What changed in this filing

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Item 1. Financial Statements

2022-05-09 compared with 2021-11-12 · 471 added, 511 removed, 1001 unchanged (50% of the section changed)

2 unchanged sentences

(Unaudited, in thousands, except per share data)

September 30,

Current assets:

1 unchanged sentence

Short-term investments

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

Accounts receivable, net of allowances of $ 130 as of March 31, 2022 and December 31, 2021

Prepaid expenses and other current assets

7 unchanged sentences

Accrued liabilities

Short-term loan from noncontrolling interest

Total current liabilities

Long-term loan, related party

Noncurrent operating lease liabilities

6 unchanged sentences

2,000 shares authorized;

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

883 shares issued and outstanding as of March 31, 2022 and December 31, 2021 (Liquidation preference of $ 7,566 and $ 7,522 as of March 31, 2022 and December 31, 2021)

Common stock, $ 0.001 par value;

70,000 shares authorized;

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

42,952 and 42,886 shares issued and outstanding as of March 31, 2022 and December 31, 2021

Additional paid-in capital

10 unchanged sentences

Three Months Ended

Nine Months Ended

September 30,

Cost of revenue

5 unchanged sentences

Interest expense, net

Equity in income (loss) of unconsolidated joint ventures

Other income (expense), net

Income before provision for (benefit from) income taxes

Provision for (benefit from) income taxes

Equity in income of unconsolidated joint ventures

Other expense, net

Income before provision for income taxes

Provision for income taxes

Net income attributable to noncontrolling interests and redeemable noncontrolling interests

7 unchanged sentences

Three Months Ended

Nine Months Ended

September 30,

Other comprehensive income, net of tax:

Change in foreign currency translation gain, net of tax

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

Total other comprehensive income, net of tax

Other comprehensive income (loss), net of tax:

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

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

Total other comprehensive income (loss), net of tax

Comprehensive income

4 unchanged sentences

(Unaudited, in thousands)

Nine Months Ended

September 30,

Three Months Ended

Cash flows from operating activities:

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

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

Depreciation and amortization

1 unchanged sentence

Stock-based compensation

Provision for doubtful accounts

(Gain) loss on disposal of equipment

Return of equity method investments (dividends)

Equity in (income) loss of unconsolidated joint ventures

Gain on disposal of equipment

Equity in income of unconsolidated joint ventures

Deferred tax assets

Changes in operating assets and liabilities:

4 unchanged sentences

Other long-term liabilities, including royalties

Net cash provided by (used in) operating activities

Net cash used in operating activities

Cash flows from investing activities:

Purchases of property, plant and equipment

Purchases of available-for-sale debt securities

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

2 unchanged sentences

Proceeds from common stock options exercised

Proceeds from short-term loan

Proceeds from long-term loan, related party

Payments on short-term loan

Proceeds from sale of subsidiary shares to noncontrolling interests

Proceeds from bank loan

Payments on bank loan

Formation of new subsidiary with noncontrolling interests

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

Dividends paid by joint ventures to their minority shareholders

Net cash provided by (used in) financing activities

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

Net cash provided by financing activities

Effect of exchange rate changes on cash and cash equivalents

2 unchanged sentences

Cash and cash equivalents at the end of the period

Supplemental disclosure of non-cash flow information:

Conversion of related party borrowings to Additional Paid-in Capital

Investment in subsidiary shares from noncontrolling interest

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

See accompanying notes to condensed consolidated financial statements.

10 unchanged sentences

Actual results could differ materially from those estimates.

The results of operations for the three and nine months ended September 30, 2021 are not necessarily indicative of the results to be expected in the future or for the full fiscal year.

It is recommended that these condensed consolidated financial statements be read in conjunction with our consolidated financial statements and the notes thereto included in our 2020 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 23, 2021 and our Quarterly Reports on Form 10-Q for the three months ended March 31, 2021 and June 30, 2021 filed with the SEC on May 14, 2021 and August 12, 2021, respectively.

The results of operations for the three months ended March 31, 2022 are not necessarily indicative of the results to be expected in the future or for the full fiscal year.

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

9 unchanged sentences

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

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

As of March 31, 2022 and December 31, 2021, we have five companies accounted for by the equity method.

For the majority-owned subsidiaries that we consolidate, we reflect the portion we do not own as either noncontrolling interests in stockholder’s equity or as redeemable noncontrolling interests in temporary equity on our condensed consolidated balance sheets and in our condensed consolidated statements of operations.

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

For the three and nine months ended September 30, 2021, expenses associated with ChaoYang LiMei had a de minimis impact on our condensed consolidated financial statements.

For the three months ended March 31, 2022, expenses associated with ChaoYang LiMei had a de minimis impact on our condensed consolidated financial statements.

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

4 unchanged sentences

Tongmei’s portion of the final investment was approximately $ 0.9 million, for a total investment of approximately $ 1.8 million for a 58.5 percent ownership of ChaoYang XinMei.

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

In December 2021 and January 2022, ChaoYang XinMei 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 ChaoYang XinMei, as an equity investment.

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

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

6 unchanged sentences

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

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

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

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

As of March 31, 2022, Tongmei’s noncontrolling interests and redeemable noncontrolling interests totaled approximately 14.5 %.

AXT remains the controlling stakeholder of Tongmei and holds a majority of the board of director positions of Tongmei.

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

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

Investments and Fair Value Measurements

1 unchanged sentence

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

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

September 30, 2021

As of March 31, 2022 and December 31, 2021, our cash, cash equivalents and debt investments are classified as follows (in thousands):

March 31, 2022

December 31, 2021

18 unchanged sentences

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

There was an insignificant amount of gross unrealized losses on our available-for-sale debt securities as of September 30, 2021, and historically, such gross unrealized losses have been temporary in nature and we believe that it is probable the principal and interest will be collected in accordance with the contractual terms.

There was an insignificant amount of gross unrealized losses on our available-for-sale debt securities as of March 31, 2022, and historically, such gross unrealized losses have been temporary in nature and we believe that it is probable the principal and interest will be collected in accordance with the contractual terms.

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

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

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

The following table summarizes the fair value and gross unrealized losses related to available-for-sale debt securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of September 30, 2021 (in thousands):

A portion of our debt investments would generate a loss if we sold them on March 31, 2022.

In Loss Position

1 unchanged sentence

Loss Position

As of September 30, 2021

As of March 31, 2022

Certificates of deposit

6 unchanged sentences

As of December 31, 2021

Certificates of deposit

Corporate bonds

2 unchanged sentences

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

The investment balances for the non-consolidated companies are accounted for under the equity method and included in “Other assets” in the condensed consolidated balance sheets and totaled $ 9.3 million and $ 6.4 million as of September 30, 2021 and December 31, 2020,

respectively.

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

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

The investment balances for the non-consolidated companies are accounted for under the equity method and included in “Other assets” in the condensed consolidated balance sheets and totaled $ 11.3 million and $ 10.2 million as of March 31, 2022 and December 31, 2021, respectively.

As of March 31, 2022, there were five companies accounted for under the equity method.

