchase Goods and Services

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and the approximate timing of the transaction.

orders are based on our current needs and are fulfilled by our vendors within short time horizons.

Our purchase orders are based on our current needs and are fulfilled by our vendors within short time horizons.

We also enter into contracts for outsourced services;

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Off-Balance Sheet Arrangements

As of March 31, 2020, we did not have any off-balance sheet financing arrangements and have never established any special purpose entities as defined under SEC Regulation S-K Item 303(a)(4)(ii).

As of June 30, 2020, we did not have any off-balance sheet financing arrangements and have never established any special purpose entities as defined under SEC Regulation S-K Item 303(a)(4)(ii).

Recent Accounting Pronouncements

For a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our condensed consolidated financial statements, please see “Note 18 - Recent Accounting Pronouncements”

in the Notes to Condensed Consolidated Financial Statements of this Form 10-Q.

QUANTITATIVE AND QUALITATIV E DISCLOSURES ABOUT MARKET RISK

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If we do not effectively manage the risks associated with this currency risk, our revenue, cash flows and financial condition could be adversely affected.

Although during 2019 and 2018, we recorded a foreign exchange gain of $321,000 and $165,000, respectively, during 2017 we recorded net foreign exchange loss of $602,000, included as part of other (expense) income, net in our consolidated statements of operation.

We incur foreign currency transaction exchange gains and losses due to operations in general.

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At quarter end and year end any foreign currency hedges not settled are netted on the condensed consolidated balance sheet and consolidated balance sheet, respectively, and classified as Level 3 assets and liabilities.

As of March 31, 2020 and December 31, 2019, 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 June 30, 2020 and December 31, 2019, 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.

The functional currency for our foreign operations is the renminbi, the local currency of China, and in the future we may establish short term hedges covering renminbi.

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We have no investments in auction rate securities.

We perform ongoing credit evaluations of our customers’

financial condition, and limit the amount of credit extended when deemed necessary, but generally do not require collateral.

We perform ongoing credit evaluations of our customers’ financial condition, and limit the amount of credit extended when deemed necessary, but generally do not require collateral.

The credit risk in our accounts receivable is mitigated by our credit evaluation process and the broad dispersion of sales transactions.

Three customers accounted for 20%, 13% and 12% of our trade accounts receivable balance as of March 31, 2020 , respectively, and three customers accounted for 14%, 13% and 12% of our trade accounts receivable as of December 31, 2019, respectively.

Two customers accounted for 13% and 12% of our trade accounts receivable balance as of June 30, 2020 , respectively, and three customers accounted for 14%, 13% and 12% of our trade accounts receivable as of December 31, 2019, respectively.

As part of our supply chain strategy, we maintain minority investments in privately-held raw material companies located in China either invested directly by us or by one of our supply chain companies in China.

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The period ended December 31, 2019 includes an impairment charge from March 31, 2019 of $1.1 million for a germanium materials company in China in which we have a 25% ownership interest (see Note 7).

As of March 31, 2020 and December 31, 2019, we did not maintain any direct investments under the cost method.

Our minority investments under the equity method as of March 31, 2020 and December 31, 2019 totaled $5.8 million and $6.0 million, respectively.

As of June 30, 2020 and December 31, 2019, we did not maintain any direct investments under the cost method.

Our minority investments under the equity method as of June 30, 2020 and December 31, 2019 totaled $5.6 million and $6.0 million, respectively.

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

What changed 10-Q

Item 1. Financial Statements