What changed in this filing

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Item 9A. Controls and Procedures

2022-03-15 compared with 2021-03-23 · 265 added, 176 removed, 1174 unchanged (27% of the section changed)

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Other Information

Disclosure R egarding Foreign Jurisdictions that Prevent Inspections

Not Applicable.

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

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm (PCAOB ID:

Consolidated Balance Sheets

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Accrued liabilities

Short-term loan from noncontrolling interest

Total current liabilities

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Accumulated deficit

Accumulated other comprehensive income (loss)

Accumulated other comprehensive income

Total AXT, Inc.

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Net income (loss)

Net income attributable to noncontrolling interests

Net income attributable to noncontrolling interests and redeemable noncontrolling interests

Net income (loss) attributable to AXT, Inc.

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

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

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

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

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Comprehensive income (loss)

Comprehensive income attributable to noncontrolling interests

Comprehensive income attributable to noncontrolling interests and redeemable noncontrolling interests

Comprehensive income (loss) attributable to AXT, Inc.

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Income (Loss)

January 1, 2018

Balance as of January 1, 2019

Common stock options exercised

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

Purchase of subsidiary shares from noncontrolling interests

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Common stock options exercised

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

Sale of subsidiary shares to noncontrolling interests

Purchase of subsidiary shares from noncontrolling interests

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Issuance of common stock in the form of restricted stock

Other comprehensive loss

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

Net dividend declared by joint ventures

Other comprehensive income

Balance as of December 31, 2020

Common stock options exercised

Sale of subsidiary shares to noncontrolling interests

Purchase of subsidiary shares from noncontrolling interests

Formation of new subsidiary with noncontrolling interests

Transfer of subsidiary with noncontrolling interests

Restricted stock awards canceled

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Issuance of common stock in the form of restricted stock

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

Net dividend declared by joint ventures

Purchase of subsidiary shares from noncontrolling interests

Transfer of subsidiary with redeemable noncontrolling interests

Noncontrolling interest portion of Tongmei stock-based compensation

Sale of common stock to employees in connection with the reorganization

Other comprehensive income

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Net income (loss)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Depreciation and amortization

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Provision for doubtful accounts

(Gain) loss on disposal of equipment

Gain from deconsolidation of a subsidiary

(Gain) loss from equity method investments, net

Return on equity method investments

(Gain) loss on disposal of equipment

Return of equity method investments (dividends)

Equity in (income) loss of unconsolidated joint ventures

Deferred tax assets

Changes in operating assets and liabilities:

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Other long-term liabilities, including royalties

Net cash provided by operating activities

Net cash provided by (used in) operating activities

Cash flows from investing activities:

Purchases of property, plant and equipment

Proceeds from sale of equipment

Purchases of available-for-sale debt securities

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Consideration paid to repurchase subsidiary shares from noncontrolling interests

Proceeds from short-term loan

Payments on short-term loan

Proceeds from bank loan

Proceeds from short-term loan from noncontrolling interest

Payments on bank loan

Proceeds from sale of subsidiary shares to noncontrolling interests

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

Formation of new subsidiary with noncontrolling interests

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

Dividends paid by joint ventures to their minority shareholders

Net cash provided by (used in) financing activities

Net cash provided by financing activities

Effect of exchange rate changes on cash and cash equivalents

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Cash and cash equivalents at the beginning of the year

Cash and cash equivalents at the end of the year

Cash and cash equivalents at the end of the period

Supplemental disclosures:

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

Consideration payable in connection with construction, included in accrued liabilities

* Dividend accrued but not paid by joint ventures of $ 0 , $ 0 and $ 504 was included in accrued liabilities as of December 31, 2020, 2019 and 2018 , respectively.

Consideration payable in connection with construction in progress, included in accrued liabilities

See accompanying notes to consolidated financial statements.

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

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

(“Tongmei”), AXT-Tongmei, Inc.

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

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

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(“JinMei”), ChaoYang JinMei Gallium Ltd.

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

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

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

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

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

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

Our consolidated balance sheet as of December 31, 2021 and 2020, as reported, does not include the assets and liabilities of JiYa, since we deconsolidated JiYa as of March 11, 2019.