There were no impairment charges in the three months ended March 31, 2022 and 2021.

Fair Value Measurements

1 unchanged sentence

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

As of September 30, 2021 and December 31, 2020, the total unrealized loss, net of tax, included in accumulated other comprehensive income was immaterial.

As of March 31, 2022 and December 31, 2021, the total unrealized loss, net of tax, included in accumulated other comprehensive income was immaterial.

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

6 unchanged sentences

We classify our available-for-sale debt securities including certificates of deposit and corporate bonds as having Level 2 inputs.

The valuation techniques used to measure the fair value of these financial instruments having Level 2 inputs were derived from bank statements, quoted market prices, broker or dealer statements or quotations, or alternative pricing sources with reasonable levels of price transparency.

The valuation techniques used to measure the fair value of these financial instruments having Level 2 inputs were derived from bank statements, quoted

market prices, broker or dealer statements or quotations, or alternative pricing sources with reasonable levels of price transparency.

We place short-term foreign currency hedges that are intended to offset the potential cash exposure related to fluctuations in the exchange rate between the United States dollar and Japanese yen.

1 unchanged sentence

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

As of September 30, 2021, the net change in fair value from the placement of the hedge to settlement at each month end during the quarter had a de minimis impact on the condensed consolidated results.

There were no changes in valuation techniques or related inputs in the three and nine months ended September 30, 2021.

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

The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis in accordance with ASC 820 as of September 30, 2021 (in thousands):

As of March 31, 2022, the net change in fair value from the placement of the hedge to settlement at each month end during the quarter had a de minimis impact on the condensed consolidated results.

There were no changes in valuation techniques or related inputs in the three months ended March 31, 2022.

There have been no transfers between fair value measurements levels during the three months ended March 31, 2022.

The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis in accordance with ASC 820 as of Mach 31, 2022 (in thousands):

Quoted Prices in

4 unchanged sentences

Observable Inputs

September 30, 2021

March 31, 2022

Cash equivalents and investments:

15 unchanged sentences

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

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

We did not record any other-than-temporary impairment charges for these investments during the three months ended March 31, 2022 and 2021, respectively.

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

September 30,

Raw materials

1 unchanged sentence

Finished goods

As of September 30, 2021 and December 31, 2020, carrying values of inventories were net of inventory reserves of $ 19.2 million and $ 17.7 million, respectively, for excess and obsolete inventory and $ 61,000 and $ 162,000 , respectively, for lower of cost or net realizable value reserves.

As of March 31, 2022 and December 31, 2021, carrying values of inventories were net of inventory reserves of $ 20.6 million and $ 19.6 million, respectively, for excess and obsolete inventory and $ 70,000 and $ 66,000 , respectively, for lower of cost or net realizable value reserves.

Property, Plant and Equipment, Net

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

September 30,

Property, plant and equipment:

6 unchanged sentences

Construction in progress

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

subsidiaries.

As of March 31, 2022, the balance of construction in progress was $ 37.5 million, of which $ 27.2 million was related to our buildings in our new Dingxing and Kazuo locations, $ 4.3 million was for manufacturing equipment purchases not yet placed in service and $ 6.1 million was for 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 for our buildings in our new Dingxing and Kazuo locations, $ 3.0 million was for manufacturing equipment purchases not yet placed in service and $ 6.0 million was for our construction in progress at our other consolidated subsidiaries.

1 unchanged sentence

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

September 30,

Preferred stock dividends payable

Accrued compensation and related charges

Preferred stock dividends payable

Advances from customers

Accrued income taxes

Accrued professional services

Payable in connection with land restoration of Nanjing JinMei factory

Accrued product warranty

Current portion of operating lease liabilities

Accrued professional services

Other personnel-related costs

Payable in connection with construction in progress

Other tax payable

Advance from customers

Payable in connection with construction

Accrual for sales returns

Payable in connection with repurchase of subsidiaries shares

Other accrued liabilities

3 unchanged sentences

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

The lease was renewed in January 2022 for a term of 11 years with annual lease payments of $ 27,000 , subject to a 5 % increase at each third year anniversary.

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

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

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

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

The loan bore interest at 2.75 % per annum.

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

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

This loan bore interest at 2.75 % per annum.

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

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

This loan bore interest at 2.75 % per annum.

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

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

This loan bore interest at 2.75 % per annum.

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

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

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

As of March 31, 2022 and December 31, 2021, amounts payable of $ 112,000 and $ 112,000 , respectively, were included in “Accounts payable” in our condensed consolidated balance sheets.

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

1 unchanged sentence

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

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

$ 858,000 to Tongmei.

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

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

As of March 31, 2022 and December 31, 2021, the remaining balance of principal and interest totaled $ 0 and $ 0 , respectively.

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

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

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

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

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

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

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

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

Accrued interest is calculated monthly and paid annually.

The loan is unsecured.

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

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

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.

Short-term loan from noncontrolling interest decreased to $ 0 .

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

As of March 31, 2022, $ 0 was included in “Long-term debt, related party” in our condensed consolidated balance sheets.

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

This policy applies to all of our employees, directors, and our consolidated subsidiaries.

This policy applies to all of our

employees, directors, and our consolidated subsidiaries.

Our executive officers retain board seats on the board of directors of the companies in which we have invested in our China joint ventures.

3 unchanged sentences

These companies form part of our overall supply chain strategy.

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

As of March 31, 2022, the investments are summarized below (in thousands):

Investment Balance as of

September 30,

Nanjing JinMei Gallium Co., Ltd.

16 unchanged sentences

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 %.

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

As of March 31, 2022, 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.

8 unchanged sentences

As a result, our ownership of JinMei increased from 95 % to 97 %.

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

In May 2019, we purchased the remaining 3 % ownership interest from retiring members of the JinMei

management team for approximately $ 413,000 .

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

14 unchanged sentences

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

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

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

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

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

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

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

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

For AXT’s minority investment entities that are not consolidated, the investment balances are included in “Other assets” in our condensed consolidated balance sheets and totaled $ 9.3 million and $ 6.4 million as of September

30, 2021 and December 31, 2020, respectively.

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

4 unchanged sentences

● we do not have controlling financial interest in, do not maintain operational or management control of, do not control the board of directors of, and are not required to provide additional investment or financial support to any of these companies.

One of the minority investment entities in which we have a 25 % ownership interest is a germanium materials company in China.

This company provides results to us only on a quarterly basis.

We received its preliminary first quarter 2019 financial results in early April 2019 as well as its projections for significant losses going forward.

Such projected losses would fully deplete our asset investment balance for this company in 2019.

This company is experiencing significant disruptions due to upgrades and repairs required to comply with stronger environmental regulations in China.

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

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

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

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

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

Excluding one fully impaired entity, the equity investment entities had the following summarized statements of operations information (in thousands) for the three months ended March 31, 2022 and 2021:

Three Months Ended

Nine Months Ended

September 30,

Operating income

Net income (loss)

Our portion of the income and losses from these minority investment entities that are not consolidated and are accounted for under the equity method was income of $ 1.1 million and $ 45,000 , respectively, for the three months ended September 30, 2021 and 2020.

