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Item 5. Market for Registrant’s Common Equity

2021-03-23 compared with 2020-03-12 · 8 added, 474 removed, 59 unchanged (89% of the section changed)

Market for Registrant’s Common Equity, Related Stockhol der Matters and Issuer Purchases of Equity Securities

Our common stock has been trading publicly on the NASDAQ Global Market (NASDAQ) under the symbol “AXTI”

since May 20, 1998, the date we consummated our initial public offering, and beginning on January 3, 2011, our common stock began trading on the NASDAQ Global Select Market under the same symbol.

Market for Registrant’s Common Equity, Related Stockhol der Matters and Issuer Purchases of Equity Securities

Our common stock has been trading publicly on the NASDAQ Global Market (NASDAQ) under the symbol “AXTI” since May 20, 1998, the date we consummated our initial public offering, and beginning on January 3, 2011, our common stock began trading on the NASDAQ Global Select Market under the same symbol.

The following table sets forth the range of high and low sales prices of the common stock for the periods indicated, as reported by NASDAQ.

8 unchanged sentences

As of March 4, 2021, there were 170 holders of record of our common stock.

Because many shares of AXT’s common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of beneficial owners of our common stock.

We have never paid or declared any cash dividends on our common stock and do not anticipate paying cash dividends in the foreseeable future.

6 unchanged sentences

During 2013 and 2015, we repurchased shares of our outstanding common stock.

As of December 31, 2015, the Series A preferred stock had cumulative dividends of $2.9 million and we include such cumulative dividends in “Accrued liabilities”

in our consolidated balance sheets .

As of December 31, 2015, the Series A preferred stock had cumulative dividends of $2.9 million and we include such cumulative dividends in “Accrued liabilities” in our consolidated balance sheets .

No shares were repurchased during 2020, 2019 and 2018 under this program.

15 unchanged sentences

See also Item 7.

“Management’s Discussion and Analysis of Financial Condition and Results of Operations”

for further information relating to items reflecting our results of operations and financial condition.

“Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further information relating to items reflecting our results of operations and financial condition.

Year Ended December 31,

8 unchanged sentences

Income (loss) from operations

Interest income, net

Equity in (loss) earnings of unconsolidated joint ventures

Interest income (expense), net

Equity in income (loss) of unconsolidated joint ventures

Other income (expense), net

12 unchanged sentences

Current liabilities

Stockholders’

Management’s Discussion and Analysis of Financial Condit ion and Results of Operations

In addition to historical information, the following discussion contains forward‑looking statements that are subject to risks and uncertainties.

Actual results may differ substantially from those referred to herein due to a number of factors, including but not limited to risks described in the section entitled Item 1A.

“Risk Factors”

and elsewhere in this Annual Report on Form 10-K.

This discussion should be read in conjunction with Item 6.

“Selected Consolidated Financial Data”

and our consolidated financial statements and related notes included elsewhere in this Form 10-K.

Critical Accounting Policies and Estimates

We prepare our 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 amounts reported on our 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 consolidated financial statements and require us to make difficult, subjective or complex judgments that could have a material effect on our financial condition 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.

We also refer you to Note 1 to our consolidated financial statements included elsewhere in this Form 10-K.

Revenue Recognition and Sales Returns

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.

As such, shipping and handling fees billed to customers in a sales transaction are recorded in revenue.

Shipping and handling costs incurred are recorded in cost of revenue.

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 accrue 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 and other related expenses are expensed as incurred, given that the expected period of benefit is less than one year.

On January 1, 2018, we adopted Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), and its related amendments, using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018.

The adoption of ASC 606, using the modified retrospective approach, had no significant impact to our accumulated deficit as of January 1, 2018 and no significant impact to the total net cash from or used in operating, investing, or financing activities within the consolidated statements of cash flows.

In connection with this adoption on January 1, 2018, we reclassified our refund liabilities relating to sales with a right of return in the amount of $169,000 to present it separately from “Accounts receivable”

and included it in “Accrued liabilities”

on the consolidated balance sheets.

