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Item 9A. Controls and Procedures

2021-03-23 compared with 2020-03-12 · 421 added, 452 removed, 929 unchanged (48% of the section changed)

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Our disclosure controls and procedures include components of our internal control over financial reporting.

Management’s assessment of the effectiveness of our internal control over financial reporting is expressed at the level of reasonable assurance because a control system, no matter how well designed and operated, can provide only reasonable assurance that the control system’s objectives will be met.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.

Internal control over financial reporting is a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and implemented by our Board of Directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America (“U.S.

GAAP”).

Internal control over financial reporting includes those policies and procedures that:

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Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls

may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, has assessed the effectiveness of our internal control over financial reporting as of December 31, 2019 based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, has assessed the effectiveness of our internal control over financial reporting as of December 31, 2020 based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Management has concluded that our internal control over financial reporting was effective as of December 31, 2020.

Our independent registered public accounting firm, BPM LLP, has audited the consolidated financial statements included in this Annual Report on Form 10-K and has issued its report on the effectiveness of our internal control over financial reporting as of December 31, 2019.

Changes in Internal Control over Financial Reporting

Beginning January 1, 2019, we implemented ASC 842, Leases.

We implemented changes to our processes related to lease recognition and the control activities within them.

These included the development of new policies, ongoing lease review requirements, and gathering of information provided for disclosures.

There was no change in our internal control over financial reporting during our fourth quarter of fiscal 2019 that has materially affected, or is reasonably likely to materially affect, AXT’s internal control over financial reporting.

There was no change in our internal control over financial reporting during our fourth quarter of fiscal 2020 that has materially affected, or is reasonably likely to materially affect, AXT’s internal control over financial reporting.

Other Information

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of AXT, Inc.

Opinion on Internal Control over Financial Reporting

We have audited the internal control over financial reporting of AXT, Inc.

and its subsidiaries (the “Company”) as of December 31, 2019, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”).

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets as of December 31, 2019 and 2018 and the related consolidated statements of operations, comprehensive income (loss), stockholders’

equity, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”) of the Company, and our report dated March 12, 2020, expressed an unqualified opinion on those consolidated financial statements.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Controls over Financial Reporting.

Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.

Our audit also included performing such other procedures as we considered necessary in the circumstances.

We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

San Jose, California

March 12, 2020

The United States Securities and Exchange Commission (“SEC”) allows us to include information required in this report by referring to other documents or reports we have already or will soon be filing.

This is called “Incorporation by Reference.”

We intend to file our definitive proxy statement for our annual meeting of stockholders to be held on May 21, 2020 (the “Proxy Statement”) pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report, and certain information therein is incorporated in this report by reference.

This is called “Incorporation by Reference.” We intend to file our definitive proxy statement for our annual meeting of stockholders to be held on May 20, 2021 (the “Proxy Statement”) pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report, and certain information therein is incorporated in this report by reference.

Directors, Executive Officers and Corporate Governance

The information required by this item with respect to identification of directors is incorporated by reference to the information contained in the section captioned “Information About our Board of Directors”

in the Proxy Statement.

The information with respect to our executive officers, is incorporated by reference to the information contained in the section captioned “Executive Officers”

in the Proxy Statement.

Information with respect to Items 405 of Regulation S-K is incorporated by reference to the information contained in the sections of the Proxy Statement captioned “Section 16(a) Beneficial Ownership Reporting Compliance.”

There will be no disclosure under Item 407(c)(3).

Information with respect to Items 407(d)(4) and 407(d)(5) is incorporated by reference to the information contained in the sections of the Proxy Statement captioned “Corporate Governance—Committees of the Board of Directors.”

The information with respect to our executive officers, is incorporated by reference to the information contained in the section captioned “Executive Officers” in the Proxy Statement.

The Board of Directors of AXT, Inc.

has adopted a Code of Conduct and Ethics (the “Code”) that applies to our principal executive officers, principal financial officer, and corporate controller, as well as all other employees.

A copy of this Code has been posted on our Internet website at www.axt.com.

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Executive Compensation

The information required by this Item is incorporated herein by reference to information set forth in our Proxy Statement under the section entitled “Executive Compensation and Other Matters.”

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this Item is incorporated herein by reference to information set forth in our Proxy Statement under the section entitled “Security Ownership of Certain Beneficial Owners and Management”

and “Equity Compensation Plan Information.”

Certain Relationships and Related Transactio ns and Director Independence

Information required by this item will be set forth in our Proxy Statement under the headings “Compensation Committee Interlocks and Insider Participation”

and “Certain Relationships and Related Transactions,”

which information is incorporated herein by reference.

Information required by this item will be set forth in our Proxy Statement under the headings “Compensation Committee Interlocks and Insider Participation” and “Certain Relationships and Related Transactions,” which information is incorporated herein by reference.

Principal Accountant Fees and Services

The information required by this Item is incorporated herein by reference to information set forth in our Proxy Statement under the section entitled “Ratification of Appointment of Independent Registered Public Accountants.”

Exhibits and Financial Statement Schedules

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Consolidated Statements of Comprehensive Income (Loss)

Consolidated Statements of Stockholders’

Consolidated Statements of Stockholders’ Equity

Consolidated Statements of Cash Flows

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To the Board of Directors and Stockholders of AXT, Inc.

Opinion on the Financial Statements

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of AXT, Inc.

(a Delaware corporation) and its subsidiaries (the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of operations, comprehensive income (loss), stockholders’

equity, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”).

(a Delaware corporation) and its subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 12, 2020, expressed an unqualified opinion.

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for leases in 2019 due to the adoption of the new lease standard.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

These consolidated financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

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Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits, we are required to obtain an understanding of internal control over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

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We believe that our audits provide a reasonable basis for our opinion.

We have served as the Company’s auditor since 2004.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Inventories – Reserve for Excess and Obsolete Inventory

As described in Notes 1 and 3 to the consolidated financial statements, the Company’s consolidated inventories balance was $51.5 million as of December 31, 2020, which was net of a reserve of $17.7 million for excess and obsolete inventories.

The Company’s inventories are stated at the lower of weighted average costs (approximated by standard cost) or net realizable value.

The Company routinely evaluates the levels of its inventories in light of current market conditions in order to identify excess and obsolete inventories, and to provide a reserve for certain inventories to their estimated net realizable value based upon the age, quality and life expectancy of the product, and the projections for sale of the completed products.

If actual demand were to be substantially lower than estimated, there could be a significant adverse impact on the carrying value of inventories and results of operations.

The principal considerations for our determination that performing procedures relating to reserve for excess and obsolete inventories is a critical audit matter are the significant amount of judgment by management in developing the assumptions of the forecasted product demand, which in turn led to significant auditor judgment, subjectivity, and effort in performing

audit procedures and evaluating audit evidence relating to the forecasted product demand.

Additionally, for certain new product launches there may be limited historical data with which to evaluate forecasts.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.

These procedures included testing the effectiveness of internal controls relating to management’s reserve for excess and obsolete inventories, including internal controls over the development of assumptions related to forecasted product demand.

The procedures also included, among others, testing management’s process for developing the reserve for excess and obsolete inventories, testing the completeness and accuracy of the underlying data used in the estimate, and evaluating management’s assumptions of forecasted product demand.

Evaluating management’s demand forecast for reasonableness involved considering historical sales or usage by product, comparing prior period estimates to actual results of the same period, and determining whether the demand forecast used was consistent with evidence obtained in other areas of the audit.

We have served as the Company’s auditor since 2004.

San Jose, California

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Operating lease right-of-use assets

LIABILITIES AND STOCKHOLDERS’

LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND STOCKHOLDERS’ EQUITY

Current liabilities:

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Commitments and contingencies (Note 16)

Stockholders’

Redeemable noncontrolling interests (Note 18)

Stockholders’ equity:

Preferred stock Series A, $ 0.001 par value;

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Accumulated deficit

Accumulated other comprehensive loss

Accumulated other comprehensive income (loss)

Total AXT, Inc.

stockholders’

stockholders’ equity

Noncontrolling interests

Total stockholders’

Total liabilities and stockholders’

Total stockholders’ equity

Total liabilities, redeemable noncontrolling interests and stockholders’ equity

See accompanying notes to consolidated financial statements.

