What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-03-15 compared with 2021-03-23 · 120 added, 139 removed, 317 unchanged (45% of the section changed)

45 unchanged sentences

As of December 31, 2021 and 2020, our accounts receivable, net balance was $34.8 million and $24.6 million, respectively, which was net of an allowance for doubtful accounts of $130,000 and $217,000 as of December 31, 2021 and 2020, respectively.

During 2021, we decreased the allowance for doubtful accounts by $87,000 due to the write-off of accounts receivable for a customer.

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

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

(“JiYa”) as of March 11, 2019.

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.

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As of December 31, 2021 and 2020, accrued product warranties totaled $743,000 and $609,000, respectively.

The increase in accrued product warranties is primarily attributable to four customers who claimed certain wafers did not meet their specifications.

The increase in accrued product warranties is primarily attributable to two customers who claimed certain wafers did not meet their specifications.

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

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Impairment of Investments

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

All available-for-sale debt securities with a quoted market value below

cost (or adjusted cost) are reviewed in order to determine whether the decline is other-than-temporary.

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.

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 debt securities for a period of time sufficient to allow for any anticipated recovery in market value.

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● Determining which model-derived valuations to use in determining fair value requires management judgment.

When observable market prices for similar securities or similar securities are not available, we price our marketable debt instruments using non-binding market consensus prices that are corroborated with observable market data or pricing models, such as discounted cash flow models, with all significant inputs derived from or corroborated with observable market data.

market data or pricing models, such as discounted cash flow models, with all significant inputs derived from or corroborated with observable market data.

Level 3 instruments include unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.

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

We also sell raw materials through our participation in majority- and minority-owned subsidiaries and joint ventures.

Our two raw material companies sell, among other items, purified gallium and pBN crucibles.

Operating Results

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

Our annual revenue increased in 2020 from $83.3 million in 2019 to $95.4 million in 2020.

This was an increase of 14.5%.

Our revenue decreased in 2019 by 18.7% to $83.3 million.

Our annual revenue increased in 2021 from $95.4 million in 2020 to $137.4 million in 2021 an increase of 44.1%.

Our annual revenue increased in 2020 from $83.3 million in 2019 to $95.4 million in 2020 an increase of 14.5%.

Our annual revenue decreased in 2019 by 18.7% to $83.3 million.

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

Our revenue increased in 2018 by 3.8% to $102.4 million, in 2017 by 21.2% to $98.7 million and in 2016 by 5.0% to $81.3 million.

In 2020, our gross margin increased from 29.8% in 2019 to 31.7% in 2020.

In 2021, our gross margin increased from 31.7% of total revenue in 2020 to 34.5% of total revenue in 2021.

In 2020, our gross margin increased from 29.8% of total revenue in 2019 to 31.7% of total revenue in 2020.

Our gross margin declined in 2019 to 29.8% of total revenue from 36.2% of total revenue in 2018.

For the years ended December 31, 2018, 2017 and 2016 our gross margin grew each year.

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

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

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

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

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

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

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

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

The underlying end markets needing our wafer substrates are growing.

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

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

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

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

Years Ended Dec.

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Revenue increased $42.0 million, or 44.1%, in 2021 from $95.4 million in 2020.

The $27.4 million increase in wafer substrate sales was led by strong demand for InP wafer substrates for 5G applications and data center upgrades (silicon photonics).

GaAs revenue also grew as the result of increased demand for LED products, industrial lasers and other applications requiring low defect densities in the wafer substrate.

Revenue from Ge wafer substrates increased modestly, primarily as a result of higher demand from our customers in China.

The $14.6 million raw materials revenue increase as compared to the same period in 2020 was primarily the result of increased revenue from sales of purified gallium and favorable pricing.

In addition, increased demand for pBN crucibles and pBN-based OLED manufacturing tools resulted in increased revenue for BoYu, one of our consolidated raw material companies .

Revenue increased $12.1 million, or 14.5%, in 2020 from $83.3 million in 2019.

The $7.7 million increase in wafer substrate sales was the result of stronger GaAs demand in LED sensors used in the automobile industry and the industrial sensor market.