As of December 31, 2019 and 2018, the balance was $26,000 and $47,000, respectively.

See Note 1 for the required disclosures related to the impact of adopting this standard.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivables are recorded at the invoiced amount and are not interest bearing.

We periodically review the likelihood of collection on our accounts receivable balances and provide an allowance for doubtful accounts receivable 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 the customer’s 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 all efforts to collect have been exhausted and recoveries are recognized when they are received.

As of December 31, 2019 and 2018, our accounts receivable, net balance was $19.0 million and $19.6 million, respectively, which was net of an allowance for doubtful accounts of $34,000 and $358,000 as of December 31, 2019 and 2018, respectively.

During 2019, the allowance for doubtful accounts decreased by $324,000 primarily due to the deconsolidation of Beijing JiYa Semiconductor Material Co., Ltd.

as of March 11, 2019.

There were no changes in the allowance for doubtful accounts in 2018.

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.

Warranty Reserve

We maintain a warranty reserve 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 December 31, 2019 and 2018, accrued product warranties totaled $387,000 and $236,000, 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 December 31, 2019 and 2018, we had an inventory reserve of $16.4 million and $14.8

million, respectively, for excess and obsolete inventory and $91,000 and $18,000, 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 and equity securities as available-for-sale securities in accordance with ASC Topic 320, Investments—Debt and Equity Securities .

All available-for-sale 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 invest in equity instruments of privately-held raw material 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 the subsidiary’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 subsidiary, fundamental changes to the business prospects of the subsidiary, 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.

For the year ended December 31, 2018, we had no impairment charges.

For the year ended December 31, 2017, we recorded an impairment charge of $313,000 for one of the gallium companies.

During the first quarter of 2017, management determined it unlikely that this company will recover from the difficult pricing environment and we wrote the investment down to zero.

Fair Value of Investments

ASC Topic 820, Fair Value Measurement 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 similar 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 consolidated balance sheet and classified as Level 3 assets and liabilities.

As of December 31, 2019 and 2018, 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.

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 such 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 asset’s fair value.

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

Assets held for sale are carried at the lower of carrying value or estimated net realizable value.

We had no “Assets held for sale”

or any impairment of long-lived assets on the consolidated balance sheets as of December 31, 2019 and 2018.

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.

(see Note 1—Summary of Significant Accounting Policies—Stock‑Based Compensation).

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 12—”Income Taxes”

in the consolidated financial statements for additional information.

Results of Operations

We were founded in 1986 to commercialize and enhance our proprietary vertical gradient freeze (VGF) technology for producing high-performance compound semiconductor substrates or wafers.

We have one operating segment and two product lines:

specialty material substrates and raw materials used to make such substrates or other related products.

We recorded our first substrate sales in 1990 and our substrate products currently include indium phosphide (InP), gallium arsenide (GaAs) and germanium (Ge) substrates used to produce semiconductor devices for use in applications such as fiber optic and wireless telecommunications, light emitting diodes (LEDs), lasers and for solar cells for space and terrestrial photovoltaic applications.

We also sell raw materials, including gallium and germanium, through our participation in majority‑ and minority‑owned subsidiaries and joint ventures.

Operating Results

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 (joint ventures).

We believe this supply chain arrangement provides us with pricing advantages, reliable supply and enhanced sourcing lead-times for key raw materials which are central to our final manufactured products.

Our annual revenue decreased in 2019 from $102.4 million in 2018 to $83.3 million in 2019.

This was a decrease of 18.7%.

For the years ended in 2018, 2017 and 2016 our revenue grew each year.

Our revenue increased in 2018 by 4% to $102.4 million, in 2017 by 21% to $98.7 million and in 2016 by 5% to $81.3 million.

Our gross margin declined in 2019 to 29.8%.

For the years ended in 2018, 2017 and 2016 our gross margin grew each year.

