What changed in this filing

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Item 9A. Controls and Procedures

2023-03-16 compared with 2022-03-15 · 341 added, 383 removed, 1056 unchanged (41% of the section changed)

17 unchanged sentences

Management has concluded that our internal control over financial reporting was effective as of December 31, 2022.

The Company’s internal control over financial reporting as of December 31, 2022 has been audited by BPM, the independent registered public accounting firm who also audited the Company’s financial statements.

BPM’s report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2022.

Changes in Internal Control over Financial Reporting

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Not Applicable.

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

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of AXT, Inc.

Opinion on Internal Control Over Financial Reporting

We have audited the internal control over financial reporting of AXT, Inc.

(a Delaware corporation) and its subsidiaries (the “Company”) as of December 31, 2022, based on criteria established in 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)”.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)”.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets as of December 31, 2022 and 2021 and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”) of the Company and our report dated March 16, 2023 expressed an unqualified opinion on those consolidated financial statements.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Controls over Financial Reporting.

Our responsibility is to express an opinion on the entity’s internal control over financial reporting based on our audit.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.

Our audit also included performing such other procedures as we considered necessary in the circumstances.

We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

An entity’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America (“U.S.

An entity’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the entity;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S.

GAAP, and that receipts and expenditures of the entity are being made only in accordance with authorizations of management and directors of the entity;

and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the entity’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

San Jose, California

March 16, 2023

The SEC allows us to include information required in this report by referring to other documents or reports we have already filed or will soon be filing.

This is called “Incorporation by Reference.” We intend to file our definitive proxy statement for our annual meeting of stockholders to be held on May 18, 2023 (the “Proxy Statement”) pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report, and certain information therein is incorporated in this report by reference.

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All schedules have been omitted because the required information is not applicable or because the information required is included in the consolidated financial statements or notes thereto.

See Index to Exhibits attached elsewhere to this Form 10-K.

The exhibits listed in the accompanying Index to Exhibits are filed as part of, or incorporated by reference into, this report on Form 10-K.

See Index to Exhibits attached elsewhere to this Annual Report on Form 10-K.

The exhibits listed in the accompanying Index to Exhibits are filed as part of, or incorporated by reference into, this Annual Report on Form 10-K.

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of AXT, Inc.

Opinion on the Consolidated Financial Statements

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of AXT, Inc.

(a Delaware corporation) and its subsidiaries (the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.

(a Delaware corporation) and its subsidiaries (the “Company”) as of December 31, 2022, and 2021, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022, and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 16, 2023, expressed an unqualified opinion.

Basis for Opinion

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Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

1 unchanged sentence

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits, we are required to obtain an understanding of internal control over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Inventories – Reserve for Excess and Obsolete Inventory

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The Company’s inventories are stated at the lower of weighted average costs (approximated by standard cost) or net realizable value.

The Company routinely evaluates the levels of its inventories in light of current market conditions in order to identify excess and obsolete inventories, and to provide a reserve for certain inventories to their estimated net realizable value based upon the age, quality and life expectancy of the product, and the projections for sale of the completed products.

If actual demand were to be substantially lower than estimated, there could be a significant adverse impact on the carrying value of inventories and results of operations.

The principal considerations for our determination that performing procedures relating to reserve for excess and obsolete inventories is a critical audit matter are the significant amount of judgment by management in developing the assumptions of the forecasted product demand, which in turn led to significant auditor judgment, subjectivity, and effort in performing

audit procedures and evaluating audit evidence relating to the forecasted product demand.

The Company routinely evaluates the levels of its inventories in light of current market

conditions in order to identify excess and obsolete inventories, and to provide a reserve for certain inventories to their estimated net realizable value based upon the age, quality and life expectancy of the product, and the projections for sale of the completed products.

If actual demand were to be substantially lower than estimated, there could be a significant adverse impact on the carrying value of inventories and consolidated results of operations.

Additionally, for certain new product launches there may be limited historical data with which to evaluate forecasts.

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Cash and cash equivalents

Restricted cash

Short-term investments

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Accumulated deficit

Accumulated other comprehensive income

Accumulated other comprehensive income (loss)

Total AXT, Inc.

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Total operating expenses

Income (loss) from operations

Interest income (expense), net

Equity in income (loss) of unconsolidated joint ventures

Income from operations

Interest expense, net

Equity in income of unconsolidated joint ventures

Other income, net

Income (loss) before provision for income taxes

Income before provision for income taxes

Provision for income taxes

Net income (loss)

Net income attributable to noncontrolling interests and redeemable noncontrolling interests

Net income (loss) attributable to AXT, Inc.

Net income attributable to AXT, Inc.

per common share:

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Year Ended December 31,

Net income (loss)

Other comprehensive income (loss), net of tax:

1 unchanged sentence

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

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

Total other comprehensive income (loss), net of tax

Comprehensive income (loss)

Comprehensive income

Comprehensive income attributable to noncontrolling interests and redeemable noncontrolling interests

Comprehensive income (loss) attributable to AXT, Inc.

Comprehensive income attributable to AXT, Inc.

See accompanying notes to consolidated financial statements.

