What changed in this filing

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Item 1. Financial Statements

2021-11-12 compared with 2021-08-12 · 371 added, 277 removed, 1141 unchanged (36% of the section changed)

2 unchanged sentences

(Unaudited, in thousands, except per share data)

September 30,

Current assets:

1 unchanged sentence

Short-term investments

Accounts receivable, net of allowances of $ 217 as of June 30, 2021 and December 31, 2020

Accounts receivable, net of allowances of $ 130 and $ 217 as of September 30, 2021 and December 31, 2020

Prepaid expenses and other current assets

8 unchanged sentences

Total current liabilities

Long-term loan, related party

Noncurrent operating lease liabilities

6 unchanged sentences

2,000 shares authorized;

883 shares issued and outstanding as of June 30, 2021 and December 31, 2020 (Liquidation preference of $ 7,434 and $ 7,346 as of June 30, 2021 and December 31, 2020)

883 shares issued and outstanding as of September 30, 2021 and December 31, 2020 (Liquidation preference of $ 7,478 and $ 7,346 as of September 30, 2021 and December 31, 2020)

Common stock, $ 0.001 par value;

70,000 shares authorized;

42,480 and 41,967 shares issued and outstanding as of June 30, 2021 and December 31, 2020

42,657 and 41,967 shares issued and outstanding as of September 30, 2021 and December 31, 2020

Additional paid-in capital

10 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Cost of revenue

3 unchanged sentences

Total operating expenses

Income (loss) from operations

Interest income (expense), net

Income from operations

Interest expense, net

Equity in income (loss) of unconsolidated joint ventures

Other income (expense), net

Income before provision for income taxes

Provision for income taxes

Income before provision for (benefit from) income taxes

Provision for (benefit from) income taxes

Net income attributable to noncontrolling interests and redeemable noncontrolling interests

4 unchanged sentences

See accompanying notes to condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited, in thousands)

Three Months Ended

Six Months Ended

Other comprehensive income (loss), net of tax:

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

Nine Months Ended

September 30,

Other comprehensive income, net of tax:

Change in foreign currency translation gain, net of tax

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

Total other comprehensive income (loss), net of tax

Comprehensive income (loss)

Total other comprehensive income, net of tax

Comprehensive income

Comprehensive income attributable to noncontrolling interests and redeemable noncontrolling interests

Comprehensive income (loss) attributable to AXT, Inc.

Comprehensive income attributable to AXT, Inc.

See accompanying notes to condensed consolidated financial statements.

1 unchanged sentence

(Unaudited, in thousands)

Six Months Ended

Nine Months Ended

September 30,

Cash flows from operating activities:

4 unchanged sentences

Provision for doubtful accounts

Loss on disposal of equipment

(Gain) loss on disposal of equipment

Return of equity method investments (dividends)

9 unchanged sentences

Purchases of property, plant and equipment

Purchases of available-for-sale debt securities

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

3 unchanged sentences

Proceeds from short-term loan

Proceeds from long-term loan, related party

Payments on short-term loan

Proceeds from sale of subsidiary shares to noncontrolling interests

Formation of new subsidiary with noncontrolling interests

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

Costs related to issuance of Tongmei's common stock to redeemable noncontrolling interests, net of proceeds

Dividends paid by joint ventures to their minority shareholders

Net cash provided by financing activities

Net cash provided by (used in) financing activities

Effect of exchange rate changes on cash and cash equivalents

2 unchanged sentences

Cash and cash equivalents at the end of the period

Supplemental disclosure of non-cash flow information:

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

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 six months ended June 30, 2021 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 2020 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 23, 2021 and our Quarterly Report on Form 10-Q for the three months ended March 31, 2021 filed with the SEC on May 14, 2021.

The results of operations for the three and nine months ended September 30, 2021 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 2020 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 23, 2021 and our Quarterly Reports on Form 10-Q for the three months ended March 31, 2021 and June 30, 2021 filed with the SEC on May 14, 2021 and August 12, 2021, respectively.

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

9 unchanged sentences

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

As of June 30, 2021 and December 31, 2020, we have five companies accounted for by the equity method.

As of September 30, 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 and six months ended June 30, 2021, expenses associated with ChaoYang LiMei had a de minimis impact on our condensed consolidated financial statements.

For the three and nine months ended September 30, 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.

15 unchanged sentences

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 June 30, 2021, Tongmei’s noncontrolling interests and redeemable noncontrolling interests totaled approximately 14.5 %.

As of September 30, 2021, Tongmei’s noncontrolling interests and redeemable noncontrolling interests totaled approximately 14.5 %.

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

In June 2021, AXT sold AXT-Tongmei to Beijing Tongmei for $ 1 .

Since Beijing Tongmei is 85.5 % owned by AXT, and the transaction was between common interest holders, the transaction was accounted for at net book value and resulted in an increase of $ 1.2 million to noncontrolling interests and $ 1.2 million to redeemable noncontrolling interests as of June 30, 2021.

In June 2021, AXT sold AXT-Tongmei to Tongmei for $ 1 .

Since Tongmei is 85.5 % owned by AXT, and the transaction was between common interest holders, the transaction was accounted for at net book value and resulted in an increase of $ 1.2 million to noncontrolling interests and $ 1.2 million to redeemable noncontrolling interests as of September 30, 2021.

Investments and Fair Value Measurements

1 unchanged sentence

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

As of June 30, 2021 and December 31, 2020, our cash, cash equivalents and debt investments are classified as follows (in thousands):

June 30, 2021

As of September 30, 2021 and December 31, 2020, our cash, cash equivalents and debt investments are classified as follows (in thousands):

September 30, 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 was an insignificant amount of gross unrealized losses on our available-for-sale debt securities as of June 30, 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.

There was an insignificant amount of gross unrealized losses on our available-for-sale debt securities as of September 30, 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.

A portion of our debt investments would generate a loss if we sold them on June 30, 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 June 30, 2021 (in thousands):

A portion of our debt investments would generate a loss if we sold them on September 30, 2021.

In Loss Position

1 unchanged sentence

Loss Position

As of June 30, 2021

As of September 30, 2021

Certificates of deposit

Corporate bonds

9 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 $ 8.3 million and $ 6.4 million as of June 30, 2021 and December 31, 2020, respectively.

As of June 30, 2021, there were five companies accounted for under the equity method.

There were no impairment charges in the three and six months ended June 30, 2021 and 2020.

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 $ 9.3 million and $ 6.4 million as of September 30, 2021 and December 31, 2020,

respectively.

As of September 30, 2021, there were five companies accounted for under the equity method.

There were no impairment charges in the three and nine months ended September 30, 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 June 30, 2021 and December 31, 2020, the total unrealized loss, net of tax, included in accumulated other comprehensive income was immaterial.

As of September 30, 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.

10 unchanged sentences

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

As of June 30, 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 and six months ended June 30, 2021.

There have been no transfers between fair value measurements levels during the three and six months ended June 30, 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 June 30, 2021 (in thousands):

As of September 30, 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 and nine months ended September 30, 2021.

There have been no transfers between fair value measurements levels during the three and nine months ended September 30, 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 September 30, 2021 (in thousands):

Quoted Prices in

4 unchanged sentences

Observable Inputs

June 30, 2021

September 30, 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).

We did not record any other-than-temporary impairment charges for these investments during the three and six months ended June 30, 2021 and 2020, respectively.

We did not record any other-than-temporary impairment charges for these investments during the three and nine months ended September 30, 2021 and 2020, respectively.

