What changed in this filing

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Item 1. Financial Statements

2021-05-14 compared with 2020-11-06 · 446 added, 575 removed, 867 unchanged (54% of the section changed)

2 unchanged sentences

(Unaudited, in thousands, except per share data)

September 30,

Current assets:

1 unchanged sentence

Short-term investments

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

Accounts receivable, net of allowances of $ 217 as of March 31, 2021 and December 31, 2020

Prepaid expenses and other current assets

3 unchanged sentences

Operating lease right-of-use assets

LIABILITIES AND STOCKHOLDERS’ EQUITY

LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND STOCKHOLDERS’ EQUITY

Current liabilities:

2 unchanged sentences

Total current liabilities

Long-term portion of royalty payments

Noncurrent operating lease liabilities

2 unchanged sentences

Commitments and contingencies (Note 12)

Redeemable noncontrolling interests (Note 18)

Stockholders’ equity:

1 unchanged sentence

2,000 shares authorized;

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

883 shares issued and outstanding as of March 31, 2021 and December 31, 2020 (Liquidation preference of $ 7,390 and $ 7,346 as of March 31, 2021 and December 31, 2020)

Common stock, $ 0.001 par value;

70,000 shares authorized;

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

42,276 and 41,967 shares issued and outstanding as of March 31, 2021 and December 31, 2020

Additional paid-in capital

Accumulated deficit

Accumulated other comprehensive loss

Accumulated other comprehensive income

Total AXT, Inc.

2 unchanged sentences

Total stockholders’ equity

Total liabilities and stockholders’ equity

Total liabilities, redeemable noncontrolling interests and stockholders’ equity

See accompanying notes to condensed consolidated financial statements.

2 unchanged sentences

Three Months Ended

Nine Months Ended

September 30,

Cost of revenue

4 unchanged sentences

Income (loss) from operations

Interest income (expense), net

Interest expense, net

Equity in income (loss) of unconsolidated joint ventures

Other income (expense), net

Income (loss) before provision for income taxes

Income before provision for income taxes

Provision for income taxes

Net income (loss)

Net income attributable to noncontrolling interests

Net income attributable to noncontrolling interests and redeemable noncontrolling interests

Net income (loss) attributable to AXT, Inc.

6 unchanged sentences

Three Months Ended

Nine Months Ended

September 30,

Net income (loss)

Other comprehensive income (loss), net of tax:

Change in foreign currency translation gain (loss), 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

Total other comprehensive income (loss), net of tax

Change in foreign currency translation loss, net of tax

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

Total other comprehensive loss, net of tax

Comprehensive income (loss)

4 unchanged sentences

(Unaudited, in thousands)

Nine Months Ended

September 30,

Three Months Ended

Cash flows from operating activities:

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

Adjustments to reconcile net income to net cash used in operating activities:

Depreciation and amortization

Amortization of marketable securities premium

Impairment charge on equity investee

Stock-based compensation

Provision for doubtful accounts

Loss on disposal of equipment

Gain from deconsolidation of a subsidiary

Loss from equity method investments, net

Return on equity method investments

(Gain) loss from equity method investments, net

Changes in operating assets and liabilities:

4 unchanged sentences

Other long-term liabilities, including royalties

Net cash provided by operating activities

Net cash used in operating activities

Cash flows from investing activities:

Purchases of property, plant and equipment

Purchases of available-for-sale debt securities

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

2 unchanged sentences

Proceeds from common stock options exercised

Proceeds from sale of previously consolidated subsidiary shares

Consideration paid to repurchase subsidiary shares from noncontrolling interests

Payments on short-term loan

Proceeds from short-term loan

Proceeds from sale of subsidiary shares to noncontrolling interests

Dividends paid by joint ventures to their minority shareholders

Net cash provided by (used in) financing activities

Formation of new subsidiary with noncontrolling interests

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

Net cash provided by financing activities

Effect of exchange rate changes on cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

Net decrease in cash and cash equivalents

Cash and cash equivalents at the beginning of the year

2 unchanged sentences

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

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

See accompanying notes to condensed consolidated financial statements.

10 unchanged sentences

Actual results could differ materially from those estimates.

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

It is recommended that these condensed consolidated financial statements be read in conjunction with our consolidated financial statements and the notes thereto included in our 2019 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 12, 2020 and our Quarterly Report on Form 10-Q for the three months ended March 31, 2020 and June 30, 2020 filed with the SEC on May 8, 2020 and August 7, 2020, respectively.

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

The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results to be expected in the future or for the full fiscal year.

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

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

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

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

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

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

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

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

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

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

(“ChaoYang LiMei”), ChaoYang XinMei High Purity Semiconductor Materials Co., Ltd.

(“ChaoYang XinMei”), 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.

All significant inter-company accounts and transactions have been eliminated.

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

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

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

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

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

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

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

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

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

Financial Officer was no longer a member of JiYa’s board of financial supervisors.

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

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

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

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

As discussed in Note 7, in May 2019, we purchased the remaining 3 % ownership interest of JinMei that we did not own from retiring members of the JinMei management team for approximately $ 413,000 .

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

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

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

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

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

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

As of March 31, 2021 and December 31, 2020, 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 condensed consolidated balance sheets and in our condensed 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 three months ended March 31, 2021, expenses associated with ChaoYang LiMei had a de minimis impact on our condensed consolidated financial statements.

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.

The agreement calls for a total investment of approximately $ 3 million, of 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.

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 Investment Agreements”), with several private equity investors in China.

In preparation for Tongmei’s application for a listing of shares in an initial public offering (the “IPO”) 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.

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

In 2020, the private equity funds (the “Investors”) 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 approximately $ 49 million investment in its entirety on January 25, 2021 at which time the Investors owned a redeemable noncontrolling interests in Tongmei of 7.28 %.

As of March 31, 2021, Tongmei’s noncontrolling interests and redeemable noncontrolling interests totaled 14.5 %.

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

Investments and Fair Value Measurements

1 unchanged sentence

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

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

September 30, 2020

As of March 31, 2021 and December 31, 2020, our cash, cash equivalents and debt investments are classified as follows (in thousands):

March 31, 2021

December 31, 2020

18 unchanged sentences

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

There were no gross unrealized losses on our available-for-sale debt securities as of September 30, 2020, and historically, such gross unrealized losses have been temporary in nature and we believe that it is probable the principal and interest will be collected in accordance with the contractual terms.

There was an insignificant amount of gross unrealized losses on our available-for-sale debt securities as of March 31, 2021, and historically, such gross unrealized losses have been temporary in nature and we believe that it is probable the principal and interest will be collected in accordance with the contractual terms.

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

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

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

A portion of our debt investments would generate a loss if we sold them on March 31, 2021.

The following table summarizes the fair value and gross unrealized losses related to available-for-sale debt securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of March 31, 2021 (in thousands):

In Loss Position

Loss Position

As of March 31, 2021

Corporate bonds

Total in loss position

7 unchanged sentences

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

The investment balances for the non-consolidated companies are accounted for under the equity method and included in “Other assets” in the condensed consolidated balance sheets and totaled $ 5.8 million and $ 6.0 million as of September 30, 2020 and December 31, 2019, respectively.

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

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

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

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

The investment balances for the non-consolidated companies are accounted for under the equity method and included in “Other assets” in the condensed consolidated balance sheets and totaled $ 7.5 million and $ 6.4 million as of March 31, 2021 and December 31, 2020, respectively.

As of March 31, 2021, there were five companies accounted for under the equity method.

There were no impairment charges in the three months ended March 31, 2021 and 2020.

Fair Value Measurements

1 unchanged sentence

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

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

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

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

As of March 31, 2021 and December 31, 2020, the total unrealized loss, net of tax, included in accumulated other comprehensive income was immaterial.

We believe it is probable the principal and interest will be collected in accordance with the contractual terms, and the unrealized loss on

these securities was due to normal market fluctuations, and not due to increased credit risk or other valuation concerns.