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Common stock options exercised

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

Purchase of subsidiary shares from noncontrolling interests

Restricted stock awards canceled

Stock-based compensation

Issuance of common stock in the form of restricted stock

Other comprehensive loss

Balance as of December 31, 2019

Common stock options exercised

Sale of subsidiary shares to noncontrolling interests

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Balance as of December 31, 2021

Common stock options exercised

Investment in subsidiary with noncontrolling interest

Investment in subsidiary with redeemable noncontrolling interest

Restricted stock awards canceled

Stock-based compensation

Issuance of common stock in the form of restricted stock

Tongmei stock-based compensation

Noncontrolling interest portion of Tongmei stock-based compensation

Investment in subsidiary from noncontrolling interest

Other comprehensive income (loss)

Balance as of December 31, 2022

See accompanying notes to consolidated financial statements .

2 unchanged sentences

Cash flows from operating activities:

Net income (loss)

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

1 unchanged sentence

Amortization of marketable securities premium

Impairment charge on equity investee

Stock-based compensation

Provision for doubtful accounts

Gain from deconsolidation of a subsidiary

(Gain) loss on disposal of equipment

Return of equity method investments (dividends)

Equity in (income) loss of unconsolidated joint ventures

Equity in income of unconsolidated joint ventures

Deferred tax assets

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Proceeds from common stock options exercised

Proceeds from sale of previously consolidated subsidiary shares

Consideration paid to repurchase subsidiary shares from noncontrolling interests

Proceeds from bank loan

Proceeds from short-term loan from noncontrolling interest

Payments on bank loan

Proceeds from sale of subsidiary shares to noncontrolling interests

Proceeds from 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

2 unchanged sentences

Net cash provided by financing activities

Effect of exchange rate changes on cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

Effect of exchange rate changes on cash and cash equivalents, and restricted cash

Net increase (decrease) in cash and cash equivalents, and restricted cash

Cash and cash equivalents at the beginning of the year

Cash and cash equivalents at the end of the period

Cash and cash equivalents, and restricted cash at the end of the period

Supplemental disclosures:

1 unchanged sentence

Supplemental disclosure of non-cash flow information:

Notes Receivables paid to purchase fixed assets

Conversion of related party borrowings to Additional Paid-in Capital

Investment in subsidiary shares from noncontrolling interest

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

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

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

Other receivable regarding sales of land and building to unconsolidated joint venture

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

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(“ChaoYang Tongmei”), ChaoYang LiMei Semiconductor Technology Co., Ltd.

(“ChaoYang LiMei”), Nanjing JinMei Gallium Co., Ltd.

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

(“ChaoYang XinMei”), Nanjing JinMei Gallium Co., Ltd.

(“JinMei”), ChaoYang JinMei Gallium Ltd.

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

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

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

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

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

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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.

For the years ended 2021 and 2020, we have five companies accounted for by the equity method.

For the years ended 2022 and 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 consolidated balance sheets and in our consolidated statements of operations.

1 unchanged sentence

For the years ended 2022 and 2021, expenses associated with ChaoYang LiMei had a de minimis impact on our consolidated financial statements.

As discussed in Note 6, “Investments in Privately-Held Raw Material Companies”, effective as of March 11, 2019, we reduced our ownership in Beijing JiYa Semiconductor Material Co., Ltd.

(“JiYa”) from 46 % to 39 % by selling a portion of our JiYa shares to our investor partner, which is also JiYa’s landlord.

As a result of this transaction, our investor partner became the largest shareholder of JiYa and assumed the right to appoint the general manager of JiYa and thereby exercised greater control over JiYa’s long-term strategic direction.

Further, although our Chief Executive Officer remains on the board, as of March 11, 2019 he was no longer the chairman of JiYa’s board of directors and our Chief Financial Officer was no longer a member of JiYa’s board of financial supervisors.

Therefore, we deconsolidated JiYa from our consolidated financial statements as of March 11, 2019 in accordance with Accounting Standards Codification (“ASC”) Topic 810, Consolidation (“ASC 810”).

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

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

Our consolidated statement of operations for the year 2019 includes JiYa’s results for the period through March 11, 2019.

As discussed in Note 6, in May 2019, we purchased the remaining 3 % ownership interest of JinMei from retiring members of the JinMei management team for approximately $ 413,000 .

As a result, our ownership of JinMei increased from 97 % to 100 %.

As of June 1, 2019, we referred to JinMei as a wholly-owned subsidiary instead of a significantly controlled subsidiary and reduced the carrying value of the corresponding noncontrolling interests to zero .

Before August 1, 2020, our ownership of ChaoYang JinMei was 100 %.

In August 2020, we sold an 8.5 % ownership interest to current members of the ChaoYang JinMei management team for approximately $ 396,000 .

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

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

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

The agreement called for a total investment of approximately $ 3.0 million, of which Tongmei would fund approximately $ 1.8 million for a 58.5 percent ownership of ChaoYang XinMei.

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

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

In May 2021, the investors completed the funding of the remaining balance of approximately $ 1.5 million.

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

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

In December 2021 and January 2022, ChaoYang XinMei received funding from Tongmei of $ 1.4 million and $ 1.4 million, respectively.

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

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

In April 2022, Tongmei entered into a capital increase agreement (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 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.

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 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 Increase Agreements”), with several private equity investors in China.

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

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

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

subsidiaries.