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

September 30,

Raw materials

1 unchanged sentence

Finished goods

As of June 30, 2021 and December 31, 2020, carrying values of inventories were net of inventory reserves of $ 19.3 million and $ 17.7 million, respectively, for excess and obsolete inventory and $ 394,000 and $ 162,000 , respectively, for lower of cost or net realizable value reserves.

As of September 30, 2021 and December 31, 2020, carrying values of inventories were net of inventory reserves of $ 19.2 million and $ 17.7 million, respectively, for excess and obsolete inventory and $ 61,000 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 June 30, 2021, the balance of construction in progress was $ 30.0 million, of which $ 21.1 million was related to our buildings in our new Dingxing and Kazuo locations, $ 4.3 million was for manufacturing equipment purchases not yet placed in service and $ 4.6 million was for our construction in progress for our other consolidated subsidiaries.

purchases not yet placed in service and $ 6.3 million was for our construction in progress at our other consolidated subsidiaries.

As of September 30, 2021, the balance of construction in progress was $ 26.8 million, of which $ 18.4 million was related to our buildings in our new Dingxing and Kazuo locations, $ 3.7 million was for manufacturing equipment purchases not yet placed in service and $ 4.7 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.

Accrued Liabilities

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

Accrued compensation and related charges

September 30,

Preferred stock dividends payable

Accrued product warranty

Payable in connection with land restoration of Nanjing JinMei factory

Accrued compensation and related charges

Accrued income taxes

Accrued professional services

Payable in connection with land restoration of Nanjing JinMei factory

Accrued product warranty

Current portion of operating lease liabilities

Advance from customers

Payable in connection with construction

Other personnel-related costs

Accrued income taxes

Other tax payable

Advance from customers

Payable in connection with construction

Accrual for sales returns

2 unchanged sentences

Related Party Transactions

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

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

For the three months ended June 30, 2021 and 2020, JinMei has recorded $ 0 and $ 0 income from agency sales, respectively.

For the six months ended June 30, 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 subsidiary, BoYu.

2 unchanged sentences

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 June 30, 2021 and December 31, 2020, amounts payable of $ 110,000 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 June 30, 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 June 30, 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.

The inter-company loan carries an interest rate of 4.9 % per annum.

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

As of June 30, 2021, JinMei repaid principal and interest totaling $ 703,000 to Tongmei.

As of June 30, 2021 and December 31, 2020, the remaining balance of principal and interest totaled $ 155,000 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.

As of September 30, 2021 and December 31, 2020, amounts payable of $ 110,000 and $ 0 , respectively, were included in “Accounts payable” in our condensed consolidated balance sheets.

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

12 unchanged sentences

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 June 30, 2021 and December 31, 2020 , there were no outstanding personal loans .

As of September 30, 2021 and December 31, 2020 , there were no outstanding personal loans .

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

The inter-company loan carries an interest rate of 4.9 % per annum.

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

In July 2021, JinMei repaid the principal and outstanding interest totaling

$ 858,000 to Tongmei.

As of September 30, 2021 and December 31, 2020, the remaining balance of principal and interest totaled $ 0 and $ 303,000 , respectively.

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

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

For the three months ended June 30, 2021 and 2020, BoYu recorded $ 45,000 and $ 12,000 , respectively, in revenue from this customer.

For the six months ended June 30, 2021 and 2020, BoYu recorded $ 50,000 and $ 0.3 million, respectively, in revenue from this customer.

As of June 30, 2021 and December 31, 2020, amounts receivable of $ 0 and $ 0 , respectively, were included in “Accounts receivable” in our condensed consolidated balance sheets.

For the three months ended September 30, 2021 and 2020, BoYu recorded $ 0 and $ 37,000 , respectively, in revenue from this customer.

For the nine months ended September 30, 2021 and 2020, BoYu recorded $ 50,000 and $ 0.3 million, respectively, in revenue from this customer.

As of September 30, 2021 and December 31, 2020, amounts receivable of $ 0 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.

In September 2021, our consolidated subsidiary, ChaoYang XinMei, received a loan from ChaoYang Xinshuo, one of two minority investors, in the amount of $ 0.9 million at an annual interest rate of 6.5 %.

Accrued interest is calculated monthly and paid annually.

The loan is unsecured.

The repayment of the full amount including any accrued interest is due September 30, 2024.

As of September 30, 2021, $ 0.9 million was included in “Long-term debt, related party” in our condensed consolidated balance sheets.

Our Related Party Transactions Policy seeks to prohibit all conflicts of interest in transactions between related parties and us, unless they have been approved by our Board of Directors.

5 unchanged sentences

These companies form part of our overall supply chain strategy.

As of June 30, 2021, the investments are summarized below (in thousands):

As of September 30, 2021, the investments are summarized below (in thousands):

Investment Balance as of

September 30,

Nanjing JinMei Gallium Co., Ltd.

17 unchanged sentences

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 June 30, 2021, Tongmei’s noncontrolling interests and redeemable noncontrolling interests totaled approximately 14.5 %.

As of September 30, 2021, Tongmei’s noncontrolling interests and redeemable noncontrolling interests totaled approximately 14.5 %.

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

9 unchanged sentences

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

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

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

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

5 unchanged sentences

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

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

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 was 67 %.

10 unchanged sentences

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

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 $ 8.3 million and $ 6.4 million as of June 30, 2021 and December 31, 2020, respectively.

30, 2021 and December 31, 2020, respectively.

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

11 unchanged sentences

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

In June 2021, we received a $ 774,000 dividend from one of our equity investments, Xiaoyi XingAn Gallium Co., Ltd.

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

Excluding one fully impaired entity, the equity entities had the following summarized income information (in thousands) for the three and six months ended June 30, 2021 and 2020:

Excluding one fully impaired entity, the equity investment entities had the following summarized statement of operations information (in thousands) for the three and nine months ended September 30, 2021 and 2020:

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Operating income

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 income of $ 1.5 million and a loss of $ 0.2 million, respectively, for the three months ended June 30, 2021 and 2020.

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 income of $ 2.6 million and a loss of $ 0.3 million, respectively, for the six months ended June 30, 2021 and 2020.

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 income of $ 1.1 million and $ 45,000 , respectively, for the three months ended September 30, 2021 and 2020.

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 income of $ 3.7 million and a loss of $ 0.2 million, respectively, for the nine months ended September 30, 2021 and 2020.

Stockholders’ Equity

Condensed Consolidated Statements of Changes in Stockholders’ Equity

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands)

The changes in stockholders’ equity by component for the three and six months ended June 30, 2021 are as follows:

The changes in stockholders’ equity by component for the three and nine months ended September 30, 2021 are as follows:

Comprehensive

20 unchanged sentences

Balance as of June 30, 2021

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

Common stock options exercised

Stock-based compensation

Other comprehensive income

Balance as of September 30, 2021

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

Comprehensive

15 unchanged sentences

Balance as of June 30, 2020

There were no reclassification adjustments from accumulated other comprehensive income (loss) for the three and six months ended June 30, 2021 and 2020 .

Common stock options exercised

Sale of subsidiary shares to noncontrolling interests

Stock-based compensation

Other comprehensive loss

Balance as of September 30, 2020

There were no reclassification adjustments from accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2021 and 2020 .

Stock Repurchase Program

3 unchanged sentences

No shares were repurchased from 2016 through 2020.

During the three and six months ended June 30, 2021, we did not repurchase any shares under the approved stock repurchase program.

