AXT INC 10-Q

Item 1. Financial Statements (unaudited) ​ AXT, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited, in thousands, except per share data) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ June 30, December 31, ​ ​ 2022 ​ 2021 ​ ​ ​ ​ ​ ​ ​ ​ ​ ASSETS ​ ​ ​ ​ ​ ​ ​ Current assets: ​ ​ ​ ​ ​ ​ ​ Cash and cash equivalents ​ $ 41,043 ​ $ 36,763 ​ Restricted cash ​ ​ 3,900 ​ ​ — ​ Short-term investments ​ 4,471 ​ 5,419 ​ Accounts receivable, net of allowances of $ 307 and $ 130 as of June 30, 2022 and December 31, 2021 ​ 38,751 ​ 34,839 ​ Inventories ​ 77,280 ​ 65,912 ​ Prepaid expenses and other current assets ​ 11,935 ​ 17,252 ​ Total current assets ​ 177,380 ​ 160,185 ​ Long-term investments ​ 7,760 ​ 9,576 ​ Property, plant and equipment, net ​ 152,882 ​ 142,415 ​ Operating lease right-of-use assets ​ ​ 2,021 ​ ​ 2,324 ​ Other assets ​ 21,222 ​ 17,941 ​ Total assets ​ $ 361,265 ​ $ 332,441 ​ LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND STOCKHOLDERS’ EQUITY ​ ​ ​ ​ ​ ​ ​ Current liabilities: ​ ​ ​ ​ ​ ​ ​ Accounts payable ​ $ 23,317 ​ $ 16,649 ​ Accrued liabilities ​ 14,581 ​ 17,057 ​ Short-term loan from noncontrolling interest ​ ​ — ​ ​ 1,887 ​ Bank loan ​ ​ 32,973 ​ ​ 12,229 ​ Total current liabilities ​ 70,871 ​ 47,822 ​ Noncurrent operating lease liabilities ​ ​ 1,596 ​ ​ 1,935 ​ Other long-term liabilities ​ 2,069 ​ 2,453 ​ Total liabilities ​ 74,536 ​ 52,210 ​ Commitments and contingencies (Note 12) ​ ​ ​ ​ ​ ​ ​ Redeemable noncontrolling interests (Note 18) ​ ​ 48,265 ​ ​ 50,385 ​ Stockholders’ equity: ​ ​ ​ ​ ​ ​ ​ Preferred stock Series A, $ 0.001 par value; 2,000 shares authorized; 883 shares issued and outstanding as of June 30, 2022 and December 31, 2021 (Liquidation preference of $ 7,610 and $ 7,522 as of June 30, 2022 and December 31, 2021) ​ 3,532 ​ 3,532 ​ Common stock, $ 0.001 par value; 70,000 shares authorized; 43,060 and 42,886 shares issued and outstanding as of June 30, 2022 and December 31, 2021 ​ 43 ​ 43 ​ Additional paid-in capital ​ 233,364 ​ 231,622 ​ Accumulated deficit ​ ( 21,259 ) ​ ( 29,970 ) ​ Accumulated other comprehensive income ​ 637 ​ 6,302 ​ Total AXT, Inc. stockholders’ equity ​ 216,317 ​ 211,529 ​ Noncontrolling interests ​ 22,147 ​ 18,317 ​ Total stockholders’ equity ​ 238,464 ​ 229,846 ​ Total liabilities, redeemable noncontrolling interests and stockholders’ equity ​ $ 361,265 ​ $ 332,441 ​ ​ See accompanying notes to condensed consolidated financial statements. 3 Table of Contents ub AXT, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited, in thousands, except per share data) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended Six Months Ended ​ ​ ​ ​ June 30, ​ June 30, ​ ​ ​ ​ 2022 2021 ​ 2022 2021 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Revenue ​ $ 39,487 ​ $ 33,735 ​ $ 79,140 ​ $ 65,085 ​ ​ Cost of revenue ​ 24,052 ​ 21,497 ​ 50,397 ​ 41,311 ​ ​ Gross profit ​ 15,435 ​ 12,238 ​ 28,743 ​ 23,774 ​ ​ Operating expenses: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Selling, general and administrative ​ 6,693 ​ 5,795 ​ 13,143 ​ 11,365 ​ ​ Research and development ​ 3,453 ​ 2,537 ​ 6,612 ​ 4,942 ​ ​ Total operating expenses ​ 10,146 ​ 8,332 ​ 19,755 ​ 16,307 ​ ​ Income from operations ​ 5,289 ​ 3,906 ​ 8,988 ​ 7,467 ​ ​ Interest income (expense), net ​ ( 188 ) ​ 39 ​ ( 371 ) ​ ( 11 ) ​ ​ Equity in income of unconsolidated joint ventures ​ 2,177 ​ 1,502 ​ 3,302 ​ 2,613 ​ ​ Other income (expense), net ​ 294 ​ 61 ​ 285 ​ ( 50 ) ​ ​ Income before provision for income taxes ​ 7,572 ​ 5,508 ​ 12,204 ​ 10,019 ​ ​ Provision for income taxes ​ 1,027 ​ 893 ​ 1,687 ​ 1,639 ​ ​ Net income ​ 6,545 ​ 4,615 ​ 10,517 ​ 8,380 ​ ​ Less: Net income attributable to noncontrolling interests and redeemable noncontrolling interests ​ ( 999 ) ​ ( 230 ) ​ ( 1,806 ) ​ ( 570 ) ​ ​ Net income attributable to AXT, Inc. ​ $ 5,546 ​ $ 4,385 ​ $ 8,711 ​ $ 7,810 ​ ​ Net income attributable to AXT, Inc. per common share: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic ​ $ 0.13 ​ $ 0.11 ​ $ 0.21 ​ $ 0.19 ​ ​ Diluted ​ $ 0.13 ​ $ 0.10 ​ $ 0.20 ​ $ 0.18 ​ ​ Weighted-average number of common shares outstanding: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic ​ 42,001 ​ 41,248 ​ 41,935 ​ 41,124 ​ ​ Diluted ​ 42,511 ​ 42,727 ​ 42,586 ​ 42,725 ​ ​ ​ ​ See accompanying notes to condensed consolidated financial statements. ​ 4 Table of Contents ​ AXT, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited, in thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Six Months Ended ​ ​ ​ June 30, ​ June 30, ​ ​ 2022 2021 2022 2021 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income ​ $ 6,545 ​ $ 4,615 ​ $ 10,517 ​ $ 8,380 ​ Other comprehensive income (loss), net of tax: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Change in foreign currency translation gain (loss), net of tax ​ ( 7,063 ) ​ 1,725 ​ ( 6,473 ) ​ 1,569 ​ Change in unrealized loss on available-for-sale debt investments, net of tax ​ ( 73 ) ​ 6 ​ ( 244 ) ​ ( 2 ) ​ Total other comprehensive income (loss), net of tax ​ ( 7,136 ) ​ 1,731 ​ ( 6,717 ) ​ 1,567 ​ Comprehensive income (loss) ​ ( 591 ) ​ 6,346 ​ 3,800 ​ 9,947 ​ Less: Comprehensive (income) loss attributable to noncontrolling interests and redeemable noncontrolling interests ​ 145 ​ ( 506 ) ​ ( 753 ) ​ ( 813 ) ​ Comprehensive income (loss) attributable to AXT, Inc. ​ $ ( 446 ) ​ $ 5,840 ​ $ 3,047 ​ $ 9,134 ​ ​ See accompanying notes to condensed consolidated financial statements. ​ 5 Table of Contents ​ AXT, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW S (Unaudited, in thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Six Months Ended ​ ​ ​ June 30, ​ ​ 2022 2021 ​ Cash flows from operating activities: ​ ​ ​ ​ ​ ​ ​ Net income ​ $ 10,517 ​ $ 8,380 ​ Adjustments to reconcile net income to net cash provided by (used in) operating activities: ​ ​ ​ ​ ​ ​ ​ Depreciation and amortization ​ 3,995 ​ 3,261 ​ Amortization of marketable securities premium ​ 39 ​ 29 ​ Stock-based compensation ​ 2,225 ​ 1,791 ​ Gain (loss) on disposal of equipment ​ 58 ​ ( 7 ) ​ Return of equity method investments (dividends) ​ ​ — ​ ​ 774 ​ Equity in income of unconsolidated joint ventures ​ ( 3,302 ) ​ ( 2,613 ) ​ Deferred tax assets ​ ​ 61 ​ ​ — ​ Changes in operating assets and liabilities: ​ ​ ​ ​ ​ ​ ​ Accounts receivable ​ ( 4,938 ) ​ ( 8,673 ) ​ Inventories ​ ( 15,589 ) ​ ( 6,577 ) ​ Prepaid expenses and other current assets ​ 4,821 ​ ( 683 ) ​ Other assets ​ ( 746 ) ​ ( 314 ) ​ Accounts payable ​ 8,823 ​ 3,265 ​ Accrued liabilities ​ ( 2,677 ) ​ ( 8,256 ) ​ Other long-term liabilities, including royalties ​ 2,250 ​ ( 946 ) ​ Net cash provided by (used in) operating activities ​ 5,537 ​ ( 10,569 ) ​ Cash flows from investing activities: ​ ​ ​ ​ ​ ​ ​ Purchases of property, plant and equipment ​ ( 20,854 ) ​ ( 13,033 ) ​ Proceeds from sales and maturities of available-for-sale debt securities ​ 2,480 ​ 240 ​ Net cash used in investing activities ​ ( 18,374 ) ​ ( 12,793 ) ​ Cash flows from financing activities: ​ ​ ​ ​ ​ ​ ​ Proceeds from common stock options exercised ​ 146 ​ 1,124 ​ Proceeds from sale of subsidiary shares to noncontrolling interests ​ ​ — ​ ​ 538 ​ Proceeds from bank loan ​ 23,380 ​ — ​ Payments on bank loan ​ ​ ( 2,799 ) ​ ​ — ​ Proceeds from capital increase in subsidiary shares from noncontrolling interest ​ ​ 1,313 ​ ​ — ​ Formation of new subsidiary with noncontrolling interests ​ ​ — ​ ​ 1,283 ​ Proceeds from issuance of Tongmei's common stock to redeemable noncontrolling interests, net of costs ​ ​ — ​ ​ 277 ​ Net cash provided by financing activities ​ 22,040 ​ 3,222 ​ Effect of exchange rate changes on cash, restricted cash and cash equivalents ​ ( 1,023 ) ​ 321 ​ Net increase (decrease) in cash, restricted cash and cash equivalents ​ 8,180 ​ ( 19,819 ) ​ Cash and cash equivalents at the beginning of the year ​ 36,763 ​ 72,602 ​ Cash, restricted cash and cash equivalents at the end of the period ​ $ 44,943 ​ $ 52,783 ​ Supplemental disclosure of non-cash flow information: ​ ​ ​ ​ ​ ​ ​ Conversion of related party borrowings to Additional Paid-in Capital ​ $ 1,887 ​ $ — ​ Investment in subsidiary shares from noncontrolling interest ​ $ 678 ​ $ — ​ Consideration payable to repurchase subsidiary shares from noncontrolling interests, included in accrued liabilities ​ $ — ​ $ 3,730 ​ Bank loan proceed paid directly to a third-party vendor, included in accounts payable ​ $ 1,177 ​ $ — ​ Consideration payable in connection with construction in progress, included in accrued liabilities ​ $ 587 ​ ​ — ​ ​ See accompanying notes to condensed consolidated financial statements. ​ 6 Table of Contents ​ AXT, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) ​ Note 1. Basis of Presentation ​ The accompanying condensed consolidated financial statements of AXT, Inc. (“AXT,” the “Company,” “we,” “us,” and “our” refer to AXT, Inc. and all of its consolidated subsidiaries) are unaudited, and have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, this interim quarterly financial report does not include all disclosures required by US GAAP. In the opinion of our management, the unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, considered necessary to present fairly the financial position, results of operations and cash flows of AXT and our consolidated subsidiaries for all periods presented. ​ Our management has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these condensed consolidated financial statements in conformity with US GAAP. Due to the COVID-19 pandemic, there has been uncertainty and disruption in the global economy and financial markets. These estimates and assumptions may change as new events occur and additional information is obtained. Actual results could differ materially from those estimates. ​ The results of operations for the three and six months ended June 30, 2022 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 2021 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 15, 2022 and our Quarterly Report on Form 10-Q for the three months ended March 31, 2022 filed with the SEC on May 9, 2022. ​ The condensed consolidated financial statements include the accounts of AXT, and our consolidated subsidiaries, Beijing Tongmei Xtal Technology Co., Ltd. (“Tongmei”), AXT-Tongmei, Inc. (“AXT-Tongmei”), Baoding Tongmei Xtal Technology Co., Ltd. (“Baoding Tongmei”), ChaoYang Tongmei Xtal Technology Co., Ltd. (“ChaoYang Tongmei”), ChaoYang LiMei Semiconductor Technology Co., Ltd. (“ChaoYang LiMei”), ChaoYang XinMei High Purity Semiconductor Materials Co., Ltd. (“ChaoYang XinMei”), Nanjing JinMei Gallium Co., Ltd. (“JinMei”), ChaoYang JinMei Gallium Ltd. (“ChaoYang JinMei”), ChaoYang ShuoMei High Purity Semiconductor Materials Co., Ltd. (“ChaoYang ShuoMei”), MaAnShan JinMei Gallium Ltd., and Beijing BoYu Semiconductor Vessel Craftwork Technology Co., Ltd. (“BoYu”). All significant inter-company accounts and transactions have been eliminated. Investments in business entities in which we do not have controlling interests, but have the ability to exercise significant influence over operating and financial policies (generally 20-50% ownership), are accounted for by the equity method. As of June 30, 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 six months ended June 30, 2022, expenses associated with ChaoYang LiMei had a de minimis impact on our condensed consolidated financial statements. ​ 7 Table of Contents In February 2021, Tongmei signed a joint venture agreement with certain investors to fund a new company, ChaoYang XinMei. The agreement called for a total investment of approximately $ 3.0 million, of which Tongmei would fund approximately $ 1.8 million for a 58.5 percent ownership of ChaoYang XinMei. In February 2021, the investors completed the initial funding of approximately $ 1.5 million. Tongmei’s portion of the investment was approximately $ 0.9 million. In May 2021, the investors completed the funding of the remaining balance of approximately $ 1.5 million. 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. In April 2022, Tongmei entered into a capital increase agreement with minority investors to further invest $ 4.5 million in ChaoYang XinMei. Tongmei’s portion of the investment was approximately $ 2.6 million, of which $ 1.1 million was paid in April 2022 and $ 0.8 million was paid in May 2022. The minority investors’ portion of the investment was approximately $ 1.9 million, of which $ 0.7 million was paid in April 2022 and $ 0.6 million was paid in May 2022. As a result, noncontrolling interests increased $ 1.4 million and redeemable noncontrolling interests increased $ 0.1 million. Tongmei’s ownership remained at 58.5 % after the April 2022 and May 2022 equity investments. ​ In April 2022, ChaoYang JinMei signed a joint venture agreement with certain investor to fund a new company, ChaoYang ShuoMei. The agreement calls for a total investment of approximately $ 4.4 million, of which ChaoYang JinMei will fund approximately $ 3.3 million for a 75 percent ownership of ChaoYang ShuoMei. ​ All activities for MaAnShan JinMei Gallium Ltd. ceased during the first half of 2022 and the subsidiary was subsequently dissolved in May 2022. The dissolution of MaAnShan JinMei Gallium Ltd. had a de minimis impact on the condensed consolidated results. ​ During the quarter ended December 31, 2020, Tongmei entered into two sets of definitive transaction documents, each consisting of a capital increase agreement along with certain supplemental agreements in substantially the same form (collectively, the “Capital Investment Agreements”), with several private equity investors in China. ​ In preparation for Tongmei’s application for a listing of shares in an initial public offering (the “IPO”) on the Shanghai Stock Exchange’s Sci-Tech innovAtion boaRd (the “STAR Market”), in late December 2020, we reorganized our entity structures in China. JinMei and BoYu and its subsidiaries were assigned to Tongmei and effectively merged with Tongmei although they retained their own respective legal entity status and are wholly owned subsidiaries of Tongmei. The 33 % minority interest stakeholders of BoYu converted their ownership to a 7.59 % minority interest in Tongmei. The 8.5 % minority interest stakeholders, employees of JinMei, converted their ownership to a 0.38 % minority interest in Tongmei. Further, a number of employees, key managers and contributors purchased a 0.4 % minority interest in Tongmei. Additionally, Baoding Tongmei and ChaoYang Tongmei, were assigned to Tongmei as wholly owned subsidiaries. In 2020, the private equity funds (the “Investors”) had transferred approximately $ 48.1 million of new capital to Tongmei. An additional investment of approximately $ 1.5 million of new capital was funded in 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 interest in Tongmei of 7.28 %. As of June 30, 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. ​ 8 Table of Contents Note 2. Investments and Fair Value Measurements ​ Our cash and cash equivalents consist of cash and instruments with original maturities of less than three months. Our investments consist of instruments with original maturities of more than three months. As of June 30, 2022 and December 31, 2021, our cash, cash equivalents and debt investments are classified as follows (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ June 30, 2022 ​ December 31, 2021 ​ ​ ​ Gross Gross ​ ​ ​ ​ Gross Gross ​ ​ ​ ​ Amortized ​ Unrealized ​ Unrealized ​ Fair ​ Amortized ​ Unrealized ​ Unrealized ​ Fair ​ Cost Gain (Loss) Value Cost Gain (Loss) Value Classified as: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cash and restricted cash ​ $ 44,943 ​ $ — ​ $ — ​ $ 44,943 ​ $ 36,763 ​ $ — ​ $ — ​ $ 36,763 ​ Cash equivalents: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Certificates of deposit 1 ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ Total cash, restricted cash and cash equivalents ​ 44,943 ​ — ​ — ​ 44,943 ​ 36,763 ​ — ​ — ​ 36,763 ​ Investments (available-for-sale): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Certificates of deposit 2 ​ 6,200 ​ — ​ ​ ( 141 ) ​ 6,059 ​ 6,680 ​ — ​ ​ ( 19 ) ​ 6,661 ​ Corporate bonds ​ 6,340 ​ — ​ ( 168 ) ​ 6,172 ​ 8,380 ​ — ​ ( 46 ) ​ 8,334 ​ Total investments ​ 12,540 ​ — ​ ( 309 ) ​ 12,231 ​ 15,060 ​ — ​ ( 65 ) ​ 14,995 ​ Total cash, restricted cash, cash equivalents and investments ​ $ 57,483 ​ $ — ​ $ ( 309 ) ​ $ 57,174 ​ $ 51,823 ​ $ — ​ $ ( 65 ) ​ $ 51,758 ​ Contractual maturities on investments: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Due within 1 year 3 ​ $ 4,523 ​ ​ ​ ​ ​ ​ ​ $ 4,471 ​ $ 5,424 ​ ​ ​ ​ ​ ​ ​ $ 5,419 ​ Due after 1 through 5 years 4 ​ 8,017 ​ ​ ​ ​ ​ ​ ​ 7,760 ​ 9,636 ​ ​ ​ ​ ​ ​ ​ 9,576 ​ ​ ​ $ 12,540 ​ ​ ​ ​ ​ ​ ​ $ 12,231 ​ $ 15,060 ​ ​ ​ ​ ​ ​ ​ $ 14,995 ​ 1. Certificates of deposit with original maturities of less than three months. 2. Certificates of deposit with original maturities of more than three months. 3. Classified as “Short-term investments” in our condensed consolidated balance sheets. 