What changed in this filing

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Item 1. Financial Statements

2020-11-06 compared with 2020-08-07 · 359 added, 259 removed, 1083 unchanged (36% of the section changed)

2 unchanged sentences

(Unaudited, in thousands, except per share data)

September 30,

Current assets:

1 unchanged sentence

Short-term investments

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

Accounts receivable, net of allowances of $ 121 and $ 34 as of September 30, 2020 and December 31, 2019

Prepaid expenses and other current assets

16 unchanged sentences

2,000 shares authorized;

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)

883 shares issued and outstanding as of September 30, 2020 and December 31, 2019 (Liquidation preference of $ 7,301 and $ 7,169 as of September 30, 2020 and December 31, 2019)

Common stock, $ 0.001 par value;

70,000 shares authorized;

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

41,135 and 40,632 shares issued and outstanding as of September 30, 2020 and December 31, 2019

Additional paid-in capital

10 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Cost of revenue

7 unchanged sentences

Other income (expense), net

Income before provision for income taxes

Income (loss) before provision for income taxes

Provision for income taxes

Net income (loss)

Net income attributable to noncontrolling interests

Net income attributable to AXT, Inc.

Net income (loss) attributable to AXT, Inc.

per common share:

4 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Net income (loss)

Other comprehensive income (loss), net of tax:

9 unchanged sentences

(Unaudited, in thousands)

Six Months Ended

Nine Months Ended

September 30,

Cash flows from operating activities:

20 unchanged sentences

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

Net cash provided by (used in) investing activities

Net cash used in investing activities

Cash flows from financing activities:

2 unchanged sentences

Consideration paid to repurchase subsidiary shares from noncontrolling interests

Payments on short-term loan

Proceeds from short-term loan

Proceeds from sale of subsidiary shares to noncontrolling interests

Dividends paid by joint ventures to their minority shareholders

Net cash provided by financing activities

Net cash provided by (used in) financing activities

Effect of exchange rate changes on cash and cash equivalents

17 unchanged sentences

Actual results could differ materially from those estimates.

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.

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 and our Quarterly Report on Form 10-Q for the three months ended March 31, 2020 filed with the SEC on May 8, 2020.

The results of operations for the three and nine months ended September 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.

1 unchanged sentence

(“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.

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

(“LiMei ChaoYang”), and, except as discussed below and in Note 7, our majority-owned subsidiaries, Nanjing JinMei Gallium Co., Ltd.

(“JinMei”), ChaoYang JinMei Gallium Ltd., MaAnShan JinMei Gallium Ltd., and Beijing BoYu Semiconductor Vessel Craftwork Technology Co., Ltd.

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

2 unchanged sentences

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 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.

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

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

For the three and nine months ended September 30, 2020, expenses associated with LiMei ChaoYang had a de minimis impact on our 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.

1 unchanged sentence

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”).

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”).

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 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 .

Our unaudited condensed consolidated statement of operations for the nine months ended September 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 that we did not own from retiring members of the JinMei management team for approximately $ 413,000 .

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

As of June 1, 2019, we referred to JinMei as a wholly-owned subsidiary instead of a significantly controlled subsidiary and reduced the carrying value of the corresponding noncontrolling interests to zero.

Before August 1, 2020, our ownership of Chaoyang Jinmei was 100 %.

In August 2020, we sold an 8.5 % ownership interest to current members of the Chaoyang Jinmei management team for approximately $ 396,000 .

As a result, our ownership of Chaoyang JinMei decreased from 100 % to 91.5 %.

As of August 2020, we referred to Chaoyang JinMei as a significantly controlled subsidiary instead of a wholly-owned subsidiary.

Investments and Fair Value Measurements

1 unchanged sentence

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

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

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

September 30, 2020

December 31, 2019

18 unchanged sentences

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.

There were no gross unrealized losses on our available-for-sale debt securities as of September 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.

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

None of our debt investments would generate a loss if we sold them on September 30, 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 December 31, 2019 (in thousands):

7 unchanged sentences

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 $ 5.6 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.

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 September 30, 2020 and December 31, 2019, respectively.

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

There were no impairment charges in the three and nine months ended September 30, 2020.

The nine months ended September 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 September 30, 2019.

Fair Value Measurements

1 unchanged sentence

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

As of September 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.

3 unchanged sentences

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.

1 unchanged sentence

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):

As of September 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 nine months ended September 30, 2020.

