What changed in this filing

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Item 1. Financial Statements

2023-05-10 compared with 2022-11-10 · 373 added, 500 removed, 1054 unchanged (45% of the section changed)

2 unchanged sentences

(Unaudited, in thousands, except per share data)

September 30,

Current assets:

2 unchanged sentences

Short-term investments

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

Accounts receivable, net of allowances of $ 307 and $ 307 as of March 31, 2023 and December 31, 2022

Prepaid expenses and other current assets

7 unchanged sentences

Accrued liabilities

Short-term loan from noncontrolling interest

Total current liabilities

7 unchanged sentences

2,000 shares authorized;

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

883 shares issued and outstanding as of March 31, 2023 and December 31, 2022 (Liquidation preference of $ 7,743 and $ 7,699 as of March 31, 2023 and December 31, 2022)

Common stock, $ 0.001 par value;

70,000 shares authorized;

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

43,586 and 43,554 shares issued and outstanding as of March 31, 2023 and December 31, 2022

Additional paid-in capital

Accumulated deficit

Accumulated other comprehensive income

Accumulated other comprehensive loss

Total AXT, Inc.

7 unchanged sentences

Three Months Ended

Nine Months Ended

September 30,

Cost of revenue

3 unchanged sentences

Total operating expenses

Income from operations

Income (loss) from operations

Interest expense, net

Equity in income of unconsolidated joint ventures

Other income, net

Income before provision for (benefit from) income taxes

Provision for (benefit from) income taxes

Net income attributable to noncontrolling interests and redeemable noncontrolling interests

Net income attributable to AXT, Inc.

Other income (expense), net

Income (loss) before provision for income taxes

Provision for income taxes

Net income (loss)

Net (income) loss attributable to noncontrolling interests and redeemable noncontrolling interests

Net income (loss) attributable to AXT, Inc.

per common share:

4 unchanged sentences

Three Months Ended

Nine Months Ended

September 30,

Net income (loss)

Other comprehensive income (loss), net of tax:

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

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

Total other comprehensive income (loss), net of tax

Comprehensive income (loss)

Comprehensive (income) loss attributable to noncontrolling interests and redeemable noncontrolling interests

Change in foreign currency translation gain, net of tax

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

Total other comprehensive income, net of tax

Comprehensive income (loss) attributable to AXT, Inc.

Comprehensive loss (income) attributable to noncontrolling interests and redeemable noncontrolling interests

Comprehensive income (loss) attributable to AXT, Inc.

See accompanying notes to condensed consolidated financial statements.

1 unchanged sentence

(Unaudited, in thousands)

Nine Months Ended

September 30,

Three Months Ended

Cash flows from operating activities:

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

Net income (loss)

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

Depreciation and amortization

1 unchanged sentence

Stock-based compensation

Gain on disposal of equipment

Return of equity method investments (dividends)

Loss on disposal of equipment

Equity in income of unconsolidated joint ventures

9 unchanged sentences

Purchases of property, plant and equipment

Purchases of available-for-sale debt securities

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

2 unchanged sentences

Proceeds from common stock options exercised

Proceeds from 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

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

Net cash provided by financing activities

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

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

Cash and cash equivalents at the beginning of the year

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

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, and restricted cash at the beginning of the year

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

Supplemental disclosure of non-cash flow information:

1 unchanged sentence

Investment in subsidiary shares from noncontrolling interest

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

Sale of land and building to unconsolidated joint venture

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

See accompanying notes to condensed consolidated financial statements.

3 unchanged sentences

(“AXT,” the “Company,” “we,” “us,” and “our” refer to AXT, Inc.

and all of its consolidated subsidiaries) are unaudited, and have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.

Accordingly, this interim quarterly financial report does not include all disclosures required by US GAAP.

and all of its consolidated subsidiaries) are unaudited, and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.

GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.

Accordingly, this interim quarterly financial report does not include all disclosures required by U.S.

In the opinion of our management, the unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, considered necessary to present fairly the financial position, results of operations and cash flows of AXT and our consolidated subsidiaries for all periods presented.

Our management has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these condensed consolidated financial statements in conformity with US GAAP.

Due to the COVID-19 pandemic, there has been uncertainty and disruption in the global economy and financial markets.

1 unchanged sentence

Actual results could differ materially from those estimates.

The results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of the results to be expected in the future or for the full fiscal year.

It is recommended that these condensed consolidated financial statements be read in conjunction with our consolidated financial statements and the notes thereto included in our 2021 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 15, 2022 and our Quarterly Reports on Form 10-Q for the three months ended March 31, 2022 and June 30, 2022 filed with the SEC on May 9, 2022 and August 10, 2022, respectively.

The results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results to be expected in the future or for the full fiscal year.

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

10 unchanged sentences

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

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

As of March 31, 2023 and December 31, 2022, we have five companies accounted for by the equity method.

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

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

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

For the three months ended March 31, 2023, expenses associated with ChaoYang LiMei had a de minimis impact on our condensed consolidated financial statements.

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

3 unchanged sentences

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

Tongmei’s portion of the final investment was approximately $ 0.9 million, for a total investment of approximately $ 1.8

million for a 58.5 percent ownership of ChaoYang XinMei.

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

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

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

14 unchanged sentences

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.

In January 2023, ChaoYang ShuoMei received $ 0.5 million in funding from ChaoYang JinMei and $ 0.2 million in 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 April 2022, Tongmei signed a joint venture agreement with certain investors to fund a new company, ChaoYang KaiMei Quartz Co., Ltd (“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 percent ownership of ChaoYang KaiMei.