Gross margins improved to 36.2% of total revenue in 2018 from 34.9% of total revenue in 2017 and from 32.4% of total revenue in 2016.

During the four years from 2012 to 2015 our revenue declined, primarily as a result of the adoption of an alternative technology, SOI, which entered the market in 2011.

SOI enabled the RF switching chip in cell phones to function satisfactorily at a reduced cost.

Before 2011, silicon did not perform adequately in this function due to power consumption, heat and speed issues.

In 2014, our revenue from InP began to grow and, in 2014 and 2015, the InP annual growth rate exceeded 50% year on year.

This mitigated the reduction in revenue from gallium arsenide and enabled us to return to annual growth in 2016.

During this period, we believe our GaAs wafer business stabilized and our manufacturing yields improved.

Our outlook for GaAs wafer substrates today is positive, as it is for InP and Ge substrates.

The underlying end markets needing our wafer substrates are growing.

For example, InP wafer substrates are used for silicon photonics/data centers, passive optical networks and, more recently, 5G.

GaAs wafer substrates are used in LED lighting, industrial lasers and cell phones.

We are continuing to improve our six-inch low defect density or low EPD GaAs substrates that are required for 3D-sensing using VCSELs.

We believe the relocation of our GaAs manufacturing line will enable us to add capacity quickly for GaAs and InP in the future if market demands so require.

Years Ended Dec.

Product Type:

Raw materials and other

Total revenue

Revenue decreased $19.1 million, or 18.7% in 2019 from $102.4 million in 2018.

The $13.2 million decrease in wafer substrate sales was the result of weaker GaAs demand in LED sensors used in the automobile industry and the industrial sensor market.

In addition, GaAs sales into wireless applications decreased.

Revenue from Ge wafer substrates also decreased, primarily as a result of lower demand from our customers in China.

These decreases were partially offset by an increase in InP revenue.

The $6.0 million raw materials revenue decrease as compared to the same period in 2018 was primarily the result of the absence of revenue from raw gallium sales due to the deconsolidation of JiYa as of March 11, 2019.

In addition there was a reduction in shipments of purified gallium due to lower market demand.

Revenue increased $3.7 million, or 3.8% in 2018 from $98.7 million in 2017.

The $2.4 million increase in wafer substrate sales primarily came from growth of our InP and Ge wafer substrate sales in 2018, which is partially offset by a modest decrease of our GaAs wafer substrate sales as compared to the same period of 2017.

The $1.3 million increase in raw materials sales from our consolidated subsidiaries came from a 31% increase in raw gallium sales and a 28% increase in pBN sales as compared to 2017, which was partially offset by the decrease in purified gallium sales from one of our consolidated subsidiaries.

During 2018, the average selling prices of our wafer substrates decreased slightly.

The revenue increase was the result of higher unit volume in 2018 as compared to the same period in 2017.

Revenue by Geographic Region

Year Ended Dec.

($ in thousands)

% of total revenue

Europe (primarily Germany)

% of total revenue

North America (primarily the United States)

% of total revenue

Asia Pacific (excluding China, Taiwan and Japan)

% of total revenue

Total revenue

Sales to customers located outside of North America represented approximately 90%, 90% and 91% of our revenue during 2019, 2018 and 2017, respectively.

Revenue from customers in China decreased in 2019 by 14.9%, primarily due to lower demand for our Ge wafer substrates.

Revenue from customers in Europe decreased by 17.4%, primarily due to weaker demand for GaAs wafer substrates used in LED sensors for the automobile industry.

In addition, GaAs sales into wireless applications decreased.

Revenue from customers in Taiwan decreased in 2019 by 19.3%, primarily due to a softening of demand from InP customers and a slow-down in both LED and wireless applications using GaAs substrate wafers.

Revenue from customers in North America decreased by 17.9% as a result of lower demand for GaAs.

In addition revenue from one customer in Canada decreased as a result of weak demand from its primary optical device customer.