There have been no transfers between fair value measurements levels during the three and nine months ended September 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 September 30, 2020 (in thousands):

Quoted Prices in

4 unchanged sentences

Observable Inputs

June 30, 2020

September 30, 2020

Cash equivalents and investments:

18 unchanged sentences

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 and six months ended June 30, 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 nine months ended September 30, 2020 and 2019, respectively.

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

September 30,

Raw materials

1 unchanged sentence

Finished goods

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.

As of September 30, 2020 and December 31, 2019, carrying values of inventories were net of inventory reserves of $ 16.9 million and $ 16.4 million, respectively, for excess and obsolete inventory and $ 86,000 and $ 91,000 , respectively, for lower of cost or net realizable value reserves.

Property, Plant and Equipment, Net

The components of our property, plant and equipment are summarized below (in thousands):

September 30,

Property, plant and equipment:

6 unchanged sentences

Construction in progress

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 September 30, 2020, the balance of construction in progress was $ 72.7 million, of which $ 57.8 million was related to our buildings in our new Dingxing and Kazuo locations, $ 4.2 million was for manufacturing equipment purchases not yet placed in service and $ 10.7 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.

2 unchanged sentences

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.

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 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.

The effect of the change in the useful lives decreased our manufacturing costs for the three and nine months ended September 30, 2020 by approximately $ 0.3 million and $ 0.9 million, respectively, and increased our basic and diluted net income per share by approximately $ 0.01 and $ 0.03 , respectively, as a result of lower depreciation expense.

Accrued Liabilities

The components of accrued liabilities are summarized below (in thousands):

September 30,

Preferred stock dividends payable

2 unchanged sentences

Accrued income taxes

Advance from customers

Accrued professional services

Current portion of operating lease liabilities

Accrued product warranty

Advance from customers

Current portion of operating lease liabilities

Other tax payable

Current portion of royalty payments

Payable in connection with construction

Other personnel-related costs

Accrual for sales returns

Payable in connection with repurchase of subsidiaries shares

Other tax payable

Other personnel-related costs

Payable in connection with construction

Other accrued liabilities

13 unchanged sentences

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

Beginning in 2012, our wholly-owned subsidiary, JinMei, became contractually obligated under an agency sales agreement to sell raw material on behalf of its equity investment entity.

Beginning in 2012, our consolidated joint venture, JinMei, became contractually obligated under an agency sales agreement to sell raw material on behalf of its equity investment entity.

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 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.

For the three months ended September

30, 2020 and 2019, JinMei has recorded $ 0 and $ 0 income from agency sales, respectively.

For the nine months ended September 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.

2 unchanged sentences

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 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.

As of September 30, 2020 and December 31, 2019, amounts payable of $ 163,000 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 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.

As of September 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 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.

As of September 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.

1 unchanged sentence

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.

As of September 30, 2020, JinMei repaid principal and interest totaling $ 501,000 to Tongmei.

As of September 30, 2020 and December 31, 2019, the remaining balance of principal and interest totaled $ 302,000 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.

12 unchanged sentences

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

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.

As of September 30, 2020 and December 31, 2019 , the balances, including both principal and accrued interest, were $ 618,000 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 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.

For the three months ended September 30, 2020 and 2019, BoYu has recorded $ 37,000 and $ 0 , respectively, in revenue from this customer.

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

As of September 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.

4 unchanged sentences

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.

These companies form part of our overall supply chain.

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

These companies form part of our overall supply chain strategy.

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

Investment Balance as of

September 30,

Nanjing JinMei Gallium Co., Ltd.

Chaoyang JinMei Gallium Co., Ltd.

Beijing JiYa Semiconductor Material Co., Ltd.

6 unchanged sentences

* Ownership percentage decreased from 46 % to 39 % as of March 11, 2019 in connection with our sale of shares of this entity.

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

** In May 2019, we purchased the remaining 3 % ownership interest that we did not own from retiring members of the JinMei management team for approximately $ 413,000 .

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

***In August 2020, we sold an 8.5 % ownership interest to current members of the Chaoyang JinMei management team for approximately $ 396,000 .

As a result, our ownership of Chaoyang JinMei decreased from 100 % to 91.5 %.

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.

8 unchanged sentences

As of March 12, 2019, we accounted for our investment in JiYa under the equity method of accounting as we continue to have board representation and substantial ownership.

Pro-forma financials have not been presented because we believe the effects were not material to our condensed consolidated financial position and results of operation for all periods presented.

Pro-forma financials have not been presented because we believe the effects were not material to our condensed consolidated financial position and results of operation for all

periods presented.

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.

3 unchanged sentences

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 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.