14 unchanged sentences

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

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

As of March 31, 2023, Tongmei’s noncontrolling interests and redeemable noncontrolling interests totaled approximately 14.5 %.

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

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

Since Tongmei is 85.5 % owned by AXT, and the transaction was between common interest holders, the transaction was accounted for at

net book value and resulted in an increase of $ 1.2 million to noncontrolling interests and $ 1.2 million to redeemable noncontrolling interests.

Since Tongmei is 85.5 %

owned by AXT, and the transaction was between common interest holders, the transaction was accounted for at net book value and resulted in an increase of $ 1.2 million to noncontrolling interests and $ 1.2 million to redeemable noncontrolling interests.

Investments and Fair Value Measurements

1 unchanged sentence

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

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

September 30, 2022

As of March 31, 2023 and December 31, 2022, our cash, cash equivalents and debt investments are classified as follows (in thousands):

March 31, 2023

December 31, 2022

19 unchanged sentences

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

There was an insignificant amount of gross unrealized losses on our available-for-sale debt securities as of September 30, 2022, and historically, such gross unrealized losses have been temporary in nature and we believe that it is probable the principal and interest will be collected in accordance with the contractual terms.

There was an insignificant amount of gross unrealized losses on our available-for-sale debt securities as of March 31, 2023, and historically, such gross unrealized losses have been temporary in nature and we believe that it is probable the principal and interest will be collected in accordance with the contractual terms.

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

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

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

The following table summarizes the fair value and gross unrealized losses related to available-for-sale debt securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of September 30, 2022 (in thousands):

In Loss Position

1 unchanged sentence

Loss Position

As of September 30, 2022

As of March 31, 2023

Certificates of deposit

11 unchanged sentences

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

As a condition of a credit facility between the Bank of Beijing and Tongmei for $ 3.4 million, we are required to maintain a time deposit of $ 3.9 million at the Bank of Beijing as collateral.

The bank loan has a term of 12 months, therefore the bank loan and time deposit are classified as short-term in our condensed consolidated balance sheet.

This time deposit has been excluded from the Company’s cash and cash equivalents balance.

As of September 30, 2022, the amount of restricted cash was $ 3.9 million.

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.

In January 2023, our consolidated subsidiary, ChaoYang LiMei, placed a time deposit of $ 3.0 million at the Bank of China as collateral for a bank loan of $ 2.9 million received by Tongmei in January 2023.

The bank loans have a term of 12 months, therefore the May 2022 bank loan, the January 2023 bank loans and the time deposits are classified as short-term in our condensed consolidated balance sheets.

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

As of March 31, 2023, $ 9.5 million was included in restricted cash in our condensed consolidated balance sheets.

Investments in Privately-held Raw Material Companies

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

The investment balances for the non-consolidated companies are accounted for under the equity method and included in “Other assets” in the condensed consolidated balance sheets and totaled $ 13.7 million and $ 10.2 million as of September 30, 2022 and December 31, 2021, respectively.

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

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

The investment balances for the non-consolidated companies are accounted for under the equity method and included in “Other assets” in the condensed consolidated balance sheets and totaled $ 16.5 million and $ 14.6 million as of March 31, 2023 and December 31, 2022, respectively.

As of March 31, 2023, there were five companies accounted for under the equity method.

Fair Value Measurements

1 unchanged sentence

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

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

As of March 31, 2023 and December 31, 2022, the total unrealized loss, net of tax, included in accumulated other comprehensive income was immaterial.

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

8 unchanged sentences

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

We measure the fair value of these foreign currency hedges at each month end and quarter end using current exchange rates and in accordance with US GAAP.

We measure the fair value of these foreign currency hedges at each month end and quarter end using current exchange rates and in accordance with U.S.

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

As of September 30, 2022, the net change in fair value from the placement of the hedge to settlement at each month end during the quarter had a de minimis impact on the condensed consolidated results.

There were no changes in valuation techniques or related inputs in the three and nine months ended September 30, 2022.

There have been no transfers between fair value measurements levels during the three and nine months ended September 30, 2022.

The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis in accordance with ASC 820 as of September 30, 2022 (in thousands):

As of March 31, 2023, the net change in fair value from the placement of the hedge to settlement at each month end during the quarter had a de minimis impact on the condensed consolidated results.

There were no changes in valuation techniques or related inputs in the three months ended March 31, 2023.

There have been no transfers between fair value measurements levels during the three months ended March 31, 2023.

The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis in accordance with ASC 820 as of March 31, 2023 (in thousands):

Quoted Prices in

4 unchanged sentences

Observable Inputs

September 30, 2022

March 31, 2023

Certificates of deposit

13 unchanged sentences

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

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

We did not record any other-than-temporary impairment charges for these investments during the three months ended March 31, 2023 and 2022, respectively.

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

September 30,

Raw materials

1 unchanged sentence

Finished goods

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

As of March 31, 2023 and December 31, 2022, carrying values of inventories were net of inventory reserves of $ 25.9 million and $ 24.7 million, respectively, for excess and obsolete inventory and $ 50,000 and $ 47,000 , respectively, for lower of cost or net realizable value reserves.

Property, Plant and Equipment, Net

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

September 30,

Property, plant and equipment:

6 unchanged sentences

Construction in progress

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

As of March 31, 2023, the balance of construction in progress was $ 38.3 million, of which $ 29.4 million was related to our buildings in our new Dingxing and Kazuo locations, $ 4.8 million was for manufacturing equipment purchases not yet placed in service and $ 4.1 million was for construction in progress for our other consolidated

subsidiaries.