Our portion of the income and losses from these minority investment entities that are not consolidated and are accounted for under the equity method was income of $ 3.7 million and a loss of $ 0.2 million, respectively, for the nine months ended September 30, 2021 and 2020.

Our portion of the income and losses from these minority investment entities that are not consolidated and are accounted for under the equity method was income of $ 1.1 million and $ 1.1 million, respectively, for the three months ended March 31, 2022 and 2021.

Stockholders’ Equity

1 unchanged sentence

(in thousands)

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

The changes in stockholders’ equity by component for the three months ended March 31, 2022 are as follows:

Comprehensive

5 unchanged sentences

Balance as of December 31, 2021

Common stock options exercised

Stock-based compensation

Formation of new subsidiary with noncontrolling interests

Sale of common stock to employees in connection with the reorganization

Purchase of subsidiary shares from noncontrolling interests

Net income (loss)

Other comprehensive loss

Balance as of March 31, 2021

Common stock options exercised

Stock-based compensation

Formation of new subsidiary with noncontrolling interests

Transfer of subsidiary with noncontrolling interest

Transfer of subsidiary with redeemable noncontrolling interest

Other comprehensive income

Balance as of June 30, 2021

Common stock options exercised

Investment in subsidiary with noncontrolling interest

Noncontrolling interest portion of Tongmei stock-based compensation

Stock-based compensation

Tongmei stock-based compensation

Investment in subsidiary from noncontrolling interest

Other comprehensive income

Balance as of September 30, 2021

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

Balance as of March 31, 2022

Net income and other comprehensive income attributable to redeemable noncontrolling interests was $ 418,000 and $ 46,000 , respectively, not shown in the table above.

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

Comprehensive

7 unchanged sentences

Stock-based compensation

Formation of new subsidiary with noncontrolling interests

Sale of common stock to employees in connection with the reorganization

Purchase of subsidiary shares from noncontrolling interests

Net income (loss)

1 unchanged sentence

Balance as of March 31, 2021

Common stock options exercised

Stock-based compensation

Net dividend declared by joint ventures

Other comprehensive income

Balance as of June 30, 2020

Common stock options exercised

Sale of subsidiary shares to noncontrolling interests

Stock-based compensation

Other comprehensive loss

Balance as of September 30, 2020

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

There were no reclassification adjustments from accumulated other comprehensive income (loss) for the three months ended March 31, 2022 and 2021 .

Stock Repurchase Program

3 unchanged sentences

No shares were repurchased from 2016 through 2021.

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

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

During the three months ended March 31, 2022, we did no t repurchase any shares under the approved stock repurchase program.

As of March 31, 2022, approximately $ 2.7 million remained available for future repurchases under this program.

Currently, we do not plan to repurchase additional shares.

5 unchanged sentences

Three Months Ended

Nine Months Ended

September 30,

Cost of revenue

4 unchanged sentences

Net effect on net income

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

As of March 31, 2022, the unamortized compensation costs related to unvested stock options granted to employees under our stock option plan was approximately $ 0.3 million, net of estimated forfeitures of $ 35,000 .

These costs will be amortized on a straight-line basis over a weighted-average period of approximately 1.4 years and will be adjusted for subsequent changes in estimated forfeitures.

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

We did not capitalize any stock-based compensation to inventory as of March 31, 2022 and December 31, 2021 due to the immateriality of the amount.

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

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

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

There were no options granted in the three months ended March 31, 2022 and 2021.

The following table summarizes the stock option transactions during the three months ended March 31, 2022 (in thousands, except per share data):

Stock Options

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Canceled and expired

Balance as of September 30, 2021

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

Options exercisable as of September 30, 2021

The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on our closing price of $ 8.33 on September 30, 2021, which would have been received by the option holder had all option holders exercised their options on that date.

Balance as of March 31, 2022

Options vested as of March 31, 2022 and unvested options expected to vest, net of forfeitures

Options exercisable as of March 31, 2022

The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on our closing price of $ 7.02 on March 31, 2022, which would have been received by the option holder had all option holders exercised their options on that date.

Restricted stock awards

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

A summary of activity related to restricted stock awards for the three months ended March 31, 2022 is presented below (in thousands, except per share data):

Weighted-Average

Non-vested as of January 1, 2022

Non-vested as of September 30, 2021

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

Non-vested as of March 31, 2022

As of March 31, 2022, the unamortized compensation costs related to unvested restricted stock awards was approximately $ 4.3 million, which is to be amortized on a straight-line basis over a weighted-average period of approximately 1.4 years.

At-Risk, Performance Shares

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

In February 2021 and 2022, 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.

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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 financial performance metric for the at-risk, performance shares issued in February 2021 is based upon year-end 2020 actual results as compared to the Company’s year-end actual results in 2021.

The financial performance metric for the at-risk, performance shares issued in February 2022 is based upon year-end 2021 actual results as compared to the Company’s year-end actual results in 2022.

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 .

None of the at-risk, performance shares had vested as of September 30, 2021.

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

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

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

The fair value per share of the at-risk, performance shares classified as equity awards granted in February 2021 and 2022 was $ 15.37 and $ 7.83 , respectively.

On February 17, 2021, the Compensation Committee recommended, and the Board approved, the grant to Dr.

Morris Young, our Chief Executive Officer, of 113,130 at-risk, performance shares under the Plan.

On February 17, 2021, the Compensation Committee approved the grant to Gary Fischer, our Chief Financial Officer and Corporate Secretary, of 38,475 at-risk, performance shares under the Plan.

On March 14, 2022, the Compensation Committee met and certified that the year-over-year annual revenue growth rate achieved for fiscal year 2021, expressed as a percentage, was 44 %.

Therefore, all of the at-risk performance shares became eligible to vest.

On February 15, 2022, the Compensation Committee recommended, and the Board approved, the grant to Dr.

Morris Young of 114,320 at-risk, performance shares under the Plan.

On February 15, 2022, the Compensation Committee approved the grant to Gary Fischer of 32,100 at-risk, performance shares under the Plan.

If the performance financial metric is less than 50 % achieved these shares are forfeited.

If the performance financial metric is between 50 % and 200 % achieved, then a corresponding pro rata portion of the 114,320 shares issued to Dr.

Young would be eligible to vest and a corresponding pro rata portion of the 32,100 shares issued to Mr.

Fischer would be eligible to vest.

Any shares that are not eligible to vest are forfeited.

If the target financial metric exceeds 200 %, then the maximum number of at-risk performance shares that would be eligible to vest is 114,320 for Dr.

Young and 32,100 for Mr.

A summary of the status of our unvested at-risk, performance shares as of March 31, 2022 is presented below (in thousands, except per share data):

Weighted-Average

Non-vested as of January 1, 2022

Non-vested as of September 30, 2021

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

As of September 30, 2021, there was $ 1.4 million of unrecognized compensation expense related to unvested at-risk, performance shares that is expected to be recognized over a weighted-average period of 1.6 years.

