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Item 1. Financial Statements

2022-11-10 compared with 2022-08-12 · 379 added, 455 removed, 1175 unchanged (42% of the section changed)

Financial Statements (unaudited)

CONDENSED CONSOLIDATED BALANCE SHEETS

CONDENSED CONSOLIDATED BALANCE SHEET S

(Unaudited, in thousands, except per share data)

September 30,

Current assets:

2 unchanged sentences

Short-term investments

Accounts receivable, net of allowances of $ 307 and $ 130 as of June 30, 2022 and December 31, 2021

Accounts receivable, net of allowances of $ 307 and $ 130 as of September 30, 2022 and December 31, 2021

Prepaid expenses and other current assets

17 unchanged sentences

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)

883 shares issued and outstanding as of September 30, 2022 and December 31, 2021 (Liquidation preference of $ 7,655 and $ 7,522 as of September 30, 2022 and December 31, 2021)

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

43,161 and 42,886 shares issued and outstanding as of September 30, 2022 and December 31, 2021

Additional paid-in capital

10 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Cost of revenue

4 unchanged sentences

Income from operations

Interest income (expense), net

Interest expense, net

Equity in income of unconsolidated joint ventures

Other income (expense), net

Income before provision for income taxes

Provision for income taxes

Other income, net

Income before provision for (benefit from) income taxes

Provision for (benefit from) income taxes

Net income attributable to noncontrolling interests and redeemable noncontrolling interests

4 unchanged sentences

See accompanying notes to condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited, in thousands)

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Other comprehensive income (loss), net of tax:

6 unchanged sentences

See accompanying notes to condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW S

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

Six Months Ended

Nine Months Ended

September 30,

Cash flows from operating activities:

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

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

Depreciation and amortization

1 unchanged sentence

Stock-based compensation

Gain (loss) on disposal of equipment

Gain on disposal of equipment

Return of equity method investments (dividends)

7 unchanged sentences

Other long-term liabilities, including royalties

Net cash provided by (used in) operating activities

Net cash used in operating activities

Cash flows from investing activities:

Purchases of property, plant and equipment

Purchases of available-for-sale debt securities

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

3 unchanged sentences

Proceeds from sale of subsidiary shares to noncontrolling interests

Proceeds from bank loan

Payments on bank loan

Proceeds from bank loans

Proceeds from long-term loan from noncontrolling interest

Payments on bank loans

Proceeds from capital increase in subsidiary shares from noncontrolling interest

Formation of new subsidiary with noncontrolling interests

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

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

Net cash provided by financing activities

6 unchanged sentences

Investment in subsidiary shares from noncontrolling interest

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

Bank loan proceed paid directly to a third-party vendor, included in accounts payable

Bank loan proceeds paid directly to a third-party vendor, included in accounts payable

Sale of land and building to unconsolidated joint venture

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

11 unchanged sentences

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 results of operations for the three and nine months ended September 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 Reports on Form 10-Q for the three months ended March 31, 2022 and June 30, 2022 filed with the SEC on May 9, 2022 and August 10, 2022, respectively.

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

7 unchanged sentences

(“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.

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

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.

As of September 30, 2022 and December 31, 2021, we have six and five companies accounted for by the equity method, respectively.

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.

For the three and nine months ended September 30, 2022, expenses associated with ChaoYang LiMei had a de minimis impact on our condensed consolidated financial statements.

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

3 unchanged sentences

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.

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.

2 unchanged sentences

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.

In April 2022, Tongmei entered into a capital increase agreement (the “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 invested in April 2022 and $ 0.8 million was invested in May 2022.

The minority investors’ portion of the investment was approximately $ 1.9 million, of which $ 0.7 million was invested in April 2022 and $ 0.6 million was invested 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.

In July 2022, Tongmei and the minority investors further invested $ 0.8 million and $ 0.6 million in ChaoYang XinMei, respectively.

This completed the investment obligations under the 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 April 2022, ChaoYang JinMei signed a joint venture agreement with a certain investor to fund a new company, ChaoYang ShuoMei, our consolidated subsidiary.

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.

In July and August 2022, ChaoYang JinMei completed the initial funding of $ 1.0 million in ChaoYang ShuoMei.

In August 2022, the investor invested $ 334,000 in ChaoYang ShuoMei.

As a result, noncontrolling interests increased $ 406,000 and redeemable noncontrolling interests increased $ 73,000 .

In April 2022, Tongmei signed a joint venture agreement with certain investors to fund a new company, ChaoYang KaiMei.

The agreement called for a total investment of approximately $ 7.6 million, of which Tongmei would fund approximately $ 3.0 million for a 40.0 percent ownership of ChaoYang KaiMei.

In July 2022, the investors completed the initial funding of approximately $ 2.2 million.

