AXT INC 10-Q

Item 1. Financial Statements (unaudited) ​ AXT, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited, in thousands, except per share data) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, December 31, ​ ​ 2020 ​ 2019 ​ ​ ​ ​ ​ ​ ​ ​ ​ ASSETS ​ ​ ​ ​ ​ ​ ​ Current assets: ​ ​ ​ ​ ​ ​ ​ Cash and cash equivalents ​ $ 22,384 ​ $ 26,892 ​ Short-term investments ​ 4,505 ​ 9,427 ​ Accounts receivable, net of allowances of $ 121 and $ 34 as of September 30, 2020 and December 31, 2019 ​ 22,653 ​ 19,031 ​ Inventories ​ 48,357 ​ 49,152 ​ Prepaid expenses and other current assets ​ 10,649 ​ 8,703 ​ Total current assets ​ 108,548 ​ 113,205 ​ Long-term investments ​ 2,884 ​ — ​ Property, plant and equipment, net ​ 108,295 ​ 97,403 ​ Operating lease right-of-use assets ​ ​ 2,702 ​ ​ 2,938 ​ Other assets ​ 10,308 ​ 9,803 ​ Total assets ​ $ 232,737 ​ $ 223,349 ​ LIABILITIES AND STOCKHOLDERS’ EQUITY ​ ​ ​ ​ ​ ​ ​ Current liabilities: ​ ​ ​ ​ ​ ​ ​ Accounts payable ​ $ 12,271 ​ $ 10,098 ​ Accrued liabilities ​ 10,842 ​ 11,681 ​ Bank loan ​ ​ 3,380 ​ ​ 5,747 ​ Total current liabilities ​ 26,493 ​ 27,526 ​ Long-term portion of royalty payments ​ 1,193 ​ — ​ Noncurrent operating lease liabilities ​ ​ 2,415 ​ ​ 2,695 ​ Other long-term liabilities ​ 744 ​ 366 ​ Total liabilities ​ 30,845 ​ 30,587 ​ Commitments and contingencies (Note 12) ​ ​ ​ ​ ​ ​ ​ Stockholders’ equity: ​ ​ ​ ​ ​ ​ ​ Preferred stock Series A, $ 0.001 par value; 2,000 shares authorized; 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) ​ 3,532 ​ 3,532 ​ Common stock, $ 0.001 par value; 70,000 shares authorized; 41,135 and 40,632 shares issued and outstanding as of September 30, 2020 and December 31, 2019 ​ 41 ​ 41 ​ Additional paid-in capital ​ 240,422 ​ 236,957 ​ Accumulated deficit ​ ( 46,609 ) ​ ( 47,783 ) ​ Accumulated other comprehensive loss ​ ( 1,992 ) ​ ( 4,862 ) ​ Total AXT, Inc. stockholders’ equity ​ 195,394 ​ 187,885 ​ Noncontrolling interests ​ 6,498 ​ 4,877 ​ Total stockholders’ equity ​ 201,892 ​ 192,762 ​ Total liabilities and stockholders’ equity ​ $ 232,737 ​ $ 223,349 ​ ​ See accompanying notes to condensed consolidated financial statements. ​ 3 Table of Contents ub AXT, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited, in thousands, except per share data) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended Nine Months Ended ​ ​ ​ ​ September 30, ​ September 30, ​ ​ ​ ​ 2020 2019 ​ 2020 2019 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Revenue ​ $ 25,469 ​ $ 19,841 ​ $ 68,326 ​ $ 64,846 ​ ​ Cost of revenue ​ 16,646 ​ 14,082 ​ 47,213 ​ 43,886 ​ ​ Gross profit ​ 8,823 ​ 5,759 ​ 21,113 ​ 20,960 ​ ​ Operating expenses: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Selling, general and administrative ​ 4,623 ​ 4,755 ​ 14,119 ​ 14,247 ​ ​ Research and development ​ 2,023 ​ 1,482 ​ 4,973 ​ 4,227 ​ ​ Total operating expenses ​ 6,646 ​ 6,237 ​ 19,092 ​ 18,474 ​ ​ Income (loss) from operations ​ 2,177 ​ ( 478 ) ​ 2,021 ​ 2,486 ​ ​ Interest income (expense), net ​ ( 70 ) ​ 41 ​ ( 138 ) ​ 215 ​ ​ Equity in income (loss) of unconsolidated joint ventures ​ 45 ​ ( 204 ) ​ ( 243 ) ​ ( 1,650 ) ​ ​ Other income (expense), net ​ ( 34 ) ​ 169 ​ 2,940 ​ ( 55 ) ​ ​ Income (loss) before provision for income taxes ​ 2,118 ​ ( 472 ) ​ 4,580 ​ 996 ​ ​ Provision for income taxes ​ 637 ​ 23 ​ 1,923 ​ 776 ​ ​ Net income (loss) ​ 1,481 ​ ( 495 ) ​ 2,657 ​ 220 ​ ​ Less: Net income attributable to noncontrolling interests ​ ( 490 ) ​ ( 403 ) ​ ( 1,483 ) ​ ( 771 ) ​ ​ Net income (loss) attributable to AXT, Inc. ​ $ 991 ​ $ ( 898 ) ​ $ 1,174 ​ $ ( 551 ) ​ ​ Net income (loss) attributable to AXT, Inc. per common share: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic ​ $ 0.02 ​ $ ( 0.02 ) ​ $ 0.03 ​ $ ( 0.02 ) ​ ​ Diluted ​ $ 0.02 ​ $ ( 0.02 ) ​ $ 0.03 ​ $ ( 0.02 ) ​ ​ Weighted-average number of common shares outstanding: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic ​ 40,152 ​ 39,466 ​ 39,978 ​ 39,438 ​ ​ Diluted ​ 40,979 ​ 39,466 ​ 40,688 ​ 39,438 ​ ​ ​ ​ See accompanying notes to condensed consolidated financial statements. ​ 4 Table of Contents ​ AXT, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited, in thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Nine Months Ended ​ ​ ​ September 30, ​ September 30, ​ ​ 2020 2019 2020 2019 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income (loss) ​ $ 1,481 ​ $ ( 495 ) ​ $ 2,657 ​ $ 220 ​ Other comprehensive income (loss), net of tax: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Change in foreign currency translation gain (loss), net of tax ​ 4,699 ​ ( 4,322 ) ​ 3,086 ​ ( 4,322 ) ​ Change in unrealized gain on available-for-sale debt investments, net of tax ​ ( 10 ) ​ ( 2 ) ​ 11 ​ 78 ​ Reclassification adjustment for gains included in net loss upon deconsolidation of a subsidiary ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 617 ) ​ Total other comprehensive income (loss), net of tax ​ 4,689 ​ ( 4,324 ) ​ 3,097 ​ ( 4,861 ) ​ Comprehensive income (loss) ​ 6,170 ​ ( 4,819 ) ​ 5,754 ​ ( 4,641 ) ​ Less: Comprehensive income attributable to noncontrolling interests ​ ( 806 ) ​ ( 189 ) ​ ( 1,710 ) ​ ( 1,178 ) ​ Comprehensive income (loss) attributable to AXT, Inc. ​ $ 5,364 ​ $ ( 5,008 ) ​ $ 4,044 ​ $ ( 5,819 ) ​ ​ See accompanying notes to condensed consolidated financial statements. ​ 5 Table of Contents ​ AXT, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited, in thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended ​ ​ ​ September 30, ​ ​ 2020 2019 ​ Cash flows from operating activities: ​ ​ ​ ​ ​ ​ ​ Net income ​ $ 2,657 ​ $ 220 ​ Adjustments to reconcile net income to net cash provided by operating activities: ​ ​ ​ ​ ​ ​ ​ Depreciation and amortization ​ 2,963 ​ 4,173 ​ Amortization of marketable securities premium ​ 28 ​ 26 ​ Impairment charge on equity investee ​ ​ — ​ ​ 1,068 ​ Stock-based compensation ​ 1,932 ​ 1,709 ​ Provision for doubtful accounts ​ 87 ​ — ​ Loss on disposal of equipment ​ 36 ​ 43 ​ Gain from deconsolidation of a subsidiary ​ ​ — ​ ​ ( 175 ) ​ Loss from equity method investments, net ​ 243 ​ 757 ​ Return on equity method investments ​ ​ — ​ ​ 362 ​ Changes in operating assets and liabilities: ​ ​ ​ ​ ​ ​ ​ Accounts receivable ​ ( 3,500 ) ​ 1,876 ​ Inventories ​ 1,638 ​ 8,272 ​ Prepaid expenses and other current assets ​ ( 1,790 ) ​ 3,277 ​ Other assets ​ ( 424 ) ​ ( 3,108 ) ​ Accounts payable ​ 1,992 ​ ( 4,993 ) ​ Accrued liabilities ​ ( 1,226 ) ​ ( 6,216 ) ​ Other long-term liabilities, including royalties ​ 1,688 ​ 46 ​ Net cash provided by operating activities ​ 6,324 ​ 7,337 ​ Cash flows from investing activities: ​ ​ ​ ​ ​ ​ ​ Purchases of property, plant and equipment ​ ( 12,121 ) ​ ( 13,969 ) ​ Purchases of available-for-sale debt securities ​ ( 2,880 ) ​ ( 8,725 ) ​ Proceeds from sales and maturities of available-for-sale debt securities ​ 4,901 ​ 20,988 ​ Net cash used in investing activities ​ ( 10,100 ) ​ ( 1,706 ) ​ Cash flows from financing activities: ​ ​ ​ ​ ​ ​ ​ Proceeds from common stock options exercised ​ 1,137 ​ 267 ​ Proceeds from sale of previously consolidated subsidiary shares ​ ​ — ​ ​ 366 ​ Consideration paid to repurchase subsidiary shares from noncontrolling interests ​ ​ — ​ ​ ( 262 ) ​ Payments on short-term loan ​ ​ ( 5,801 ) ​ ​ — ​ Proceeds from short-term loan ​ 3,380 ​ 5,760 ​ Proceeds from sale of subsidiary shares to noncontrolling interests ​ ​ 396 ​ ​ — ​ Dividends paid by joint ventures to their minority shareholders ​ ( 89 ) ​ — ​ Net cash provided by (used in) financing activities ​ ( 977 ) ​ 6,131 ​ Effect of exchange rate changes on cash and cash equivalents ​ 245 ​ ( 451 ) ​ Net increase (decrease) in cash and cash equivalents ​ ( 4,508 ) ​ 11,311 ​ Cash and cash equivalents at the beginning of the year ​ 26,892 ​ 16,526 ​ Cash and cash equivalents at the end of the year ​ $ 22,384 ​ $ 27,837 ​ Supplemental disclosure of non-cash flow information: ​ ​ ​ ​ ​ ​ ​ Consideration payable to repurchase subsidiary shares from noncontrolling interests, included in accrued liabilities ​ $ — ​ $ 151 ​ Reduction of noncontrolling interests in excess (deficit) of total consideration paid and payable in connection with the repurchase of subsidiary shares from noncontrolling interests ​ $ — ​ $ ( 74 ) ​ ​ See accompanying notes to condensed consolidated financial statements. ​ 6 Table of Contents ​ ​ ​ AXT, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) ​ Note 1. Basis of Presentation ​ The accompanying condensed consolidated financial statements of AXT, Inc. (“AXT,” the “Company,” “we,” “us,” and “our” refer to AXT, Inc. and all of its consolidated subsidiaries) are unaudited, and have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, this interim quarterly financial report does not include all disclosures required by US GAAP. In the opinion of our management, the unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, considered necessary to present fairly the financial position, results of operations and cash flows of AXT and our consolidated subsidiaries for all periods presented. ​ Our management has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these condensed consolidated financial statements in conformity with US GAAP. Due to the COVID-19 pandemic, there has been uncertainty and disruption in the global economy and financial markets. These estimates and assumptions may change as new events occur and additional information is obtained. Actual results could differ materially from those estimates. ​ 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. 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 and June 30, 2020 filed with the SEC on May 8, 2020 and August 7, 2020, respectively. ​ The condensed consolidated financial statements include the accounts of AXT, our wholly-owned subsidiaries, Beijing Tongmei Xtal Technology Co., Ltd. (“Tongmei”), Baoding Tongmei Xtal Technology Co., Ltd. (“Tongmei Baoding”), ChaoYang Tongmei Xtal Technology Co., Ltd. (“Tongmei ChaoYang”), 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. (“BoYu”). Tongmei Baoding is located in the city of Dingxing, China. Each of Tongmei ChaoYang and LiMei ChaoYang is located in the city of Kazuo, China. All significant inter-company accounts and transactions have been eliminated. 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 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 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. (“JiYa”) from 46 % to 39 % by selling a portion of our JiYa shares to our investor partner, which is also JiYa’s landlord. As a result of this transaction, our investor partner became the largest shareholder of JiYa and assumed the right to appoint the general manager of JiYa and thereby exercised greater control over JiYa’s long-term strategic direction. Further, although our Chief Executive Officer remains on the board, as of March 11, 2019, he was no longer the chairman of JiYa’s board of directors and our Chief 7 Table of Contents 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 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. ​ Note 2. Investments and Fair Value Measurements ​ Our cash and cash equivalents consist of cash and instruments with original maturities of less than three months. Our investments consist of instruments with original maturities of more than three months. 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 ​ ​ ​ Gross Gross ​ ​ ​ ​ Gross Gross ​ ​ ​ ​ Amortized ​ Unrealized ​ Unrealized ​ Fair ​ Amortized ​ Unrealized ​ Unrealized ​ Fair ​ Cost Gain (Loss) Value Cost Gain (Loss) Value Classified as: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cash ​ $ 22,384 ​ $ — ​ $ — ​ $ 22,384 ​ $ 26,892 ​ $ — ​ $ — ​ $ 26,892 ​ Cash equivalents: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Certificates of deposit 1 ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ Total cash and cash equivalents ​ 22,384 ​ — ​ — ​ 22,384 ​ 26,892 ​ — ​ — ​ 26,892 ​ Investments (available-for-sale): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Certificates of deposit 2 ​ 2,880 ​ 4 ​ ​ — ​ 2,884 ​ 2,400 ​ 2 ​ ​ — ​ 2,402 ​ Corporate bonds ​ 4,501 ​ 4 ​ — ​ 4,505 ​ 7,030 ​ 4 ​ ( 9 ) ​ 7,025 ​ Total investments ​ 7,381 ​ 8 ​ — ​ 7,389 ​ 9,430 ​ 6 ​ ( 9 ) ​ 9,427 ​ Total cash, cash equivalents and investments ​ $ 29,765 ​ $ 8 ​ $ — ​ $ 29,773 ​ $ 36,322 ​ $ 6 ​ $ ( 9 ) ​ $ 36,319 ​ Contractual maturities on investments: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Due within 1 year 3 ​ $ 4,501 ​ ​ ​ ​ ​ ​ ​ $ 4,505 ​ $ 9,430 ​ ​ ​ ​ ​ ​ ​ $ 9,427 ​ Due after 1 through 5 years 4 ​ 2,880 ​ ​ ​ ​ ​ ​ ​ 2,884 ​ — ​ ​ ​ ​ ​ ​ ​ — ​ ​ ​ $ 7,381 ​ ​ ​ ​ ​ ​ ​ $ 7,389 ​ $ 9,430 ​ ​ ​ ​ ​ ​ ​ $ 9,427 ​ 1. Certificates of deposit with original maturities of less than three months. 2. Certificates of deposit with original maturities of more than three months. 3. Classified as “Short-term investments” in our condensed consolidated balance sheets. 4. Classified as “Long-term investments” in our condensed consolidated balance sheets. ​ ​ 8 Table of Contents We manage our debt investments as a single portfolio of highly marketable securities that is intended to be available to meet our current cash requirements. Certificates of deposit and corporate bonds are typically held until maturity. ​ 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 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 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): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ In Loss Position ​ In Loss Position ​ Total In ​ ​ < 12 months ​ > 12 months ​ Loss Position ​ ​ Gross ​ Gross ​ Gross ​ ​ Fair ​ Unrealized ​ Fair ​ Unrealized ​ Fair ​ Unrealized As of December 31, 2019 ​ Value ​ (Loss) ​ Value ​ (Loss) ​ Value ​ (Loss) Investments: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Corporate bonds ​ 4,515 ​ ( 9 ) ​ — ​ — ​ 4,515 ​ ​ ( 9 ) ​ Total in loss position ​ $ 4,515 ​ $ ( 9 ) ​ $ — ​ $ — ​ $ 4,515 ​ $ ( 9 ) ​ ​ Investments in Privately-held Raw Material Companies ​ We have made strategic investments in private companies located in China in order to gain access at a competitive cost to raw materials that are critical to our substrate business (see Note 7). The investment balances for the non-consolidated companies are accounted for under the equity method and included in “Other assets” in the condensed consolidated balance sheets and totaled $ 5.8 million and $ 6.0 million as of 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 ​ We invest primarily in money market accounts, certificates of deposits, corporate bonds and notes, and government securities. 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 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. ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), establishes three levels of inputs that may be used to measure fair value. Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets of the asset or identical assets. Level 2 instrument valuations are obtained from readily-available, observable pricing sources for comparable instruments. 