2 unchanged sentences

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

September 30,

Payable in connection with construction in progress

Accrued compensation and related charges

Preferred stock dividends payable

Accrued income taxes

Other tax payable

Advances from customers

Accrued product warranty

Other tax payable

Payable in connection with construction in progress

Accrued professional services

Accrued income taxes

Current portion of operating lease liabilities

Advances from customers

Other personnel-related costs

2 unchanged sentences

Related Party Transactions

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

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

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

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

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

As of September 30, 2022 and December 31, 2021, amounts payable of $ 100,000 and $ 112,000 , respectively, were included in “Accounts payable” in our condensed consolidated balance sheets.

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

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

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

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

As of September 30, 2022 and December 31, 2021, the remaining balance of principal and interest totaled $ 0 and $ 0 , respectively.

As of March 31, 2023 and December 31, 2022, amounts payable of $ 104,000 and $ 103,000 , respectively, were included in “Accounts payable ” in our condensed consolidated balance sheets.

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

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

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

11 unchanged sentences

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

As of September 30, 2022, $ 0 was included in “Long-term debt, related party” in our condensed consolidated balance sheets.

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.

In January 2023, ChaoYang KaiMei paid the Company $ 1.5 million.

As of March 31, 2023, $ 0 million was included in “Prepaid expenses and other current assets” in our condensed consolidated balance sheets.

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

5 unchanged sentences

These companies form part of our overall supply chain strategy.

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

As of March 31, 2023, the investments are summarized below (in thousands):

Investment Balance as of

September 30,

Nanjing JinMei Gallium Co., Ltd.

5 unchanged sentences

Beijing JiYa Semiconductor Material Co., Ltd.

Xilingol Tongli Germanium Co., Ltd.

Xiaoyi XingAn Gallium Co., Ltd.

10 unchanged sentences

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

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 %.

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

As of March 31, 2023, 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.

1 unchanged sentence

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

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

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 condensed consolidated balance sheets.

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

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

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

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

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

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

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

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

***** 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 %.

3 unchanged sentences

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

Our ownership of BoYu was 67 %.

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

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

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

7 unchanged sentences

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

For AXT’s minority investment entities that are not consolidated, the investment balances are included in “Other assets” in our condensed consolidated balance sheets and totaled $ 13.7 million and $ 10.2 million as of September 30, 2022 and December 31, 2021, respectively.

For AXT’s minority investment entities that are not consolidated, the investment balances are included in “Other assets” in our condensed consolidated balance sheets and totaled $ 16.5 million and $ 14.6 million as of March 31, 2023 and December 31, 2022, respectively.

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

4 unchanged sentences

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

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

In June 2022, we received a $ 1.3 million dividend from BoYu.

In July 2022, we received a $ 1.5 million dividend from one of our equity investment entities, Xiaoyi XingAn Gallium Co., Ltd.

(“Xiaoyi XingAn”).

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

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

In August 2022, we received a $ 125,000 dividend from one of our equity investment entities, Beijing JiYa Semiconductor Material Co., Ltd.

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.

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

The equity investment entities had the following summarized statements of operations information (in thousands) for the three months ended March 31, 2023 and 2022:

Three Months Ended

Nine Months Ended

September 30,

Operating income

Our portion of the income and losses from these minority investment entities that are not consolidated and are accounted for under the equity method was income of $ 2.0 million and $ 1.1 million, respectively, for the three months ended September 30, 2022 and 2021.

Our portion of the income and losses from these minority investment entities that are not consolidated and are accounted for under the equity method was income of $ 5.3 million and $ 3.7 million, respectively, for the nine months ended September 30, 2022 and 2021.

Our portion of the income and losses from these minority investment entities that are not consolidated and are accounted for under the equity method was an income of $ 1.0 million and $ 1.1 million, respectively, for the three months ended March 31, 2023 and 2022.

Stockholders’ Equity

1 unchanged sentence

(in thousands)

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

The changes in stockholders’ equity by component for the three months ended March 31, 2023 are as follows:

Comprehensive

5 unchanged sentences

Balance as of December 31, 2022

Common stock options exercised

Investment in subsidiary with noncontrolling interest

Investment in subsidiary with redeemable noncontrolling interest

Noncontrolling interest portion of Tongmei stock-based compensation

1 unchanged sentence

Tongmei stock-based compensation

Investment in subsidiary from noncontrolling interest

Other comprehensive income

Balance as of March 31, 2023

Common stock options exercised

Investment in subsidiary with noncontrolling interest

Noncontrolling interest portion of Tongmei stock-based compensation

Stock-based compensation

Tongmei stock-based compensation

Other comprehensive income (loss)

Balance as of June 30, 2022

Common stock options exercised

Investment in subsidiary with noncontrolling interest

Noncontrolling interest portion of Tongmei stock-based compensation

Stock-based compensation

Tongmei stock-based compensation

Other comprehensive income (loss)

Balance as of September 30, 2022

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

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

Net loss and other comprehensive income attributable to redeemable noncontrolling interests were $ 149,000 and $ 70,000 , respectively, for the three months ended March 31, 2023 and are not shown in the table above.

