What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-16 compared with 2022-03-15 · 107 added, 149 removed, 288 unchanged (47% of the section changed)

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“Risk Factors” and elsewhere in this Annual Report on Form 10-K.

This discussion should be read in conjunction with Item 6.

“Selected Consolidated Financial Data” and our consolidated financial statements and related notes included elsewhere in this Form 10-K.

This discussion should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Form 10-K.

Critical Accounting Policies and Estimates

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Different estimates that we could have used, or changes in the estimate that are reasonably likely to occur, may have a material impact on our financial condition or results of operations.

We also refer you to Note 1 to our consolidated financial statements included elsewhere in this Form 10-K.

We also refer you to Note 1 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Revenue Recognition and Sales Returns

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As of December 31, 2022 and 2021, our accounts receivable, net balance was $29.3 million and $34.8 million, respectively, which was net of an allowance for doubtful accounts of $307,000 and $130,000 as of December 31, 2022 and 2021, respectively.

During 2022, we increased the allowance for doubtful accounts by $177,000 due to the poor financial condition of a customer.

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

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

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

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As of December 31, 2022 and 2021, accrued product warranties totaled $669,000 and $743,000, respectively.

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

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

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

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Our inventory consists of raw materials as well as finished goods and work-in-process that include material, labor and manufacturing overhead costs.

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

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

reserve for certain inventories based upon the age and quality of the product and the projections for sale of the completed products.

As of December 31, 2022 and 2021, we had an inventory reserve of $24.7 million and $19.6 million, respectively, for excess and obsolete inventory and $47,000 and $66,000, respectively, for lower of cost or net realizable value reserves.

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For the years ended December 31, 2022, 2021 and 2020, we had no impairment charges.

For the year ended December 31, 2019, we recorded an impairment charge of $1.1 million for a germanium materials company in China in which we have a 25% ownership interest.

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

Fair Value of Investments

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

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

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

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

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

ASC 740 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that a portion of the deferred tax asset will not be realized.

ASC 740 also requires that deferred tax assets be

reduced by a valuation allowance if it is more likely than not that a portion of the deferred tax asset will not be realized.

Our deferred tax assets have been reduced to zero by valuation allowance.

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See Note 12—”Income Taxes” in the consolidated financial statements for additional information.

Change in Accounting Estimate – Useful Life of Equipment and Facilities

From time to time we review our estimates of the useful lives of our property, plant and equipment.

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

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

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

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

GAAP regarding management estimates.

The effect of the change in the useful lives decreased our manufacturing costs for the year ended December 31, 2020 by approximately $1.4 million and increased our basic and diluted net income per share by approximately $0.03, respectively, as a result of lower depreciation expense.

Results of Operations

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

Our annual revenue increased in 2022 from $137.4 million to $141.1 million in 2022 an increase of 2.7%.

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

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

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

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

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

In 2022, our gross margin increased from 34.5% of total revenue in 2021 to 36.9% of total revenue in 2022.

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

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

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

Years Ended Dec.

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Revenue increased $3.7 million, or 2.7%, in 2022 from $137.4 million in 2021.

The $8.1 million increase in wafer substrate sales was led by strong demand for InP wafer substrates for 5G applications, data center upgrades (silicon photonics) and consumer related applications, partially offset by lower demand for our GaAs wafer substrates as the result of decreased demand for LED products, industrial lasers and other applications requiring low defect densities in the wafer substrate and Ge wafer substrates decreased primarily as a result of lower demand from our customers in China.

The $4.3 million raw materials revenue decrease as compared to the same period in 2021 was primarily the result

of decreased revenue from sales of purified gallium and unfavorable pricing, partially offset by increased demand for pBN crucibles and pBN-based OLED manufacturing tools sold by BoYu, one of our consolidated raw material companies.

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

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

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

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

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

In addition, GaAs sales into wireless applications increased.

Revenue from InP sales also increased.

The InP revenue increase was driven by 5G infrastructure and data center upgrades (silicon photonics).

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

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

Revenue by Geographic Region

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Total revenue

Sales to customers located outside of North America represented approximately 90% of our revenue during 2021, 2020 and 2019, respectively.

Sales to customers located outside of North America represented approximately 86% of our revenue in 2022 and approximately 90% of our revenue during 2021 and 2020, respectively.

Revenue from customers in China decreased in 2022 by 17.8%, primarily due to lower demand for refined gallium and pBN crucibles sold by our consolidated subsidiaries.