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, 9 Table of Contents 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. ​ We place short-term foreign currency hedges that are intended to offset the potential cash exposure related to fluctuations in the exchange rate between the United States dollar and Japanese yen. We measure the fair value of these foreign currency hedges at each month end and quarter end using current exchange rates and in accordance with US GAAP. At quarter end, any foreign currency hedges not settled are netted in “Accrued liabilities” on the condensed consolidated balance sheet and classified as Level 3 assets and liabilities. As of 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 ​ ​ ​ Significant ​ ​ ​ ​ ​ Active Markets of ​ Significant Other ​ Unobservable ​ ​ Balance as of ​ Identical Assets ​ Observable Inputs ​ Inputs ​ September 30, 2020 (Level 1) (Level 2) (Level 3) Assets: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cash equivalents and investments: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Certificates of deposit ​ $ 2,884 ​ $ — ​ $ 2,884 ​ $ — ​ Corporate bonds ​ 4,505 ​ — ​ 4,505 ​ — ​ Total ​ $ 7,389 ​ $ — ​ $ 7,389 ​ $ — ​ ​ The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis in accordance with ASC 820 as of December 31, 2019 (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Quoted Prices in ​ ​ ​ Significant ​ ​ ​ ​ ​ Active Markets of ​ Significant Other ​ Unobservable ​ ​ Balance as of ​ Identical Assets ​ Observable Inputs ​ Inputs ​ December 31, 2019 (Level 1) (Level 2) (Level 3) Assets: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cash equivalents and investments: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Certificates of deposit ​ $ 2,402 ​ $ — ​ $ 2,402 ​ $ — ​ Corporate bonds ​ 7,025 ​ — ​ 7,025 ​ — ​ Total ​ $ 9,427 ​ $ — ​ $ 9,427 ​ $ — ​ ​ 10 Table of Contents Items Measured at Fair Value on a Nonrecurring Basis ​ Certain assets that are subject to nonrecurring fair value measurements are not included in the table above. These assets include investments in privately-held companies accounted for by the equity or cost method (see Note 7). One such investment is a 25 % ownership interest in a germanium materials company in China. After receiving such company’s preliminary first quarter 2019 financial results in early April 2019 and its projections for significant losses going forward, we determined that this asset was fully impaired and wrote the asset balance down to zero . This resulted in a $ 1.1 million impairment charge in our first quarter 2019 financial results. Except as mentioned above, we did not record other-than-temporary impairment charges for the remainder of these investments during the three and nine months ended September 30, 2020 and 2019, respectively. ​ Note 3. Inventories ​ The components of inventories are summarized below (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, ​ December 31, ​ ​ 2020 2019 Inventories: ​ ​ ​ ​ ​ ​ ​ Raw materials ​ $ 23,078 ​ $ 20,677 ​ Work in process ​ 23,166 ​ 24,946 ​ Finished goods ​ 2,113 ​ 3,529 ​ ​ ​ $ 48,357 ​ $ 49,152 ​ ​ 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. ​ Note 4. Property, Plant and Equipment, Net ​ The components of our property, plant and equipment are summarized below (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, ​ December 31, ​ ​ ​ 2020 ​ 2019 ​ Property, plant and equipment: ​ ​ ​ ​ ​ ​ ​ Machinery and equipment, at cost ​ $ 46,207 ​ $ 45,742 ​ Less: accumulated depreciation and amortization ​ ​ ( 37,876 ) ​ ​ ( 37,115 ) ​ Building, at cost ​ ​ 39,870 ​ ​ 38,837 ​ Less: accumulated depreciation and amortization ​ ​ ( 14,070 ) ​ ​ ( 12,736 ) ​ Leasehold improvements, at cost ​ 5,903 ​ 4,877 ​ Less: accumulated depreciation and amortization ​ ​ ( 4,404 ) ​ ​ ( 4,035 ) ​ Construction in progress ​ 72,665 ​ 61,833 ​ ​ ​ $ 108,295 ​ $ 97,403 ​ ​ 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. ​ From time to time we review our estimates of the useful lives of our property, plant and equipment. As a result of the review, we determined a portion of our manufacturing equipment was lasting longer than the estimate previously established for the respective useful lives. Where appropriate, we extended the useful life of the manufacturing equipment in our accounting records. In addition, the useful life of our buildings located in China was extended to better 11 Table of Contents 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 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. ​ ​ Note 5. Accrued Liabilities ​ The components of accrued liabilities are summarized below (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, ​ December 31, ​ ​ 2020 2019 Preferred stock dividends payable ​ $ 2,901 ​ $ 2,901 ​ Accrued compensation and related charges ​ ​ 2,213 ​ ​ 3,307 ​ Payable in connection with land restoration of Nanjing JinMei factory ​ ​ 720 ​ ​ 703 ​ Accrued income taxes ​ ​ 714 ​ ​ 171 ​ Accrued professional services ​ ​ 659 ​ ​ 630 ​ Accrued product warranty ​ ​ 529 ​ ​ 387 ​ Advance from customers ​ ​ 494 ​ ​ 396 ​ Current portion of operating lease liabilities ​ ​ 421 ​ ​ 319 ​ Other tax payable ​ ​ 357 ​ ​ 50 ​ Current portion of royalty payments ​ ​ 300 ​ ​ — ​ Payable in connection with construction ​ ​ 208 ​ ​ 1,447 ​ Other personnel-related costs ​ ​ 142 ​ ​ 180 ​ Accrual for sales returns ​ ​ 92 ​ ​ 26 ​ Payable in connection with repurchase of subsidiaries shares ​ ​ 49 ​ ​ 151 ​ Other accrued liabilities ​ ​ 1,043 ​ ​ 1,013 ​ ​ ​ $ 10,842 ​ $ 11,681 ​ ​ ​ Note 6. Related Party Transactions ​ Effective as of March 11, 2019, we reduced our ownership in JiYa from 46 % to 39 % by selling a portion of our JiYa shares to our investor partner, which is also JiYa’s landlord. Based on an independent third party valuation analysis, we sold these shares for $ 366,000 . Previously, we were the largest shareholder of JiYa and as such, we had the right to appoint the general manager of JiYa and the ability to exercise control in substance over JiYa’s long-term strategic direction. Further, our Chief Executive Officer was the chairman of JiYa’s board of directors and our Chief Financial Officer was a member of JiYa’s board of financial supervisors. As a result of this transaction, our investor partner, Shanxi Aluminum Industrial Co., Ltd. became the largest shareholder of JiYa and assumed the right to appoint the general manager of JiYa and thereby exercised greater control over JiYa’s long-term strategic direction. Further, although our Chief Executive Officer remains on the board, as of March 11, 2019, he was no longer chairman of JiYa’s board of directors and our Chief Financial Officer was no longer on JiYa’s board of financial supervisors. ​ Previously, we accounted for JiYa’s financial performance under the consolidation method of accounting. As a result of the changes, we began to account for JiYa’s financial performance under the equity method of accounting. Therefore, we deconsolidated JiYa from our consolidated financial statements as of March 11, 2019 in accordance with ASC 810. 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. 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 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 September 12 Table of Contents 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. The lease agreement for the land of approximately 22,081 square feet commenced on January 1, 2012 for a term of 10 years with annual lease payments of $ 24,000 , subject to a 5 % increase at each third year anniversary. The annual lease payment is due by January 31 st of each year. ​ 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 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 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 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. The inter-company loan carries an interest rate of 4.9 % per annum. 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 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. ​ In April 2016, our consolidated joint venture, BoYu, provided a personal loan of $ 177,000 to one of its executive employees. This loan is secured by the officer’s shares in BoYu. The loan bears interest at 2.75 % per annum. During the three months ended June 30, 2017, the repayment of the principal and interest totaling $ 180,000 was received by our consolidated joint venture. In November 2017, BoYu provided another personal loan of $ 291,000 to the same executive employee. This loan bears interest at 2.75 % per annum. Principal and accrued interest are due on November 30, 2020. In May 2019, BoYu provided another personal loan of $ 146,000 to the same executive employee. This loan bears interest at 2.75 % per annum. Principal and accrued interest are due at such time BoYu pays a dividend to its shareholders. In March 2020, BoYu provided another personal loan of $ 141,000 to the same executive employee. This loan bears interest at 2.75 % per annum. Principal and accrued interest are due on December 31, 2024. 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 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. ​ 13 Table of Contents Our Related Party Transactions Policy seeks to prohibit all conflicts of interest in transactions between related parties and us, unless they have been approved by our Board of Directors. This policy applies to all of our employees, directors, and our consolidated subsidiaries. Our executive officers retain board seats on the board of directors of the companies in which we have invested in our China joint ventures. See Note 7 for further details. ​ Note 7. Investments in Privately-Held Raw Material Companies ​ 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 strategy. ​ As of September 30, 2020, the investments are summarized below (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Investment Balance as of ​ ​ ​ ​ ​ ​ ​ September 30, ​ December 31, ​ Accounting ​ Ownership ​ Company 2020 2019 Method Percentage ​ Nanjing JinMei Gallium Co., Ltd. ​ $ 592 ​ $ 592 Consolidated **100 % Chaoyang JinMei Gallium Co., Ltd. ​ $ 1,820 ​ $ 1,820 ​ Consolidated ​ ***91.5 % Beijing JiYa Semiconductor Material Co., Ltd. ​ ​ N/A ​ ​ N/A ​ Consolidated ​ *46 % Beijing BoYu Semiconductor Vessel Craftwork Technology Co., Ltd. ​ 1,346 ​ 1,346 Consolidated 63 % ​ ​ $ 3,758 ​ $ 3,758 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Donghai County Dongfang High Purity Electronic Materials Co., Ltd. ​ $ 1,509 ​ $ 1,326 Equity 46 % Beijing JiYa Semiconductor Material Co., Ltd. ​ ​ 1,192 ​ ​ 1,621 ​ Equity ​ *39 % Xilingol Tongli Germanium Co., Ltd. ​ — ​ — Equity 25 % Xiaoyi XingAn Gallium Co., Ltd. ​ ​ 2,605 ​ ​ 2,367 ​ Equity ​ 25 % Emeishan Jia Mei High Purity Metals Co., Ltd. ​ 520 ​ 647 Equity 25 % ​ ​ $ 5,826 ​ $ 5,961 ​ ​ ​ ​ ​ ​ * 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 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. Based on an independent third party valuation analysis, we sold these shares for $ 366,000 . Previously, we were the largest shareholder and, as such, we had the right to appoint the general manager of JiYa and the ability to exercise control in substance over JiYa’s long-term strategic direction. Further, our Chief Executive Officer was the chairman of JiYa’s board of directors and our Chief Financial Officer was a member of JiYa’s board of financial supervisors. As a result of this transaction, our investor partner, Shanxi Aluminum Industrial Co., Ltd., became the largest shareholder and assumed the right to appoint the general manager and thereby exercised greater control over JiYa’s long-term strategic direction. Further, although our Chief Executive Officer remains on the board, as of March 11, 2019 he was no longer the chairman of JiYa’s board of directors and our Chief Financial Officer was no longer a member of JiYa’s board of financial supervisors. ​ Previously, we accounted for JiYa’s financial performance under the consolidation method of accounting. As a result of the changes we began to account for JiYa’s financial performance under the equity method of accounting. Therefore, we deconsolidated JiYa from our consolidated financial statements as of March 11, 2019 in accordance with ASC 810. 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 14 Table of Contents 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. ​ We recorded a gain on the deconsolidation of JiYa of $ 175,000 as a component of “Equity in loss of unconsolidated joint ventures” for the three months ended March 31, 2019 in the condensed consolidated statement of operations and comprehensive income (loss). On the date of deconsolidation, the fair value of the Company’s investment in JiYa exceeded the Company’s share of the net assets of JiYa, which generated the gain. As of March 12, 2019, we recorded our investment in JiYa at a fair value of $ 2,040,000 , which was based on an independent third party valuation analysis. The valuation is based on the asset-based approach. The market-based approach is not deemed appropriate due to lack of availability of market data for comparable companies on the open market and the discounted cash flow approach is not deemed reliable because of the difficulty in predicting the future profitability of JiYa due to the volatility of the gallium market, the concentration of customers and the significant accumulated losses of JiYa. The asset-based approach examines the value of a company’s assets net of its liabilities to derive a value for the equity holders. The gain on deconsolidation includes the following: ​ ​ ​ ​ ​ ​ ​ Amount ​ (in thousands) Fair value of the consideration received ​ $ 366 Fair value of the retained investment in Beijing JiYa Semiconductor Material Co., Ltd. ​ ​ 2,040 Carrying value of noncontrolling interests, net of accumulated other comprehensive income attributable to subsidiary ​ ​ 617 Derecognition of Beijing JiYa Semiconductor Material Co., Ltd.'s net asset ​ ​ ( 2,848 ) Gain recognized on deconsolidation of Beijing JiYa Semiconductor Material Co., Ltd. ​ $ 175 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Amount ​ ​ (in thousands) Fair value of the retained investment in Beijing JiYa Semiconductor Material Co., Ltd. ​ $ 2,040 Carrying value of retained noncontrolling investment ​ ​ ( 1,559 ) Gain on retained noncontrolling investment due to remeasurement ​ $ 481 ​ ​ Before June 15, 2018, our ownership of JinMei was 83 %. On June 15, 2018, we purchased a 12 % ownership interest from one of the minority owners of JinMei for $ 1.4 million. The $ 1.4 million was scheduled to be paid in two installments. On June 15, 2018, we paid the first installment of $ 163,000 . In May 2019, we paid the second installment of $ 1.2 million as the relocation of JinMei’s headquarters and manufacturing operations was nearly complete, which had been previously included in “Accrued liabilities” in our condensed consolidated balance sheets. As a result, our ownership of JinMei increased from 83 % to 95 %. In September 2018, we purchased a 2 % ownership interest from one of the three remaining minority owners of JinMei for $ 252,000 . As a result, our ownership of JinMei increased from 95 % to 97 %. 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 $ 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 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. ​ 15 Table of Contents Our ownership of BoYu is 63 %. On November 2, 2017, 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. As a result, our ownership of BoYu was diluted from 70 % to 63 %. We continue to consolidate BoYu as we have a controlling financial interest and have majority control of the board and, accordingly, no gain was recognized as a result of this equity transaction. Our Chief Executive Officer is chairman of the BoYu board and we have appointed two other representatives to serve on the board. ​ Although we have representation on the board of directors of each of the privately held raw material companies, the daily operations of each of these companies are managed by local management and not by us. 