As of June 30, 2021, approximately $ 2.7 million remained available for future repurchases under this program.

During the three and nine months ended September 30, 2021, we did not repurchase any shares under the approved stock repurchase program.

As of September 30, 2021, approximately $ 2.7 million remained available for future repurchases under this program.

Currently, we do not plan to repurchase additional shares.

5 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Cost of revenue

4 unchanged sentences

Net effect on net income

As of June 30, 2021, the unamortized compensation costs related to unvested stock options granted to employees under our stock option plan was approximately $ 0.6 million, net of estimated forfeitures of $ 56,000 .

As of September 30, 2021, the unamortized compensation costs related to unvested stock options granted to employees under our stock option plan was approximately $ 0.5 million, net of estimated forfeitures of $ 90,000 .

These costs will be amortized on a straight-line basis over a weighted-average period of approximately 1.8 years and will be adjusted for subsequent changes in estimated forfeitures.

We did not capitalize any stock-based compensation to inventory as of June 30, 2021 and December 31, 2020 due to the immateriality of the amount.

We did not capitalize any stock-based compensation to inventory as of September 30, 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 six months ended June 30, 2021 and 2020.

The following table summarizes the stock option transactions during the six months ended June 30, 2021 (in thousands, except per share data):

There were no options granted in the three and nine months ended September 30, 2021 and 2020.

The following table summarizes the stock option transactions during the nine months ended September 30, 2021 (in thousands, except per share data):

Stock Options

1 unchanged sentence

Canceled and expired

Balance as of June 30, 2021

Options vested as of June 30, 2021 and unvested options expected to vest, net of forfeitures

Options exercisable as of June 30, 2021

The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on our closing price of $ 10.98 on June 30, 2021, which would have been received by the option holder had all option holders exercised their options on that date.

Balance as of September 30, 2021

Options vested as of September 30, 2021 and unvested options expected to vest, net of forfeitures

Options exercisable as of September 30, 2021

The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on our closing price of $ 8.33 on September 30, 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 six months ended June 30, 2021 is presented below (in thousands, except per share data):

A summary of activity related to restricted stock awards for the nine months ended September 30, 2021 is presented below (in thousands, except per share data):

Weighted-Average

Non-vested as of January 1, 2021

Non-vested as of June 30, 2021

As of June 30, 2021, the unamortized compensation costs related to unvested restricted stock awards was approximately $ 4.4 million, which is to be amortized on a straight-line basis over a weighted-average period of approximately 1.4 years.

Non-vested as of September 30, 2021

As of September 30, 2021, the unamortized compensation costs related to unvested restricted stock awards was approximately $ 3.8 million, which is to be amortized on a straight-line basis over a weighted-average period of approximately 1.2 years.

At-Risk, Performance Shares

9 unchanged sentences

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 June 30, 2021.

None of the at-risk, performance shares had vested as of September 30, 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 June 30, 2021 is presented below (in thousands, except per share data):

A summary of the status of our unvested at-risk, performance shares as of September 30, 2021 is presented below (in thousands, except per share data):

Weighted-Average

Non-vested as of January 1, 2021

Non-vested as of June 30, 2021

Non-vested as of September 30, 2021

*The number of share presented is based on achieving 150 % of the targeted financial performance metric as defined in the at-risk, performance shares agreement.

As of June 30, 2021, there was $ 1.2 million of unrecognized compensation expense related to unvested at-risk, performance shares that is expected to be recognized over a weighted-average period of 1.9 years.

As of September 30, 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 1.6 years.

Net Income (Loss) Per Share

1 unchanged sentence

Diluted net income (loss) per share is computed using the weighted-average number of common shares outstanding and potentially dilutive common shares outstanding during the periods.

The dilutive effect of outstanding stock options and restricted stock awards is reflected in diluted earnings per share by application of the treasury stock method.

dilutive common shares consist of common shares issuable upon the exercise of stock options and vesting of restricted stock awards.

The dilutive effect of outstanding stock options and

restricted stock awards is reflected in diluted earnings per share by application of the treasury stock method.

Potentially dilutive common shares consist of common shares issuable upon the exercise of stock options and vesting of restricted stock awards.

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

1 unchanged sentence

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Net income attributable to AXT, Inc.

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

The 883,000 shares of $ 0.001 par value Series A preferred stock issued and outstanding as of June 30, 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.

The 883,000 shares of $ 0.001 par value Series A preferred stock issued and outstanding as of September 30, 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

Six Months Ended

Nine Months Ended

September 30,

Product Type:

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Geographical region:

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

September 30,

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

1 unchanged sentence

Significant Customers

No customers represented 10% of our revenue for the three months ended June 30, 2021 while one customer, Landmark, represented 10 % of our revenue for the three months ended June 30, 2020.

Our top five customers, although not the same five customers for each period, represented 31 % and 30 % of our revenue for the three months ended June 30, 2021 and 2020, respectively.

No customers represented 10% of our revenue for the six months ended June 30, 2021 while two customers, Landmark and Osram Opto, represented 13 % and 11 % , respectively, of our revenue for the six months ended June 30,

Our top five customers, although not the same five customers for each period, represented 27 % and 39 % of our revenue for the six months ended June 30, 2021 and 2020, respectively.

No customers represented 10% of our revenue for the three months ended September 30, 2021 and 2020, respectively.

Our top five customers, although not the same five customers for each period, represented 25 % and 29 % of our revenue for the three months ended September 30, 2021 and 2020, respectively.

No customers represented 10% of our revenue for the nine months ended September 30, 2021 while two customers, Landmark and Osram Opto, represented 11 % and 10 % , respectively, of our revenue for the nine months ended September 30, 2020.

Our top five customers, although not the same five customers for each period, represented 26 % and 33 % of our revenue for the nine months ended September 30, 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.

One customer accounted for 14 % of our accounts receivable balance as of June 30, 2021 , and two customers accounted for 11 % and 10 % of our accounts receivable as of December 31, 2020.

One customer accounted for 11 % of our accounts receivable balance as of September 30, 2021 , and two customers accounted for 11 % and 10 % of our accounts receivable as of December 31, 2020.

Commitments and Contingencies

9 unchanged sentences

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

The following table reflects the change in our warranty accrual which is included in “Accrued liabilities” on the condensed consolidated balance sheets, during the three and six months ended June 30, 2021 and 2020 (in thousands):

The following table reflects the change in our warranty accrual which is included in “Accrued liabilities” in the condensed consolidated balance sheets, during the three and nine months ended September 30, 2021 and 2020 (in thousands):

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Beginning accrued product warranty

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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 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.

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 June 30, 2021, we do not have any outstanding purchase orders that will incur a penalty if cancelled by the Company.

As of September 30, 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 months ended June 30, 2021 and 2020, includes a grant of $ 0 and $ 1.6 million, respectively, from a Chinese provincial government agency as an award for relocating to its province.

Other income (expense), net for the six months ended June 30, 2021 and 2020, includes a grant of $ 0.1 million and $ 3.0 million, respectively, from a Chinese provincial government agency as an award for relocating to its province.

In addition, we incurred a foreign currency transaction exchange gain of $ 34,000 and $ 51,000 for the three months ended June 30, 2021 and 2020, respectively.

We incurred a foreign currency transaction exchange loss of $ 140,000 and gain of $ 9,000 for the six months ended June 30, 2021 and 2020, respectively.

Other income (expense), net for the three months ended September 30, 2021 and 2020, includes a grant of $ 1.0 million and $ 0 , respectively, from a Chinese provincial government agency as an award for relocating to its province.