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

All activities for MaAnShan JinMei ceased during the first half of 2022 and the subsidiary was subsequently dissolved in May 2022.

The dissolution of MaAnShan JinMei 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.

9 unchanged sentences

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

As of June 30, 2022, Tongmei’s noncontrolling interests and redeemable noncontrolling interests totaled approximately 14.5 %.

As of September 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.

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.

Investments and Fair Value Measurements

1 unchanged sentence

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

As of June 30, 2022 and December 31, 2021, our cash, cash equivalents and debt investments are classified as follows (in thousands):

June 30, 2022

As of September 30, 2022 and December 31, 2021, our cash, cash equivalents and debt investments are classified as follows (in thousands):

September 30, 2022

December 31, 2021

19 unchanged sentences

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

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

There was an insignificant amount of gross unrealized losses on our available-for-sale debt securities as of September 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):

A portion of our debt investments would generate a loss if we sold them on September 30, 2022.

In Loss Position

1 unchanged sentence

Loss Position

As of June 30, 2022

As of September 30, 2022

Certificates of deposit

14 unchanged sentences

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.

As of September 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.

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 $ 13.7 million and $ 10.2 million as of September 30, 2022 and December 31, 2021, respectively.

As of September 30, 2022 and December 31, 2021, there were six and five companies accounted for under the equity method, respectively.

There were no impairment charges in the three and nine months ended September 30, 2022 and 2021.

Fair Value Measurements

1 unchanged sentence

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

As of June 30, 2022 and December 31, 2021, the total unrealized loss, net of tax, included in accumulated other comprehensive income was immaterial.

As of September 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.

10 unchanged sentences

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

As of June 30, 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):

As of September 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 nine months ended September 30, 2022.

There have been no transfers between fair value measurements levels during the three and nine months ended September 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 September 30, 2022 (in thousands):

Quoted Prices in

4 unchanged sentences

Observable Inputs

June 30, 2022

September 30, 2022

Certificates of deposit

13 unchanged sentences

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

We did not record any other-than-temporary impairment charges for these investments during the three and six months ended June 30, 2022 and 2021, respectively.

We did not record any other-than-temporary impairment charges for these investments during the three and nine months ended September 30, 2022 and 2021, respectively.

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

September 30,

Raw materials

1 unchanged sentence

Finished goods

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.

As of September 30, 2022 and December 31, 2021, carrying values of inventories were net of inventory reserves of $ 23.0 million and $ 19.6 million, respectively, for excess and obsolete inventory and $ 42,000 and $ 66,000 , respectively, for lower of cost or net realizable value reserves.

Property, Plant and Equipment, Net

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

September 30,

Property, plant and equipment:

6 unchanged sentences

Construction in progress

As of 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

As of September 30, 2022, the balance of construction in progress was $ 36.6 million, of which $ 27.7 million was related to our buildings in our new Dingxing and Kazuo locations, $ 4.9 million was for manufacturing equipment purchases not yet placed in service and $ 4.0 million was for construction in progress for our other consolidated

subsidiaries.

2 unchanged sentences

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

September 30,

Payable in connection with construction in progress

Accrued compensation and related charges

1 unchanged sentence

Accrued income taxes

Payable in connection with construction in progress

Accrued product warranty

Advances from customers

Other tax payable

Accrued product warranty

Accrued professional services

Current portion of operating lease liabilities

Advances from customers

Other personnel-related costs

7 unchanged sentences

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

As of June 30, 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.

As of September 30, 2022 and December 31, 2021, amounts payable of $ 100,000 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.

2 unchanged sentences

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.

As of September 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.

In January 2022, the China local government certified this additional funding in 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, Tongmei entered into the Capital Increase Agreement with minority investors to further invest $ 4.5 million in ChaoYang XinMei.

In April 2022 and May 2022, ChaoYang XinMei received funding from Tongmei of $ 1.1 million and $ 0.8 million, respectively, as equity investments.

2 unchanged sentences

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 July 2022, Tongmei and the minority investors further invested $ 0.8 million and $ 0.6 million in ChaoYang XinMei, respectively.

This completed the investment obligations under the 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.

As of September 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.

5 unchanged sentences

These companies form part of our overall supply chain strategy.

As of June 30, 2022, the investments are summarized below (in thousands):

As of September 30, 2022, the investments are summarized below (in thousands):

Investment Balance as of

September 30,

Nanjing JinMei Gallium Co., Ltd.

1 unchanged sentence

Beijing BoYu Semiconductor Vessel Craftwork Technology Co., Ltd.

ChaoYang ShuoMei High Purity Semiconductor Materials Co., Ltd.

ChaoYang XinMei High Purity Semiconductor Materials Co., Ltd.

3 unchanged sentences

Xiaoyi XingAn Gallium Co., Ltd.

ChaoYang KaiMei Quartz Co., Ltd.