3 unchanged sentences

Fair value of the retained investment in Beijing JiYa Semiconductor Material Co., Ltd.

Carrying value of noncontrolling interest, net of accumulated other comprehensive income attributable to subsidiary

Carrying value of noncontrolling interests, net of accumulated other comprehensive income attributable to subsidiary

Derecognition of Beijing JiYa Semiconductor Material Co., Ltd.'s net asset

4 unchanged sentences

Gain on retained noncontrolling investment due to remeasurement

Our ownership of JinMei is 100 %.

Before June 15, 2018, our ownership of JinMei was 83 %.

7 unchanged sentences

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 $ 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.

We paid approximately $ 29,000 , $ 73,000 and $ 262,000 in July 2020, April 2020, and May 2019, respectively, and plan to pay the remainder of approximately $ 49,000 at a date to be determined by both parties.

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

Prior to June 1, 2019, we reported JinMei as a consolidated joint venture as we had a controlling financial interest and have majority control of the board.

As of June 1, 2019, we now refer to it as a wholly-owned subsidiary and reduced the carrying value of the corresponding noncontrolling interests to zero .

As of June 1, 2019, we referred to it as a wholly-owned subsidiary and reduced the carrying value of the corresponding noncontrolling interests to zero .

Before August 1, 2020, our ownership of Chaoyang Jinmei was 100 %.

In August 2020, we sold an 8.5 % ownership interest to current members of the Chaoyang JinMei management team for approximately $ 396,000 .

As a result, our ownership of Chaoyang JinMei decreased from 100 % to 91.5 %.

As of August 2020, we referred to Chaoyang JinMei as a significantly controlled subsidiary instead of a wholly-owned subsidiary.

Our Chief Executive Officer is chairman of the JinMei board and we have appointed two other representatives to serve on the JinMei board.

6 unchanged sentences

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 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.

During the three months ended September 30, 2020 and 2019, the consolidated joint ventures, before eliminating inter-company transactions, generated income of $ 1.8 million and $ 1.1 million, respectively, of which gains of $ 0.5 million and $ 0.4 million, respectively, were allocated to noncontrolling interests, resulting in an increase of $ 1.3 million to our net income and a reduction to our net loss of $ 0.7 million, respectively.

During the nine months ended September 30, 2020 and 2019, the consolidated joint ventures, before eliminating inter-company transactions, generated income of $ 4.3 million and $ 2.6 million, respectively, of which gains of $ 1.5 million and $ 0.8 million, respectively, were allocated to noncontrolling interests, resulting in an increase of $ 2.8 million to our net income and $ 1.8 million reduction to our net loss, respectively.

Our unaudited condensed consolidated statements of operations for the nine months ended September 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 $ 5.8 million and $ 6.0 million as of September 30, 2020 and December 31, 2019, respectively.

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

12 unchanged sentences

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:

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

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Operating income (loss)

Net income (loss)

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.

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 gain of $ 45,000 and a loss of $ 0.2 million, respectively, for the three months ended September 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 $ 0.2 million and $ 1.7 million, respectively, for the nine months ended September 30, 2020 and 2019.

Stockholders’ Equity

1 unchanged sentence

(in thousands)

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

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

Comprehensive

15 unchanged sentences

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:

Common stock options exercised

Sale of subsidiary shares to noncontrolling interests

Stock-based compensation

Other comprehensive income

Balance as of September 30, 2020

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

Comprehensive

15 unchanged sentences

Balance as of June 30, 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 and six months ended June 30, 2020 and 2019 .

Common stock options exercised

Stock-based compensation

Other comprehensive loss

Balance as of September 30, 2019

Stock Repurchase Program

3 unchanged sentences

No shares were repurchased from 2016 through 2019.

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.

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

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

Currently, we do not plan to repurchase additional shares.

1 unchanged sentence

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.

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.

1 unchanged sentence

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Cost of revenue

3 unchanged sentences

Tax effect on stock-based compensation

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 .

Net effect on net income (loss)

As of September 30, 2020, the unamortized compensation costs related to unvested stock options granted to employees under our stock option plan was approximately $ 1.0 million, net of estimated forfeitures of $ 80,000 .

These costs will be amortized on a straight-line basis over a weighted-average period of approximately 2.5 years and will be adjusted for subsequent changes in estimated forfeitures.

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 did not capitalize any stock-based compensation to inventory as of September 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 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):

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

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

Stock Options

1 unchanged sentence

Canceled and expired

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.