Non-vested as of March 31, 2022

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

** The first annual vesting was reported in Q4 2021, when 25 % of the at-risk performance shares became eligible subject to review and confirmation by the Compensation Committee after year-end results were certified.

As of March 31, 2022, there was $ 1.5 million of unrecognized compensation expense related to unvested at-risk, performance shares that is expected to be recognized over a weighted-average period of 1.8 years.

Net Income (Loss) Per Share

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

The dilutive effect of outstanding stock options and

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

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

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

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Three Months Ended

Nine Months Ended

September 30,

Net income attributable to AXT, Inc.

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per common share:

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

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

The 883,000 shares of $ 0.001 par value Series A preferred stock issued and outstanding as of September 30, 2021 and December 31, 2020, valued at $ 3,532,000 , are non-voting and non-convertible preferred stock with a 5.0 % cumulative annual dividend rate payable when declared by the board of directors and a $ 4 per share liquidation preference over common stock, which must be paid before any distribution is made to common stockholders.

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

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

The 883,000 shares of $ 0.001 par value Series A preferred stock issued and outstanding as of March 31, 2022 and December 31, 2021, valued at $ 3,532,000 , are non-voting and non-convertible preferred stock with a 5.0 % cumulative annual dividend rate payable when declared by the Board of Directors and a $ 4 per share liquidation preference over common stock, which must be paid before any distribution is made to common stockholders.

These preferred shares were issued to Lyte Optronics, Inc.

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Three Months Ended

Nine Months Ended

September 30,

Product Type:

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Three Months Ended

Nine Months Ended

September 30,

Geographical region:

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

September 30,

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

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Significant Customers

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

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

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

Our top five customers, although not the same five customers for each period, represented 26 % and 33 % of our revenue for the nine months ended September 30, 2021 and 2020, respectively.

One customer, Landmark, represented 10 % of our revenue for the three months ended March 31, 2022 and no customer represented 10% of our revenue for the three months ended March 31, 2021.

Our top five customers, although not the same five customers for each period, represented 29 % and 26 % of our revenue for the three months ended March 31, 2022 and 2021, respectively.

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

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

Two customers accounted for 12 % and 10 % of our accounts receivable balance as of March 31, 2022 , and no customer accounted for 10% of our accounts receivable as of December 31, 2021.

Commitments and Contingencies

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

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

The following table reflects the change in our warranty accrual which is included in “Accrued liabilities” in the condensed consolidated balance sheets, during the three months ended March 31, 2022 and 2021 (in thousands):

Three Months Ended

Nine Months Ended

September 30,

Beginning accrued product warranty

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

customer list or the end user of our substrates, for example, the end users of 3-D sensing VCSELs (vertical cavity surface emitting lasers), a deemed value for employment of local citizens, a deemed value for our proprietary process technology, other intellectual property, other intangibles and additional items of value.

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

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

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

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

As of March 31, 2022, we do not have any outstanding purchase orders that will incur a penalty if cancelled by the Company.

Legal Proceedings

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We do not expect that any of these matters, individually or in the aggregate, will have a material adverse effect on our business, financial condition, cash flows or results of operations.

Other Income (Expense), Net

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

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

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

We incurred a foreign currency transaction exchange loss of $ 185,000 and loss of $ 126,000 for the nine months ended September 30, 2021 and 2020, respectively.

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

Other Expense, Net

Other expense, net for the three months ended March 31, 2022 and 2021, includes a grant of $ 0.2 million and $ 0.1 million, respectively, from a Chinese provincial government agency as an award for relocating to its province.

In addition, we incurred a foreign currency transaction exchange loss of $ 228,000 and $ 173,000 for the three months ended March 31, 2022 and 2021, respectively.

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.

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

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

1 unchanged sentence

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

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

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

Income tax expense for the three months ended March 31, 2022 includes no interest and penalties.

As of March 31, 2022, we have no accrued interest and penalties related to uncertain tax positions.

We file income tax returns in the U.S.

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

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

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

Provision for income taxes for the three months ended March 31, 2022 was mostly related to our wholly owned China subsidiaries and our partially owned subsidiaries in China.

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

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

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

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

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

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

had been fully offset by utilization of federal and state net operating loss carryforwards except for the newly created US subsidiary, AXT-Tongmei.

Which has incurred tax expense.

Under the 2017 Tax Cuts and Jobs Act (TCJA), research and experimental (“R&E”), expenditures incurred or paid for tax years beginning after December 31, 2021, will no longer be immediately deductible for tax purposes.

Instead, businesses are now required to capitalize and amortize R&E expenditures over a period of five years for research conducted within the U.S.

or 15 years for research conducted in a foreign jurisdiction.

We capitalize the R&E expense for our US Corporation and amortize it over 5 years.

We also capitalize the R&E expense in our China subsidiaries and amortize it over 15 years.

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

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We have elected to account for shipping and handling as activities to fulfill the promise to transfer the goods.

Shipping and handling fees billed to customers in a sales transaction are recorded as an offset to shipping and handling expenses.

Shipping and handling fees billed to customers in a sales transaction are recorded as an offset to shipping and handling

Sales taxes and value added taxes in foreign jurisdictions that are collected from customers and remitted to governmental authorities are accounted for on a net basis and, therefore, are excluded from revenue.

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

We do not have any material contract assets as of September 30, 2021.

We do not have any material contract assets as of March 31, 2022.

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

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

September 30,

The following table reflects the contract liabilities balance, which is included in “Accrued liabilities” on the condensed consolidated balance sheets, as of March 31, 2022 and December 31, 2021 (in thousands):

Contract liabilities

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

During the three months ended March 31, 2022, the Company recognized $ 321,000 of revenue that was included in the contract balances as of December 31, 2021.

Disaggregated Revenue

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

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

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

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

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

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

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.

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

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

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

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

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

The repayment of the loan was due on March 22, 2021, however the credit facility contained an option to renew for an additional six months , which was exercised in March 2021 for approximately $ 3.1 million.

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 %.

In March 2022, Tongmei repaid $ 2.7 million of the Credit Facility, including all outstanding accrued interest.

As of March 31, 2022, $ 0 was included in “Bank loan” in our condensed 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 %.

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

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

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

As of September 30, 2021, $ 8.6 million was included in “Bank loan” in our condensed consolidated balance sheets.

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

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

As of March 31, 2022, $ 0 was included in “Bank loan” in our condensed consolidated balance sheets.

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

Accrued interest is calculated monthly and paid quarterly.

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

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

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

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

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

Accrued interest is calculated monthly and paid monthly.

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

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

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

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

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 March 31, 2022, $ 1.6 million was included in “Bank loan” in our condensed consolidated balance sheets.

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

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

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

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 March 31, 2022, $ 4.7 million was included in “Bank loan” in our condensed 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 March 31, 2022, $ 1.6 million was included in “Bank loan” in our condensed 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 March 31, 2022, $ 1.6 million was included in “Bank loan” in our condensed consolidated balance sheets.

In January 2022, ChaoYang Tongmei entered into a credit facility with the Bank of Communications for $ 1.6 million with an annual interest rate of 3.3 %.