Emeishan Jia Mei High Purity Metals Co., Ltd.

8 unchanged sentences

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

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

As of June 30, 2022, Tongmei’s noncontrolling interests and redeemable noncontrolling interests totaled approximately 14.5 %.

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 September 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.

**** In April 2022, ChaoYang JinMei signed a joint venture agreement with certain investor to fund a new company, ChaoYang ShuoMei.

Before June 15, 2018, our ownership of JinMei was 83 %.

2 unchanged sentences

On June 15, 2018, we paid the first installment of $ 163,000 .

In May 2019, we paid the second installment

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.

In May 2019, we paid the second installment 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 %.

23 unchanged sentences

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

For AXT’s minority investment entities that are not consolidated, the investment balances are included in “Other assets” in our condensed consolidated balance sheets and totaled $ 13.1 million and $ 10.2 million as of June 30, 2022 and December 31, 2021, respectively.

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 $ 13.7 million and $ 10.2 million as of September 30, 2022 and December 31, 2021, respectively.

Our respective ownership interests in each of these companies are 46 %, 40 %, 39 %, 25 %, 25 % and 25 %.

5 unchanged sentences

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

(“Xiaoyi XingAn”).

In July 2022, we received a $ 1.5 million dividend from Xiaoyi XingAn.

In August 2022, we received a $ 125,000 dividend from one of our equity investments, JiYa Semiconductor Material 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:

Excluding one fully impaired entity, the equity investment entities had the following summarized statements of operations information (in thousands) for the three and nine months ended September 30, 2022 and 2021:

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Operating income

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.

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 $ 2.0 million and $ 1.1 million, respectively, for the three months ended September 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 $ 5.3 million and $ 3.7 million, respectively, for the nine months ended September 30, 2022 and 2021.

Stockholders’ Equity

1 unchanged sentence

(in thousands)

The changes in stockholders’ equity by component for the three and six months ended June 30, 2022 are as follows:

The changes in stockholders’ equity by component for the three and nine months ended September 30, 2022 are as follows:

Comprehensive

19 unchanged sentences

Balance as of June 30, 2022

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.

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

Common stock options exercised

Investment in subsidiary with noncontrolling interest

Noncontrolling interest portion of Tongmei stock-based compensation

Stock-based compensation

Tongmei stock-based compensation

Other comprehensive income (loss)

Balance as of September 30, 2022

Net income and other comprehensive loss attributable to redeemable noncontrolling interests was $ 525,000 and $ 635,000 , respectively, for the three months ended September 30, 2022, and $ 1.5 million and $ 1.2 million, respectively, for the nine months ended September 30, 2022 are not shown in the table above.

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

Comprehensive

20 unchanged sentences

Balance as of June 30, 2021

There were no reclassification adjustments from accumulated other comprehensive income (loss) for the three and six months ended June 30, 2022 and 2021 .

Common stock options exercised

Stock-based compensation

Other comprehensive income

Balance as of September 30, 2021

There were no reclassification adjustments from accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2022 and 2021 .

Stock Repurchase Program

3 unchanged sentences

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.

During the three and nine months ended September 30, 2022, we did no t repurchase any shares under the approved stock repurchase program.

As of September 30, 2022, approximately $ 2.7 million remained available for future repurchases under this program.

Currently, we do not plan to repurchase additional shares.

1 unchanged sentence

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

recognized as expense over the employee’s requisite service period of the award.

Stock-based compensation cost is measured at each grant date, based on the fair value of the award, and is 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.

1 unchanged sentence

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Cost of revenue

4 unchanged sentences

Net effect on net income

As of June 30, 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 .

As of September 30, 2022 , the unamortized compensation costs related to unvested stock options granted to employees under our stock option plan was approximately $ 0.2 million, net of estimated forfeitures of $ 21,000 .

These costs will be amortized on a straight-line basis over a weighted-average period of approximately 1.0 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 did not capitalize any stock-based compensation to inventory as of September 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):

There were no o ptions granted in the three and nine months ended September 30, 2022 and 2021 .

The following table summarizes the stock option transactions during the nine months ended September 30, 2022 (in thousands, except per share data):

Stock Options

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Canceled and expired

Balance as of June 30, 2022

Options vested as of June 30, 2022 and unvested options expected to vest, net of forfeitures

Options exercisable as of June 30, 2022

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.

Balance as of September 30, 2022

Options vested as of September 30, 2022 and unvested options expected to vest, net of forfeitures

Options exercisable as of September 30, 2022

The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on our closing price of $ 6.70 on September 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):

A summary of activity related to restricted stock awards for the nine months ended September 30, 2022 is presented below (in thousands, except per share data):

Weighted-Average

Non-vested as of January 1, 2022

Non-vested as of June 30, 2022

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.