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Income (loss) from operations

Interest income, net

Equity in loss of unconsolidated joint ventures

Other income (expense), net

Interest income (expense), net

Equity in income (loss) of unconsolidated joint ventures

Other income, net

Income (loss) before provision for income taxes

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Net income (loss)

Net (income) loss attributable to noncontrolling interests

Net income attributable to noncontrolling interests

Net income (loss) attributable to AXT, Inc.

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Change in foreign currency translation gain (loss), net of tax

Change in unrealized gain (loss) on available-for-sale investments, net of tax

Change in unrealized gain on available-for-sale debt investments, net of tax

Reclassification adjustment for gains included in net loss upon deconsolidation of a subsidiary

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See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

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Comprehensive

Stockholders’

Noncontrolling

Stockholders’

Income (Loss)

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Common stock options exercised

Sale of subsidiary shares to noncontrolling interests

Purchase of subsidiary shares from noncontrolling interests

Restricted stock awards canceled

Stock-based compensation

Issuance of common stock in the form of restricted stock

Issuance of common stock, net of stock issuance costs of $2,639

Net dividend declared by joint ventures

Other comprehensive income

Other comprehensive loss

Balance as of December 31, 2018

Common stock options exercised

Reclassification out of accumulated other comprehensive income and noncontrolling interests upon the deconsolidation of a subsidiary

Purchase of subsidiary shares from noncontrolling interests

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Common stock options exercised

Reclassification out of accumulated other comprehensive income and noncontrolling interests upon the deconsolidation of a subsidiary

Sale of subsidiary shares to noncontrolling interests

Purchase of subsidiary shares from noncontrolling interests

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Issuance of common stock in the form of restricted stock

Other comprehensive loss

Adjustment to noncontrolling interests in connection with the reorganization and alignment of assets under Tongmei

Net dividend declared by joint ventures

Other comprehensive income

Balance as of December 31, 2020

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Stock-based compensation

Realized gain on sale of available-for-sale securities

Loss (gain) on disposal of equipment

Provision for doubtful accounts

(Gain) loss on disposal of equipment

Gain from deconsolidation of a subsidiary

Loss from equity method investments, net

(Gain) loss from equity method investments, net

Return on equity method investments

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Proceeds from sale of equipment

Purchases of available-for-sale securities

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

Repayment of related party notes receivable

Purchases of available-for-sale debt securities

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

Net cash used in investing activities

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Proceeds from short-term loan

Payments on short-term loan

Proceeds from sale of subsidiary shares to noncontrolling interests

Proceeds from issuance of Tongmei's common stock to redeemable noncontrolling interests net of issuance cost

Dividends paid by joint ventures to their minority shareholders

Net cash provided by financing activities

Net cash provided by (used in) financing activities

Effect of exchange rate changes on cash and cash equivalents

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The Company and Summary of Significant Accounting Policies

(“AXT”, “the Company”, “we,”

“us,”

and “our”

refer to AXT, Inc.

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

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

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Our single element substrates are made from germanium (Ge).

Our raw materials include both raw gallium and purified gallium.

We use purified gallium in producing our GaAs substrates and also sell purified gallium in the open market to other companies for use in magnetic materials, high temperature thermometers and growing single crystal ingots including gallium arsenide, gallium nitride, gallium antimonide, gallium phosphide and other materials and alloys.

We also produce 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 and epitaxial layer growth in MBE reactors.

Our raw materials include purified gallium, InP based material and pBN crucibles.

We use purified gallium in producing our GaAs substrates and also sell purified gallium in the open market to other companies for use in magnetic materials, high temperature thermometers and growing single crystal ingots including gallium arsenide, gallium nitride, gallium antimonite, gallium phosphide and other materials and alloys.

Pyrolytic boron nitride (pBN) crucibles are used in the high temperature (typically in the range 500 C to 1,500 C) growth process of single crystal ingots and epitaxial layer growth in MBE reactors.

We use these pBN crucibles in our own ingot growth processes and also sell them in the open market to other companies.

Principles of Consolidation

The 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”), Nanjing JinMei Gallium Co., Ltd.

(“JinMei”), ChaoYang JinMei Gallium Ltd.

and MaAnShan JinMei Gallium Ltd., and, except as discussed below and in Note 6, our majority-owned subsidiary, Beijing BoYu Semiconductor Vessel Craftwork Technology Co., Ltd.

(“BoYu”).

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

Tongmei ChaoYang is located in the city of Kazuo, China.

The consolidated financial statements include the accounts of AXT, and our consolidated subsidiaries, Beijing Tongmei Xtal Technology Co., Ltd.

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

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

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

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

(“JinMei”), ChaoYang JinMei Gallium Ltd.

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

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

Each of ChaoYang Tongmei and ChaoYang LiMei 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 December 31, 2019, we have five companies accounted for by the equity method.

As of December 31, 2018, we had seven companies accounted for by the equity method.

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

As discussed in Note 6, “Investments in Privately-Held Raw Material Companies”, effective as of March 11, 2019, we reduced our ownership in Beijing JiYa Semiconductor Material Co., Ltd.

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

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

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

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

For the years ended 2020 and 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 either noncontrolling interests in stockholder’s equity or as redeemable noncontrolling interests in temporary equity on our consolidated balance sheets and in our consolidated statements of operations.

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

For the years ended 2020 and 2019, expenses associated with ChaoYang LiMei had a de minimis impact on our consolidated financial statements.

As discussed in Note 6, “Investments in Privately-Held Raw Material 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 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 consolidated balance sheet as of December 31, 2018, as reported, included JiYa’s assets and liabilities, after all significant inter-company accounts and transactions were eliminated.

Our 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 consolidated statement of operations for the year 2019 includes JiYa’s results for the period through March 11, 2019.

Our consolidated balance sheet as of December 31, 2018, as reported, included JiYa’s assets and liabilities, after all significant inter-company accounts and transactions were eliminated.

Our consolidated balance sheet as of December 31, 2020 and 2019, as reported, does not include the assets and liabilities of JiYa, since we deconsolidated JiYa as of March 11, 2019.

Our consolidated statement of operations for the year 2019 includes JiYa’s results for the period through March 11, 2019.

As discussed in Note 6, in May 2019, we purchased the remaining 3 % ownership interest of JinMei from retiring members of the JinMei management team for approximately $ 413,000 .

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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.

During the quarter ended December 31, 2020, Tongmei entered into two sets of definitive transaction documents, each consisting of a capital increase agreement along with certain supplemental agreements in substantially the same form (collectively, the “Capital Increase Agreements”), with several private equity investors in China.

In preparation for Tongmei’s application for a listing on the Shanghai Stock Exchange’s Sci-Tech innovAtion boaRd (the “STAR Market”), in late December we reorganized our entity structures in China.

JinMei and BoYu and its subsidiaries were assigned to Tongmei and effectively merged with Tongmei although they retained their own respective legal entity status and are wholly owned subsidiaries of Tongmei.

The 33 % minority interest stakeholders of BoYu converted their ownership to a 7.59 % minority interest in Tongmei.

The 8.5 % minority interest stakeholders, employees of JinMei, converted their ownership to a 0.38 % minority interest in Tongmei.

Further, a number of employees, key managers and contributors purchased a 0.4 % minority interest in Tongmei.

As of December 31, 2020, Tongmei’s noncontrolling interests totaled 8.37 % .

Additionally, Baoding Tongmei and ChaoYang Tongmei, were assigned to Tongmei as wholly owned subsidiaries.

AXT remains the controlling stakeholder of Tongmei and holds a majority of the Board of Director positions of Tongmei.

The reorganization does not result in any change to the consolidated financials of AXT.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S.

GAAP”) requires management to make estimates, judgments and assumptions.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S.

GAAP”) requires management to make estimates, judgments and assumptions.

We believe that the estimates, judgments, and assumptions upon which management relies are reasonable based on information available at the time that these estimates, judgments, and assumptions are made.