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

Comprehensive

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Balance as of December 31, 2021

Common stock options exercised

Stock-based compensation

Formation of new subsidiary with noncontrolling interests

Sale of common stock to employees in connection with the reorganization

Purchase of subsidiary shares from noncontrolling interests

Net income (loss)

Other comprehensive loss

Balance as of March 31, 2021

Common stock options exercised

Stock-based compensation

Formation of new subsidiary with noncontrolling interests

Transfer of subsidiary with noncontrolling interest

Transfer of subsidiary with redeemable noncontrolling interest

Other comprehensive income

Balance as of June 30, 2021

Common stock options exercised

Investment in subsidiary with noncontrolling interest

Noncontrolling interest portion of Tongmei stock-based compensation

Stock-based compensation

Tongmei stock-based compensation

Investment in subsidiary from noncontrolling interest

Other comprehensive income

Balance as of September 30, 2021

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

Balance as of March 31, 2022

Net income and other comprehensive income attributable to redeemable noncontrolling interests were $ 418,000 and $ 46,000 , respectively, for the three months ended March 31, 2023 and are not shown in the table above.

There were no reclassification adjustments from accumulated other comprehensive income (loss) for the three months ended March 31, 2023 and 2022 .

Stock Repurchase Program

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No shares were repurchased from 2016 through 2022.

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

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

During the three months ended March 31, 2023, we did no t repurchase any shares under the approved stock repurchase program.

As of March 31, 2023, approximately $ 2.7 million remained available for future repurchases under this program.

Currently, we do not plan to repurchase additional shares.

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Three Months Ended

Nine Months Ended

September 30,

Cost of revenue

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Research and development

Total stock-based compensation

Tax effect on stock-based compensation

Net effect on net income

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

Net effect on net income (loss)

As of March 31, 2023, the unamortized compensation costs related to unvested stock options granted to employees under our stock option plan was approximately $ 0.1 million, net of estimated forfeitures of $ 12,000 .

These costs will be amortized on a straight-line basis over a weighted-average period of approximately 0.6 years and will be adjusted for subsequent changes in estimated forfeitures.

We did not capitalize any stock-based compensation to inventory as of September 30, 2022 and December 31, 2021 due to the immateriality of the amount.

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

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

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

We did not capitalize any stock-based compensation to inventory as of March 31, 2023 and December 31, 2022 due to the immateriality of the amount.

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

There were no options granted in the three months ended March 31, 2023 and 2022.

The following table summarizes the stock option transactions during the three months ended March 31, 2023 (in thousands, except per share data):

Stock Options

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Canceled and expired

Balance as of September 30, 2022

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

Options exercisable as of September 30, 2022

The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on our closing price of $ 6.70 on September 30, 2022, which would have been received by the option holder had all option holders exercised their options on that date.

Balance as of March 31, 2023

Options vested as of March 31, 2023 and unvested options expected to vest, net of forfeitures

Options exercisable as of March 31, 2023

The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on our closing price of $ 3.98 on March 31, 2023, which would have been received by the option holder had all option holders exercised their options on that date.

Restricted stock awards

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

A summary of activity related to restricted stock awards for the three months ended March 31, 2023 is presented below (in thousands, except per share data):

Weighted-Average

Non-vested as of January 1, 2023

Non-vested as of September 30, 2022

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

Non-vested as of March 31, 2023

As of March 31, 2023, the unamortized compensation costs related to unvested restricted stock awards was approximately $ 4.5 million, which is to be amortized on a straight-line basis over a weighted-average period of approximately 1.4 years.

At-Risk, Performance Shares

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

In February 2022 and March 2023, the Company issued at-risk, performance shares classified as equity awards.

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

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

All performance shares, if earned, are still subject to annual vesting over a four-year period except that no shares are vested

on the first anniversary because the performance measurement is based on year-end results for the year 2021 and 2022, respectively.

The financial performance metrics for the at-risk, performance shares issued in March 2023 are based upon the Company’s year-end actual results in 2023.

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 2022 and 2023, respectively.

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

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

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

The fair value per share of the at-risk, performance shares classified as equity awards granted in February 2022 and March 2023 was $ 7.83 and $ 3.71 , respectively.

On February 17, 2021, the Compensation Committee recommended, and the Board of Directors 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 %.

On March 14, 2022, the Compensation Committee met and certified 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.

On February 15, 2022, the Compensation Committee recommended, and the Board of Directors 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.

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.

On March 15, 2023, the Compensation Committee recommended, and the Board of Directors approved, the grant to Dr.

Morris Young of 223,590 at-risk, performance shares under the Plan.

On March 15, 2023, the Compensation Committee approved, the grant to Gary Fischer of 77,600 at-risk, performance shares under the Plan.

If the minimum financial metric is achieved, then based upon a performance formula, a corresponding portion of the 223,590 shares issued to Dr.

Young would be eligible to vest and a corresponding portion of the 77,600 shares issued to Mr.

Fischer would be eligible to vest.

Any shares that are not eligible to vest are forfeited.

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

Young and 32,100 for Mr.

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

If the target financial metric is exceeded and an additional financial metric is achieved, additional shares above the target number of shares are earned based on such performance formula and the maximum number of additional shares earned is capped at 100 % of the target.

If the minimum financial metric is not achieved, then these awards are forfeited based upon the pre-determined revenue metric for the year ending December 31, 2023.

A summary of the status of our unvested at-risk, performance shares as of March 31, 2023 is presented below (in thousands, except per share data):

Weighted-Average

Non-vested as of January 1, 2023

Non-vested as of September 30, 2022

Non-vested as of March 31, 2023

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

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

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

As of March 31, 2023, there was $ 0.4 million of unrecognized compensation expense related to unvested at-risk, performance shares that is expected to be recognized over a weighted-average period of 1.2 years.

Net Income (Loss) Per Share

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Three Months Ended

Nine Months Ended

September 30,

Net income attributable to AXT, Inc.

Net income (loss) attributable to AXT, Inc.