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 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 %. These minority investment entities are not considered variable interest entities because: ​ ● all minority investment entities have sustainable businesses of their own; ​ ● our voting power is proportionate to our ownership interests; ​ ● we only recognize our respective share of the losses and/or residual returns generated by the companies if they occur; and ​ ● we do not have controlling financial interest in, do not maintain operational or management control of, do not control the board of directors of, and are not required to provide additional investment or financial support to any of these companies. ​ One of the minority investment entities in which we have a 25 % ownership interest is a germanium materials company in China. This company provides results to us only on a quarterly basis. We received its preliminary first quarter 2019 financial results in early April 2019 as well as its projections for significant losses going forward. Such projected losses would fully deplete our asset investment balance for this company in 2019. This company is experiencing significant disruptions due to upgrades and repairs required to comply with stronger environmental regulations in China. As a result, we determined that this asset was fully impaired and wrote the asset balance down to zero . This resulted in a $ 1.1 million impairment charge in our first quarter 2019 financial results. ​ 16 Table of Contents 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 nine months ended September 30, 2020 and 2019: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Nine Months Ended ​ ​ ​ September 30, ​ September 30, ​ ​ 2020 2019 2020 2019 Net revenue ​ $ 5,052 ​ $ 3,713 ​ $ 12,610 ​ $ 14,713 ​ Gross profit ​ $ 918 ​ $ 309 ​ $ 2,944 ​ $ 1,423 ​ Operating income (loss) ​ $ 136 ​ $ ( 436 ) ​ $ 598 ​ $ ( 1,857 ) ​ Net income (loss) ​ $ 7 ​ $ ( 502 ) ​ $ ( 151 ) ​ $ ( 2,518 ) ​ ​ 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. ​ Note 8. Stockholders’ Equity ​ Condensed Consolidated Statements of Changes in Stockholders’ Equity (in thousands) ​ The changes in stockholders’ equity by component for the three and nine months ended September 30, 2020 are as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Accumulated ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other ​ AXT, Inc. Total ​ ​ Preferred Common Additional Accumulated Comprehensive ​ Stockholders’ Noncontrolling Stockholders’ ​ ​ Stock Stock Paid-In Capital Deficit Income (Loss) Equity Interests Equity Balance as of December 31, 2019 $ 3,532 $ 41 $ 236,957 $ ( 47,783 ) $ ( 4,862 ) ​ $ 187,885 $ 4,877 $ 192,762 ​ Common stock options exercised ​ ​ — ​ ​ — ​ ​ 441 ​ ​ — ​ ​ — ​ ​ 441 ​ ​ — ​ ​ 441 ​ Stock-based compensation ​ ​ — ​ ​ — ​ ​ 643 ​ ​ — ​ ​ — ​ ​ 643 ​ ​ — ​ ​ 643 ​ Net income (loss) ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 178 ) ​ ​ — ​ ​ ( 178 ) ​ ​ 395 ​ ​ 217 ​ Other comprehensive loss ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 1,775 ) ​ ​ ( 1,775 ) ​ ​ ( 98 ) ​ ​ ( 1,873 ) ​ Balance as of March 31, 2020 ​ $ 3,532 ​ $ 41 ​ $ 238,041 ​ $ ( 47,961 ) ​ $ ( 6,637 ) ​ $ 187,016 ​ $ 5,174 ​ $ 192,190 ​ Common stock options exercised ​ ​ — ​ ​ — ​ ​ 72 ​ ​ — ​ ​ — ​ ​ 72 ​ ​ — ​ ​ 72 ​ Stock-based compensation ​ ​ — ​ ​ — ​ ​ 641 ​ ​ — ​ ​ — ​ ​ 641 ​ ​ — ​ ​ 641 ​ Net income ​ ​ — ​ ​ — ​ ​ — ​ ​ 361 ​ ​ — ​ ​ 361 ​ ​ 598 ​ ​ 959 ​ Net dividend declared by joint ventures ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 89 ) ​ ​ ( 89 ) ​ Other comprehensive income ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ 272 ​ ​ 272 ​ ​ 9 ​ ​ 281 ​ Balance as of June 30, 2020 $ 3,532 ​ $ 41 ​ $ 238,754 ​ $ ( 47,600 ) ​ $ ( 6,365 ) ​ $ 188,362 ​ $ 5,692 ​ $ 194,054 ​ Common stock options exercised ​ ​ — ​ ​ — ​ ​ 624 ​ ​ — ​ ​ — ​ ​ 624 ​ ​ — ​ ​ 624 ​ Sale of subsidiary shares to noncontrolling interests ​ ​ — ​ ​ — ​ ​ 396 ​ ​ — ​ ​ — ​ ​ 396 ​ ​ — ​ ​ 396 ​ Stock-based compensation ​ ​ — ​ ​ — ​ ​ 648 ​ ​ — ​ ​ — ​ ​ 648 ​ ​ — ​ ​ 648 ​ Net income ​ ​ — ​ ​ — ​ ​ — ​ ​ 991 ​ ​ — ​ ​ 991 ​ ​ 490 ​ ​ 1,481 ​ Other comprehensive income ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ 4,373 ​ ​ 4,373 ​ ​ 316 ​ ​ 4,689 ​ Balance as of September 30, 2020 $ 3,532 ​ $ 41 ​ $ 240,422 ​ $ ( 46,609 ) ​ $ ( 1,992 ) ​ $ 195,394 ​ $ 6,498 ​ $ 201,892 ​ ​ 17 Table of Contents The changes in stockholders’ equity by component for the three and nine months ended September 30, 2019 are as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Accumulated ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other ​ AXT, Inc. Total ​ Preferred Common Additional Accumulated Comprehensive ​ Stockholders’ Noncontrolling Stockholders’ ​ Stock Stock Paid-In Capital Deficit Income (Loss) Equity Interests Equity Balance as of December 31, 2018 $ 3,532 $ 40 $ 234,418 $ ( 45,183 ) $ ( 1,972 ) ​ $ 190,835 $ 3,697 $ 194,532 Reclassification out of accumulated other comprehensive income and noncontrolling interests upon the deconsolidation of a subsidiary ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 1,150 ) ​ ​ ( 1,150 ) ​ ​ 533 ​ ​ ( 617 ) Stock-based compensation ​ ​ — ​ ​ — ​ ​ 558 ​ ​ — ​ ​ — ​ ​ 558 ​ ​ — ​ ​ 558 Net income (loss) ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 1,104 ) ​ ​ — ​ ​ ( 1,104 ) ​ ​ 81 ​ ​ ( 1,023 ) Other comprehensive income ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ 2,389 ​ ​ 2,389 ​ ​ 142 ​ ​ 2,531 Balance as of March 31, 2019 ​ $ 3,532 ​ $ 40 ​ $ 234,976 ​ $ ( 46,287 ) ​ $ ( 733 ) ​ $ 191,528 ​ $ 4,453 ​ $ 195,981 Common stock options exercised ​ ​ — ​ ​ — ​ ​ 232 ​ ​ — ​ ​ — ​ ​ 232 ​ ​ — ​ ​ 232 Purchase of subsidiary shares from noncontrolling interests ​ ​ — ​ ​ — ​ ​ ( 74 ) ​ ​ — ​ ​ — ​ ​ ( 74 ) ​ ​ ( 339 ) ​ ​ ( 413 ) Stock-based compensation ​ ​ — ​ ​ — ​ ​ 568 ​ ​ — ​ ​ — ​ ​ 568 ​ ​ — ​ ​ 568 Net income ​ ​ — ​ ​ — ​ ​ — ​ ​ 1,451 ​ ​ — ​ ​ 1,451 ​ ​ 287 ​ ​ 1,738 Other comprehensive loss ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 2,397 ) ​ ​ ( 2,397 ) ​ ​ ( 54 ) ​ ​ ( 2,451 ) Balance as of June 30, 2019 $ 3,532 ​ $ 40 ​ $ 235,702 ​ $ ( 44,836 ) ​ $ ( 3,130 ) ​ $ 191,308 ​ $ 4,347 ​ $ 195,655 Common stock options exercised ​ ​ — ​ ​ — ​ ​ 35 ​ ​ — ​ ​ — ​ ​ 35 ​ ​ — ​ ​ 35 Stock-based compensation ​ ​ — ​ ​ — ​ ​ 583 ​ ​ — ​ ​ — ​ ​ 583 ​ ​ — ​ ​ 583 Net income ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 898 ) ​ ​ — ​ ​ ( 898 ) ​ ​ 403 ​ ​ ( 495 ) Other comprehensive loss ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 4,110 ) ​ ​ ( 4,110 ) ​ ​ ( 214 ) ​ ​ ( 4,324 ) Balance as of September 30, 2019 $ 3,532 ​ $ 40 ​ $ 236,320 ​ $ ( 45,734 ) ​ $ ( 7,240 ) ​ $ 186,918 ​ $ 4,536 ​ $ 191,454 ​ ​ 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 nine months ended September 30, 2020 and 2019 . ​ Stock Repurchase Program ​ 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. These repurchases can be made from time to time in the open market and are funded from our existing cash balances and cash generated from operations. During 2015, we repurchased approximately 908,000 shares at an average price of $ 2.52 per share for a total purchase price of approximately $ 2.3 million under the stock repurchase program. No shares were repurchased from 2016 through 2019. 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. ​ Note 9. Stock-Based Compensation ​ We account for stock-based compensation in accordance with the provisions of ASC Topic 718, Compensation-Stock Compensation (“ASC 718”), which established accounting for stock-based awards exchanged for employee services. Stock-based compensation cost is measured at each grant date, based on the fair value of the award, and is 18 Table of Contents 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. ​ The following table summarizes compensation costs related to our stock-based awards (in thousands, except per share data): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Nine Months Ended ​ ​ ​ September 30, ​ September 30, ​ ​ 2020 2019 2020 2019 Cost of revenue ​ $ 28 ​ $ 31 ​ $ 83 ​ $ 92 ​ Selling, general and administrative ​ 496 ​ 433 ​ 1,480 ​ 1,296 ​ Research and development ​ 124 ​ 119 ​ 369 ​ 321 ​ Total stock-based compensation ​ 648 ​ 583 ​ 1,932 ​ 1,709 ​ Tax effect on stock-based compensation ​ — ​ — ​ — ​ — ​ Net effect on net income (loss) ​ $ 648 ​ $ 583 ​ $ 1,932 ​ $ 1,709 ​ ​ 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 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 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): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted ​ ​ ​ ​ ​ ​ ​ ​ average ​ ​ ​ ​ ​ ​ Weighted- ​ Remaining ​ ​ ​ ​ ​ Number of ​ average ​ Contractual ​ Aggregate ​ ​ Options ​ Exercise ​ Life ​ Intrinsic Stock Options Outstanding Price (in years) Value Balance as of January 1, 2020 2,953 ​ $ 4.00 5.95 ​ $ 3,040 ​ Granted — ​ — ​ — ​ ​ — ​ Exercised ( 460 ) ​ 2.47 ​ — ​ ​ — ​ Canceled and expired ( 162 ) ​ 5.83 ​ — ​ ​ — ​ Balance as of September 30, 2020 2,331 ​ $ 4.18 5.89 ​ $ 5,061 ​ Options vested as of September 30, 2020 and unvested options expected to vest, net of forfeitures 2,313 ​ $ 4.18 5.87 ​ $ 5,012 ​ Options exercisable as of September 30, 2020 1,703 ​ $ 4.20 4.88 ​ $ 3,675 ​ ​ 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. ​ 19 Table of Contents Restricted stock awards ​ 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 ​ ​ ​ ​ Grant Date Stock Awards Shares Share Value Non-vested as of January 1, 2020 ​ 939 ​ $ 5.02 ​ Granted 55 ​ $ 5.21 ​ Vested ( 127 ) ​ $ 6.00 ​ Forfeited ​ ( 12 ) ​ $ 5.69 ​ Non-vested as of September 30, 2020 855 ​ $ 4.88 ​ ​ 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. ​ Note 10. Net Income (Loss) Per Share ​ Basic net income (loss) per share is computed using the weighted-average number of common shares outstanding during the periods less shares of common stock subject to repurchase and non-vested stock awards. Diluted net income (loss) per share is computed using the weighted-average number of common shares outstanding and potentially dilutive common shares outstanding during the periods. The dilutive effect of outstanding stock options and restricted stock awards is reflected in diluted earnings per share by application of the treasury stock method. Potentially dilutive common shares consist of common shares issuable upon the exercise of stock options and vesting of restricted stock awards. 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 income (loss) per share calculations is as follows (in thousands, except per share data): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Nine Months Ended ​ ​ ​ September 30, ​ September 30, ​ ​ 2020 2019 2020 2019 Numerator: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income (loss) attributable to AXT, Inc. ​ $ 991 ​ $ ( 898 ) ​ $ 1,174 ​ $ ( 551 ) ​ Less: Preferred stock dividends ​ ( 44 ) ​ ( 44 ) ​ ( 132 ) ​ ( 132 ) ​ Net income (loss) available to common stockholders ​ $ 947 ​ $ ( 942 ) ​ $ 1,042 ​ $ ( 683 ) ​ Denominator: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Denominator for basic net income (loss) per share - weighted-average common shares ​ 40,152 ​ 39,466 ​ 39,978 ​ 39,438 ​ Effect of dilutive securities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Common stock options ​ 575 ​ — ​ 510 ​ — ​ Restricted stock awards ​ 252 ​ — ​ 200 ​ — ​ Denominator for dilutive net income (loss) per common shares ​ 40,979 ​ 39,466 ​ 40,688 ​ 39,438 ​ Net income (loss) attributable to AXT, Inc. per common share: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic ​ $ 0.02 ​ $ ( 0.02 ) ​ $ 0.03 ​ $ ( 0.02 ) ​ Diluted ​ $ 0.02 ​ $ ( 0.02 ) ​ $ 0.03 ​ $ ( 0.02 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Options excluded from diluted net income (loss) per share as the impact is anti-dilutive ​ 1,036 ​ 2,523 ​ 1,298 ​ 2,523 ​ Restricted stock excluded from diluted net income (loss) per share as the impact is anti-dilutive ​ 218 ​ 698 ​ 347 ​ 698 ​ 20 Table of Contents ​ 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. stockholders in connection with the completion of our acquisition of Lyte Optronics, Inc. on May 28, 1999. ​ Note 11. Segment Information and Foreign Operations ​ Segment Information ​ We operate in one segment for the design, development, manufacture and distribution of high-performance compound and single element semiconductor substrates and sale of raw materials integral to these substrates. Our chief operating decision-maker has been identified as our Chief Executive Officer, who reviews operating results to make decisions about allocating resources and assessing performance for the Company. Since we operate in one segment, all financial segment and product line information can be found in the condensed consolidated financial statements. ​ Product Information ​ The following table represents revenue amounts (in thousands) by product type: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Nine Months Ended ​ ​ ​ ​ September 30, ​ September 30, ​ ​ ​ 2020 2019 2020 2019 Product Type: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Substrates ​ $ 20,311 ​ $ 15,959 ​ $ 54,066 ​ $ 53,324 ​ ​ Raw Materials and Other ​ 5,158 ​ 3,882 ​ 14,260 ​ 11,522 ​ ​ Total ​ $ 25,469 ​ $ 19,841 ​ $ 68,326 ​ $ 64,846 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Geographical Information ​ The following table represents revenue amounts (in thousands) reported for products shipped to customers in the corresponding geographic region: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Nine Months Ended ​ ​ ​ ​ September 30, ​ September 30, ​ ​ ​ 2020 2019 2020 2019 Geographical region: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ China ​ $ 10,568 ​ $ 5,117 ​ $ 23,045 ​ $ 21,870 ​ ​ Taiwan ​ ​ 3,333 ​ ​ 4,399 ​ ​ 12,908 ​ ​ 12,062 ​ ​ Japan ​ 2,233 ​ 1,339 ​ 5,265 ​ 4,641 ​ ​ Asia Pacific (excluding China, Taiwan and Japan) ​ ​ 1,446 ​ ​ 2,234 ​ ​ 4,503 ​ ​ 6,156 ​ ​ Europe (primarily Germany) ​ ​ 4,689 ​ ​ 4,737 ​ ​ 15,017 ​ ​ 13,752 ​ ​ North America (primarily the United States) ​ 3,200 ​ 2,015 ​ ​ 7,588 ​ ​ 6,365 ​ ​ Total ​ $ 25,469 ​ $ 19,841 ​ $ 68,326 ​ $ 64,846 ​ ​ ​ 21 Table of Contents Long-lived assets consist primarily of property, plant and equipment and operating lease right-of-use assets, and are attributed to the geographic location in which they are located. Long-lived assets, net of depreciation, by geographic region were as follows (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ As of ​ ​ ​ September 30, ​ December 31, ​ ​ 2020 2019 Long-lived assets by geographic region, net of depreciation: ​ ​ ​ ​ ​ ​ ​ North America ​ $ 857 ​ $ 1,069 ​ China ​ 110,140 ​ 99,272 ​ ​ ​ $ 110,997 ​ $ 100,341 ​ ​ Significant Customers ​ 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 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. ​ Note 12. Commitments and Contingencies ​ Indemnification Agreements ​ We have entered into indemnification agreements with our directors and officers that require us to indemnify our directors and officers against liabilities that may arise by reason of their status or service as directors or officers, other than liabilities arising from willful misconduct of a culpable nature; to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified; and to obtain directors’ and officers’ insurance if available on reasonable terms, which we currently have in place. ​ Product Warranty ​ We provide warranties for our products for a specific period of time, generally twelve months , against material defects. We provide for the estimated future costs of warranty obligations in cost of sales when the related revenue is recognized. 