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The $4.4 million raw materials revenue increase as compared to the same period in 2019 was primarily the result of increased shipments of purified gallium due to stronger market demand and higher demand for pBN crucibles and OLED manufacturing tools using pBN sold by our consolidated subsidiaries.

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

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

In addition, GaAs sales into wireless applications decreased.

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

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

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

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

Revenue by Geographic Region

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Revenue from customers in China increased in 2021 by 91.7%, primarily due to higher demand for refined gallium and pBN crucibles sold by our consolidated subsidiaries.

In addition, revenue from InP, GaAs and Ge wafer substrates increased.

Revenue from customers in Taiwan increased in 2021 by 2.2%, primarily due to an increase in demand for wireless applications using GaAs wafer substrates, partially offset by a decline in InP revenue in Taiwan that was transferred to North America.

Revenue from customers in Japan increased in 2021 by 32.6% as a result of increased demand for InP wafer substrates, partially offset by lower demand for pBN crucibles sold by one of our consolidated subsidiaries and GaAs used in wireless applications.

Revenue from customers in Asia Pacific increased by 38.1% as a result of increased demand for GaAs used in wireless applications and InP wafer substrates, partially offset by lower demand for pBN crucibles sold by one of our consolidated subsidiaries.

Revenue from customers in Europe increased in 2021 by 17.3%, primarily due to GaAs used in LED applications, InP wafer substrates and pBN crucibles sold by one of our consolidated subsidiaries, partially offset by lower demand for Ge wafer substrates.

Revenue from customers in North America increased by 13.4% primarily due to increased demand for our InP and Ge wafer substrates, and pBN crucibles sold by one of our consolidated subsidiaries.

Revenue from customers in China increased in 2020 by 31.2%, primarily due to higher demand for refined gallium and pBN crucibles sold by our consolidated subsidiaries.

In addition, revenue from GaAs wafer substrates increased.

4 unchanged sentences

Revenue from customers in North America increased by 33.3% primarily due to increased demand for our InP wafer substrates partially offset by lower demand for wireless applications using our GaAs wafer substrates.

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

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

In addition, GaAs sales into wireless applications decreased.

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

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

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

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

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

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

Year Ended Dec.

($ in thousands)

Gross Margin %

Gross Profit %

Gross profit increased $17.1 million in 2021 as compared to 2020.

1 unchanged sentence

The increase in gross profit is attributed to higher revenue resulting in fixed costs being spread over more units and a favorable change in product mix.

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

Gross profit increased $5.5 million in 2020 as compared to 2019.

Gross margin in 2020 was 31.7% as compared to 29.8% in 2019.

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

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

The increase in gross profit is attributed to higher revenue resulting in fixed costs being spread over more units and a favorable change in product mix.

Selling, General and Administrative Expenses

3 unchanged sentences

% of total revenue

Selling, general and administrative expenses increased $5.0 million, or 26.0%, to $24.2 million for 2021 compared to $19.2 million for 2020.

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

personnel-related expenses, stock compensation expenses, license and fees, and an increase in outside commission expenses due to higher volume of sales in 2021, partially offset by lower bad debt expense.

Selling, general and administrative expenses decreased $0.1 million, or 0.5%, to $19.2 million for 2020 compared to $19.3 million for 2019.

The lower selling, general and administrative expenses were primarily from lower travel-related expenses driven by the COVID-19 pandemic, reimbursement of certain expenses from the local government in China for relocating our manufacturing line to its province, lower license, tax and registration related expenses and lower professional service-related expenses partially offset by higher personnel-related expenses and increase in our bad debt expenses due to the poor financial condition of a few customers as a result of the COVID-19 pandemic.

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

The higher selling, general and administrative expenses were primarily from higher stock compensation expenses, VAT tax, legal expenses and consulting expenses related to our building construction in China which were partially offset by lower office supplies, facility and freight related expenses.

Research and Development Expenses

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Research and development expenses increased $3.2 million, or 44.8%, to $10.3 million in 2021 from $7.1 million in 2020.

The increase in research and development expenses in 2021 was primarily due to higher 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, new product testing and personnel-related expenses.