Accounting Standards Codification (“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.

1 unchanged sentence

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

On a recurring basis,

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

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

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

4 unchanged sentences

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

As of September 30, 2020, the net change in fair value from the placement of the hedge to settlement at each month end during the quarter had a de minimis impact on the condensed consolidated results.

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

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

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

As of March 31, 2021, the net change in fair value from the placement of the hedge to settlement at each month end during the quarter had a de minimis impact on the condensed consolidated results.

There were no changes in valuation techniques or related inputs in the three months ended March 31, 2021.

There have been no transfers between fair value measurements levels during the three months ended March 31, 2021.

The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis in accordance with ASC 820 as of March 31, 2021 (in thousands):

Quoted Prices in

4 unchanged sentences

Observable Inputs

September 30, 2020

March 31, 2021

Cash equivalents and investments:

15 unchanged sentences

These assets include investments in privately-held companies accounted for by the equity or cost method (see Note 7).

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

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

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

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

We did not record any other-than-temporary impairment charges for these investments during the three months ended March 31, 2021 and 2020, respectively.

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

September 30,

Raw materials

1 unchanged sentence

Finished goods

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

As of March 31, 2021 and December 31, 2020, carrying values of inventories were net of inventory reserves of $ 18.3 million and $ 17.7 million, respectively, for excess and obsolete inventory and $ 269,000 and $ 162,000 , respectively, for lower of cost or net realizable value reserves.

Property, Plant and Equipment, Net

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

September 30,

Property, plant and equipment:

6 unchanged sentences

Construction in progress

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

As of March 31, 2021, the balance of construction in progress was $ 28.6 million, of which $ 16.8 million was related to our buildings in our new Dingxing and Kazuo locations, $ 4.5 million was for manufacturing equipment purchases not yet placed in service and $ 7.3 million was for our construction in progress for our other consolidated subsidiaries.

As of December 31, 2020, the balance of construction in progress was $ 24.5 million, of which $ 14.2 million was for our buildings in our new Dingxing and Kazuo locations, $ 4.0 million was for manufacturing equipment purchases not yet placed in service and $ 6.3 million was for our construction in progress at our other consolidated subsidiaries.

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

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

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

In addition, the useful life of our buildings located in China was extended to better

align with industry standards.

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

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

Accrued Liabilities

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

September 30,

Preferred stock dividends payable

Payable in connection with repurchase of subsidiaries shares

Accrued compensation and related charges

Payable in connection with land restoration of Nanjing JinMei factory

Preferred stock dividends payable

Payable in connection with construction

Accrued income taxes

Accrued professional services

Accrued product warranty

Payable in connection with land restoration of Nanjing JinMei factory

Advance from customers

Accrued product warranty

Accrued professional services

Current portion of operating lease liabilities

Other tax payable

Current portion of royalty payments

Payable in connection with construction

Other personnel-related costs

Other tax payable

Accrual for sales returns

Payable in connection with repurchase of subsidiaries shares

Other accrued liabilities

Related Party Transactions

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

For the three months ended September

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

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

For the three months ended March 31, 2021 and 2020, JinMei has recorded $ 0 and $ 0 income from agency sales, respectively, which were included in “Other income (expense), net” in the condensed consolidated statements of operations.

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

1 unchanged sentence

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

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

As of September 30, 2020 and December 31, 2019, amounts payable of $ 163,000 and $ 0 , respectively, were included in “Accounts payable” in our condensed consolidated balance sheets.

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

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

As of March 31, 2021 and December 31, 2020, amounts payable of $ 108,000 and $ 0 , respectively, were included in “Accounts payable” in our condensed consolidated balance sheets.

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

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

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

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

As of March 31, 2021 and December 31, 2020, amounts payable of $ 0 and $ 0 , respectively, were included in “Accounts payable” in our condensed consolidated balance sheets.

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

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

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

As of March 31, 2021 and December 31, 2020, amounts payable of $ 0 and $ 0 , respectively, were included in “Accounts payable” in our condensed consolidated balance sheets.

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

1 unchanged sentence

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

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

As of September 30, 2020 and December 31, 2019, the remaining balance of principal and interest totaled $ 302,000 and $ 285,000 , respectively.

As of March 31, 2021, JinMei repaid principal and interest totaling $ 535,000 to Tongmei.

As of March 31, 2021 and December 31, 2020, the remaining balance of principal and interest totaled $ 306,000 and $ 303,000 , respectively.

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

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

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

The loan bears interest at 2.75 % per annum.

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

The loan bore interest at 2.75 % per annum.

During the three months ended June 30, 2017, the repayment of the principal and interest totaling $ 180,000 was received by our consolidated joint venture.

In November 2017, BoYu provided another personal loan of $ 291,000 to the same executive employee.

This loan bears interest at 2.75 % per annum.

Principal and accrued interest are due on November 30, 2020.

This loan bore interest at 2.75 % per annum.

Principal and accrued interest were due on November 30, 2020.

In May 2019, BoYu provided another personal loan of $ 146,000 to the same executive employee.

This loan bears interest at 2.75 % per annum.

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

This loan bore interest at 2.75 % per annum.

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

In March 2020, BoYu provided another personal loan of $ 141,000 to the same executive employee.

This loan bears interest at 2.75 % per annum.

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

As of September 30, 2020 and December 31, 2019 , the balances, including both principal and accrued interest, were $ 618,000 and $ 449,000 , respectively, and included in “Other assets” in our condensed consolidated balance sheets.

This loan bore interest at 2.75 % per annum.

Principal and accrued interest were 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 March 31, 2021 and December 31, 2020 , there were no outstanding personal loans .

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

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

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

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

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

For the three months ended March 31, 2021 and 2020, BoYu has recorded $ 5,000 and $ 254,000 , respectively, in revenue from this customer.

As of March 31, 2021 and December 31, 2020, amounts receivable of $ 5,000 and $ 0 , respectively, were included in “Accounts receivable” in our condensed 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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These companies form part of our overall supply chain strategy.

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

As of March 31, 2021, the investments are summarized below (in thousands):

Investment Balance as of

September 30,

Nanjing JinMei Gallium Co., Ltd.

Chaoyang JinMei Gallium Co., Ltd.

Beijing JiYa Semiconductor Material Co., Ltd.

Beijing BoYu Semiconductor Vessel Craftwork Technology Co., Ltd.

ChaoYang XinMei High Purity Semiconductor Materials Co., Ltd.

Donghai County Dongfang High Purity Electronic Materials 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 that we did not own from retiring members of the JinMei management team for approximately $ 413,000 .

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

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

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

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

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

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

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

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

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

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

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

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

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

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

periods presented.

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

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

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

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

The valuation is based on the asset-based approach.

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

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

The gain on deconsolidation includes the following:

(in thousands)

Fair value of the consideration received

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

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

Gain recognized on deconsolidation of Beijing JiYa Semiconductor Material Co., Ltd.

(in thousands)

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

Carrying value of retained noncontrolling investment

Gain on retained noncontrolling investment due to remeasurement

* These percentages reflect the ownership currently in effect upon the completion of the reorganization in China and the ownership in effect upon the completion of the new capital funding by private equity investors in January 2021.

** 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.

In 2020, the Investors 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 approximately $ 49 million investment in its entirety on January 25, 2021 at which time the Investors owned a redeemable noncontrolling interests in Tongmei of 7.28 %.

As of March 31, 2021, Tongmei’s noncontrolling interests and redeemable noncontrolling interests totaled approximately 14.5 %.

*** In February 2021, Tongmei signed a joint venture agreement with certain investors to fund ChaoYang XinMei.

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

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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.

Our ownership of BoYu is 63 %.

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

Our ownership of BoYu was 67 %.

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

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

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 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 board of directors of each of the privately held raw material companies, the daily operations of each of these companies are managed by local management and not by us.