Revenue from customers in Asia Pacific decreased by 10.6% as a result of lower demand for GaAs wafers used to produce industrial sensors.

Revenue from customers in Japan decreased in 2019 by 39.3% as a result of lower demand for raw materials.

In addition, there was lower demand for GaAs used in wireless applications and there was an aggressive inventory reduction program at one of our customers.

Revenue from customers in China increased in 2018 by 26.2%, primarily due to an increase of $1.2 million, or 12%, from raw materials sales and an increase of $5.3 million, or 36%, from wafer substrate sales.

Sales of all three of our wafer substrate products in China increased in 2018.

Revenue from customers in Europe decreased by 8.1%, primarily due to a decrease of $1.6 million, or 75.5%, in gallium sales from our consolidated joint ventures and from a decrease of $0.7 million, or 3%, from wafer substrate sales.

Revenue from customers in Japan decreased in 2018 by 22.3% due to a decrease of $3.9 million in GaAs wafer substrate sales.

However, sales from InP and Ge wafer substrates and raw materials in Japan all increased in 2018 as compared to 2017.

Revenue from customers in Taiwan increased by 9.8%, primarily due to strong demand for InP substrates used in silicon photonics, specifically in data center expansions and upgrades.

Year Ended Dec.

($ in thousands)

Gross Margin %

Gross profit decreased $12.2 million in 2019 as compared to 2018.

Gross margin in 2019 was 29.8% as compared to 36.2% in 2018.

The decrease in gross profit is attributed to the lower sales volume in 2019 as compared to 2018.

In addition our manufacturing costs did not drop commensurately, particularly in GaAs.

Gross margin increased to 36.2% of total revenue in 2018 from 34.9% of total revenue in 2017.

Gross margin increased in 2018 as a result of an increase in gross margins from raw materials sales, particularly pBN crucibles, and InP wafer substrates offset by a slight decrease in gross margins from sales of GaAs wafer substrates.

Substrate gross margin slightly decreased to 36.2% of substrate revenue in 2018 from 37.4% of revenue in 2017 and raw materials gross margin increased to 36.2% of raw materials revenue in 2018 from 25.5% of raw materials revenue in 2017.

Gross profit increased primarily due to favorable substrate product mix, increased revenue and improvement in raw materials gross margin.

Selling, General and Administrative Expenses

Years Ended Dec.

($ in thousands)

Selling, general and administrative expenses

% of total revenue

Selling, general and administrative expenses increased $0.3 million, or 1.6%, to $19.3 million for 2019 compared to $19.0 million for 2018.

The higher selling, general and administrative expenses were primarily from higher

stock compensation expenses, VAT tax, legal expenses and consulting expenses related to our building construction in China which were partially offset by lower office supplies, facility and freight related expenses.

Selling, general and administrative expenses increased $2.0 million, or 11.7%, to $19.0 million for 2018 compared to $17.0 million for 2017.

The higher selling, general and administrative expenses were primarily from higher personnel-related costs from hiring additional staff in China in connection with the relocation of our gallium arsenide and germanium production lines and a new direct sales professional in Europe, higher travel expenses related to traveling for customer visits and to our new manufacturing sites and higher stock compensation expenses, which were partially offset by lower professional service fees and lower sales commission expense that resulted from the termination of our European sales representative.

Research and Development Expenses

Years Ended Dec.

($ in thousands)

Research and development

% of total revenue

Research and development expenses decreased $0.1 million, or 1.1%, to $5.8 million in 2019 from $5.9 million in 2018.

The decrease in research and development expenses in 2019 was primarily due to lower personnel costs in one of our consolidated subsidiaries which was partially offset by higher personnel-related costs in North America.

Research and development expenses increased $1.1 million, or 22.2%, to $5.9 million in 2018 from $4.8 million in 2017.

The increase in research and development expenses in 2018 was primarily due to the increased use of raw materials for product development programs, particularly for low EPD-related programs and for improving Ge performance specifications, higher personnel-related costs and higher depreciation expenses.