Non-vested as of September 30, 2022

As of September 30, 2022, the unamortized compensation costs related to unvested restricted stock awards was approximately $ 3.3 million, which is to be amortized on a straight-line basis over a weighted-average period of approximately 1.1 years.

At-Risk, Performance Shares

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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.

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.

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Young and 32,100 for Mr.

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):

A summary of the status of our unvested at-risk, performance shares as of September 30, 2022 is presented below (in thousands, except per share data):

Weighted-Average

Non-vested as of January 1, 2022

Non-vested as of June 30, 2022

Non-vested as of September 30, 2022

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

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

As of 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.

As of September 30, 2022, there was $ 0.9 million of unrecognized compensation expense related to unvested at-risk, performance shares that is expected to be recognized over a weighted-average period of 1.3 years.

Net Income (Loss) Per Share

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Net income attributable to AXT, Inc.

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

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

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

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Product Type:

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Geographical region:

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

September 30,

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

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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.

One customer, Landmark, represented 18 % of our revenue for the three months ended September 30, 2022 and no customer represented 10% of our revenue for the three months ended September 30, 2021.

Our top five customers, although not the same five customers for each period, represented 40 % and 25 % of our revenue for the three months ended September 30, 2022 and 2021, respectively.

One customer, Landmark, represented 14 % of our revenue for the nine months ended September 30, 2022 and no customer represented 10% of our revenue for the nine months ended September 30, 2021.

Our top five customers, although not the same five customers for each period, represented 33 % and 26 % of our revenue for the nine months ended September 30, 2022 and 2021, respectively.

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

One customer accounted for 11 % of our accounts receivable balance as of June 30, 2022 , and no customer accounted for 10% of our accounts receivable as of December 31, 2021.

One customer accounted for 14 % of our accounts receivable balance as of September 30, 2022 , and no customer accounted for 10% of our accounts receivable as of December 31, 2021.

Commitments and Contingencies

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

The following table reflects the change in our warranty accrual which is included in “Accrued liabilities” in the condensed consolidated balance sheets, during the three and six months ended June 30, 2022 and 2021 (in thousands):

The following table reflects the change in our warranty accrual which is included in “Accrued liabilities” in the condensed consolidated balance sheets, during the three and nine months ended September 30, 2022 and 2021 (in thousands):

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Beginning accrued product warranty

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

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

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

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

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.

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.

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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.

As of September 30, 2022, we do not have any outstanding purchase orders that will incur a penalty if cancelled by the Company.

Legal Proceedings

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

Other 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.

Other Income, Net

Other income, net for the three months ended September 30, 2022 and 2021, includes a grant of $ 0 and $ 1.0 million, respectively, from a Chinese provincial government agency as an award for relocating to its province.

Other income, net for the nine months ended September 30, 2022 and 2021, includes a grant of $ 0.2 million and $ 1.0 million, respectively, from a Chinese provincial government agency as an award for relocating to its province.

In addition, we incurred a foreign currency transaction exchange gain of $ 540,000 and a loss of $ 45,000 for the three months ended September 30, 2022 and 2021, respectively.

We incurred a foreign currency transaction exchange gain of $ 542,000 and a loss of $ 185,000 for the nine months ended September 30, 2022 and 2021, respectively.

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

3 unchanged sentences

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.

Income tax expense for the three and nine months ended September 30, 2022 includes no interest and penalties.

As of September 30, 2022, we have no accrued interest and penalties related to uncertain tax positions.

We file income tax returns in the U.S.

1 unchanged sentence

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

Provision for income taxes for the three and six months ended June 30, 2022 was mostly related to our wholly owned China subsidiaries and our partially owned subsidiaries in China.

Provision for income taxes for the three and nine months ended September 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

net operating loss carryforwards except for the newly created US subsidiary, AXT-Tongmei.

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

Which has incurred tax expense.

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

We do not have any material contract assets as of June 30, 2022.

We do not have any material contract assets as of September 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):

The following table reflects the contract liabilities balance, which is included in “Accrued liabilities” on the condensed consolidated balance sheets, as of September 30, 2022 and December 31, 2021 (in thousands):

September 30,

Contract liabilities

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.

During the three and nine months ended September 30, 2022, the Company recognized $ 7,000 and $ 738,000 of revenue that was included in the contract balances as of December 31, 2021.

Disaggregated Revenue

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Bank Loans and Line of Credit

On 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

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

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.

Our bank loans and credit facilities typically have a term of 12 months or less and are included in “Bank loan” in our condensed consolidated balance sheets.