Balance as of September 30, 2020

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

Options exercisable as of September 30, 2020

The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on our closing price of $ 6.12 on September 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 six months ended June 30, 2020 is presented below (in thousands, except per share data):

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

Weighted-Average

Non-vested as of January 1, 2020

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.

Non-vested as of September 30, 2020

As of September 30, 2020, the unamortized compensation costs related to unvested restricted stock awards was approximately $ 3.0 million, which is to be amortized on a straight-line basis over a weighted-average period of approximately 1.1 years.

Net Income (Loss) Per Share

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Potentially dilutive common shares are excluded from the computation of weighted-average number of common shares outstanding in net loss years, as their effect would be anti-dilutive to the computation.

A reconciliation of the numerators and denominators of the basic and diluted net loss per share calculations is as follows (in thousands, except per share data):

A reconciliation of the numerators and denominators of the basic and diluted net income (loss) per share calculations is as follows (in thousands, except per share data):

Three Months Ended

Six Months Ended

Net income attributable to AXT, Inc.

Nine Months Ended

September 30,

Net income (loss) attributable to AXT, Inc.

Preferred stock dividends

Net income available to common stockholders

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

Net income (loss) available to common stockholders

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

Effect of dilutive securities:

1 unchanged sentence

Restricted stock awards

Denominator for dilutive net income per common shares

Net income attributable to AXT, Inc.

Denominator for dilutive net income (loss) per common shares

Net income (loss) attributable to AXT, Inc.

per common share:

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.

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

Restricted stock excluded from diluted net income (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 September 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.

9 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Product Type:

3 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Geographical region:

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Long-lived assets, net of depreciation, by geographic region were as follows (in thousands):

September 30,

Long-lived assets by geographic region, net of depreciation:

1 unchanged sentence

Significant Customers

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.

No customer represented 10 % of our revenue for the three months ended September 30, 2020 while one customer, Landmark, represented 16 %, of our revenue for the three months ended September 30, 2019.

Our top five customers, although not the same five customers for each period, represented 29 % and 40 % of our revenue for the three months ended September 30, 2020 and 2019, respectively.

Two customers, Landmark and Osram Opto, represented 11 % and 10 % , respectively, of our revenue for the nine months ended September 30, 2020 while two customers, Landmark and Haisi Optoelectronics, represented 14 % and 10 % , respectively, of our revenue for the nine months ended September 30, 2019.

Our top five customers, although not the same five customers for each period, represented 33 % and 41 % of our revenue for the nine months ended September 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.

Two customers accounted for 10 % and 10 % of our accounts receivable balance as of September 30, 2020 , and three customers accounted for 14 %, 13 % and 12 % of our accounts receivable as of December 31, 2019.

Commitments and Contingencies

7 unchanged sentences

The accrued warranty costs represent the best estimate at the time of sale of the total costs that we expect to incur to repair or replace product parts that fail while still under warranty.

The amount of accrued estimated warranty costs are primarily based on historical experience as to product failures as well as current information on repair costs.

The amount of accrued estimated warranty costs is primarily based on historical experience as to product failures as well as current information on repair costs.

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 and six months ended June 30, 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 nine months ended September 30, 2020 and 2019 (in thousands):

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Beginning accrued product warranty

16 unchanged sentences

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.

6 unchanged sentences

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

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

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

Legal Proceedings

2 unchanged sentences

Other Income (Expense), Net

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.

Other income (expense), net for the three and nine months ended September 30, 2020, includes a grant of $ 0 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 loss of $ 135,000 and gain of $ 165,000 for the three months ended September 30, 2020 and 2019, respectively.

We incurred a foreign currency transaction exchange loss of $ 126,000 and gain of $ 85,000 for the nine months ended September 30, 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.

4 unchanged sentences

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

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.

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

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

We file income tax returns in the U.S.

1 unchanged sentence

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 and six months ended June 30, 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 nine months ended September 30, 2020 was mostly related to our wholly owned China subsidiaries and our partially owned subsidiaries in China.

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

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

operations for the three and nine months ended September 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.

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 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.

20 unchanged sentences

Accounts receivables are recorded when the right to this consideration becomes unconditional.

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 June 30, 2020.

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

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

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

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

September 30,

Contract liabilities

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.

During the three and nine months ended September 30, 2020, the Company recognized $ 8,000 and $ 242,000 , respectively, of revenue that was included in the contract balances as of December 31, 2019.

Disaggregated Revenue

7 unchanged sentences

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

As of September 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 June 30, 2020.

The annual interest rate was approximately 4.7 % as of July 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 primary intended use of the credit facility is for general purposes, which may include working capital and other corporate expenses.