4. Classified as “Long-term investments” in our condensed consolidated balance sheets. ​ ​ We manage our debt investments as a single portfolio of highly marketable securities that is intended to be available to meet our current cash requirements. Certificates of deposit and corporate bonds are typically held until maturity. ​ Historically, the gross unrealized losses related to our portfolio of available-for-sale debt securities were immaterial, and primarily due to normal market fluctuations and not due to increased credit risk or other valuation concerns. There was an insignificant amount of gross unrealized losses on our available-for-sale debt securities as of June 30, 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 June 30, 2022. The following table summarizes the fair value and gross unrealized losses related to available-for-sale debt securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of June 30, 2022 (in thousands): 9 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ In Loss Position ​ In Loss Position ​ Total In ​ ​ < 12 months ​ > 12 months ​ Loss Position ​ ​ ​ ​ ​ Gross ​ ​ ​ ​ Gross ​ ​ ​ ​ Gross ​ ​ Fair ​ Unrealized ​ Fair ​ Unrealized ​ Fair ​ Unrealized As of June 30, 2022 Value (Losses) Value (Losses) Value (Losses) Investments: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Certificates of deposit ​ $ 6,059 ​ $ ( 141 ) ​ $ — ​ $ — ​ $ 6,059 ​ $ ( 141 ) ​ Corporate bonds ​ 4,822 ​ ( 165 ) ​ 1,000 ​ ( 3 ) ​ 5,822 ​ ​ ( 168 ) ​ Total in loss position ​ $ 10,881 ​ $ ( 306 ) ​ $ 1,000 ​ $ ( 3 ) ​ $ 11,881 ​ $ ( 309 ) ​ ​ ​ 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 December 31, 2021 (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ In Loss Position ​ In Loss Position ​ Total In ​ ​ < 12 months ​ > 12 months ​ Loss Position ​ ​ Gross ​ Gross ​ Gross ​ ​ Fair ​ Unrealized ​ Fair ​ Unrealized ​ Fair ​ Unrealized As of December 31, 2021 ​ Value ​ (Loss) ​ Value ​ (Loss) ​ Value ​ (Loss) Investments: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Certificates of deposit ​ $ 6,181 ​ $ ( 19 ) ​ $ — ​ $ — ​ $ 6,181 ​ $ ( 19 ) ​ Corporate bonds ​ 5,970 ​ ( 42 ) ​ 2,013 ​ ( 4 ) ​ 7,983 ​ ​ ( 46 ) ​ Total in loss position ​ $ 12,151 ​ $ ( 61 ) ​ $ 2,013 ​ $ ( 4 ) ​ $ 14,164 ​ $ ( 65 ) ​ ​ Restricted Cash ​ We maintain restricted cash in connection with cash balances temporarily restricted for regular business operations. As a condition of a credit facility between the Bank of Beijing and Tongmei for $ 3.4 million, we are required to maintain a time deposit of $ 3.9 million at the Bank of Beijing as collateral. The bank loan has a term of 12 months, therefore the bank loan and time deposit are classified as short-term in our condensed consolidated balance sheet. This time deposit has been excluded from the Company’s cash and cash equivalents balance. As of June 30, 2022, the amount of restricted cash was $ 3.9 million. ​ Investments in Privately-held Raw Material Companies ​ 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 $ 13.1 million and $ 10.2 million as of June 30, 2022 and December 31, 2021, respectively. As of June 30, 2022, there were five companies accounted for under the equity method. There were no impairment charges in the three and six months ended June 30, 2022 and 2021. ​ 10 Table of Contents Fair Value Measurements ​ We invest primarily in money market accounts, certificates of deposits, corporate bonds and notes, and government securities. We review our debt investment portfolio for credit loss at least quarterly or when there are changes in credit risk or other potential valuation concerns. As of June 30, 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. Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), establishes three levels of inputs that may be used to measure fair value. Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets of the asset or identical assets. Level 2 instrument valuations are obtained from readily-available, observable pricing sources for comparable instruments. Level 3 instrument valuations are obtained from unobservable inputs in which there is little or no market data, which require us to develop our own assumptions. On a recurring basis, we measure certain financial assets and liabilities at fair value, primarily consisting of our short-term and long-term debt investments. ​ The type of instrument valued based on quoted market prices in active markets include our money market funds, which are generally classified within Level 1 of the fair value hierarchy. 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. ​ 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. We measure the fair value of these foreign currency hedges at each month end and quarter end using current exchange rates and in accordance with US GAAP. At quarter end, any foreign currency hedges not settled are netted in “Accrued liabilities” on the condensed consolidated balance sheet and classified as Level 3 assets and liabilities. As of June 30, 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 and six months ended June 30, 2022. There have been no transfers between fair value measurements levels during the three and six months ended June 30, 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 June 30, 2022 (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Quoted Prices in ​ ​ ​ Significant ​ ​ ​ ​ ​ Active Markets of ​ Significant Other ​ Unobservable ​ ​ Balance as of ​ Identical Assets ​ Observable Inputs ​ Inputs ​ June 30, 2022 (Level 1) (Level 2) (Level 3) Assets: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Investments: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Certificates of deposit ​ $ 6,059 ​ $ — ​ $ 6,059 ​ $ — ​ Corporate bonds ​ 6,172 ​ — ​ 6,172 ​ — ​ Total ​ $ 12,231 ​ $ — ​ $ 12,231 ​ $ — ​ ​ 11 Table of Contents The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis in accordance with ASC 820 as of December 31, 2021 (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Quoted Prices in ​ ​ ​ Significant ​ ​ ​ ​ ​ Active Markets of ​ Significant Other ​ Unobservable ​ ​ Balance as of ​ Identical Assets ​ Observable Inputs ​ Inputs ​ December 31, 2021 (Level 1) (Level 2) (Level 3) Assets: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Investments: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Certificates of deposit ​ $ 6,661 ​ $ — ​ $ 6,661 ​ $ — ​ Corporate bonds ​ 8,334 ​ — ​ 8,334 ​ — ​ Total ​ $ 14,995 ​ $ — ​ $ 14,995 ​ $ — ​ ​ Items Measured at Fair Value on a Nonrecurring Basis ​ Certain assets that are subject to nonrecurring fair value measurements are not included in the table above. These assets include investments in privately-held companies accounted for by the equity or cost method (see Note 7). We did not record any other-than-temporary impairment charges for these investments during the three and six months ended June 30, 2022 and 2021, respectively. ​ Note 3. Inventories ​ The components of inventories are summarized below (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ June 30, ​ December 31, ​ ​ 2022 2021 Inventories: ​ ​ ​ ​ ​ ​ ​ Raw materials ​ $ 38,463 ​ $ 29,658 ​ Work in process ​ 35,976 ​ 32,605 ​ Finished goods ​ 2,841 ​ 3,649 ​ ​ ​ $ 77,280 ​ $ 65,912 ​ ​ As of June 30, 2022 and December 31, 2021, carrying values of inventories were net of inventory reserves of $ 22.1 million and $ 19.6 million, respectively, for excess and obsolete inventory and $ 135,000 and $ 66,000 , respectively, for lower of cost or net realizable value reserves. ​ Note 4. Property, Plant and Equipment, Net ​ The components of our property, plant and equipment are summarized below (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ June 30, ​ December 31, ​ ​ ​ 2022 ​ 2021 ​ Property, plant and equipment: ​ ​ ​ ​ ​ ​ ​ Machinery and equipment, at cost ​ $ 58,437 ​ $ 59,284 ​ Less: accumulated depreciation and amortization ​ ​ ( 38,487 ) ​ ​ ( 40,292 ) ​ Building, at cost ​ ​ 109,814 ​ ​ 108,782 ​ Less: accumulated depreciation and amortization ​ ​ ( 19,303 ) ​ ​ ( 18,710 ) ​ Leasehold improvements, at cost ​ 6,771 ​ 7,039 ​ Less: accumulated depreciation and amortization ​ ​ ( 5,407 ) ​ ​ ( 5,352 ) ​ Construction in progress ​ 41,057 ​ 31,664 ​ ​ ​ $ 152,882 ​ $ 142,415 ​ ​ As of June 30, 2022, the balance of construction in progress was $ 41.1 million, of which $ 33.3 million was related to our buildings in our new Dingxing and Kazuo locations, $ 4.0 million was for manufacturing equipment purchases not yet placed in service and $ 3.9 million was for construction in progress for our other consolidated 12 Table of Contents 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. ​ ​ Note 5. Accrued Liabilities ​ The components of accrued liabilities are summarized below (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ June 30, ​ December 31, ​ ​ 2022 2021 Accrued compensation and related charges ​ $ 4,083 ​ $ 5,115 ​ Preferred stock dividends payable ​ ​ 2,901 ​ ​ 2,901 ​ Accrued income taxes ​ ​ 1,447 ​ ​ 539 ​ Payable in connection with construction in progress ​ ​ 861 ​ ​ 2,974 ​ Accrued product warranty ​ ​ 839 ​ ​ 743 ​ Advances from customers ​ ​ 757 ​ ​ 946 ​ Other tax payable ​ ​ 576 ​ ​ 392 ​ Accrued professional services ​ ​ 562 ​ ​ 880 ​ Current portion of operating lease liabilities ​ ​ 498 ​ ​ 488 ​ Other personnel-related costs ​ ​ 267 ​ ​ 279 ​ Accrual for sales returns ​ ​ 27 ​ ​ 48 ​ Other accrued liabilities ​ ​ 1,763 ​ ​ 1,752 ​ ​ ​ $ 14,581 ​ $ 17,057 ​ ​ ​ Note 6. Related Party Transactions ​ In March 2012, Tongmei, entered into an operating lease for the land it owns with our consolidated subsidiary, BoYu. The lease agreement for the land of approximately 22,081 square feet commenced on January 1, 2012 for a term of 10 years with annual lease payments of $ 24,000 , subject to a 5 % increase at each third year anniversary. 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 June 30, 2022 and December 31, 2021, amounts payable of $ 106,000 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. The inter-company loan carries an interest rate of 4.9 % per annum. The principal is due in three installments between December 2021 and December 2023 while the interest is due in December of each year . In July 2021, JinMei repaid the principal and outstanding interest totaling $ 858,000 to Tongmei. As of June 30, 2022 and December 31, 2021, the remaining balance of principal and interest totaled $ 0 and $ 0 , respectively. ​ 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 . In April 2022 and May 2022, ChaoYang XinMei received funding from Tongmei of $ 1.1 million and $ 0.8 million, respectively, as equity investments. In April 2022 and May 2022, the minority investors invested $ 0.7 million and $ 0.6 million, respectively. As a result, noncontrolling interests increased $ 1.4 million and redeemable noncontrolling interests increased $ 0.1 million. 13 Table of Contents Tongmei’s ownership remained at 58.5 % after these equity investments. As of June 30, 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. Our executive officers retain board seats on the board of directors of the companies in which we have invested in our China joint ventures. See Note 7 for further details. ​ Note 7. Investments in Privately-Held Raw Material Companies ​ 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. These companies form part of our overall supply chain strategy. ​ As of June 30, 2022, the investments are summarized below (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Investment Balance as of ​ ​ ​ ​ ​ ​ ​ June 30, ​ December 31, ​ Accounting ​ Ownership * Company 2022 2021 Method Percentage ​ Nanjing JinMei Gallium Co., Ltd. ​ $ 592 ​ $ 592 Consolidated **85.5 % ChaoYang JinMei Gallium Co., Ltd. ​ ​ 1,820 ​ ​ 1,820 ​ Consolidated ​ **85.5 % Beijing BoYu Semiconductor Vessel Craftwork Technology Co., Ltd. ​ 1,346 ​ 1,346 Consolidated **85.5 % ChaoYang XinMei High Purity Semiconductor Materials Co., Ltd. ​ ​ 6,545 ​ ​ 1,814 ​ Consolidated ***58.5 % ​ ​ $ 10,303 ​ $ 5,572 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Donghai County Dongfang High Purity Electronic Materials Co., Ltd. ​ $ 1,957 ​ $ 2,053 Equity **46 % Beijing JiYa Semiconductor Material Co., Ltd. ​ ​ 5,227 ​ ​ 3,760 ​ Equity ​ 39 % Xilingol Tongli Germanium Co., Ltd. ​ — ​ — Equity 25 % Xiaoyi XingAn Gallium Co., Ltd. ​ ​ 5,587 ​ ​ 4,095 ​ Equity ​ **25 % Emeishan Jia Mei High Purity Metals Co., Ltd. ​ 311 ​ 258 Equity 25 % ​ ​ $ 13,082 ​ $ 10,166 ​ ​ ​ ​ ​ ​ * These percentages reflect the ownership currently in effect upon the completion of the reorganization in China and the ownership in effect upon the completion of the new capital funding by private equity investors in January 2021. ​ ** In preparation for Tongmei’s application for a listing of shares in an IPO on the STAR Market, in late December 2020 we reorganized our entity structures in China. JinMei and BoYu and its subsidiaries, previously organized under AXT, Inc., were assigned to Tongmei and effectively merged with Tongmei although they retained their own respective legal entity status and are wholly owned subsidiaries of Tongmei. The 33 % minority interest stakeholders of BoYu converted their ownership to a 7.59 % minority interest in Tongmei. The 8.5 % minority interest stakeholders, employees of JinMei, converted their ownership to a 0.38 % minority interest in Tongmei. Further, a number of employees, key managers and contributors, purchased a 0.4 % minority interest in Tongmei. In 2020, the Investors transferred approximately $ 48.1 million of new capital to Tongmei. An additional investment of approximately $ 1.5 million of new capital was funded in early January 2021. Under China regulations these investments must be formally approved by the appropriate government agency and are not deemed to be dilutive until such approval is granted. The government approved the approximately $ 49 million investment in its entirety on January 25, 2021 at which time the Investors owned a redeemable noncontrolling interest in Tongmei of 7.28 %. As of June 30, 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 February 2021, Tongmei signed a joint venture agreement with certain investors to fund ChaoYang XinMei. ​ Before June 15, 2018, our ownership of JinMei was 83 %. On June 15, 2018, we purchased a 12 % ownership interest from one of the minority owners of JinMei for $ 1.4 million. The $ 1.4 million was scheduled to be paid in two installments. On June 15, 2018, we paid the first installment of $ 163,000 . In May 2019, we paid the second installment 14 Table of Contents of $ 1.2 million as the relocation of JinMei’s headquarters and manufacturing operations was nearly complete, which had been previously included in “Accrued liabilities” in our condensed consolidated balance sheets. As a result, our ownership of JinMei increased from 83 % to 95 %. In September 2018, we purchased a 2 % ownership interest from one of the three remaining minority owners of JinMei for $ 252,000 . 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 . The final payment to the JinMei management team was made in October, 2020. As a result, our ownership of JinMei increased from 97 % to 100 %. Prior to June 1, 2019, we reported JinMei as a consolidated joint venture as we had a controlling financial interest and have majority control of the board. As of June 1, 2019, we referred to it as a wholly owned subsidiary and reduced the carrying value of the corresponding noncontrolling interests to zero . Before August 1, 2020, our ownership of ChaoYang JinMei was 100 %. In August 2020, we sold an 8.5 % ownership interest to current members of the ChaoYang JinMei management team for approximately $ 396,000 . As a result, our ownership of ChaoYang JinMei decreased from 100 % to 91.5 %. As of August 2020, we referred to ChaoYang JinMei as a significantly controlled subsidiary instead of a wholly owned subsidiary. Our Chief Executive Officer is chairman of the JinMei board and we have appointed two other representatives to serve on the JinMei board. ​ Our ownership of BoYu was 67 %. On November 2, 2017, BoYu raised additional capital in the amount of $ 2 million in cash from a third-party investor through the issuance of shares equivalent to 10 % ownership of BoYu. As a result, our ownership of BoYu was diluted from 70 % to 63 %. In December 2020, we purchased shares equivalent to 4 % of BoYu from the same third-party investor for $ 1.6 million. As a result, our ownership of BoYu increased from 63 % to 67 %. We continue to consolidate BoYu as we have a controlling financial interest and have majority control of the board and accordingly no gain was recognized as a result of this equity transaction. Our Chief Executive Officer is chairman of the BoYu board and we have appointed two other representatives to serve on the board. An additional step in the STAR Market IPO process 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 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 $ 13.1 million and $ 10.2 million as of June 30, 2022 and December 31, 2021, respectively. Our respective ownership interests in each of these companies are 46 %, 39 %, 25 %, 25 % and 25 %. These minority investment entities are not considered variable interest entities because: ​ ● all minority investment entities have sustainable businesses of their own; ​ ● our voting power is proportionate to our ownership interests; ​ ● we only recognize our respective share of the losses and/or residual returns generated by the companies if they occur; and ​ ● 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. ​ ​ ​ ​ 15 Table of Contents 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 statements of operations information (in thousands) for the three and six months ended June 30, 2022 and 2021: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Six Months Ended ​ ​ ​ June 30, ​ June 30, ​ ​ 2022 2021 2022 2021 Net revenue ​ $ 14,099 ​ $ 10,264 ​ $ 24,833 ​ $ 18,789 ​ Gross profit ​ $ 8,827 ​ $ 5,537 ​ $ 14,827 ​ $ 9,344 ​ Operating income ​ $ 9,119 ​ $ 4,693 ​ $ 13,268 ​ $ 7,753 ​ Net income ​ $ 7,253 ​ $ 4,491 ​ $ 10,951 ​ $ 7,103 ​ ​ Our portion of the income and losses from these minority investment entities that are not consolidated and are accounted for under the equity method was income of $ 2.2 million and $ 1.5 million, respectively, for the three months ended June 30, 2022 and 2021. 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 $ 3.3 million and $ 2.6 million, respectively, for the six months ended June 30, 2022 and 2021. ​ 16 Table of Contents Note 8. Stockholders’ Equity ​ Condensed Consolidated Statements of Stockholders’ Equity (in thousands) ​ The changes in stockholders’ equity by component for the three and six months ended June 30, 2022 are as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Accumulated ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other ​ AXT, Inc. Total ​ ​ Preferred Common Additional Accumulated Comprehensive ​ Stockholders’ Noncontrolling Stockholders’ ​ ​ Stock Stock Paid-In Capital Deficit Income (Loss) Equity Interests Equity Balance as of December 31, 2021 $ 3,532 $ 43 $ 231,622 $ ( 29,970 ) $ 6,302 ​ $ 211,529 $ 18,317 $ 229,846 ​ Investment in subsidiary with noncontrolling interest ​ ​ — ​ ​ — ​ ​ ( 410 ) ​ ​ — ​ ​ — ​ ​ ( 410 ) ​ ​ 204 ​ ​ ( 206 ) ​ Noncontrolling interest portion of Tongmei stock-based compensation ​ ​ — ​ ​ — ​ ​ 17 ​ ​ — ​ ​ — ​ ​ 17 ​ ​ ( 7 ) ​ ​ 10 ​ Stock-based compensation ​ ​ — ​ ​ — ​ ​ 875 ​ ​ — ​ ​ — ​ ​ 875 ​ ​ — ​ ​ 875 ​ Tongmei stock-based compensation ​ ​ — ​ ​ — ​ ​ 213 ​ ​ — ​ ​ — ​ ​ 213 ​ ​ — ​ ​ 213 ​ Net income ​ ​ — ​ ​ — ​ ​ — ​ ​ 3,165 ​ ​ — ​ ​ 3,165 ​ ​ 389 ​ ​ 3,554 ​ Investment in subsidiary from noncontrolling interest ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ 1,887 ​ ​ 1,887 ​ Other comprehensive income ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ 327 ​ ​ 327 ​ ​ 45 ​ ​ 372 ​ Balance as of March 31, 2022 ​ $ 3,532 ​ $ 43 ​ $ 232,317 ​ $ ( 26,805 ) ​ $ 6,629 ​ $ 215,716 ​ $ 20,835 ​ $ 236,551 ​ Common stock options exercised ​ ​ — ​ ​ — ​ ​ 146 ​ ​ — ​ ​ — ​ ​ 146 ​ ​ — ​ ​ 146 ​ Investment in subsidiary with noncontrolling interest ​ ​ — ​ ​ — ​ ​ ( 268 ) ​ ​ — ​ ​ — ​ ​ ( 268 ) ​ ​ 1,447 ​ ​ 1,179 ​ Noncontrolling interest portion of Tongmei stock-based compensation ​ ​ — ​ ​ — ​ ​ 32 ​ ​ — ​ ​ — ​ ​ 32 ​ ​ ( 16 ) ​ ​ 16 ​ Stock-based compensation ​ ​ — ​ ​ — ​ ​ 919 ​ ​ — ​ ​ — ​ ​ 919 ​ ​ — ​ ​ 919 ​ Tongmei stock-based compensation ​ ​ — ​ ​ — ​ ​ 218 ​ ​ — ​ ​ — ​ ​ 218 ​ ​ — ​ ​ 218 ​ Net income ​ ​ — ​ ​ — ​ ​ — ​ ​ 5,546 ​ ​ — ​ ​ 5,546 ​ ​ 450 ​ ​ 5,996 ​ Other comprehensive income (loss) ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 5,992 ) ​ ​ ( 5,992 ) ​ ​ ( 569 ) ​ ​ ( 6,561 ) ​ Balance as of June 30, 2022 $ 3,532 ​ $ 43 ​ $ 233,364 ​ $ ( 21,259 ) ​ $ 637 ​ $ 216,317 ​ $ 22,147 ​ $ 238,464 ​ ​ Net income and other comprehensive loss attributable to redeemable noncontrolling interests was $ 549,000 and $ 575,000 , respectively, for the three months ended June 30, 2022, and $ 967,000 and $ 529,000 , respectively, for the six months ended June 30, 2022 not shown in the table above. 