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Fair Value of Investments

ASC Topic 820, Fair value measurement (“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 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

These Level 2 instruments require more management judgment and subjectivity compared to Level 1 instruments, including:

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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 sheets and classified as Level 3 assets and liabilities.

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

As of December 31, 2020 and 2019, the net change in fair value from the placement of the hedge to settlement had a de minimis impact to the consolidated results.

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Transaction gains and losses resulting from transactions denominated in currencies other than the U.S.

dollar or in the functional currencies of our subsidiaries are included in “Other (expense) income, net”

for the years presented.

The transaction gain totaled $321,000 and $165,000 for the years ended December 31, 2019 and 2018, respectively.

dollar or in the functional currencies of our subsidiaries are included in “Other income, net” for the years presented.

The transaction loss for the year ended December 31, 2020 totaled $ 411,000 .

The transaction gain totaled $ 321,000 and $ 165,000 for the years ended December 31, 2019 and 2018, respectively.

The assets and liabilities of the subsidiaries are translated at the rates of exchange on the balance sheet date.

Revenue and expense items are translated at the average rate of exchange for the period.

Gains and losses from foreign currency translation are included in “Other comprehensive income (loss)”

in the consolidated statements of comprehensive income (loss), net of tax.

Revenue and expense items are translated at the average rate of exchange for the

Gains and losses from foreign currency translation are included in “Other comprehensive income (loss)” in the consolidated statements of comprehensive income (loss), net of tax.

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).

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 (6N and 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.

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As such, sales commissions are expensed as incurred, given that the expected period of benefit is less than one year .

On January 1, 2018, we adopted 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.

Contract Balances

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Contract liabilities

During the three and twelve months ended December 31, 2019, the Company recognized $0 and $0.4 million, respectively, of revenue that was included in the contract balances as of December 31, 2018.

During the three and twelve months ended December 31, 2020, the Company recognized $ 9,000 and $ 251,000 , respectively, of revenue that was included in the contract balances as of December 31, 2019.

Disaggregated Revenue

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Practical Expedients and Exemptions

As part of our adoption of ASC 606, we elected to use the following practical expedients:

We elected to use the following practical expedients:

(i) not to adjust the promised amount of consideration for the effects of a significant financing component when we expect, at contract inception, that the period between our transfer of a promised product or service to a customer and when the customer pays for that product or service will be one year or less;

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We generally purchase these materials through standard purchase orders and not pursuant to long-term supply contracts.

Financial instruments that potentially subject us to concentration of credit risk consist primarily of cash and cash equivalents, investments, and trade accounts receivable.

Financial instruments that potentially subject us to concentration of credit risk consist primarily of cash and cash equivalents, investments, and accounts receivable.

We invest primarily in money market accounts, certificates of deposit and corporate bonds.

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We are exposed to credit risks in the event of default by the issuers to the extent of the amount recorded on the consolidated balance sheets.

We perform ongoing credit evaluations of our customers’

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

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

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

Three customers accounted for 14%, 13% and 12% of our trade accounts receivable as of December 31, 2019 and three customers accounted for 17%, 12% and 10% of our trade accounts receivable as of December 31, 2018.

Two customers accounted for 11 % and 10 % of our accounts receivable as of December 31, 2020 and three customers accounted for 14 %, 13 % and 12 % of our trade accounts receivable as of December 31, 2019.

One customer represented 11 % of our revenue for the year ended December 31, 2020.

One customer represented 15 % of our revenue for the year ended December 31, 2019.

Two customers represented 12% and 11%, respectively, of our revenue for the year ended December 31, 2017.

Our top five customers, although not the same five customers for each period, represented 40% of our revenue for the year 2019 and 35% of our revenue for each of the years 2018 and 2017, respectively.

One customer represented 13 % of our revenue for the year ended December 31, 2018.

Our top five customers, although not the same five customers for each period, represented 32 % of our revenue for the year 2020 and 40 % of our revenue for 2019 and 35 % of our revenue for 2018, respectively.

For the year ended December 31, 2020, one third-party customer for the raw materials products from our consolidated subsidiaries accounted for over 10% of the revenue from raw materials sales.

For the years ended December 31, 2019 and 2018, each of three third-party customers for the raw materials products from our consolidated subsidiaries accounted for over 10% of the revenue from raw materials sales.

Our subsidiaries and joint ventures are a key strategic benefit for us as they further diversify our sources of revenue.

Our subsidiaries and raw material joint ventures are a key strategic benefit for us as they further diversify our sources of revenue.

Cash and Cash Equivalents

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Short-Term and Long-Term Investments

We classify our investments in marketable securities as available-for-sale securities .

We classify our investments in marketable securities as available-for-sale debt securities .

Short-term and long-term investments are comprised of available-for-sale marketable securities, which consist primarily of certificates of deposit and corporate bonds.

These investments are reported at fair value as of the respective balance sheet dates with unrealized gains and losses included in accumulated other comprehensive income (loss) within stockholders’

equity on the consolidated balance sheets.

The amortized cost of securities is adjusted for amortization of premiums and accretion of

discounts to maturity.

Such amortization is included in “Other (expense) income, net”

in the consolidated statements of operations.

Realized gains and losses and declines in value judged to be other than temporary on available-for-sale securities are also included in “Other (expense) income, net”

in the consolidated statements of operations.

These investments are reported at fair value as of the respective balance sheet dates with unrealized gains and losses included in accumulated other comprehensive income (loss) within stockholders’ equity on the consolidated balance sheets.

The amortized cost of securities is adjusted for amortization of premiums and accretion of discounts to maturity.

Such amortization is included in “Other income, net” in the consolidated statements of operations.

Realized gains and losses and declines in value judged to be other than temporary on available-for-sale securities are also included in “Other income, net” in the consolidated statements of operations.

The cost of securities sold is based upon the specific identification method.

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As of December 31, 2020 and 2019, our accounts receivable, net balance was $ 24.6 million and $ 19.0 million, respectively, which was net of an allowance for doubtful accounts of $ 217,000 and $ 34,000 in December 31, 2020 and 2019, respectively.

During 2020, the allowance for doubtful accounts increased by $ 183,000 due to the poor financial condition of a few customers.

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

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 for the future periods.

Historically, our allowance for sales returns reserve was deducted from gross accounts receivable.

In connection with the adoption of ASC Topic 606, 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.

During 2019, we utilized $26,000 and reserved an additional $5,000 and during 2018, we utilized $47,000 and reduced an additional $75,000.

As of December 31, 2020 and 2019, the sales returns reserve (included in accrued liabilities) balance was $ 81,000 and $ 26,000 , respectively.

During 2020, we utilized $ 82,000 and reserved an additional $ 137,000 and during 2019, we utilized $ 26,000 and reserved an additional $ 5,000 .

Warranty Reserve

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As of December 31, 2020 and 2019, accrued product warranties totaled $ 609,000 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.

The increase in accrued product warranties is primarily attributable to increased claims for quality issues experienced by approximately four of our 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.

Inventories are stated at the lower of cost (approximated by standard cost) or net realizable value.

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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 to their estimated net realizable value based upon the age and quality of the product and the projections for sale of the completed products.

We routinely evaluate the levels of our inventory in light of current market conditions in order to identify excess and obsolete inventory, and we provide a reserve for certain inventories to their estimated net realizable value based upon the age and quality of the product and the projections for sale of the completed products.

When a reserve is recorded, a new lower cost basis for that inventory is established and subsequent changes in facts and circumstances do not result in the restoration or increase in the new cost basis.

Property, Plant and Equipment

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Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful life or the term of the lease.

We generally depreciate computer, software, office equipment, furniture and fixtures 3 to 5 years, machinery and equipment 1 to 5 years, automobiles 5 to 10 years, leasehold and building improvements over 10 years, or the lease term if shorter, and buildings over 27.5 years.

We generally depreciate com puter , soft ware , office equipment , furniture and fixtures 3 to 5 years , machinery and equipment 1 to 20 years , automobiles 5 to 10 years , leasehold and building improvements over 10 years , or the lease term if shorter, and buildings over 39.5 years.

Repairs and maintenance costs are expensed as incurred.