On August 9, 2019, Tongmei 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.

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.

On August 9, 2019, Tongmei borrowed $ 2.8 million against the credit facility the (“August 2019 borrowing”).

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

On September 12, 2019 Tongmei borrowed an additional $ 2.8 million against the credit facility the (“September 2019 borrowing”).

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

In August 2020, Tongmei repaid the full amount of the credit facility including all outstanding accrued interest of approximately $ 5.9 million and simultaneously applied to renew the credit facility.

The process of repaying a loan and then renewing the loan is customary in China.

In September 2020, the August 2019 borrowing was renewed and funded against the credit facility with an interest rate of 3.85 %.

The interest owed during the term of the loan was deducted prior to funding.

The repayment of the loan is due on March 22, 2021, however the credit facility contains an option to renew for an additional six months .

As of September 30, 2020, $ 2.9 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.

Accrued interest is calculated monthly and paid quarterly.

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

The annual interest rate was approximately 4.3 % as of September 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.

2 unchanged sentences

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

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

As of September 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.

3 unchanged sentences

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 were granted an extension to the term of the lease for an additional three years .

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.

27 unchanged sentences

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:

the fixed noncancelable lease payments, payments for optional renewal periods where it is reasonably certain the renewal period will be exercised, and payments for early termination options unless it is reasonably certain the lease will not be terminated early.

the fixed noncancelable lease payments, payments for optional renewal periods where it is reasonably certain the renewal period

will be exercised, and payments for early termination options unless it is reasonably certain the lease will not be terminated early.

Lease expense for operating leases consists of the lease payments plus any initial direct costs, primarily brokerage commissions, and is recognized on a straight-line basis over the lease term.

1 unchanged sentence

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

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

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

Maturity of Lease Liabilities

4 unchanged sentences

The weighted average remaining lease term and the weighted-average discount rate for our operating leases as of each date is as follows:

September 30,

Weighted-average remaining lease term (years)

1 unchanged sentence

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

Six Months Ended

Nine Months Ended

September 30,

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

Nine Months Ended

September 30,

Operating lease

5 unchanged sentences

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 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.

Our adoption of ASU 2016-13 and its subsequent series of amendments during the three and nine months ended September 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.

Subsequent Events

In October 2020, the September 2019 borrowing was renewed and funded against the credit facility and an additional $ 2.7 million was approved and funded against the credit facility with the annual interest rate of 4.7 %.

Accrued interest is calculated monthly and paid quarterly.

The combined loan totals $ 5.6 million.

The repayment of the $ 5.6 million is due on April 8, 2021, however, the credit facility contains an option to renew for an additional six months .

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

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

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

13 unchanged sentences

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 wafer substrate cannot meet the performance requirements of a semiconductor or optoelectronic device.

Our wafer substrates are used in the semiconductor industry 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.

119 unchanged sentences

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

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

For the nine months ended September 30, 2020, we paid approximately $850,000 in tariffs.

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

31 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 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.

As of September 30, 2020 and December 31, 2019, our accounts receivable, net balance was $22.7 million and $19.0 million, respectively, which was net of an allowance for doubtful accounts of $121,000 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 June 30, 2020 and December 31, 2019, the balance was $90,000 and $26,000, respectively.

As of September 30, 2020 and December 31, 2019, the balance was $92,000 and $26,000, respectively.

Warranty Reserve

1 unchanged sentence

Warranty costs are accrued at the time revenue is recognized.

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.

As of September 30, 2020 and December 31, 2019, accrued product warranties totaled $529,000 and $387,000, respectively.

The increase in accrued product warranties is primarily attributable to increased 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 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.

As of September 30, 2020 and December 31, 2019, we had an inventory reserve of $16.9 million and $16.4 million, respectively, for excess and obsolete inventory and $86,000 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.

11 unchanged sentences

Except as mentioned above, there

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

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

Fair Value of Investments

12 unchanged sentences

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.

As of September 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 nine months ended September 30, 2020 and 2019.

Impairment of Long-Lived Assets

5 unchanged sentences

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 June 30, 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 September 30, 2020 and December 31, 2019.

Stock-based Compensation

22 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.

The effect of the change in the useful lives decreased our manufacturing costs for the three and nine months ended September 30, 2020 by approximately $0.3 million and $0.9 million, respectively, and increased our basic and diluted net income per share by approximately $0.01 and $0.03, respectively, as a result of lower depreciation expense.

Impact of the COVID-19 Pandemic

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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.