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

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

In preparation for Tongmei’s application for a listing of shares in an initial public offering (the “IPO”) on the Shanghai Stock Exchange’s Sci-Tech innovAtion boaRd (the “STAR Market”), in late December 2020, we reorganized our entity structures in China.

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

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

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

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

In 2020, the private equity funds (the “Investors”) had transferred approximately $ 48.1 million of new capital to Tongmei.

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

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

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

As of December 31, 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.

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

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.

Use of Estimates

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

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

We believe that the estimates, judgments, and assumptions upon which management relies are reasonable based on information available

at the time that these estimates, judgments, and assumptions are made.

These estimates, judgments, and assumptions can affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements as well as the reported amounts of revenues and expenses during the periods presented.

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

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

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

The transaction loss for the years ended December 31, 2021 and 2020 totaled $ 434,000 and $ 411,000 , respectively.

The transaction gain totaled $ 321,000 for the year ended December 31, 2019.

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

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

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

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

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

Revenue Recognition

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

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

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

No customer accounted for more than 10% of our accounts receivable as of December 31, 2021 and two customers accounted for 11 % and 10 % of our accounts receivable as of December 31, 2020.

No customers represented more than 10% of our revenue for the year ended December 31, 2021.

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

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

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

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

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

Our top five customers, although not the same five customers for each period, represented 26 % of our revenue for the year 2021, 32 % of our revenue for 2020 and 40 % of our revenue for 2019.

For the years ended December 31, 2021 and 2020, one third-party customer for the raw materials products from our consolidated subsidiaries accounted for over 10% of the revenue from raw materials sales.

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

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

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Uncollectible receivables are recorded as bad debt expense when all efforts to collect have been exhausted and recoveries are recognized when they are received.

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

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

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

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 increased claims for quality issues experienced by approximately four of our customers.

If actual warranty costs or pending new claims differ substantially from our estimates, revisions to

the estimated warranty liability would be required, which could have a material impact on our financial condition and results of operations for future periods.

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

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

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

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

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

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

Repairs and maintenance costs are expensed as incurred.

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We monitor our investments for impairment and record reductions in carrying value when events or changes in circumstances indicate that the carrying value may not be recoverable.

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

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

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

Determination of impairment is highly

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

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

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

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

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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.

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.

The impact of ASC 740 is more fully described in Note 12.

Comprehensive Income (Loss)

The components of other comprehensive income (loss) include unrealized gains and losses on marketable securities and foreign currency translation adjustments.

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

The balance of accumulated other comprehensive income (loss) is as follows (in thousands):

Comprehensive Income

The components of other comprehensive income include unrealized gains and losses on marketable securities and foreign currency translation adjustments.

Comprehensive income is presented in the consolidated statements of comprehensive income (loss).

The balance of accumulated other comprehensive income is as follows (in thousands):

As of December 31,

Accumulated other comprehensive income (loss):

Accumulated other comprehensive income:

Unrealized gain (loss) on investments, net

Cumulative translation adjustment

Cumulative translation adjustment attributable to noncontrolling interests

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

Cumulative translation adjustment attributable to noncontrolling interests and redeemable noncontrolling interests

Accumulated other comprehensive income attributable to AXT, Inc.

Net Income (Loss) Per Share

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Recent Accounting Pronouncements

Accounting Standard Update No.

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

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

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

Our adoption of ASU 2016-13 and its subsequent series of amendments during the twelve months ended December 31, 2020 using the modified retrospective transition approach did not result in a material impact on our consolidated financial statements.

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

In November 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2021-10, Government Assistance (Topic 832):

Disclosures by Business Entities about Government Assistance.

ASU 2021-10 aims to provide increased transparency by requiring business entities to disclose information about certain types of government assistance they receive in the notes to the financial statements.

The FASB broadly defined “government assistance” in Accounting Standards Codification (“ASC”) 832 to ensure that assistance received from most types of governmental entities or other related organizations would be disclosed.

Government assistance within the scope of ASC 832 includes assistance that is administered by domestic, foreign, local (such as city, town, county, or municipality), regional (such as state, provincial, or territorial), national (federal) governments, as well as entities related to those governments (such as departments, independent agencies, boards, commissions, or component units).

ASC 832 also includes government assistance from intergovernmental organizations (for example, global organizations such as the United Nations, regional organizations such as the European Union, and economic organizations such as the World Trade Organization).