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

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

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

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

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Impairment of Investments

All available-for-sale securities are periodically reviewed for impairment.

All available-for-sale debt securities are periodically reviewed for impairment.

An investment is considered to be impaired when its fair value is less than its amortized cost basis and it is more likely than not that we will be required to sell the impaired security before recovery of its amortized cost basis.

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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 subsidiary, 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.

We estimate fair value of our cost method investments considering available information such as pricing in recent rounds of financing, current cash positions, earnings and cash flow forecasts, recent operational performance and any other readily available market data.

We have 25% ownership interest in a germanium materials company in China and we incurred an impairment charge for the period ended March 31, 2019.

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.

We have 25 % ownership interest in a germanium materials company in China and we incurred an impairment charge during 2019.

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

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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 our performance for the Company.

We discuss revenue and capacity

for both AXT and our joint ventures collectively, when determining capacity constraints and need for raw materials in our business, and consider their capacity when determining our strategic and product marketing and advertising strategies.

We discuss revenue and capacity for both AXT and our joint ventures collectively, when determining capacity constraints and need for raw materials in our business, and consider their capacity when determining our strategic and product marketing and advertising strategies.

While we consolidate our majority-owned or significantly controlled joint ventures, we do not allocate any portion of overhead, interest and other income, interest expense or taxes to them.

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Stock-Based Compensation

We have employee stock option plans, which are described more fully in Note 10—Employee Benefit Plans and Stock-based Compensation.

We account for stock‑based compensation in accordance with the provisions of ASC Topic 718, Compensation-Stock Compensation (“ASC 718”).

We have employee stock option plans, which are described more fully in Note 10—"Employee Benefit Plans and Stock-based Compensation”.

We account for stock-based compensation in accordance with the provisions of ASC Topic 718, Compensation-Stock Compensation (“ASC 718”).

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.

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Advertising costs for the years ended December 31, 2020, 2019 and 2018 were insignificant.

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.

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As of December 31,

Accumulated other comprehensive loss:

Unrealized loss on investments, net

Accumulated other comprehensive income (loss):

Unrealized gain ( loss) on investments, net

Cumulative translation adjustment

Cumulative translation adjustment attributable to noncontrolling interests

Accumulated other comprehensive loss attributable to AXT, Inc.

Accumulated other comprehensive income (loss) attributable to AXT, Inc.

Net Income (Loss) Per Share

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Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board issued Accounting Standard Update 2016-02, Leases (Topic 842) (“ASC 842”), which replaces the existing guidance for leases.

The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than twelve months.

Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement.

The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years and requires retrospective application.

We adopted this guidance effective January 1, 2019, using the modified retrospective approach.

The modified retrospective approach provides a method for recording existing leases at the beginning of the period of adoption.

In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward the historical lease classification and we elected the hindsight practical expedient to determine the lease term for existing leases.

We determined that the exercise of our renewal option associated with our lease of facility in Fremont, California, would be reasonably certain in determining the expected lease term.

The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.

Adoption of ASC 842 standard resulted in the recording of net ROU assets of $1.1 million and lease liabilities of $1.1 million, as of January 1, 2019.

ASC 842 did not have an impact on our consolidated results of operations or cash flow.

The impact of the adoption of ASC 842 on the balance sheet as of January 1, 2019 was (in thousands):

Adoption of ASC 842

December 31, 2018

Increase (Decrease)

January 1, 2019

Operating lease right-of-use assets

Accrued liabilities

Total current liabilities

Long-term liability - operating leases

Total liabilities

Total liabilities and equity

* Short-term portion of lease liability included in accrued liabilities

Accounting Standard Update 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 twelve months ended December 31, 2020 using the modified retrospective transition approach did not result in a material impact on our 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.

Cash, Cash Equivalents and Investments

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

As of December 31, 2019 and 2018, our cash, cash equivalents and investments are classified as follows (in thousands):

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

December 31, 2020

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

Classified as “Short-term investments”

in our consolidated balance sheets.

Classified as “Long-term investments”

in our consolidated balance sheets.

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

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

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

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

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

Corporate equity securities have no maturity and may be sold at any time.

The gross unrealized losses related to our portfolio of available-for-sale securities were primarily due to changes in interest rates and market and credit conditions of the underlying securities.

We have determined that the gross unrealized losses on some of our available-for-sale securities as of December 31, 2019 are temporary in nature.

We periodically review our investment portfolio to identify and evaluate investments that have indications of possible impairment.

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.

Gross unrealized losses on our available-for-sale debt securities as of December 31, 2020 was $ 2,000 , and historically, such gross unrealized losses have been temporary in nature and we believe that it is probable the principal and interest will be collected in accordance with the contractual terms.

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

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

A portion of our investments would generate a loss if we sold them on December 31, 2019.

The following table summarizes the fair value and gross unrealized losses related to available-for-sale 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):

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

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

In Loss Position

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Total in loss position

The following table summarizes the fair value and gross unrealized losses related to available-for-sale securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2018 (in thousands):

In Loss Position

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As of December 31, 2019

Certificates of deposit

Corporate bonds

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We have made strategic investments in private companies located in China in order to gain access at a competitive cost to raw materials that are critical to our substrate business (see Note 6).

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

in the consolidated balance sheets and totaled $6.0 million and $8.4 million as of December 31, 2019 and 2018, respectively.

The investment balances for the non-consolidated companies, are accounted for under the equity method and included in “Other assets” in the consolidated balance sheets and totaled $ 6.4 million and $ 6.0 million as of December 31, 2020 and 2019, respectively.

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

The year ended December 31, 2019 includes an impairment charge of $1.1 million for one of our minority investments in the three months ended March 31, 2019 (see Note 6).

We had no impairment charges during 2018.

For the year ended December 31, 2017, we recognized 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.

The year ended December 31, 2019 includes an impairment charge of $ 1.1 million for one of our minority investments (see Note 6).

We had no impairment charges during 2020 and 2018.

Fair Value Measurements

We invest primarily in money market accounts, certificates of deposit, corporate bonds and notes, and government securities.

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

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

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

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

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

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

Other than corporate equity securities which are based on quoted market prices and classified as Level 1, we classify our available-for-sale 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 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.

There were no changes in valuation techniques or related inputs in the year ended December 31, 2020.

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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 sheets and classified as Level 3 assets and liabilities.

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

As of December 31, 2020, the net change in fair value from the placement of the hedge to settlement at each month end during the quarter had a de minimis impact to the consolidated results.

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

We had no impairment charges 2018.

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

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

We had no impairment charges for 2020 and 2018.

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

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Related Party Transactions

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

For the years ended December 31, 2019 and 2018, JinMei recorded $0 and $24,000 of income from agency sales, respectively, which were included in “Other (expense) income, net”

in the consolidated statements of operations.

For the years ended December 31, 2020, 2019 and 2018, JinMei recorded $ 0 , $ 0 and $ 24,000 of income from agency sales, respectively, which were included in “Other income, net” in the consolidated statements of operations.

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

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The annual lease payment is due by January 31 st of each year.

Tongmei has paid certain amounts on behalf of Donghai County Dongfang High Purity Electronic Materials Co., Ltd.

(“Dongfang”), its equity investment entity, to purchase materials.

The original agreement was signed between Tongmei and Dongfang in 2014 and the date of repayment was set as December 31, 2015.

In 2015, both parties agreed to delay the date of repayment to December 31, 2017.

During 2017, the repayment of the full amount of principal and interest totaling $114,000 was received by our wholly owned subsidiary.

In April 2014, Tongmei loaned an additional of $46,000 to Dongfang.

The loan bears interest at 6.15% per annum and comes due on December 31, 2017.

During 2017, the repayment of the full amount of principal and interest totaling $55,000 was received by our wholly owned subsidiary.

Tongmei also purchases raw materials from Dongfang for production in the ordinary course of business.

As of December 31, 2019 and 2018, amount payable of $0 and $59,000, respectively, were included in “Accounts payable”

in our consolidated balance sheets.

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

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

As of December 31, 2019 and 2018, amount payable of $0 and $0, respectively, were included in “Accounts payable”

in our consolidated balance sheets.