The following table represents bank loans as of September 30, 2022 and December 31, 2021 (in thousands, except interest rate data):

September 30,

Bank of China (1)

Bank of Communications (2)

China Merchants Bank (3)

China Merchants Bank (5)

Bank of Beijing (4)

Industrial Bank (5)

NingBo Bank (5)

Industrial and Commercial Bank of China (5)

NanJing Bank (5)

Industrial and Commercial Bank of China (6)

NingBo Bank (5)

Collateral for the above bank loans and line of credit

(1) Baoding Tongmei’s land use rights and all of its buildings located at its facility in Dingxing, China.

(2) ChaoYang Tongmei’s land use rights and all of its buildings located at its facility in Kazuo, China.

(3) Beijing Capital Financing Guarantee Co., Ltd.

in exchange for the guarantee fee of 1.5 % of the loan amount.

(4) AXT time deposit.

(5) Not collateralized.

(6) BoYu’s land use rights and its building located at its facility in Tianjin, China and BoYu’s accounts receivable.

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

23 unchanged sentences

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):

As of September 30, 2022, the maturities of our operating lease liabilities (excluding short-term leases) are as follows (in thousands):

Maturity of Lease Liabilities

4 unchanged sentences

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

September 30,

Weighted-average remaining lease term (years)

1 unchanged sentence

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

Six Months Ended

Nine Months Ended

September 30,

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

2 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Operating lease

9 unchanged sentences

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.

The aggregate redemption amount is approximately $ 49 million, subject to the foreign exchange rate variable at time of redemption.

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.

On August 1, 2022, the CSRC accepted for review Tongmei’s IPO application.

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.

Subject to review and approval by the CSRC and other authorities, Tongmei expects to accomplish this goal 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):

The components of the change in redeemable noncontrolling interests for the nine months ended September 30, 2022 are presented in the following table (in thousands):

Balance as of January 1, 2022

Investment in subsidiary with redeemable noncontrolling interest

Equity issuance costs incurred for the six months ended June 30, 2022

Equity issuance costs incurred for the nine months ended September 30, 2022

Stock-based compensation attributable to redeemable noncontrolling interests

2 unchanged sentences

Effect of foreign currency translation attributable to redeemable noncontrolling interests

Balance as of June 30, 2022

Balance as of September 30, 2022

Recent Accounting Pronouncements

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Adoption of the new standard will have an immaterial effect on our condensed consolidated financial statements.

In September 2022, FASB issued Accounting Standards Update No.

2022-04, Liabilities—Supplier Finance Programs (Subtopic 405-50):

Disclosure of Supplier Finance Program Obligations, to enhance the transparency about the use of supplier finance programs for investors.

The amendments in this Update require that a buyer in a supplier finance program disclose sufficient information about the program to allow a user of financial statements to understand the program’s nature, activity during the period, changes from period to period, and potential magnitude.

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.

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.

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

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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.

Our supply chain strategy includes several 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.

113 unchanged sentences

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 aggregate redemption amount is approximately $49 million, subject to the foreign exchange rate variable at time of redemption.

Tongmei submitted its IPO application to the Shanghai Stock Exchange 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.

On August 1, 2022, the CSRC accepted for review Tongmei’s IPO application.

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.

Subject to review and approval by the CSRC and other authorities, Tongmei expects to accomplish this goal 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.

8 unchanged sentences

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 following organization chart depicts the consolidated structure as of September 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.

13 unchanged sentences

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.

For the nine months ended September 30, 2022 and 2021, we paid approximately $2.6 million and $0.9 million, respectively.

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

34 unchanged sentences

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.

As of September 30, 2022 and December 31, 2021, our accounts receivable, net balance was $38.1 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.

2 unchanged sentences

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.

As of September 30, 2022 and December 31, 2021, accrued product warranties totaled $767,000 and $743,000, respectively.

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

5 unchanged sentences

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

As of June 30, 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.

As of September 30, 2022 and December 31, 2021, we had an inventory reserve of $23.0 million and $19.6 million, respectively, for excess and obsolete inventory and $42,000 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,

9 unchanged sentences

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.

There were no impairment charges during the three and nine months ended September 30, 2022 and 2021.

Fair Value of Investments

12 unchanged sentences

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.

As of September 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 September 30, 2022 and 2021.

Impairment of Long-Lived Assets

4 unchanged sentences

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.

We had no “Assets held for sale” or any impairment of long-lived assets in the condensed consolidated balance sheets as of September 30, 2022 and December 31, 2021.

Stock-based Compensation

21 unchanged sentences

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 World Health Organization declared the outbreak of COVID-19 to be a pandemic, which continues to spread throughout the world.

In March 2020, the President of the United States declared the COVID-19 outbreak a national emergency.

6 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Product Type:

3 unchanged sentences

Total revenue

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

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.

Revenue increased $0.6 million, or 1.8%, to $35.2 million for the three months ended September 30, 2022 from $34.6 million for the three months ended September 30, 2021.