In addition, revenue from InP and Ge wafer substrates decreased, partially offset by increased demand for GaAs wafer substrates.

Revenue from customers in Taiwan increased in 2022 by 70.9%, primarily due to an increase in demand for InP wafer substrates, partially offset by a decline in wireless applications using GaAs wafer substrates.

Revenue from customers in Japan increased in 2022 by 15.9% as a result of increased demand for refined gallium and pBN crucibles sold by our consolidated subsidiaries, partially offset by lower demand for GaAs wafer substrates used in wireless applications.

Revenue from customers in Asia Pacific decreased by 44.5% as a result of decreased demand for GaAs used in wireless applications, InP wafer substrates and pBN crucibles sold by one of our consolidated subsidiaries.

Revenue from customers in Europe decreased in 2022 by 10.7%, primarily due to lower demand for GaAs used in LED applications, Ge wafer substrates and pBN crucibles sold by one of our consolidated subsidiaries, partially offset by increased demand for InP wafer substrates.

Revenue from customers in North America increased by 64.2% primarily due to increased 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 from customers in China increased in 2021 by 91.7%, primarily due to higher demand for refined gallium and pBN crucibles sold by our consolidated subsidiaries.

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

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

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

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

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

In addition, revenue from GaAs wafer substrates increased.

Revenue from customers in Taiwan increased in 2020 by 1.7%, primarily due to an increase in demand for wireless applications using GaAs wafer substrates, partially offset by a decline in InP revenue in Taiwan that was transferred to North America.

Revenue from customers in Japan increased in 2020 by 21.8% as a result of increased demand for InP wafer substrates and GaAs used in wireless applications, partially offset by lower demand for pBN crucibles sold by our consolidated subsidiary.

Revenue from customers in Asia Pacific decreased by 28.1% as a result of lower demand for pBN crucibles sold by our consolidated subsidiaries.

Revenue from customers in Europe increased in 2020 by 8.2%, primarily due to pBN crucibles sold by our consolidated subsidiary and Ge wafer substrates.

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

Year Ended Dec.

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Selling, general and administrative expenses increased $1.5 million, or 6.1%, to $25.7 million for 2022 compared to $24.2 million for 2021.

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

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

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

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

The higher selling, general and administrative expenses were primarily from higher personnel-related expenses, professional services, stock compensation expenses, and bad debt expense, partially offset by lower license and fees and outside commissions.

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

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

Research and Development Expenses

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Research and development expenses increased $3.6 million, or 34.7%, to $13.9 million in 2022 from $10.3 million in 2021.

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

The increase in research and development expenses in 2022 was primarily due to higher development expenses for 8-inch GaAs and 6-inch InP wafer substrates and the development of new features for certain of our GaAs and InP wafer substrates, new product testing and personnel-related expenses.

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

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

Interest Income (Expense), Net

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

Interest Expense, Net

Years Ended Dec.

($ in thousands)

Interest income (expense), net

Interest expense, net

% of total revenue

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

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

Equity in Income (Loss) of Unconsolidated Joint Venture Companies

Interest expense, net increased in 2022 as compared to the same period in 2021, primarily due to lower investment balances in 2022 and increased borrowings in 2022.

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

Equity in Income of Unconsolidated Joint Venture Companies

Years Ended Dec.

($ in thousands)

Equity in income (loss) of unconsolidated joint ventures

Equity in income of unconsolidated joint ventures

% of total revenue

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

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

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

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

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

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

Equity in income of unconsolidated joint ventures increased $1.5 million to an income of $6.0 million in 2022 from an income of $4.4 million in 2021 as our unconsolidated joint ventures reported better performance in 2022 as compared to 2021.

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

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

Other Income, Net

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% of total revenue

Other income, net increased $3.0 million to an income of $3.5 million for 2022 as compared to an income of $0.5 million in 2021, primarily due to foreign exchange gains of $1.6 million in 2022 compared to foreign exchange losses of $434,000 in 2021 and compensation received from the China government by one of our consolidated subsidiaries for relocating their facilities to Kazuo in 2022 as compared to 2021.

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

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

Provision for Income Taxes

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% of total revenue

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

The increase in noncontrolling interests and redeemable noncontrolling interests’ share of income for 2022 as compared to 2021 was primarily due to the structural changes of the legal entities in China (see Note 1 to our

consolidated financial statements) and to a lesser degree, losses generated by our consolidated subsidiary, ChaoYang XinMei High Purity Semiconductor Materials Co., Ltd.

(ChaoYang XinMei”).