Interest Income, Net

Years Ended Dec.

($ in thousands)

Interest income, net

% of total revenue

Interest income, net decreased in 2019 as compared to the same period in 2018, primarily due to lower investment balances in 2019.

Interest income, net increased in 2018 as compared to the same period in 2017, primarily due to higher market interest rates.

Equity in Loss of Unconsolidated Joint Venture Companies

Years Ended Dec.

($ in thousands)

Equity in loss of unconsolidated joint ventures

% of total revenue

Equity in loss of unconsolidated joint ventures is the aggregate net loss from our minority-owned supply chain joint venture companies that are not consolidated.

Equity in loss of unconsolidated joint ventures increased $0.8 million to a loss of $1.9 million in 2019 from a loss of $1.1 million in 2018 as our unconsolidated joint ventures reported worse performance in 2019 as compared to 2018.

The loss in 2019 includes an impairment charge of $1.1 million from the germanium mining company in our raw material supply chain.

The decrease of $0.6 million in 2018 from 2017 resulted

from price increases of raw materials in 2018.

Further, there were no impairment charges in 2018 as compared to a charge of $313,000 in 2017.

Equity in loss of unconsolidated joint ventures decreased $0.6 million to a loss of $1.1 million in 2018 from a loss of $1.7 million in 2017 as our unconsolidated joint ventures reported better performance in 2018 as compared to 2017.

The loss in 2018 primarily came from a single minority-owned supply chain joint venture company that was required to temporarily shut down during the fourth quarter of 2018 to install manufacturing improvements mandated by a regional environmental agency.

This resulted in a $1.1 million charge in the fourth quarter and a cumulative loss of $1.4 million for this entity in 2018.

The decrease of $0.6 million in 2018 from 2017 resulted from price increases of raw materials in 2018.

Further, there were no impairment charges in 2018 as compared to a charge of $313,000 in 2017.

Other Income (expense), Net

Years Ended Dec.

($ in thousands)

Other income (expense), net

% of total revenue

Other income (expense), net increased $0.6 million to an income of $0.9 million for 2019 as compared to an income of $0.4 million in 2018, primarily due to compensation received from the China government by one of our consolidated subsidiaries for relocating their facility outside of Nanjing.

In addition, our Beijing facility received an economic stimulus grant.

Other income, net increased $0.9 million to an income of $0.4 million for 2018 as compared to a loss of $0.6 million in 2017, primarily due to a higher foreign exchange gain in 2018 as compared to 2017.

Provision for Income Taxes

Years Ended Dec.

($ in thousands)

Provision for income taxes

% of total revenue

Provision for income taxes for 2019 and 2018 were $0.6 million and $0.9 million, respectively, which were mostly related to our wholly owned subsidiary in China and our partially owned consolidated raw material companies.

No income taxes or benefits have been provided for 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.

Net (Income) Loss Attributable to Noncontrolling Interests

Years Ended Dec.

($ in thousands)

Net (income) loss attributable to noncontrolling interests

% of total revenue

The decrease in noncontrolling interests’

share of income for 2019 as compared to 2018 was due to lower profitability from one of our consolidated subsidiaries in China.

The increase in noncontrolling interests’

share of income for 2018 as compared to the 2017 was due to higher profitability from all of our consolidated subsidiaries in China.

Liquidity and Capital Resources

Year Ended December 31,

($ in thousands)

Net cash provided by (used in):

Operating activities

Investing activities

Financing activities

Effect of exchange rate changes

Net change in cash and cash equivalents

Cash and cash equivalents—beginning year

Cash and cash equivalents—end of year

Short and long-term investments—end of year

Total cash, cash equivalents and short-term and long-term investments

We consider cash and cash equivalents, short-term investments and long-term investments as liquid and available for use within two years in our current operations.

Short-term investments and long-term investments are comprised of money market accounts, certificates of deposit, corporate bonds and notes, and government securities.