Research and development expenses increased $1.3 million, or 22.3%, to $7.1 million in 2020 from $5.8 million in 2019.

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

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

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

Interest Income (Expense), Net

4 unchanged sentences

Interest income (expense), net decreased in 2021 as compared to the same period in 2020, primarily due to lower investment balances in 2021 and increased borrowings in 2021.

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

Interest income (expense), net decreased in 2020 as compared to the same period in 2019, primarily due to lower investment balances in 2020 and increased borrowings in 2020.

Equity in Income (Loss) of Unconsolidated Joint Venture Companies

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

Equity in income (loss) of unconsolidated joint ventures increased $4.3 million to an income of $4.4 million in 2021 from an income of $0.1 million in 2020 as our unconsolidated joint ventures reported better performance in 2021 as compared to 2020.

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

Equity in income (loss) of unconsolidated joint ventures increased $2.0 million to an income of $0.1 million in 2020 from a loss of $1.9 million in 2019 as our unconsolidated joint ventures reported better performance in 2020 as compared to 2019.

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

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

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

Further, there were no impairment charges in 2018.

Other Income, Net

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% of total revenue

Other income, net increased $2.3 million to an income of $3.2 million for 2020 as compared to an income of $0.9 million in 2019, primarily due to compensation received from the China government by three of our consolidated subsidiaries for relocating their facilities outside of Nanjing.

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

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

Other income, net decreased $2.7 million to an income of $0.5 million for 2021 as compared to an income of $3.2 million in 2020, primarily due to lower compensation received from the China government by three of our consolidated subsidiaries for relocating their facilities to Kazuo in 2021 as compared to 2020.

Provision for Income Taxes

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Provision for income taxes for 2021 and 2020 were $1.1 million and $2.0 million, respectively, which were mostly related to our consolidated wafer substrate subsidiaries in China and our two partially owned consolidated raw material companies.

No income taxes or benefits have been provided for U.S.

operations as the income in the U.S.

No income taxes or benefits have been provided for AXT as the income in the U.S.

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

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

We have accrued approximately $223,000 in federal income tax for AXT-Tongmei for the year ended December 31, 2021, which has no net operating loss carryover.

Our estimated tax rate can vary greatly from year to year because of the change or benefit in the mix of taxable income between our U.S.

and China-based operations.

Due to our uncertainty regarding our future profitability in the U.S., we recorded a full valuation allowance against our net deferred tax assets of $19.8 million for the years 2020, 2019 and 2018.

Net Income Attributable to Noncontrolling Interests

Due to our uncertainty regarding our future profitability, we recorded a valuation allowance against our net deferred tax assets of $15.4 million and $19.8 million for the years 2021 and 2020, respectively.

Net Income Attributable to Noncontrolling Interests and Redeemable Noncontrolling Interests

Years Ended Dec.

($ in thousands)

Net income attributable to noncontrolling interests

Net income attributable to noncontrolling interests and redeemable noncontrolling interests

% of total revenue

The increase in noncontrolling interests’ share of income for 2020 as compared to 2019 was due to higher profitability from one of our consolidated subsidiaries in China.

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

The increase in noncontrolling interests and redeemable noncontrolling interests’ share of income for 2021 as compared to 2020 was primarily due to the structural changes of the legal entities in China (see Note 1 to our Consolidated Financial Statements) and to a lesser degree, losses generated by our consolidated subsidiary, ChaoYang XinMei High Purity Semiconductor Materials Co., Ltd.

(ChaoYang XinMei”).

The increase in noncontrolling interests and noncontrolling interests’ share of income for 2020 as compared to 2019 was due to higher profitability from one of our consolidated subsidiaries in China.

Liquidity and Capital Resources

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As of December 31, 2021, we and our consolidated joint ventures held approximately $26.0 million in cash and investments in foreign bank accounts.

This consists of $55.5 million held by our consolidated wafer substrate subsidiaries in China and $5.0 million held by our two consolidated raw material subsidiaries in China.

Total cash and cash equivalents, short-term and long-term investments decreased by $26.8 million in 2021.