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

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

Liquidity and Capital Resources

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Effect of exchange rate changes

Net change in cash and cash equivalents

Net change in cash, restricted cash and cash equivalents

Cash and cash equivalents—beginning year

Cash and cash equivalents—end of year

Cash, restricted cash and cash equivalents—end of year

Short and long-term investments—end of year

Total cash, cash equivalents and short-term and long-term investments

Total cash, restricted cash, cash equivalents and short-term and long-term investments

We consider cash and cash equivalents, short-term investments and long-term investments as liquid and available for use within two years in our current operations.

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As of December 31, 2022, we and our consolidated joint ventures held approximately $26.1 million in cash and investments in foreign bank accounts.

Total cash, restricted cash and cash equivalents, short-term and long-term investments increased by $1.0 million in 2022.

As of December 31, 2022, our principal source of liquidity was $52.8 million, which consisted of cash, restricted cash and cash equivalents of $41.3 million and short-term and long-term investments of $11.5 million.

In 2022, cash, restricted cash and cash equivalents increased by $4.6 million and short-term and long-term investments decreased by $3.5 million.

The increase in cash, restricted cash and cash equivalents of $4.6 million in 2022 was primarily due to net cash provided by financing activities of $38.0 million and the effect of exchange rate changes of $0.5 million, partially offset by net cash used in investing activities of $25.2 million and operating activities of $8.8 million.

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

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

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

As of December 31, 2020, our principal source of liquidity was $78.6 million, which consisted of cash and cash equivalents of $72.6 million and short-term and long-term investments of $6.0 million.

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

The increase in cash and cash

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

Net cash used in operating activities of $8.8 million for 2022 was primarily comprised of net change in operating assets and liabilities of $35.2 million, gain on equity method investments of $6.0 million offset in part by our net income of $18.7 million, adjustment of non-cash items of depreciation and amortization of $8.1 million, stock-based compensation of $4.0 million, return of equity method investments (dividends) of $1.6 million, and amortization of marketable securities premium of $0.1 million.

The $35.2 million net change in operating assets and liabilities primarily resulted from a $31.4 million increase in inventories, a $5.5 million decrease in accounts payable, a $3.5 million increase

in prepaid expenses and other current assets, a $2.1 million decrease in accrued liabilities, and a $0.5 million increase in other assets offset in part by a $4.5 million decrease in accounts receivable and a $3.3 million increase in other long-term liabilities, including royalties.

Net cash used in operating activities of $3.3 million for 2021 was primarily comprised of net change in operating assets and liabilities of $30.3 million and gain on equity method investments of $4.4 million, offset in part by our net income of $16.5 million, adjustment of non-cash items of depreciation and amortization of $7.1 million, stock-based compensation of $4.5 million, deferred tax assets of $2.3 million, return of equity method investments (dividends) of $0.8 million and amortization of marketable securities premium of $0.1 million.

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The $6.3 million net change in operating assets and liabilities primarily resulted from a $6.7 million increase in prepaid expenses and other current assets, a $5.3 million increase in accounts receivable a $0.9 million increase in inventories and a $0.1 million increase in other assets offset in part by a $2.3 million decrease in accounts payable, a $1.9 million decrease in other long-term liabilities, including royalties and a $2.6 million decrease in accrued liabilities.

Net cash provided by operating activities of $12.7 million for 2019 was primarily comprised of an adjustment of non-cash items of depreciation and amortization of $5.5 million, stock-based compensation of $2.3 million, impairment charge on equity investee of $1.1 million, loss on equity method investments of $1.0 million, return on equity method investments of $0.4 million, loss on disposal of equipment of $0.1 million, net change in operating assets and liabilities of $4.0 million offset in part by our net loss of $1.6 million and gain from deconsolidation of a subsidiary of $0.2 million.

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

Net cash used in investing activities of $25.2 million for 2022 was primarily due to property, plant and equipment of $28.5 million in preparation for our new manufacturing sites, additional equipment for our Beijing site and equipment and facility costs incurred by our consolidated subsidiaries and the purchases of marketable investment securities of $2.2 million, which were partially offset by proceeds from maturities and sales of available-for-sale debt securities of $5.4 million.

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

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

Net cash provided by financing activities was $38.0 million for 2022 which mainly consisted of the proceeds of $53.1 million from short-term loans in China, $2.2 million from the capital increase in subsidiary shares from noncontrolling interest, and $0.5 million from the exercise of common stock options, which were partially offset by payments on short-term loans of $17.8 million.