As of December 31, 2019, we and our consolidated joint ventures held approximately $16.5 million in cash and investments in foreign bank accounts.

This consists of $15.1 million held by our wholly owned subsidiaries in China and $1.4 million held by our consolidated subsidiary in China.

Total cash and cash equivalents, short-term and long-term investments decreased by $3.1 million in 2019.

As of December 31, 2019, our principal source of liquidity was $36.3 million, which consisted of cash and cash equivalents of $26.9 million and short-term investments of $9.4 million.

In 2019, cash and cash equivalents increased by $10.4 million and short-term and long-term investments decreased by $13.4 million.

The increase in cash and cash equivalents of $10.4 million in 2019 was primarily due to net cash provided by operating activities of $12.7 million and financing activities of $6.2 million and partially offset by net cash used in investing activities of $8.3 million and the effect of exchange rate changes of $0.2 million.

Total cash and cash equivalents, short-term and long-term investments decreased by $37.6 million in 2018.

As of December 31, 2018, our principal source of liquidity was $39.4 million, which consisted of cash and cash equivalents of $16.5 million, short-term investments of $22.1 million and long-term investments of $0.7 million.

In 2018, cash and cash equivalents decreased by $27.8 million and short-term and long-term investments decreased by $9.8 million.

The decrease in cash and cash equivalents of $27.8 million in 2018 was primarily due to net cash used in investing activities of $30.8 million, primarily due to property, plant and equipment activities for the new manufacturing sites in China, and the effect of exchange rate changes of $0.4 million, and was partially offset by net cash provided by operating activities of $3.2 million and net cash provided by financing activities of $0.2 million.

Net cash provided by operating activities of $12.7 million for 2019 was primarily comprised of an adjustment of non-cash items of depreciation and amortization of $5.5 million, stock-based compensation of $2.3 million, impairment charge on equity investee of $1.1 million, loss on equity method investments of $1.0 million, return on equity method investments of $0.4 million, loss on disposal of equipment of $0.1 million, net change in operating assets and liabilities of $4.0 million offset in part by our net loss of $1.6 million and gain from deconsolidation of a subsidiary of $0.2 million.

The $4.0 million net change in operating assets and liabilities primarily resulted from a $8.9 million decrease in inventories, a $2.9 million decrease in prepaid expenses and other current assets, a $0.4 million decrease in accounts receivable, a $0.1 million increase in other long-term liabilities, including royalties offset in part by a $4.0 million decrease in accrued liabilities, a $3.1 million decrease in accounts payable and a $1.2 million increase in other assets.

Net cash provided by operating activities of $3.2 million for 2018 was primarily comprised of our net income of $11.0 million, adjusted for non-cash items of depreciation and amortization of $4.9 million, stock-based compensation of $1.9 million, loss on equity method investments of $1.1 million, amortization of marketable securities premium of $0.2 million offset in part by gain on disposal of property, plant and equipment of $0.1 million, which were partially offset by a net change of $15.7 million in operating assets and liabilities.

The $15.7 million net change in operating assets and liabilities primarily resulted from a $14.6 million increase in inventories, a $4.6 million increase in prepaid expenses and other current assets, a $1.9 million increase in other assets, a $0.3 million decrease in other long-term liabilities offset in part by a $0.5 million increase in accrued liabilities, a $2.8 million decrease in accounts receivable, and a $2.3 million increase in accounts payable.

Net cash provided by operating activities of $8.6 million for 2017 was primarily comprised of our net income of $10.1 million, adjusted for non-cash items of depreciation and amortization of $4.4 million, loss on equity method investments of $1.4 million, stock-based compensation of $1.4 million, impairment charge on equity investee of $0.3 million, amortization of marketable securities premium of $0.2 million, which were partially offset by a net change of $9.1 million in operating assets and liabilities.

The $9.1 million net change in operating assets and liabilities primarily resulted from a $8.0 million increase in accounts receivable, a $4.7 million increase in inventories, a $2.3 million increase in prepaid expenses and other current assets, offset in part by a $4.4 million increase in accounts payable and a $1.6 million increase in accrued liabilities.