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

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

As of December 31, 2019 and 2018, amount payable of $0 and $0, respectively, were included in “Accounts payable”

in our consolidated balance sheets.

Tongmei also purchases raw materials from Donghai County Dongfang High Purity Electronic Materials Co., Ltd.

for production in the ordinary course of business.

As of December 31, 2020 and 2019, there were no amounts payable outstanding.

ChaoYang Tongmei also purchases raw materials from one of our equity investment entities, Emeishan Jia Mei High Purity Metals Co.

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

As of December 31, 2020 and 2019, there no amounts payable outstanding.

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

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

As of December 31, 2020 and 2019, there no amounts payable outstanding.

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.

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

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

The loan bears interest at 2.75 % per annum.

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Principal and accrued interest are due at such time BoYu pays a dividend to its shareholders.

As of December, 2019 and 2018, the balances, including both principal and accrued interest, were $449,000, and $299,000, respectively, and included in “Other assets”

and “Prepaid expenses and other current assets”, respectively, in our consolidated balance sheets.

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.

On December 25, 2020, the executive repaid the principal of $ 612,000 and interest of $ 35,000 of the personal loans to BoYu.

As of December 31, 2020 and 2019, the balances, including both principal and accrued interest, were $ 0 , and $ 449,000 , respectively, and included in “Other assets” in our 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.

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For the years ended December 31, 2020 and 2019, BoYu has recorded $ 0.3 million and $ 0.2 million in revenue from this customer, respectively.

As of December 31, 2019 and 2018, amounts receivable of $12,000 and $0, respectively, were included in “Accounts receivable”

in our consolidated balance sheets.

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

In December 2020, we purchased shares equivalent to 4 % of BoYu from the same third-party investor for $ 1.6 million and the remaining 6 % was sold to another third-party investor.

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.

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Depreciation and amortization expense was $ 4.3 million, $ 5.5 million and $ 4.9 million for the years ended December 31, 2020, 2019 and 2018, respectively.

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 U.S.

GAAP regarding management estimates.

The effect of the change in the useful lives decreased our manufacturing costs for the year ended December 31, 2020 by approximately $ 1.4 million and increased our basic and diluted net income per share by approximately $ 0.03 , respectively, as a result of lower depreciation expense.

Investments in Privately-held Raw Material Companies

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Nanjing JinMei Gallium Co., Ltd.

Beijing JiYa Semiconductor Material Co., Ltd.

Chaoyang JinMei Gallium Co., Ltd.

Beijing BoYu Semiconductor Vessel Craftwork Technology Co., Ltd.

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Emeishan Jia Mei High Purity Metals Co., Ltd.

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

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

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

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

* These percentages reflect the ownership currently in effect upon the completion of the reorganization in China.

** In preparation for Tongmei’s application for a listing on the STAR Market, in late December 2020 we reorganized our entity structures in China.

JinMei and BoYu and its subsidiaries, previously organized under AXT, Inc., were assigned to Tongmei and effectively merged with Tongmei although they retained their own respective legal entity status and are wholly owned subsidiaries of Tongmei.

The 33 % minority interest stakeholders of BoYu converted their ownership to a 7.59 % minority interest in Tongmei.

The 8.5 % minority interest stakeholders, employees of JinMei, converted their ownership to a 0.38 % minority interest in Tongmei.

Further, a number of employees, key managers and contributors, purchased a 0.4 % minority interest in Tongmei.

As of December 31, 2020, Tongmei’s noncontrolling interests totaled 8.37 %.

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.

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

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

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

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

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

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

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

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

during 2019 in the consolidated statements of operations and comprehensive income (loss).

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

We recorded a gain on the deconsolidation of JiYa of $ 175,000 as a component of “Equity in loss of unconsolidated joint ventures” during 2019 in the consolidated statements 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.

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

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

The gain on deconsolidation includes the following:

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

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

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

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

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Gain on retained noncontrolling investment due to remeasurement

Our ownership of JinMei is 100%.

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.

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 consolidated balance sheets.

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

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

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

We paid approximately $262,000 in May 2019 and plan to pay the remainder of approximately $151,000 in January 2020.

The final payment to the JinMei management team was made in October, 2020.

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

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

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

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

Before August 1, 2020, our ownership of ChaoYang JinMei was 100 %.

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

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

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

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

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As a result, our ownership of BoYu was diluted from 70 % to 63 %.

In December 2020, we purchased shares equivalent to 4 % of BoYu from the same third-party investor for $ 1.6 million.

As a result, our ownership of BoYu increased from 63 % to 67 %.

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.

An additional step in the STAR Market initial public offering (“IPO”) process involves certain entity reorganizations and alignment of assets under Tongmei.

In this regard our two consolidated raw material companies, JinMei and BoYu and its subsidiaries were assigned to Tongmei in December 2020.

This will increase the number of customers and employees attributable to Tongmei as well as increase Tongmei’s consolidated revenue.

Although we have representation on the boards of directors of each of these 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 decisions concerning sales of finished product, are made by local management with regular guidance and input from us.

During 2019, 2018 and 2017, the consolidated joint ventures generated $4.3 million, $5.5 million and $2.1 million of income, respectively, of which an income of $1.0 million, an income of $1.4 million and a loss of $0.1 million, respectively were allocated to noncontrolling interests, resulting in $3.3 million, $4.1 million and $2.2 million of income, respectively, to our net income (loss).

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

in our consolidated balance sheets and totaled $6.0 million and $8.4 million as of December 31, 2019 and 2018, respectively.

During 2020, 2019 and 2018, our two consolidated raw material subsidiaries generated $ 7.5 million, $ 4.3 million and $ 5.5 million of income, respectively, of which an income of $ 1.8 million, an income of $ 1.0 million and an income of $ 1.4 million, respectively were allocated to noncontrolling interests, resulting in $ 5.7 million, $ 3.3 million and $ 4.1 million of income, respectively, to our net income (loss).

For AXT’s minority investment entities that are not consolidated, the investment balances are included in “Other assets” in our consolidated balance sheets and totaled $ 6.4 million and $ 6.0 million as of December 31, 2020 and 2019, respectively.

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

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

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

Excluding one fully impaired entity, the equity entities had the following summarized income information (in thousands) for the years ended December 31, 2020, 2019 and 2018, respectively:

Our share for the

Operating loss

Operating income (loss)

Net income (loss)

Excluding one fully impaired entity, these minority investment entities that are not consolidated, but rather are accounted for under the equity method, had the following summarized balance sheet information (in thousands) as of December 31, 2020 and 2019, respectively:

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Noncurrent liabilities

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 $1.9 million, $1.1 million, and $1.7 million for the years ended December 31, 2019, 2018 and 2017, respectively.

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 gain of $ 0.1 million for the year ended December 31, 2020 and a loss of $ 1.9 million and $ 1.1 million for the years ended December 31, 2019 and 2018, respectively.

Dividends received from these minority investment entities were $ 362,000 for the year ended December 31, 2019 and $ 0 for each of the years ended December 31, 2020 and 2018.

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

As of December 31,

Accrued compensation and related charges

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Payable in connection with construction

Payable in connection with repurchase of subsidiaries shares

Accrued income taxes

Payable in connection with land restoration of Nanjing JinMei factory

Accrued professional services

Advance from customers

Accrued product warranty

Current portion of operating lease liability

Other personnel-related costs

Accrued income taxes

Payable in connection with repurchase of subsidiaries shares

Current portion of operating lease liabilities

Advance from customers

Other tax payable

Other personnel-related costs

Accrual for sales returns

Deferred government grant income in connection with purchase of land

Dividends payable by consolidated joint ventures

Other accrued liabilities

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 0.04% 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 is 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 is 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.

On December 26, 2018, we repaid the principal of $291,000 and interest of $3,000 of this loan to the bank.

This credit line was terminated in December 2018, after we repaid both principal and interest to ICBC.

We have 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 from the two new manufacturing sites have more strategic advantages as compared to have one single loan from Beijing.

On November 6, 2018, the Company entered into the Credit Agreement, which established a $ 10 million secured revolving line of credit with a $ 1.0 million letter of credit sublimit facility.