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

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

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

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

For AXT’s minority investment entities that are not consolidated, the investment balances are included in “Other assets” in our condensed consolidated balance sheets and totaled $ 5.8 million and $ 6.0 million as of September 30, 2020 and December 31, 2019, respectively.

For AXT’s minority investment entities that are not consolidated, the investment balances are included in “Other assets” in our condensed consolidated balance sheets and totaled $ 7.5 million and $ 6.4 million as of March 31, 2021 and December 31, 2020, respectively.

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

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

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

Excluding one fully impaired entity, the equity entities had the following summarized income information (in thousands) for the three months ended March 31, 2021 and 2020:

Three Months Ended

Nine Months Ended

September 30,

Operating income (loss)

Net income (loss)

Our portion of the income and losses from these minority investment entities that are not consolidated and are accounted for under the equity method was a gain of $ 45,000 and a loss of $ 0.2 million, respectively, for the three months ended September 30, 2020 and 2019.

Our portion of the income and losses, including impairment charges, from these minority investment entities that are not consolidated and are accounted for under the equity method was a loss of $ 0.2 million and $ 1.7 million, respectively, for the nine months ended September 30, 2020 and 2019.

Operating income

Our portion of the income and losses from these minority investment entities that are not consolidated and are accounted for under the equity method was a gain of $ 1.1 million and a loss of $ 0.1 million, respectively, for the three months ended March 31, 2021 and 2020.

Stockholders’ Equity

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(in thousands)

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

The changes in stockholders’ equity by component for the three months ended March 31, 2021 are as follows:

Comprehensive

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Stock-based compensation

Formation of new subsidiary with noncontrolling interests

Sale of common stock to employees in connection with the reorganization

Purchase of subsidiary shares from noncontrolling interests

Net income (loss)

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Balance as of March 31, 2021

Common stock options exercised

Stock-based compensation

Net dividend declared by joint ventures

Other comprehensive income

Balance as of June 30, 2020

Common stock options exercised

Sale of subsidiary shares to noncontrolling interests

Stock-based compensation

Other comprehensive income

Balance as of September 30, 2020

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

The changes in stockholders’ equity by component for the three months ended March 31, 2020 are as follows:

Comprehensive

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Balance as of December 31, 2019

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

Stock-based compensation

Net income (loss)

Other comprehensive income

Balance as of March 31, 2019

Common stock options exercised

Purchase of subsidiary shares from noncontrolling interests

Stock-based compensation

Other comprehensive loss

Balance as of June 30, 2019

Common stock options exercised

Stock-based compensation

Net income (loss)

Other comprehensive loss

Balance as of September 30, 2019

Except as shown above related to the deconsolidation of a subsidiary, there were no reclassification adjustments from accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2020 and 2019 .

Balance as of March 31, 2020

There were no reclassification adjustments from accumulated other comprehensive income (loss) for the three months ended March 31, 2021 and 2020 .

Stock Repurchase Program

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No shares were repurchased from 2016 through 2020.

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

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

During the three months ended March 31, 2021, we did not repurchase any shares under the approved stock repurchase program.

As of March 31, 2021, approximately $ 2.7 million remained available for future repurchases under this program.

Currently, we do not plan to repurchase additional shares.

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

Stock-based compensation cost is measured at each grant date, based on the fair value of the award, and is

recognized as expense over the employee’s requisite service period of the award.

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

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

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Three Months Ended

Nine Months Ended

September 30,

Cost of revenue

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Net effect on net income (loss)

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

As of March 31, 2021, the unamortized compensation costs related to unvested stock options granted to employees under our stock option plan was approximately $ 0.7 million, net of estimated forfeitures of $ 63,000 .

These costs will be amortized on a straight-line basis over a weighted-average period of approximately 2.2 years and will be adjusted for subsequent changes in estimated forfeitures.

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

We did not capitalize any stock-based compensation to inventory as of March 31, 2021 and December 31, 2020 due to the immateriality of the amount.

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

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

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

There were no options granted in the three months ended March 31, 2021 and 2020.

The following table summarizes the stock option transactions during the three months ended March 31, 2021 (in thousands, except per share data):

Stock Options

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Canceled and expired

Balance as of September 30, 2020

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

Options exercisable as of September 30, 2020

The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on our closing price of $ 6.12 on September 30, 2020, which would have been received by the option holder had all option holders exercised their options on that date.

Balance as of March 31, 2021

Options vested as of March 31, 2021 and unvested options expected to vest, net of forfeitures

Options exercisable as of March 31, 2021

The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on our closing price of $ 11.66 on March 31, 2021, which would have been received by the option holder had all option holders exercised their options on that date.

Restricted stock awards

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

A summary of activity related to restricted stock awards for the three months ended March 31, 2021 is presented below (in thousands, except per share data):

Weighted-Average

Non-vested as of January 1, 2021

Non-vested as of September 30, 2020

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

Non-vested as of March 31, 2021

As of March 31, 2021, the unamortized compensation costs related to unvested restricted stock awards was approximately $ 4.6 million, which is to be amortized on a straight-line basis over a weighted-average period of approximately 1.5 years.

At-Risk, Performance Shares

In February 2021, the Company issued at-risk, performance shares classified as equity awards.

Expense is recognized quarterly on a straight-line method over the requisite service period, based on the probability of achieving the specified financial performance metric, with changes in expectations recognized as an adjustment to earnings in the period of change.

Compensation cost is not recognized for at-risk, performance shares that do not vest because service or performance conditions are not satisfied and any previously recognized compensation cost is reversed.

At-risk, performance shares are eligible to receive dividend equivalents under the Company's 2015 Equity Incentive Plan (the “Plan”), as determined by the Board of Directors.

The Company will recognize forfeitures as they occur.

The Company's at-risk, performance shares are classified as equity and contain performance and service conditions that must be satisfied for an employee to receive the shares.

The financial performance metric is based upon year-end 2020 actual results as compared to the Company’s year-end actual results in 2021.

All performance shares, if earned, are still subject to annual vesting over a four year period except that no shares are vested on the first anniversary because the performance measurement is based on year-end results for the year 2021.

The fair value of the at-risk, performance shares is determined based on the closing price of the Company’s common stock on the second day following the Compensation Committee and Board of Directors approval date, which is considered the grant date.

The fair value per share of the at-risk, performance shares classified as equity awards granted in February 2021 was $ 15.37 .

None of the at-risk, performance shares had vested as of March 31, 2021.

On February 17, 2021, the Compensation Committee recommended, and the Board approved, at-risk, performance shares under the Plan, wherein 75,420 shares were granted to Dr.

Morris Young, our Chief Executive Officer, and 25,650 shares were granted to Gary Fischer, our Chief Financial Officer and Corporate Secretary.

A summary of the status of our unvested at-risk, performance shares as of March 31, 2021 is presented below (in thousands, except per share data):

Weighted-Average

Non-vested as of January 1, 2021

Non-vested as of March 31, 2021

*The number of share presented is based on achieving 100 % of the targeted financial performance metric as defined in the at-risk, performance shares agreement.

As of March 31, 2021, there was $ 1.4 million of unrecognized compensation expense related to unvested at-risk, performance shares that is expected to be recognized over a weighted-average period of 2.1 years.

Net Income (Loss) Per Share

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Three Months Ended

Nine Months Ended

September 30,

Net income (loss) attributable to AXT, Inc.

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

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

The 883,000 shares of $ 0.001 par value Series A preferred stock issued and outstanding as of March 31, 2021 and December 31, 2020, valued at $ 3,532,000 , are non-voting and non-convertible preferred stock with a 5.0 % cumulative annual dividend rate payable when declared by the board of directors and a $ 4 per share liquidation preference over common stock, which must be paid before any distribution is made to common stockholders.

These preferred shares were issued to Lyte Optronics, Inc.