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

The repayment of the loan is due in January 2023.

As of March 31, 2022, $ 1.6 million was included in “Bank loan” in our condensed consolidated balance sheets.

In January 2022, ChaoYang JinMei entered into a credit facility with the Bank of Communications for $ 1.6 million with an annual interest rate of 3.3 %.

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

The repayment of the loan is due in January 2023.

As of March 31, 2022, $ 1.6 million was included in “Bank loan” in our condensed consolidated balance sheets.

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.

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, China.

As of March 31, 2022, $ 4.4 million was included in “Bank loan” in our condensed consolidated balance sheets.

In March 2022, Tongmei entered into a credit facility with the Bank of China for $ 3.1 million with an annual interest rate of 3.7 %.

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

The repayment of the loan is due in September 2022.

As of March 31, 2022, $ 3.1 million was included in “Bank loan” in our condensed consolidated balance sheets.

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

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

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

As of March 31, 2022, the maturities of our operating lease liabilities (excluding short-term leases) are as follows (in thousands):

Maturity of Lease Liabilities

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

September 30,

Weighted-average remaining lease term (years)

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

Nine Months Ended

September 30,

Three Months Ended

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

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Three Months Ended

Nine Months Ended

September 30,

Operating lease

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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.

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

The initial carrying amount of the redeemable noncontrolling interest 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 condensed 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.

1 unchanged sentence

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 fourth quarter of 2021 or in the first quarter of 2022.

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

The aggregate redemption amount is approximately $ 49 million.

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

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

The Shanghai Stock Exchange provided comments to the formal application in March 2022 and Tongmei filed an amended application to address the comments on April 14, 2022.

The Shanghai Stock Exchange accepted for review the amended application on April 18, 2022 and provided comments to the amended application on April 26, 2022.

The Shanghai Stock Exchange has not yet approved the formal application.

If the Shanghai Stock Exchange approves the formal application, then the Shanghai Stock Exchange 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.

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 nine months ended September 30, 2021 are presented in the following table (in thousands):

The components of the change in redeemable noncontrolling interests for the three months ended March 31, 2022 are presented in the following table (in thousands):

Balance as of January 1, 2022

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 for the nine months ended September 30, 2021

Investment in subsidiary with redeemable noncontrolling interest

Equity issuance costs incurred

Stock-based compensation attributable to redeemable noncontrolling interests

Net income attributable to redeemable noncontrolling interests

Effect of foreign currency translation on redeemable noncontrolling interests

Effect of foreign currency translation attributable to redeemable noncontrolling interests

Balance as of September 30, 2021

Balance as of March 31, 2022

Recent Accounting Pronouncements

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 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.

Adoption of the new standard had a de minimis effect on our condensed consolidated financial statements.

Subsequent Event

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

Accrued interest is calculated monthly and paid annually.

The loan is unsecured.

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

In April 2022, Tongmei entered into a capital increase agreement with noncontrolling interests to further invest $ 4.5 million in our consolidated subsidiary, ChaoYang XinMei.

Tongmei’s portion of the investment was approximately $ 2.6 million, of which $ 1.1 million was paid in April 2022.

Noncontrolling interests’ portion of the investment was approximately $ 1.9 million, of which $ 0.7 million was paid in April 2022.

As a result, noncontrolling interests increased $ 0.8 million and redeemable noncontrolling interests increased $ 0.1 million.

Tongmei’s ownership remained at 58.5 % after the April 2022 equity investment.

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

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

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

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

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

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These uncertainties and factors include but are not limited to:

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

investments in Tongmei and the listing of shares of Tongmei on the STAR Market, continued open access to companies to list shares on the STAR Market, investor enthusiasm for new listings of shares on the STAR Market and geopolitical tensions between China and the United States.

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

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the relocation of manufacturing lines and ramping of production;

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

possible factory shutdowns as a result of air pollution in China or COVID-19;

COVID-19 or other outbreaks of a contagious disease;

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

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

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

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

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

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

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

GaAs wafers could also be used for making vertical cavity surface emitting lasers (VCSELs) and micro-LEDs targeting

improved screen technology.

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

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We consolidate the companies in which we have either a controlling financial interest, or majority financial interest combined with the ability to exercise substantive control over the operations, or financial decisions, of such companies.

We use the equity method to account for companies in which we have smaller financial interest and have the ability to exercise significant influence, but not control, over such companies.

We use the equity method to account for companies in which we have noncontrolling financial interest and have the ability to exercise significant influence, but not control, over such companies.

We purchase portions of the materials produced by these companies for our own use and they sell the remainder of their production to third parties.

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

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

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

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

A large park, named Green Heart City Park, was built across the street from our facility and Universal Studios has developed an amusement park within a few miles of our facility.

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

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

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

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

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

We entered into volume production in 2020.

Our PRC subsidiary, Baoding Tongmei Xtal Technology Co., Ltd.

(“Baoding Tongmei”), entered into volume production in 2020.

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

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

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

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

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

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

A few customers are still in that process.

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

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

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

A few customers, as well as prospective customers, are still in that process.

These new facilities enabled us to expand capacity and upgrade some of the equipment.

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

Our PRC subsidiaries also acquired sufficient land to enable them to add facilities, if needed in the future.

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

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

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

By December 31, 2020, Investors, which consist of 10 private equity funds, had engaged with Tongmei for a total investment of

approximately $48.1 million.

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

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

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

dollars for this report.) The remaining 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.

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

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

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

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

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

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

The aggregate redemption amount is approximately $49 million.

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

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

The Shanghai Stock Exchange provided comments to the formal application in March 2022 and Tongmei filed an amended application to address the comments on April 14, 2022.

The Shanghai Stock Exchange accepted for review the amended application on April 18, 2022 and provided comments to the amended application on April 26, 2022.

The Shanghai Stock Exchange has not yet approved the formal application.

If the Shanghai Stock Exchange approves the formal application, then the Shanghai Stock Exchange 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.

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 the application is approved and Tongmei completes the IPO then 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.

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

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

The following organization chart depicts the consolidated structure as of September 30, 2021;

We are neither a PRC operating company nor do we conduct our operations in China through the use of variable interest entities (“VIEs”).

The following organization chart depicts the consolidated structure as of March 31, 2022;

The businesses of our PRC subsidiaries and PRC joint ventures are subject to complex and rapidly evolving laws and regulations in the PRC, which can change quickly with little advance notice.

The PRC government is a single

party form of government with virtually unlimited authority and power to intervene in or influence commercial operations in China.

In the past, we have experienced such intervention or influence by the PRC government and a change in the rules and regulations in China when we were instructed by the Beijing municipal government to relocate our manufacturing facility in Beijing and expect that such intervention or influence or change in the rules and regulations in China could occur in the future.

In the ordinary course of business, our PRC subsidiaries and PRC joint ventures require permits and licenses to operate in the PRC.

Such permits and licenses include permits to use hazardous materials in manufacturing operations.

From time to time, the PRC government issues new regulations, which may require additional actions on the part of our PRC subsidiaries and PRC joint ventures to comply.