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The line of credit was reduced from $ 10 million to $ 7 million.

The commitments under the First Amendment To 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 2.5%.

The commitments under the First Amendment To Credit Agreement expired on November 30, 2020, no loans or letters of credit were outstanding under the Credit Agreement at December 31, 2020.

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.

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The annual interest rate was approximately 4.7 % as of December 31, 2019.

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

The credit facility is collateralized by Baoding Tongmei’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.

The repayment of the full amount was 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.

Stockholders’

Equity and Stock Repurchase Program

Stockholders’

The 883,000 shares of $0.001 par value Series A preferred stock issued and outstanding as of December 31, 2019 and 2018, 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 $4 per share liquidation preference over common stock, and must be paid before any distribution is made to common stockholders.

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 month s.

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 .

As of December 31, 2020, $ 8.9 million was included in “Bank loan” in our consolidated balance sheets.

In February 2020, our consolidated 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 December 31, 2020.

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

The 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.

In December 2020, BoYu borrowed an additional $ 1.1 million against the credit facility.

As of December 31, 2020, $ 1.5 million was included in “Bank loan” in our consolidated balance sheets.

Stockholders’ Equity and Stock Repurchase Program

Stockholders’ Equity

The 883,000 shares of $ 0.001 par value Series A preferred stock issued and outstanding as of December 31, 2020 and 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 $ 4 per share liquidation preference over common stock, and must be paid before any distribution is made to common stockholders.

These preferred shares were issued to Lyte Optronics, Inc.

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on May 28, 1999.

Changes in AXT, Inc.’s ownership interest in consolidated subsidiaries.

The effects of changes in the Company’s ownership interests in its less than 100% owned subsidiaries on the Company’s equity are as follows:

Changes in AXT, Inc.’s ownership interest in consolidated subsidiaries

The effects of changes in the Company’s ownership interests in its less than 100% owned subsidiaries on the Company’s equity are as follows:

As of December 31,

Net income (loss) attributable to AXT, Inc.

Increase (decrease) in paid-in capital for:

Purchase of subsidiary shares from noncontrollling interest

Increase (decrease) in additional paid-in capital for:

Sales of subsidiary shares to noncontrolling interest

Purchase of subsidiary shares from noncontrolling interest

Adjustment to noncontrolling interests in connection with the reorganization and alignment of assets under Tongmei

Net transfers to noncontrolling interests

Net income (loss) attributable to AXT, Inc., net of transfers to noncontrolling interests

Change from net income (loss) attributable to AXT, Inc., net of transfers to noncontrolling interest

Stock Repurchase Program

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

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

In 2018, 2019 and 2020, we did not repurchase any of our outstanding common stock.

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Stock Option Plans and Equity Incentive Plans

In May 2007, our stockholders approved our 2007 Equity Incentive Plan (the “2007 Plan”), which provides for the grant of incentive and non-qualified stock options to our employees, consultants and directors.

The 2007 Plan is a restatement of the 1997 Stock Option Plan which expired in 2007.

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Stock options and stock appreciation rights may not be granted below fair market value.

Stock options or stock appreciation rights generally shall not be fully vested over a period of less than three years from the date of grant and cannot be exercised more than 10 years from the date of grant.

Stock options or stock

appreciation rights generally shall not be fully vested over a period of less than three years from the date of grant and cannot be exercised more than 10 years from the date of grant.

Restricted stock, restricted stock units, and performance awards generally shall not vest faster than over a three-year period (or a twelve-month period if vesting is based on a performance measure).

In December 2008, the 2007 Plan was amended to comply with the applicable requirements under Section 409A of the Internal Revenue Code.

In May 2015, our stockholders approved our 2015 Equity Incentive Plan (the “2015 Plan”).

The 2015 Plan is a replacement of the 2007 Plan.

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December 31, 2020

Weighted ‑

Weighted ‑ average

Weighted ‑ Average

Exercise Price

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There were 905,000 , 113,000 and 238,000 options exercised in the years ended December 31, 2020, 2019 and 2018, respectively.

The total intrinsic value of options exercised for the years ended December 31, 2019, 2018 and 2017, was $266,000, $666,000 and $4,030,000, respectively.

The total intrinsic value of options exercised for the years ended December 31, 2020, 2019 and 2018, was $ 3.2 million, $ 266,000 and $ 666,000 , respectively.

As of December 31, 2020, the unamortized compensation costs related to unvested stock options granted to employees under our 2015 plan was approximately $ 0.8 million, net of estimated forfeitures of $ 71,000 .

These costs will be amortized on a straight-line basis over a weighted-average period of approximately 2.9 years and will be adjusted

for subsequent changes in estimated forfeitures.

We did not capitalize any stock‑based compensation to inventory as of December 31, 2019 and 2018, due to the immateriality of the amount.

These costs will be amortized on a straight-line basis over a weighted-average period of approximately 2.4 years and will be adjusted for subsequent changes in estimated forfeitures.

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

Restricted Stock Awards

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Non-vested as of December 31, 2020

Total fair value of stock awards vested during the years ended December 31, 2019, 2018 and 2017 was $1.5 million, $1.1 million and $490,000, respectively.

As of December 31, 2019, we had $4.2 million of unrecognized compensation expense related to restricted stock awards, which will be recognized over the weighted average period of 1.6 years.

Total fair value of stock awards vested during the years ended December 31, 2020, 2019 and 2018 was $ 1.9 million, $ 1.5 million and $ 1.1 million, respectively.

As of December 31, 2020, we had $ 4.8 million of unrecognized

compensation expense related to restricted stock awards, which will be recognized over the weighted average period of 1.6 years.

The following number of shares of common stock were reserved and available for future issuance as of December 31, 2020 (in thousands, except per share data):

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Effect on diluted net income (loss) per share

We estimate the fair value of stock options using a Black‑Scholes valuation model.

We estimate the fair value of stock options using a Black-Scholes option pricing model.

There were no stock options granted during 2020.

There were 430,000 and 246,000 stock options granted with a weighted-average grant date fair value of $ 1.48 and $ 2.74 per share during 2019 and 2018, respectively.

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Retirement Savings Plan

We have a 401(k) Savings Plan (“Savings Plan”) which qualifies as a thrift plan under Section 401(k) of the Internal Revenue Code.

All full-time U.S.

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Employees may elect to reduce their current compensation by up to the statutory prescribed annual limit and have the amount of such reduction contributed to the 401(k) Plan.

We provide matching to employee contributions up to 4% of the employees’

base pay if employees contribute at least 6% of their base pay.

We provide matching to employee contributions up to 4 % of the employees’ base pay if employees contribute at least 6 % of their base pay.

If the contribution rate is less than 6 % of the base pay, the matching percentage is prorated.

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

and to obtain directors’

and officers’

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

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

Product Warranty

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

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

on the consolidated balance sheets, during 2019 and 2018 (in thousands):

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

Beginning accrued product warranty

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income of approximately $ 12.1 million, $ 2.8 million and $ 6.5 million for the years ended December 31, 2020, 2019 and 2018, respectively.

We recorded a current tax provision of $562,000, $938,000 and $792,000 for the years ended December 31, 2019, 2018 and 2017, respectively.

We recorded a current tax provision of $ 2.0 million, $ 0.6 million and $ 0.9 million for the years ended December 31, 2020, 2019 and 2018, respectively.

The components of the provision for income taxes are summarized below (in thousands):

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Foreign income inclusion

Section 78 gross up

Foreign tax credit

Tax effect in equity method loss or gain from unconsolidated affiliates

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Total net deferred tax assets

As of December 31, 2019, we have federal net operating loss (“NOL”) carryforwards of approximately $58.3 million, which will expire beginning in 2022.

In addition, we have federal tax credit carryforwards of approximately $1.7 million, which will expire beginning in 2027.

As of December 31, 2020, we have federal net operating loss (“NOL”) carryforwards of approximately $ 57.0 million, which will begin to expire in 2024.

In addition, we have federal tax credit carryforwards of approximately $ 0.8 million, which will begin to expire in 2021.

We have utilized all state net operating losses, primarily in the state of California, as of December 31, 2020.