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 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 nine months ended September 30, 2020 and 2019 (in thousands): 22 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Nine Months Ended ​ ​ September 30, ​ September 30, ​ 2020 2019 2020 2019 Beginning accrued product warranty ​ $ 352 ​ $ 353 ​ $ 387 ​ $ 236 ​ Accruals for warranties issued ​ 195 ​ 146 ​ 384 ​ 388 ​ Adjustments related to pre-existing warranties including expirations and changes in estimates ​ 171 ​ 27 ​ 99 ​ 175 ​ Cost of warranty repair ​ ( 189 ) ​ ( 183 ) ​ ( 341 ) ​ ( 456 ) ​ Ending accrued product warranty ​ $ 529 ​ $ 343 ​ $ 529 ​ $ 343 ​ ​ Contractual Obligations ​ In 2020, we and a competitor entered into a cross license and covenant agreement (the “Cross License Agreement”), which has a term that began on January 1, 2020 and expires on December 31, 2029. The Cross License Agreement is a fixed-cost cross license and not a variable-cost cross license that is based on revenue or units. Under the Cross License Agreement, we are obligated to make annual payments over a 10-year period. ​ ​ Land Purchase and Investment Agreement ​ We have established a wafer processing production line in Dingxing, China. In addition to a land rights and building purchase agreement that we entered into with a private real estate development company to acquire our new manufacturing facility, we also entered into a cooperation agreement with the Dingxing local government. In addition to pledging its full support and cooperation, the Dingxing local government will issue certain tax credits to us as we achieve certain milestones. We, in turn, agreed to hire local workers over time, pay taxes when due and eventually demonstrate a total investment of approximately $ 90 million in value, assets and capital. The investment will include cash paid for the land and buildings, cash on deposit in our name at local banks, the gross value of new and used equipment (including future equipment that might be used for indium phosphide and germanium substrates production), the deemed value for our customer list or the end user of our substrates (for example, the end users of the 3-D sensing VCSELs), a deemed value for employment of local citizens, a deemed value for our proprietary process technology, other intellectual property, other intangibles and additional items of value. There is no timeline or deadline by which this must be accomplished, rather it is a good faith covenant entered into between AXT and the Dingxing local government. Further, there is no specific penalty contemplated if either party breaches the agreement. 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. We believe that such cooperation agreements are normal, customary and usual in China and that the future valuation is flexible. We have a similar agreement with the city of Kazuo, China, although on a smaller scale. The total investment targeted by AXT in Kazuo is approximately $ 15 million in value, assets and capital. In addition, BoYu has a similar agreement with the city of Kazuo. The total investment targeted by BoYu in Kazuo is approximately $ 8 million in value, assets and capital. ​ Purchase Obligations with Penalties for Cancellation ​ In the normal course of business, we issue purchase orders to various suppliers. In certain cases, we may incur a penalty if we cancel the purchase order. 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 ​ From time to time we may be involved in judicial or administrative proceedings concerning matters arising in the ordinary course of business. We do not expect that any of these matters, individually or in the aggregate, will have a material adverse effect on our business, financial condition, cash flows or results of operations. ​ 23 Table of Contents Note 13. Other Income (Expense), Net ​ 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. ​ Note 14. Income Taxes ​ 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. ASC 740 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that a portion of the deferred tax asset will not be realized. Our deferred tax assets have been reduced to zero by a valuation allowance. ​ We provide for income taxes based upon the geographic composition of worldwide earnings and tax regulations governing each region, particularly China. The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws, particularly in foreign countries such as China. ​ We recognize interest and penalties related to uncertain tax positions in income tax expense. 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. federal, various states and foreign jurisdictions. 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 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 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. The CARES Act includes several significant business tax provisions including modification to the taxable income limitation for utilization of net operating losses (“NOLs”) incurred in 2018, 2019 and 2020 and the ability to carry back NOLs from those years for a period of up to five years, an increase to the limitation on deductibility of certain business interest expense, bonus depreciation for purchases of qualified improvement property and special deductions on certain corporate charitable contributions. The Company analyzed the provisions of the CARES Act and determined there was no effect on its provision for the current period and will continue to evaluate the impact, if any, the CARES Act may have on the Company’s condensed consolidated financial statements and disclosures. ​ On June 29, 2020, California Governor Gavin Newsom signed Assembly Bill 85 (“AB 85”) into law as part of the California 2020 Budget Act, which temporarily suspends the use of California net operating losses and imposes a cap on the amount of business incentive tax credits that companies can utilize against their net income for tax years 2020, 2021, and 2022. We analyzed the provisions of AB 85 and determined there was no impact on our provision for income taxes for the current period and will continue to evaluate the impact, if any, AB 85 may have on the Company’s condensed consolidated financial statements and disclosures . ​ 24 Table of Contents Note 15. Revenue ​ Revenue Recognition ​ We manufacture and sell high-performance compound semiconductor substrates including indium phosphide, gallium arsenide and germanium wafers, and our consolidated subsidiaries sell certain raw materials, including high purity gallium (7N Ga), pyrolytic boron nitride (pBN) crucibles and boron oxide (B2O3). After we ship our products, there are no remaining obligations or customer acceptance requirements that would preclude revenue recognition. Our products are typically sold pursuant to purchase orders placed by our customers, and our terms and conditions of sale do not require customer acceptance. We account for a contract with a customer when there is a legally enforceable contract, which could be the customer’s purchase order, the rights of the parties are identified, the contract has commercial terms, and collectibility of the contract consideration is probable. The majority of our contracts have a single performance obligation to transfer products and are short term in nature, usually less than six months. Our revenue is measured based on the consideration specified in the contract with each customer in exchange for transferring products that are generally based upon a negotiated, formula, list or fixed price. Revenue is recognized when control of the promised goods is transferred to our customer, which is either upon shipment from our dock, receipt at the customer’s dock, or removal from consignment inventory at the customer’s location, in an amount that reflects the consideration we expect to be entitled to receive in exchange for those goods. ​ We have elected to account for shipping and handling as activities to fulfill the promise to transfer the goods. Shipping and handling fees billed to customers in a sales transaction are recorded as an offset to shipping and handling expenses. Sales taxes and value added taxes in foreign jurisdictions that are collected from customers and remitted to governmental authorities are accounted for on a net basis and, therefore, are excluded from revenue. ​ We do not provide training, installation or commissioning services. We provide for future returns based on historical data, prior experience, current economic trends and changes in customer demand at the time revenue is recognized. We do not recognize any asset associated with the incremental cost of obtaining revenue generating customer contracts. As such, sales commissions are expensed as incurred, given that the expected period of benefit is less than one year . ​ Contract Balances ​ We receive payments from customers based on a billing schedule as established in our contracts. Contract assets are recorded when we have a conditional right to consideration for our completed performance under the contracts. Accounts receivables are recorded when the right to this consideration becomes unconditional. 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, ​ December 31, ​ ​ ​ 2020 ​ 2019 ​ Contract liabilities ​ $ ( 494 ) ​ $ ( 396 ) ​ 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 ​ In general, revenue disaggregated by product types and geography (See Note 11) is aligned according to the nature and economic characteristics of our business and provides meaningful disaggregation of our results of operations. Since we operate in one segment, all financial segment and product line information can be found in the condensed consolidated financial statements. ​ 25 Table of Contents Note 16. Bank Loans and Line of Credit ​ On November 6, 2018, the Company entered into a Credit Agreement (the “Credit Agreement”), by and between the Company and Wells Fargo Bank, National Association (“Wells Fargo Bank”), which established a $ 10 million secured revolving line of credit with a $ 1.0 million letter of credit sublimit facility. The revolving credit facility is collateralized by substantially all of the assets of the Company located within the United States, subject to certain exceptions. The commitments under the Credit Agreement expire on November 30, 2020 and any loans thereunder will bear interest at a rate based on the daily one-month London Inter-bank Offered Rate (“LIBOR”) for the applicable interest period plus a margin of 2.00 %. On February 5, 2020, the Company entered into the First Amendment to Credit Agreement (the “First Amendment”), by and between the Company and Wells Fargo Bank, which reduced the $ 10 million secured revolving line of credit under the Credit Agreement to $ 7 million. 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 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 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 (“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 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. The primary intended use of the credit facility is for general purposes, which may include working capital and other corporate expenses. ​ In March 2020, BoYu borrowed $ 0.4 million against the credit facility. The repayment of the full amount is due in March 2021. As of September 30, 2020, $ 0.4 million was included in “Bank loan” in our condensed consolidated balance sheets. ​ ​ Note 17. Leases ​ We lease certain equipment, office space, warehouse and facilities under long-term operating leases expiring at various dates through July 2029. The majority of our lease obligations relate to our lease agreement for a nitrogen system to be used during the manufacturing process for our facility in Dingxing, China. The equipment lease became effective in August 2019 and will expire in July 2029. There are no variable lease payments, residual value guarantees or any restrictions or covenants imposed by the equipment lease. 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 26 Table of Contents agreement, in May 2020, we were granted an extension to the term of the lease for an additional three years . There are no variable lease payments, residual value guarantees or any restrictions or covenants imposed by the facility lease. All other operating leases have a term of 12 months or less. ​ On January 1, 2019, we adopted Accounting Standard Update 2016-02, Leases (Topic 842) (“ASC 842”), which requires the recognition of the right-of-use assets and related operating and finance lease liabilities on the balance sheet. As permitted by ASC 842, we elected the adoption date of January 1, 2019, which is the date of initial application. As a result, the consolidated balance sheet prior to January 1, 2019 was not restated, continues to be reported under ASC Topic 840, Leases , (“ASC 840”), which did not require the recognition of operating lease liabilities on the balance sheet, and is not comparative. Under ASC 842, all leases are required to be recorded on the balance sheet and are classified as either operating leases or finance leases. The lease classification affects the expense recognition in the statement of operations. Operating lease charges are recorded entirely in operating expenses. Finance lease charges are split, where amortization of the right-of-use asset is recorded in operating expenses and an implied interest component is recorded in interest expense. The expense recognition for operating leases and finance leases under ASC 842 is substantially consistent with ASC 840. As a result, there is no significant difference in our results of operations presented in our consolidated statement of operations and consolidated statement of comprehensive income (loss) for each year presented. ​ We adopted ASC 842 using a modified retrospective approach for all leases existing at January 1, 2019. The adoption of ASC 842 had a material impact on our consolidated balance sheet. The most significant impact was the recognition of the operating lease right-of-use assets and the liability for operating leases. Accordingly, upon adoption, leases that were classified as operating leases under ASC 840 were classified as operating leases under ASC 842, and we recorded an adjustment of $ 1.1 million to operating lease right-of-use assets and the related lease liability. The lease liability is based on the present value of the remaining minimum lease payments, determined under ASC 840, discounted using our secured incremental borrowing rate at the effective date of January 1, 2019, using the original lease term as the tenor. As permitted under ASC 842, we elected several practical expedients that permit us to not reassess (1) whether a contract is or contains a lease, (2) the classification of existing leases, and (3) whether previously capitalized costs continue to qualify as initial indirect costs. The application of the practical expedients did not have a material impact on the measurement of the operating lease liability. ​ Leases are classified as either finance leases or operating leases. A lease is classified as a finance lease if any one of the following criteria are met: the lease transfers ownership of the asset by the end of the lease term, the lease contains an option to purchase the asset that is reasonably certain to be exercised, the lease term is for a major part of the remaining useful life of the asset or the present value of the lease payments equals or exceeds substantially all of the fair value of the asset. A lease is classified as an operating lease if it does not meet any one of these criteria. All of our leases are classified as operating leases and substantially all of our operating leases are comprised of equipment and office space leases. None of our leases are classified as finance leases. ​ For all leases at the lease commencement date, a right-of-use asset and a lease liability are recognized. The right-of-use asset represents the right to use the leased asset for the lease term. The lease liability represents the present value of the lease payments under the lease. ​ The right-of-use asset is initially measured at cost, which primarily comprises the initial amount of the lease liability, plus any initial direct costs incurred, consisting mainly of brokerage commissions, less any lease incentives received. 