17 Table of Contents The changes in stockholders’ equity by component for the three and six months ended June 30, 2021 are as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Accumulated ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other ​ AXT, Inc. Total ​ Preferred Common Additional Accumulated Comprehensive ​ Stockholders’ Noncontrolling Stockholders’ ​ Stock Stock Paid-In Capital Deficit Income (Loss) Equity Interests Equity Balance as of December 31, 2020 $ 3,532 $ 42 $ 230,381 $ ( 44,545 ) $ 3,209 ​ $ 192,619 $ 15,350 $ 207,969 Common stock options exercised ​ ​ — ​ ​ — ​ ​ 704 ​ ​ — ​ ​ — ​ ​ 704 ​ ​ — ​ ​ 704 Stock-based compensation ​ ​ — ​ ​ — ​ ​ 816 ​ ​ — ​ ​ — ​ ​ 816 ​ ​ — ​ ​ 816 Formation of new subsidiary with noncontrolling interests ​ ​ — ​ ​ — ​ ​ ( 131 ) ​ ​ — ​ ​ — ​ ​ ( 131 ) ​ ​ 707 ​ ​ 576 Sale of common stock to employees in connection with the reorganization ​ ​ — ​ ​ — ​ ​ 538 ​ ​ — ​ ​ — ​ ​ 538 ​ ​ — ​ ​ 538 Purchase of subsidiary shares from noncontrolling interests ​ ​ — ​ ​ — ​ ​ ( 2,691 ) ​ ​ — ​ ​ — ​ ​ ( 2,691 ) ​ ​ ( 1,039 ) ​ ​ ( 3,730 ) Net income (loss) ​ ​ — ​ ​ — ​ ​ — ​ ​ 3,425 ​ ​ — ​ ​ 3,425 ​ ​ 311 ​ ​ 3,736 Other comprehensive loss ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 131 ) ​ ​ ( 131 ) ​ ​ ( 16 ) ​ ​ ( 147 ) Balance as of March 31, 2021 ​ $ 3,532 ​ $ 42 ​ $ 229,617 ​ $ ( 41,120 ) ​ $ 3,078 ​ $ 195,149 ​ $ 15,313 ​ $ 210,462 Common stock options exercised ​ ​ — ​ ​ — ​ ​ 420 ​ ​ — ​ ​ — ​ ​ 420 ​ ​ — ​ ​ 420 Stock-based compensation ​ ​ — ​ ​ — ​ ​ 975 ​ ​ — ​ ​ — ​ ​ 975 ​ ​ — ​ ​ 975 Formation of new subsidiary with noncontrolling interests ​ ​ — ​ ​ — ​ ​ ( 131 ) ​ ​ — ​ ​ — ​ ​ ( 131 ) ​ ​ 706 ​ ​ 575 Transfer of subsidiary with noncontrolling interest ​ ​ — ​ ​ — ​ ​ ( 1,229 ) ​ ​ — ​ ​ — ​ ​ ( 1,229 ) ​ ​ 1,229 ​ ​ — Transfer of subsidiary with redeemable noncontrolling interest ​ ​ — ​ ​ — ​ ​ ( 1,241 ) ​ ​ — ​ ​ — ​ ​ ( 1,241 ) ​ ​ — ​ ​ ( 1,241 ) Net income ​ ​ — ​ ​ — ​ ​ — ​ ​ 4,385 ​ ​ — ​ ​ 4,385 ​ ​ 94 ​ ​ 4,479 Other comprehensive income ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ 1,455 ​ ​ 1,455 ​ ​ 137 ​ ​ 1,592 Balance as of June 30, 2021 $ 3,532 ​ $ 42 ​ $ 228,411 ​ $ ( 36,735 ) ​ $ 4,533 ​ $ 199,783 ​ $ 17,479 ​ $ 217,262 ​ ​ There were no reclassification adjustments from accumulated other comprehensive income (loss) for the three and six months ended June 30, 2022 and 2021 . ​ Stock Repurchase Program ​ 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. These repurchases can be made from time to time in the open market and are funded from our existing cash balances and cash generated from operations. During 2015, we repurchased approximately 908,000 shares at an average price of $ 2.52 per share for a total purchase price of approximately $ 2.3 million under the stock repurchase program. No shares were repurchased from 2016 through 2021. During the three and six months ended June 30, 2022, we did no t repurchase any shares under the approved stock repurchase program. As of June 30, 2022, approximately $ 2.7 million remained available for future repurchases under this program. Currently, we do not plan to repurchase additional shares. ​ Note 9. Stock-Based Compensation ​ We account for stock-based compensation in accordance with the provisions of ASC Topic 718, Compensation-Stock Compensation (“ASC 718”), which established accounting for stock-based awards exchanged for employee services. Stock-based compensation cost is measured at each grant date, based on the fair value of the award, and is 18 Table of Contents recognized as expense over the employee’s requisite service period of the award. All of our stock compensation is accounted for as an equity instrument. ​ The following table summarizes compensation costs related to our stock-based awards (in thousands, except per share data): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Six Months Ended ​ ​ ​ June 30, ​ June 30, ​ ​ 2022 2021 2022 2021 Cost of revenue ​ $ 113 ​ $ 36 ​ $ 226 ​ $ 75 ​ Selling, general and administrative ​ 859 ​ 802 ​ 1,674 ​ 1,442 ​ Research and development ​ 162 ​ 137 ​ 325 ​ 274 ​ Total stock-based compensation ​ 1,134 ​ 975 ​ 2,225 ​ 1,791 ​ Tax effect on stock-based compensation ​ — ​ — ​ — ​ — ​ Net effect on net income ​ $ 1,134 ​ $ 975 ​ $ 2,225 ​ $ 1,791 ​ ​ As of June 30, 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 $ 28,000 . These costs will be amortized on a straight-line basis over a weighted-average period of approximately 1.2 years and will be adjusted for subsequent changes in estimated forfeitures. We did not capitalize any stock-based compensation to inventory as of June 30, 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 six months ended June 30, 2022 and 2021. ​ The following table summarizes the stock option transactions during the six months ended June 30, 2022 (in thousands, except per share data): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted- ​ ​ ​ ​ ​ ​ ​ ​ average ​ ​ ​ ​ ​ ​ Weighted- ​ Remaining ​ ​ ​ ​ ​ Number of ​ average ​ Contractual ​ Aggregate ​ ​ Options ​ Exercise ​ Life ​ Intrinsic Stock Options Outstanding Price (in years) Value Balance as of January 1, 2022 1,378 ​ $ 4.83 5.60 ​ $ 5,573 ​ Granted — ​ — ​ ​ ​ ​ ​ ​ Exercised ( 67 ) ​ ​ 2.18 ​ ​ ​ ​ ​ ​ Canceled and expired — ​ ​ — ​ ​ ​ ​ ​ ​ Balance as of June 30, 2022 1,311 ​ $ 4.97 5.22 ​ $ 1,751 ​ Options vested as of June 30, 2022 and unvested options expected to vest, net of forfeitures 1,310 ​ $ 4.97 5.22 ​ $ 1,745 ​ Options exercisable as of June 30, 2022 1,113 ​ $ 5.24 4.87 ​ $ 1,263 ​ ​ The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on our closing price of $ 5.86 on June 30, 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 six months ended June 30, 2022 is presented below (in thousands, except per share data): ​ ​ ​ ​ ​ ​ ​ 19 Table of Contents ​ ​ Weighted-Average ​ ​ ​ ​ Grant Date Stock Awards Shares Share Value Non-vested as of January 1, 2022 ​ 875 ​ $ 6.26 ​ Granted 48 ​ $ 5.38 ​ Vested ( 133 ) ​ $ 6.72 ​ Forfeited ​ ( 15 ) ​ $ 4.76 ​ Non-vested as of June 30, 2022 775 ​ $ 6.22 ​ ​ As of June 30, 2022, the unamortized compensation costs related to unvested restricted stock awards was approximately $ 3.9 million, which is to be amortized on a straight-line basis over a weighted-average period of approximately 1.3 years. ​ At-Risk, Performance Shares ​ 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. Compensation cost is not recognized for at-risk, performance shares that do not vest because service or performance conditions are not satisfied and any previously recognized compensation cost is reversed. At-risk, performance shares are eligible to receive dividend equivalents under the Company's 2015 Equity Incentive Plan (the “Plan”), as determined by the Board of Directors. The Company will recognize forfeitures as they occur. ​ The Company's at-risk, performance shares are classified as equity and contain performance and service conditions that must be satisfied for an employee to receive the shares. The financial performance metric 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. 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 and 2022, respectively. ​ 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 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. Fischer. ​ 20 Table of Contents A summary of the status of our unvested at-risk, performance shares as of June 30, 2022 is presented below (in thousands, except per share data): ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted-Average ​ ​ ​ ​ Grant Date Stock Awards Shares* Share Value Non-vested as of January 1, 2022 ​ 114 ​ $ 15.37 Granted 74 ** $ 10.91 Vested — ​ $ — Forfeited ​ — ​ $ — Non-vested as of June 30, 2022 188 ​ $ 12.42 ​ *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 June 30, 2022, there was $ 1.2 million of unrecognized compensation expense related to unvested at-risk, performance shares that is expected to be recognized over a weighted-average period of 1.6 years. ​ Note 10. Net Income (Loss) Per Share ​ Basic net income (loss) per share is computed using the weighted-average number of common shares outstanding during the periods less shares of common stock subject to repurchase and non-vested stock awards. 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. Potentially dilutive common shares consist of common shares issuable upon the exercise of stock options and vesting of restricted stock awards. Potentially dilutive common shares are excluded from the computation of weighted-average number of common shares outstanding in net loss years, as their effect would be anti-dilutive to the computation. ​ 21 Table of Contents A reconciliation of the numerators and denominators of the basic and diluted net income (loss) per share calculations is as follows (in thousands, except per share data): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Six Months Ended ​ ​ ​ June 30, ​ June 30, ​ ​ 2022 2021 2022 2021 Numerator: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income attributable to AXT, Inc. ​ $ 5,546 ​ $ 4,385 ​ $ 8,711 ​ $ 7,810 ​ Less: Preferred stock dividends ​ ( 44 ) ​ ( 44 ) ​ ( 88 ) ​ ( 88 ) ​ Net income available to common stockholders ​ $ 5,502 ​ $ 4,341 ​ $ 8,623 ​ $ 7,722 ​ Denominator: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Denominator for basic net income per share - weighted-average common shares ​ 42,001 ​ 41,248 ​ 41,935 ​ 41,124 ​ Effect of dilutive securities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Common stock options ​ 284 ​ 889 ​ 379 ​ 986 ​ Restricted stock awards ​ 226 ​ 590 ​ 272 ​ 615 ​ Denominator for dilutive net income per common shares ​ 42,511 ​ 42,727 ​ 42,586 ​ 42,725 ​ Net income attributable to AXT, Inc. per common share: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic ​ $ 0.13 ​ $ 0.11 ​ $ 0.21 ​ $ 0.19 ​ Diluted ​ $ 0.13 ​ $ 0.10 ​ $ 0.20 ​ $ 0.18 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Options excluded from diluted net income per share as the impact is anti-dilutive ​ 392 ​ 21 ​ 220 ​ 21 ​ Restricted stock excluded from diluted net income per share as the impact is anti-dilutive ​ 362 ​ 99 ​ 352 ​ 90 ​ ​ The 883,000 shares of $ 0.001 par value Series A preferred stock issued and outstanding as of June 30, 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. stockholders in connection with the completion of our acquisition of Lyte Optronics, Inc. on May 28, 1999. ​ Note 11. Segment Information and Foreign Operations ​ Segment Information ​ We operate in one segment for the design, development, manufacture and distribution of high-performance compound and single element semiconductor substrates and sale of raw materials integral to these substrates. Our chief operating decision-maker has been identified as our Chief Executive Officer, who reviews operating results to make decisions about allocating resources and assessing performance for the Company. Since we operate in one segment, all financial segment and product line information can be found in the condensed consolidated financial statements. ​ 22 Table of Contents Product Information ​ The following table represents revenue amounts (in thousands) by product type: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Six Months Ended ​ ​ ​ June 30, ​ June 30, ​ ​ 2022 2021 2022 2021 Product Type: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Substrates ​ $ 31,694 ​ $ 24,905 ​ $ 63,439 ​ $ 48,278 ​ Raw Materials and Other ​ 7,793 ​ 8,830 ​ 15,701 ​ 16,807 ​ Total ​ $ 39,487 ​ $ 33,735 ​ $ 79,140 ​ $ 65,085 ​ ​ Geographical Information ​ The following table represents revenue amounts (in thousands) reported for products shipped to customers in the corresponding geographic region: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Six Months Ended ​ ​ ​ June 30, ​ June 30, ​ ​ 2022 2021 2022 2021 Geographical region: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ China ​ $ 18,445 ​ $ 15,546 ​ $ 35,925 ​ $ 31,092 ​ Taiwan ​ ​ 7,044 ​ ​ 4,996 ​ ​ 13,903 ​ ​ 8,011 ​ Japan ​ 2,718 ​ 2,635 ​ 5,525 ​ 5,158 ​ Asia Pacific (excluding China, Taiwan and Japan) ​ ​ 662 ​ ​ 1,396 ​ ​ 2,418 ​ ​ 3,213 ​ Europe (primarily Germany) ​ ​ 5,299 ​ ​ 6,411 ​ ​ 11,693 ​ ​ 11,846 ​ North America (primarily the United States) ​ 5,319 ​ 2,751 ​ ​ 9,676 ​ ​ 5,765 ​ Total ​ $ 39,487 ​ $ 33,735 ​ $ 79,140 ​ $ 65,085 ​ ​ Long-lived assets consist primarily of property, plant and equipment and operating lease right-of-use assets, and are attributed to the geographic location in which they are located. Long-lived assets, net of depreciation, by geographic region were as follows (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ As of ​ ​ ​ June 30, ​ December 31, ​ ​ 2022 2021 Long-lived assets by geographic region, net of depreciation: ​ ​ ​ ​ ​ ​ ​ North America ​ $ 846 ​ $ 1,610 ​ China ​ 154,057 ​ 143,129 ​ ​ ​ $ 154,903 ​ $ 144,739 ​ ​ Significant Customers ​ One customer, Landmark, represented 12 % of our revenue for the three months ended June 30, 2022 and no customer represented 10% of our revenue for the three months ended June 30, 2021. Our top five customers, although not the same five customers for each period, represented 35 % and 31 % of our revenue for the three months ended June 30, 2022 and 2021, respectively. ​ One customer, Landmark, represented 11 % of our revenue for the six months ended June 30, 2022 and no customer represented 10% of our revenue for the six months ended June 30, 2021. Our top five customers, although not the same five customers for each period, represented 32 % and 27 % of our revenue for the six months ended June 30, 2022 and 2021, respectively. 23 Table of Contents ​ 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 June 30, 2022 , and no customer accounted for 10% of our accounts receivable as of December 31, 2021. ​ Note 12. Commitments and Contingencies ​ Indemnification Agreements ​ We have entered into indemnification agreements with our directors and officers that require us to indemnify our directors and officers against liabilities that may arise by reason of their status or service as directors or officers, other than liabilities arising from willful misconduct of a culpable nature; to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified; and to obtain directors’ and officers’ insurance if available on reasonable terms, which we currently have in place. ​ Product Warranty ​ We provide warranties for our products for a specific period of time, generally twelve months , against material defects. We provide for the estimated future costs of warranty obligations in cost of sales when the related revenue is recognized. The accrued warranty costs represent the best estimate at the time of sale of the total costs that we expect to incur to repair or replace product parts that fail while still under warranty. The amount of accrued estimated warranty costs is primarily based on historical experience as to product failures as well as current information on repair costs. 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 six months ended June 30, 2022 and 2021 (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Six Months Ended ​ ​ June 30, ​ June 30, ​ 2022 2021 2022 2021 Beginning accrued product warranty ​ $ 832 ​ $ 582 ​ $ 743 ​ $ 609 ​ Accruals for warranties issued ​ 191 ​ 388 ​ 747 ​ 501 ​ Adjustments related to pre-existing warranties including expirations and changes in estimates ​ ( 76 ) ​ ( 85 ) ​ ( 189 ) ​ ( 139 ) ​ Cost of warranty repair ​ ( 108 ) ​ ( 93 ) ​ ( 462 ) ​ ( 179 ) ​ Ending accrued product warranty ​ $ 839 ​ $ 792 ​ $ 839 ​ $ 792 ​ ​ Contractual Obligations ​ In 2020, we and a competitor entered into a cross license and covenant agreement (the “Cross License Agreement”), which has a term that began on January 1, 2020 and expires on December 31, 2029. The Cross License Agreement is a fixed-cost cross license and not a variable-cost cross license that is based on revenue or units. Under the Cross License Agreement, we are obligated to make annual payments over a 10-year period. ​ Land Purchase and Investment Agreement ​ We have established a wafer process production line in Dingxing, China. In addition to a land rights and building purchase agreement that we entered into with a private real estate development company to acquire our new manufacturing facility, we also entered into a cooperation agreement with the Dingxing local government. In addition to pledging its full support and cooperation, the Dingxing local government will issue certain credits or rebates to us as we achieve certain milestones. We, in turn, agreed to hire local workers over time, pay taxes when due and eventually demonstrate a total investment of approximately $ 90 million in value, assets and capital. The investment will include cash paid for the land and buildings, cash on deposit in our name at local banks, the gross value of new and used equipment (including future equipment that might be used for indium phosphide and germanium substrates production), the deemed value for our 24 Table of Contents 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. Further, there is no specific penalty contemplated if either party breaches the agreement. However, the agreement does state that each party has a right to seek from the other party compensation for losses. Under certain conditions, the Dingxing local government may purchase the land and building at the appraised value. We believe that such cooperation agreements are normal, customary and usual in China and that the future valuation is flexible. We have a similar agreement with the city of Kazuo, China, although on a smaller scale. The total investment targeted by AXT in Kazuo is approximately $ 15 million in value, assets and capital. In addition, BoYu has a similar agreement with the city of Kazuo. The total investment targeted by BoYu in Kazuo is approximately $ 8 million in value, assets and capital. ​ Purchase Obligations with Penalties for Cancellation ​ In the normal course of business, we issue purchase orders to various suppliers. In certain cases, we may incur a penalty if we cancel the purchase order. As of June 30, 2022, we do not have any outstanding purchase orders that will incur a penalty if cancelled by the Company. ​ Legal Proceedings ​ From time to time we may be involved in judicial or administrative proceedings concerning matters arising in the ordinary course of business. 