As of December 31, 2021, our principal source of liquidity was $51.8 million, which consisted of cash and cash equivalents of $36.8 million and short-term and long-term investments of $15.0 million.

In 2021, cash and cash equivalents decreased by $35.8 million and short-term and long-term investments increased by $9.0 million.

The decrease in cash and cash equivalents of $35.8 million in 2021 was primarily due to net cash used in investing activities of $38.8 million and operating activities of $3.3 million and partially offset by net cash provided by financing activities of $5.8 million and the effect of exchange rate changes of $0.6 million.

Total cash and cash equivalents, short-term and long-term investments increased by $42.2 million in 2020.

1 unchanged sentence

In 2020, cash and cash equivalents increased by $45.7 million and short-term and long-term investments decreased by $3.5 million.

The increase in cash and cash equivalents of $45.7 million in 2020 was primarily due to net cash provided by financing activities of $52.7 million, operating activities of $5.9 million and the effect of exchange rate changes of $3.6 million and partially offset by net cash used in investing activities of $16.4 million.

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

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

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

The increase in cash and cash equivalents of $10.4 million in 2019 was primarily due to net cash provided by operating activities of $12.7 million and financing

activities of $6.2 million and partially offset by net cash used in investing activities of $8.3 million and the effect of exchange rate changes of $0.2 million.

The increase in cash and cash

equivalents of $45.7 million in 2020 was primarily due to net cash provided by financing activities of $52.7 million, operating activities of $5.9 million and the effect of exchange rate changes of $3.6 million and partially offset by net cash used in investing activities of $16.4 million.

Net cash used in operating activities of $3.3 million for 2021 was primarily comprised of net change in operating assets and liabilities of $30.2 million and gain on equity method investments of $4.4 million, offset in part by our net income of $16.5 million, adjustment of non-cash items of depreciation and amortization of $7.1 million, stock-based compensation of $4.5 million, deferred tax assets of $2.3 million, return of equity method investments (dividends) of $0.8 million and amortization of marketable securities premium of $0.1 million.

The $30.2 million net change in operating assets and liabilities primarily resulted from a $12.4 million increase in inventories, a $9.7 million increase in accounts receivable, a $6.3 million increase in other assets, a $3.4 million decrease in accrued liabilities, a $1.2 million decrease in other long-term liabilities, including royalties, and a $0.8 million increase in prepaid expenses and other current assets, offset in part by a $3.6 million increase in accounts payable.

Net cash provided by operating activities of $5.9 million for 2020 was primarily comprised of our net income of $5.0 million, an adjustment of non-cash items of depreciation and amortization of $4.3 million, stock-based compensation of $2.6 million, provision for doubtful accounts of $0.2 million, loss on disposal of equipment of $0.1 million, offset in part by our net change in operating assets and liabilities of $6.3 million and gain on equity method investments of $0.1 million.

2 unchanged sentences

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

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

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

Net cash used in investing activities of $38.8 million for 2021 was primarily due to property, plant and equipment of $29.6 million in preparation for our new manufacturing sites, additional equipment for our Beijing site and equipment and facility costs incurred by our consolidated subsidiaries and the purchases of marketable investment securities of $9.6 million, which were partially offset by proceeds from maturities and sales of available-for-sale debt securities of $0.5 million.

Net cash used in investing activities of $16.4 million for 2020 was primarily due to property, plant and equipment of $19.9 million in preparation for our new manufacturing sites, additional equipment for our Beijing site and equipment and facility costs incurred by our consolidated subsidiaries and the purchases of marketable investment securities of $6.0 million, which were partially offset by proceeds from maturities and sales of available-for-sale debt securities of $9.4 million.

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

term loan in China, $2.5 million from the exercise of common stock options, $0.4 million from sale of Tongmei shares to noncontrolling interests partially offset by payments on short-term loans of $6.0 million and dividends paid by joint ventures to their minority shareholders of $2.2 million.