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These factors include our history of losses related to domestic operations, and the lack of carryback capacity to realize deferred tax assets.

The valuation allowance increased by $0.2 million for the year ended December 31, 2019, whereas the valuation allowance decreased by $2.6 million and $46.3 million for the years ended December 31, 2018 and 2017, respectively.

The China Enterprise Income Tax Law (“EIT”) imposes a single uniform income tax rate of 25% on all Chinese enterprises.

Our subsidiaries in China have qualified for a preferential 15% tax rate that is available for High and New Technology Enterprises (“HTE”).

In order to retain the preferential tax rate, we must meet certain operating conditions, satisfy certain product requirements, meet certain headcount requirements and maintain certain levels of research

expenditures.

The valuation allowance increased by $ 0.1 million and $ 0.2 million for the years ended December 31, 2020 and 2019, respectively, whereas the valuation allowance decreased by $ 2.6 million for the year ended December 31, 2018.

The China Enterprise Income Tax Law (“EIT”) imposes a single uniform income tax rate of 25 % on all Chinese enterprises.

Our subsidiaries in China have qualified for a preferential 15 % tax rate that is available for High and New Technology Enterprises (“HTE”).

We realized benefits from this 10 % reduction in tax rate of $ 973,000 , $ 211,000 and $ 764,000 for 2020, 2019 and 2018, respectively.

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The preferential tax rate that we enjoy could be modified or discontinued altogether at any time, which could materially and adversely affect our financial condition and results of operations.

Our subsidiaries in China also qualify for reduction in their taxable income in China for research and development (“R&D”) expenditures.

Government pre-approval is required to claim R&D tax benefits.

Any R&D claim is then submitted with the annual corporate income tax for the taxing authorities’

Historically, we didn’t record such benefit until we received the tax refund from the Chinese government.

Any R&D claim is then submitted with the annual corporate income tax for the taxing authorities’ approval.

Historically, we didn’t record such benefit until we received the tax refund from the Chinese government.

Beginning in 2019, we record the tax benefit in the year it incurs the cost rather than in the year the tax benefit is received.

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Benefits under the tax holidays vary by jurisdiction.

Utilization of the NOL and R&D credit carryforwards may be subject to a substantial annual limitation due to ownership changes that might have occurred previously or that could occur in the future, as provided by Section 382 of the Internal Revenue Code of 1986 (“Section 382”), as well as similar state provisions.

Ownership changes may limit the amount of NOL and tax credit carryforwards that can be utilized to offset future taxable income and tax, respectively.

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To date, such interest and penalties have not been material.

Excluding the effects of recorded valuation allowances for deferred tax assets, $ 14.6 million of the unrecognized tax benefit would favorably impact the effective tax rate in future periods if recognized.

We comply with the laws, regulations, and filing requirements of all jurisdictions in which we conduct business.

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

A reconciliation of the beginning and ending amount of the gross unrecognized tax benefits is as follows (in thousands):

Year Ended December 31,

Gross unrecognized tax benefits balance at beginning of the year

Additions based on tax positions related to the current year

Additions for tax positions of prior years

Decrease related to lapse of statute of limitations

Gross unrecognized tax benefits balance at end of the year

Excluding the effects of recorded valuation allowances for deferred tax assets, $14.6 million of the unrecognized tax benefit would favorably impact the effective tax rate in future periods if recognized.

On June 29, 2020, Governor Newsom signed the highly anticipated budget package for California’s fiscal year that began on July 1, 2020.

As part of the budget package, Assembly Bill 85 (“AB 85”) was enacted into law.

The bill contains several tax changes to help with the budget deficit.

Notably, AB 85 contains two major tax changes:

(1) it suspends the usage of NOLs;

and (2) it limits certain business tax credits for tax years 2020, 2021, and 2022.

The budget has no impact to the Company since the Company has no NOLs and business credits to utilize.

On Sunday, December 27, 2020, a new $900 billion Coronavirus relief bill was signed into law by the President.

The bill includes updates to the Families First Coronavirus Act, CARES Act, the Employee Social Security Deferral and the Paycheck Protection Program.

Since the Company has no taxable income, most of the acts have no direct impact or are not applicable to the Company.

Net Income (Loss) per Share

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Denominator for dilutive net income (loss) per common shares

Basic net income (loss) per share:

Net income (loss) attributable to AXT, Inc.

Net income (loss) to common stockholders

Diluted net income (loss) per share:

Net income (loss) attributable to AXT, Inc.

Net income (loss) to common stockholders

per common share:

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

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Geographical region:

Asia Pacific (excluding China, Taiwan and Japan)

Europe (primarily Germany)

North America (primarily the United States)

Asia Pacific (excluding China, Taiwan and Japan)

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

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North America

Other (expense) income

The components of other (expense) income are summarized below (in thousands):

Other income, net

The components of other income, net are summarized below (in thousands):

Foreign exchange gain (loss)

Gain on available-for-sales securities

Gain from local China government subsidy

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

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

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

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

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

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

On January 1, 2019, we adopted 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.

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

The lease liability is initially measured at the present value of the lease payments, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined,

our secured incremental borrowing rate for the same term as the underlying lease.

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

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

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

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

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

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

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Present value of lease obligations

Current portion

Current portion, included in accrued liabilities

Long-term portion of lease obligations

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

December 31, 2019

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

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

Right-of-use assets obtained in exchange for new operating lease liabilities

Leased assets obtained in exchange for new operating lease liabilities

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

December 31, 2019

Operating lease

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Royalty Agreement

We had 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.

We were to pay up to $7.0 million in royalty payment over eight years that began 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 was lower than a pre-determined amount set forth in this agreement.

In 2010, we and a competitor had entered into a royalty agreement with a term of eight years , terminating December 31, 2018.

We were obligated to make annual payments over an eight-year period.

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

These expenses were included in cost of revenue.

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.

Please see Note 18 of our Notes to Consolidated Financial Statements.

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.

For the year ended December 31, 2020, royalty expense under this agreement was $ 174,000 .

Land Purchase and Investment Agreement

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per share, diluted

Redeemable Noncontrolling Interests

As discussed in Note 1, during the quarter ended December 31, 2020, Tongmei entered into the Capital Investment Agreements with private equity funds that invested approximately $ 48.1 million in the form of redeemable noncontrolling interests representing 7.06 % of the outstanding shares of Tongmei.

The initial carrying amount of the redeemable noncontrolling interests was recorded at fair value on the date of issuance of Tongmei’s common stock, net of issuance costs and presented in temporary equity on the consolidated balance sheets.

This classification is due to the existence of certain contingencies that could result in potential redemption at the fixed purchase price as described below.

We currently do not believe that this is probable thus no accretion of the issuance costs has been recorded.

Pursuant to the Capital Investment Agreements with the Investors, each Investor has the right to require AXT to redeem any or all Tongmei shares held by such Investor at the original purchase price paid by such Investor, without interest, in the event of a material adverse change or if Tongmei does not achieve its IPO on or before December 31, 2022.

This right is suspended when Tongmei submits its formal application to the China Securities Regulatory Commission (“CSRC”).

Tongmei currently plans to submit its formal application to the CSRC in the third quarter of 2021.

However, if on December 31, 2022 the IPO application has been submitted and accepted by the CSRC or the stock exchange and such submission remains under review, then the date when such Investor is entitled to exercise such redemption right shall be deferred to a date when such submission is rejected by the CSRC or stock exchange, or the date when Tongmei withdraws its IPO application.

The process of going public on the STAR Market includes several periods of review and is therefore a lengthy process.

Tongmei does not expect to complete the IPO until mid-2022.

The listing of Tongmei on China’s STAR Market will not change the status of AXT as a U.S.

public company.

There can be no assurances that Tongmei will complete its IPO by December 31, 2022, or at all.

In the event that Investors exercise their redemption rights, we may be required to seek additional capital in order to redeem their Tongmei shares and there would be no assurances that such capital would be available on terms acceptable to us, if at all.

Any redemptions could have a material adverse effect on our business, financial condition and results of operations.