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

1 unchanged sentence

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

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

As of December 31, 2021, Tongmei’s noncontrolling interests and redeemable noncontrolling interests totaled approximately 14.5 %.

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 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.

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

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

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

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

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

1 unchanged sentence

Fair Value of Financial Instruments

The carrying amounts of certain of our financial instruments including cash and cash equivalents, short-term investments and long-term investments, accounts receivable, accounts payable and accrued liabilities approximate fair value due to their short maturities.

The carrying amounts of certain of our financial instruments including cash and cash equivalents, restricted cash, short-term investments and long-term investments, accounts receivable, accounts payable, accrued liabilities and bank loans approximate fair value due to their short maturities.

Certain cash equivalents and investments are required to be adjusted to fair value on a recurring basis.

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

When observable market prices for similar securities or comparable 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.

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

The transaction gain totaled $ 1.6 million for the year ended December 31, 2022.

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

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

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

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Contract liabilities

During the three and twelve months ended December 31, 2021, the Company recognized $ 3,000 and $ 266,000 , respectively, of revenue that was included in the contract balances as of December 31, 2020.

During the three and twelve months ended December 31, 2022, the Company recognized $ 22,000 and $ 760,000 of revenue that was included in the contract balances as of December 31, 2021.

Disaggregated Revenue

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In addition, we do not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.

Accounting for Sales Taxes

Accounting for Sales and Use Taxes

We record sales taxes collected on sales of our products and for amounts not yet remitted to tax authorities as accrued liabilities on our consolidated balance sheets.

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The composition and maturities are regularly monitored by management.

Such deposits are in excess of the amount of the insurance provided by the federal government on such deposits.

Such deposits are

in excess of the amount of the insurance provided by the federal government on such deposits.

We are exposed to credit risks in the event of default by the issuers to the extent of the amount recorded on the consolidated balance sheets.

1 unchanged sentence

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

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

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

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

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

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

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

One customer, Landmark, represented 15 % and 11 % of our revenue for the years ended December 31, 2022 and 2020, respectively.

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

Our top five customers, although not the same five customers for each period, represented 34 % of our revenue for the year 2022, 26 % of our revenue for the year 2021 and 32 % of our revenue for 2020.

For the year ended December 31, 2022, one third-party customer for the raw materials products from our consolidated subsidiaries accounted for over 10% of the revenue from raw materials sales.

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

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

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

3 unchanged sentences

Cash and cash equivalents are stated at cost, which approximates fair value.

Restricted Cash

We maintain restricted cash in connection with cash balances temporarily restricted for regular business operations.

In May 2022, Tongmei and the Bank of Beijing signed a credit facility for $ 3.4 million.

As a condition of the credit facility we must maintain a time deposit at the Bank Of Beijing as collateral, and therefore we placed time deposits of $ 2.9 million and $ 1.0 million at the Bank Of Beijing in April 2022 and May 2022, respectively.

In December 2022, we placed another time deposit of $ 2.5 million at the Bank of Beijing as collateral for a bank loan of $ 2.3 million received by Tongmei in January 2023.

The bank loans have a term of 12 months, therefore the May 2022 bank loan and the time deposits are classified as short-term in our consolidated balance sheets.

The time deposits have been excluded from the Company’s cash and cash equivalents balance.

As of December 31, 2022, $ 6.4 million was included in restricted cash in our consolidated balance sheets.

Short-Term and Long-Term Investments

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Accounts receivable are recorded at the invoiced amount and are not interest bearing.

We periodically review the likelihood of collection on our accounts receivable balances and provide an allowance for doubtful accounts receivable primarily based upon the age of these accounts.

We periodically review the likelihood of collection on our accounts receivable balances and provide an allowance for doubtful accounts

receivable primarily based upon the age of these accounts.

We evaluate receivables from U.S.

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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, the allowance for doubtful accounts increased 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 increased claims for quality issues experienced by approximately two of our customers.

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

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

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

Determination of impairment is highly

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

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

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

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

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

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

Except as mentioned above, there were no impairment charges for the remainder of these investments during the years ended December 31, 2021 and 2020.

There were no impairment charges during the years ended December 31, 2022 and 2021.

Segment Reporting

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

Stock-based compensation cost is measured at each grant date, based on the fair value of the award, and is recognized as expense and as an increase in additional paid-in capital over the 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 and as an increase in additional paid-in capital over the requisite service period of the award.

Research and Development

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

ASC 740 also requires that deferred tax assets be

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

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

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

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Accumulated other comprehensive income:

Unrealized gain (loss) on investments, net

Unrealized loss on investments, net

Cumulative translation adjustment

Cumulative translation adjustment attributable to noncontrolling interests and redeemable noncontrolling interests

Accumulated other comprehensive income attributable to AXT, Inc.

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

Net Income (Loss) Per Share

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

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

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

In March 2022, FASB pronouncement ASU 2022-02, Financial Instruments-Credit Losses (Topic 326):

Troubled Debt Restructurings and Vintage Disclosures was issued as an amendment to Accounting Standards Update 2016-13, Financial Instruments-Credit Losses.

ASU 2022-02 aims to modify disclosure requirements for certain loan refinancings and restructurings by creditors.

The amendment also require that an entity disclose current-period gross write offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured at Amortized Cost.