Other income (expense), net for the nine months ended September 30, 2021 and 2020, includes a grant of $ 1.0 million and $ 3.0 million, respectively, from a Chinese provincial government agency as an award for relocating to its province.

In addition, we incurred a foreign currency transaction exchange loss of $ 45,000 and loss of $ 135,000 for the three months ended September 30, 2021 and 2020, respectively.

We incurred a foreign currency transaction exchange loss of $ 185,000 and loss of $ 126,000 for the nine months ended September 30, 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.

ASC 740 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that a portion of the deferred tax asset will not be realized.

Our deferred tax assets have been reduced to zero by a valuation allowance.

During the quarter ended September 30, 2021, we recorded a deferred tax asset of $ 1.8 million, which is included in “Other assets” in the condensed consolidated balance sheets.

We provide for income taxes based upon the geographic composition of worldwide earnings and tax regulations governing each region, particularly China.

1 unchanged sentence

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

Income tax expense for the three and six months ended June 30, 2021 includes no interest and penalties.

As of June 30, 2021, we have no accrued interest and penalties related to uncertain tax positions.

Income tax expense for the three and nine months ended September 30, 2021 includes no interest and penalties.

As of September 30, 2021, we have no accrued interest and penalties related to uncertain tax positions.

We file income tax returns in the U.S.

1 unchanged sentence

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

Provision for income taxes for the three and six months ended June 30, 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 six months ended June 30, 2021 due to no taxable income in the U.S.

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

Provision for (benefit from) income taxes for the three and nine months ended September 30, 2021 was mostly related to our wholly owned China subsidiaries and our partially owned subsidiaries in China.

The three months ended September 30, 2021, included a favorable credit resulting from an adjustment in deferred tax assets at our subsidiary, Tongmei.

Income taxes and certain state taxes, have been provided for our U.S.

operations as most of the income in the U.S.

had been fully offset by utilization of federal and state net operating loss carryforwards except for the newly created US subsidiary, AXT-Tongmei, and had a de minimis impact to the condensed consolidated results.

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

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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 June 30, 2021.

We do not have any material contract assets as of September 30, 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 June 30, 2021 and December 31, 2020 (in thousands):

The following table reflects the contract liabilities balance, which is included in “Accrued liabilities” on the condensed consolidated balance sheets, as of September 30, 2021 and December 31, 2020 (in thousands):

September 30,

Contract liabilities

During the three and six months ended June 30, 2021, the Company recognized $ 12,000 and $ 260,000 of revenue that was included in the contract balances as of December 31, 2020.

During the three and nine months ended September 30, 2021, the Company recognized $ 0 and $ 260,000 of revenue that was included in the contract balances as of December 31, 2020.

Disaggregated Revenue

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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 June 30, 2021, the Credit agreement has expired and no loans or letters of credit were outstanding.

As of September 30, 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.

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

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.

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 for approximately $ 3.1 million.

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 combined loan totaled $ 5.6 million.

In April 2021, Tongmei repaid the full amount of the credit facility, including all outstanding accrued interest, of approximately $ 5.6 million and simultaneously applied to renew the credit facility.

In June 2021, the combined loans were renewed for approximately $ 5.8 million and funded against the credit facility with an annual interest rate of 4.7 %.

As of June 30, 2021, $ 9.0 million was included in “Bank loan” in our condensed consolidated balance sheets.

In September 2021, Tongmei repaid $ 3.1 million of the credit facility, including all outstanding accrued interest and simultaneously applied to renew the credit facility.

In September 2021, the credit facility was renewed for approximately $ 2.7 million with an annual interest rate of 3.85 %.

As of September 30, 2021, $ 8.6 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.

4 unchanged sentences

Accrued interest is calculated monthly and paid monthly.

The annual interest rate was approximately 3.92 % as of June 30, 2021.

The annual interest rate was approximately 3.92 % as of September 30, 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 June 30, 2021, $ 1.5 million was included in “Bank loan” in our condensed consolidated balance sheets.

As of September 30, 2021, $ 1.5 million was included in “Bank loan” in our condensed consolidated balance sheets.

In September 2021, Tongmei entered into a credit facility with the Bank of Communications with a $ 3.1 million line of credit at an annual interest rate of 4.0 % as of September 30, 2021.

Accrued interest is calculated monthly and paid quarterly.

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

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

As of September 30, 2021, $ 3.1 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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The effect of short-term leases on our right-of-use asset and lease liability was not material.

As of June 30, 2021, the maturities of our operating lease liabilities (excluding short-term leases) are as follows (in thousands):

As of September 30, 2021, the maturities of our operating lease liabilities (excluding short-term leases) are as follows (in thousands):

Maturity of Lease Liabilities

4 unchanged sentences

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

September 30,

Weighted-average remaining lease term (years)

1 unchanged sentence

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

Six Months Ended

Nine Months Ended

September 30,

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

2 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Operating lease

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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 or the fourth quarter of 2021.

Tongmei currently plans to submit its formal application to the CSRC in the fourth quarter of 2021 or in the first quarter of 2022.

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.

6 unchanged sentences

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 six months ended June 30, 2021 are presented in the following table (in thousands):

The components of the change in redeemable noncontrolling interests for the nine months ended September 30, 2021 are presented in the following table (in thousands):

Balance as of January 1, 2021

2 unchanged sentences

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

Equity issuance costs incurred for the six months ended June 30, 2021

Equity issuance costs incurred for the nine months ended September 30, 2021

Net income attributable to redeemable noncontrolling interests

Effect of foreign currency translation attributable to redeemable noncontrolling interests

Balance as of June 30, 2021

Balance as of September 30, 2021

Subsequent Event

In October 2021, our consolidated subsidiary, ChaoYang XinMei, received a loan from ChaoYang Xinshuo, one of two minority investors, in the amount of $ 0.9 million at an annual interest rate of 6.5 %.

Accrued interest is calculated monthly and paid annually.

The loan is unsecured.

The repayment of the full amount including any accrued interest is due October 30, 2024.

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

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Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.

Readers are urged to carefully review and consider the various disclosures made in this report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.

Readers are urged to carefully review and consider the various disclosures made in this report, which attempt to advise interested parties of the risks and

factors that may affect our business, financial condition, results of operations and prospects.

We undertake no obligation to revise or update any forward-looking statements in order to reflect any development, event or circumstance that may arise after the date of this report.

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• Used when growing epitaxial layers in Molecular Beam Epitaxy (MBE) reactors

We manufacture all of our products in the People’s Republic of China (PRC or China), which generally has favorable costs for facilities and labor compared with comparable facilities in the United States, Europe or Japan.

All of our products are manufactured in the People’s Republic of China (PRC or China) by our PRC subsidiaries and PRC joint ventures.

The PRC generally has favorable costs for facilities and labor compared with comparable facilities in the United States, Europe or Japan.

Our supply chain includes partial ownership of raw material companies in China (subsidiaries/joint ventures).

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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.

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

We entered into volume production in 2020.

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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 or in the fourth quarter of 2021.

Tongmei currently plans to submit its formal application to the CSRC in the fourth quarter of 2021 or in the first quarter of 2022.

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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 June 30, 2021;

is neither a PRC operating company nor a variable interest entity.

The following organization chart depicts the consolidated structure as of September 30, 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.

2 unchanged sentences

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

For the six months ended June 30, 2021, we paid approximately $554,000 in tariffs.