The guidance is effective for fiscal years beginning after December 15, 2021, with early application permitted.

We are currently evaluating the impact the adoption of this ASU will have on our consolidated financial statements.

Cash, Cash Equivalents and Investments

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As of December 31, 2021

Certificates of deposit

Corporate bonds

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

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

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

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

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

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

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

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

for production in the ordinary course of business.

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

As of December 31, 2021 and 2020, amounts payable of $ 112,000 and $ 0 , respectively, were included in “Accounts payable” in our consolidated balance sheets.

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

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

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

As of December 31, 2021 and 2020, there were no amounts payable outstanding.

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

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

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

As of December 31, 2021 and 2020, there were no amounts payable outstanding.

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

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

As of December 31, 2020, JinMei repaid principal and interest totaling $ 537,000 to Tongmei.

In July 2021, JinMei repaid the principal and outstanding interest totaling $ 858,000 to Tongmei .

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

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

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

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

The loan bears interest at 2.75 % per annum.

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

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

In November 2017, our consolidated joint venture, BoYu, provided a personal loan of $ 291,000 to one of its executive employees.

This loan bears interest at 2.75 % per annum.

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

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

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

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

For the years ended December 31, 2021 and 2020, BoYu has recorded $ 50,000 and $ 0.3 million in revenue from this customer, respectively.

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

In September 2021 and 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 and $ 1.0 million, respectively, 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 and October 31, 2024, respectively.

As of December 31, 2021, $ 1.9 million was included in “Short-term loan from noncontrolling interest” in our consolidated balance sheets.

In December 2021, ChaoYang Xinshuo and ChaoYang XinMei agreed to request approval from the Chinese local government to convert these loans to an equity investment.

The final approval of the equity investment was granted by the Chinese local government in early January 2022.

In December 2021, each of Tongmei and a joint venture partner agreed to make an equity investment on a pro-rata basis into ChaoYang XinMei.

Tongmei’s portion of the investment forwarded directly to ChaoYang XinMei was $ 1.4 million.

Tongmei’s ownership remained at 58.5 % after the December 2021 equity investments.

The equity investment required review and approval by the Chinese local government, which was not received by December 31, 2021.

The final approval of the equity investment was granted by the Chinese local government in early January 2022.

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

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Construction in progress

As of December 31, 2020, the balance of construction in progress was $ 24.5 million, of which $ 14.2 million was related to 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 from our construction in progress for our other consolidated subsidiaries.

As of December 31, 2021, the balance of construction in progress was $ 31.7 million, of which $ 22.7 million was related to our buildings in our Dingxing and Kazuo locations, $ 3.0 million was for manufacturing equipment purchases not yet placed in service and $ 6.0 million was from our construction in progress for our other consolidated subsidiaries.

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

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

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

The changes in our estimate of the useful life, effective January 1, 2020, were made in order to remain consistent with U.S.

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

In addition, the useful lives of our buildings located in Dingxing and Kazuo was extended to 39.5 years to better align with industry standards.

The changes in our estimate of the useful lives, effective January 1, 2020, were made in order to remain consistent with U.S.

GAAP regarding management estimates.

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Beijing BoYu Semiconductor Vessel Craftwork Technology Co., Ltd.

ChaoYang XinMei High Purity Semiconductor Materials Co., Ltd.

Donghai County Dongfang High Purity Electronic Materials Co., Ltd.

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Emeishan Jia Mei High Purity Metals Co., Ltd.

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

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

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

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

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

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

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

In 2020, the Investors transferred approximately $ 48.1 million of new capital to Tongmei.

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

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

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

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

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

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

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

As of August 2020, we referred to ChaoYang JinMei as

a significantly controlled subsidiary instead of a wholly-owned subsidiary.

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

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

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

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

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

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

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

For AXT’s minority investment entities that are not consolidated, the investment balances are included in “Other assets” in our consolidated balance sheets and totaled $ 10.2 million and $ 6.4 million as of December 31, 2021 and 2020, respectively.