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. ​ Note 13. Other Expense, Net ​ Other expense, net for the six months ended June 30, 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 gain of $ 230,000 and $ 34,000 for the three months ended June 30, 2022 and 2021, respectively. We incurred a foreign currency transaction exchange gain of $ 2,000 and a loss of $ 140,000 for the six months ended June 30, 2022 and 2021, respectively. ​ Note 14. Income Taxes ​ We account for income taxes in accordance with ASC Topic 740, Income Taxes (“ASC 740”), which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. ASC 740 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that a portion of the deferred tax asset will not be realized. ​ We provide for income taxes based upon the geographic composition of worldwide earnings and tax regulations governing each region, particularly China. The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws, particularly in foreign countries such as China. ​ We recognize interest and penalties related to uncertain tax positions in income tax expense. Income tax expense for the three and six months ended June 30, 2022 includes no interest and penalties. As of June 30, 2022, we have no accrued interest and penalties related to uncertain tax positions. We file income tax returns in the U.S. federal, various states and foreign jurisdictions. Currently, there is no tax audit in any of the jurisdictions and we do not expect there will be any significant change to this. Provision for income taxes for the three and six months ended June 30, 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 25 Table of Contents 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. ​ Note 15. Revenue ​ Revenue Recognition ​ We manufacture and sell high-performance compound semiconductor substrates including indium phosphide, gallium arsenide and germanium wafers, and our consolidated subsidiaries sell certain raw materials, including high purity gallium (7N Ga), pyrolytic boron nitride (pBN) crucibles and boron oxide (B2O3). 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. 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. The majority of our contracts have a single performance obligation to transfer products and are short term in nature, usually less than six months. Our revenue is measured based on the consideration specified in the contract with each customer in exchange for transferring products that are generally based upon a negotiated, formula, list or fixed price. Revenue is recognized when control of the promised goods is transferred to our customer, which is either upon shipment from our dock, receipt at the customer’s dock, or removal from consignment inventory at the customer’s location, in an amount that reflects the consideration we expect to be entitled to receive in exchange for those goods. ​ 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. 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. ​ We do not provide training, installation or commissioning services. We provide for future returns based on historical data, prior experience, current economic trends and changes in customer demand at the time revenue is recognized. We do not recognize any asset associated with the incremental cost of obtaining revenue generating customer contracts. As such, sales commissions are expensed as incurred, given that the expected period of benefit is less than one year . ​ Contract Balances ​ Contract assets are recorded when we have a conditional right to consideration for our completed performance under the contracts. Accounts receivables are recorded when the right to this consideration becomes unconditional. We believe the fair value of our accounts receivable approximates its carrying value due to its short maturities and nominal credit risk. We do not have any material contract assets as of June 30, 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 June 30, 2022 and December 31, 2021 (in thousands): 26 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ June 30, ​ December 31, ​ ​ ​ 2022 ​ 2021 ​ Contract liabilities ​ $ 757 ​ $ 946 ​ During the three and six months ended June 30, 2022, the Company recognized $ 410,000 and $ 731,000 of revenue that was included in the contract balances as of December 31, 2021. ​ ​ ​ ​ ​ ​ ​ Disaggregated Revenue ​ In general, revenue disaggregated by product types and geography (See Note 11) is aligned according to the nature and economic characteristics of our business and provides meaningful disaggregation of our results of operations. Since we operate in one segment, all financial segment and product line information can be found in the condensed consolidated financial statements. ​ Note 16. Bank Loans and Line of Credit ​ On August 9, 2019, Tongmei entered into a credit facility (the “Credit Facility”) with the Bank of China with a $ 5.8 million line of credit at an annual interest rate of approximately 0.4 % over the average interest rate quoted by the National Interbank Funding Center. Accrued interest is calculated monthly and paid quarterly. The annual interest rate was approximately 4.7 % as of December 31, 2019. The Credit Facility is collateralized by Baoding Tongmei’s land use rights and all of its buildings located at its facility in Dingxing. The primary intended use of the Credit Facility is for general purposes, which may include working capital and other corporate expenses. ​ On August 9, 2019, Tongmei borrowed $ 2.8 million against the Credit Facility (the “August 2019 borrowing”). 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 (the “September 2019 borrowing”). The repayment of the full amount was due on September 12, 2020. In August 2020, Tongmei repaid the full amount of the Credit Facility, including all outstanding accrued interest, of approximately $ 5.9 million and simultaneously applied to renew the Credit Facility. The process of repaying a loan and then renewing the loan is customary in China. ​ In September 2020, the August 2019 borrowing was renewed and funded against the Credit Facility with an interest rate of 3.85 %. 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 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 June 30, 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 % . Accrued interest is calculated monthly and paid quarterly. The combined loan totaled $ 5.6 million. In April 2021, Tongmei repaid the full amount of the Credit Facility, including all outstanding accrued interest, of approximately $ 5.6 million and simultaneously applied to renew the Credit Facility. In June 2021, the combined loans were renewed for approximately $ 5.8 million and funded against the Credit Facility with an annual interest rate of 4.7 %. In November 2021, Tongmei repaid the full amount of the Credit Facility, including all outstanding accrued interest. As of June 30, 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 27 Table of Contents 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. 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 June 30, 2022, $ 1.5 million was included in “Bank loan” in our condensed consolidated balance sheets. ​ In September 2021, Tongmei entered into a credit facility with the Bank of Communications with a $ 3.1 million line of credit at an annual interest rate of 4.0 % as of September 30, 2021. Accrued interest is calculated monthly and paid quarterly. The credit facility is collateralized by ChaoYang Tongmei’s land use rights and all of its buildings located at its facility in Kazuo, China. The primary intended use of the credit facility is for general purposes, which may include working capital and other corporate expenses. 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 June 30, 2022, $ 4.5 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 June 30, 2022, $ 1.5 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 June 30, 2022, $ 1.5 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 June 30, 2022, $ 1.5 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 June 30, 2022, $ 1.5 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 June 30, 2022, $ 4.2 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 June 30, 2022, $ 3.0 million was included in “Bank loan” in our condensed consolidated balance sheets. ​ In April 2022, Tongmei entered into a credit facility with the Bank of China for $ 1.5 million with an annual interest rate of 4.2 %. Accrued interest is calculated monthly and paid quarterly. The repayment of the loan and any 28 Table of Contents accrued interest is due in April 2023. As of June 30, 2022, $ 1.5 million was included in “Bank loan” in our condensed consolidated balance sheets. ​ In May 2022, Tongmei entered into a credit facility with the Bank of Beijing for $ 3.4 million with an annual interest rate of 4.2 %. Accrued interest is calculated monthly and paid quarterly. The repayment of the loan and any accrued interest is due in May 2023. The credit facility is collateralized by a $ 3.9 million time deposit held in the Bank of Beijing. The time deposit cannot be withdrawn until such time as the credit facility and all accrued interest has been repaid. As of June 30, 2022, $ 3.4 million was included in “Bank loan” in our condensed consolidated balance sheets. ​ In June 2022, Tongmei entered into a credit facility with Industrial Bank for $ 6.0 million with an annual interest rate of 4.35 %. Accrued interest is calculated monthly and paid quarterly. The repayment of the loan and any accrued interest is due in June 2023. The credit facility is not collateralized. As of June 30, 2022, $ 6.0 million was included in “Bank loan” in our condensed consolidated balance sheets. ​ In June 2022, Tongmei entered into a credit facility with NingBo Bank for $ 1.5 million with an annual interest rate of 4.8 %. The repayment of the loan and any accrued interest is due in June 2023. The credit facility is not collateralized. As of June 30, 2022, $ 1.5 million was included in “Bank loan” in our condensed consolidated balance sheets. ​ In June 2022, BoYu entered into a credit facility with NingBo Bank for $ 1.5 million with an annual interest rate of 4.8 %. The repayment of the loan and any accrued interest is due in June 2023. The credit facility is not collateralized. As of June 30, 2022, $ 1.5 million was included in “Bank loan” in our condensed consolidated balance sheets. ​ ​ ​ Note 17. Leases ​ We lease certain equipment, office space, warehouse and facilities under long-term operating leases expiring at various dates through July 2029. The majority of our lease obligations relate to our lease agreement for a nitrogen system to be used during the manufacturing process for our facility in Dingxing, China. The equipment lease became effective in August 2019 and will expire in July 2029. There are no variable lease payments, residual value guarantees or any restrictions or covenants imposed by the equipment lease. The remainder relate to our lease agreement for our facility in Fremont, California with approximately 19,467 square feet, which was scheduled to expire in 2020. Under the terms of the facility lease agreement, in May 2020, we were granted an extension to the term of the lease for an additional three years . There are no variable lease payments, residual value guarantees or any restrictions or covenants imposed by the facility lease. All other operating leases have a term of 12 months or less. ​ Leases are classified as either finance leases or operating leases. A lease is classified as a finance lease if any one of the following criteria are met: the lease transfers ownership of the asset by the end of the lease term, the lease contains an option to purchase the asset that is reasonably certain to be exercised, the lease term is for a major part of the remaining useful life of the asset or the present value of the lease payments equals or exceeds substantially all of the fair value of the asset. A lease is classified as an operating lease if it does not meet any one of these criteria. All of our leases are classified as operating leases and substantially all of our operating leases are comprised of equipment and office space leases. None of our leases are classified as finance leases. ​ For all leases at the lease commencement date, a right-of-use asset and a lease liability are recognized. The right-of-use asset represents the right to use the leased asset for the lease term. The lease liability represents the present value of the lease payments under the lease. ​ The right-of-use asset is initially measured at cost, which primarily comprises the initial amount of the lease liability, plus any initial direct costs incurred, consisting mainly of brokerage commissions, less any lease incentives received. All right-of-use assets are reviewed for impairment. The lease liability is initially measured at the present value of the lease payments, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, our secured incremental borrowing rate for the same term as the underlying lease. ​ 29 Table of Contents Lease payments included in the measurement of the lease liability comprise the following: the fixed noncancelable lease payments, payments for optional renewal periods where it is reasonably certain the renewal period will be exercised, and payments for early termination options unless it is reasonably certain the lease will not be terminated early. ​ Lease expense for operating leases consists of the lease payments plus any initial direct costs, primarily brokerage commissions, and is recognized on a straight-line basis over the lease term. ​ We have elected not to recognize right-of-use assets and lease liabilities for short-term leases that have a term of 12 months or less. The effect of short-term leases on our right-of-use asset and lease liability was not material. ​ As of June 30, 2022, the maturities of our operating lease liabilities (excluding short-term leases) are as follows (in thousands): ​ ​ ​ ​ Maturity of Lease Liabilities ​ 2022 $ 289 2023 ​ 567 2024 ​ 278 2025 ​ 278 2026 ​ 277 Thereafter ​ 717 Total minimum lease payments ​ 2,406 Less: Interest ​ ( 312 ) Present value of lease obligations ​ 2,094 Less: Current portion, included in accrued liabilities ​ ( 498 ) Long-term portion of lease obligations $ 1,596 ​ The weighted-average remaining lease term and the weighted-average discount rate for our operating leases as of each date is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ June 30, ​ December 31, ​ ​ ​ 2022 ​ 2021 ​ Weighted-average remaining lease term (years) ​ 6.14 ​ 6.44 ​ Weighted-average discount rate ​ 4.61 % 4.61 % ​ ​ Supplemental cash flow information related to leases where we are the lessee is as follows (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Six Months Ended ​ ​ ​ June 30, ​ ​ ​ 2022 ​ 2021 ​ Cash paid for amounts included in the measurement of lease liabilities: ​ ​ ​ ​ ​ ​ ​ Operating cash flows from operating leases ​ $ 291 ​ $ 283 ​ ​ 30 Table of Contents The components of lease expense are as follows (in thousands) within our condensed consolidated statements of operations: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Six Months Ended ​ ​ June 30, ​ June 30, ​ ​ 2022 ​ 2021 ​ 2022 ​ 2021 Operating lease ​ $ 133 ​ $ 133 ​ $ 268 ​ $ 266 Short-term lease expense ​ ​ 29 ​ ​ 28 ​ ​ 65 ​ ​ 52 Total ​ $ 162 ​ $ 161 ​ $ 333 ​ $ 318 ​ ​ Note 18. Redeemable Noncontrolling Interests As discussed in Note 1, during the quarter ended December 31, 2020, Tongmei entered into the Capital Investment Agreements with Investors that invested approximately $ 48.1 million in the form of redeemable noncontrolling interests representing 7.06 % of the outstanding shares of Tongmei. An additional investment of approximately $ 1.5 million of new capital was funded in early January 2021. Under China regulations these investments must be formally approved by the appropriate government agency and are not deemed to be dilutive until such approval is granted. The government approved the entire approximately $ 49 million investment on January 25, 2021, at which time the Investors owned a redeemable noncontrolling 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. We currently do not believe that this is probable thus no amortization of the issuance costs has been recorded. Pursuant to the Capital Investment Agreements with the Investors, each Investor has the right to require AXT to redeem any or all Tongmei shares held by such Investor at the original purchase price paid by such Investor, without interest, in the event the IPO fails to pass the audit of the Shanghai Stock Exchange, is not approved by the Chinese Securities Regulatory Commission (“CSRC”) or Tongmei cancels the IPO application. The aggregate redemption amount is approximately $ 49 million. ​ Tongmei submitted its IPO application 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 approved the IPO application on July 12, 2022. The STAR Market IPO remains subject to review and approval by the CSRC and other authorities. The process of going public on the STAR Market includes several periods of review and, therefore, is a lengthy process. Subject to review and approval by the CSRC and other authorities, Tongmei expects to accomplish this goal in the second half of 2022, probably in the fourth quarter of 2022. The listing of Tongmei on the STAR Market will not change the status of AXT as a U.S. public company. ​ The components of the change in redeemable noncontrolling interests for the six months ended June 30, 2022 are presented in the following table (in thousands): ​ ​ ​ Balance as of January 1, 2022 $ 50,385 Investment in subsidiary with redeemable noncontrolling interest ​ 341 Equity issuance costs incurred for the six months ended June 30, 2022 ​ ( 326 ) Stock-based compensation attributable to redeemable noncontrolling interests ​ ( 13 ) Net income attributable to redeemable noncontrolling interests ​ 967 Effect of foreign currency translation on redeemable noncontrolling interests ​ ( 2,560 ) Effect of foreign currency translation attributable to redeemable noncontrolling interests ​ ( 529 ) Balance as of June 30, 2022 $ 48,265 ​ 31 Table of Contents ​ Note 19. 