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Three Months Ended

Nine Months Ended

September 30,

Product Type:

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Three Months Ended

Nine Months Ended

September 30,

Geographical region:

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

September 30,

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

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Significant Customers

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

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

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

Our top five customers, although not the same five customers for each period, represented 33 % and 41 % of our revenue for the nine months ended September 30, 2020 and 2019, respectively.

No customers represented 10 % of our revenue for the three months ended March 31, 2021 while two customers, Landmark and Osram, represented 17 % and 15 % , respectively, of our revenue for the three months ended March 31, 2020.

Our top five customers, although not the same five customers for each period, represented 26 % and 49 % of our revenue for the three months ended March 31, 2021 and 2020, respectively.

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

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

Two customers accounted for 14 % and 10 % of

our accounts receivable balance as of March 31, 2021 , and three customers accounted for 20 %, 13 % and 12 % of our accounts receivable balance as of March 31, 2020.

Commitments and Contingencies

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

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

The following table reflects the change in our warranty accrual which is included in “Accrued liabilities” on the condensed consolidated balance sheets, as of March 31, 2021 and 2020 (in thousands):

Three Months Ended

Nine Months Ended

September 30,

Beginning accrued product warranty

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Land Purchase and Investment Agreement

We have established a wafer processing production line in Dingxing, China.

We have established a wafer process production line in Dingxing, China.

In addition to a land rights and building purchase agreement that we entered into with a private real estate development company to acquire our new manufacturing facility, we also entered into a cooperation agreement with the Dingxing local government.

In addition to pledging its full support and cooperation, the Dingxing local government will issue certain tax credits to us as we achieve certain milestones.

In addition to pledging its full support and cooperation, the Dingxing local government will issue certain credits or rebates to us as we achieve certain milestones.

We, in turn, agreed to hire local workers over time, pay taxes when due and eventually demonstrate a total investment of approximately $ 90 million in value, assets and capital.

The investment will include cash paid for the land and buildings, cash on deposit in our name at local banks, the gross value of new and used equipment (including future equipment that might be used for indium phosphide and germanium substrates production), the deemed value for our customer list or the end user of our substrates (for example, the end users of the 3-D sensing VCSELs), a deemed value for employment of local citizens, a deemed value for our proprietary process technology, other intellectual property, other intangibles and additional items of value.

The investment will include cash paid for the land and buildings, cash on deposit in our name at local banks, the gross value of new and used equipment (including future equipment that might be used for indium phosphide and germanium substrates production), the deemed value for our customer list or the end user of our substrates, for example, the end users of 3-D sensing VCSELs (vertical cavity surface

emitting lasers), a deemed value for employment of local citizens, a deemed value for our proprietary process technology, other intellectual property, other intangibles and additional items of value.

There is no timeline or deadline by which this must be accomplished, rather it is a good faith covenant entered into between AXT and the Dingxing local government.

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

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

As of March 31, 2021, we do not have any outstanding purchase orders that will incur a penalty if cancelled by the Company.

Legal Proceedings

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Other Income (Expense), Net

Other income (expense), net for the three and nine months ended September 30, 2020, includes a grant of $ 0 and $ 3.0 million, respectively, from a Chinese provincial government agency as an award for relocating to its province.

In addition, we incurred a foreign currency transaction exchange loss of $ 135,000 and gain of $ 165,000 for the three months ended September 30, 2020 and 2019, respectively.

We incurred a foreign currency transaction exchange loss of $ 126,000 and gain of $ 85,000 for the nine months ended September 30, 2020 and 2019, respectively.

Other income (expense), net for the three months ended March 31, 2021 and 2020, includes a grant of $ 0.1 million and $ 1.4 million, respectively, from a Chinese provincial government agency as an award for relocating to its province.

In addition, we incurred a foreign currency transaction exchange loss of $ 173,000 and $ 43,000 for the three months ended March 31, 2021 and 2020, respectively.

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

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

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

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

Income tax expense for the three months ended March 31, 2021 includes no interest and penalties.

As of March 31, 2021, we have no accrued interest and penalties related to uncertain tax positions.

We file income tax returns in the U.S.

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

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

Provision for income taxes for the three months ended March 31, 2021 was mostly related to our wholly owned China subsidiaries and our partially owned subsidiaries in China.

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

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

operations for the three months ended March 31, 2021 due to the loss in the

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

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Contract Balances

We receive payments from customers based on a billing schedule as established in our contracts.

Contract assets are recorded when we have a conditional right to consideration for our completed performance under the contracts.

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

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

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

September 30,

We do not have any material contract assets as of March 31, 2021.

In some contracts we require payment in advance of shipment, per a billing schedule reflected in our customer contracts, and the payment is recorded as a contract liability.

The following table reflects the contract liabilities balance, which is included in “Accrued liabilities” on the condensed consolidated balance sheets, as of March 31, 2021 and December 31, 2020 (in thousands):

Contract liabilities

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

During the three months ended March 31, 2021, the Company recognized $ 248,000 of revenue that was included in the contract balances as of December 31, 2020.

Disaggregated Revenue

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

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

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

The revolving credit facility, which was never drawn down, was collateralized by substantially all of the assets of the Company located within the United States, subject to certain exceptions.

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

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

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

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

The commitments under the Credit Agreement, as amended by the First Amendment, expired on November 30, 2020 and there were no loans thereunder .

As of March 31, 2021, the Credit agreement has expired and no loans or letters of credit were outstanding.

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

Accrued interest is calculated monthly and paid quarterly.

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

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

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

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

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

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

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

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

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

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

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

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

The repayment of the loan was due on March 22, 2021, however the credit facility contained an option to renew for an additional six months , which was exercised in March 2021.

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 March 31, 2021, $ 8.8 million was included in “Bank loan” in our condensed consolidated balance sheets.

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

Accrued interest is calculated monthly and paid quarterly.

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

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

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

In March 2020, BoYu borrowed $ 0.4 million against the credit facility.

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

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

In December 2020, BoYu repaid the outstanding loan amount of $ 0.4 million and renewed the credit facility with a $ 1.5 million line of credit at an annual interest rate of approximately 0.07 % over the loan prime rate.

Accrued interest is calculated monthly and paid monthly.

The annual interest rate was approximately 3.92 % as of March 31, 2021.

In December 2020, BoYu borrowed $ 1.5 million against the credit facility.

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

As of March 31, 2021, $ 1.5 million was included in “Bank loan” in our condensed consolidated balance sheets.

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

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

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

Under the terms of the facility lease

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

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

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

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

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

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

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

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

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

The lease classification affects the expense recognition in the statement of operations.

Operating lease charges are recorded entirely in operating expenses.

Finance lease charges are split, where amortization of the right-of-use asset is recorded in operating expenses and an implied interest component is recorded in interest expense.

The expense recognition for operating leases and finance leases under ASC 842 is substantially consistent with ASC 840.

As a result, there is no significant difference in our results of operations presented in our consolidated statement of operations and consolidated statement of comprehensive income (loss) for each year presented.

We adopted ASC 842 using a modified retrospective approach for all leases existing at January 1, 2019.

The adoption of ASC 842 had a material impact on our consolidated balance sheet.

The most significant impact was the recognition of the operating lease right-of-use assets and the liability for operating leases.

Accordingly, upon adoption, leases that were classified as operating leases under ASC 840 were classified as operating leases under ASC 842, and we recorded an adjustment of $ 1.1 million to operating lease right-of-use assets and the related lease liability.

The lease liability is based on the present value of the remaining minimum lease payments, determined under ASC 840, discounted using our secured incremental borrowing rate at the effective date of January 1, 2019, using the original lease term as the tenor.

As permitted under ASC 842, we elected several practical expedients that permit us to not reassess (1) whether a contract is or contains a lease, (2) the classification of existing leases, and (3) whether previously capitalized costs continue to qualify as initial indirect costs.

The application of the practical expedients did not have a material impact on the measurement of the operating lease liability.

Leases are classified as either finance leases or operating leases.