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Our share for the

Operating income (loss)

Operating income

Net income (loss)

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Noncurrent liabilities

Our portion of the income and losses, including impairment charges, from these minority investment entities that are not consolidated and are accounted for under the equity method was a gain of $ 0.1 million for the year ended December 31, 2020 and a loss of $ 1.9 million and $ 1.1 million for the years ended December 31, 2019 and 2018, respectively.

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

Our portion of the income and losses, including impairment charges, from these minority investment entities that are not consolidated and are accounted for under the equity method was a gain of $ 4.4 million and $ 0.1 million for the years ended December 31, 2021 and 2020, respectively, and a loss of $ 1.9 million for the year ended December 31, 2019.

Dividends received from these minority investment entities were $ 774,000 and $ 362,000 for the years ended December 31, 2021 and 2019, respectively, and $ 0 for the year ended December 31, 2020.

Excluding one fully impaired entity, undistributed retained earnings relating to our investments in these minority investment entities amounted to $ 5.0 million and $ 1.3 million as of December 31, 2021 and 2020, respectively.

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Other intangible assets

Deferred tax assets

Accrued Liabilities

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

As of December 31,

Accrued compensation and related charges

Payable in connection with construction in progress

Preferred stock dividends payable

Payable in connection with construction

Payable in connection with repurchase of subsidiaries shares

Accrued income taxes

Payable in connection with land restoration of Nanjing JinMei factory

Advance from customers

Accrued professional services

Accrued product warranty

Accrued income taxes

Current portion of operating lease liabilities

Advance from customers

Other tax payable

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Accrual for sales returns

Payable in connection with repurchase of subsidiaries shares

Payable in connection with land restoration of Nanjing JinMei factory

Other accrued liabilities

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

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

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

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

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

Accrued interest is calculated monthly and paid quarterly.

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

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

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

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

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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 month s.

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 , 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 %.

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 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.

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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 China 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.

Stockholders’ Equity and Stock Repurchase Program

Stockholders’ Equity

The 883,000 shares of $ 0.001 par value Series A preferred stock issued and outstanding as of December 31, 2020 and 2019, valued at $ 3,532,000 are non-voting and non-convertible preferred stock with a 5.0 % cumulative annual

dividend rate payable when declared by the Board of Directors and $ 4 per share liquidation preference over common stock, and must be paid before any distribution is made to common stockholders.

The 883,000 shares of $ 0.001 par value Series A preferred stock issued and outstanding as of December 31, 2021 and 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 $ 4 per share liquidation preference over common

stock, and must be paid before any distribution is made to common stockholders.

These preferred shares were issued to Lyte Optronics, Inc.

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As of December 31,

Net income (loss) attributable to AXT, Inc.

Net income attributable to AXT, Inc.

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

Sales of subsidiary shares to noncontrolling interest

Purchase of subsidiary shares from noncontrolling interest

Sales of subsidiary shares to noncontrolling interests

Purchase of subsidiary shares from noncontrolling interests

Formation of new subsidiary with noncontrolling interests

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

Net transfers to noncontrolling interests

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

Change from net income attributable to AXT, Inc., net of transfers to noncontrolling interests

Stock Repurchase Program

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

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

In 2021, 2020 and 2019, we did no t repurchase any of our outstanding common stock.

If we are required to pay the cumulative dividends on the Series A preferred stock, our cash and cash equivalents would be reduced.

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In May 2019, our stockholders approved 1,600,000 of additional shares for issuance under the 2015 Plan.

In May 2021, our stockholders approved 3,600,000 of additional shares for issuance under the 2015 Plan.

Awards that may be made under the 2015 Plan are stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, deferred compensation awards and other stock-based awards.

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There were 507,000 , 905,000 and 113,000 options exercised in the years ended December 31, 2021, 2020 and 2019, respectively.

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

The total intrinsic value of options exercised for the years ended December 31, 2021, 2020 and 2019, was $ 3.7 million, $ 3.2 million and $ 266,000 , respectively.

As of December 31, 2021, the unamortized compensation costs related to unvested stock options granted to employees under our 2015 plan was approximately $ 0.4 million, net of estimated forfeitures of $ 41,000 .

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

At-Risk, Performance Shares

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

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

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

At-risk, performance shares are eligible to receive dividend equivalents under the 2015 Plan, as determined by the Board of Directors.

The Company will recognize forfeitures as they occur.