Preferred stock dividends

Net income available to common stockholders

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

Net income (loss) available to common stockholders

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

Effect of dilutive securities:

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Restricted stock awards

Denominator for dilutive net income per common shares

Net income attributable to AXT, Inc.

Denominator for dilutive net income (loss) per common shares

Net income (loss) attributable to AXT, Inc.

per common share:

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

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

The 883,000 shares of $ 0.001 par value Series A preferred stock issued and outstanding as of September 30, 2022 and December 31, 2021, valued at $ 3,532,000 , are non-voting and non-convertible preferred stock with a 5.0 % cumulative annual dividend rate payable when declared by the Board of Directors and a $ 4 per share liquidation preference over common stock, which must be paid before any distribution is made to common stockholders.

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

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

The 883,000 shares of $ 0.001 par value Series A preferred stock issued and outstanding as of March 31, 2023 and December 31, 2022, valued at $ 3,532,000 , are non-voting and non-convertible preferred stock with a 5.0 % cumulative annual dividend rate payable when declared by the Board of Directors and a $ 4 per share liquidation preference over common stock, which must be paid before any distribution is made to common stockholders.

These preferred shares were issued to Lyte Optronics, Inc.

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We operate in one segment for the design, development, manufacture and distribution of high-performance compound and single element semiconductor substrates and sale of raw materials integral to these substrates.

Our chief operating decision-maker has been identified as our Chief Executive Officer, who reviews operating results to make decisions about allocating resources and assessing performance for the Company.

In accordance with ASC Topic 280, Segment Reporting, our chief operating decision maker has been identified as the Chief Executive Officer, who reviews operating results to make decisions about allocating resources and assessing performance for the Company.

Since we operate in one segment, all financial segment and product line information can be found in the condensed consolidated financial statements.

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Three Months Ended

Nine Months Ended

September 30,

Product Type:

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Three Months Ended

Nine Months Ended

September 30,

Geographical region:

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

September 30,

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

1 unchanged sentence

Significant Customers

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

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

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

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

No customers represented 10 % of our revenue for the three months ended March 31, 2023 and one customer, Landmark, represented 10 % of our revenue for the three months ended March 31, 2022.

Our top five customers, although not the same five customers for each period, represented 28 % and 29 % of our revenue for the three months ended March 31, 2023 and 2022, respectively.

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

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

No customers accounted for 10 % of our accounts receivable balance as of March 31, 2023 , and two customers accounted for more than 10 % of our accounts receivable as of December 31, 2022.

Commitments and Contingencies

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

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

The following table reflects the change in our warranty accrual which is included in “Accrued liabilities” in the condensed consolidated balance sheets, during the three months ended March 31, 2023 and 2022 (in thousands):

Three Months Ended

Nine Months Ended

September 30,

Beginning accrued product warranty

15 unchanged sentences

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

However, the agreement does

state that each party has a right to seek from the other party compensation for losses.

However, the agreement does state that each party has a right to seek from the other party compensation for losses.

Under certain conditions, the Dingxing local government may purchase the land and building at the appraised value.

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

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

As of March 31, 2023, we do not have any outstanding purchase orders that will incur a penalty if cancelled by the Company.

Legal Proceedings

1 unchanged sentence

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

Other Income, Net

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

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

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

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

Other Income (expense), Net

Other income (expense), net for the three months ended March 31, 2023 and 2022, includes a grant of $ 0.5 million and $ 0.2 million, respectively, from a Chinese provincial government agency as an award for relocating to its province.

In addition, we incurred a foreign currency transaction exchange loss of $ 213,000 and $ 228,000 for the three months ended March 31, 2023 and 2022, respectively.

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

3 unchanged sentences

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

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

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

Income tax expense for the three months ended March 31, 2023 includes no interest and penalties.

As of March 31, 2023, we have no accrued interest and penalties related to uncertain tax positions.

We file income tax returns in the U.S.

1 unchanged sentence

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

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

Provision for income taxes for the three months ended March 31, 2023 was mostly related to our wholly owned China subsidiaries and our partially owned subsidiaries in China.

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

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or 15 years for research conducted in a foreign jurisdiction.

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

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

We capitalize the R&E expense incurred by our Delaware corporation and amortize it over five years.

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

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

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

Revenue Recognition

1 unchanged sentence

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

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

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

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

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

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

We do not have any material contract assets as of March 31, 2023.

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

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

September 30,

The following table reflects the contract liabilities balance, which is included in “Accrued liabilities” on the condensed consolidated balance sheets, as of March 31, 2023 and December 31, 2022 (in thousands):

Contract liabilities

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

During the three months ended March 31, 2023, the Company recognized $ 286,000 of revenue that was included in the contract balances as of December 31, 2022.

Disaggregated Revenue

3 unchanged sentences

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

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

September 30,

The following table represents bank loans as of March 31, 2023 and December 31, 2022 (in thousands, except interest rate data):

Bank of China (1)

Bank of China (5)

Bank of China (3)

Bank of Communications (2)

China Merchants Bank (3)

Bank of Communications (5)

China Merchants Bank (5)

5 unchanged sentences

Industrial and Commercial Bank of China (6)

Bank of China (5)

NingBo Bank (5)

2 unchanged sentences

(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.

(3) ChaoYang LiMei time deposit.

(4) AXT time deposit.

7 unchanged sentences

Under the terms of the facility lease agreement, in May 2020, we were granted an extension to the term of the lease for an additional three years .

We are in the process of negotiating a new lease at our current location.

We are reasonably certain to sign a new lease for a minimum term of three years in the coming months.