For example, on February 27, 2015, the China State Administration of Work Safety updated its list of hazardous substances.

The previous list, which was published in 2002, did not restrict the materials that we use in our wafers.

The new list added gallium arsenide.

In the ordinary course of business, our PRC subsidiaries and PRC joint ventures apply for permits as required.

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

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

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

For the three months ended March 31, 2022, we paid approximately $675,000 in tariffs.

In 2021, we paid approximately $1.3 million in tariffs.

The future impact of tariffs and trade wars is uncertain.

Our independent registered public accounting firm is BPM LLP (“BPM”), which is registered with the Public Company Accounting Oversight Board (the “PCAOB”).

The Holding Foreign Companies Accountable Act (the “HFCA Act”) requires that the PCAOB determine whether it is unable to inspect or investigate completely registered public accounting firms located in a non-U.S.

jurisdiction because of a position taken by one or more authorities in that jurisdiction.

On December 16, 2021, the PCAOB issued a report on its determinations that the PCAOB is unable to inspect or investigate completely registered public accounting firms headquartered in the PRC and Hong Kong because of positions taken by PRC authorities in those jurisdictions.

BPM is neither headquartered in the PRC or Hong Kong nor is it subject to the determinations announced by the PCAOB.

Critical Accounting Policies, Estimates and Change in Accounting Estimates

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

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

amounts reported on our condensed consolidated financial statements.

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

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

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After we ship our products, there are no remaining obligations or customer acceptance requirements that would preclude revenue recognition.

Our products are typically sold pursuant to purchase orders placed by our customers, and our terms and conditions of sale do not require customer acceptance.

products are typically sold pursuant to purchase orders placed by our customers, and our terms and conditions of sale do not require customer acceptance.

We account for a contract with a customer when there is a legally enforceable contract, which could be the customer’s purchase order, the rights of the parties are identified, the contract has commercial terms, and collectibility of the contract consideration is probable.

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

As of September 30, 2021 and December 31, 2020, our accounts receivable, net balance was $36.6 million and $24.6 million, respectively, which was net of an allowance for doubtful accounts of $130,000 and $217,000, respectively.

As of March 31, 2022 and December 31, 2021, our accounts receivable, net balance was $39.8 million and $34.8 million, respectively, which was net of an allowance for doubtful accounts of $130,000 and $130,000, respectively.

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

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Warranty costs are accrued at the time revenue is recognized.

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

As of March 31, 2022 and December 31, 2021, accrued product warranties totaled $832,000 and $743,000, respectively.

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

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

As of September 30, 2021 and December 31, 2020, we had an inventory reserve of $19.2 million and $17.7 million, respectively, for excess and obsolete inventory and $61,000 and $162,000, respectively, for lower of cost or net realizable value reserves.

As of March 31, 2022 and December 31, 2021, we had an inventory reserve of $20.6 million and $19.6 million, respectively, for excess and obsolete inventory and $70,000 and $66,000, respectively, for lower of

cost or net realizable value reserves.

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

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

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

There were no impairment charges during the three months ended March 31, 2022 and 2021.

Fair Value of Investments

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

As of September 30, 2021, the net change in fair value from the placement of the hedge to settlement at each month end during the quarter had a de minimis impact to the condensed consolidated results.

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

As of March 31, 2022, the net change in fair value from the placement of the hedge to settlement at each month end during the quarter had a de minimis impact to the condensed consolidated results.

There have been no transfers between fair value measurement levels during the three months ended March 31, 2022 and 2021.

Impairment of Long-Lived Assets

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

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

We had no “Assets held for sale” or any impairment of long-lived assets in the condensed consolidated balance sheets as of March 31, 2022 and December 31, 2021.

Stock-based Compensation

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

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

assumptions, including estimating stock price volatility and expected term.

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

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

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

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

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

The Performance Goal will be measured over the Company’s fiscal year 2021 or 2022 (each a “Performance Period”).

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

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

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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.

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

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

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

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

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

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

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

Results of Operations

Three Months Ended

Nine Months Ended

September 30,

Product Type:

($ in thousands)

Raw materials and other

Total revenue

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

The substrate revenue increase for the three months ended September 30, 2021 as compared to the same period in 2020 was primarily the result of higher demand for our InP wafer substrates followed by an increase in revenue for semi-conducting GaAs wafer substrates.

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

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

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

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

The raw materials revenue increase for the three months ended September 30, 2021 as compared to the same period in 2020 was primarily the result of an increase in sales of refined gallium and pBN crucibles resulting from stronger market demand.

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

The substrate revenue increase for the nine months ended September 30, 2021 as compared to the same period in 2020 was primarily the result of higher demand for our InP wafer substrates followed by an increase in revenue for semi-conducting GaAs wafer substrates.

Revenue increased $8.3 million, or 26.5%, to $39.7 million for the three months ended March 31, 2022 from $31.4 million for the three months ended March 31, 2021.

The substrate revenue increase for the three months ended March 31, 2022 as compared to the same period in 2021 was primarily the result of higher demand for our InP wafer substrates followed by an increase in revenue for semi-conducting GaAs and Ge wafer substrates.

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

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

In addition, data

center connectivity applications contributed to InP revenue.

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

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

The raw materials revenue increase for the nine months ended September 30, 2021 as compared to the same period in 2020, was primarily the result of an increase in sales of refined gallium and pBN crucibles resulting from stronger market demand.

In addition, we had continued strength in high-power industrial laser applications.

Raw materials sales decreased $0.1 million, or 0.9%, to $7.9 million for the three months ended March 31, 2022 as compared to the same period in 2021.

The decrease in raw materials revenue for the three months ended March 31, 2022 as compared to the same period in 2021 was primarily the result of a decrease in sales of refined gallium partially offset by increased sales of pBN crucibles resulting from stronger market demand.

Revenue by Geographic Region

Three Months Ended

September 30,

($ in thousands)

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Total revenue

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

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

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

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

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

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

Nine Months Ended

September 30,

($ in thousands)

% of total revenue

Asia Pacific (excluding China, Taiwan and Japan)

% of total revenue

Europe (primarily Germany)

% of total revenue

North America (primarily the United States)

% of total revenue

Total revenue

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

gallium sold by two of our consolidated subsidiaries.

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

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

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

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

Revenue in China increased $1.9 million for the three months ended March 31, 2022, primarily due to higher demand for our GaAs, InP and Ge wafer substrates and pBN crucibles sold by one of our consolidated subsidiaries, partially offset by lower demand for our refined gallium sold by one of our consolidated subsidiaries.

Revenue in Taiwan increased $3.8 million, primarily due to higher demand for our InP and GaAs wafer substrates.

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

Revenue in Asia Pacific decreased by $0.1 million, primarily due to decreased demand for our InP wafer substrates partially offset by increased demand for our GaAs wafer substrates.

Revenue in Europe increased by $1.0 million primarily due to increased demand for our Ge, GaAs and InP wafer substrates partially offset by decreased demand for pBN crucibles sold by one of our consolidated subsidiaries.