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

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

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

The fair value of the at-risk, performance shares is determined based on the closing price of the Company’s common stock on the first day after the public issuance of the Company’s earnings release for the most recent fiscal quarter, following the Compensation Committee and Board of Directors approval, which is considered the grant date.

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

For the year ended December 31, 2021, 37,901 shares of the at-risk, performance shares had vested.

On February 17, 2021, the Compensation Committee recommended, and the Board of Directors 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 December 31, 2021 is presented below (in thousands, except per share data):

Weighted-Average

Non-vested as of January 1, 2021

Non-vested as of December 31, 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 December 31, 2021, there was $ 1.1 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.

The following number of shares of common stock were reserved and available for future issuance as of December 31, 2021 (in thousands, except per share data):

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

There were no stock options granted during 2020.

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

There were no stock options granted during 2021 and 2020.

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

The fair value of options granted was estimated at the date of grant using the following weighted-average assumptions:

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Ending accrued product warranty

Consolidated income before provision for income taxes includes non-U.S.

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

Consolidated income (loss) before provision for income taxes was income of $ 17.6 million and $ 7.1 million for the years ended December 31, 2021and 2020, respectively, and a loss of $ 1.0 million for the year ended December 31, 2019.

We recorded a current tax provision of $ 1.1 million, $ 2.0 million and $ 0.6 million for the years ended December 31, 2021, 2020 and 2019, respectively.

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Foreign income inclusion

Gain from sale of IP

Tax effect in equity method loss or gain from unconsolidated affiliates

Foreign-derived intangible income

Effective tax rate

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Operating lease right-of-use assets

Total net deferred tax assets

Total net deferred tax assets (included in other assets)

As of December 31, 2021 we have federal net operating loss (“NOL”) carryforwards of approximately $ 43.5 million, which will begin to expire in 2024.

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

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

The valuation allowance decreased for the year ended December 31, 2021 by $ 4.4 million and increased by $ 0.1 million and $ 0.2 million for the years ended December 31, 2020 and 2019, respectively.

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

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

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

We realized benefits from this 10 % reduction in tax rate of $ 1.0 million, $ 1.0 million and $ 0.2 million for 2021, 2020 and 2019, respectively.

As of December 31, 2021, the favorable tax rate is still valid for the Company and it will stay the same for next year if there is no change of the business nature.

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In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain shareholders or public groups in the stock of a corporation by more than 50 percentage points over a three-year period.

If there is a change of control, utilization of our NOL or tax credit carryforwards would be subject to an annual limitation under Section 382.

If there is a change of control, utilization of our NOL or tax credit carryforwards would be subject to an annual limitation

under Section 382.

Any limitation may result in expiration of a portion of the NOL or research and development credit carryforwards before utilization.

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

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

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

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

AB 85 has no impact to the Company since the Company has no NOLs and business credits to utilize.

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

The bill includes updates to the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), the Employee Social Security Deferral and the Paycheck Protection Program.

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

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Restricted stock awards

Denominator for dilutive net income (loss) per common shares

Denominator for dilutive net income per common shares

Net income (loss) attributable to AXT, Inc.

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Foreign exchange gain (loss)

Gain from local China government subsidy

Other income (expense)

Income from local China government subsidy

Other expense

Commitments and Contingencies

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

The majority of our lease obligations relate to our lease agreement for a nitrogen system to be used during the manufacturing process for our facility in Dingxing, China.

The majority of our lease obligations relate to our lease agreement for a nitrogen

system to be used during the manufacturing process for our facility in Dingxing, China.

The equipment lease became effective in August 2019 and will expire in July 2029.

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

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

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

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

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

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Operating cash flows from operating leases

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

Leased assets obtained in exchange for new operating lease liabilities

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

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Royalty Agreement

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

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

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

These expenses were included in cost of revenue.

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

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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 under this agreement was $ 174,000 .

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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(in thousands, except per share data)

Net income (loss) attributable to AXT, Inc.

Net income attributable to AXT, Inc.

per share, basic

Net income (loss) attributable to AXT, Inc.

Net income attributable to AXT, Inc.

per share, diluted

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Redeemable Noncontrolling Interests

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

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

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

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

The government approved the entire approximately $ 49 million investment on January 25, 2021, at which time the Investors owned a redeemable noncontrolling interests in Tongmei of 7.28 %.