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

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

As of March 31, 2021, the maturities of our operating lease liabilities (excluding short-term leases) are as follows (in thousands):

Maturity of Lease Liabilities

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

September 30,

Weighted-average remaining lease term (years)

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

Nine Months Ended

September 30,

Three Months Ended

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

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Three Months Ended

Nine Months Ended

September 30,

Operating lease

Short-term lease expense

Recent Accounting Pronouncements

Accounting Standard Update (“ASU”) No.

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

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

Under ASU 2016-13, existing guidance on reporting credit losses for trade and other receivables and available for sale debt securities have been replaced with a new forward-looking “expected loss” model that has resulted in the earlier recognition of allowances for losses.

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

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

Subsequent Events

Accrued interest is calculated monthly and paid quarterly.

The combined loan totals $ 5.6 million.

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

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

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

Redeemable Noncontrolling Interests

As discussed in Note 1, during the quarter ended December 31, 2020, Tongmei entered into the Capital Investment Agreements with Investors that invested approximately $ 48.1 million in the form of redeemable noncontrolling interests representing 7.06 % of the outstanding shares of 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 Investors owned a redeemable noncontrolling interests in Tongmei of 7.28 %.

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 amortization 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 quarter ended March 31, 2021 are presented in the following table (in thousands):

Balance as of January 1, 2021

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

Increase in redeemable noncontrolling interests due to formation of new subsidiary with noncontrolling interests

Equity issuance costs incurred during the quarter ended March 31, 2021

Net income attributable to redeemable noncontrolling interests

Effect of foreign currency translation attributable to redeemable noncontrolling interests

Balance as of March 31, 2021

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

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

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

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

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

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

Additionally, statements regarding completing steps in connection with the proposed listing of shares of our wafer manufacturing company, Beijing Tongmei Xtal Technology Co., Ltd.

(“Tongmei”), on the Shanghai Stock Exchange’s Sci-Tech innovAtion boaRd (the “STAR Market”), being accepted to list shares of Tongmei on the STAR Market, the timing and completion of such listing of shares of Tongmei on the STAR Market and the completion of entity reorganizations and the alignment of assets under Tongmei are forward looking statements.

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

Our forward-looking statements are based upon assumptions that are subject to uncertainties and factors relating to the company’s operations and business environment, which could cause actual results to differ materially from those expressed or implied in the forward-looking statements contained in this report.

These uncertainties and factors include but are not limited to:

the withdrawal, cancellations or requests for redemptions by private equity funds in China of their investments in Tongmei, the administrative challenges in satisfying the requirements of various government agencies in China in connection with the investments in Tongmei and the listing of shares of Tongmei on the STAR Market, continued open access to companies to list shares on the STAR Market, investor enthusiasm for new listings of shares on the STAR Market and geopolitical tensions between China and the United States.

Additional uncertainties and factors include, but are not limited to:

the timing and receipt of significant orders;

the cancellation of orders and return of product;

emerging applications using chips or devices fabricated on our substrates;

end-user acceptance of products containing chips or devices fabricated on our substrates;

our ability to bring new products to market;

product announcements by our competitors;

the ability to control costs and improve efficiency;

the ability to utilize our manufacturing capacity;

product yields and their impact on gross margins;

the relocation of manufacturing lines and ramping of production;

possible factory shutdowns as a result of air pollution in China;

COVID-19 or other outbreaks of a contagious disease;

the availability of COVID-19 vaccines;

tariffs and other trade war issues;

the financial performance of our partially owned supply chain companies;

policies and regulations in China;

and other factors as set forth in this Quarterly Report on Form 10-Q, including those set forth under the section entitled “Risk Factors” in Item 1A below.

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

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

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

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

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

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

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

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

InP is a high-performance semiconductor substrate used in broadband and fiber optic applications and data center connectivity.

InP substrates can also be used in 5G applications.

InP is a high-performance semiconductor substrate used in broadband and fiber optic applications, 5G infrastructure and data center connectivity.

InP substrates are also used in biometric wearables and other health monitoring applications.

In recent years, InP demand has increased.

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A new application for semi-conducting GaAs substrates is 3-D sensing chips using VCSELs (vertical cavity surface emitting lasers) as an array of lasers on a single chip that can be used in cell phones and other devices.

GaAs wafers could also be used for making micro-LEDs.

Ge substrates are used in applications such as solar cells for space and terrestrial photovoltaic applications.

Our supply chain strategy includes partial ownership in raw material companies.

Two of these companies are consolidated.

One of these companies produces pyrolytic boron nitride (pBN) crucibles used in the high temperature (typically in the range 500 C to 1,500 C) growth process of single crystal ingots, effusion rings when growing OLED (Organic Light Emitting Diode) tools, epitaxial layer growth in MOCVD (Metal-Organic Chemical Vapor Deposition) reactors and MBE (Molecular Beam Epitaxy) reactors.

Our supply chain strategy includes two consolidated raw material companies.

One of these consolidated companies produces pyrolytic boron nitride (pBN) crucibles used in the high temperature (typically in the range 500 C to 1,500 C) growth process of single crystal ingots, effusion rings when growing OLED (Organic Light Emitting Diode) tools, epitaxial layer growth in MOCVD (Metal-Organic Chemical Vapor Deposition) reactors and MBE (Molecular Beam Epitaxy) reactors.

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

The second consolidated company converts raw gallium to purified gallium.

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

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

In addition to purified gallium, the second consolidated company also produces InP base material which we then use to grow single crystal ingots.

In prior years, a third company was consolidated, but, in the first quarter of 2019, we sold a portion of our ownership to our investment partner and, as of March 11, 2019, we ceased to consolidate this company.

Our substrate product group generated 81%, 79% and 80% of our consolidated revenue and our raw materials product group generated 19%, 21% and 20% for the years 2019, 2018 and 2017, respectively.

Our substrate product group generated 79%, 81% and 79% of our consolidated revenue and our raw materials product group generated 21%, 19% and 21% for 2020, 2019 and 2018, respectively.

The following chart shows our substrate products and their materials, diameters and illustrative applications and shows our raw materials group primary products and their illustrative uses and applications.

Substrate Group

Wafer Diameter

Substrate Group and Wafer Diameter

Sample of Applications

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• Infrared light-emitting diode (LEDs) motion control

• Lidar for robotics and autonomous vehicles

• Infrared thermal imaging

Gallium Arsenide

1”, 2”, 3”, 4”, 5”, 6”

• Wi-Fi devices

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• IoT devices

1”, 2”, 3”, 4”, 5”, 6”

• High-performance transistors

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• High efficiency solar cells for drones and automobiles

• Solar cells

Gallium Arsenide

1”, 2”, 3”, 4”, 5", 6”

• High brightness LEDs

(GaAs - semi-conducting)

• Screen displays using micro-LEDs

1”, 2”, 3”, 4”, 5", 6”

• Printer head lasers and LEDs

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• Night vision goggles

• Satellite solar cells

• Lidar for robotics and autonomous vehicles

• Solar cells

• Multi-junction solar cells for satellites

• Optical sensors and detectors

• Terrestrial concentrated photo voltaic (CPV) cells

• Multi-junction solar cells for satellites

• Infrared detectors

• Carrier wafer for LED

Raw Materials Group

6N+ purified gallium

6N+ and 7N+ purified gallium

• Key material in single crystal ingots such as:

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- Gallium Nitride (GaN)

- Gallium Antimonide (GaSb)

- Gallium Antimonite (GaSb)

- Gallium Phosphide (GaP)

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We believe this supply chain arrangement provides us with pricing advantages, reliable supply, market trend visibility and better sourcing lead-times for key raw materials central to manufacturing our substrates.

Our subsidiaries and joint venture companies produce materials, including raw gallium (4N Ga), high purity gallium (6N Ga), arsenic, germanium, germanium dioxide, pyrolytic boron nitride (pBN) crucibles and boron oxide (B2O3).

Our ownership and the ownership held by one of the joint venture companies range from 91.5% to 25%.