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

4 unchanged sentences

A lease is classified as an operating lease if it does not meet any one of these criteria.

All of our leases are classified as operating leases and substantially all of our operating leases are comprised of equipment and office space leases.

All of our leases

are classified as operating leases and substantially all of our operating leases are comprised of equipment and office space leases.

None of our leases are classified as finance leases.

10 unchanged sentences

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

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

As of March 31, 2023, the maturities of our operating lease liabilities (excluding short-term leases) are as follows (in thousands):

Maturity of Lease Liabilities

4 unchanged sentences

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

September 30,

Weighted-average remaining lease term (years)

1 unchanged sentence

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

Nine Months Ended

September 30,

Three Months Ended

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

2 unchanged sentences

Three Months Ended

Nine Months Ended

September 30,

Operating lease

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

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

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.

2 unchanged sentences

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

Subject to review and approval by the CSRC and other authorities, Tongmei expects to accomplish this goal in the fourth quarter of 2022.

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.

public company.

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

The components of the change in redeemable noncontrolling interests for the three months ended March 31, 2023 are presented in the following table (in thousands):

Balance as of January 1, 2023

Investment in subsidiary with redeemable noncontrolling interest

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

Equity issuance costs incurred

Stock-based compensation attributable to redeemable noncontrolling interests

Net income attributable to redeemable noncontrolling interests

Net loss attributable to redeemable noncontrolling interests

Effect of foreign currency translation on redeemable noncontrolling interests

Effect of foreign currency translation attributable to redeemable noncontrolling interests

Balance as of September 30, 2022

Balance as of March 31, 2023

Recent Accounting Pronouncements

In November 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2021-10, Government Assistance (Topic 832):

Disclosures by Business Entities about Government Assistance.

ASU 2021-10 aims to provide increased transparency by requiring business entities to disclose information about certain types of government assistance they receive in the notes to the financial statements.

The FASB broadly defined “government assistance” in ASC 832 to ensure that assistance received from most types of governmental entities or other related organizations would be disclosed.

Government assistance within the scope of ASC 832 includes assistance that is administered by domestic, foreign, local (such as city, town, county, or municipality), regional (such as state, provincial, or territorial), national (federal) governments, as well as entities related to those governments (such as departments, independent agencies, boards, commissions, or component units).

ASC 832 also includes government assistance from intergovernmental organizations (for example, global organizations such as the United Nations, regional organizations such as the European Union, and economic organizations such as the World Trade Organization).

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

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

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

3 unchanged sentences

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

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

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

In September 2022, FASB issued Accounting Standards Update No.

3 unchanged sentences

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

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

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

Subsequent Event

In April 2023, each of Xiaoyi XingAn and JiYa , our equity investment entities, paid to us a dividend of $ 1.8 million.

We have no current intentions to distribute to our investors earnings under our corporate structure.

In April 2023, our consolidated subsidiary, ChaoYang XinMei received a subsidy of approximately $ 730,000 from the provincial government in China.

The aim of the fund is to support innovation in enterprises.

In May 2023, the Company entered into an agreement to divest 15 % of its equity investments in Emeishan JiaMei High Pure Materials Co., Ltd.

to a third party for approximately $ 875,000 .

Upon completion of the sale, the Company’s ownership in Emeishan JiaMei High Pure Materials Co., Ltd.

will be reduced to 10 % .

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

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

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

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

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

(“Tongmei”), on the Shanghai Stock Exchange’s Sci-Tech innovAtion boaRd (the “STAR Market”), being accepted to list shares of Tongmei on the STAR Market and the timing and completion of such listing of shares of Tongmei on the STAR Market are forward looking statements.

Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “goals,” “should,” “continues,” “would,” “could” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this annual report.

(“Tongmei”), on the Shanghai Stock Exchange’s Sci-Tech innovAtion boaRd (the “STAR Market”), being accepted to list shares of Tongmei on the STAR Market, the timing and completion of such listing of shares of Tongmei on the STAR Market are forward-looking statements.

Additionally, statements concerning future matters such as our strategy and plans, industry trends and the impact of trends, tariffs and trade wars, the potential or expected impact of the COVID-19 pandemic on our business, results of operations and financial condition, mandatory factory shutdowns in China, changes in policies and regulations in China and economic cycles on our business are forward-looking statements.

Our forward-looking statements are based upon assumptions that are subject to uncertainties and factors relating to the company’s operations and business environment, which could cause actual results to differ materially from those expressed or implied in the forward-looking statements contained in this report.

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

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the relocation of manufacturing lines and ramping of production;

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

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

COVID-19 or other outbreaks of a contagious disease;

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and other factors as set forth in this Quarterly Report on Form 10-Q, including those set forth under the section entitled “Risk Factors” in Item 1A below.

All forward-looking statements are based upon management’s views as of the date of this quarterly report and are subject to risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated in such forward-looking statements.

Such risks and uncertainties include those set forth under the section entitled “Risk Factors” in Item 1A below, as well as those discussed elsewhere in this quarterly report, and identify important factors that could disrupt or injure our business or cause actual results to differ materially from those predicted in any such forward-looking statements.

All forward-looking statements are based upon management’s views as of the date of this Quarterly Report on Form 10-Q and are subject to risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated in such forward-looking statements.

Such risks and uncertainties include those set forth under the section entitled “Risk Factors” in Item 1A below, as well as those discussed elsewhere in this Quarterly Report on Form 10-Q and identify important factors that could disrupt or injure our business or cause actual results to differ materially from those predicted in any such forward-looking statements.