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

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

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

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

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

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

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

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

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 Chinese Securities Regulatory Commission (“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.

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

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 cancelled.

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

public company.

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

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

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

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

The components of the change in redeemable noncontrolling interests for the years ended December 31, 2021 and 2020 are presented in the following table (in thousands):

Balance as of January 1, 2020

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Balance as of December 31, 2020

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

Increase in redeemable noncontrolling interests due to transfer of subsidiary with noncontrolling interests

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

Equity issuance costs incurred

Stock-based compensation attributable to redeemable noncontrolling interests

Net income attributable to redeemable noncontrolling interests

Effect of foreign currency translation attributable to redeemable noncontrolling interests

Effect of foreign currency translation on redeemable noncontrolling interests

Balance as of December 31, 2021

Subsequent Events

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

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

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

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

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

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

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

(“ChaoYang XinMei”).

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

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

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

In September 2021 and October 2021, our consolidated subsidiary, ChaoYang XinMei received funding from a minority investor of $ 0.9 million and $ 1.0 million, respectively.

In December 2021 and January 2022, the same subsidiary received funding from Tongmei of $ 1.4 million and $ 1.4 million, respectively.

In January 2022, the China local government certified this additional funding in our consolidated subsidiary, ChaoYang XinMei, as an equity investment.

As a result, noncontrolling interests increased $ 2.2 million and redeemable noncontrolling interests increased $ 0.2 million.

Tongmei’s ownership remained at 58.5 % after these equity investments.

In January 2022, Tongmei entered into a credit facility with the Bank of Communications for $ 3.1 million with an annual interest rate of 3.3 %.

Accrued interest is calculated monthly and paid quarterly.

The repayment of the loan and any accrued interest is due in January 2023.

In January 2022, Tongmei entered into a credit facility with the Bank of China for $ 4.4 million with an annual interest rate of 4.55 %.

Accrued interest is calculated monthly and paid quarterly.

The repayment of the loan and any accrued interest is due in January 2023.

Form 10-K Summary

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Form of Indemnification Agreement for directors and officers

6-inch Supply Agreement dated December 31, 2008 between AXT, Inc.

4-inch Supply Agreement dated December 31, 2008 between AXT, Inc.

2007 Equity Incentive Plan (amended December 8, 2008)

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Executive Incentive Plan

Credit Agreement, dated as of November 2, 2018, by and between AXT, Inc.

and Wells Fargo Bank, National Association

First Amendment to Credit Agreement, dated as of February 5, 2020, by and between AXT, Inc.

and Wells Fargo Bank, National Association

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

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Schedule identifying agreements substantially identical to the form of Second Supplemental Agreement filed as Exhibit 10.13 hereto

Letter of Commitment on Share Lock-up

Letter of Commitment on the Shareholding Intention and Share Reduction Intention

Letter of Commitment on Plan for Stabilizing Tongmei’s Stock Price within Three Years upon the Listing and the Restraint Measures

Letter of Commitment on Share Repurchase for Fraudulent Listing

Letter of Commitment on No False Records, Misleading Statements or Major Omissions in the Prospectus

Letter of Commitment on Filling the Diluted Spot Return

Letter of Commitment on Restraint Measures for Nonperformance of the Commitments

Letter of Commitment on Avoiding Horizontal Competition

Letter of Commitment on Regulating and Reducing Related Party Transactions

Letter of Commitment on Avoiding Illegal Guarantees

Statement and Letter of Commitment

Special Commitment Letter for Disclosure of Shareholders’ Information and Verification of Retired Personnel of CSRC

Computation of Ratio of Earnings to Fixed Charges

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Management contract or compensatory plan.

Confidential treatment has been requested of the SEC for portions of the exhibit.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized.

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/s/ MORRIS S.

Chief Executive Officer and Director

Chief Executive Officer and Chairman of the Board of Directors

March 15, 2022

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/s/ JESSE CHEN

Chairman of the Board of Directors

March 23, 2021

Lead Independent Director

March 15, 2022

/s/ LEONARD LEBLANC

March 15, 2022

Leonard LeBlanc

/s/ Christine Russell

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

What changed 10-K

Item 9A. Controls and Procedures