The guidance is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.

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

Cash, Cash Equivalents and Investments

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Classified as:

Cash and restricted cash

Cash equivalents:

Certificates of deposit 1

Total cash and cash equivalents

Total cash, restricted cash and cash equivalents

Investments (available-for-sale):

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Total investments

Total cash, cash equivalents and investments

Total cash, restricted cash, cash equivalents and investments

Contractual maturities on investments:

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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 December 31, 2021.

The following table summarizes the fair value and gross unrealized losses related to available-for-sale debt securities, aggregated by investment category and length of time that individual debt securities have been in a continuous unrealized loss position as of December 31, 2022 (in thousands):

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As of December 31, 2021

Certificates of deposit

Corporate bonds

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The investment balances for the non-consolidated companies, are accounted for under the equity method and included in “Other assets” in the consolidated balance sheets and totaled $ 14.6 million and $ 10.2 million as of December 31, 2022 and 2021, respectively.

As of December 31, 2021, there were five companies accounted for under the equity method.

The year ended December 31, 2019 includes an impairment charge of $ 1.1 million for one of our minority investments (see Note 6).

We had no impairment charges during 2021 and 2020.

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

Fair Value Measurements

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December 31, 2022

Cash equivalents and investments:

Certificates of deposit

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December 31, 2021

Cash equivalents and investments:

Certificates of deposit

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These assets include investments in privately-held companies accounted for by equity and cost method (See Note 6).

For the year ended December 31, 2019, we recognized an impairment charge of $ 1.1 million for one of our minority investments.

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

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

This company in which we have a minority investment is experiencing significant disruptions due to upgrades and repairs required to comply with stronger environmental regulations in China.

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

We had no impairment charges for 2022, 2021 and 2020.

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Related Party Transactions

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

Based on an independent third-party valuation analysis, we sold these shares for $ 366,000 .

Previously we were the largest shareholder of JiYa and as such, we had the right to appoint the general manager of JiYa and the ability to exercise control in substance over JiYa’s long-term strategic direction.

Further, our Chief Executive Officer was the chairman of JiYa’s board of directors and our Chief Financial Officer was a member of JiYa’s board of financial supervisors.

As a result of this transaction, our investor partner, Shanxi Aluminum Industrial Co., Ltd.

became the largest shareholder of JiYa and assumed the right to appoint the general manager of JiYa and thereby exercised greater control over JiYa’s long-term strategic direction.

Further, although our Chief Executive Officer remains on the board, as of March 11, 2019, he was no longer chairman of JiYa’s board of directors and our Chief Financial Officer was no longer on JiYa’s board of financial supervisors.

Previously, we accounted for JiYa’s financial performance under the consolidation method of accounting.

As a result of the changes, we began to account for JiYa’s financial performance under the equity method of accounting.

Therefore, we deconsolidated JiYa from our consolidated financial statements as of March 11, 2019 in accordance with ASC 810.

As of March 12, 2019, we accounted for our investment in JiYa under the equity method of accounting as we continue to have board representation and substantial ownership.

Pro-forma financials have not been presented because we believe the effects were not material to our consolidated financial position and results of operations for all periods presented.

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

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

The lease agreement for the land of approximately 22,081 square feet commenced on January 1, 2012 for a term of 10 years with annual lease payments of $ 24,000 subject to a 5 % increase at each third year anniversary.

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

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

ChaoYang Tongmei purchases raw materials from one of our equity investments, Donghai County Dongfang High Purity Electronic Materials Co., Ltd.

for production in the ordinary course of business.

As of December 31, 2022 and 2021, amounts payable of $ 103,000 and $ 112,000 , respectively, were included in “Accounts payable” in our consolidated balance sheets.

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

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

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

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

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

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

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

The inter-company loan carries an interest rate of 4.9 % per annum.

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

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

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

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

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

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As of December 31, 2022 and 2021, the balances, including both principal and accrued interest, were $ 0 , and $ 0 , respectively, and included in “Other assets” in our consolidated balance sheets.

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

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

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

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

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

In September 2021 and October 2021, our consolidated subsidiary, ChaoYang XinMei, received a loan from ChaoYang Xinshuo, one of two minority investors, in the amount of $ 0.9 million and $ 1.0 million, respectively, at an annual interest rate of 6.5 % .

Accrued interest is calculated monthly and paid annually.

The loan is unsecured.

The repayment of the full amount including any accrued interest is due September 30, 2024 and October 31, 2024, respectively.

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.

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

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

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

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

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

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

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

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

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 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.

In April 2022 and May 2022, the minority investors invested $ 0.7 million and $ 0.6 million, respectively.

As a result, noncontrolling interests increased $ 1.4 million and redeemable noncontrolling interests increased $ 0.1 million.

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

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 September 2022, our consolidated subsidiary, ChaoYang LiMei completed the sale of land and its attached buildings to our equity investment entity, ChaoYang KaiMei, for a total consideration of $ 1.5 million.

As of December 31, 2022, $ 1.5 million was included in “Prepaid expenses and other current assets” in our 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.

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As of December 31, 2022, the balance of construction in progress was $ 36.7 million, of which $ 27.2 million was related to our buildings in our Dingxing and Kazuo locations, $ 5.4 million was for manufacturing equipment purchases not yet placed in service and $ 4.1 million was from our construction in progress for our other consolidated subsidiaries.