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 potential resurgence of the outbreak in countries that had previously contained 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.

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 until the COVID-19 pandemic subsides and related public health measures are reduced or eliminated.

Results of Operations

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Product Type:

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Total revenue

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 increased $5.6 million, or 28.4%, to $25.5 million for the three months ended September 30, 2020 from $19.8 million for the three months ended September 30, 2019.

The substrate revenue increase for the three months ended September 30, 2020 as compared to the same period in 2019 was primarily the result of higher demand for our InP wafer substrates followed by an increase in revenue for semi-insulating GaAs wafer substrates.

Raw m aterials sales increased $1.3 million, or 32.9%, to $5.2 million for the three months ended September 30, 2020 as compared to the same period in 2019.

The raw materials revenue increase for the three months ended September 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 increased $3.5 million, or 5.4%, to $68.3 million for the nine months ended September 30, 2020 from $64.8 million for the nine months ended September 30, 2019.

The substrate revenue increase for the nine months ended September 30, 2020 as compared to the same period in 2019 was primarily the result of increased revenue for both our GaAs and Ge wafer substrates.

Raw m aterials sales increased $2.7 million, or 23.8%, to $14.3 million for the nine months ended September 30, 2020 as compared to the same period in 2019.

The raw materials revenue increase for the nine months ended September 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

September 30,

($ in thousands)

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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 China increased $5.5 million for the three months ended September 30, 2020, primarily due to higher demand for our InP and GaAs wafer substrates and pBN crucibles sold by one of our consolidated subsidiaries.

Revenue in Taiwan decreased $1.1 million primarily due to decreased demand for InP wafer substrates partially offset by increased demand for our GaAs wafer substrates.

Revenue in Japan increased $0.9 million primarily due to higher demand for our InP wafer substrates and pBN crucibles sold by one of our consolidated subsidiaries.

Revenue in Asia Pacific decreased by $0.8 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

Revenue in North America increased by $1.2 million due to higher demand for our InP wafer substrates partially offset by lower demand for our GaAs wafer substrates.

Nine Months Ended

September 30,

($ in thousands)

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Total revenue

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 China increased $1.2 million for the nine months ended September 30, 2020, primarily due to higher demand for refined gallium and pBN crucibles sold by our consolidated subsidiaries.

In addition, revenue from GaAs wafer substrates increased, partially offset by lower demand for our InP wafer substrates.

Revenue in Taiwan increased by $0.8 million primarily due to increased demand for our GaAs wafer substrates partially offset by lower demand for our InP wafer substrates.

Revenue in Asia Pacific decreased by $1.7 million due to lower demand for our GaAs wafer substrates and pBN crucibles.

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 our GaAs and InP wafer substrates.

Revenue in North America increased $1.2 million primarily due to increased demand for our InP wafer substrates partially offset by lower demand for our GaAs wafer substrates.

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

($ in thousands)

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Gross Margin %

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.

Gross profit increased $3.1 million, or 53.2%, to $8.8 million for the three months ended September 30, 2020 from $5.8 million for the three months ended September 30, 2019.

The increase in gross profit is attributed to higher revenue, a change in product mix and more efficient manufacturing yields.

Gross profit increased $0.2 million, or 0.7%, to $21.1 million for the nine months ended September 30, 2020 from $21.0 million for the nine months ended September 30, 2019.

The increase in gross profit is attributed to higher revenue partially offset by a change in product mix and less efficient manufacturing yields in the first half of the year as a result of the relocation process.

Selling, General and Administrative Expenses

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

($ in thousands)

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% of total revenue

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.

Selling, general and administrative expenses decreased $132,000, or 2.8%, to $4.6 million for the three months ended September 30, 2020 from $4.8 million for the three months ended September 30, 2019.

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

Selling, general and administrative expenses decreased $128,000, or 0.9%, to $14.1 million for the nine months ended September 30, 2020 from $14.2 million for the nine months ended September 30, 2019.

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

Research and Development

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

($ in thousands)

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% of total revenue

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.

Research and development expenses increased $541,000, or 36.5%, to $2.0 million for the three months ended September 30, 2020 from $1.5 million for the three months ended September 30, 2019.

The increase in research and development expenses for the three months ended September 30, 2020 was primarily due to higher development expenses of new features for certain of our GaAs and InP wafer substrates, product testing and personnel-related expenses.

Research and development expenses increased $746,000, or 17.6%, to $5.0 million for the nine months ended September 30, 2020 from $4.2 million for the nine months ended September 30, 2019.