For the nine months ended September 30, 2021, we paid approximately $892,000 in tariffs.

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

2 unchanged sentences

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.

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.

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

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

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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 June 30, 2021 and December 31, 2020, our accounts receivable, net balance was $33.5 million and $24.6 million, respectively, which was net of an allowance for doubtful accounts of $217,000 and $217,000, respectively.

As of September 30, 2021 and December 31, 2020, our accounts receivable, net balance was $36.6 million and $24.6 million, respectively, which was net of an allowance for doubtful accounts of $130,000 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.

2 unchanged sentences

Warranty costs are accrued at the time revenue is recognized.

As of June 30, 2021 and December 31, 2020, accrued product warranties totaled $792,000 and $609,000, respectively.

As of September 30, 2021 and December 31, 2020, accrued product warranties totaled $662,000 and $609,000, respectively.

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

5 unchanged sentences

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

As of June 30, 2021 and December 31, 2020, we had an inventory reserve of $19.3 million and $17.7 million, respectively, for excess and obsolete inventory and $394,000 and $162,000, respectively, for lower of cost or net realizable value reserves.

As of September 30, 2021 and December 31, 2020, we had an inventory reserve of $19.2 million and $17.7 million, respectively, for excess and obsolete inventory and $61,000 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.

Impairment of Investments

We classify marketable investments in debt securities as available-for-sale debt securities in accordance with ASC Topic 320, Investments - Debt Securities .

We classify marketable investments in debt securities as available-for-sale debt securities in accordance with Accounting Standards Codification (“ASC”) Topic 320, Investments - Debt Securities .

All available-for-sale debt securities with a quoted market value below cost (or adjusted cost) are reviewed in order to determine whether the decline is other-than-temporary.

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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.

There were no impairment charges during the six months ended June 30, 2021 and 2020.

There were no impairment charges during the nine months ended September 30, 2021 and 2020.

Fair Value of Investments

11 unchanged sentences

We measure the fair value of these foreign currency hedges at each month end and quarter end using current exchange rates and in accordance with generally accepted accounting principles.

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

As of June 30, 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 June 30, 2021 and 2020.

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

As of September 30, 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 condensed consolidated results.

There have been no transfers between fair value measurement levels during the three months ended September 30, 2021 and 2020.

Impairment of Long-Lived Assets

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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 June 30, 2021 and December 31, 2020.

We had no “Assets held for sale” or any impairment of long-lived assets in the condensed consolidated balance sheets as of September 30, 2021 and December 31, 2020.

Stock-based Compensation

1 unchanged sentence

Share-based awards granted include stock options and restricted stock awards.

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

Historical volatility of our stock price was

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

We utilize the Black-Scholes option pricing model to estimate the grant date fair value of stock options, which requires the input of highly subjective

assumptions, including estimating stock price volatility and expected term.

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

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

12 unchanged sentences

ASC 740 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that a portion of the deferred tax asset will not be realized.

Our deferred tax assets have been reduced to zero by valuation allowance.

During the quarter ended September 30, 2021, we recorded a deferred tax asset of $1.8 million, which is included in “Other assets” in the condensed consolidated balance sheets.

We provide for income taxes based upon the geographic composition of worldwide earnings and tax regulations governing each region, particularly China.

6 unchanged sentences

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 as a result of variants in countries that had previously contained the outbreak, the availability of COVID-19 vaccines and the number of people who are vaccinated, 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

Six Months Ended

Nine Months Ended

September 30,

Product Type:

3 unchanged sentences

Total revenue

Revenue increased $11.6 million, or 52.4%, to $33.7 million for the three months ended June 30, 2021 from $22.1 million for the three months ended June 30, 2020.

The substrate revenue increase for the three months ended June 30, 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-conducting GaAs wafer substrates.

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

Revenue increased $9.1 million, or 35.8%, to $34.6 million for the three months ended September 30, 2021 from $25.5 million for the three months ended September 30, 2020.

The substrate revenue increase for the three months ended September 30, 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-conducting GaAs wafer substrates.

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

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

Demand for GaAs wafer substrates used in LED applications was the primary contributor to GaAs revenue growth, primarily in automotive applications and high-end signage.

Raw materials sales increased $3.6 million, or 67.9%, to $8.8 million for the three months ended June 30, 2021 as compared to the same period in 2020.

The raw materials revenue increase for the three months ended June 30, 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 increased $22.2 million, or 51.9%, to $65.1 million for the six months ended June 30, 2021 from $42.9 million for the six months ended June 30, 2020.

The substrate revenue increase for the six months ended June 30, 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-conducting GaAs wafer substrates.

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

Raw materials sales increased $3.3 million, or 63.3%, to $8.4 million for the three months ended September 30, 2021 as compared to the same period in 2020.

The raw materials revenue increase for the three months ended September 30, 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.

Revenue increased $31.3 million, or 45.9%, to $99.7 million for the nine months ended September 30, 2021 from $68.3 million for the nine months ended September 30, 2020.

The substrate revenue increase for the nine months ended September 30, 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-conducting GaAs wafer substrates.

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

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

Demand for GaAs wafer substrates used in LED applications was the primary contributor to GaAs revenue growth, primarily in automotive applications and high-end signage.

Raw m aterials sales increased $7.7 million, or 84.7%, to $16.8 million for the six months ended June 30, 2021 as compared to the same period in 2020.

The raw materials revenue increase for the six months ended June 30, 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.

Raw m aterials sales increased $11.0 million, or 76.9%, to $25.2 million for the nine months ended September 30, 2021 as compared to the same period in 2020.

The raw materials revenue increase for the nine months ended September 30, 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.

Revenue by Geographic Region

Three Months Ended

September 30,

($ in thousands)

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Total revenue

Revenue in China increased $7.8 million for the three months ended June 30, 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 increased $0.6 million, primarily due to higher demand for our InP wafer substrates partially offset by decreased demand for our GaAs wafer substrates.

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

Revenue in Asia Pacific decreased by $0.3 million, primarily due to decreased demand for pBN crucibles sold by one of our consolidated subsidiaries partially offset by increased demand for our GaAs wafer substrates.

Revenue in Europe increased by $2.3 million primarily due to increased demand for our GaAs, InP and Ge wafer substrates.

Revenue in North America increased by $0.3 million due to higher demand for our InP and Ge wafer substrates partially offset by lower demand for our GaAs wafer substrates and decreased demand for pBN crucibles sold by one of our consolidated subsidiaries.

Six Months Ended

Revenue in China increased $6.4 million for the three months ended September 30, 2021, primarily due to higher demand for our InP and Ge wafer substrates and refined gallium and pBN crucibles sold by two of our consolidated subsidiaries.

Revenue in Taiwan increased $0.5 million, primarily due to higher demand for our GaAs wafer substrates partially offset by decreased demand for our InP wafer substrates.

Revenue in Japan increased $1.2 million primarily due to higher demand for our InP and GaAs wafer substrates and pBN crucibles sold by one of our consolidated subsidiaries.

Revenue in Asia Pacific increased by $0.5 million, primarily due to increased demand for our GaAs wafer substrates partially offset by decreased demand for pBN crucibles sold by one of our consolidated subsidiaries.

Revenue in Europe increased by $0.3 million primarily due to increased demand for our InP and GaAs wafer substrates partially offset by decreased demand for pBN crucibles sold by one of our consolidated subsidiaries and our Ge wafer substrates.

Revenue in North America increased by $0.3 million due to higher demand for pBN crucibles sold by one of our consolidated subsidiaries partially offset by lower demand for our InP wafer substrates.