As of December 31, 2020, the balance of construction in progress was $ 24.5 million, of which $ 14.2 million was related to our buildings in our new Dingxing and Kazuo locations, $ 4.0 million was for manufacturing equipment purchases not yet placed in service and $ 6.3 million was from our construction in progress for our other consolidated subsidiaries.

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

Depreciation and amortization expense was $ 8.1 million, $ 7.1 million and $ 4.3 million for the years ended December 31, 2022, 2021 and 2020, respectively.

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 lives of the manufacturing equipment in our accounting records.

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

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

GAAP regarding management estimates.

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.

Investments in Privately-held Raw Material Companies

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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.

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

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

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

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

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

AXT remains the controlling stakeholder of Tongmei and holds a majority of the Board of Director positions of Tongmei.

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

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

Based on an independent third-party valuation analysis, we sold these shares for $ 366,000 .

Previously, we were the largest shareholder and, as such, we had the right to appoint the general manager of JiYa and the ability to exercise control in substance over JiYa’s long-term strategic direction.

Further, our Chief Executive Officer was the chairman of JiYa’s Board of Directors and our Chief Financial Officer was a member of JiYa’s board of financial supervisors.

As a result of this transaction, our investor partner, Shanxi Aluminum Industrial Co., Ltd., became the largest shareholder and assumed the right to appoint the general manager and thereby exercised greater control over JiYa’s long-term strategic direction.

Further, although our Chief Executive Officer remains on the board, as of March 11, 2019 he was no longer the chairman of JiYa’s Board of Directors and our Chief Financial Officer was no longer a member of JiYa’s board of financial supervisors.

Previously we accounted for JiYa’s financial performance under the consolidation method of accounting.

As a result of the changes we began to account for JiYa’s financial performance under the equity method of accounting.

Therefore, we deconsolidated JiYa from our consolidated financial statements as of March 11, 2019 in accordance with ASC 810.

As of March 12, 2019, we accounted for our investment in JiYa under the equity method of accounting as we continue to have board representation and substantial ownership.

Pro-forma financials have not been presented because we believe the effects were not material to our consolidated financial position and results of operation for all periods presented.

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

We recorded a gain on the deconsolidation of JiYa of $ 175,000 as a component of “Equity in loss of unconsolidated joint ventures” during 2019 in the consolidated statements of operations and comprehensive income (loss).

On the date of deconsolidation, the fair value of the Company’s investment in JiYa exceeded the Company’s share of the net assets of JiYa, which generated the gain.

As of March 12, 2019, we recorded our investment in JiYa at a fair value of $ 2,040,000 , which was based on an independent third-party valuation analysis.

The valuation is based on the asset-based approach.

The market-based approach is not deemed appropriate due to lack of availability of market data for comparable companies on the open market and the discounted cash flow approach is not deemed reliable because of the difficulty in predicting the future profitability of JiYa due to the volatility of the gallium market, the concentration of customers and the significant accumulated losses of JiYa.

The asset-based approach examines the value of a company’s assets net of its liabilities to derive a value for the equity holders.

The gain on deconsolidation includes the following:

(in thousands)

Fair value of the consideration received

Fair value of the retained investment in Beijing JiYa Semiconductor Material Co., Ltd.

Carrying value of noncontrolling interests, net of accumulated other comprehensive income attributable to subsidiary

Derecognition of Beijing JiYa Semiconductor Material Co., Ltd.'s net asset

Gain recognized on deconsolidation of Beijing JiYa Semiconductor Material Co., Ltd.

(in thousands)

Fair value of the retained investment in Beijing JiYa Semiconductor Material Co., Ltd.

Carrying value of retained noncontrolling investment

Gain on retained noncontrolling investment due to remeasurement

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

On June 15, 2018, we purchased a 12 % ownership interest from one of the minority owners of JinMei for $ 1.4 million.

The $ 1.4 million was scheduled to be paid in two installments.

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

In May 2019, we paid the second installment 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 consolidated balance sheets.

As a result, our ownership of JinMei increased from 83 % to 95 %.

In September 2018, we purchased a 2 % ownership interest from one of the three remaining minority owners of JinMei for $ 252,000 .

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

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

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

As a result, our ownership of JinMei increased from 97 % to 100 %.

Prior to June 1, 2019, we reported JinMei as a consolidated joint venture as we had a controlling financial interest and have majority control of the board.

As of June 1, 2019, we referred to it as a wholly-owned subsidiary and reduced the carrying value of the corresponding noncontrolling interests to zero .

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

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

Before August 1, 2020, our ownership of ChaoYang JinMei was 100 %.

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

As of August 2020, we referred to ChaoYang JinMei as

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

As of August 2020, we referred to

ChaoYang JinMei as a significantly controlled subsidiary instead of a wholly owned subsidiary.

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

Our ownership of BoYu is 67 %.

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

As a result, our ownership of BoYu was diluted from 70 % to 63 %.

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

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

Although we have representation on the boards of directors of each of these companies, the daily operations of each of these companies are managed by local management and not by us.