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. ​ In March 2022, FASB pronouncement ASU 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures was issued as an amendment to Accounting Standards Update 2016-13, Financial Instruments-Credit Losses. ASU 2022-02 aims to modify disclosure requirements for certain loan refinancings and restructurings by creditors. The amendment also require that an entity disclose current-period gross write offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured at Amortized Cost. The guidance is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Adoption of the new standard will have an immaterial effect on our condensed consolidated financial statements. ​ ​ Note 20. Subsequent Event ​ In July, we received a $ 1.5 million dividend from one of our equity investments, Xiaoyi XingAn Gallium Co., Ltd. ​ In July and August 2022, ChaoYang JinMei completed the initial funding of $ 1.0 million in our consolidated subsidiary, ChaoYang ShuoMei. In August 2022, noncontrolling interest contributed $ 334,000 in ChaoYang ShuoMei. As a result, noncontrolling interests increased $ 406,000 and redeemable noncontrolling interests increased $ 73,000 . ​ In July 2022, Tongmei further contributed $ 0.8 million in our consolidated subsidiary, ChaoYang XinMei. Noncontrolling interest further contributed $ 0.6 million in ChaoYang XinMei. This completed the agreed amount in the April capital increase agreement. As a result, noncontrolling interests increased $ 610,000 and redeemable noncontrolling interests increased $ 57,000 . Tongmei’s ownership remained at 58.5 % after the July 2022 equity investment. ​ In August 2022, Tongmei entered into a credit facility with NingBo Bank for $ 1.5 million with an annual interest rate of 4.8 %. The repayment of the loan and any accrued interest is due in August 2023. ​ ​ ​ 32 Table of Contents ITEM 2. 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 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. (“Tongmei”), on the Shanghai Stock Exchange’s Sci-Tech innovAtion boaRd (the “STAR Market”), being accepted to list shares of Tongmei on the STAR Market and the timing and completion of such listing of shares of Tongmei on the STAR Market are forward looking statements. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “goals,” “should,” “continues,” “would,” “could” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this annual report. Additionally, statements concerning future matters such as our strategy and plans, industry trends and the impact of trends, tariffs and trade wars, the potential or expected impact of the COVID-19 pandemic on our business, results of operations and financial condition, mandatory factory shutdowns in China, changes in policies and regulations in China and economic cycles on our business are forward-looking statements. ​ Our forward-looking statements are based upon assumptions that are subject to uncertainties and factors relating to the company’s operations and business environment, which could cause actual results to differ materially from those expressed or implied in the forward-looking statements contained in this report. These uncertainties and factors include but are not limited to: the withdrawal, cancellations or requests for redemptions by private equity funds in China of their investments in Tongmei, the administrative challenges in satisfying the requirements of various government agencies in China in connection with the investments in Tongmei and the listing of shares of Tongmei on the STAR Market, continued open access to companies to list shares on the STAR Market, investor enthusiasm for new listings of shares on the STAR Market and geopolitical tensions between China and the United States. Additional uncertainties and factors include, but are not limited to: the timing and receipt of significant orders; the cancellation of orders and return of product; emerging applications using chips or devices fabricated on our substrates; end-user acceptance of products containing chips or devices fabricated on our substrates; our ability to bring new products to market; product announcements by our competitors; the ability to control costs and improve efficiency; the ability to utilize our manufacturing capacity; product yields and their impact on gross margins; the relocation of manufacturing lines and ramping of production; possible factory shutdowns as a result of air pollution in China or COVID-19; COVID-19 or other outbreaks of a contagious disease; the availability of COVID-19 vaccines; tariffs and other trade war issues; the financial performance of our partially owned supply chain companies; policies and regulations in China; and other factors as set forth in this Quarterly Report on Form 10-Q, including those set forth under the section entitled “Risk Factors” in Item 1A below. All forward-looking statements are based upon management’s views as of the date of this quarterly report and are subject to risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated in such forward-looking statements. Such risks and uncertainties include those set forth under the section entitled “Risk Factors” in Item 1A below, as well as those discussed elsewhere in this quarterly report, and identify important factors that could disrupt or injure our business or cause actual results to differ materially from those predicted in any such forward-looking statements. These forward-looking statements are not guarantees of future performance. 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. 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. This discussion should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2021 and the condensed consolidated financial statements included elsewhere in this report. ​ 33 Table of Contents Overview ​ AXT, Inc. (“AXT”, “the company”, “we,” “us,” and “our” refer to AXT, Inc. and its consolidated subsidiaries) is a worldwide materials science company that develops and produces high-performance compound and single element semiconductor substrates, also known as wafers. Two of our consolidated subsidiaries produce and sell certain raw materials some of which are used in our substrate manufacturing process and some of which are sold to other companies . Our substrate wafers are used when a typical silicon substrate wafer cannot meet the performance requirements of a semiconductor or optoelectronic device. The dominant substrates used in producing semiconductor chips and other electronic circuits are made from silicon. However, certain chips may become too hot or perform their function too slowly if silicon is used as the base material. In addition, optoelectronic applications, such as LED lighting and chip-based lasers, do not use silicon substrates because they require a wave form frequency that cannot be achieved using silicon. Alternative or specialty materials are used to replace silicon as the preferred base in these situations. Our wafers provide such alternative or specialty materials. We do not design or manufacture the chips. We add value by researching, developing and producing the specialty material wafers. We have two product lines: specialty material substrates and raw materials integral to these substrates. Our compound substrates combine indium with phosphorous (indium phosphide: InP) or gallium with arsenic (gallium arsenide: GaAs). Our single element substrates are made from germanium (Ge). ​ InP is a high-performance semiconductor substrate used in broadband and fiber optic applications, 5G infrastructure and data center connectivity. InP substrates are also used in biometric wearables and other health monitoring applications. In recent years, InP demand has increased. Semi-insulating GaAs substrates are used to create various high-speed microwave components, including power amplifier chips used in cell phones, satellite communications and broadcast television applications. Semi-conducting GaAs substrates are used to create opto-electronic products, including high brightness light emitting diodes (HBLEDs) that are often used to backlight wireless handsets and liquid crystal display (LCD) TVs and also used for automotive panels, signage, display and lighting applications. 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 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. Our supply chain strategy includes two consolidated raw material companies. One of these consolidated companies produces pyrolytic boron nitride (pBN) crucibles used in the high temperature (typically in the range 500 C to 1,500 C) growth process of single crystal ingots, effusion rings when growing OLED (Organic Light Emitting Diode) tools, epitaxial layer growth in MOCVD (Metal-Organic Chemical Vapor Deposition) reactors and MBE (Molecular Beam Epitaxy) reactors. We use these pBN crucibles in our own ingot growth processes and they are also sold in the open market to other companies. The second consolidated company converts raw gallium to purified gallium. We use purified gallium in producing our GaAs substrates and it is also sold in the open market to other companies for use in producing magnetic materials, high temperature thermometers, single crystal ingots, including gallium arsenide, gallium nitride, gallium antimonite and gallium phosphide ingots, and other materials and alloys. In addition to purified gallium, the second consolidated company also produces InP base material which we then use to grow single crystal ingots. Our substrate product group generated 75%, 79% and 81% of our consolidated revenue and our raw materials product group generated 25%, 21% and 19% for 2021, 2020 and 2019, respectively. ​ 34 Table of Contents The following chart shows our substrate products and their materials, diameters and illustrative applications and shows our raw materials group primary products and their illustrative uses and applications. ​ Products ​ Substrate Group and Wafer Diameter ​ Sample of Applications Indium Phosphide ​ • Data center connectivity using light/lasers (InP) ​ • 5G communications 2”, 3”, 4” ​ • Fiber optic lasers and detectors ​ ​ • Passive Optical Networks (PONs) ​ ​ • Silicon photonics ​ ​ • Photonic Integrated circuits (PICs) ​ ​ • High efficiency terrestrial solar cells (CPV) ​ ​ • RF amplifier and switching (military wireless & 5G) ​ ​ • Infrared light-emitting diode (LEDs) motion control ​ ​ • Lidar for robotics and autonomous vehicles ​ ​ • Infrared thermal imaging Gallium Arsenide ​ • Wi-Fi devices (GaAs - semi-insulating) ​ • IoT devices 1”, 2”, 3”, 4”, 5”, 6” ​ • High-performance transistors ​ ​ • Direct broadcast television ​ ​ • Power amplifiers for wireless devices ​ ​ • Satellite communications ​ ​ • High efficiency solar cells for drones and automobiles ​ ​ • Solar cells Gallium Arsenide ​ • High brightness LEDs (GaAs - semi-conducting) ​ • Screen displays using micro-LEDs 1”, 2”, 3”, 4”, 5&quot;, 6” ​ • Printer head lasers and LEDs ​ ​ • 3-D sensing using VCSELs ​ ​ • Data center communication using VCSELs ​ ​ • Sensors for industrial robotics/Near-infrared sensors ​ ​ • Laser machining, cutting and drilling ​ ​ • Optical couplers ​ ​ • High efficiency solar cells for drones and automobiles ​ ​ • Other lasers ​ ​ • Night vision goggles ​ ​ • Lidar for robotics and autonomous vehicles ​ ​ • Solar cells Germanium ​ • Multi-junction solar cells for satellites (Ge) ​ • Optical sensors and detectors 2”, 4”, 6” ​ • Terrestrial concentrated photo voltaic (CPV) cells ​ ​ • Infrared detectors ​ ​ • Carrier wafer for LED Raw Materials Group ​ ​ 6N+ and 7N+ purified gallium ​ • Key material in single crystal ingots such as: ​ ​ - Gallium Arsenide (GaAs) ​ ​ - Gallium Nitride (GaN) ​ ​ - Gallium Antimonite (GaSb) ​ ​ - Gallium Phosphide (GaP) Boron trioxide (B2O3) ​ • Encapsulant in the ingot growth of III-V compound semiconductors Gallium-Magnesium alloy ​ • Used for the synthesis of organo-gallium compounds in epitaxial growth on semiconductor wafers pyrolytic boron nitride (pBN) crucibles ​ • Used when growing single-crystal compound semiconductor ingots ​ ​ • Used as effusion rings growing OLED tools pBN insulating parts ​ • Used in MOCVD reactors ​ ​ • Used when growing epitaxial layers in Molecular Beam Epitaxy (MBE) reactors 35 Table of Contents ​ All of our products are manufactured in the People’s Republic of China (PRC or China) by our PRC subsidiaries and PRC joint ventures. The PRC generally has favorable costs for facilities and labor compared with comparable facilities in the United States, Europe or Japan. Our supply chain includes partial ownership of raw material companies in China (subsidiaries/joint ventures). We believe this supply chain arrangement provides us with pricing advantages, reliable supply, market trend visibility and better sourcing lead-times for key raw materials central to manufacturing our substrates. Our raw material companies produce materials, including raw gallium (4N Ga), high purity gallium (6N and 7N Ga), starting material for InP, arsenic, germanium, germanium dioxide, pyrolytic boron nitride (pBN) crucibles and boron oxide (B2O3). We have board representation in all of these raw material companies. 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 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 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. 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. We were instructed to relocate our gallium arsenide manufacturing lines. For reasons of manufacturing efficiency, we elected to also move part of our germanium manufacturing line. Our indium phosphide manufacturing line, as well as various administrative and sales functions, will remain primarily at our original site. ​ Begun in 2017, the relocation of our gallium arsenide production lines is now completed. 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 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, 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. In addition, a new level of technological sophistication in our manufacturing capabilities will enable us to support the major trends that we believe are likely to drive demand for our products in the years ahead. ​ Customer qualifications and expanding capacity as needed require us to continue to diligently address the many details that arise at both of the new sites. A failure to properly accomplish this could result in disruption to our production and have a material adverse impact on our revenue, our results of operations and our financial condition. If we fail to meet the product qualification and volume requirements of a customer, we may lose sales to that customer. Our reputation may also be damaged. Any loss of sales could have a material adverse effect on our revenue, our results of operations and our financial condition. ​ On November 16, 2020, we announced a strategic initiative to access China’s capital markets by beginning a process to list shares of Tongmei in an initial public offering (the “IPO”) on the STAR Market, an exchange intended to support innovative companies in China. We formed and founded Tongmei in 1998 and believe Tongmei has grown into a company that will be an attractive offering on the STAR Market. To qualify for a STAR Market listing, the first major step in the process was to engage private equity firms in China (“Investors”) to invest funds in Tongmei. By December 31, 2020, Investors, which consist of 10 private equity funds, had entered into two sets of definitive transaction documents, 36 Table of Contents each consisting of a capital increase agreement along with certain supplemental agreements in substantially the same form (collectively, the “Capital Investment Agreements”), 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 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% redeemable noncontrolling interest in Tongmei. ​ 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 the IPO fails to pass the audit of the Shanghai Stock Exchange, is not approved by the Chinese Securities Regulatory Commission (“CSRC”) or Tongmei cancels the IPO application. The aggregate redemption amount is approximately $49 million. ​ Tongmei submitted its IPO application 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 approved the IPO application on July 12, 2022. The STAR Market IPO remains subject to review and approval by the CSRC and other authorities. The process of going public on the STAR Market includes several periods of review and, therefore, is a lengthy process. Subject to review and approval by the CSRC and other authorities, Tongmei expects to accomplish this goal in the second half of 2022, probably in the fourth quarter of 2022. The listing of Tongmei on the STAR Market will not change the status of AXT as a U.S. public company. ​ An additional step in the STAR Market IPO process involves certain entity reorganizations and alignment of assets under Tongmei. In this regard our two consolidated raw material companies, Nanjing JinMei Gallium Co., Ltd. (“JinMei”) and Beijing BoYu Semiconductor Vessel Craftwork Technology Co., Ltd. (“BoYu”) and its subsidiaries were assigned to Tongmei in December 2020. As of June 30, 2021, AXT-Tongmei, Inc., a wholly owned subsidiary of AXT, was assigned to Tongmei. The assignment to Tongmei of JinMei, BoYu and its subsidiaries, and AXT-Tongmei, Inc. will increase the number of customers and employees attributable to Tongmei as well as increase Tongmei’s consolidated revenue. ​ 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 June 30, 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 37 Table of Contents 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. This pronouncement imposed tariffs on the wafer substrates we imported into the United States. The initial tariff rate was 10% and subsequently was increased to 25%. Approximately 10% of our revenue derives from importing our wafers into the United States. For the six months ended June 30, 2022 and 2021, we paid approximately $1.6 million and $0.6 million, respectively. ​ 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. These estimates, assumptions and judgments about future events and their effects on our results cannot be determined with certainty, and are made based upon our historical experience and on other assumptions that are believed to be reasonable under the circumstances. These estimates may change as new events occur or additional information is obtained, and we may periodically be faced with uncertainties, the outcomes of which are not within our control and may not be known for a prolonged period of time. ​ We have identified the policies below as critical to our business operations and understanding of our financial condition and results of operations. Critical accounting policies are material to the presentation of our condensed consolidated financial statements and require us to make difficult, subjective or complex judgments that could have a material effect on our financial reports and results of operations. They may require us to make assumptions about matters that are highly uncertain at the time of the estimate. Different estimates that we could have used, or changes in the estimate that are reasonably likely to occur, may have a material impact on our financial condition or results of operations. ​ Revenue Recognition ​ We manufacture and sell high-performance compound semiconductor substrates including indium phosphide, gallium arsenide and germanium wafers, and our consolidated subsidiaries sell certain raw materials, including high purity gallium (7N Ga), pyrolytic boron nitride (pBN) crucibles and boron oxide (B2O3). 