The increase in research and development expenses for the nine months ended September 30, 2020 was primarily due to higher development expenses of new features for certain of our GaAs and InP wafer substrates, product testing and personnel-related expenses partially offset by lower facility-related expenses.

Interest Income (Expense), Net

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

($ in thousands)

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% of total revenue

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.

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.

Interest income (expense), net decreased $111,000 or 270.7% for the three months ended September 30, 2020 as compared to the same period in 2019.

Interest income (expense), net decreased primarily due to significantly lower interest rates resulting from the economic impact of the COVID-19 pandemic and interest expense incurred by Tongmei under the credit facility.

Interest income (expense), net decreased $353,000 or 164.2% for the nine months ended September 30, 2020 as compared to the same period in 2019.

Interest income (expense), net decreased primarily due to significantly lower interest rates resulting from the economic impact of the pandemic and interest expense incurred by Tongmei under the credit facility.

Equity in Income (Loss) of Unconsolidated Joint Ventures

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Equity in Income (Loss)

September 30,

Equity in Loss

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% of total revenue

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 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.

The equity in income (loss) of unconsolidated joint venture companies was a gain of $45,000 for the three months ended September 30, 2020 as compared to a loss of $204,000 for the three months ended September 30, 2019.

The current quarter gain is primarily due to positive financial results of two raw gallium companies.

The equity in loss of unconsolidated joint venture companies was a loss of $243,000 for the nine months ended September 30, 2020 as compared to a loss of $1.7 million for the nine months ended September 30, 2019.

The current loss for the nine months ended September 30, 2020 is primarily due to poor financial results of two raw gallium companies.

The $1.7 million aggregate loss for the nine months ended September 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

Nine Months Ended

September 30,

Other Income (Expense)

September 30,

Other Income (Expense)

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% of total revenue

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 decreased $203,000 to an expense of $34,000 for the three months ended September 30, 2020 from an income of $169,000 for the three months ended September 30, 2019.

Other income (expense), net decreased primarily due to a loss on foreign exchange partially offset by payment received on an insurance claim at one of our consolidated subsidiaries.

Other income (expense), net increased $3.0 million to an income of $2.9 million for the nine months ended September 30, 2020 from an expense of $55,000 for the nine months ended September 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.

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

($ in thousands)

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% of total revenue

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.

Provision for income taxes for the three and nine months ended September 30, 2020 was $637,000 and $1.9 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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Net income attributable to

Six Months Ended

Nine Months Ended

Net income attributable to

September 30,

Noncontrolling interests

September 30,

Noncontrolling interests

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% of total revenue

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.

Net income attributable to noncontrolling interests increased $87,000 or 21.6% to $490,000 for the three months ended September 30, 2020 from $403,000 for the three months ended September 30, 2019 primarily due to higher profitability from our consolidated joint venture operations in China.

Net income attributable to noncontrolling interests increased $712,000 or 92.3% to $1.5 million for the nine months ended September 30, 2020 from $771,000 for the nine months ended September 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 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.

As of September 30, 2020, our principal source of liquidity was $29.8 million, which consisted of cash and cash equivalents of $22.4 million and investments of $7.4 million.

In the nine months ended September 30, 2020, cash and cash equivalents decreased by $4.5 million and investments decreased by $2.0 million.

The decrease in cash and cash equivalents of $4.5 million in the nine months ended September 30, 2020 was primarily due to net cash used in investing activities of $10.1 million and financing activities of $1.0 million, partially offset by net cash provided by operating activities of $6.3 million and the effect of exchange rate changes of $0.2 million.

As of September 30, 2020 only $2.9 million of Tongmei’s initial loan had been renewed and funded as compared to $5.8 million as of September 30, 2019.

In October 2020, the second $2.9 million of Tongmei’s loan was renewed and funded against its credit facility.

As of September 30, 2020, we and our consolidated joint ventures held approximately $14.3 million in cash and investments in foreign bank accounts.

This consisted of $7.8 million held by our wholly-owned subsidiaries in China and $6.5 million held by our partially-owned consolidated subsidiaries in China.

As of September 30, 2019, our principal source of liquidity was $38.5 million, which consisted of cash and cash equivalents of $27.8 million and investments of $10.6 million.

In the nine months ended September 30, 2019, cash and cash equivalents increased by $11.3 million and short-term and long-term investments decreased by $12.2 million.

The increase in cash and cash equivalents of $11.3 million in the nine months ended September 30, 2019 was primarily due to net cash provided by operating activities of $7.3 million, net cash provided by financing activities of $6.1 million, partially offset by net cash used in investing activities of $1.7 million and the effect of exchange rate changes of $451,000.