The substrate revenue increase for the three months ended September 30, 2022 as compared to the same period in 2021 was primarily the result of higher demand for our InP wafer substrates, partially offset by lower demand for our semi-conducting GaAs and Ge wafer substrates.

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.

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

Raw materials sales decreased $0.1 million, or 1.2%, to $8.3 million for the three months ended September 30, 2022 as compared to the same period in 2021.

The decrease in raw materials revenue for the three months ended September 30, 2022 as compared to the same period in 2021 was primarily the result of a decrease in sales of pBN crucibles partially offset by increased sales of refined gallium resulting from stronger market demand.

Revenue increased $14.7 million, or 14.7%, to $114.3 million for the nine months ended September 30, 2022 from $99.7 million for the nine months ended September 30, 2021.

The increase in substrate revenue for the nine months ended September 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.

2 unchanged sentences

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.

Raw materials sales decreased $1.2 million, or 4.8%, to $24.0 million for the nine months ended September 30, 2022 as compared to the same period in 2021.

The decrease in raw materials revenue for the nine months ended September 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

September 30,

($ in thousands)

9 unchanged sentences

Total revenue

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

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

Revenue in China decreased $4.6 million for the three months ended September 30, 2022, primarily due to lower demand for our InP and Ge wafer substrates and pBN crucibles sold by one of our consolidated subsidiaries, partially offset by higher demand for our GaAs wafer substrates and refined gallium sold by one of our consolidated subsidiaries.

Revenue in Taiwan increased $4.0 million, primarily due to higher demand for our InP and Ge wafer substrates, partially offset by lower demand for our GaAs wafer substrates.

Revenue in Japan decreased $0.7 million primarily due to lower demand for our InP and GaAs wafer substrates and pBN crucibles sold by one of our consolidated subsidiaries.

Revenue in Asia Pacific decreased $1.2 million, primarily due to lower demand for our GaAs and InP wafer substrates, partially offset by higher demand for pBN crucibles sold by one of our consolidated subsidiaries.

Revenue in Europe increased $50,000, primarily due to higher demand for our InP wafer substrates and pBN crucibles sold by one of our consolidated subsidiaries, partially offset by lower demand for our Ge and GaAs wafer substrates.

Revenue in North America increased $3.1 million, primarily due to higher demand for our InP wafer substrates partially offset by lower demand for our GaAs and Ge wafer substrates and pBN crucibles sold by one of our consolidated subsidiaries.

Nine Months Ended

September 30,

($ in thousands)

9 unchanged sentences

Total revenue

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.

Revenue in China increased $0.2 million for the nine months ended September 30, 2022, primarily due to higher demand for our GaAs wafer substrates, partially offset by lower demand for our refined gallium and pBN crucibles sold by our consolidated subsidiaries and our InP and Ge wafer substrates.

Revenue in Taiwan increased $9.9 million, primarily due to higher demand for our InP wafer substrates, partially offset by lower demand for our GaAs wafer substrates.

Revenue in Japan decreased $0.4 million primarily due to lower demand for our InP and GaAs wafer substrates and raw gallium sold by one of our consolidated subsidiaries, partially offset by higher demand for pBN crucibles sold by one of our consolidated subsidiaries.

Revenue in Asia Pacific decreased $2.0 million, primarily due to lower demand for our GaAs and InP wafer substrates and raw gallium sold by one of our consolidated subsidiaries.

Revenue in Europe decreased $0.1 million primarily due to lower demand for our GaAs and Ge wafer substrates and pBN crucibles sold by one of our consolidated subsidiaries partially offset by higher demand for our InP wafer substrates.

Revenue in North America increased $7.0 million, primarily due to higher demand for our InP wafer substrates and pBN crucibles sold by one of our consolidated subsidiaries, partially offset by lower demand for our GaAs and Ge wafer substrates.

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

($ in thousands)

1 unchanged sentence

Gross Profit %

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.

Gross profit increased $3.3 million, or 28.5%, to $14.8 million for the three months ended September 30, 2022 from $11.5 million for the three months ended September 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.

Gross profit increased $8.3 million, or 23.4%, to $43.5 million for the nine months ended September 30, 2022 from $35.3 million for the nine months ended September 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.

Selling, General and Administrative Expenses

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

($ in thousands)

2 unchanged sentences

% of total revenue

Selling, general and administrative expenses increased $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.

Selling, general and administrative expenses increased $0.1 million, or 1.5%, to $6.6 million for the three months ended September 30, 2022 from $6.5 million for the three months ended September 30, 2022.

The higher selling, general and administrative expenses were primarily from an increase in professional services.

Selling, general and administrative expenses increased $1.9 million, or 10.5%, to $19.7 million for the nine months ended September 30, 2022 from $17.8 million for the nine months ended September 30, 2021.

The higher selling, general and administrative expenses were primarily from higher personnel-related expenses, insurance premiums and a provision for bad debt allowance.