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

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

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

For AXT’s minority investment entities that are not consolidated, the investment balances are included in “Other assets” in our consolidated balance sheets and totaled $ 14.6 million and $ 10.2 million as of December 31, 2022 and 2021, respectively.

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

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

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

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

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

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

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

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

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

These dividends generally occur when the PRC joint venture declares a dividend for all of its shareholders.

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

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

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

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

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

For the 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 Gallium Co., Ltd.

(“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.

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

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

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Operating income

Net income (loss)

Excluding one fully impaired entity, these minority investment entities that are not consolidated, but rather are accounted for under the equity method, had the following summarized balance sheet information (in thousands) as of December 31, 2022 and 2021, respectively:

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Noncurrent liabilities

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

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

Our portion of the income and losses, including impairment charges, from these minority investment entities that are not consolidated and are accounted for under the equity method was an income of $ 6.0 million, $ 4.4 million and $ 0.1 million for the years ended December 31, 2022, 2021 and 2020, respectively.

Excluding one fully impaired entity, undistributed retained earnings relating to our investments in these minority investment entities amounted to $ 9.2 million and $ 5.0 million as of December 31, 2022 and 2021, respectively.

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Preferred stock dividends payable

Advance from customers

Accrued professional services

Accrued product warranty

Other tax payable

Accrued income taxes

Accrued product warranty

Current portion of operating lease liabilities

Other tax payable

Advances from customers

Other personnel-related costs

Accrual for sales returns

Payable in connection with repurchase of subsidiaries shares

Payable in connection with land restoration of Nanjing JinMei factory

Other accrued liabilities

Bank Loans and Line of Credit

On November 6, 2018, the Company entered into the Credit Agreement, which established a $ 10 million secured revolving line of credit with a $ 1.0 million letter of credit sublimit facility.

The revolving credit facility is collateralized by substantially all of the assets of the Company located within the United States, subject to certain exceptions.

The commitments under the Credit Agreement expire on November 30, 2020 and any loans thereunder will bear interest at a rate based on the daily one-month LIBOR for the applicable interest period plus a margin of 2 % .

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

Effective February 5, 2020, the Company amended the Credit Agreement.

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

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

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

Accrued interest is calculated monthly and paid quarterly.

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

The Credit Facility is collateralized by Baoding Tongmei 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 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 is due on March 22, 2021, however the credit facility contains an option to renew for an additional six months , which was exercised in March 2021 for approximately $ 3.1 million.

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

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

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

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

Accrued interest is calculated monthly and paid quarterly.

The combined loan totaled $ 5.6 million.

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

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

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

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

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

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

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

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

Accrued interest is calculated monthly and paid quarterly.

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

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

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

a fee of 1.5 % of the loan amount or approximately $ 24,000 .

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

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

Accrued interest is calculated monthly and paid quarterly.

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

The credit facility is not collateralized.

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

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.

Stockholders’ Equity and Stock Repurchase Program

Stockholders’ Equity

The 883,000 shares of $ 0.001 par value Series A preferred stock issued and outstanding as of December 31, 2021 and 2020, valued at $ 3,532,000 are non-voting and non-convertible preferred stock with a 5.0 % cumulative annual dividend rate payable when declared by the Board of Directors and $ 4 per share liquidation preference over common

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

The 883,000 shares of $ 0.001 par value Series A preferred stock issued and outstanding as of December 31, 2022 and 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 $ 4 per share liquidation preference over common stock, and must be paid before any distribution is made to common stockholders.

These preferred shares were issued to Lyte Optronics, Inc.

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Net income attributable to AXT, Inc.

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

Sales of subsidiary shares to noncontrolling interests

Decrease in additional paid-in capital for:

Investment in subsidiary with noncontrolling interest

Purchase of subsidiary shares from noncontrolling interests

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

Changes in AXT, Inc.'s ownership interests in consolidated subsidiaries

Net transfers to noncontrolling interests

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In 2022, 2021 and 2020, we did no t repurchase any of our outstanding common stock.

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

If we are required to pay

the cumulative dividends on the Series A preferred stock, our cash and cash equivalents would be reduced.

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

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Stock options and stock appreciation rights may not be granted below fair market value.

Stock options or stock

appreciation rights generally shall not be fully vested over a period of less than three years from the date of grant and cannot be exercised more than 10 years from the date of grant.

Stock options or stock appreciation rights generally shall not be fully vested over a period of less than three years from the date of grant and cannot be exercised more than 10 years from the date of grant.

Restricted stock, restricted stock units, and performance awards generally shall not vest faster than over a three-year period (or a twelve-month period if vesting is based on a performance measure).

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There were 172,000 , 507,000 and 905,000 options exercised in the years ended December 31, 2022, 2021 and 2020, respectively.

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

The total intrinsic value of options exercised for the years ended December 31, 2022, 2021 and 2020, was $ 0.8 million, $ 3.7 million and $ 3.2 million, respectively.

As of December 31, 2022, the unamortized compensation costs related to unvested stock options granted to employees under our 2015 plan was approximately $ 0.2 million, net of estimated forfeitures of $ 16,000 .

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Total fair value of stock awards vested during the years ended December 31, 2022, 2021 and 2020 was $ 2.3 million, $ 3.8 million and $ 1.9 million, respectively.