As of September 30, 2019, we and our consolidated joint ventures held approximately $15.0 million in cash and investments in foreign bank accounts.

This consisted of $12.5 million held by our wholly-owned subsidiaries in China and $2.5 million held by our partially-owned consolidated subsidiary in China.

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.

Net cash provided by operating activities of $6.3 million for the nine months ended September, 2020 was primarily comprised of a net income before income attributable to non-controlling interest of $2.7 million, the adjustment for non-cash items of depreciation and amortization of $3.0 million, stock-based compensation of $1.9 million, loss on equity method investments of $0.2 million and provision for doubtful accounts of $0.1 million, partially offset by a net change of $1.6 million in operating assets and liabilities.

Net cash provided by operating activities of $7.3 million for the nine months ended September 30, 2019 was primarily comprised of a net income of $0.2 million, return on equity method investments of $0.4 million, the adjustment

for non-cash items of depreciation and amortization of $4.2 million, impairment charge on equity investment of $1.1 million, stock-based compensation of $1.7 million and loss on equity method investments of $0.8 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 $0.8 million in operating assets and liabilities.

Net cash used in investing activities of $10.1 million for the nine months ended September 30, 2020 was primarily from the purchase of property, plant and equipment of $12.1 million and purchases of available-for-sale debt securities of $2.9 million, partially offset by proceeds from sales and maturities of available-for-sale debt securities of $4.9 million.

Net cash used in investing activities of $1.7 million for the nine months ended September 30, 2019 was primarily from the purchase of property, plant and equipment of $14.0 million and purchase of available for sale securities of $8.7 million, partially offset by proceeds from sales and maturities of available-for-sale securities of $21.0 million.

Net cash used in financing activities was $1.0 million for the nine months ended September 30, 2020, which consisted of payment on short-term borrowings of $5.8 million and dividends paid by joint ventures to their minority shareholders of $0.1 million, partially offset by proceeds from short term borrowings of $3.4 million and common stock exercised of $1.1 million, and proceeds from sale of subsidiary shares to noncontrolling interests of $0.4 million.

Net cash provided by financing activities was $6.1 million for the nine months ended September 30, 2019, which consisted of proceeds from short-term borrowings of $5.8 million, net proceeds of $0.4 million on the sale of previously consolidated subsidiary shares and proceeds from common stock exercised of $0.3 million, partially offset by consideration paid in cash to repurchase of 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 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.

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

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

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.

approximately 250 miles from Beijing.

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

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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 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.

As of September 30, 2020, JinMei repaid principal and interest totaling $501,000 to Tongmei.

As of September 30, 2020, the remaining balance of principal and interest totaled $302,000.

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

As of September 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 June 30, 2020.

The annual interest rate was approximately 4.7% as of July 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.

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Tongmei initially borrowed $2.8 million against the credit facility.

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

The repayment of the full amount was 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.

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.

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

In August 2020, Tongmei repaid the full amount of the credit facility including all outstanding accrued interest of approximately $5.9 million and simultaneously applied to renew the credit facility.

The process of repaying a loan and then renewing the loan is customary in China.

In September 2020, the August 2019 borrowing was renewed and funded against the credit facility with an interest rate of 3.85%.

The interest owed during the term of the loan was deducted prior to funding.

The repayment of the loan is due on March 22, 2021, however the credit facility contains an option to renew for an additional six months.

As of September 30, 2020, $2.9 million was included in “Bank loan” in our condensed consolidated balance sheets.

In October 2020, the September 2019 borrowing was renewed and funded against the credit facility and an additional $2.7 million was approved and funded against the credit facility with the annual interest rate of 4.7%.

Accrued interest is calculated monthly and paid quarterly.

The combined loan totals $5.6 million.

The repayment of the $5.6 million is due on April 8, 2021, however, the credit facility contains an option to renew for an additional six months.

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

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

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 June 30, 2020.

The annual interest rate was approximately 4.3% as of September 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.

2 unchanged sentences

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

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

As of September 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.

27 unchanged sentences

Off-Balance Sheet Arrangements

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).

As of September 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

15 unchanged sentences

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 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.

As of September 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 condensed 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.

18 unchanged sentences

Interest Rate

September 30,

Cash and cash equivalents

9 unchanged sentences

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

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.

Two customers accounted for 10% each of our trade accounts receivable balance as of September 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.

4 unchanged sentences

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 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.

As of September 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 September 30, 2020 and December 31, 2019 totaled $5.8 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