Revenue in North America increased by $1.3 million due to higher demand for our InP wafer substrates and pBN crucibles sold by one of our consolidated subsidiaries partially offset by lower demand for our GaAs and Ge wafer substrates.

Three Months Ended

Nine Months Ended

September 30,

($ in thousands)

Gross Profit %

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

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

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

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

Gross profit increased $1.8 million, or 15.4%, to $13.3 million for the three months ended March 31, 2022 from $11.5 million for the three months ended March 31, 2021.

The increase in gross profit is attributed to higher revenue and

a change in product mix.

Gross margin as a percent of revenue declined as a result of increased costs in our manufacturing materials.

Selling, General and Administrative Expenses

Three Months Ended

Nine Months Ended

September 30,

($ in thousands)

Selling, general and administrative expenses

% of total revenue

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

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

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

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

Selling, general and administrative expenses increased $0.9 million, or 15.8%, to $6.5 million for the three months ended March 31, 2022 from $5.6 million for the three months ended March 31, 2021.

The higher selling, general and administrative expenses were primarily from higher personnel-related expenses.

Research and Development

Three Months Ended

Nine Months Ended

September 30,

($ in thousands)

Research and development

% of total revenue

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

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

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

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

Research and development expenses increased $0.8 million, or 31.4%, to $3.2 million for the three months ended March 31, 2022 from $2.4 million for the three months ended March 31, 2021.

The increase in research and development expenses for the three months ended March 31, 2022 was primarily due to personnel-related expenses, travel and development expenses for 8-inch GaAs and 6-inch InP wafer substrates and development of new features for certain of our GaAs and InP wafer substrates.

Interest Expense, Net

Three Months Ended

Nine Months Ended

September 30,

($ in thousands)

Interest expense, net

% of total revenue

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

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

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

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

Equity in Income (Loss) of Unconsolidated Joint Ventures

Interest expense, net increased $133,000 or 266.0% to $183,000 for the three months ended March 31, 2022 from $50,000 for the three months ended March 31, 2021.

Interest expense, net increased primarily due to a decrease in the amount of cash and cash equivalents held by us during the three months ended March 2022 as compared to the three months ended March 31, 2021 and due to increased debt during the three months ended March 31, 2022 as compared to the three months ended March 31, 2021.

Equity in Income of Unconsolidated Joint Ventures

Three Months Ended

Nine Months Ended

September 30,

Equity in Income

September 30,

Equity in Income ( Loss)

($ in thousands)

Equity in income (loss) of unconsolidated joint ventures

Equity in income of unconsolidated joint ventures

% of total revenue

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

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

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

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

Other Income (Expense), Net

The equity in income of unconsolidated joint venture companies was income of $1.1 million for the three months ended March 31, 2022 as compared to income of $1.1 million for the three months ended March 31, 2021.

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

Other Expense, Net

Three Months Ended

Nine Months Ended

September 30,

Other Income (Expense)

September 30,

($ in thousands)

Other Expense

($ in thousands)

Other income (expense), net

Other expense, net

% of total revenue

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

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

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

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

Provision for (benefit from) Income Taxes

Other expense, net decreased $102,000 or 91.9% to an expense of $9,000 for the three months ended March 31, 2022 from an expense of $111,000 for the three months ended March 31, 2021.

Other expense, net decreased primarily due to a grant of $0.2 million received from a Chinese provincial government agency as an award for relocating to its province in March 2022, compared to $0.1 million in March 2021.

Provision for Income Taxes

Three Months Ended

Nine Months Ended

September 30,

($ in thousands)

Provision for (benefit from) income taxes

Provision for income taxes

% of total revenue

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

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

Provision for income taxes decreased $86,000, or 11.5%, to $660,000 for the three months ended March 31, 2022 from $746,000 for the three months ended March 31, 2021.

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

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

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

subsidiary, AXT-Tongmei.

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

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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 and 2019.

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

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

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

2021, and 2022.

Instead, businesses are now required to capitalize and amortize R&E expenditures over a period of five years for research conducted within the U.S.

or 15 years for research conducted in a foreign jurisdiction.

We capitalize the R&E expense for our US Corporation and amortize it over 5 years.

We also capitalize the R&E expense in our China subsidiaries and amortize it over 15 years.

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

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Net income attributable to

Nine Months Ended

Net income attributable to

noncontrolling interests and

September 30,

redeemable noncontrolling interests

September 30,

redeemable noncontrolling interests

($ in thousands)

Net income attributable to noncontrolling interests and redeemable noncontrolling interests

% of total revenue

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

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

Net income attributable to noncontrolling interests and redeemable noncontrolling interests increased $467,000 or 137.4% to $807,000 for the three months ended March 31, 2022, from $340,000 for the three months ended March 31, 2021, primarily due to the structural changes of the legal entities in China (see Note 1) and to a lesser degree, losses generated by ChaoYang XinMei.

Liquidity and Capital Resources

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Net cash used in investing activities of $25.5 million for the nine months ended September 30, 2021 was primarily from the purchase of property, plant and equipment of $19.1 million and purchases of available-for-sale debt securities of $6.7 million, partially offset by proceeds from sales and maturities of available-for-sale debt securities of $0.2 million.

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

Net cash provided by financing activities was $7.1 million for the nine months ended September 30, 2021, which consisted of proceeds from short-term loan of $5.8 million, common stock exercised of $1.6 million, formation of new subsidiary with noncontrolling interest of $1.3 million, proceeds from long-term loan, related party of $0.9 million and proceeds from sale of subsidiary shares to noncontrolling interests of $0.5 million, partially offset by repayment of short-term loan of $3.1 million.

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

As of March 31, 2022, our principal source of liquidity was $44.3 million, which consisted of cash and cash equivalents of $29.5 million and investments of $14.8 million.

In the three months ended March 31, 2022, cash and cash equivalents decreased by $7.3 million and investments decreased by $0.2 million.

The decrease in cash and cash equivalents of $7.3 million in the three months ended March 31, 2022 was primarily due to net cash used in operating activities of $8.9 million, and net cash used in investing activities of $6.3 million, partially offset by net cash provided by financing activities of $7.9 million and the effect of exchange rate changes of $12,000.

As of March 31, 2022, we and our consolidated joint ventures in China held approximately $18.8 million in cash and investments in foreign bank accounts.

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

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

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

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

Net cash used in operating activities of $8.9 million for the three months ended March 31, 2022 was primarily comprised of a net change of $14.9 million in operating assets and liabilities and income from equity method investments of $1.1 million, partially offset by a net income before income attributable to non-controlling interest and redeemable noncontrolling interests of $4.0 million, the adjustment for non-cash items of depreciation and amortization of $2.0 million and stock-based compensation of $1.1 million.

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

Net cash used in investing activities of $6.3 million for the three months ended March 31, 2022 was from the purchase of property, plant and equipment of $6.3 million.

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

Net cash provided by financing activities was $7.9 million for the three months ended March 31, 2022, which consisted of proceeds from short-term loan of $10.7 million, partially offset by repayment of short-term loan of $2.8 million.