Our raw material companies produce materials, including raw gallium (4N Ga), high purity gallium (6N and 7N Ga), starting material for InP, arsenic, germanium, germanium dioxide, pyrolytic boron nitride (pBN) crucibles and boron oxide (B2O3).

We have board representation in all of these raw material companies.

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To create room and upgrade the district, the city instructed virtually all existing manufacturing companies, including AXT, to relocate all or some of their manufacturing lines.

We were instructed to move our gallium arsenide manufacturing line out of the area.

For reasons of manufacturing efficiency, we elected to also move our germanium manufacturing line.

We were instructed to relocate our gallium arsenide manufacturing lines.

For reasons of manufacturing efficiency, we elected to also move part of our germanium manufacturing line.

Our indium phosphide manufacturing line, as well as various administrative and sales functions, will remain primarily at our original site for the near future.

Begun in 2017, the relocation of our gallium arsenide production lines is now largely completed.

We entered into volume production in 2020.

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

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

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

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

This process is ongoing.

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

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

The new facilities are intended to give us the long-term capacity and a new level of technological sophistication in our manufacturing capabilities to support the major trends that we believe are likely to drive demand for our products in the years ahead.

Customer qualification of the Dingxing site requires us to continue to diligently address the many details that arise at both of the new sites.

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

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

Some of our larger, more sophisticated customers qualified gallium arsenide wafers from the new sites in 2020.

A few customers are still in that process.

Our new facilities enabled us to expand capacity and upgrade some of our equipment.

The new buildings are large enough that we can install additional equipment if market demand increases or if we gain market share.

We also acquired sufficient land to enable us to add facilities, if needed in the future.

We believe our ability to add capacity gives us a competitive advantage.

In addition, a new level of technological sophistication in our manufacturing capabilities will enable us to support the major trends that we believe are likely to drive demand for our products in the years ahead.

Customer qualifications and expanding capacity as needed require us to continue to diligently address the many details that arise at both of the new sites.

A failure to properly accomplish this could result in disruption to our production and have a material adverse impact on our revenue, our results of operations and our financial condition.

If we fail to meet the product qualification requirements of a customer, we may lose sales to that customer.

If we fail to meet the product qualification and volume requirements of a customer, we may lose sales to that customer.

Our reputation may also be damaged.

Any loss of sales could have a material adverse effect on our revenue, our results of operations and our financial condition.

On November 16, 2020 we announced a strategic initiative to access China’s capital markets by beginning a process to list shares of Tongmei in an initial public offering (the “IPO”) on the STAR Market, an exchange intended to support innovative companies in China.

We formed and founded Tongmei in 1998 and believe Tongmei has grown into a company that will be an attractive offering on the STAR Market.

To qualify for a STAR Market listing, the first major step in the process was to engage private equity firms in China (“Investors”) to invest funds in Tongmei.

By December 31, 2020, 10 Investors had engaged with Tongmei for a total investment of approximately $48.1 million.

(The currency used in the investment transactions was the Chinese renminbi, which has been converted to approximate U.S.

dollars for this report.) The remaining investment of approximately $1.5 million of new capital was funded in early January, 2021.

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 approximately $49 million investment in its entirety on January 25, 2021.

In exchange for an investment of approximately $49 million, the Investors received a 7.28% noncontrolling interest in Tongmei.

Pursuant to the investment agreements (“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 for IPO to the China Securities Regulatory Commission (“CSRC”).

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

Tongmei would be required to sell a minimum of 10% of its equity in the IPO.

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.

An additional step in the STAR Market IPO process involves certain entity reorganizations and alignment of assets under Tongmei.

In this regard our two consolidated raw material companies, Nanjing JinMei Gallium Co., Ltd.

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

(“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.

The following organization chart depicts the consolidated structure as of March 31, 2021;

In September 2018, the Trump Administration announced a list of thousands of categories of goods that became subject to tariffs when imported into the United States.

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

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

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

For the three months ended March 31, 2021, we paid approximately $273,000 in tariffs.

In 2020, we paid approximately $1.3 million in tariffs.

The future impact of tariffs and trade wars is uncertain.

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We prepare our condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America.

Accordingly, we make estimates, assumptions and judgments that affect the

amounts reported on our condensed consolidated financial statements.

Accordingly, we make estimates, assumptions and judgments that affect the amounts reported on our condensed consolidated financial statements.

These estimates, assumptions and judgments about future events and their effects on our results cannot be determined with certainty, and are made based upon our historical experience and on other assumptions that are believed to be reasonable under the circumstances.

These estimates may change as new events occur or additional information is obtained, and we may periodically be faced with uncertainties, the outcomes of which are not within our control and may not be known for a prolonged period of time.

estimates may change as new events occur or additional information is obtained, and we may periodically be faced with uncertainties, the outcomes of which are not within our control and may not be known for a prolonged period of time.

We have identified the policies below as critical to our business operations and understanding of our financial condition and results of operations.

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

As of September 30, 2020 and December 31, 2019, our accounts receivable, net balance was $22.7 million and $19.0 million, respectively, which was net of an allowance for doubtful accounts of $121,000 and $34,000, respectively.

As of March 31, 2021 and December 31, 2020, our accounts receivable, net balance was $28.4 million and $24.6 million, respectively, which was net of an allowance for doubtful accounts of $217,000 and $217,000, respectively.

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

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

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

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

Warranty Reserve

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Warranty costs are accrued at the time revenue is recognized.

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

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

As of March 31, 2021 and December 31, 2020, accrued product warranties totaled $582,000 and $609,000, respectively.

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

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

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

As of September 30, 2020 and December 31, 2019, we had an inventory reserve of $16.9 million and $16.4 million, respectively, for excess and obsolete inventory and $86,000 and $91,000, respectively, for lower of cost or net realizable value reserves.

As of March 31, 2021 and December 31, 2020, we had an inventory reserve of $18.3 million and $17.7 million, respectively, for excess and obsolete inventory and $269,000 and $162,000, respectively, for lower of cost or net realizable value reserves.

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

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

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

Except as mentioned above, there

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

There were no impairment charges during the three months ended March 31, 2021 and 2020.

Fair Value of Investments

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

As of September 30, 2020, the net change in fair value from the placement of the hedge to settlement at each month end during the quarter had a de minimis impact to the consolidated results.

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

As of March 31, 2021, the net change in fair value from the placement of the hedge to settlement at each month end during the quarter had a de minimis impact to the consolidated results.

There have been no transfers between fair value measurement levels during the three months ended March 31, 2021 and 2020.

Impairment of Long-Lived Assets

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

Assets held for

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

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

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

We had no “Assets held for sale” or any impairment of long-lived assets on the condensed consolidated balance sheets as of March 31, 2021 and December 31, 2020.

Stock-based Compensation

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We utilize the Black-Scholes option pricing model to estimate the grant date fair value of stock options, which requires the input of highly subjective assumptions, including estimating stock price volatility and expected term.

Historical volatility of our stock price was used while the expected term for our options was estimated based on historical option exercise behavior and post-vesting forfeitures of options, and the contractual term, the vesting period and the expected term of the outstanding options.

Historical volatility of our stock price was

used while the expected term for our options was estimated based on historical option exercise behavior and post-vesting forfeitures of options, and the contractual term, the vesting period and the expected term of the outstanding options.

Further, we apply an expected forfeiture rate in determining the amount of share-based compensation.

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The cost of restricted stock awards is determined using the fair value of our common stock on the date of grant.

The award of performance Restricted Stock covering Shares (the “Performance Award”) will be subject to vesting requirements relating to both the recipient of the Performance Award (the “Participant”) continuously remaining a Service Provider through specified dates and achievement of specified performance-based criteria (“Performance Goal”).

Any capitalized term not defined herein will have the meaning ascribed to such term in the 2015 Equity Incentive Plan.

The Performance Goal will be measured over the Company’s fiscal year 2021 (the “Performance Period”).