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. We account for a contract with a customer when there is a legally enforceable contract, 38 Table of Contents 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. The majority of our contracts have a single performance obligation to transfer products and are short term in nature, usually less than six months. Our revenue is measured based on the consideration specified in the contract with each customer in exchange for transferring products that are generally based upon a negotiated, formula, list or fixed price. Revenue is recognized when control of the promised goods is transferred to our customer, which is either upon shipment from our dock, receipt at the customer’s dock, or removal from consignment inventory at the customer’s location, in an amount that reflects the consideration we expect to be entitled to receive in exchange for those goods. ​ Accounts Receivable and Allowance for Doubtful Accounts ​ Accounts receivables are recorded at the invoiced amount and are not interest bearing. We review at least quarterly, or when there are changes in credit risks, the likelihood of collection on our accounts receivable balances and provide an allowance for doubtful accounts receivable for any expected credit losses primarily based upon the age of these accounts. We evaluate receivables from U.S. customers with an emphasis on balances in excess of 90 days and for receivables from customers located outside the U.S. with an emphasis on balances in excess of 120 days and establish a reserve allowance on the receivable balances if needed. The reason for the difference in the evaluation of receivables between foreign and U.S. customers is that U.S. customers have historically made payments in a shorter period of time than foreign customers. Foreign business practices generally require us to allow customer payment terms that are longer than those accepted in the United States. We assess the probability of collection based on a number of factors, including the length of time a receivable balance has been outstanding, our past history with the customer and their credit-worthiness. ​ We exercise judgment when determining the adequacy of our reserves as we evaluate historical bad debt trends, general economic conditions in the United States and internationally, and changes in customer financial conditions. Uncollectible receivables are recorded as bad debt expense when a credit loss is expected through the establishment of an allowance, which would then be written off when all efforts to collect have been exhausted and recoveries are recognized when they are received. As of June 30, 2022 and December 31, 2021, our accounts receivable, net balance was $38.8 million and $34.8 million, respectively, which was net of an allowance for doubtful accounts of $307,000 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. ​ Warranty Reserve ​ We maintain a product warranty based upon our claims experience during the prior twelve months and any pending claims and returns of which we are aware. Warranty costs are accrued at the time revenue is recognized. As of June 30, 2022 and December 31, 2021, accrued product warranties totaled $839,000 and $743,000, respectively. The increase in accrued product warranties is primarily attributable to increased claims for quality issues experienced by customers. If actual warranty costs or pending new claims differ substantially from our estimates, revisions to the estimated warranty liability would be required, which could have a material impact on our financial condition and results of operations for future periods. ​ Inventory Valuation ​ Inventories are stated at the lower of cost (approximated by standard cost) or net realizable value. Cost is determined using the weighted-average cost method. Our inventory consists of raw materials as well as finished goods and work in process that include material, labor and manufacturing overhead costs. We routinely evaluate the levels of our inventory in light of current market conditions in order to identify excess and obsolete inventory, and we provide a valuation allowance for certain inventories based upon the age and quality of the product and the projections for sale of the completed products. As of June 30, 2022 and December 31, 2021, we had an inventory reserve of $22.1 million and $19.6 million, respectively, for excess and obsolete inventory and $135,000 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, 39 Table of Contents additional inventory adjustments for excess or obsolete inventory might be required, which could have a material impact on our business, financial condition and results of operations. ​ Impairment of Investments ​ We classify marketable investments in debt securities as available-for-sale debt securities in accordance with Accounting Standards Codification (“ASC”) Topic 320, Investments - Debt Securities . All available-for-sale debt securities with a quoted market value below cost (or adjusted cost) are reviewed in order to determine whether the decline is other-than-temporary. Factors considered in determining whether a loss is temporary include the magnitude of the decline in market value, the length of time the market value has been below cost (or adjusted cost), credit quality, and our ability and intent to hold the securities for a period of time sufficient to allow for any anticipated recovery in market value. We also 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 expected credit losses or impairment would be necessary. ​ We also invest in equity instruments of privately-held companies in China for business and strategic purposes. Investments in our unconsolidated joint venture companies are classified as other assets and accounted for under either the equity or cost method, depending on whether we have the ability to exercise significant influence over their operations or financial decisions. We monitor our investments for impairment and record reductions in carrying value when events or changes in circumstances indicate that the carrying value may not be recoverable. Determination of impairment is highly subjective and is based on a number of factors, including an assessment of the strength of each company’s management, the length of time and extent to which the fair value has been less than our cost basis, the financial condition and near-term prospects of the 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 three and six months ended June 30, 2022 and 2021. ​ Fair Value of Investments ​ ASC 820, establishes three levels of inputs that may be used to measure fair value. ​ Level 1 instruments represent quoted prices in active markets. Therefore, determining fair value for Level 1 instruments does not require significant management judgment, and the estimation is not difficult. ​ Level 2 instruments include observable inputs other than Level 1 prices, such as quoted prices for identical instruments in markets with insufficient volume or infrequent transactions (less active markets), issuer bank statements, credit ratings, non-binding market consensus prices that can be corroborated with observable market data, model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated with observable market data for substantially the full term of the assets or liabilities, or quoted prices for similar assets or liabilities. These Level 2 instruments require more management judgment and subjectivity compared to Level 1 instruments, including: ​ ● Determining which instruments are most comparable to the instrument being priced requires management to identify a sample of similar securities based on the coupon rates, maturity, issuer, credit rating, and instrument type, and subjectively select an individual security or multiple securities that are deemed most similar to the security being priced. ​ ● Determining which model-derived valuations to use in determining fair value requires management judgment. When observable market prices for similar securities or similar securities are not available, we price our marketable debt instruments using non-binding market consensus prices that are corroborated with observable market data or pricing models, such as discounted cash flow models, with all significant inputs derived from or corroborated with observable market data. 40 Table of Contents ​ Level 3 instruments include unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities. The determination of fair value for Level 3 instruments requires the most management judgment and subjectivity. ​ 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. We measure the fair value of these foreign currency hedges at each month end and quarter end using current exchange rates and in accordance with generally accepted accounting principles. At quarter end any foreign currency hedges not settled are netted in “Accrued liabilities” in the condensed consolidated balance sheets and classified as Level 3 assets and liabilities. As of June 30, 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 June 30, 2022 and 2021. ​ Impairment of Long-Lived Assets ​ We evaluate the recoverability of property, equipment and intangible assets in accordance with ASC Topic 360, Property, Plant and Equipment. When events and circumstances indicate that long-lived assets may be impaired, we compare the carrying value of the long-lived assets to the projection of future undiscounted cash flows attributable to these assets. In the event that the carrying value exceeds the future undiscounted cash flows, we record an impairment charge against income equal to the excess of the carrying value over the assets’ fair value. Fair values are determined based on quoted market values, discounted cash flows or internal and external appraisals, as applicable. Assets held for sale are carried at the lower of carrying value or estimated net realizable value. We had no “Assets held for sale” or any impairment of long-lived assets in the condensed consolidated balance sheets as of June 30, 2022 and December 31, 2021. ​ Stock-based Compensation ​ We account for stock-based compensation in accordance with ASC Topic 718, Stock-based Compensation . Share-based awards granted include stock options and restricted stock awards. We utilize the Black-Scholes option pricing model to estimate the grant date fair value of stock options, which requires the input of highly subjective assumptions, including estimating stock price volatility and expected term. Historical volatility of our stock price was used while the expected term for our options was estimated based on historical option exercise behavior and post-vesting forfeitures of options, and the contractual term, the vesting period and the expected term of the outstanding options. Further, we apply an expected forfeiture rate in determining the amount of share-based compensation. We use historical forfeitures to estimate the rate of future forfeitures. Changes in these inputs and assumptions can materially affect the measure of estimated fair value of our stock compensation. The cost of restricted stock awards is determined using the fair value of our common stock on the date of grant. The award of performance Restricted Stock covering Shares (the “Performance Award”) will be subject to vesting requirements relating to both the recipient of the Performance Award (the “Participant”) continuously remaining a Service Provider through specified dates and achievement of specified performance-based criteria (“Performance Goal”). Any capitalized term not defined herein will have the meaning ascribed to such term in the 2015 Equity Incentive Plan. The Performance Goal will be measured over the Company’s fiscal year 2021 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. 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 entire year. 41 Table of Contents 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. Compensation expense for restricted stock awards is recognized over the vesting period, which is generally one, three or four years. Stock-based compensation expense is recorded in cost of revenue, research and development, and selling, general and administrative expenses. Income Taxes ​ We account for income taxes in accordance with ASC Topic 740, Income Taxes (“ASC 740”), which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. ASC 740 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that a portion of the deferred tax asset will not be realized. ​ We provide for income taxes based upon the geographic composition of worldwide earnings and tax regulations governing each region, particularly China. The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws, particularly in foreign countries such as China. ​ See Note 14—“Income Taxes” in the notes to condensed consolidated financial statements for additional information. ​ Impact of the COVID-19 Pandemic ​ In March 2020, the World Health Organization declared the outbreak of COVID-19 to be a pandemic, which continues to be spread throughout the world. In March 2020, the President of the United States declared the COVID-19 outbreak a national emergency. For much of the three months ended March 31, 2020, our manufacturing facilities in China were operating at reduced staffing levels to limit the risk of COVID-19 exposure for our employees. 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 lockdowns in China that may require the temporary closure of one or more of our manufacturing facilities in China and travel restrictions between China and the U.S. that have disrupted our normal movement to and from China and impacted our efficiency. As a result of these factors, we believe that the COVID-19 pandemic could have a material adverse impact on our business, 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 ​ Revenue ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ ​ ​ ​ ​ ​ Six Months Ended ​ ​ ​ ​ ​ ​ ​ ​ ​ June 30, ​ Increase ​ ​ ​ ​ June 30, ​ Increase ​ ​ ​ ​ ​ ​ 2022 2021 ​ (Decrease) % Change ​ 2022 2021 (Decrease) % Change ​ Product Type: ​ ($ in thousands) ​ ​ ​ ​ ​ ​ ​ ($ in thousands) ​ ​ ​ ​ ​ ​ ​ Substrates ​ $ 31,694 ​ $ 24,905 ​ $ 6,789 27.3 % ​ $ 63,439 ​ $ 48,278 ​ $ 15,161 31.4 % ​ Raw materials and other ​ ​ 7,793 ​ ​ 8,830 ​ ​ (1,037) (11.7) % ​ ​ 15,701 ​ ​ 16,807 ​ ​ (1,106) (6.6) % ​ Total revenue ​ $ 39,487 ​ $ 33,735 ​ $ 5,752 ​ 17.1 % ​ $ 79,140 ​ $ 65,085 ​ $ 14,055 ​ 21.6 % ​ ​ Revenue increased $5.8 million, or 17.1%, to $39.5 million for the three months ended June 30, 2022 from $33.7 million for the three months ended June 30, 2021. The substrate revenue increase for the three months ended June 30, 2022 as compared to the same period in 2021 was primarily the result of higher demand for our InP wafer substrates 42 Table of Contents 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. 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. In addition, we had continued strength in high-power industrial laser applications. Raw materials sales decreased $1.0 million, or 11.7%, to $7.8 million for the three months ended June 30, 2022 as compared to the same period in 2021. The decrease in raw materials revenue for the three months ended June 30, 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 increased $14.1 million, or 21.6%, to $79.1 million for the six months ended June 30, 2022 from $65.1 million for the six months ended June 30, 2021. The substrate revenue increase for the six months ended June 30, 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. 