Nine Months Ended

September 30,

($ in thousands)

9 unchanged sentences

Total revenue

Revenue in China increased by $18.6 million for the six months ended June 30, 2021, primarily due to increased demand for our InP, GaAs and Ge wafer substrates along with increased demand for pBN crucibles and refined

Revenue in China increased by $25.0 million for the nine months ended September 30, 2021, primarily due to increased demand for our InP, GaAs and Ge wafer substrates along with increased demand for pBN crucibles and refined

gallium sold by two of our consolidated subsidiaries.

Revenue in Taiwan decreased by $1.6 million primarily due to decreased demand for our InP and GaAs wafer substrates.

Revenue in Japan increased $2.1 million primarily due to higher demand for our InP wafer substrates partially offset by lower demand for our GaAs wafer substrates.

Revenue in Europe increased $1.5 million, primarily due to increased demand for GaAs wafer substrates partially offset by lower demand for Ge wafer substrates.

Revenue in North America increased $1.4 million, primarily due to increased demand for our InP wafer substrates partially offset by decreased demand for our GaAs wafer substrates.

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

Revenue in Japan increased $3.3 million primarily due to higher demand for our InP wafer substrates and pBN crucibles sold by one of our consolidated subsidiaries partially offset by lower demand for our GaAs and Ge wafer substrates.

Revenue in Europe increased $1.8 million, primarily due to increased demand for GaAs and InP wafer substrates partially offset by lower demand for our Ge wafer substrates and pBN crucibles sold by one of our consolidated subsidiaries.

Revenue in North America increased $1.7 million, primarily due to increased demand for our InP wafer substrates and pBN crucibles sold by one of our consolidated subsidiaries partially offset by decreased demand for our GaAs wafer substrates.

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

($ in thousands)

Gross Margin %

Gross profit increased $5.5 million, or 80.8%, to $12.2 million for the three months ended June 30, 2021 from $6.8 million for the three months ended June 30, 2020.

Gross Profit %

Gross profit increased $2.7 million, or 30.4%, to $11.5 million for the three months ended September 30, 2021 from $8.8 million for the three months ended September 30, 2020.

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

Gross profit increased $11.5 million, or 93.4%, to $23.8 million for the six months ended June 30, 2021 from $12.3 million for the six months ended June 30, 2020.

Gross profit increased $14.2 million, or 67.1%, to $35.3 million for the nine months ended September 30, 2021 from $21.1 million for the nine months ended September 30, 2020.

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

1 unchanged sentence

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

($ in thousands)

2 unchanged sentences

% of total revenue

Selling, general and administrative expenses increased $1.0 million, or 22.1%, to $5.8 million for the three months ended June 30, 2021 from $4.7 million for the three months ended June 30, 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.

Selling, general and administrative expenses increased $1.9 million, or 19.7%, to $11.4 million for the six months ended June 30, 2021 from $9.5 million for the six months ended June 30, 2020.

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

Selling, general and administrative expenses increased $1.9 million, or 40.1%, to $6.5 million for the three months ended September 30, 2021 from $4.6 million for the three months ended September 30, 2020.

The higher selling, general and administrative expenses were primarily from higher personnel-related expenses, license and fees and professional service-related expenses.

Selling, general and administrative expenses increased $3.7 million, or 26.4%, to $17.8 million for the nine months ended September 30, 2021 from $14.1 million for the nine months ended September 30, 2020.

The higher selling, general and administrative expenses were primarily from higher personnel-related expenses, professional service-related expenses, license and fees, directors and officers insurance and outside commissions.

Research and Development

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

($ in thousands)

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% of total revenue

Research and development expenses increased $1.0 million, or 64.4%, to $2.5 million for the three months ended June 30, 2021 from $1.5 million for the three months ended June 30, 2020.

The increase in research and

development expenses for the three months ended June 30, 2021 was primarily due to development expenses for 8-inch GaAs and 6-inch InP wafer substrates and development of new features for certain of our GaAs and InP wafer substrates, higher product testing and personnel-related expenses.

Research and development expenses increased $2.0 million, or 67.5%, to $4.9 million for the six months ended June 30, 2021 from $3.0 million for the six months ended June 30, 2020.

The increase in research and development expenses for the six months ended June 30, 2021 was primarily due to development expenses for 8-inch GaAs and 6-inch InP wafer substrates and development of new features for certain of our GaAs and InP wafer substrates, higher expense in our new product testing and personnel-related expenses.

Interest Income (Expense), Net

Research and development expenses increased $0.6 million, or 30.0%, to $2.6 million for the three months ended September 30, 2021 from $2.0 million for the three months ended September 30, 2020.

The increase in research and development expenses for the three months ended September 30, 2021 was primarily due to personnel-related expenses and development expenses for 8-inch GaAs and 6-inch InP wafer substrates and development of new features for certain of our GaAs and InP wafer substrates.

Research and development expenses increased $2.6 million, or 52.2%, to $7.6 million for the nine months ended September 30, 2021 from $5.0 million for the nine months ended September 30, 2020.

The increase in research and development expenses for the nine months ended September 30, 2021 was primarily due to development expenses for 8-inch GaAs and 6-inch InP wafer substrates and development of new features for certain of our GaAs and InP wafer substrates, higher expense in our new product testing and personnel-related expenses.

Interest Expense, Net

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

($ in thousands)

Interest income (expense), net

Interest expense, net

% of total revenue

Interest income (expense), net increased $78,000 or 200.0% for the three months ended June 30, 2021 as compared to the same period in 2020.

Interest income (expense), net increased primarily due to an increase in the amount of cash and cash equivalents held by us in June 2021 as compared to June 2020.

Interest income (expense), net increased $57,000 or 83.8% for the six months ended June 30, 2021 as compared to the same period in 2020.

Interest income (expense), net increased primarily due to an increase in the amount of cash and cash equivalents held by us in June 2021 as compared to June 2020.

Interest expense, net decreased $26,000 or 37.1% for the three months ended September 30, 2021 as compared to the same period in 2020.

Interest expense, net decreased primarily due to an increase in the amount of cash and cash equivalents held by us in September 2021 as compared to September 2020.

Interest expense, net decreased $83,000 or 60.1% for the nine months ended September 30, 2021 as compared to the same period in 2020.

Interest expense, net decreased primarily due to an increase in the amount of cash and cash equivalents held by us in September 2021 as compared to September 2020.

Equity in Income (Loss) of Unconsolidated Joint Ventures

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Equity in Income

September 30,

Equity in Income ( Loss)

Equity in Loss

($ in thousands)

2 unchanged sentences

% of total revenue

The equity in income (loss) of unconsolidated joint venture companies was income of $1.5 million for the three months ended June 30, 2021 as compared to a loss of $168,000 for the three months ended June 30, 2020.

The equity in income (loss) of unconsolidated joint venture companies was income of $1.1 million for the three months ended September 30, 2021 as compared to income of $45,000 for the three months ended September 30, 2020.

The current quarter income is primarily due to positive financial results of two raw gallium companies that benefited from higher sales volume.

The equity in income (loss) of unconsolidated joint venture companies was income of $2.6 million for the six months ended June 30, 2021 as compared to a loss of $0.3 million for the six months ended June 30, 2020.

The current year six month income is primarily due to positive financial results of two raw gallium companies that benefited from higher sales volume and an increase in the selling price of gallium.