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. ​ 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 27 Table of Contents 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. ​ We have elected not to recognize right-of-use assets and lease liabilities for short-term leases that have a term of 12 months or less. The effect of short-term leases on our right-of-use asset and lease liability was not material. ​ 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 ​ 2020 $ 129 2021 ​ 555 2022 ​ 571 2023 ​ 562 2024 ​ 274 Thereafter ​ 1,252 Total minimum lease payments ​ 3,343 Less: Interest ​ ( 507 ) Present value of lease obligations ​ 2,836 Less: Current portion, included in accrued liabilities ​ ( 421 ) Long-term portion of lease obligations $ 2,415 ​ 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, ​ December 31, ​ ​ ​ 2020 ​ 2019 ​ Weighted-average remaining lease term (years) ​ 7.34 ​ 7.94 ​ Weighted-average discount rate ​ 4.61 % 4.61 % ​ ​ Supplemental cash flow information related to leases where we are the lessee is as follows (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended ​ ​ ​ September 30, ​ ​ ​ 2020 ​ 2019 ​ Cash paid for amounts included in the measurement of lease liabilities: ​ ​ ​ ​ ​ ​ ​ Operating cash flows from operating leases ​ $ 324 ​ $ 159 ​ Supplemental noncash information on lease liabilities arising from obtaining right-of-use assets: ​ ​ ​ ​ ​ ​ ​ Leased assets obtained in exchange for new operating lease liabilities ​ $ — ​ $ 2,072 ​ ​ 28 Table of Contents The components of lease expense are as follows (in thousands) within our condensed consolidated statements of operations: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Nine Months Ended ​ ​ September 30, ​ September 30, ​ ​ 2020 ​ 2019 ​ 2020 ​ 2019 Operating lease ​ $ 128 ​ $ 106 ​ $ 383 ​ $ 229 Short-term lease expense ​ ​ 27 ​ ​ 14 ​ ​ 61 ​ ​ 42 Total ​ $ 155 ​ $ 120 ​ $ 444 ​ $ 271 ​ ​ Note 18. Recent Accounting Pronouncements Accounting Standard Update (“ASU”) No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”) was issued in June 2016. Under ASU 2016-13, existing guidance on reporting credit losses for trade and other receivables and available for sale debt securities have been replaced with a new forward-looking “expected loss” model that has resulted in the earlier recognition of allowances for losses. Our adoption of ASU 2016-13 and its subsequent series of amendments during the 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. ​ ​ Note 19. 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. ​ 29 Table of Contents ​ ITEM 2. MANAGEMENT’S DISCUSSIO N AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ​ This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Statements relating to our expectations regarding results of operations, market and customer demand for our products, customer qualifications of our products, our ability to expand our markets or increase sales, emerging applications using chips or devices fabricated on our substrates, the development of new products, applications, enhancements or technologies, the life cycles of our products and applications, product yields and gross margins, expense levels, the impact of the adoption of certain accounting pronouncements, our investments in capital projects, our ability to relocate our gallium arsenide production line in a timely and orderly manner, ramping production at our new sites, our estimated construction and relocation costs, including potential severance costs, with respect to the relocation of our gallium arsenide production line, our ability to have customers re-qualify substrates from our new manufacturing location in Dingxing, China, our ability to utilize or increase our manufacturing capacity, and our belief that we have adequate cash and investments to meet our needs over the next 12 months are forward-looking statements. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “goals,” “should,” “continues,” “would,” “could” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this quarterly report. Additionally, statements concerning future matters such as our strategy and plans, industry trends and the impact of trends, tariffs and trade wars, the potential or expected impact of the COVID-19 pandemic on our business, results of operations and financial condition, mandatory factory shutdowns in China, policies and regulations in China and economic cycles on our business are forward-looking statements. All forward-looking statements are based upon management’s views as of the date of this quarterly report and are subject to risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated in such forward-looking statements. Such risks and uncertainties include those set forth under the section entitled “Risk Factors” in Item 1A below, as well as those discussed elsewhere in this quarterly report, and identify important factors that could disrupt or injure our business or cause actual results to differ materially from those predicted in any such forward-looking statements. ​ These forward-looking statements are not guarantees of future performance. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Readers are urged to carefully review and consider the various disclosures made in this report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects. We undertake no obligation to revise or update any forward-looking statements in order to reflect any development, event or circumstance that may arise after the date of this report. This discussion should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2019 and the condensed consolidated financial statements included elsewhere in this report. ​ ​ 30 Table of Contents Overview ​ AXT, Inc. (“AXT”, “the company”, “we,” “us,” and “our” refer to AXT, Inc. and its consolidated subsidiaries) is a worldwide materials science company that develops and produces high-performance compound and single element semiconductor substrates, also known as wafers. Our consolidated subsidiaries produce and sell certain raw materials some of which are used in our substrate manufacturing process and some of which are sold to other companies. Our wafer substrates are used 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. However, certain chips may become too hot or perform their function too slowly if silicon is used as the base material. In addition, optoelectronic applications, such as LED lighting and chip-based lasers, do not use silicon substrates because they require a wave form frequency that cannot be achieved using silicon. Alternative or specialty materials are used to replace silicon as the preferred base in these situations. Our wafers provide such alternative or specialty materials. We do not design or manufacture the chips. We add value by researching, developing and producing the specialty material wafers. We have two product lines: specialty material substrates and raw materials integral to these substrates. Our compound substrates combine indium with phosphorous (indium phosphide: InP) or gallium with arsenic (gallium arsenide: GaAs). Our single element substrates are made from germanium (Ge). InP is a high-performance semiconductor substrate used in broadband and fiber optic applications and data center connectivity. InP substrates can also be used in 5G applications. In recent years, InP demand has increased. Semi-insulating GaAs substrates are used to create various high-speed microwave components, including power amplifier chips used in cell phones, satellite communications and broadcast television applications. Semi-conducting GaAs substrates are used to create opto-electronic products, including high brightness light emitting diodes (HBLEDs) that are often used to backlight wireless handsets and liquid crystal display (LCD) TVs and also used for automotive panels, signage, display and lighting applications. A new application for semi-conducting GaAs substrates is 3-D sensing chips using VCSELs (vertical cavity surface emitting lasers) as an array of lasers on a single chip that can be used in cell phones and other devices. Ge substrates are used in applications such as solar cells for space and terrestrial photovoltaic applications. Our supply chain strategy includes partial ownership in raw material companies. Two of these companies are consolidated. One of these companies produces pyrolytic boron nitride (pBN) crucibles used in the high temperature (typically in the range 500 C to 1,500 C) growth process of single crystal ingots, effusion rings when growing OLED (Organic Light Emitting Diode) tools, epitaxial layer growth in MOCVD (Metal-Organic Chemical Vapor Deposition) reactors and MBE (Molecular Beam Epitaxy) reactors. We use these pBN crucibles in our own ingot growth processes and they are also sold in the open market to other companies. The second consolidated company converts raw gallium to purified gallium. We use purified gallium in producing our GaAs substrates and it is also sold in the open market to other companies for use in producing magnetic materials, high temperature thermometers, single crystal ingots, including gallium arsenide, gallium nitride, gallium antimonide and gallium phosphide ingots, and other materials and alloys. In addition to purified gallium, the second consolidated company also produces InP base material which we then use to grow single crystal ingots. In prior years, a third company was consolidated, but, in the first quarter of 2019, we sold a portion of our ownership to our investment partner and, as of March 11, 2019, we ceased to consolidate this company. Our substrate product group generated 81%, 79% and 80% of our consolidated revenue and our raw materials product group generated 19%, 21% and 20% for the years 2019, 2018 and 2017, respectively. ​ 31 Table of Contents The following chart shows our substrate products and their materials, diameters and illustrative applications and shows our raw materials group primary products and their illustrative uses and applications. ​ ​ ​ ​ ​ ​ ​ ​ Products ​ ​ ​ ​ ​ ​ Substrate Group ​ Wafer Diameter ​ Sample of Applications ​ ​ Indium Phosphide ​ 2”, 3”, 4” ​ • Data center connectivity using light/lasers ​ ​ (InP) ​ ​ ​ • 5G communications ​ ​ ​ ​ ​ ​ • Fiber optic lasers and detectors ​ ​ ​ ​ ​ ​ • Passive Optical Networks (PONs) ​ ​ ​ ​ ​ ​ • Silicon photonics ​ ​ ​ ​ ​ ​ • Photonic Integrated circuits (PICs) ​ ​ ​ ​ ​ ​ • High efficiency terrestrial solar cells (CPV) ​ ​ ​ ​ ​ ​ • RF amplifier and switching (military wireless & 5G) ​ ​ ​ ​ ​ ​ • Infrared light-emitting diode (LEDs) motion control ​ ​ ​ ​ ​ ​ • Infrared thermal imaging ​ ​ Gallium Arsenide ​ 1”, 2”, 3”, 4”, 5”, 6” ​ • Wi-Fi devices ​ ​ (GaAs - semi-insulating) ​ ​ ​ • IoT devices ​ ​ ​ ​ ​ ​ • High-performance transistors • Direct broadcast television • Power amplifiers for wireless devices ​ ​ ​ ​ ​ ​ • Satellite communications ​ ​ ​ ​ ​ ​ • High efficiency solar cells for drones and automobiles ​ ​ Gallium Arsenide ​ 1”, 2”, 3”, 4”, 5&quot;, 6” ​ • High brightness LEDs ​ ​ (GaAs - semi-conducting) ​ ​ ​ • Printer head lasers and LEDs ​ ​ ​ ​ ​ ​ • 3-D sensing using VCSELs ​ ​ ​ ​ ​ ​ • Data center communication using VCSELs ​ ​ ​ ​ ​ ​ • Sensors for industrial robotics/Near-infrared sensors ​ ​ ​ ​ ​ ​ • Laser machining, cutting and drilling ​ ​ ​ ​ ​ ​ • Optical couplers ​ ​ ​ ​ ​ ​ • High efficiency solar cells for drones and automobiles ​ ​ ​ ​ ​ ​ • Other lasers • Night vision goggles ​ ​ ​ ​ ​ ​ ​ ​ Germanium ​ 2”, 4”, 6” ​ • Satellite solar cells ​ ​ (Ge) ​ ​ ​ • Optical sensors and detectors ​ ​ ​ ​ ​ ​ • Terrestrial concentrated photo voltaic (CPV) cells • Multi-junction solar cells for satellites • Infrared detectors ​ ​ Raw Materials Group ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 6N+ purified gallium ​ ​ ​ • Key material in single crystal ingots such as: ​ ​ ​ ​ ​ ​ - Gallium Arsenide (GaAs) ​ ​ ​ ​ ​ ​ - Gallium Nitride (GaN) ​ ​ ​ ​ ​ ​ - Gallium Antimonide (GaSb) ​ ​ ​ ​ ​ ​ - Gallium Phosphide (GaP) ​ ​ Boron trioxide (B2O3) ​ ​ ​ • Encapsulant in the ingot growth of III-V compound semiconductors ​ ​ Gallium-Magnesium alloy ​ ​ ​ • Used for the synthesis of organo-gallium compounds in epitaxial growth on semiconductor wafers ​ ​ pyrolytic boron nitride (pBN) crucibles ​ ​ ​ • Used when growing single-crystal compound semiconductor ingots ​ ​ ​ ​ ​ ​ • Used as effusion rings growing OLED tools ​ ​ pBN insulating parts ​ ​ ​ • Used in MOCVD reactors ​ ​ ​ ​ ​ ​ • Used when growing epitaxial layers in Molecular Beam Epitaxy (MBE) reactors ​ ​ 32 Table of Contents We manufacture all of our products in the People’s Republic of China (PRC or China), which generally has favorable costs for facilities and labor compared with comparable facilities in the United States, Europe or Japan. Our supply chain includes partial ownership of raw material companies in China (subsidiaries/joint ventures). We believe this supply chain arrangement provides us with pricing advantages, reliable supply, market trend visibility and better sourcing lead-times for key raw materials central to manufacturing our substrates. Our subsidiaries and joint venture companies produce materials, including raw gallium (4N Ga), high purity gallium (6N Ga), arsenic, germanium, germanium dioxide, pyrolytic boron nitride (pBN) crucibles and boron oxide (B2O3). Our ownership and the ownership held by one of the joint venture companies range from 91.5% to 25%. We have board representation in all of these raw material companies. We consolidate the companies in which we have either a controlling financial interest, or majority financial interest combined with the ability to