These forward-looking statements are not guarantees of future performance.

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

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

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

This discussion should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2021 and the condensed consolidated financial statements included elsewhere in this report.

Readers are urged to carefully review and consider the various disclosures made in this Quarterly Report on Form 10-Q, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.

We undertake no obligation to revise or update any forward-looking statements in order to reflect any development, event or circumstance that may arise after the date of this Quarterly Report on Form 10-Q.

This discussion should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2022 and the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

(“AXT”, “the company”, “we,” “us,” and “our” refer to AXT, Inc.

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Our single element substrates are made from germanium (Ge).

InP is a high-performance semiconductor substrate used in broadband and fiber optic applications, 5G infrastructure and data center connectivity.

InP substrates are also used in biometric wearables and other health monitoring applications.

InP is a high-performance semiconductor wafer substrate used in broadband and fiber optic applications, 5G infrastructure and data center connectivity.

More recently, InP substrates are being used in certain consumer products, including biometric wearables and other health monitoring applications.

In recent years, InP demand has increased.

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Semi-conducting GaAs substrates are used to create opto-electronic products, including high brightness light emitting diodes (HBLEDs) that are often used to backlight wireless handsets and liquid crystal display (LCD) TVs and also used for automotive panels, signage, display and lighting applications.

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

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

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• Fiber optic lasers and detectors

• Consumer devices

• Passive Optical Networks (PONs)

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• Screen displays using micro-LEDs

1”, 2”, 3”, 4”, 5", 6”

• Printer head lasers and LEDs

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We believe this supply chain arrangement provides us with pricing advantages, reliable supply, market trend visibility and better sourcing lead-times for key raw materials central to manufacturing our substrates.

In the event of industry-wide supply shortages we believe our vertically integrated supply chain strategy will be even more advantageous.

Our raw material companies produce materials, including raw gallium (4N Ga), high purity gallium (6N and 7N Ga), starting material for InP, arsenic, germanium, germanium dioxide, pyrolytic boron nitride (pBN) crucibles and boron oxide (B2O3).

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

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

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

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

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

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

Most of our larger, more sophisticated customers have qualified gallium arsenide wafers from the new sites.

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

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

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

In 2021 and 2022, we added additional equipment, including certain more advanced equipment.

We have also invested in additional buildings to complement the initial construction and add capacity as needed.

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

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In addition, a new level of technological sophistication in our manufacturing capabilities will enable us to support the major trends that we believe are likely to drive demand for our products in the years ahead.

Customer qualifications and expanding capacity as needed require us to continue to diligently address the many details that arise at both of the new sites.

Customer qualifications and expanding capacity as needed require us to continue to diligently address the many details that arise at each of our sites.

A failure to properly accomplish this could result in disruption to our production and have a material adverse impact on our revenue, our results of operations and our financial condition.

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We formed and founded Tongmei in 1998 and believe Tongmei has grown into a company that will be an attractive offering on the STAR Market.

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

By December 31, 2020, Investors, which consist of 10 private equity funds, had entered into two sets of definitive transaction documents,

each consisting of a capital increase agreement along with certain supplemental agreements in substantially the same form (collectively, the “Capital Investment Agreements”), with Tongmei for a total investment of approximately $48.1 million.

To qualify for a STAR Market listing, the first major step

in the process was to engage private equity firms in China (“Investors”) to invest funds in Tongmei.

By December 31, 2020, Investors, which consist of 10 private equity funds, had entered into two sets of definitive transaction documents, each consisting of a capital increase agreement along with certain supplemental agreements in substantially the same form (collectively, the “Capital Investment Agreements”), with Tongmei for a total investment of approximately $48.1 million.

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

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

dollars for this Quarterly Report on Form 10-Q.) The remaining investment of approximately $1.5 million of new capital was funded in January 2021.

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

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

Subject to review and approval by the CSRC and other authorities, Tongmei expects to accomplish this goal in the fourth quarter of 2022.

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.

public company.

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

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

In this regard our two consolidated raw material companies, Nanjing JinMei Gallium Co., Ltd.

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The assignment to Tongmei of JinMei, BoYu and its subsidiaries, and AXT-Tongmei, Inc.

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

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

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

The following organization chart depicts the consolidated structure as of September 30, 2022;

Recent statements and regulatory actions by China’s government on the use of VIEs and data security or anti-monopoly concerns have not impacted our ability to conduct our business or continue to list our common stock on the Nasdaq Global Select Market.

The following organization chart depicts the consolidated structure as of March 31, 2023;

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

The PRC government is a single party form of government with virtually unlimited authority and power to intervene in or influence commercial

operations in China.

The PRC government is a single party form of government with virtually unlimited authority and power to intervene in or influence commercial operations in China.

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

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The new list added gallium arsenide.

As a result of the newly published list, we were required to seek additional permits.

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

Any such intervention or influence or change in the rules and regulations in China could result in a material change in our PRC operations and/or the value of our common stock or cause the value of such securities to significantly decline or be worthless.

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

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The initial tariff rate was 10% and subsequently was increased to 25%.

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

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

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

Approximately 14% of our revenue derives from importing our wafers into the United States and we expect the volume to increase.

For the three months ended March 31, 2023, we paid approximately $447,000 in tariffs.

In 2022, we paid approximately $3.3 million in tariffs.

The future impact of tariffs and trade wars is uncertain.

We have created a vertically integrated supply chain and transfer cash through our corporate structure in three ways.

First, we capitalize our investments in our PRC subsidiaries.

We license to our PRC subsidiaries intellectual property and receive from our PRC subsidiaries royalty payments.