As of December 31, 2021, we had $ 4.9 million of unrecognized

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

As of December 31, 2022, we had $ 4.8 million of unrecognized compensation expense related to restricted stock awards, which will be recognized over the weighted average period of 1.6 years.

At-Risk, Performance Shares

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

In February 2021 and 2022, the Company issued at-risk, performance shares classified as equity awards.

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

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

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

At-risk, performance shares are eligible to receive dividend equivalents under the Company's 2015 Equity Incentive Plan (the “Plan”), as determined by the Board of Directors.

The Company will recognize forfeitures as they occur.

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

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

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

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

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

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

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

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

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

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

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

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

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

On February 17, 2021,

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

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

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

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

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

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

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

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

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

Fischer would be eligible to vest.

Any shares that are not eligible to vest are forfeited.

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

Young and 32,100 for Mr.

On February 14, 2023, the Compensation Committee met and certified the year-over-year annual revenue growth rate achieved for fiscal year 2022, expressed as a percentage, was 2.7 %.

Therefore, none of the at-risk performance shares became eligible to vest.

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

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Non-vested as of December 31, 2021

Non-vested as of December 31, 2022

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

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Research and development

Total stock-based compensation

Tax effect on stock-based compensation

Net effect on net income (loss)

Shares used in computing basic net income (loss) per share

Shares used in computing diluted net income (loss) per share

Effect on basic net income (loss) per share

Effect on diluted net income (loss) per share

Net effect on net income

Shares used in computing basic net income per share

Shares used in computing diluted net income per share

Effect on basic net income per share

Effect on diluted net income per share

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

There were no stock options granted during 2022, 2021 and 2020.

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

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

Expected term (in years)

Expected dividend

Risk-free interest rate

The expected term for stock options is based on the observed historical option exercise behavior and post-vesting forfeitures of options by our employees, and the contractual term, the vesting period and the expected term of the outstanding options.

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We provide for the estimated future costs of warranty obligations in cost of sales when the related revenue is recognized.

The accrued warranty costs represent the best estimate at the time of sale of the total costs that we expect to incur to repair or replace product parts that fail while still under warranty.

The accrued warranty costs represent the best estimate at the time of sale of the total costs that we expect to

incur to repair or replace product parts that fail while still under warranty.

The amount of accrued estimated warranty costs are primarily based on historical experience as to product failures as well as current information on repair costs.

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Ending accrued product warranty

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

Consolidated income before provision for income taxes was income of $ 20.9 million, $ 17.6 million and $ 7.1 million for the years ended December 31, 2022, 2021 and 2020, respectively.

We recorded a current tax provision of $ 2.2 million, $ 1.1 million and $ 2.0 million for the years ended December 31, 2022, 2021 and 2020, respectively.

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As of December 31, 2022 we have federal net operating loss (“NOL”) carryforwards of approximately $ 31.9 million, which will begin to expire in 2025.

In addition, we have federal tax credit carryforwards of approximately $ 0.4 million, which will begin to expire in 2022.

We have utilized all state net operating losses, primarily in the state of California, as of December 31, 2021.

We have California net operating loss carryforwards of approximately $ 21,000 as of December 31, 2022.

The deferred tax assets valuation allowance as of December 31, 2022 is attributed to U.S.

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

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

The valuation allowance decreased for the years ended December 31, 2022 and 2021 by $3.5 million and $ 4.4 million, respectively.

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

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

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

under Section 382.

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

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

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

carryforwards before utilization.

Subsequent ownership changes could further impact the limitation in future years.

Until a Section 382 study is completed and any limitation known, no amounts are being presented as an uncertain tax position.

Until a Section 382 study for the year-ended December 31, 2022 is completed and any limitation known, no amounts are being presented as an uncertain tax position.

The Company does not believe that per Section 382 there will be a limitation on the utilization of the net operating loss and tax credit carryforwards.

A full valuation allowance has been provided against our NOL carryforwards and R&D credit carryforwards and, if an adjustment is required, this adjustment would be offset by an adjustment to the valuation allowance.

Thus, there would be no net impact to the consolidated balance sheets or statements of operations if an adjustment were required.

During fiscal year 2021, 2020 and 2019, the amount of gross unrecognized tax benefits remains unchanged.

The total amount of unrecognized tax benefits was $ 14.6 million as of December 31, 2021 and 2020.

During fiscal year 2022 and 2021, the amount of gross unrecognized tax benefits was $ 1.1 million as of December 31, 2022 and 2021.

The Company recognizes interest and penalties related to uncertain tax positions as part of the provision for income taxes.

To date, such interest and penalties have not been material.

Excluding the effects of recorded valuation allowances for deferred tax assets, $ 14.6 million of the unrecognized tax benefit would favorably impact the effective tax rate in future periods if recognized.

All of the unrecognized tax benefit would impact the effective tax rate in future periods if recognized.

We comply with the laws, regulations, and filing requirements of all jurisdictions in which we conduct business.

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

On June 29, 2020, Governor Newsom signed the highly anticipated budget package for California’s fiscal year that began on July 1, 2020.

As part of the budget package, Assembly Bill 85 (“AB 85”) was enacted into law.

The bill contains several tax changes to help with the budget deficit.