exercise substantive control over the operations, or financial decisions, of such companies. We use the equity method to account for companies in which we have smaller financial interest and have the ability to exercise significant influence, but not control, over such companies. We purchase portions of the materials produced by these companies for our own use and they sell the remainder of their production to third parties. ​ The Beijing city government is moving its offices into the area where our original manufacturing facility is currently located and is in the process of moving thousands of government employees into this area. The government has constructed showcase tower buildings and overseen the establishment of new apartment complexes, retail stores and restaurants. An amusement park is being constructed within a few miles of our facility. To create room and upgrade the district, the city instructed virtually all existing manufacturing companies, including AXT, to relocate all or some of their manufacturing lines. We were instructed to move our gallium arsenide manufacturing line out of the area. For reasons of manufacturing efficiency, we elected to also move our germanium manufacturing line. Our indium phosphide manufacturing line, as well as various administrative and sales functions, will remain primarily at our original site for the near future . ​ 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. We have transferred our wafer processing equipment for gallium arsenide to our new manufacturing facility in Dingxing, a city approximately 75 miles from Beijing. Our key focus now is transferring volume production of the wafer processing steps for gallium arsenide to Dingxing. This process is ongoing. Some of our larger, more sophisticated customers want to perform a site qualification and subsequently work with us to ramp up production at Dingxing. One of our largest gallium arsenide customers has already qualified our new manufacturing sites for volume production. The new facilities are intended to give us the long-term capacity and a new level of technological sophistication in our manufacturing capabilities to support the major trends that we believe are likely to drive demand for our products in the years ahead. ​ Customer qualification of the Dingxing site requires us to continue to diligently address the many details that arise at both of the new sites. A failure to properly accomplish this could result in disruption to our production and have a material adverse impact on our revenue, our results of operations and our financial condition. If we fail to meet the product qualification requirements of a customer, we may lose sales to that customer. Our reputation may also be damaged. Any loss of sales could have a material adverse effect on our revenue, our results of operations and our financial condition. ​ In September 2018, the Trump Administration announced a list of thousands of categories of goods that became subject to tariffs when imported into the United States. This pronouncement imposed tariffs on the wafer substrates we imported into the United States. The initial tariff rate was 10% and subsequently was increased to 25%. Approximately 10% of our revenue derives from importing our wafers into the United States. For the nine months ended September 30, 2020, we paid approximately $850,000 in tariffs. In 2019, we paid approximately $735,000 in tariffs. The future impact of tariffs and trade wars is uncertain. ​ Critical Accounting Policies, Estimates and Change in Accounting Estimates ​ We prepare our condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. Accordingly, we make estimates, assumptions and judgments that affect the 33 Table of Contents amounts reported on our condensed consolidated financial statements. These estimates, assumptions and judgments about future events and their effects on our results cannot be determined with certainty, and are made based upon our historical experience and on other assumptions that are believed to be reasonable under the circumstances. These estimates may change as new events occur or additional information is obtained, and we may periodically be faced with uncertainties, the outcomes of which are not within our control and may not be known for a prolonged period of time. ​ We have identified the policies below as critical to our business operations and understanding of our financial condition and results of operations. Critical accounting policies are material to the presentation of our condensed consolidated financial statements and require us to make difficult, subjective or complex judgments that could have a material effect on our financial reports and results of operations. They may require us to make assumptions about matters that are highly uncertain at the time of the estimate. Different estimates that we could have used, or changes in the estimate that are reasonably likely to occur, may have a material impact on our financial condition or results of operations. ​ Revenue Recognition ​ We manufacture and sell high-performance compound semiconductor substrates including indium phosphide, gallium arsenide and germanium wafers, and our consolidated subsidiaries sell certain raw materials, including high purity gallium (7N Ga), pyrolytic boron nitride (pBN) crucibles and boron oxide (B2O3). After we ship our products, there are no remaining obligations or customer acceptance requirements that would preclude revenue recognition. Our products are typically sold pursuant to purchase orders placed by our customers, and our terms and conditions of sale do not require customer acceptance. We account for a contract with a customer when there is a legally enforceable contract, which could be the customer’s purchase order, the rights of the parties are identified, the contract has commercial terms, and collectibility of the contract consideration is probable. The majority of our contracts have a single performance obligation to transfer products and are short term in nature, usually less than six months. Our revenue is measured based on the consideration specified in the contract with each customer in exchange for transferring products that are generally based upon a negotiated, formula, list or fixed price. Revenue is recognized when control of the promised goods is transferred to our customer, which is either upon shipment from our dock, receipt at the customer’s dock, or removal from consignment inventory at the customer’s location, in an amount that reflects the consideration we expect to be entitled to receive in exchange for those goods. ​ Accounts Receivable and Allowance for Doubtful Accounts ​ Accounts receivable are recorded at the invoiced amount and are not interest bearing. We review at least quarterly, or when there are changes in credit risks, the likelihood of collection on our accounts receivable balances and provide an allowance for doubtful accounts receivable for any expected credit losses primarily based upon the age of these accounts. We evaluate receivables from U.S. customers with an emphasis on balances in excess of 90 days and for receivables from customers located outside the U.S. with an emphasis on balances in excess of 120 days and establish a reserve allowance on the receivable balances if needed. The reason for the difference in the evaluation of receivables between foreign and U.S. customers is that U.S. customers have historically made payments in a shorter period of time than foreign customers. Foreign business practices generally require us to allow customer payment terms that are longer than those accepted in the United States. We assess the probability of collection based on a number of factors, including the length of time a receivable balance has been outstanding, our past history with the customer and their credit-worthiness. ​ We exercise judgment when determining the adequacy of our reserves as we evaluate historical bad debt trends, general economic conditions in the United States and internationally, and changes in customer financial conditions. 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 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. 34 Table of Contents ​ Historically, our allowance for sales returns reserve was deducted from gross accounts receivable. 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 September 30, 2020 and December 31, 2019, the balance was $92,000 and $26,000, respectively. ​ Warranty Reserve ​ We maintain a product warranty based upon our claims experience during the prior twelve months and any pending claims and returns of which we are aware. Warranty costs are accrued at the time revenue is recognized. 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. ​ Inventory Valuation ​ Inventories are stated at the lower of cost (approximated by standard cost) or net realizable value. Cost is determined using the weighted-average cost method. Our inventory consists of raw materials as well as finished goods and work in process that include material, labor and manufacturing overhead costs. 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 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. ​ Impairment of Investments ​ We classify marketable investments in debt securities as available-for-sale debt securities in accordance with ASC Topic 320, Investments - Debt Securities . All available-for-sale debt securities with a quoted market value below cost (or adjusted cost) are reviewed in order to determine whether the decline is other-than-temporary. 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. We also 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 expected credit losses or impairment would be necessary. ​ We also invest in equity instruments of privately-held companies in China for business and strategic purposes. Investments in our unconsolidated joint venture companies are classified as other assets and accounted for under either the equity or cost method, depending on whether we have the ability to exercise significant influence over their operations or financial decisions. We monitor our investments for impairment and record reductions in carrying value when events or changes in circumstances indicate that the carrying value may not be recoverable. Determination of impairment is highly subjective and is based on a number of factors, including an assessment of the strength of each company’s management, the length of time and extent to which the fair value has been less than our cost basis, the financial condition and near-term prospects of the company, fundamental changes to the business prospects of the company, share prices of subsequent offerings, and our intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in our carrying value. ​ For the year ended December 31, 2019, we recorded an impairment charge of $1.1 million for a germanium materials company in China in which we have a 25% ownership interest. After receiving such company’s preliminary first quarter 2019 financial results in early April 2019 and its projections for significant losses going forward, we determined that this asset was fully impaired and wrote the asset balance down to zero. Except as mentioned above, there 35 Table of Contents 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 ​ ASC 820, establishes three levels of inputs that may be used to measure fair value. ​ Level 1 instruments represent quoted prices in active markets. Therefore, determining fair value for Level 1 instruments does not require significant management judgment, and the estimation is not difficult. ​ Level 2 instruments include observable inputs other than Level 1 prices, such as quoted prices for identical instruments in markets with insufficient volume or infrequent transactions (less active markets), issuer bank statements, credit ratings, non-binding market consensus prices that can be corroborated with observable market data, model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated with observable market data for substantially the full term of the assets or liabilities, or quoted prices for similar assets or liabilities. These Level 2 instruments require more management judgment and subjectivity compared to Level 1 instruments, including: ​ ● Determining which instruments are most comparable to the instrument being priced requires management to identify a sample of similar securities based on the coupon rates, maturity, issuer, credit rating, and instrument type, and subjectively select an individual security or multiple securities that are deemed most similar to the security being priced. ​ ● Determining which model-derived valuations to use in determining fair value requires management judgment. When observable market prices for similar securities or similar securities are not available, we price our marketable debt instruments using non-binding market consensus prices that are corroborated with observable market data or pricing models, such as discounted cash flow models, with all significant inputs derived from or corroborated with observable market data. ​ Level 3 instruments include unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities. The determination of fair value for Level 3 instruments requires the most management judgment and subjectivity. ​ We place short-term foreign currency hedges that are intended to offset the potential cash exposure related to fluctuations in the exchange rate between the United States dollar and Japanese yen. We measure the fair value of these foreign currency hedges at each month end and quarter end using current exchange rates and in accordance with generally accepted accounting principles. At quarter end any foreign currency hedges not settled are netted in “Accrued liabilities” on the condensed consolidated balance sheet and classified as Level 3 assets and liabilities. As of 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 ​ We evaluate the recoverability of property, equipment and intangible assets in accordance with ASC Topic 360, Property, Plant and Equipment. When events and circumstances indicate that long-lived assets may be impaired, we compare the carrying value of the long-lived assets to the projection of future undiscounted cash flows attributable to these assets. In the event that the carrying value exceeds the future undiscounted cash flows, we record an impairment charge against income equal to the excess of the carrying value over the assets’ fair value. Fair values are determined based on quoted market values, discounted cash flows or internal and external appraisals, as applicable. Assets held for 36 Table of Contents 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 September 30, 2020 and December 31, 2019. ​ Stock-based Compensation ​ We account for stock-based compensation in accordance with ASC Topic 718, Stock-based Compensation . Share-based awards granted include stock options and restricted stock awards. We utilize the Black-Scholes option pricing model to estimate the grant date fair value of stock options, which requires the input of highly subjective assumptions, including estimating stock price volatility and expected term. Historical volatility of our stock price was used while the expected term for our options was estimated based on historical option exercise behavior and post-vesting forfeitures of options, and the contractual term, the vesting period and the expected term of the outstanding options. Further, we apply an expected forfeiture rate in determining the amount of share-based compensation. We use historical forfeitures to estimate the rate of future forfeitures. Changes in these inputs and assumptions can materially affect the measure of estimated fair value of our stock compensation. The cost of restricted stock awards is determined using the fair value of our common stock on the date of grant. We recognize the compensation costs net of an estimated forfeiture rate over the requisite service period of the options award, which is generally the vesting term of four years. Compensation expense for restricted stock awards is recognized over the vesting period, which is generally one, three or four years. Stock-based compensation expense is recorded in cost of revenue, research and development, and selling, general and administrative expenses. Income Taxes ​ 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. ASC 740 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that a portion of the deferred tax asset will not be realized. Our deferred tax assets have been reduced to zero by valuation allowance. ​ We provide for income taxes based upon the geographic composition of worldwide earnings and tax regulations governing each region, particularly China. The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws, particularly in foreign countries such as China. ​ See Note 14—“Income Taxes” in the notes to condensed consolidated financial statements for additional information. ​ Change in Accounting Estimate – Useful Life of Equipment and Facilities ​ From time to time we review our estimates of the useful lives of our property, plant and equipment. As a result of the review, we determined a portion of our manufacturing equipment was lasting longer than the estimate previously established for the respective useful lives. Where appropriate, we extended the useful life of the manufacturing equipment in our accounting records. 