Research and Development

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

($ in thousands)

2 unchanged sentences

% of total revenue

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

Research and development expenses increased $1.0 million, or 38.4%, to $3.6 million for the three months ended September 30, 2022 from $2.6 million for the three months ended September 30, 2021.

The increase in research and development expenses for the three months ended September 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 $2.7 million, or 35.4%, to $10.3 million for the nine months ended September 30, 2022 from $7.6 million for the nine months ended September 30, 2021.

The increase in research and development expenses for the nine months ended September 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 Expense, Net

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

($ in thousands)

Interest income (expense), net

Interest expense, net

% of total revenue

Interest income (expense), net 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.

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.

Interest expense, net increased $255,000 to $299,000 for the three months ended September 30, 2022 from $44,000 for the three months ended September 30, 2021.

Interest expense, net increased primarily due to a decrease in the amount of cash, restricted cash and cash equivalents held by us during the three months ended September 30, 2022 as compared to the three months ended September 30, 2021 and due to increased debt during the three months ended September 30, 2022 as compared to the three months ended September 30, 2021.

Interest expense, net increased $615,000 to $670,000 for the nine months ended September 30, 2022 from $55,000 for the nine months ended September 30, 2021.

Interest expense, net increased primarily due to a decrease in the

amount of cash, restricted cash and cash equivalents held by us during the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021 and due to increased debt during the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021.

Equity in Income of Unconsolidated Joint Ventures

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Equity in Income

September 30,

Equity in Income

3 unchanged sentences

% of total revenue

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 equity in income of unconsolidated joint venture companies was income of $2.0 million for the three months ended September 30, 2022 as compared to income of $1.1 million for the three months ended September 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 equity in income of unconsolidated joint venture companies was income of $5.3 million for the nine months ended September 30, 2022 as compared to income of $3.7 million for the nine months ended September 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

Other Income, Net

Three Months Ended

Six Months Ended

Other Expense

Nine Months Ended

September 30,

($ in thousands)

Other income (expense), net

Other income, net

% of total revenue

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.

Provision for Income Taxes

Other income, net increased $9,000 to $957,000 for the three months ended September 30, 2022 from an income of $948,000 for the three months ended September 30, 2021.

Other income, net increased primarily due to a foreign exchange gain of $0.5 million in the three months ended September 2022, compared to a foreign exchange loss of $45,000 in the three months ended September 2021.

Other income, net increased $344,000 to $1.2 million for the nine months ended September 30, 2022 from an income of $898,000 for the nine months ended September 30, 2021.

Other income, 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 $185,000 for the nine months ended September 2021 compared to a gain of $542,000 for the nine months ended September 2022.

Provision for (benefit from) Income Taxes

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

($ in thousands)

Provision for income taxes

Provision for (benefit from) income taxes

% of total revenue

Provision for income taxes 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.

Provision for income taxes increased $636,000, or 471.1%, to $501,000 for the three months ended September 30, 2022 from a benefit of $135,000 for the three months ended September 30, 2021.

Provision for income taxes increased $684,000, or 45.5%, to $2.2 million for the nine months ended September 30, 2022 from $1.5 million for the nine months ended September 30, 2021.

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

12 unchanged sentences

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.

On August 16, 2022, President Biden signed the Inflation Reduction Act into law finalizing a legislation intended to address inflation by paying down the national debt, lower consumer energy costs, provide incentives for the production of clean energy, and reduce healthcare costs.

The ACT imposes 1% exercise tax on stock buy back and 15% minimum tax on corporation with over $1billion in profit.

The Act has no impact to the Company, since the Company has no plan to buy back its common stock and the Company’s profit is not over $1 billion.

Net Income Attributable to Noncontrolling Interests and Redeemable Noncontrolling Interests

1 unchanged sentence

Net income attributable to

Six Months Ended

Nine Months Ended

Net income attributable to

1 unchanged sentence

noncontrolling interests and

September 30,

redeemable noncontrolling interests

September 30,

redeemable noncontrolling interests

3 unchanged sentences

% of total revenue

Net income attributable to noncontrolling interests and redeemable noncontrolling interests 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

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 $275,000 or 39.5% to $971,000 for the three months ended September 30, 2022, from $696,000 for the three months ended September 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 $1.5 million or 119.4% to $2.8 million for the nine months ended September 30, 2022, from $1.3 million for the nine months ended September 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

2 unchanged sentences

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,

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.

As of September 30, 2022, our principal source of liquidity was $48.2 million, which consisted of cash, restricted cash and cash equivalents of $36.8 million and investments of $11.4 million.

In the nine months ended September 30, 2022, cash, restricted cash and cash equivalents increased by $0.1 million and investments decreased by $3.6 million.