Notably, AB 85 contains two major tax changes:

(1) it suspends the usage of NOLs;

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

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

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

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

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

The Coronavirus relief bill had a de minimis effect on our consolidated financial statements.

On August 9, 2022, Congress passed the CHIPS Act of 2022 to strengthen domestic semiconductor manufacturing, design and research, fortify the economy and national security, and reinforce America’s chip supply chains.

The CHIPS Act provides for a new 25% advanced manufacturing investment credit for investments in semiconductor manufacturing and for the manufacture of certain equipment required in the semiconductor manufacturing process.

Since the Company has all its manufacturing in China, the Company will not qualify for the investment credit.

On August 16, 2022, President Biden signed the Inflation Reduction Act into law.

The law is intended to address inflation by paying down the national debt, lower consumer energy costs, provide incentives for the production of clean energy and reduce health care costs.

The new law imposes a 1% excise tax on corporate buybacks, based on Brown’s Stock Buyback Accountability Act.

The Company currently has no plans to buy back its stock.

Effective for tax years beginning after December 31, 2022, the act requires corporations with over $1 billion in profits to pay a minimum tax of 15% on their adjusted financial statement income.

The Company does not qualify for the Inflation Reduction Act.

Net Income (Loss) per Share

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Potentially dilutive common shares are excluded in net loss periods, as their effect would be anti-dilutive.

A reconciliation of the numerators and denominators of the basic and diluted net income (loss) per share calculations is as follows (in thousands, except per share data):

Net income (loss) attributable to AXT, Inc.

A reconciliation of the numerators and denominators of the basic and diluted net income per share calculations is as follows (in thousands, except per share data):

Net income attributable to AXT, Inc.

Preferred stock dividends

Net income (loss) available to common stockholders

Denominator for basic net income (loss) per share - weighted-average common shares

Net income available to common stockholders

Denominator for basic net income per share - weighted-average common shares

Effect of dilutive securities:

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Denominator for dilutive net income per common shares

Net income (loss) attributable to AXT, Inc.

Net income attributable to AXT, Inc.

per common share:

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

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

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

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

Segment Information and Foreign Operations

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North America

Other income, net

The components of other income, net are summarized below (in thousands):

Other income (expense), net

The components of other income (expense), net are summarized below (in thousands):

Foreign exchange gain (loss)

Income from local China government subsidy

Other expense

Other income (expense)

Commitments and Contingencies

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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.

Under certain conditions, the Dingxing

local government may purchase the land and building at the appraised value.

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

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

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

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

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

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

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

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

Pursuant to the Capital Investment Agreements with the Investors, each Investor has the right to require AXT to redeem any or all Tongmei shares held by such Investor at the original purchase price paid by such Investor, without interest, in the event 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 Chinese Securities Regulatory Commission (“CSRC”) for further review.

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

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

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

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

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, 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 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.

3 unchanged sentences

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

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

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

Equity issuance costs incurred

Stock-based compensation attributable to redeemable noncontrolling interests

Net income attributable to redeemable noncontrolling interests

Effect of foreign currency translation attributable to redeemable noncontrolling interests

Effect of foreign currency translation on redeemable noncontrolling interests

Balance as of December 31, 2021

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

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

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

Investment in subsidiary with redeemable noncontrolling interest

Equity issuance costs incurred

1 unchanged sentence

Net income attributable to redeemable noncontrolling interests

Effect of foreign currency translation attributable to redeemable noncontrolling interests

Effect of foreign currency translation on redeemable noncontrolling interests

Effect of foreign currency translation attributable to redeemable noncontrolling interests

Balance as of December 31, 2022

Subsequent Events

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

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

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

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

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

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

Accrued interest is calculated monthly and paid quarterly.

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

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

Accrued interest is calculated monthly and paid quarterly.

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

In January 2023, our consolidated subsidiary, ChaoYang ShuoMei received $ 0.5 million funding from ChaoYang JinMei and $ 0.2 million funding from one of the minority investors.

As a result, noncontrolling interests increased $ 0.2 million and redeemable noncontrolling interests increased $ 36,000 .

ChaoYang JinMei’s ownership of ChaoYang ShuoMei remained at 75 % after these equity investments.

In January 2023, Tongmei made an additional investment of $ 0.9 million to our equity investment entity, ChaoYang KaiMei.

Concurrently, the majority shareholder made a payment of $ 1.1 million to ChaoYang KaiMei.

Tongmei's ownership of ChaoYang KaiMei remained at 40 % after these equity investments.

In January 2023, we obtained $ 15.7 million in new one-year bank loans with interest rates ranging from 2.35 % to 4.50 %.

A portion of the new bank loans, $ 5.3 million, are collateralized by time deposits.

The remaining balance of $ 10.4 million new loans are unsecured.

We also repaid $ 10.8 million of existing loans in Q1 2023.

Form 10-K Summary

39 unchanged sentences

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

Computation of Ratio of Earnings to Fixed Charges

List of Subsidiaries

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Management contract or compensatory plan.

† The certifications attached as Exhibits 32.1 and 32.2 that accompany this Annual Report on Form 10-K are deemed furnished and not filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of AXT, Inc.

under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Annual Report on Form 10-K, irrespective of any general incorporation language contained in such filing.

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

23 unchanged sentences

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

What changed 10-K

Item 9A. Controls and Procedures