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 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 ​ In March 2020, the World Health Organization declared the outbreak of COVID-19 to be a pandemic, which continues to be spread throughout the world. In March 2020, the President of the United States declared the COVID-19 outbreak a national emergency. For much of the three months ended March 31, 2020, our manufacturing facilities in 37 Table of Contents China were operating at reduced staffing levels to limit the risk of COVID-19 exposure for our employees. The Chinese government mandates have evolved, allowing us to return to full staffing levels at all three manufacturing locations in China. We are unable to accurately predict the full impact of the COVID-19 pandemic due to numerous uncertainties, including the severity of the disease, the duration of the outbreak, the 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 until the COVID-19 pandemic subsides and related public health measures are reduced or eliminated. ​ Results of Operations ​ Revenue ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ ​ ​ ​ ​ ​ Nine Months Ended ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, ​ Increase ​ ​ ​ ​ September 30, ​ Increase ​ ​ ​ ​ ​ ​ 2020 2019 ​ (Decrease) % Change ​ 2020 2019 (Decrease) % Change ​ Product Type: ​ ($ in thousands) ​ ​ ​ ​ ​ ​ ​ ($ in thousands) ​ ​ ​ ​ ​ ​ ​ Substrates ​ $ 20,311 ​ $ 15,959 ​ $ 4,352 27.3 % ​ $ 54,066 ​ $ 53,324 ​ $ 742 1.4 % ​ Raw materials and other ​ ​ 5,158 ​ ​ 3,882 ​ ​ 1,276 32.9 % ​ ​ 14,260 ​ ​ 11,522 ​ ​ 2,738 23.8 % ​ Total revenue ​ $ 25,469 ​ $ 19,841 ​ $ 5,628 ​ 28.4 % ​ $ 68,326 ​ $ 64,846 ​ $ 3,480 ​ 5.4 % ​ ​ 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 $14.3 million for the nine months ended September 30, 2020 as compared to the same period in 2019. The raw materials revenue increase for the nine months ended September 30, 2020 as compared to the same period in 2019 was primarily the result of an increase in sales of refined gallium and pBN crucibles resulting from stronger market demand. ​ 38 Table of Contents Revenue by Geographic Region ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, ​ Increase ​ ​ ​ ​ ​ 2020 2019 (Decrease) % Change ​ ​ ​ ($ in thousands) ​ ​ ​ ​ ​ ​ ​ China ​ $ 10,568 ​ $ 5,117 ​ $ 5,451 106.5 % ​ % of total revenue ​ 41 % 26 % ​ ​ ​ ​ ​ ​ Taiwan ​ 3,333 ​ 4,399 ​ ​ (1,066) ​ (24.2) % ​ % of total revenue ​ 13 % 22 % ​ ​ ​ ​ ​ ​ Japan ​ ​ 2,233 ​ ​ 1,339 ​ 894 66.8 % ​ % of total revenue ​ 9 % 7 % ​ ​ ​ ​ ​ ​ Asia Pacific (excluding China, Taiwan and Japan) ​ 1,446 ​ 2,234 ​ (788) (35.3) % ​ % of total revenue ​ 6 % 11 % ​ ​ ​ ​ ​ ​ Europe (primarily Germany) ​ 4,689 ​ 4,737 ​ (48) (1.0) % ​ % of total revenue ​ 18 % 24 % ​ ​ ​ ​ ​ ​ North America (primarily the United States) ​ ​ 3,200 ​ ​ 2,015 ​ ​ 1,185 ​ 58.8 % ​ % of total revenue ​ ​ 13 % ​ 10 % ​ ​ ​ ​ ​ ​ Total revenue ​ $ 25,469 ​ $ 19,841 ​ $ 5,628 28.4 % ​ ​ 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 North America increased by $1.2 million due to higher demand for our InP wafer substrates partially offset by lower demand for our GaAs wafer substrates. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, ​ Increase ​ ​ ​ ​ ​ 2020 2019 (Decrease) % Change ​ ​ ​ ($ in thousands) ​ ​ ​ ​ ​ ​ ​ China ​ $ 23,045 ​ $ 21,870 ​ $ 1,175 5.4 % ​ % of total revenue ​ 34 % 34 % ​ ​ ​ ​ ​ ​ Taiwan ​ 12,908 ​ 12,062 ​ 846 7.0 % ​ % of total revenue ​ 19 % 19 % ​ ​ ​ ​ ​ ​ Japan ​ 5,265 ​ 4,641 ​ 624 13.4 % ​ % of total revenue ​ 8 % 7 % ​ ​ ​ ​ ​ ​ Asia Pacific (excluding China, Taiwan and Japan) ​ 4,503 ​ 6,156 ​ (1,653) (26.9) % ​ % of total revenue ​ 6 % 9 % ​ ​ ​ ​ ​ ​ Europe (primarily Germany) ​ ​ 15,017 ​ ​ 13,752 ​ ​ 1,265 ​ 9.2 % ​ % of total revenue ​ ​ 22 % ​ 21 % ​ ​ ​ ​ ​ ​ North America (primarily the United States) ​ 7,588 ​ 6,365 ​ 1,223 19.2 % ​ % of total revenue ​ 11 % 10 % ​ ​ ​ ​ ​ ​ Total revenue ​ $ 68,326 ​ $ 64,846 ​ $ 3,480 5.4 % ​ ​ 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 39 Table of Contents 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 $1.2 million primarily due to increased demand for our InP wafer substrates partially offset by lower demand for our GaAs wafer substrates. ​ Gross Margin ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ ​ ​ ​ ​ ​ Nine Months Ended ​ ​ ​ ​ ​ ​ ​ ​ September 30, ​ Increase ​ ​ ​ ​ September 30, ​ Increase ​ ​ ​ ​ ​ 2020 2019 (Decrease) % Change ​ ​ 2020 2019 (Decrease) % Change ​ ​ ​ ($ in thousands) ​ ​ ​ ​ ​ ​ ​ ($ in thousands) ​ ​ ​ ​ ​ ​ ​ Gross profit $ 8,823 ​ $ 5,759 ​ $ 3,064 53.2 % ​ $ 21,113 ​ $ 20,960 ​ $ 153 0.7 % ​ Gross Margin % 34.6 % 29.0 % ​ ​ ​ ​ ​ ​ 30.9 % 32.3 % ​ ​ ​ ​ ​ ​ ​ 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 $21.0 million for the nine months ended September 30, 2019. The increase in gross profit is attributed to higher revenue partially offset by a change in product mix and less efficient manufacturing yields in the first half of the year as a result of the relocation process. ​ Selling, General and Administrative Expenses ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ ​ ​ ​ ​ ​ Nine Months Ended ​ ​ ​ ​ ​ ​ ​ ​ September 30, ​ Increase ​ ​ ​ ​ September 30, ​ Increase ​ ​ ​ ​ ​ 2020 2019 (Decrease) % Change ​ ​ 2020 2019 (Decrease) % Change ​ ​ ​ ($ in thousands) ​ ​ ​ ​ ​ ​ ​ ($ in thousands) ​ ​ ​ ​ ​ ​ ​ Selling, general and administrative expenses $ 4,623 ​ $ 4,755 ​ $ (132) (2.8) % ​ $ 14,119 ​ $ 14,247 ​ $ (128) (0.9) % ​ % of total revenue 18.2 % 24.0 % ​ ​ ​ ​ ​ ​ 20.7 % 22.0 % ​ ​ ​ ​ ​ ​ ​ 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 $14.2 million for the nine months ended September 30, 2019. The lower selling, general and administrative expenses were primarily from lower licensing fees, lower professional service-related expenses and reduced travel-related expenses driven by the COVID-19 pandemic partially offset by higher personnel-related expenses, outside commissions and legal expenses. ​ Research and Development ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ ​ ​ ​ ​ ​ Nine Months Ended ​ ​ ​ ​ ​ ​ ​ ​ September 30, ​ Increase ​ ​ ​ ​ September 30, ​ Increase ​ ​ ​ ​ ​ 2020 2019 (Decrease) % Change ​ ​ 2020 2019 (Decrease) % Change ​ ​ ​ ($ in thousands) ​ ​ ​ ​ ​ ​ ​ ($ in thousands) ​ ​ ​ ​ ​ ​ ​ Research and development $ 2,023 ​ $ 1,482 ​ $ 541 36.5 % ​ $ 4,973 ​ $ 4,227 ​ $ 746 17.6 % ​ % of total revenue 7.9 % 7.5 % ​ ​ ​ ​ ​ ​ 7.3 % 6.5 % ​ ​ ​ ​ ​ ​ 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. 40 Table of Contents ​ Research and development expenses increased $746,000, or 17.6%, to $5.0 million for the nine months ended September 30, 2020 from $4.2 million for the nine months ended September 30, 2019. The increase in research and development expenses for the nine months ended September 30, 2020 was primarily due to higher development expenses of new features for certain of our GaAs and InP wafer substrates, product testing and personnel-related expenses partially offset by lower facility-related expenses. ​ Interest Income (Expense), Net ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ ​ ​ ​ ​ ​ Nine Months Ended ​ ​ ​ ​ ​ ​ ​ ​ September 30, ​ Increase ​ ​ ​ ​ September 30, ​ Increase ​ ​ ​ ​ ​ 2020 2019 (Decrease) % Change ​ ​ 2020 2019 (Decrease) % Change ​ ​ ​ ($ in thousands) ​ ​ ​ ​ ​ ​ ​ ($ in thousands) ​ ​ ​ ​ ​ ​ ​ Interest income (expense), net $ (70) ​ $ 41 ​ $ (111) (270.7) % ​ $ (138) ​ $ 215 ​ $ (353) (164.2) % ​ % of total revenue (0.3) % 0.2 % ​ ​ ​ ​ ​ ​ (0.2) % 0.3 % ​ ​ ​ ​ ​ ​ ​ 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 $353,000 or 164.2% for the nine months ended September 30, 2020 as compared to the same period in 2019. Interest income (expense), net decreased primarily due to significantly lower interest rates resulting from the economic impact of the pandemic and interest expense incurred by Tongmei under the credit facility. ​ Equity in Income (Loss) of Unconsolidated Joint Ventures ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ ​ ​ ​ ​ ​ Nine Months Ended ​ ​ ​ ​ ​ ​ ​ ​ September 30, ​ Equity in Income (Loss) ​ ​ September 30, ​ Equity in Loss ​ ​ ​ 2020 2019 Change % Change ​ ​ 2020 2019 Change % Change ​ ​ ​ ($ in thousands) ​ ​ ​ ​ ​ ​ ​ ($ in thousands) ​ ​ ​ ​ ​ ​ ​ Equity in income (loss) of unconsolidated joint ventures $ 45 ​ $ (204) ​ $ 249 122.1 % ​ $ (243) ​ $ (1,650) ​ $ (1,407) (85.3) % ​ % of total revenue 0.2 % (1.0) % ​ ​ ​ ​ ​ ​ (0.4) % (2.5) % ​ ​ ​ ​ ​ ​ ​ 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 $1.1 million for a germanium materials company in China in which we have a 25% ownership interest (See Note 7) and the poor financial results of two raw gallium companies. ​ 41 Table of Contents Other Income (Expense), Net ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ ​ ​ ​ ​ ​ Nine Months Ended ​ ​ ​ ​ ​ ​ ​ ​ September 30, ​ Other Income (Expense) ​ ​ September 30, ​ Other Income (Expense) ​ ​ ​ 2020 2019 Change % Change ​ ​ 2020 2019 Change % Change ​ ​ ​ ($ in thousands) ​ ​ ​ ​ ​ ​ ​ ($ in thousands) ​ ​ ​ ​ ​ ​ ​ Other income (expense), net $ (34) ​ $ 169 ​ $ (203) ​ (120.1) % ​ $ 2,940 ​ $ (55) ​ $ 2,995 5,445.5 % ​ % of total revenue (0.1) % 0.9 % ​ ​ ​ ​ ​ ​ 4.3 % (0.1) % ​ ​ ​ ​ ​ ​ ​ 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 $3.0 million received from a Chinese provincial government agency as an award for relocating to its province. ​ Provision for Income Taxes ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ ​ ​ ​ ​ ​ Nine Months Ended ​ ​ ​ ​ ​ ​ ​ ​ September 30, ​ Increase ​ ​ ​ ​ September 30, ​ Increase ​ ​ ​ ​ ​ 2020 2019 (Decrease) % Change ​ 2020 2019 (Decrease) % Change ​ ​ ​ ($ in thousands) ​ ​ ​ ​ ​ ​ ​ ($ in thousands) ​ ​ ​ ​ ​ ​ ​ Provision for income taxes $ 637 ​ $ 23 ​ $ 614 2,669.6 % ​ $ 1,923 ​ $ 776 ​ $ 1,147 147.8 % ​ % of total revenue 2.5 % 0.1 % ​ ​ ​ ​ ​ ​ 2.8 % 1.2 % ​ ​ ​ ​ ​ ​ ​ 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. operations as the income in the U.S. had been fully offset by utilization of federal and state net operating loss carryforwards. Additionally, there is uncertainty of generating future profit in the U.S., which has resulted in our deferred tax assets being fully reserved. Our estimated tax rate can vary greatly from year to year because of the change or benefit in the mix of taxable income between our U.S. and China-based operations. Due to our uncertainty regarding our future profitability in the U.S., we recorded a full valuation allowance against our net deferred tax assets of $20 million in 2019, $20 million in 2018 and $22 million in 2017. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was passed into law. The CARES Act includes several significant business tax provisions, including modification to the taxable income limitation for utilization of net operating losses (“NOLs”) incurred in 2018, 2019 and 2020 and the ability to carry back NOLs from those years for a period of up to five years, an increase to the limitation on deductibility of certain business interest expense, bonus depreciation for purchases of qualified improvement property, and special deductions on certain corporate charitable contributions. We analyzed the provisions of the CARES Act and determined there was no effect on our provision for income taxes for the current period and will continue to evaluate the impact, if any, the CARES Act may have on the Company’s condensed consolidated financial statements and disclosures. ​ On June 29, 2020, California Governor Gavin Newsom signed Assembly Bill 85 (“AB 85”) into law as part of the California 2020 Budget Act, which temporarily suspends the use of California net operating losses and imposes a cap on the amount of business incentive tax credits that companies can utilize against their net income for tax years 2020, 2021, and 2022. We analyzed the provisions of AB 85 and determined there was no impact on our provision for income taxes for the current period and will continue to evaluate the impact, if any, AB 85 may have on the Company’s condensed consolidated financial statements and disclosures. 