The equity in income (loss) of unconsolidated joint venture companies was income of $3.7 million for the nine months ended September 30, 2021 as compared to a loss of $243,000 for the nine months ended September 30, 2020.

The current year nine month income is primarily due to positive financial results of two raw gallium companies that benefited from higher sales volume and an increase in the selling price of gallium.

Other Income (Expense), Net

Three Months Ended

Six Months Ended

Other Income (Expense)

Nine Months Ended

September 30,

Other Income (Expense)

September 30,

($ in thousands)

2 unchanged sentences

% of total revenue

Other income (expense), net decreased $1.5 million to an income of $0.1 million for the three months ended June 30, 2021 from an income of $1.6 million for the three months ended June 30, 2020.

Other income (expense), net decreased primarily due to a grant of $1.6 million received from a Chinese provincial government agency as an award for relocating to its province in June 2020, which was not repeated in June 2021.

Other income (expense), net decreased $3.0 million to an expense of $50,000 for the six months ended June 30, 2021 from an income of $3.0 million for the six months ended June 30, 2020.

Other income (expense), net decreased primarily due to grants totaling $3.0 million received from a Chinese provincial government agency as an award for relocating to its province in June 2020, which was not repeated in June 2021.

Provision for Income Taxes

Other income (expense), net increased $1.0 million to an income of $1.0 million for the three months ended September 30, 2021 from an expense of $34,000 for the three months ended September 30, 2020.

Other income (expense), net increased primarily due to a grant of $1.0 million received from a Chinese provincial government agency as an award for relocating to its province in September 2021, which did not occur in September 2020.

Other income (expense), net decreased $2.0 million to an income of $0.9 million for the nine months ended September 30, 2021 from an income of $2.9 million for the nine months ended September 30, 2020.

Other income (expense), net decreased primarily due to grants totaling $3.0 million received from a Chinese provincial government agency, in the first half of 2020, as an award for relocating to its province in September 2020, compared to $1.0 million received from a Chinese provincial government agency as an award for relocating to its province in September 2021.

Provision for (benefit from) Income Taxes

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

($ in thousands)

Provision for income taxes

Provision for (benefit from) income taxes

% of total revenue

Provision for income taxes for the three and six months ended June 30, 2021 was $893,000 and $1.6 million, respectively, which was primarily related to higher profits in China and a tax on a rebate we received from a purchase of land use rights when we began the relocation.

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

operations as the income in the U.S.

had been fully offset by utilization of federal and state net operating loss carryforwards.

Provision for (benefit from) income taxes for the three and nine months ended September 30, 2021 was $(135,000) and $1.5 million.

The three months ended September 30, 2021, included a favorable credit resulting from an adjustment in deferred tax assets at our consolidated subsidiaries in China .

Income taxes and certain state taxes, have been provided for our U.S.

operations as most of the income in the U.S.

had been fully offset by utilization of federal and state net operating loss carryforwards except for the newly created U.S.

subsidiary, AXT-Tongmei, and had a de minimis impact to the condensed consolidated results.

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

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

On June 29, 2020, California Governor Gavin Newsom signed Assembly Bill 85 (“AB 85”) into law as part of the California 2020 Budget Act, which temporarily suspends the use of California net operating losses and imposes a cap on the amount of business incentive tax credits that companies can utilize against their net income for tax years 2020, 2021, and 2022.

2021, and 2022.

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

2 unchanged sentences

Net income attributable to

Six Months Ended

Nine Months Ended

Net income attributable to

1 unchanged sentence

noncontrolling interests and

September 30,

redeemable noncontrolling interests

September 30,

redeemable noncontrolling interests

3 unchanged sentences

% of total revenue

Net income attributable to noncontrolling interests and redeemable noncontrolling interests decreased $368,000 or 61.5% to $230,000 for the three months ended June 30, 2021, from $598,000 for the three months ended June 30, 2020, primarily due to the structural changes of the legal entities in China (see Note 1) and to a lesser degree, losses generated by ChaoYang XinMei.

Net income attributable to noncontrolling interests and redeemable noncontrolling interests decreased $423,000 or 42.6% to $570,000 for the six months ended June 30, 2021, from $993,000 for the six months ended June 30, 2020, primarily due to the structural changes of the legal entities in China (see Note 1) and to a lesser degree, losses generated by ChaoYang XinMei.

Net income attributable to noncontrolling interests and redeemable noncontrolling interests increased $206,000 or 42.0% to $696,000 for the three months ended September 30, 2021, from $490,000 for the three months ended September 30, 2020, primarily due to the structural changes of the legal entities in China (see Note 1) and to a lesser degree, losses generated by ChaoYang XinMei.

Net income attributable to noncontrolling interests and redeemable noncontrolling interests decreased $217,000 or 14.6% to $1.3 million for the nine months ended September 30, 2021, from $1.5 million for the nine months ended September 30, 2020, primarily due to lower profitability from one of our consolidated subsidiaries in China.

Liquidity and Capital Resources

2 unchanged sentences

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

As of June 30, 2021, our principal source of liquidity was $58.5 million, which consisted of cash and cash equivalents of $52.8 million and investments of $5.7 million.

In the six months ended June 30, 2021, cash and cash equivalents decreased by $19.8 million and investments decreased by $0.3 million.

The decrease in cash and cash equivalents of $19.8 million in the six months ended June 30, 2021 was primarily due to net cash used in operating activities of $10.6 million, and net cash used in investing activities of $12.8 million, partially offset by net cash provided by financing activities of $3.2 million and the effect of exchange rate changes of $0.3 million.

As of June 30, 2021, we and our consolidated subsidiaries in China held approximately $34.5 million in cash and investments in foreign bank accounts.

As of June 30, 2020, our principal source of liquidity was $32.5 million, which consisted of cash and cash equivalents of $26.5 million and investments of $6.0 million.

In the six months ended June 30, 2020, cash and cash equivalents decreased by $0.4 million and investments decreased by $3.5 million.

The decrease in cash and cash equivalents of $0.4 million in the six months ended June 30, 2020 was primarily due to net cash used in investing activities of $3.0 million and the effect of exchange rate changes of $0.2 million, partially offset by net cash provided by operating activities of $2.0 million and financing activities of $0.8 million.

As of June 30, 2020, we and our consolidated subsidiaries held approximately $13.4 million in cash and investments in foreign bank accounts.

This consisted of $11.3 million held by our wholly-owned subsidiaries in China and $2.1 million held by our partially-owned consolidated subsidiary in China.

Net cash used in operating activities of $10.6 million for the six months ended June 30, 2021 was primarily comprised of a net change of $22.2 million in operating assets and liabilities and a gain on equity method investments of

$2.6 million, partially offset by a net income before income attributable to non-controlling interest and redeemable noncontrolling interests of $8.4 million, the adjustment for non-cash items of depreciation and amortization of $3.3 million stock-based compensation of $1.8 million and return of equity method investments (dividends) of $0.8 million.

Net cash provided by operating activities of $2.0 million for the six months ended June 30, 2020 was primarily comprised of a net income before income attributable to non-controlling interest of $1.2 million, the adjustment for non-cash items of depreciation and amortization of $2.0 million, stock-based compensation of $1.3 million and loss on equity method investments of $0.3 million, partially offset by a net change of $2.8 million in operating assets and liabilities.

Net cash used in investing activities of $12.8 million for the six months ended June 30, 2021 was primarily from the purchase of property, plant and equipment of $13.0 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 $3.0 million for the six months ended June 30, 2020 was primarily from the purchase of property, plant and equipment of $6.5 million, partially offset by proceeds from sales and maturities of available-for-sale debt securities of $3.5 million.