The financial Performance Goal is a metric based upon year-end 2020 actual results as compared to the Company’s year-end actual results in 2021.

We recognize the compensation costs net of an estimated forfeiture rate over the requisite service period of the options award, which is generally the vesting term of four years.

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

Change in Accounting Estimate – Useful Life of Equipment and Facilities

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

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

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

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

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

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

Impact of the COVID-19 Pandemic

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

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

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

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

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

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

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

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

As a result of these factors, we believe that the COVID-19 pandemic could have a material adverse impact on our business, consolidated results of operations and financial condition until the COVID-19 pandemic subsides and related public health measures are reduced or eliminated.

As a result of these factors, we believe that the COVID-19 pandemic could

have a material adverse impact on our business, consolidated results of operations and financial condition until the COVID-19 pandemic subsides and related public health measures are reduced or eliminated.

Results of Operations

Three Months Ended

Nine Months Ended

September 30,

Product Type:

($ in thousands)

Raw materials and other

Total revenue

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

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

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

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

Revenue increased $3.5 million, or 5.4%, to $68.3 million for the nine months ended September 30, 2020 from $64.8 million for the nine months ended September 30, 2019.

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

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

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

Revenue increased $10.6 million, or 51.3%, to $31.4 million for the three months ended March 31, 2021 from $20.7 million for the three months ended March 31, 2020.

The substrate revenue increase for the three months ended March 31, 2021 as compared to the same period in 2020 was primarily the result of higher demand for our InP wafer substrates followed by an increase in revenue for semi-insulating GaAs wafer substrates.

Demand for InP used in 5G and related 5G technologies was a primary contributor to InP revenue growth.

In addition, data center connectivity applications contributed to InP revenue.

Demand for GaAs used in LED applications was the primary contributor to GaAs revenue growth, primarily in automotive applications.

Raw materials sales increased $4.1 million, or 107.6%, to $8.0 million for the three months ended March 31, 2021 as compared to the same period in 2020.

The raw materials revenue increase for the three months ended March 31, 2021 as compared to the same period in 2020 was primarily the result of an increase in sales of refined gallium and pBN crucibles resulting from stronger market demand.

In addition, pricing for purified gallium increased .

Revenue by Geographic Region

Three Months Ended

September 30,

($ in thousands)

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Total revenue

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

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

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

Revenue in Asia Pacific decreased by $0.8 million primarily due to decreased demand for pBN crucibles sold by one of our consolidated subsidiaries.

Revenue in China increased $10.8 million for the three months ended March 31, 2021, primarily due to higher demand for our InP, GaAs and Ge wafer substrates and, refined gallium and pBN crucibles sold by two of our consolidated subsidiaries.

Revenue in Taiwan decreased $2.2 million primarily due to an end customer who began buying directly from us instead of from an epitaxial growth customer in Taiwan, and decreased demand for InP and GaAs wafer substrates.

Revenue in Japan increased $1.2 million primarily due to higher demand for our InP wafer substrates.

Revenue in Asia Pacific increased by $0.5 million primarily due to increased demand for GaAs wafer

substrates partially offset by decreased demand for pBN crucibles sold by one of our consolidated subsidiaries.

Revenue in Europe decreased by $0.8 million primarily due to decreased demand for our Ge wafer substrates partially offset by increased demand for our GaAs wafer substrates.

Revenue in North America increased by $1.1 million due to higher demand for our InP wafer substrates partially offset by lower demand for our GaAs wafer substrates.

Nine Months Ended

September 30,

($ in thousands)

% of total revenue

Asia Pacific (excluding China, Taiwan and Japan)

% of total revenue

Europe (primarily Germany)

% of total revenue

North America (primarily the United States)

% of total revenue

Total revenue

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

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

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

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

Revenue in Europe increased $1.3 million primarily due to increased demand

for Ge wafer substrates and pBN crucibles sold by one of our consolidated subsidiaries partially offset by lower demand for our GaAs and InP wafer substrates.

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

Three Months Ended

Nine Months Ended

September 30,

($ in thousands)

Gross Margin %

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

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

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

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

Gross profit increased $6.0 million, or 108.9%, to $11.5 million for the three months ended March 31, 2021 from $5.5 million for the three months ended March 31, 2020.

The increase in gross profit is attributed to higher revenue and a change in product mix.

Selling, General and Administrative Expenses

Three Months Ended

Nine Months Ended

September 30,

($ in thousands)

Selling, general and administrative expenses

% of total revenue

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

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

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

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

Selling, general and administrative expenses increased $0.8 million, or 17.3%, to $5.6 million for the three months ended March 31, 2021 from $4.7 million for the three months ended March 31, 2020.

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

Research and Development

Three Months Ended

Nine Months Ended

September 30,

($ in thousands)

Research and development

% of total revenue

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

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

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

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

Interest Income (Expense), Net

Research and development expenses increased $1.0 million, or 70.9%, to $2.4 million for the three months ended March 31, 2021 from $1.4 million for the three months ended March 31, 2020.

The increase in research and development expenses for the three months ended March 31, 2021 was primarily due to development expenses for 8-inch GaAs wafer substrates and development of new features for certain of our GaAs and InP wafer substrates, product testing and personnel-related expenses.

Interest Expense, Net

Three Months Ended

Nine Months Ended

September 30,

($ in thousands)

Interest income (expense), net

Interest expense, net

% of total revenue

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

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

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

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

Interest expense, net increased $21,000 or 72.4% for the three months ended March 31, 2021 as compared to the same period in 2020.

Interest expense, net increased primarily due to significantly lower interest rates on our investments resulting from the economic impact of the COVID-19 pandemic and interest expense incurred by Tongmei under the credit facility.

Equity in Income (Loss) of Unconsolidated Joint Ventures

Three Months Ended

Nine Months Ended

September 30,

Equity in Income (Loss)

September 30,

Equity in Loss

($ in thousands)

Equity in income (loss) of unconsolidated joint ventures

% of total revenue

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

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

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

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

The $1.7 million aggregate loss for the nine months ended September 30, 2019 includes an impairment charge of $1.1 million for a germanium materials company in China in which we have a 25% ownership interest (See Note 7) and the poor financial results of two raw gallium companies.

The equity in income (loss) of unconsolidated joint venture companies was a gain of $1.1 million for the three months ended March 31, 2021 as compared to a loss of $120,000 for the three months ended March 31, 2020.

The current quarter gain is primarily due to positive financial results of two raw gallium companies that benefited from higher average selling prices.

Other Income (Expense), Net

Three Months Ended

Nine Months Ended

September 30,

Other Income (Expense)

September 30,

Other Income (Expense)

($ in thousands)

Other income (expense), net

% of total revenue

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

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

Other income (expense), net increased $3.0 million to an income of $2.9 million for the nine months ended September 30, 2020 from an expense of $55,000 for the nine months ended September 30, 2019.

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

Other income (expense), net decreased $1.5 million to an expense of $0.1 million for the three months ended March 31, 2021 from an income of $1.4 million for the three months ended March 31, 2020.

Other income (expense), net decreased primarily due to a grant of $1.4 million received from a provincial government agency as an award for relocating to its province in March 2020, which was not repeated in March 2021.

Provision for Income Taxes

Three Months Ended

Nine Months Ended

September 30,

($ in thousands)

Provision for income taxes

% of total revenue

Provision for income taxes for the three and nine months ended September 30, 2020 was $637,000 and $1.9 million, respectively, which was primarily related to higher profits in China and a tax on a rebate we received from a purchase of land use rights when we began the relocation.

Provision for income taxes for the three months ended March 31, 2021 was $746,000, which was primarily related to higher profits in China and a tax on a rebate we received from a purchase of land use rights when we began the relocation.

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

4 unchanged sentences

and China-based operations.

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

Due to our uncertainty regarding our future profitability in the U.S., we recorded a full valuation allowance against our net deferred tax assets of $19.8 million for the years 2020 and 2019.