Net cash used in investing activities of $8.3 million for 2019 was primarily due to property, plant and equipment of $21.8 million in preparation for our new manufacturing sites, additional equipment for our Beijing site and equipment and facility costs incurred by our consolidated subsidiaries and the purchases of marketable investment securities of $8.7 million, which were partially offset by proceeds from maturities and sales of available-for-sale securities of $22.2 million.

Net cash used in investing activities of $30.8 million for 2018 was primarily due to property, plant and equipment of $40.6 million in preparation for our new manufacturing sites, additional equipment for our Beijing site and equipment and facility costs incurred by our consolidated subsidiaries and the purchases of marketable investment securities of $9.9 million, which were partially offset by proceeds from maturities and sales of available-for-sale securities of $19.6 million and proceeds from sale of property, plant and equipment of $0.1 million.

Net cash used in investing activities of $36.5 million for 2017 was primarily from the purchases of marketable investment securities of $30.0 million and investments in property, plant and equipment of $21.4 million in preparation for our new manufacturing sites, additional equipment for our Beijing site and equipment and facility costs incurred by our consolidated subsidiaries, which were partially offset by proceeds from maturities and sales of available-for-sale securities of $14.8 million.

Net cash provided by financing activities was $6.2 million for 2019 , which mainly consisted of the proceeds of $5.8 million from short-term loan in China, $0.3 million from the exercise of common stock options, $0.4 from sale of previously consolidated subsidiary shares partially offset by the considerations paid in cash to repurchase subsidiary shares from noncontrolling interests of $0.3 million .

Net cash provided by financing activities was $0.2 million for 2018 , which mainly consisted of the proceeds of $0.6 million from the exercise of common stock options, partially offset by the considerations paid in cash to repurchase subsidiary shares from noncontrolling interests of $0.4 million .

Net cash provided by financing activities was $35.6 million for 2017 , which mainly consisted of the net proceeds of $31.9 million received from the public offering of 5,307,692 shares of our common stock in March 2017, proceeds of $2.5 million from the exercise of common stock options and proceeds from sales of subsidiary shares to noncontrolling interest of $1.8 million, partially offset by the net dividends paid by our joint ventures of $0.5 million, which mainly consisted of proceeds from common stock options exercised.

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 during 2019, 2018 and 2017 under this program.

As of December 31, 2019, 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 paid or declared 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 included this amount in “Accrued liabilities”

in our consolidated balance sheets .

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

We account for the cumulative year to date dividends on the Series A preferred stock when calculating our earnings per share.

See Item 5, Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities in Part II.

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.

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

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

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

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 consolidated raw material joint ventures, JinMei, is in the process of relocating its manufacturing operations to the city of Kazuo, located in the province in Liaoning near the Inner Mongolia Autonomous Region, 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 December 31, 2019, JinMei repaid principal and interest totaling $490,000 to Tongmei.

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

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

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.

On October 24, 2016, we filed with the SEC a registration statement on Form S-3, pursuant to which we may offer up to $60 million of common stock, preferred stock, depositary shares, warrants, debt securities and/or units in one or more offerings and in any combination.

On November 4, 2016, the SEC declared the registration statement effective.

On November 4, 2019, the registration statement expired.

On March 2, 2017, we filed with the SEC a final prospectus supplement, pursuant to which we offered and sold 5,307,692 shares of our common stock.

The net proceeds are being used for the relocation of our gallium arsenide production line, for equipment capital expenditures, working capital for accounts receivable and inventory, possible acquisitions of complementary products, technologies or businesses and other general purposes.

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”

Bank Loans and Line of Credit

In September 2018, Tongmei entered into a credit facility with Industrial and Commercial Bank of China (“ICBC”) in China with a $2.9 million line of credit at an annual interest rate of approximately 0.4% over the current Loan Prime Rate published by ICBC.