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

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

2 unchanged sentences

Since 2015, no shares were repurchased under this program.

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

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

During the three months ended March 31, 2022, we did not repurchase any shares under the approved stock repurchase program.

As of March 31, 2022, approximately $2.7 million remained available for future repurchases under this program.

Currently, we do not plan to repurchase additional shares.

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

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

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

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

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, including its PRC subsidiaries and PRC joint ventures, to the Company and its investors as well as the ability to settle amounts owed by the Company to its PRC subsidiaries and PRC joint ventures.

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

For the three months ended March 31, 2022 and 2021, 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 $0 and $0, respectively.

For the three months ended March 31, 2022 and 2021, the aggregate dividends paid to minority shareholders by our PRC subsidiaries and PRC raw material joint ventures were approximately $0 and $0, respectively.

For the three months ended March 31, 2022, no transfers, dividends, or distributions have been made to date between the Company and its PRC subsidiaries, or to investors, except for the settlement of amounts owed under our transfer pricing arrangements in the ordinary course of business.

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.

The cash generated from one PRC subsidiary is not used to fund another PRC subsidiary’s operations.

None of our PRC subsidiaries has ever faced difficulties or limitations on its ability to transfer cash between our subsidiaries.

AXT has cash management policies that dictate the amount of such funding.

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.

The aggregate redemption amount is approximately $49 million.

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 fourth quarter of 2021 or in the first quarter of 2022.

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

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

The Shanghai Stock Exchange provided comments to the formal application in March 2022 and Tongmei filed an amended application to address the comments on April 14, 2022.

The Shanghai Stock Exchange accepted for review the amended application on April 18, 2022 and provided comments to the amended application on April 26, 2022.

The Shanghai Stock Exchange has not yet approved the formal application.

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.

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

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

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

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

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

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

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

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

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.

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%.

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

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

The Credit Facility is collateralized by Baoding Tongmei 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.

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

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

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

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

On September 12, 2019 Tongmei borrowed an additional $2.8 million against the Credit Facility (the September 2019 borrowing”).

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

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

The repayment of the loan was due on March 22, 2021, however the credit facility contained an option to renew for an additional six months, which was exercised in March 2021 for approximately $3.1 million.

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%.

In March 2022, Tongmei repaid $2.7 million of the Credit Facility, including all outstanding accrued interest.

As of March 31, 2022, $0 was included in “Bank loan” in our condensed 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%.

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

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

As of September 30, 2021, $8.6 million was included in “Bank loan” in our condensed consolidated balance sheets.

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

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 March 31, 2022, $0 was included in “Bank loan” in our condensed consolidated balance sheets.

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

Accrued interest is calculated monthly and paid quarterly.

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

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

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

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

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

Accrued interest is calculated monthly and paid monthly.

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

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

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

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

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 March 31, 2022, $1.6 million was included in “Bank loan” in our condensed consolidated balance sheets.

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

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

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

Accrued interest is calculated monthly and paid annually.

The loan is unsecured.

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

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

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

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 March 31, 2022, $4.7 million was included in “Bank loan” in our condensed consolidated balance sheets.

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.

As of March 31, 2022, $0 was included in “Long-term debt, related party” in our condensed 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 March 31, 2022, $1.6 million was included in “Bank loan” in our condensed 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 March 31, 2022, $1.6 million was included in “Bank loan” in our condensed consolidated balance sheets.

In January 2022, ChaoYang Tongmei entered into a credit facility with the Bank of Communications for $1.6 million with an annual interest rate of 3.3%.

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

The repayment of the loan is due in January 2023.

As of March 31, 2022, $1.6 million was included in “Bank loan” in our condensed consolidated balance sheets.

In January 2022, ChaoYang JinMei entered into a credit facility with the Bank of Communications for $1.6 million with an annual interest rate of 3.3%.

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

The repayment of the loan is due in January 2023.

As of March 31, 2022, $1.6 million was included in “Bank loan” in our condensed consolidated balance sheets.

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.

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, China.

As of March 31, 2022, $4.4 million was included in “Bank loan” in our condensed consolidated balance sheets.

In March 2022, Tongmei entered into a credit facility with the Bank of China for $3.1 million with an annual interest rate of 3.7%.

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

The repayment of the loan is due in September 2022.

As of March 31, 2022, $3.1 million was included in “Bank loan” in our condensed consolidated balance sheets.

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

A prospectus supplement, which we will provide each time we offer securities, will describe the specific amounts, prices and terms of the securities we determine to offer.

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We may also use a portion of the net proceeds to acquire, license or invest in complementary products, technologies or businesses.

The SEC has not yet declared the registration statement effective.

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

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

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

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

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

Contract to Purchase Goods and Services

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

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

There is no timeline or deadline by which this must be

accomplished, rather it is a good faith covenant entered into between AXT and the Dingxing local government.

Further, there is no specific penalty contemplated if either party breaches the agreement.

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Off-Balance Sheet Arrangements

As of September 30, 2021, we did not have any off-balance sheet financing arrangements and have never established any special purpose entities as defined under SEC Regulation S-K Item 303(a)(4)(ii).

As of March 31, 2022, we did not have any off-balance sheet financing arrangements and have never established any special purpose entities as defined under SEC Regulation S-K Item 303(a)(4)(ii).

QUANTITATIVE AND QUALITATIV E DISCLOSURES ABOUT MARKET RISK

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If we do not effectively manage the risks associated with this currency risk, our revenue, cash flows and financial condition could be adversely affected.

Although during 2019 and 2018, we recorded a foreign exchange gain of $321,000 and $165,000, respectively, during 2020 we recorded net foreign exchange loss of $411,000, included as part of other (expense) income, net in our consolidated statements of operations.

Although during 2019, we recorded a foreign exchange gain of $321,000, during 2021 and 2020 we recorded net foreign exchange loss of $434,000 and $411,000, respectively, included as part of other income, net in our condensed consolidated statements of operations.

We incur foreign currency transaction exchange gains and losses due to operations in general.

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

As of September 30, 2021 and December 31, 2020, the net change in fair value from the placement of the hedge to settlement at each month end during the quarter had a de minimis impact to the condensed consolidated results.

As of March 31, 2022 and December 31, 2021, the net change in fair value from the placement of the hedge to settlement at each month end during the quarter had a de minimis impact to the condensed consolidated results.

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

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Interest Rate

September 30,

Cash and cash equivalents

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

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

Two customers accounted for 12% and 10% of our accounts receivable balance as of March 31, 2022 and no customer accounted for more than 10% of our accounts receivable as of December 31, 2021.

Impairment of Equity Investment Risk

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

As of September 30, 2021 and December 31, 2020, we did not maintain any direct investments under the cost method.

Our minority investments under the equity method as of September 30, 2021 and December 31, 2020 totaled $9.3 million and $6.4 million, respectively.

As of March 31, 2022 and December 31, 2021, we did not maintain any direct investments under the cost method.

Our minority investments under the equity method as of March 31, 2022 and December 31, 2021 totaled $11.3 million and $10.2 million, respectively.

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

What changed 10-Q

Item 1. Financial Statements