Net cash provided by financing activities was $3.2 million for the six months ended June 30, 2021, which consisted of proceeds from issuance of Tongmei’s common stock to redeemable noncontrolling interests of $0.3 million, common stock exercised of $1.1 million, formation of new subsidiary with noncontrolling interest of $1.3 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 six months ended June 30, 2020, which consisted of proceeds from short-term borrowings of $0.4 million and proceeds from common stock exercised of $0.5 million, partially offset by dividends paid by joint ventures to their minority shareholders of $0.1 million.

As of September 30, 2021, our principal source of liquidity was $56.0 million, which consisted of cash and cash equivalents of $43.6 million and investments of $12.4 million.

In the nine months ended September 30, 2021, cash and cash equivalents decreased by $29.0 million and investments increased by $6.4 million.

The decrease in cash and cash equivalents of $29.0 million in the nine months ended September 30, 2021 was primarily due to net cash used in operating activities of $11.0 million, and net cash used in investing activities of $25.5 million, partially offset by net cash provided by financing activities of $7.4 million and the effect of exchange rate changes of $0.2 million.

As of September 30, 2021, we and our consolidated subsidiaries in China held approximately $26.2 million in cash and investments in foreign bank accounts.

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

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

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

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

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

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.

Net cash used in operating activities of $10.7 million for the nine months ended September 30, 2021 was primarily comprised of a net change of $29.3 million in operating assets and liabilities and income from equity method investments of $3.7 million, partially offset by a net income before income attributable to non-controlling interest and redeemable noncontrolling interests of $12.9 million, the adjustment for non-cash items of depreciation and amortization of $5.1 million, stock-based compensation of $3.4 million, and return of equity method investments (dividends) of $0.8 million.

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

Net cash used in investing activities of $25.5 million for the nine months ended September 30, 2021 was primarily from the purchase of property, plant and equipment of $19.1 million and purchases of available-for-sale debt securities of $6.7 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 $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 provided by financing activities was $7.1 million for the nine months ended September 30, 2021, which consisted of proceeds from short-term loan of $5.8 million, common stock exercised of $1.6 million, formation of new subsidiary with noncontrolling interest of $1.3 million, proceeds from long-term loan, related party of $0.9 million and proceeds from sale of subsidiary shares to noncontrolling interests of $0.5 million, partially offset by repayment of short-term loan of $3.1 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.

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.

2 unchanged sentences

Since 2015, no shares were repurchased under this program.

During the six months ended June 30, 2021, we did not repurchase any shares under the approved stock repurchase program.

As of June 30, 2021, approximately $2.7 million remained available for future repurchases under this program.

During the nine months ended September 30, 2021, we did not repurchase any shares under the approved stock repurchase program.

As of September 30, 2021, approximately $2.7 million remained available for future repurchases under this program.

Currently, we do not plan to repurchase additional shares.

3 unchanged sentences

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

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

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

3 unchanged sentences

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 or in the fourth quarter of 2021.

when such submission is rejected by the CSRC or stock exchange, or the date when Tongmei withdraws its IPO application.

Tongmei currently plans to submit its formal application to the CSRC in the fourth quarter of 2021 or in the first quarter of 2022.

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.

22 unchanged sentences

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

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.

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 for approximately $3.1 million.

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 combined loan totaled $5.6 million.

In April 2021, Tongmei repaid the full amount of the credit facility, including all outstanding accrued interest, of approximately $5.6 million and simultaneously applied to renew the credit facility.

In June 2021, the combined loans were renewed for approximately $5.8 million and funded against the credit facility with an annual interest rate of 4.7%.

As of June 30, 2021, $9.0 million was included in “Bank loan” in our condensed consolidated balance sheets.

In June 2021, the combined loans were renewed for approximately

$5.8 million and funded against the credit facility with an annual interest rate of 4.7%.

In September 2021, Tongmei repaid $3.1 million of the credit facility, including all outstanding accrued interest and simultaneously applied to renew the credit facility.

In September 2021, the credit facility was renewed for approximately $2.7 million with an annual interest rate of 3.85%.

As of September 30, 2021, $8.6 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.

4 unchanged sentences

Accrued interest is calculated monthly and paid monthly.

The annual interest rate was approximately 3.92% as of June 30, 2021.

The annual interest rate was approximately 3.92% as of September 30, 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 June 30, 2021, $1.5 million was included in “Bank loan” in our condensed consolidated balance sheets.

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

As of September 30, 2021, $1.5 million was included in “Bank loan” in our condensed consolidated balance sheets.

In September 2021, Tongmei entered into a credit facility with the Bank of Communications with a $3.1 million line of credit at an annual interest rate of 4.0% as of September 30, 2021.

Accrued interest is calculated monthly and paid quarterly.

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

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

As of September 30, 2021, $3.1 million was included in “Bank loan” in our condensed consolidated balance sheets.

Accrued interest is calculated monthly and paid annually.

The loan is unsecured.

The repayment of the full amount including any accrued interest is due September 30, 2024.

As of September 30, 2021, $0.9 million was included in “Long-term debt, related party” in our condensed consolidated balance sheets

On July 27, 2021, we filed with the SEC a registration statement on Form S-3, pursuant to which we may offer up to $60,000,000 of common stock, preferred stock, debt securities, depositary shares, warrants, subscription rights, purchase contracts and/or units in one or more offerings and in any combination.

5 unchanged sentences

Cash from operations could be affected by various risks and uncertainties, including, but not limited to those set forth below under Item 1A “Risk Factors”.

Occasionally, one of our PRC subsidiaries or PRC raw material joint ventures declares and pays a dividend.

For the nine months ended September 30, 2021 and 2020, the aggregate dividends paid to the Company, directly or to an intermediate entity of the Company, by its PRC subsidiaries and PRC raw material joint ventures were approximately $774,000 and $0, respectively.

For the nine months ended September 30, 2021 and 2020, the aggregate dividends paid to minority shareholders by our PRC subsidiaries and PRC raw material joint ventures were approximately $0 and $89,000, respectively.

All of these distributions were paid to the PRC companies and the minority shareholders.

Contract to Purchase Goods and Services

24 unchanged sentences

Off-Balance Sheet Arrangements

As of June 30, 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).

As of September 30, 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

13 unchanged sentences

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

As of June 30, 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.

As of September 30, 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.

10 unchanged sentences

The company may choose not to hedge certain foreign exchange exposures for a variety of reasons, including but not limited to accounting considerations and the prohibitive economic cost of hedging particular exposures.

However, even with our hedging program, we still experience losses on foreign exchange from time to time.

However, even with our hedging program, we still experience gains and losses on foreign exchange from time to time.

Interest Rate Risk

5 unchanged sentences

Interest Rate

September 30,

Cash and cash equivalents

9 unchanged sentences

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

One customer accounted for 14% of our accounts receivable balance as of June 30, 2021 and two customers accounted for 11% and 10% of our accounts receivable as of December 31, 2020.

One customer accounted for 11% of our accounts receivable balance as of September 30, 2021 and two customers accounted for 11% and 10% of our accounts receivable as of December 31, 2020.

Impairment of Equity Investment Risk

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

3 unchanged sentences

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.

As of June 30, 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 June 30, 2021 and December 31, 2020 totaled $8.3 million and $6.4 million, respectively.

As of September 30, 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 September 30, 2021 and December 31, 2020 totaled $9.3 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