Accrued interest is calculated and paid monthly.

The annual interest rate was approximately 4.4%.

This credit line was collateralized by Tongmei’s land-use right and all of its buildings located at its facility in Beijing.

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

In September 2018, we borrowed $291,000 against this credit line.

The repayment of the full amount was due in September 2019.

However, on December 26, 2018, we repaid the principal of $291,000 and interest of $3,000 and terminated this credit line.

We decided to terminate this loan because we were able to secure a larger bank loan in the U.S.

and our management believed that to secure bank loans in the future based on the two new manufacturing sites may have more strategic advantages as compared to have a loan based on the Beijing site.

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%.

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 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 the date of this Annual Report on Form 10-K, 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 (the “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 December 31, 2019.

The Credit Facility is collateralized by Baoding Tongmei Xtal Technology Co., Ltd.’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, we borrowed $2.8 million against the Credit Facility.

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

On September 12, 2019 we borrowed an additional $2.8 million against the Credit Facility.

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

As of December 31, 2019, $5.7 million was included in “Bank loan”

in our consolidated balance sheets.

Off-Balance Sheet Arrangements

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).

We have not entered into any options on non-financial assets.

Contractual Obligations

We lease certain office space, warehouse facilities and equipment 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 agreement, in May, 2020, we will have the option to extend the term of the lease for an additional three years.

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

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.

Total rent expenses under these operating leases were approximately $306,000, $319,000 and $302,000 for the years ended December 31, 2019, 2018 and 2017, respectively.

The following table summarizes our contractual obligations as of December 31, 2019 (in thousands):

Payments due by period

Contractual Obligations

Less than 1 year

Operating leases

We entered into a royalty agreement with Sumitomo effective December 3, 2010 with a term of eight years, terminating December 31, 2018.

We and our related companies were granted a worldwide, nonexclusive, royalty bearing, irrevocable license to certain patents for the term on the agreement.

Under this agreement we could have paid up to $7.0 million in royalty payments over eight years beginning in 2011 based on future royalty bearing sales.

This agreement contained a clause that allowed us to claim a credit, starting in 2013, in the event that the royalty bearing sales for the year is lower than a pre-determined amount set forth in this agreement.

For the year ended December 31, 2018, royalty expense under this agreement was $565,000, which was net of claim for credit of $10,000.

Royalty expense for the year ended December 31, 2017 was $526,000, which was net of claim for credit of $49,000.

In January 2020, we agreed to enter into a cross license and covenant agreement with Sumitomo that will expire December 31, 2029 and includes annual payments by us to Sumitomo over a 10-year period in the aggregate amount of $2 million.

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.

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 December 31, 2019, we do not have any outstanding purchase orders that will incur a penalty if cancelled by the Company.

Selected Quarterly Results of Operations

The following table sets forth unaudited quarterly results for the eight quarters ended December 31, 2019.

The information for each of these quarters is unaudited but has been prepared on the same basis as the audited consolidated financial statements.

We believe that all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts stated below to present fairly such quarterly information.

The operating results for any quarter are not necessarily indicative of results for any subsequent period.

Quarters Ended

(in thousands, except

for per share amounts)

Cost of revenue

Operating expenses:

Selling, general and administrative

Research and development

Total operating expenses

Income (loss) from operations

Interest income, net

Equity in earnings (loss) of unconsolidated joint ventures

Other (expense) income, net

Income (loss) before provision for (benefit from) income taxes

Provision for (benefit from) income taxes

Net income (loss)

Net income attributable to noncontrolling interests

Net income (loss) attributable to AXT, Inc

Net income (loss) attributable to AXT, Inc.

per common share:

Weighted average number of common shares outstanding:

Recent Accounting Pronouncements

Recent accounting pronouncements are detailed in Note 1 to our Consolidated Financial Statements included in this Annual Report on Form 10-K.

Stockholders’ equity

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

What changed 10-K

Item 5. Market for Registrant’s Common Equity