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

Net cash provided by financing activities was $5.7 million for 2021 which mainly consisted of the proceeds of $20.5 million from short-term loan in China, $1.8 million from short-term loan from noncontrolling interest, $1.7 million from the exercise of common stock options, $1.3 million from formation of new subsidiary with noncontrolling interests and $0.5 million from sale of Tongmei shares to noncontrolling interests, which were partially offset by payments on short-term loans of $19.1 million and $1.1 million of issuance costs in connection with issuance of Tongmei common stock to redeemable noncontrolling interests.

Net cash provided by financing activities was $52.7 million for 2020 which mainly consisted of the proceeds of $47.6 million from issuance of common stock to noncontrolling interests net of issuance cost, $10.4 million from short-term loan in China, $2.5 million from the exercise of common stock options, $0.4 million from sale of Tongmei shares to noncontrolling interests partially offset by payments on short-term loans of $6.0 million and dividends paid by joint ventures to their minority shareholders of $2.2 million.

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

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

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

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

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

These dividends generally occur when the PRC joint venture declares a dividend for all of its shareholders.

Dividends paid to the Company are subject to a 10% PRC withholding tax.

The Company is required to obtain approval from the State Administration of Foreign Exchange (“SAFE”) to transfer funds in or out of the PRC.

SAFE requires a valid agreement to approve the transfers, which are processed through a bank.

Other than PRC foreign exchange restrictions, the Company is not subject to any PRC restrictions and limitations on its ability to distribute earnings from its businesses.

If SAFE approval is denied the dividend payable to the Company would be owed but would not be paid.

For the years ended December 31, 2021, 2020 and 2019, the aggregate dividends paid to us, directly or to an intermediate entity within our corporate structure, by our PRC subsidiaries and PRC raw material joint ventures were approximately $774,000, $0 and $362,000, respectively.

In June 2021 and May 2019, we received a dividend of $774,000 and $362,000, respectively, from one of our equity investments, Xiaoyi XingAn Gallium Co., Ltd.

For the years ended December 31, 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.

We have no current intentions to distribute to our investors earnings under our corporate structure.

We settle amounts owed under our transfer pricing arrangements in the ordinary course of business.

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

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

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

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

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

This right is suspended when Tongmei submits its formal application to the Shanghai Stock Exchange and is accepted for review.

Tongmei submitted the application in December 2021 and it was formally accepted for review on January 10, 2022.

If the Shanghai Stock Exchange approves the formal application, then they will forward it to the CSRC for further review.

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

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

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

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

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

Tongmei does not expect to complete the IPO until the second half of 2022.

If, on December 31, 2022, the IPO application 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.

If the application is approved and Tongmei completes an IPO the redemption right is canceled.

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

public company.

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

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On November 4, 2019, the registration statement expired.

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 million of common stock, preferred stock, depositary shares, warrants, debt securities and/or units in one or more offerings and in any combination.

The SEC has not yet declared the registration statement effective.

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

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Bank Loans and Line of Credit

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

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

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

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

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

The commitments under the Credit Agreement, as amended by the First Amendment, expired on November 30, 2020.

As of the date of this Annual Report on Form 10-K, no loans or letters of credit were outstanding under the Credit Agreement, as amended by the First Amendment.

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

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

In August 2020, Tongmei repaid the full amount of the credit facility including all outstanding accrued interest of approximately $5.9 million and simultaneously applied to renew the credit facility.

In August 2020, Tongmei repaid the full amount of the credit facility, including all outstanding accrued interest, of approximately $5.9 million (the “August 2019 borrowing”) and simultaneously applied to renew the credit facility.

The process of repaying a loan and then renewing the loan is customary in China.

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

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

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

months, which was exercised in March 2021 for approximately $3.1 million.

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 December 31, 2021 and 2020, $2.8 million and $8.9 million, respectively, was included in “Bank loan” in our consolidated balance sheets.

In October 2020, the September 2019 borrowing was renewed and funded against the credit facility and an additional $2.7 million was approved and funded against the credit facility with the annual interest rate of 4.7%.

Accrued interest is calculated monthly and paid quarterly.

The combined loan totals $5.6 million.

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

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

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%.

In November 2021, Tongmei repaid the full amount of the credit facility, including all outstanding accrued interest.

As of December 31, 2021, $0 was included in “Bank loan” in our consolidated balance sheets.