The increase in cash, restricted cash and cash equivalents of $0.1 million in the nine months ended September 30, 2022 was primarily due to net cash provided by financing activities of $35.3 million, partially offset by net cash used in investing activities of $25.5 million, net cash used in operating activities of $9.3 million and the effect of exchange rate changes of $0.4 million.

As of September 30, 2022, we and our consolidated joint ventures in China held approximately $22.0 million in cash and investments in foreign bank accounts.

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

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

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

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

Net cash used in operating activities of $9.3 million for the nine months ended September 30, 2022 was primarily comprised of a net change of $32.2 million in operating assets and liabilities, income from equity method investments of $5.3 million and loss on disposal of equipment of $0.1 million, partially offset by a net income before income attributable to noncontrolling interest and redeemable noncontrolling interests of $17.2 million, the adjustment for non-cash items of depreciation and amortization of $6.1 million, stock-based compensation of $3.3 million, return of equity method investments of $1.6 million and change in deferred tax assets of $0.2 million.

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

Net cash used in investing activities of $25.5 million for the nine months ended September 30, 2022 was primarily from the purchase of property, plant and equipment of $28.8 million and purchases of available-for-sale debt securities of $2.2 million, partially offset by proceeds from sales and maturities of available-for-sale debt securities of $5.4 million.

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

Net cash provided by financing activities was $35.3 million for the nine months ended September 30, 2022, which consisted of proceeds from short-term loans of $42.4 million, capital increase in subsidiary shares from noncontrolling interest of $2.2 million and common stock option exercised of $0.5 million, partially offset by repayment of short-term loan of $9.8 million.

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

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

2 unchanged sentences

Since 2015, no shares were repurchased under this program.

During the six months ended June 30, 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.

During the nine months ended September 30, 2022, we did not repurchase any shares under the approved stock repurchase program.

As of September 30, 2022, approximately $2.7 million remained available for future repurchases under this program.

Currently, we do not plan to repurchase additional shares.

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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.

For the nine months ended September 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 $2.9 million and $774,000, respectively.

For the nine months ended September 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 nine months ended September 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.

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The Shanghai Stock Exchange approved the IPO application on July 12, 2022.

On August 1, 2022, the CSRC accepted for review Tongmei’s IPO application.

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.

Subject to review and approval by the CSRC and other authorities, Tongmei expects to accomplish this goal 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

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

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.

Our bank loans and credit facilities typically have a term of 12 months or less and are included in “Bank loan” in our condensed consolidated balance sheets.

The following table represents bank loans as of September 30, 2022 and December 31, 2021 (in thousands, except interest rate data):

September 30,

Bank of China (1)

Bank of Communications (2)

China Merchants Bank (3)

China Merchants Bank (5)

Bank of Beijing (4)

Industrial Bank (5)

NingBo Bank (5)

Industrial and Commercial Bank of China (5)

NanJing Bank (5)

Industrial and Commercial Bank of China (6)

NingBo Bank (5)

Collateral for the above bank loans and line of credit

(1) Baoding Tongmei’s land use rights and all of its buildings located at its facility in Dingxing, China.

(2) ChaoYang Tongmei’s land use rights and all of its buildings located at its facility in Kazuo, China.

(3) Beijing Capital Financing Guarantee Co., Ltd.

in exchange for the guarantee fee of 1.5% of the loan amount.

(4) AXT time deposit.

(5) Not collateralized.

(6) BoYu’s land use rights and its building located at its facility in Tianjin, China and BoYu’s accounts receivable.

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 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.

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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).

As of September 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).

QUANTITATIVE AND QUALITATIV E DISCLOSURES ABOUT MARKET RISK

13 unchanged sentences

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

As of June 30, 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.

As of September 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.

12 unchanged sentences

Interest Rate Risk

Cash and cash equivalents earning interest and certain variable rate debt instruments are subject to interest rate fluctuations.

Cash, cash equivalents and restricted cash 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):

3 unchanged sentences

Interest Rate

September 30,

Cash, cash equivalents and restricted cash

1 unchanged sentence

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.

Financial instruments that potentially subject us to concentration of credit risk consist primarily of cash, cash equivalents and restricted cash, short-term investments, and trade accounts receivable.

We invest primarily in money market accounts, certificates of deposits, corporate bonds and notes, and government securities.

1 unchanged sentence

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.

Our cash, cash equivalents and restricted cash, 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.

1 unchanged sentence

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.

One customer accounted for 14% of our accounts receivable balance as of September 30, 2022 and no customer accounted for more than 10% of our accounts receivable as of December 31, 2021.

Impairment of Equity Investment Risk

4 unchanged sentences

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

As of June 30, 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.

As of September 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 September 30, 2022 and December 31, 2021 totaled $13.7 million and $10.2 million, respectively.

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

What changed 10-Q

Item 1. Financial Statements