42 Table of Contents ​ Net Income Attributable to Noncontrolling Interests ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Net income attributable to ​ ​ Nine Months Ended ​ Net income attributable to ​ ​ ​ September 30, Noncontrolling interests ​ ​ September 30, Noncontrolling interests ​ ​ ​ 2020 ​ 2019 ​ Increase ​ % Change ​ ​ 2020 ​ 2019 ​ Increase ​ % Change ​ ​ ​ ($ in thousands) ​ ​ ​ ​ ​ ​ ​ ($ in thousands) ​ ​ ​ ​ ​ ​ ​ Net income attributable to noncontrolling interests $ 490 ​ $ 403 ​ $ 87 21.6 % ​ $ 1,483 ​ $ 771 ​ $ 712 92.3 % ​ % of total revenue 1.9 % 2.0 % ​ ​ ​ ​ ​ ​ 2.2 % 1.2 % ​ ​ ​ ​ ​ ​ ​ 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 ​ We consider cash and cash equivalents and short-term investments as liquid and available for use within one year in our current operations. Short-term investments are comprised of U.S. government securities, certificates of deposit and investment-grade corporate notes and bonds. ​ 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. ​ 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 43 Table of Contents 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. These repurchases could be made from time to time in the open market and could be funded from our existing cash balances and cash generated from operations. During 2015, we repurchased approximately 908,000 shares at an average price of $2.52 per share for a total purchase price of approximately $2.3 million under the stock repurchase program. Since 2015, no shares were repurchased 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. ​ Dividends accrue on our outstanding Series A preferred stock, and are payable as and when declared by our board of directors. We have never declared or paid any dividends on the Series A preferred stock. By the terms of the Series A preferred stock, so long as any shares of Series A preferred stock are outstanding, neither the Company nor any subsidiary of the Company shall redeem, repurchase or otherwise acquire any shares of common stock, unless all accrued dividends on the Series A preferred stock have been paid. During 2013 and 2015, we repurchased shares of our outstanding common stock. As of December 31, 2015, the Series A preferred stock had cumulative dividends of $2.9 million and we include such cumulative dividends in “Accrued liabilities” in our condensed consolidated balance sheets . At the time we pay this accrued liability, our cash and cash equivalents will be reduced. We account for the cumulative year to date dividends on the Series A preferred stock when calculating our earnings per share. ​ The Beijing city government is moving its offices into the area where our original manufacturing facility is currently located and is in the process of moving thousands of government employees into this area. The government has constructed showcase tower buildings and overseen the establishment of new apartment complexes, retail stores and restaurants. An amusement park is being constructed within a few miles of our facility. To create room and upgrade the district, the city instructed virtually all existing manufacturing companies, including AXT, to relocate all or some of their manufacturing lines. ​ 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 44 Table of Contents 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. Our key focus now is transferring volume production of the wafer processing steps for gallium arsenide to Dingxing. This process is ongoing. We expect to spend approximately $5 million in capital expenditures for our gallium arsenide manufacturing line in 2020 and are considering additional investments in our indium phosphide manufacturing line. One of our wholly-owned subsidiaries, JinMei, is in the process of relocating its manufacturing operations to Kazuo, very near our own location. Currently, JinMei expects to invest approximately $3.0 million to $3.5 million related to the new facilities in 2020. In July 2017, our wholly-owned subsidiary, Tongmei, provided an inter-company loan to JinMei in the amount of $768,000 in preparation for the acquisition of the land use rights and the construction of a new building. The inter-company loan carries an interest rate of 4.9% per annum and is due on June 30, 2023. 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. ​ On November 6, 2018, the Company entered into a Credit Agreement, which established a $10 million secured revolving line of credit with a $1.0 million letter of credit sublimit facility. The revolving credit facility is collateralized by substantially all of the assets of the Company located within the United States, subject to certain exceptions. The commitments under the Credit Agreement expire on November 30, 2020 and any loans thereunder will bear interest at a rate based on the daily one-month 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. 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. 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 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 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. ​ Tongmei initially borrowed $2.8 million against the credit facility. 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 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. ​ 45 Table of Contents 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 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. The primary intended use of the credit facility is for general purposes, which may include working capital and other corporate expenses. ​ In March 2020, BoYu borrowed $0.4 million against the credit facility. The repayment of the full amount is due in March 2021. 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. If our sales decrease, however, our ability to generate cash from operations will be adversely affected which could adversely affect our future liquidity, require us to use cash at a more rapid rate than expected, and require us to seek additional capital. Cash from operations could be affected by various risks and uncertainties, including, but not limited to those set forth below under Item 1A “Risk Factors”. ​ Contract to Purchase Goods and Services ​ Purchase orders or contracts for the purchase of certain goods and services are not considered to be part of our contractual obligations. We cannot determine the aggregate amount of such purchase orders that represent contractual obligations because purchase orders may represent authorizations to purchase rather than binding agreements. For the purposes of this disclosure, contractual obligations for purchase of goods or services are defined as agreements that are enforceable and legally binding and that specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction. Our purchase orders are based on our current needs and are fulfilled by our vendors within short time horizons. We also enter into contracts for outsourced services; however, the obligations under these contracts were not significant and the contracts generally contain clauses allowing for cancellation without significant penalty. Contractual obligations that are contingent upon the achievement of certain milestones would also not be included. ​ Land Purchase and Investment Agreement We have established a wafer processing production line in Dingxing, China. In addition to a land rights and building purchase agreement that we entered into with a private real estate development company to acquire our new manufacturing facility, we also entered into a cooperation agreement with the Dingxing local government. In addition to pledging its full support and cooperation, the Dingxing local government will issue certain tax credits to us as we achieve certain milestones. We, in turn, agreed to hire local workers over time, pay taxes when due and eventually demonstrate a total investment of approximately $90 million in value, assets and capital. The investment will include cash paid for the land and buildings, cash on deposit in our name at local banks, the gross value of new and used equipment (including future equipment that might be used for indium phosphide and germanium substrates production), the deemed value for our customer list or the end user of our substrates (for example, the end users of the 3-D sensing VCSELs), a deemed value for employment of local citizens, a deemed value for our proprietary process technology, other intellectual property, other intangibles and additional items of value. There is no timeline or deadline by which this must be accomplished, rather it is a good faith covenant entered into between AXT and the Dingxing local government. Further, there is no specific penalty contemplated if either party breaches the agreement. 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. We believe that such cooperation agreements are normal, customary and usual in China and that the future valuation is flexible. We have a similar agreement with the city of Kazuo, China, although on a smaller scale. The total investment targeted by AXT in Kazuo is approximately $15 million in value, assets and capital. In addition, BoYu has a similar agreement with the city of Kazuo. The total investment targeted by BoYu in Kazuo is approximately $8 million in value, assets and capital. ​ 46 Table of Contents Off-Balance Sheet Arrangements ​ 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 ​ For a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our condensed consolidated financial statements, please see “Note 18 - Recent Accounting Pronouncements” in the Notes to Condensed Consolidated Financial Statements of this Form 10-Q. ​ ​ 47 Table of Contents ITEM 3 . QUANTITATIVE AND QUALITATIV E DISCLOSURES ABOUT MARKET RISK ​ Foreign Currency Risk ​ A significant portion of our business is conducted in currencies other than the U.S. dollar. Foreign exchange losses have had a material adverse effect on our operating results and cash flows in the past and could have a material adverse effect on our operating results and cash flows in the future. If we do not effectively manage the risks associated with this currency risk, our revenue, cash flows and financial condition could be adversely affected. Although during 2019 and 2018, we recorded a foreign exchange gain of $321,000 and $165,000, respectively, during 2017 we recorded net foreign exchange loss of $602,000, included as part of other (expense) income, net in our consolidated statements of operations. We incur foreign currency transaction exchange gains and losses due to operations in general. In the future we may experience foreign exchange losses on our non-functional currency denominated receivables and payables to the extent that we have not mitigated our exposure. Foreign exchange losses could have a materially adverse effect on our operating results and cash flows. ​ Our product sales to Japanese customers are typically invoiced in Japanese yen. As such, we have foreign exchange exposure on our accounts receivable and on any Japanese yen denominated cash deposits. To partially protect us against fluctuations in foreign currency resulting from accounts receivable in Japanese yen, starting in 2015, we instituted a foreign currency hedging program. We place short term hedges that are intended to offset the potential cash exposure related to fluctuations in the exchange rate between the United States dollar and Japanese yen. We measure the fair value of these hedges at each month end and quarter end using current exchange rates and in accordance with generally accepted accounting principles. 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 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. Most of our operations are conducted in China and most of our costs are incurred in Chinese renminbi, which subjects us to fluctuations in the exchange rates between the U.S. dollar and the Chinese renminbi. We incur transaction gains or losses resulting from consolidation of expenses incurred in local currencies for our Chinese subsidiaries, as well as in translation of the assets and liabilities at each balance sheet date. Our financial results could be adversely affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets, including the revaluation by China of the renminbi, and any future adjustments that China may make to its currency such as any move it might make to a managed float system with opportunistic interventions. We may also experience foreign exchange losses on our non-functional currency denominated receivables and payables. ​ We currently are using a hedging program to minimize the effects of currency fluctuations relating to the Japanese yen. While we may apply this program to other currencies, such as the Chinese renminbi, our hedging position is partial and may not exist at all in the future. It may not succeed in minimizing our foreign currency fluctuation risks. Our primary objective in holding these instruments is to reduce the volatility of earnings and cash flows associated with changes in foreign currency. The program is not designated for trading or speculative purposes. The company may choose not to hedge certain foreign exchange exposures for a variety of reasons, including but not limited to accounting considerations and the prohibitive economic cost of hedging particular exposures. However, even with our hedging program, we still experience losses on foreign exchange from time to time. ​ 48 Table of Contents Interest Rate Risk ​ Cash and cash equivalents earning interest and certain variable rate debt instruments are subject to interest rate fluctuations. The following table sets forth the probable impact of a 10% change in interest rates (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Proforma 10% Proforma 10% ​ ​ Balance as of ​ Current ​ Projected Annual ​ Interest Rate ​ Interest Rate ​ ​ September 30, ​ Interest ​ Interest ​ Decline ​ Increase Instrument ​ 2020 ​ Rate ​ Income ​ Income ​ Income Cash and cash equivalents ​ $ 22,384 0.20 % $ 45 ​ $ 41 ​ $ 50 ​ Investments in marketable debt ​ 7,389 1.44 % 106 ​ 95 ​ 117 ​ ​ ​ ​ ​ ​ ​ ​ $ 151 ​ $ 136 ​ $ 167 ​ ​ The primary objective of our investment activities is to preserve principal while maximizing income without significantly increasing risk. Financial instruments that potentially subject us to concentration of credit risk consist primarily of cash and cash equivalents, short-term investments, and trade accounts receivable. We invest primarily in money market accounts, certificates of deposits, corporate bonds and notes, and government securities. We are exposed to credit risks in the event of default by the issuers to the extent of the amount recorded on the condensed consolidated balance sheets. These securities are generally classified as available-for-sale and consequently are recorded on the balance sheet at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income (loss), net of estimated tax, further reduced by a valuation allowance for expected credit losses, if any. Our cash, cash equivalents and short-term investments and long-term investments are in high-quality instruments placed with major banks and financial institutions and commercial paper. We have no investments in auction rate securities. ​ Credit Risk ​ We perform ongoing credit evaluations of our customers’ financial condition, and limit the amount of credit extended when deemed necessary, but generally do not require collateral. The credit risk in our accounts receivable is mitigated by our credit evaluation process and the broad dispersion of sales transactions. 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. ​ Equity Risk ​ 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. These minority investments are reviewed for other than temporary declines in value on a quarterly basis. These investments are classified as other assets in the condensed consolidated balance sheets and accounted for under either the equity or cost method, depending on whether we have the ability to exercise significant influence over their operations or financial decisions. We monitor our investments for impairment and record reductions in carrying value when events or changes in circumstances indicate that the carrying value may not be recoverable. Reasons for other than temporary declines in value include whether the related company would have insufficient cash flow to operate for the next twelve months, significant changes in the operating performance and changes in market conditions. 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 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. ​ 49 Table of Contents