The components of the change in redeemable noncontrolling interests for the year ended December 31, 2020 are presented in the following table (in thousands):

Balance as of January 1, 2020

Increase in redeemable noncontrolling interests due to issuance of Tongmei's common stock

Equity issuance costs incurred

Net income attributable to redeemable noncontrolling interests

Effect of foreign currency translation attributable to redeemable noncontrolling interests

Balance as of December 31, 2020

Subsequent Events

On January 28, 2020, AXT and Sumitomo entered into a basic agreement, pursuant to which AXT and Sumitomo agreed to execute a formal cross license and covenant agreement that will expire on December 31, 2029.

The formal agreement is a fixed-cost cross license and not a variable-cost cross license that is based on revenue or units.

Under the formal agreement, the aggregate fixed cost is $2 million, which is payable in annual installments over a 10-year period.

In November 2018, AXT entered into a credit agreement with Wells Fargo Bank (“Credit Agreement”).

The line of credit has never been drawn on.

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 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.

In 2020, the private equity funds had transferred approximately $ 48.1 million of new capital to Tongmei.

An additional investment of approximately $ 1.5 million of new capital was funded in early January 2021.

Under China regulations these investments must be formally approved by the appropriate government agency and are not deemed to be dilutive until such approval is granted.

The government approved the entire approximately $ 49 million investment on January 25, 2021 at which time the private equity funds owned a minority interest in Tongmei of 7.28 %.

In January 2021, we purchased 0.55 % shares of Tongmei from Beijing Bomeilian Special Ceramics Co., Ltd., previously a minority interest shareholder of BoYu, for $ 3.73 million.

As a result of this purchase, and of the government’s approval January 25, 2021 of the private equity funds we now own 85.5 % of Tongmei.

In February 2021, Tongmei signed a joint venture agreement with certain investors to fund a new company, ChaoYang XinMei High Purity Semiconductor Materials Co., Ltd.

(“ChaoYang XinMei”).

The agreement calls for a total investment of approximately $ 3 million in which Tongmei will fund approximately $ 1.8 million for a 58.5 percent ownership of ChaoYang XinMei.

In February 2021, the investors completed the initial funding of approximately $ 1.5 million.

Tongmei’s portion of the investment was approximately $ 0.9 million.

Form 10-K Summary

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Certificate of Amendment to the Restated Certificate of Incorporation

Certificate of Designation, Preferences and Rights of Series A Preferred Stock (which is incorporated herein by reference to Exhibit 2.1 to the registrant’s form 8-K dated May 28, 1999).

Second Amended and Restated By Laws

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and Wells Fargo Bank, National Association

Form of Capital Increase Agreement between Beijing Tongmei Xtal Technologies Co., Ltd.

and certain investors

Schedule identifying agreements substantially identical to the form of Capital Increase Agreement filed as Exhibit 10.13 hereto

Form of First Supplemental Agreement between Beijing Tongmei Xtal Technology Co., Ltd.

and certain investors

Schedule identifying agreements substantially identical to the form of First Supplemental Agreement filed as Exhibit 10.14 hereto

Form of Second Supplemental Agreement between Beijing Tongmei Xtal Technology Co., Ltd.

and certain investors

Schedule identifying agreements substantially identical to the form of Second Supplemental Agreement filed as Exhibit 10.15 hereto

Computation of Ratio of Earnings to Fixed Charges

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Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

XBRL Instance.

XBRL Taxonomy Extension Schema.

XBRL Taxonomy Extension Calculation Linkbase.

XBRL Taxonomy Extension Definition Linkbase.

XBRL Taxonomy Extension Label Linkbase.

XBRL Taxonomy Extension Presentation Linkbase.

Incorporated by reference to exhibit 3.1 to registrant’s Form 10-K filed with the SEC on March 31, 1999.

Incorporated by reference to exhibit 3.1 to registrant’s Form 10-Q filed with the SEC on August 14, 2000.

Incorporated by reference to exhibit 3.4 to registrant’s Form 10-Q filed with SEC on August 5, 2004.

Incorporated by reference to exhibit 3.1 to registrant’s Form 8-K filed with the SEC on June 14, 1999.

Incorporated by reference to exhibit 3.4 to registrant’s Form 8-K filed with the SEC on May 30, 2001.

Incorporated by reference to exhibit 99.2 to registrant’s Form 8-K filed with the SEC on August 1, 2007.

Incorporated by reference to exhibit 3.1 to registrant’s Form 8-K filed with the SEC on October 26, 2010.

Incorporated by reference to exhibit 10.1 to registrant’s Form 8-K filed with the SEC on October 31, 2014.

Incorporated by reference to exhibit 10.29 to registrant’s Form 8-K filed with the SEC on January 5, 2009.

Incorporated by reference to exhibit 10.30 to registrant’s Form 8-K filed with the SEC on January 5, 2009.

Incorporated by reference to exhibit 10.31 to registrant’s Form 10-K filed with the SEC on March 31, 2009.

Incorporated by reference to exhibit 10.20 to registrant’s Form 10-K filed with the SEC on March 22, 2010.

Incorporated by reference to exhibit 10.1 to registrant’s Form 8-K filed with the SEC on December 4, 2012.

Incorporated by reference to exhibit 10.1 to registrant’s Form 8-K filed with the SEC on August 12, 2014.

Incorporated by reference to appendix A to the registrant’s Definitive Proxy Statement on Schedule 14A filed with the SEC on April 8, 2015.

Incorporated by reference to exhibit 10.1 to registrant’s Form 8-K filed with the SEC on February 26, 2016.

Incorporated by reference to exhibit 10.1 registrant’s Form 8-K filed with the SEC on November 9, 2018.

Inline XBRL Instance.

Inline XBRL Taxonomy Extension Schema.

Inline XBRL Taxonomy Extension Calculation Linkbase.

Inline XBRL Taxonomy Extension Definition Linkbase.

Inline XBRL Taxonomy Extension Label Linkbase.

Inline XBRL Taxonomy Extension Presentation Linkbase.

Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

(1) Incorporated by reference to exhibit 3.1 to registrant’s Form 10-K filed with the SEC on March 31, 1999.

(2) Incorporated by reference to exhibit 3.1 to registrant’s Form 10-Q filed with the SEC on August 14, 2000.

(3) Incorporated by reference to exhibit 3.4 to registrant’s Form 10-Q filed with SEC on August 5, 2004.

(4) Incorporated by reference to exhibit 3.1 to registrant’s Form 8-K filed with the SEC on June 14, 1999.

(5) Incorporated by reference to exhibit 3.4 to registrant’s Form 8-K filed with the SEC on May 30, 2001.

(6) Incorporated by reference to exhibit 99.2 to registrant’s Form 8-K filed with the SEC on August 1, 2007.

(7) Incorporated by reference to exhibit 3.1 to registrant’s Form 8-K filed with the SEC on October 26, 2010.

(8) Incorporated by reference to exhibit 10.1 to registrant’s Form 8-K filed with the SEC on October 31, 2014.

(9) Incorporated by reference to exhibit 10.29 to registrant’s Form 8-K filed with the SEC on January 5, 2009.

(10) Incorporated by reference to exhibit 10.30 to registrant’s Form 8-K filed with the SEC on January 5, 2009.

(11) Incorporated by reference to exhibit 10.31 to registrant’s Form 10-K filed with the SEC on March 31, 2009.

(12) Incorporated by reference to exhibit 10.20 to registrant’s Form 10-K filed with the SEC on March 22, 2010.

(13) Incorporated by reference to exhibit 10.1 to registrant’s Form 8-K filed with the SEC on December 4, 2012.

(14) Incorporated by reference to exhibit 10.1 to registrant’s Form 8-K filed with the SEC on August 12, 2014.

(15) Incorporated by reference to appendix A to the registrant’s Definitive Proxy Statement on Schedule 14A filed with the SEC on April 8, 2015.

(16) Incorporated by reference to exhibit 10.1 to registrant’s Form 8-K filed with the SEC on February 26, 2016.

(17) Incorporated by reference to exhibit 10.1 registrant’s Form 8-K filed with the SEC on November 9, 2018.

Management contract or compensatory plan.

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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 9A. Controls and Procedures