In February 2020, our consolidated subsidiary, BoYu, entered into a credit facility with the ICBC with a $1.4 million line of credit at an annual interest rate of approximately 0.15% over the loan prime rate.

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The annual interest rate was approximately 4.3% as of December 31, 2020.

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

BoYu’s accounts receivable.

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

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

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

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

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

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

Accrued interest is calculated monthly and paid monthly.

In December 2021, BoYu repaid the outstanding loan amount of approximately $1.6 million and renewed the credit facility with a $1.6 million line of credit.

Accrued interest is calculated monthly and paid monthly.

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

As of December 31, 2021 and 2020, $1.6 million and $1.5 million, respectively, was included in “Bank loan” in our 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.

In November 2021, the Bank of Communications increased the line of credit, under the same terms as the September 2021 line of credit, by $1.6 million for a total line of credit of $4.7 million.

As of December 31, 2021, $4.7 million was included in “Bank loan” in our consolidated balance sheets.

In December 2021, Tongmei entered into a credit facility with China Merchants Bank for $1.6 million with an annual interest rate of 3.55%.

Accrued interest is calculated monthly and paid quarterly.

The repayment of the loan and any accrued interest is due on December 6, 2022.

The loan is guaranteed by Beijing Capital Financing Guarantee Co., Ltd.

In exchange for the guarantee, Tongmei paid Beijing Capital Financing Guarantee Co., Ltd.

a fee of 1.5% of the

loan amount or approximately $24,000.

As of December 31, 2021, $1.6 million was included in “Bank loan” in our consolidated balance sheets.

In December 2021, Tongmei entered into a credit facility with China Merchants Bank for $1.6 million with an annual interest rate of 4.22%.

Accrued interest is calculated monthly and paid quarterly.

The repayment of the loan and any accrued interest is due on December 7, 2022.

The credit facility is not collateralized.

As of December 31, 2021, $1.6 million was included in “Bank loan” in our consolidated balance sheets.

Off-Balance Sheet Arrangements

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Total rent expenses under these operating leases charged to cost of revenue were approximately $296,000, $266,000 and $112,000 for the years ended December 31, 2021, 2020 and 2019, respectively, primarily related to the nitrogen system at our facility in Dingxing.

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

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

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

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

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

In 2020, we and a competitor entered into a cross license and covenant agreement (the “Cross License Agreement”), which has a term that begins on January 1, 2020 and expires on December 31, 2029.

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Under the Cross License Agreement, we are obligated to make annual payments over a 10-year period.

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

The following table summarizes our contractual obligations as of December 31, 2020 (in thousands):

Payments due by period

Contractual Obligations

Less than 1 year

Operating leases

Royalty agreement

For the years ended December 31, 2021 and 2020, the royalty expense under the Cross License Agreement was not considered material to our consolidated financial statements.

Land Purchase and Investment Agreement

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We believe that such cooperation agreements are normal, customary and usual in China and that the future valuation is flexible.

We have a similar agreement with the city of Kazuo, China, although on a smaller scale.

We have a similar agreement with the city of Kazuo, China,

although on a smaller scale.

The total investment targeted by AXT in Kazuo is approximately $15 million in value, assets and capital.

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

As of December 31, 2020, we do not have any outstanding purchase orders that will incur a penalty if cancelled by the Company.

Selected Quarterly Results of Operations

The following table sets forth unaudited quarterly results for the eight quarters ended December 31, 2020.

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

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

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

Quarters Ended

(in thousands, except

for per share amounts)

Cost of revenue

Operating expenses:

Selling, general and administrative

Research and development

Total operating expenses

Income (loss) from operations

Interest income (expense), net

Equity in income (loss) of unconsolidated joint ventures

Other (expense) income, net

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

Provision for (benefit from) income taxes

Net income (loss)

Net income attributable to noncontrolling interests

Net income (loss) attributable to AXT, Inc

Net income (loss) attributable to AXT, Inc.

per common share:

Weighted average number of common shares outstanding:

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

Recent Accounting Pronouncements

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

What changed 10-K

Item 7. Management’s Discussion and Analysis