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

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

The CARES Act includes several significant business tax provisions, including modification to the taxable

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

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

1 unchanged sentence

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

Net Income Attributable to Noncontrolling Interests

Net Income Attributable to Noncontrolling Interests and Redeemable Noncontrolling Interests

Three Months Ended

Net income attributable to

Nine Months Ended

Net income attributable to

September 30,

Noncontrolling interests

September 30,

Noncontrolling interests

($ in thousands)

Noncontrolling interests and

redeemable noncontrolling interests

($ in thousands)

Net income attributable to noncontrolling interests

Net income attributable to noncontrolling interests and redeemable noncontrolling interests

% of total revenue

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

Net income attributable to noncontrolling interests increased $712,000 or 92.3% to $1.5 million for the nine months ended September 30, 2020 from $771,000 for the nine months ended September 30, 2019 primarily due to higher profitability from our consolidated joint venture operations in China.

Net income attributable to noncontrolling interests and redeemable noncontrolling interests decreased $55,000 or 13.9% to $340,000 for the three months ended March 31, 2021 from $395,000 for the three months ended March 31, 2020 primarily due to lower profitability from our consolidated joint venture operations in China.

Liquidity and Capital Resources

2 unchanged sentences

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

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

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

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

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

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

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

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

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

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

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

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

As of March 31, 2021, our principal source of liquidity was $66.9 million, which consisted of cash and cash equivalents of $61.2 million and investments of $5.7 million.

In the three months ended March 31, 2021, cash and cash equivalents decreased by $11.4 million and investments decreased by $0.3 million.

The decrease in cash and cash equivalents of $11.4 million in the three months ended March 31, 2021 was primarily due to net cash used in operating activities of $8.3 million, net cash used in investing activities of $5.5 million, the effect of exchange rate changes of $0.2 million, partially offset by net cash provided by financing activities of $2.6.

As of March 31, 2021, we and our consolidated subsidiaries in China held approximately $44.4 million in cash and investments in foreign bank accounts.

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

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

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

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

This consisted of $9.5 million held by our wholly-owned subsidiaries in China and $1.7 million held by our partially-owned consolidated subsidiary in China.

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

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

for non-cash items of depreciation and amortization of $4.2 million, impairment charge on equity investment of $1.1 million, stock-based compensation of $1.7 million and loss on equity method investments of $0.8 million, partially offset by an adjustment for a non-cash item of $0.2 million gain from the deconsolidation of a subsidiary and a net change of $0.8 million in operating assets and liabilities.

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

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

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

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

Net cash used in operating activities of $8.3 million for the three months ended March 31, 2021 was primarily comprised of a net change of $13.4 million in operating assets and liabilities and a gain on equity method investments of $1.1 million, partially offset by a net income before income attributable to non-controlling interest of $3.8 million, the adjustment for non-cash items of depreciation and amortization of $1.6 million and stock-based compensation of $0.8 million.

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

Net cash used in investing activities of $5.5 million for the three months ended March 31, 2021 was primarily from the purchase of property, plant and equipment of $5.8 million, partially offset by proceeds from sales and maturities of available-for-sale debt securities of $0.2 million.

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

Net cash provided by financing activities was $2.6 million for the three months ended March 31, 2021, which consisted of proceeds from issuance of Tongmei’s common stock to redeemable noncontrolling interests of $0.7 million, common stock exercised of $0.7 million, formation of new subsidiary with noncontrolling interest of $0.6 million and proceeds from sale of subsidiary shares to noncontrolling interests of $0.5 million.

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

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

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Since 2015, no shares were repurchased under this program.

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

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

During the three months ended March 31, 2021, we did not repurchase any shares under the approved stock repurchase program.

As of March 31, 2021, approximately $2.7 million remained available for future repurchases under this program.

Currently, we do not plan to repurchase additional shares.

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

The Beijing city government is moving its offices into the area where our original manufacturing facility is currently located and is in the process of moving thousands of government employees into this area.

The government has constructed showcase tower buildings and overseen the establishment of new apartment complexes, retail stores and restaurants.

An amusement park is being constructed within a few miles of our facility.

To create room and upgrade the district, the city instructed virtually all existing manufacturing companies, including AXT, to relocate all or some of their manufacturing lines.

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

approximately 250 miles from Beijing.

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

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

This process is ongoing.

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

One of our wholly-owned subsidiaries, JinMei, is in the process of relocating its manufacturing operations to Kazuo, very near our own location.

Currently, JinMei expects to invest approximately $3.0 million to $3.5 million related to the new facilities in 2020.

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

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

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

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

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

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

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

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

As one of the first steps in the process of listing Tongmei on the STAR Market and going public, we sold approximately 7.28% of Tongmei to private equity investors for approximately $49 million in the aggregate.

This right is suspended when Tongmei submits its formal application to the 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.

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.

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

The revolving credit facility, which was never drawn down, was collateralized by substantially all of the assets of the Company located within the United States, subject to certain exceptions.

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

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

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

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

The commitments under the Credit Agreement, as amended by the First Amendment, expired on November 30, 2020 and there were no loans thereunder.

As of the date of this Quarterly Report on Form 10-Q, the Credit agreement is expired and no loans or letters of credit were outstanding.

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

Accrued interest is calculated monthly and paid quarterly.

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

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

The annual interest rate was approximately 4.7%.

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.

Tongmei initially borrowed $2.8 million against the credit facility.

On August 9, 2019, we borrowed $2.8 million against the credit facility.

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

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

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

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

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

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

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

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

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%.

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

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

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

As of March 31, 2021, $8.8 million was included in “Bank loan” in our condensed consolidated balance sheets.

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

Accrued interest is calculated monthly and paid quarterly.

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

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

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

In March 2020, BoYu borrowed $0.4 million against the credit facility.

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

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

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

In December 2020, BoYu repaid the outstanding loan amount of $0.4 million and renewed the credit facility with a $1.5 million line of credit at an annual interest rate of approximately 0.07% over the loan prime rate.

Accrued interest is calculated monthly and paid monthly.

The annual interest rate was approximately 3.92% as of March 31, 2021.

In December 2020, BoYu borrowed $1.5 million against the credit facility.

The repayment of the full amount is due in

December 2021.

As of March 31, 2021, $1.5 million was included in “Bank loan” in our condensed consolidated balance sheets.

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

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

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Off-Balance Sheet Arrangements

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

Recent Accounting Pronouncements

For a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our condensed consolidated financial statements, please see “Note 18 - Recent Accounting Pronouncements” in the Notes to Condensed Consolidated Financial Statements of this Form 10-Q.

As of March 31, 2021, we did not have any off-balance sheet financing arrangements and have never established any special purpose entities as defined under SEC Regulation S-K Item 303(a)(4)(ii).

QUANTITATIVE AND QUALITATIV E DISCLOSURES ABOUT MARKET RISK

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

As of September 30, 2020 and December 31, 2019, the net change in fair value from the placement of the hedge to settlement at each month end during the quarter had a de minimis impact to the condensed consolidated results.

As of March 31, 2021 and 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 condensed consolidated results.

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

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Interest Rate

September 30,

Cash and cash equivalents

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

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

Two customers accounted for 14% and 10%, respectively, of our accounts receivable balance as of March 31, 2021 and two customers accounted for 11% and 10% of our accounts receivable as of December 31, 2020.

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

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Reasons for other than temporary declines in value include whether the related company would have insufficient cash flow to operate for the next twelve months, significant changes in the operating performance and changes in market conditions.

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

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

Our minority investments under the equity method as of September 30, 2020 and December 31, 2019 totaled $5.8 million and $6.0 million, respectively.

As of March 31, 2021 and December 31, 2020, we did not maintain any direct investments under the cost method.

Our minority investments under the equity method as of March 31, 2021 and December 31, 2020 totaled $7.5 million and $6.4 million, respectively.

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

What changed 10-Q

Item 1. Financial Statements