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. In addition, we had continued strength in high-power industrial laser applications. Raw materials sales decreased $1.1 million, or 6.6%, to $15.7 million for the six months ended June 30, 2022 as compared to the same period in 2021. The decrease in raw materials revenue for the six months ended June 30, 2022 as compared to the same period in 2021 was primarily the result of a decrease in sales of refined gallium partially offset by increased sales of pBN crucibles resulting from stronger market demand. ​ Revenue by Geographic Region ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ 2021 to 2022 ​ ​ ​ ​ June 30, ​ Increase ​ ​ ​ ​ ​ 2022 2021 (Decrease) % Change ​ ​ ​ ($ in thousands) ​ ​ ​ ​ ​ ​ ​ China ​ $ 18,445 ​ $ 15,546 ​ $ 2,899 18.6 % ​ % of total revenue ​ 47 % 46 % ​ ​ ​ ​ ​ ​ Taiwan ​ 7,044 ​ 4,996 ​ ​ 2,048 ​ 41.0 % ​ % of total revenue ​ 18 % 15 % ​ ​ ​ ​ ​ ​ Japan ​ ​ 2,718 ​ ​ 2,635 ​ 83 3.1 % ​ % of total revenue ​ 7 % 8 % ​ ​ ​ ​ ​ ​ Asia Pacific (excluding China, Taiwan and Japan) ​ 662 ​ 1,396 ​ (734) (52.6) % ​ % of total revenue ​ 2 % 4 % ​ ​ ​ ​ ​ ​ Europe (primarily Germany) ​ 5,299 ​ 6,411 ​ (1,112) (17.3) % ​ % of total revenue ​ 13 % 19 % ​ ​ ​ ​ ​ ​ North America (primarily the United States) ​ ​ 5,319 ​ ​ 2,751 ​ ​ 2,568 ​ 93.3 % ​ % of total revenue ​ ​ 13 % ​ 8 % ​ ​ ​ ​ ​ ​ Total revenue ​ $ 39,487 ​ $ 33,735 ​ $ 5,752 17.1 % ​ ​ Revenue in China increased $2.9 million for the three months ended June 30, 2022, primarily due to higher demand for our GaAs 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 and InP wafer substrates. Revenue in Taiwan increased $2.0 million, primarily due to higher demand for our InP and GaAs wafer substrates. Revenue in Japan increased $0.1 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 $0.7 million, primarily due to decreased demand for our GaAs and InP wafer substrates and pBN crucibles sold by one of our consolidated subsidiaries. Revenue in Europe decreased by $1.1 million primarily due to decreased demand for our Ge and GaAs wafer substrates and pBN crucibles sold by one of our consolidated subsidiaries partially offset by increased demand for our InP wafer substrates. Revenue in North America increased by $2.6 million 43 Table of Contents due to higher demand for our InP wafer substrates and pBN crucibles sold by one of our consolidated subsidiaries partially offset by lower demand for our GaAs and Ge wafer substrates. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Six Months Ended ​ ​ ​ ​ ​ ​ ​ ​ ​ June 30, ​ Increase ​ ​ ​ ​ ​ 2022 2021 (Decrease) % Change ​ ​ ​ ($ in thousands) ​ ​ ​ ​ ​ ​ ​ China ​ $ 35,925 ​ $ 31,092 ​ $ 4,833 15.5 % ​ % of total revenue ​ 45 % 48 % ​ ​ ​ ​ ​ ​ Taiwan ​ 13,903 ​ 8,011 ​ 5,892 73.5 % ​ % of total revenue ​ 18 % 12 % ​ ​ ​ ​ ​ ​ Japan ​ 5,525 ​ 5,158 ​ 367 7.1 % ​ % of total revenue ​ 7 % 8 % ​ ​ ​ ​ ​ ​ Asia Pacific (excluding China, Taiwan and Japan) ​ 2,418 ​ 3,213 ​ (795) (24.7) % ​ % of total revenue ​ 3 % 5 % ​ ​ ​ ​ ​ ​ Europe (primarily Germany) ​ ​ 11,693 ​ ​ 11,846 ​ ​ (153) ​ (1.3) % ​ % of total revenue ​ ​ 15 % ​ 18 % ​ ​ ​ ​ ​ ​ North America (primarily the United States) ​ 9,676 ​ 5,765 ​ 3,911 67.8 % ​ % of total revenue ​ 12 % 9 % ​ ​ ​ ​ ​ ​ Total revenue ​ $ 79,140 ​ $ 65,085 ​ $ 14,055 21.6 % ​ ​ Revenue in China increased $4.8 million for the six months ended June 30, 2022, primarily due to higher demand for our GaAs 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 and our InP wafer substrates. Revenue in Taiwan increased $5.9 million, primarily due to higher demand for our InP and GaAs wafer substrates. Revenue in Japan increased $0.4 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 $0.8 million, primarily due to decreased demand for our GaAs and InP wafer substrates and pBN crucibles sold by one of our consolidated subsidiaries. Revenue in Europe decreased by $0.2 million primarily due to decreased demand for our GaAs and Ge wafer substrates and pBN crucibles sold by one of our consolidated subsidiaries partially offset by increased demand for our InP wafer substrates. Revenue in North America increased by $3.9 million due to higher demand for our InP wafer substrates and pBN crucibles sold by one of our consolidated subsidiaries partially offset by lower demand for our GaAs and Ge wafer substrates. ​ Gross Profit ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ ​ ​ ​ ​ ​ Six Months Ended ​ ​ ​ ​ ​ ​ ​ June 30, ​ Increase ​ ​ ​ ​ June 30, ​ Increase ​ ​ ​ ​ 2022 2021 (Decrease) % Change ​ ​ 2022 2021 (Decrease) % Change ​ ​ ($ in thousands) ​ ​ ​ ​ ​ ​ ​ ($ in thousands) ​ ​ ​ ​ ​ ​ Gross profit $ 15,435 ​ $ 12,238 ​ $ 3,197 26.1 % ​ $ 28,743 ​ $ 23,774 ​ $ 4,969 20.9 % Gross Profit % 39.1 % 36.3 % ​ ​ ​ ​ ​ ​ 36.3 % 36.5 % ​ ​ ​ ​ ​ ​ Gross profit increased $3.2 million, or 26.1%, to $15.4 million for the three months ended June 30, 2022 from $12.2 million for the three months ended June 30, 2021. The increase in gross profit is attributed to higher revenue and a change in product mix. Gross margin as a percent of revenue increased due to improved yields in crystal growth for our wafer substrates, the recycling of remnants of indium phosphide processing material, higher gross margin for our two raw material companies and a change in product mix that was more favorable to gross margin. ​ Gross profit increased $5.0 million, or 20.9%, to $28.7 million for the six months ended June 30, 2022 from $23.8 million for the six months ended June 30, 2021. The increase in gross profit is attributed to higher revenue and a change in product mix. Gross margin as a percent of revenue remained relatively flat. ​ ​ 44 Table of Contents Selling, General and Administrative Expenses ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ ​ ​ ​ ​ ​ Six Months Ended ​ ​ ​ ​ ​ ​ ​ June 30, ​ Increase ​ ​ ​ ​ June 30, ​ Increase ​ ​ ​ ​ 2022 2021 (Decrease) % Change ​ ​ 2022 2021 (Decrease) % Change ​ ​ ($ in thousands) ​ ​ ​ ​ ​ ​ ​ ($ in thousands) ​ ​ ​ ​ ​ ​ Selling, general and administrative expenses $ 6,693 ​ $ 5,795 ​ $ 898 15.5 % ​ $ 13,143 ​ $ 11,365 ​ $ 1,778 15.6 % % of total revenue 16.9 % 17.2 % ​ ​ ​ ​ ​ ​ 16.6 % 17.5 % ​ ​ ​ ​ ​ ​ Selling, general and administrative expenses increased $0.9 million, or 15.5%, to $6.7 million for the three months ended June 30, 2022 from $5.8 million for the three months ended June 30, 2021. The higher selling, general and administrative expenses were primarily from higher personnel-related expenses, increase in professional services and a provision for bad debt allowance. ​ Selling, general and administrative expenses increased $1.8 million, or 15.6%, to $13.1 million for the six months ended June 30, 2022 from $11.4 million for the six months ended June 30, 2021. The higher selling, general and administrative expenses were primarily from higher personnel-related expenses and a provision for bad debt allowance. ​ Research and Development ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ ​ ​ ​ ​ ​ Six Months Ended ​ ​ ​ ​ ​ ​ ​ ​ June 30, ​ Increase ​ ​ ​ ​ June 30, ​ Increase ​ ​ ​ ​ ​ 2022 2021 (Decrease) % Change ​ ​ 2022 2021 (Decrease) % Change ​ ​ ​ ($ in thousands) ​ ​ ​ ​ ​ ​ ​ ($ in thousands) ​ ​ ​ ​ ​ ​ ​ Research and development $ 3,453 ​ $ 2,537 ​ $ 916 36.1 % ​ $ 6,612 ​ $ 4,942 ​ $ 1,670 33.8 % ​ % of total revenue 8.7 % 7.5 % ​ ​ ​ ​ ​ ​ 8.4 % 7.6 % ​ ​ ​ ​ ​ ​ Research and development expenses increased $0.9 million, or 36.1%, to $3.5 million for the three months ended June 30, 2022 from $2.5 million for the three months ended June 30, 2021. The increase in research and development expenses for the three months ended June 30, 2022 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 $1.7 million, or 33.8%, to $6.6 million for the six months ended June 30, 2022 from $4.9 million for the six months ended June 30, 2021. The increase in research and development expenses for the six months ended June 30, 2022 was primarily due to personnel-related expenses, travel and development expenses for 8-inch GaAs and 6-inch InP wafer substrates and development of new features for certain of our GaAs and InP wafer substrates. ​ Interest Income (Expense), Net ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ ​ ​ ​ ​ ​ Six Months Ended ​ ​ ​ ​ ​ ​ ​ ​ June 30, ​ Increase ​ ​ ​ ​ June 30, ​ Increase ​ ​ ​ ​ ​ 2022 2021 (Decrease) % Change ​ ​ 2022 2021 (Decrease) % Change ​ ​ ​ ($ in thousands) ​ ​ ​ ​ ​ ​ ​ ($ in thousands) ​ ​ ​ ​ ​ ​ ​ Interest income (expense), net $ (188) ​ $ 39 ​ $ (227) (582.1) % ​ $ (371) ​ $ (11) ​ $ (360) 3,272.7 % ​ % of total revenue (0.5) % 0.1 % ​ ​ ​ ​ ​ ​ (0.5) % (0.0) % ​ ​ ​ ​ ​ ​ ​ Interest income (expense), net decreased $227,000 to an expense of $188,000 for the three months ended June 30, 2022 from income of $39,000 for the three months ended June 30, 2021. Interest income (expense), net decreased primarily due to a decrease in the amount of cash, restricted cash and cash equivalents held by us during the three months ended June 30, 2022 as compared to the three months ended June 30, 2021 and due to increased debt during the three months ended June 30, 2022 as compared to the three months ended June 30, 2021. ​ 45 Table of Contents Interest income (expense), net decreased $360,000 to an expense of $371,000 for the six months ended June 30, 2022 from an expense of $11,000 for the six months ended June 30, 2021. Interest income (expense), net decreased primarily due to a decrease in the amount of cash, restricted cash and cash equivalents held by us during the six months ended June 30, 2022 as compared to the six months ended June 30, 2021 and due to increased debt during the six months ended June 30, 2022 as compared to the six months ended June 30, 2021. ​ Equity in Income of Unconsolidated Joint Ventures ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ ​ ​ ​ ​ ​ Six Months Ended ​ ​ ​ ​ ​ ​ ​ ​ June 30, ​ Equity in Income ​ ​ June 30, ​ Equity in Income ​ ​ ​ 2022 2021 Change % Change ​ ​ 2022 2021 Change % Change ​ ​ ​ ($ in thousands) ​ ​ ​ ​ ​ ​ ​ ($ in thousands) ​ ​ ​ ​ ​ ​ ​ Equity in income of unconsolidated joint ventures $ 2,177 ​ $ 1,502 ​ $ 675 44.9 % ​ $ 3,302 ​ $ 2,613 ​ $ 689 26.4 % ​ % of total revenue 5.5 % 4.5 % ​ ​ ​ ​ ​ ​ 4.2 % 4.0 % ​ ​ ​ ​ ​ ​ ​ The equity in income of unconsolidated joint venture companies was income of $2.2 million for the three months ended June 30, 2022 as compared to income of $1.5 million for the three months ended June 30, 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. ​ The equity in income of unconsolidated joint venture companies was income of $3.3 million for the six months ended June 30, 2022 as compared to income of $2.6 million for the six months ended June 30, 2021. The current quarter income is primarily due to positive financial results of two raw gallium companies that benefited from higher sales volume and higher prices. ​ Other Income (Expense), Net ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ ​ ​ ​ ​ ​ Six Months Ended ​ ​ ​ ​ ​ ​ ​ ​ June 30, ​ Other Expense ​ ​ June 30, ​ Other Income ​ ​ ​ 2022 2021 Change % Change ​ ​ 2022 2021 Change % Change ​ ​ ​ ($ in thousands) ​ ​ ​ ​ ​ ​ ​ ($ in thousands) ​ ​ ​ ​ ​ ​ ​ Other income (expense), net $ 294 ​ $ 61 ​ $ 233 ​ 382.0 % ​ $ 285 ​ $ (50) ​ $ 335 670.0 % ​ % of total revenue 0.7 % 0.2 % ​ ​ ​ ​ ​ ​ 0.4 % (0.1) % ​ ​ ​ ​ ​ ​ ​ Other income (expense), net increased $233,000 to an income of $294,000 for the three months ended June 30, 2022 from an income of $61,000 for the three months ended June 30, 2021. Other income (expense), net increased primarily due to a foreign exchange gain of $0.2 million in June 2022, compared to a foreign exchange gain of $33,000 in June 2021. ​ Other income (expense), net increased $335,000 to an income of $285,000 for the six months ended June 30, 2022 from an expense of $50,000 for the six months ended June 30, 2021. Other income (expense), net increased 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 a grant of $0.1 million in March 2021 and a foreign exchange loss of $140,000 in June 2021 compared to a gain of $2,000 in June 2022. ​ 46 Table of Contents Provision for Income Taxes ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ ​ ​ ​ ​ ​ Six Months Ended ​ ​ ​ ​ ​ ​ ​ ​ June 30, ​ Increase ​ ​ ​ ​ June 30, ​ Increase ​ ​ ​ ​ ​ 2022 2021 (Decrease) % Change ​ 2022 2021 (Decrease) % Change ​ ​ ​ ($ in thousands) ​ ​ ​ ​ ​ ​ ​ ($ in thousands) ​ ​ ​ ​ ​ ​ ​ Provision for income taxes $ 1,027 ​ $ 893 ​ $ 134 15.0 % ​ $ 1,687 ​ $ 1,639 ​ $ 48 2.9 % ​ % of total revenue 2.6 % 2.6 % ​ ​ ​ ​ ​ ​ 2.1 % 2.5 % ​ ​ ​ ​ ​ ​ ​ Provision for income taxes increased $134,000, or 15.0%, to $1.0 million for the three months ended June 30, 2022 from $893,000 for the three months ended June 30, 2021. Provision for income taxes increased $48,000, or 2.9%, to $1.7 million for the six months ended June 30, 2022 from $1.6 million for the six months ended June 30, 2021. Income taxes and certain state taxes, have been provided for our U.S. operations as most of the income in the U.S. had been fully offset by utilization of federal and state net operating loss carryforwards except for the newly created U.S. subsidiary, AXT-Tongmei. Additionally, there is uncertainty of generating future profit in the U.S., which has resulted in our deferred tax assets being fully reserved. Our estimated tax rate can vary greatly from year to year because of the change or benefit in the mix of taxable income between our U.S. and China-based operations. ​ 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. We analyzed the provisions of AB 85 and determined there was no impact on our provision for income taxes for the current period and will continue to evaluate the impact, if any, AB 85 may have on the Company’s condensed consolidated financial statements and disclosures. ​ Net Income Attributable to Noncontrolling Interests and Redeemable Noncontrolling Interests ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Net income attributable to ​ ​ Six Months Ended ​ Net income attributable to ​ ​ ​ ​ ​ ​ ​ ​ ​ noncontrolling interests and ​ ​ ​ ​ ​ ​ ​ ​ noncontrolling interests and ​ ​ ​ June 30, redeemable noncontrolling interests ​ ​ June 30, redeemable noncontrolling interests ​ ​ ​ 2022 ​ 2021 ​ Change ​ % Change ​ ​ 2022 ​ 2021 ​ Change ​ % Change ​ ​ ​ ($ in thousands) ​ ​ ​ ​ ​ ​ ​ ($ in thousands) ​ ​ ​ ​ ​ ​ ​ Net income attributable to noncontrolling interests and redeemable noncontrolling interests $ 999 ​ $ 230 ​ $ 769 334.3 % ​ $ 1,806 ​ $ 570 ​ $ 1,236 216.8 % ​ % of total revenue 2.5 % 0.7 % ​ ​ ​ ​ ​ ​ 2.3 % 0.9 % ​ ​ ​ ​ ​ ​ ​ Net income attributable to noncontrolling interests and redeemable noncontrolling interests increased $769,000 or 334.3% to $999,000 for the three months ended June 30, 2022, from $230,000 for the three months ended June 30, 2021, primarily due to the structural changes of the legal entities in China (see Note 1) and partially offset by, losses generated by ChaoYang XinMei. ​ Net income attributable to noncontrolling interests and redeemable noncontrolling interests increased $1.2 million or 216.8% to $1.8 million for the six months ended June 30, 2022, from $570,000 for the six months ended June 47 Table of Contents 30, 2021, primarily due to the structural changes of the legal entities in China (see Note 1) and partially offset by, losses generated by ChaoYang XinMei. ​ Liquidity and Capital Resources ​ We consider cash and cash equivalents and short-term investments as liquid and available for use within one year in our current operations. Short-term investments are comprised of U.S. government securities, certificates of deposit and investment-grade corporate notes and bonds. ​ As of June 30, 2022, our principal source of liquidity was $57.2 million, which consisted of cash, restricted cash and cash equivalents of $44.9 million and investments of $12.2 million. In the six months ended June 30, 2022, cash, restricted cash and cash equivalents increased by $8.2 million and investments decreased by $2.8 million. The increase in cash, restricted cash and cash equivalents of $8.2 million in the six months ended June 30, 2022 was primarily due to net cash provided by financing activities of $22.0 million and operating activities of $5.5 million, partially offset by net cash used in investing activities of $18.4 million and the effect of exchange rate changes of $1.0 million. As of June 30, 2022, we and our consolidated joint ventures in China held approximately $31.5 million in cash and investments in foreign bank accounts. ​ As of June 30, 2021, our principal source of liquidity was $58.5 million, which consisted of cash and cash equivalents of $52.8 million and investments of $5.7 million. In the six months ended June 30, 2021, cash and cash equivalents decreased by $19.8 million and investments decreased by $0.3 million. The decrease in cash and cash equivalents of $19.8 million in the six months ended June 30, 2021 was primarily due to net cash used in operating activities of $10.6 million, and net cash used in investing activities of $12.8 million, partially offset by net cash provided by financing activities of $3.2 million and the effect of exchange rate changes of $0.3 million. As of June 30, 2021, we and our consolidated subsidiaries in China held approximately $34.5 million in cash and investments in foreign bank accounts. ​ Net cash provided by operating activities of $5.5 million for the six months ended June 30, 2022 was primarily comprised of a net income before income attributable to noncontrolling interest and redeemable noncontrolling interests of $10.5 million, the adjustment for non-cash items of depreciation and amortization of $4.0 million and stock-based compensation of $2.2 million, partially offset by a net change of $8.1 million in operating assets and liabilities and income from equity method investments of $3.3 million. ​ Net cash used in operating activities of $10.6 million for the six months ended June 30, 2021 was primarily comprised of a net change of $22.2 million in operating assets and liabilities and a gain on equity method investments of $2.6 million, partially offset by a net income before income attributable to noncontrolling interest and redeemable noncontrolling interests of $8.4 million, the adjustment for non-cash items of depreciation and amortization of $3.3 million stock-based compensation of $1.8 million and return of equity method investments (dividends) of $0.8 million. ​ Net cash used in investing activities of $18.4 million for the six months ended June 30, 2022 was primarily from the purchase of property, plant and equipment of $20.9 million, partially offset by proceeds from sales and maturities of available-for-sale debt securities of $2.5 million. ​ Net cash used in investing activities of $12.8 million for the six months ended June 30, 2021 was primarily from the purchase of property, plant and equipment of $13.0 million, partially offset by proceeds from sales and maturities of available-for-sale debt securities of $0.2 million. ​ Net cash provided by financing activities was $22.0 million for the six months ended June 30, 2022, which consisted of proceeds from short-term loan of $23.4 million, capital increase in subsidiary shares from noncontrolling interest of $1.3 million and common stock option exercised of $0.1 million, partially offset by repayment of short-term loan of $2.8 million. ​ Net cash provided by financing activities was $3.2 million for the six months ended June 30, 2021, which consisted of proceeds from issuance of Tongmei’s common stock to redeemable noncontrolling interests of $0.3 million, 48 Table of Contents common stock exercised of $1.1 million, formation of new subsidiary with noncontrolling interests of $1.3 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. These repurchases could be made from time to time in the open market and could be funded from our existing cash balances and cash generated from operations. During 2015, we repurchased approximately 908,000 shares at an average price of $2.52 per share for a total purchase price of approximately $2.3 million under the stock repurchase program. Since 2015, no shares were repurchased under this program. During the six months ended June 30, 2022, we did not repurchase any shares under the approved stock repurchase program. As of June 30, 2022, approximately $2.7 million remained available for future repurchases under this program. Currently, we do not plan to repurchase additional shares. ​ Dividends accrue on our outstanding Series A preferred stock, and are payable as and when declared by our Board of Directors. We have never declared or paid any dividends on the Series A preferred stock. By the terms of the Series A preferred stock, so long as any shares of Series A preferred stock are outstanding, neither the Company nor any subsidiary of the Company shall redeem, repurchase or otherwise acquire any shares of common stock, unless all accrued dividends on the Series A preferred stock have been paid. During 2013 and 2015, we repurchased shares of our outstanding common stock. As of December 31, 2015, the Series A preferred stock had cumulative dividends of $2.9 million and we include such cumulative dividends in “Accrued liabilities” in our condensed consolidated balance sheets . At the time we pay this accrued liability, our cash and cash equivalents will be reduced. 