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

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

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

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

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

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

The Company is required to obtain approval from SAFE to transfer funds in or out of the PRC.

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

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

Other than PRC foreign exchange restrictions, the Company is not subject to any PRC restrictions and limitations on its ability to distribute earnings from its businesses, including its PRC subsidiaries and PRC joint ventures, to the Company and its investors as well as the ability to settle amounts owed by the Company to its PRC subsidiaries and PRC joint ventures.

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

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

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

For the years ended December 31, 2022, 2021 and 2020, 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, $774,000 and $0, respectively.

In June 2022, July 2022 and August 2022, we received a dividend of $1.3 million from BoYu, $1.5 million from one of our equity investments, Xiaoyi XingAn and $0.1 million from JiYa Semiconductor Material Co.

Ltd., respectively.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Pursuant to the Capital Investment Agreements with the Investors, each Investor has the right to require AXT to redeem any or all

Tongmei shares held by such Investor at the original purchase price paid by such Investor, without interest, in the event the IPO fails to pass the audit of the Shanghai Stock Exchange, is not approved by the CSRC or Tongmei cancels the IPO application.

The aggregate redemption amount is approximately $49 million.

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

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

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 hopes to accomplish this goal in the coming months.

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

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If our sales decrease, however, our ability to generate cash from operations will be adversely affected which could adversely affect our future liquidity, require us to use cash at a more rapid rate than expected, and require us to seek additional capital.

On October 24, 2016, we filed with the SEC a registration statement on Form S-3, pursuant to which we may offer up to $60 million of common stock, preferred stock, depositary shares, warrants, debt securities and/or units in one or more offerings and in any combination.

On November 4, 2016, the SEC declared the registration statement effective.

On November 4, 2019, the registration statement expired.

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

The SEC has not yet declared the registration statement effective.

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

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

We currently expect to use the net proceeds from the sale of securities under the shelf registration statement for working capital, capital expenditures and other general corporate purposes.

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

On May 17, 2022, the SEC declared the registration statement effective.

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

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Bank Loans and Line of Credit

On 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, we borrowed $2.8 million against the Credit Facility.

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 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 (the “August 2019 borrowing”) and simultaneously applied to renew the credit facility.

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

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%.

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

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

Accrued interest is calculated monthly and paid quarterly.

The combined loan totaled $5.6 million.

In April 2021, Tongmei repaid the full amount of the credit facility, including all outstanding accrued interest, of approximately $5.6 million and simultaneously applied to renew the credit facility.

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

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

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

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

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

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

Accrued interest is calculated monthly and paid quarterly.

The credit facility is collateralized by ChaoYang Tongmei’s land use rights and all of its buildings located at its facility in Kazuo, China.

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

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

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

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

Accrued interest is calculated monthly and paid quarterly.

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

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

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

a fee of 1.5% of the

loan amount or approximately $24,000.

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

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

Accrued interest is calculated monthly and paid quarterly.

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

The credit facility is not collateralized.

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

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

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

Bank of China (1)

Bank of Communications (2)

Bank of Communications (5)

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.

In addition, the December 2022 loan attracts a guarantee fee amounting to 1.78% of the loan amount.

Off-Balance Sheet Arrangements

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There are no variable lease payments, residual value guarantees or any restrictions or covenants imposed by the equipment lease.

The remainder relate to our lease agreement for our facility in Fremont, California with approximately 19,467 square feet, which expires in 2023.

The remainder relate to our lease agreement for our facility in Fremont, California with approximately 19,467 square feet, which expires in November 2023.

We are reasonably certain to renew the lease for another five years.

There are no variable lease payments, residual value guarantees or any restrictions or covenants imposed by the facility lease.

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Total rent expenses under these operating leases charged to selling, general and administrative were approximately $458,000, $431,000 and $322,000 for the years ended December 31, 2022, 2021 and 2020, respectively, primarily related to our Fremont facility.

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

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

Total rent expenses under these operating leases charged to cost of revenue

were approximately $303,000, $296,000 and $266,000 for the years ended December 31, 2022, 2021 and 2020, respectively, primarily related to the nitrogen system at our facility in Dingxing.

In 2020, we and a competitor entered into the Cross License Agreement, which has a term that begins on January 1, 2020 and expires on December 31, 2029.

The Cross License Agreement is a fixed-cost cross license and not a variable-cost cross license that is based on revenue or units.

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

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

although on a smaller scale.

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

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

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

What changed 10-K

Item 7. Management’s Discussion and Analysis