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 six months ended June 30, 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 $1.3 million and $774,000, respectively. For the six months ended June 30, 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 six months ended June 30, 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. 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 the IPO fails to pass the audit of the Shanghai Stock Exchange, is not approved by the CSRC or Tongmei cancels the IPO application. The aggregate redemption amount is approximately $49 million. 49 Table of Contents Tongmei submitted its IPO application to the Shanghai Stock Exchange, and it was formally accepted for review on January 10, 2022. The Shanghai Stock Exchange approved the IPO application on July 12, 2022. The STAR Market IPO remains subject to review and approval by the CSRC and other authorities. The process of going public on the STAR Market includes several periods of review and, therefore, is a lengthy process. Subject to review and approval by the CSRC and other authorities, Tongmei expects to accomplish this goal in the second half of 2022, probably in the fourth quarter of 2022. 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% 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, 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 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. In August 2020, Tongmei repaid the full amount of the Credit Facility, including all outstanding accrued interest, of approximately $5.9 million and simultaneously applied to renew the Credit Facility. The process of repaying a loan and then renewing the loan is customary in China. ​ In September 2020, the August 2019 borrowing was renewed and funded against the Credit Facility with an interest rate of 3.85%. 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 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 June 30, 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%. Accrued interest is calculated monthly and paid quarterly. The combined loan totaled $5.6 million. In April 2021, Tongmei repaid the full amount of the Credit Facility, including all outstanding accrued interest, of approximately $5.6 million and simultaneously applied to renew the Credit Facility. In June 2021, the combined loans were renewed for approximately $5.8 million and funded against the Credit Facility with an annual interest rate of 4.7%. In November 2021, Tongmei repaid the full amount of the Credit Facility, including all outstanding accrued interest. As of June 30, 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. 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 50 Table of Contents rate was approximately 3.92% as of December 31, 2021. As of June 30, 2022, $1.5 million was included in “Bank loan” in our condensed consolidated balance sheets. ​ In September 2021, Tongmei entered into a credit facility with the Bank of Communications with a $3.1 million line of credit at an annual interest rate of 4.0% as of September 30, 2021. Accrued interest is calculated monthly and paid quarterly. The credit facility is collateralized by ChaoYang Tongmei’s land use rights and all of its buildings located at its facility in Kazuo, China. The primary intended use of the credit facility is for general purposes, which may include working capital and other corporate expenses. 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 June 30, 2022, $4.5 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 June 30, 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 June 30, 2022, $1.5 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 June 30, 2022, $1.5 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 June 30, 2022, $1.5 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 June 30, 2022, $1.5 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 June 30, 2022, $4.2 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 June 30, 2022, $3.0 million was included in “Bank loan” in our condensed consolidated balance sheets. ​ In April 2022, Tongmei entered into a credit facility with the Bank of China for $1.5 million with an annual interest rate of 4.2%. Accrued interest is calculated monthly and paid quarterly. The repayment of the loan and any 51 Table of Contents accrued interest is due in April 2023. As of June 30, 2022, $1.5 million was included in “Bank loan” in our condensed consolidated balance sheets. ​ In May 2022, Tongmei entered into a credit facility with the Bank of Beijing for $3.4 million with an annual interest rate of 4.2%. Accrued interest is calculated monthly and paid quarterly. The repayment of the loan and any accrued interest is due in May 2023. The credit facility is collateralized by a $3.9 million time deposit held in the Bank of Beijing. The time deposit cannot be withdrawn until such time the credit facility and all accrued interest has been repaid. As of June 30, 2022, $3.4 million was included in “Bank loan” in our condensed consolidated balance sheets. ​ In June 2022, Tongmei entered into a credit facility with Industrial Bank for $6.0 million with an annual interest rate of 4.35%. Accrued interest is calculated monthly and paid quarterly. The repayment of the loan and any accrued interest is due in June 2023. The credit facility is not collateralized. As of June 30, 2022, $6.0 million was included in “Bank loan” in our condensed consolidated balance sheets. ​ In June 2022, Tongmei entered into a credit facility with NingBo Bank for $1.5 million with an annual interest rate of 4.8%. The repayment of the loan and any accrued interest is due in June 2023. The credit facility is not collateralized. As of June 30, 2022, $1.5 million was included in “Bank loan” in our condensed consolidated balance sheets. ​ In June 2022, BoYu entered into a credit facility with NingBo Bank for $1.5 million with an annual interest rate of 4.8%. The repayment of the loan and any accrued interest is due in June 2023. The credit facility is not collateralized. As of June 30, 2022, $1.5 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. We currently expect to use the net proceeds from the sale of securities under the shelf registration statement for working capital, capital expenditures and other general corporate purposes. We may also use a portion of the net proceeds to acquire, license or invest in complementary products, technologies or businesses. On May 17, 2022, the SEC 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. If our sales decrease, however, our ability to generate cash from operations will be adversely affected which could adversely affect our future liquidity, require us to use cash at a more rapid rate than expected, and require us to seek additional capital. 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”. ​ Contract to Purchase Goods and Services ​ Purchase orders or contracts for the purchase of certain goods and services are not considered to be part of our contractual obligations. We cannot determine the aggregate amount of such purchase orders that represent contractual obligations because purchase orders may represent authorizations to purchase rather than binding agreements. For the purposes of this disclosure, contractual obligations for purchase of goods or services are defined as agreements that are enforceable and legally binding and that specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction. Our purchase orders are based on our current needs and are fulfilled by our vendors within short time horizons. We also enter into contracts for outsourced services; however, the obligations under these contracts were not significant and the contracts generally contain clauses allowing for cancellation without significant penalty. Contractual obligations that are contingent upon the achievement of certain milestones would also not be included. ​ 52 Table of Contents Land Purchase and Investment Agreement We have established a wafer processing production line in Dingxing, China. In addition to a land rights and building purchase agreement that we entered into with a private real estate development company to acquire our new manufacturing facility, we also entered into a cooperation agreement with the Dingxing local government. In addition to pledging its full support and cooperation, the Dingxing local government will issue certain tax credits to us as we achieve certain milestones. We, in turn, agreed to hire local workers over time, pay taxes when due and eventually demonstrate a total investment of approximately $90 million in value, assets and capital. The investment will include cash paid for the land and buildings, cash on deposit in our name at local banks, the gross value of new and used equipment (including future equipment that might be used for indium phosphide and germanium substrates production), the deemed value for our customer list or the end user of our substrates (for example, the end users of the 3-D sensing VCSELs), a deemed value for employment of local citizens, a deemed value for our proprietary process technology, other intellectual property, other intangibles and additional items of value. 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. However, the agreement does state that each party has a right to seek from the other party compensation for losses. Under certain conditions, the Dingxing local government may purchase the land and building at the appraised value. We believe that such cooperation agreements are normal, customary and usual in China and that the future valuation is flexible. We have a similar agreement with the city of Kazuo, China, although on a smaller scale. The total investment targeted by AXT in Kazuo is approximately $15 million in value, assets and capital. In addition, BoYu has a similar agreement with the city of Kazuo. The total investment targeted by BoYu in Kazuo is approximately $8 million in value, assets and capital. ​ Off-Balance Sheet Arrangements ​ As of June 30, 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). ​ ​ ​ ​ 53 Table of Contents ITEM 3 . QUANTITATIVE AND QUALITATIV E DISCLOSURES ABOUT MARKET RISK ​ Foreign Currency Risk ​ A significant portion of our business is conducted in currencies other than the U.S. dollar. Foreign exchange losses have had a material adverse effect on our operating results and cash flows in the past and could have a material adverse effect on our operating results and cash flows in the future. 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, 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. In the future we may experience foreign exchange losses on our non-functional currency denominated receivables and payables to the extent that we have not mitigated our exposure. Foreign exchange losses could have a materially adverse effect on our operating results and cash flows. ​ Our product sales to Japanese customers are typically invoiced in Japanese yen. As such, we have foreign exchange exposure on our accounts receivable and on any Japanese yen denominated cash deposits. To partially protect us against fluctuations in foreign currency resulting from accounts receivable in Japanese yen, starting in 2015, we instituted a foreign currency hedging program. We place short term 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. We measure the fair value of these hedges at each month end and quarter end using current exchange rates and in accordance with generally accepted accounting principles. At quarter end and year end any foreign currency hedges not settled are netted on the condensed consolidated balance sheet and consolidated balance sheet, respectively, and classified as Level 3 assets and liabilities. As of June 30, 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. Most of our operations are conducted in China and most of our costs are incurred in Chinese renminbi, which subjects us to fluctuations in the exchange rates between the U.S. dollar and the Chinese renminbi. We incur transaction gains or losses resulting from consolidation of expenses incurred in local currencies for our Chinese subsidiaries, as well as in translation of the assets and liabilities at each balance sheet date. Our financial results could be adversely affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets, including the revaluation by China of the renminbi, and any future adjustments that China may make to its currency such as any move it might make to a managed float system with opportunistic interventions. We may also experience foreign exchange losses on our non-functional currency denominated receivables and payables. ​ We currently are using a hedging program to minimize the effects of currency fluctuations relating to the Japanese yen. While we may apply this program to other currencies, such as the Chinese renminbi, our hedging position is partial and may not exist at all in the future. It may not succeed in minimizing our foreign currency fluctuation risks. Our primary objective in holding these instruments is to reduce the volatility of earnings and cash flows associated with changes in foreign currency. The program is not designated for trading or speculative purposes. The company may choose not to hedge certain foreign exchange exposures for a variety of reasons, including but not limited to accounting considerations and the prohibitive economic cost of hedging particular exposures. However, even with our hedging program, we still experience gains and losses on foreign exchange from time to time. ​ 54 Table of Contents Interest Rate Risk ​ Cash and cash equivalents earning interest and certain variable rate debt instruments are subject to interest rate fluctuations. The following table sets forth the probable impact of a 10% change in interest rates (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Proforma 10% Proforma 10% ​ ​ Balance as of ​ Current ​ Projected Annual ​ Interest Rate ​ Interest Rate ​ ​ June 30, ​ Interest ​ Interest ​ Decline ​ Increase Instrument ​ 2022 ​ Rate ​ Income ​ Income ​ Income Cash, cash equivalents and restricted cash ​ $ 44,943 0.31 % $ 139 ​ $ 125 ​ $ 153 ​ Investments in marketable debt ​ 12,231 0.71 % 87 ​ 78 ​ 96 ​ ​ ​ ​ ​ ​ ​ ​ $ 226 ​ $ 203 ​ $ 249 ​ ​ The primary objective of our investment activities is to preserve principal while maximizing income without significantly increasing risk. Financial instruments that potentially subject us to concentration of credit risk consist primarily of cash and cash equivalents, short-term investments, and trade accounts receivable. We invest primarily in money market accounts, certificates of deposits, corporate bonds and notes, and government securities. We are exposed to credit risks in the event of default by the issuers to the extent of the amount recorded on the condensed consolidated balance sheets. These securities are generally classified as available-for-sale and consequently are recorded on the balance sheet at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income (loss), net of estimated tax, further reduced by a valuation allowance for expected credit losses, if any. Our cash, cash equivalents and short-term investments and long-term investments are in high-quality instruments placed with major banks and financial institutions and commercial paper. We have no investments in auction rate securities. ​ Credit Risk ​ 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. 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 June 30, 2022 and no customer accounted for more than 10% of our accounts receivable as of December 31, 2021. ​ Impairment of Equity Investment Risk ​ As part of our supply chain strategy, we maintain minority investments in privately-held raw material companies located in China either invested directly by us or by one of our supply chain companies in China. These minority investments are reviewed for other than temporary declines in value on a quarterly basis. These investments are classified as other assets in the condensed consolidated balance sheets and accounted for under either the equity or cost method, depending on whether we have the ability to exercise significant influence over their operations or financial decisions. We monitor our investments for impairment and record reductions in carrying value when events or changes in circumstances indicate that the carrying value may not be recoverable. Reasons for other than temporary declines in value include whether the related company would have insufficient cash flow to operate for the next twelve months, significant changes in the operating performance and changes in market conditions. As of June 30, 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 June 30, 2022 and December 31, 2021 totaled $13.1 million and $10.2 million, respectively. ​ 55 Table of Contents