Second, we use transfer pricing arrangements to buy from our PRC subsidiaries and PRC joint ventures wafers and raw materials.

We also sell to our PRC subsidiaries capital equipment that we purchase at the request of our PRC subsidiaries and for which we are reimbursed by the applicable PRC subsidiary.

We review the terms of the transfer pricing arrangements annually with our independent registered public accounting firm.

Third, our PRC subsidiaries and PRC joint ventures have paid dividends to entities within the Company’s corporate structure.

For the three months ended March 31, 2023, the aggregate dividends paid to the Company, directly or to an intermediate entity within our corporate structure, by our PRC subsidiaries and PRC raw

material joint ventures were $0.

For the year ended December 31, 2022, the aggregate dividends paid to the Company, 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.

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

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

For the three months ended March 31, 2023 and the year ended December 31, 2022, no transfers, dividends, or distributions were made between the Company and its PRC subsidiaries, or to investors, except for the settlement of amounts owed under our transfer pricing arrangements in the ordinary course of business.

We have no current intentions to distribute to our investors earnings under our corporate structure.

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

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

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

We have cash management policies that dictate the amount of such funding.

We are subject to a number of unique legal and operational risks associated with our corporate structure, any of which could result in a material change in our operations and/or the value of our common stock or cause the value of such securities to significantly decline or be worthless.

Please carefully read the information beginning on page 53 of this Quarterly Report on Form 10-Q and included in the section entitled “Risk Factors” in Item 1A below.

In particular, the following risk factors address issues associated with our corporate structure:

● Although we are a Delaware corporation and are neither a PRC operating company nor do we conduct our operations in China through the use of VIEs, in the event we inadvertently concluded that we do not require any permissions or approvals from the CSRC or other PRC central government authorities to complete a public offering of securities in the U.S.

or applicable laws, regulations, or interpretations change, we may be required to obtain such permissions or approvals to complete such a public offering of securities.

● The PRC central government may intervene in or influence our PRC operations at any time and the rules and regulations in China can change quickly with little advance notice.

● The PRC central government may also exert more control over offerings conducted overseas and/or foreign investment in China-based issuers, which could result in a material change in our operations and/or the value of our common stock.

● Changes in China’s political, social, regulatory or economic environments may affect our financial performance.

● Joint venture raw material companies in China bring certain risks.

● Risks exist in utilizing our new gallium arsenide manufacturing sites efficiently.

● The Chinese central government is increasingly aware of air pollution and other forms of environmental pollution and their reform efforts can impact our manufacturing, including intermittent mandatory shutdowns.

● Shutdowns or underutilizing our manufacturing facilities may result in declines in our gross margins.

● Enhanced trade tariffs, import restrictions, export restrictions, Chinese regulations or other trade barriers may materially harm our business.

● If China places restrictions on freight and transportation routes and on ports of entry and departure this could result in shipping delays or increased costs for shipping.

● Our international operations are exposed to potential adverse tax consequence in China.

● We derive a significant portion of our revenue from international sales, and our ability to sustain and increase our international sales involves significant risks.

● The terms of the private equity raised in China as a first step toward an IPO on the STAR Market grant each Investor a right of redemption if Tongmei fails to achieve its IPO.

● We are subject to foreign exchange gains and losses that may materially impact our statement of operations.

● Although the audit report is prepared by an independent registered public accounting firm that is currently inspected fully by the Public Company Accounting Oversight Board (the “PCAOB”), there is no guarantee

that future audit reports will be prepared by an independent registered public accounting firm that is completely inspected by the PCAOB.

Our independent registered public accounting firm is BPM LLP (“BPM”), which is registered with the PCAOB.

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

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

Accordingly, the Company does not expect the HFCA Act, the Accelerating Holding Foreign Companies Accountable Act and the related regulations to affect the Company and does not expect to be identified by the Securities and Exchange Commission, or SEC, under the HFCA Act.

On December 15, 2022, the PCAOB vacated its 2021 determinations that the positions taken by authorities in the PRC and Hong Kong prevented it from inspecting and investigating completely registered public accounting firms headquartered in those jurisdictions.

See “Although the audit report is prepared by an independent registered public accounting firm that is currently inspected fully by the PCAOB, there is no guarantee that future audit reports will be prepared by an independent registered public accounting firm that is completely inspected by the PCAOB” under the section entitled “Risk Factors” in Item 1A below for further information on risks related to our foreign operations and dependence.

Critical Accounting Policies, Estimates and Change in Accounting Estimates

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

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

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

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Revenue Recognition

We manufacture and sell high-performance compound semiconductor substrates including indium phosphide, gallium arsenide and germanium wafers, and our consolidated subsidiaries sell certain raw materials, including high purity gallium (7N Ga), pyrolytic boron nitride (pBN) crucibles and boron oxide (B2O3).

We manufacture and sell high-performance compound semiconductor substrates including indium phosphide, gallium arsenide and germanium wafers, and our consolidated subsidiaries sell certain raw materials, including high purity gallium (6N and 7N Ga), pyrolytic boron nitride (pBN) crucibles and boron oxide (B2O3).

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

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

We account for a contract with a customer when there is a legally enforceable contract,

which could be the customer’s purchase order, the rights of the parties are identified, the contract has commercial terms, and collectibility of the contract consideration is probable.

The majority of our contracts have a single performance obligation to transfer products and are short term in nature, usually less than six months.

Our revenue is measured based on the consideration specified in the contract with each customer in exchange for transferring products that are generally based upon a negotiated, formula, list or fixed price.

Revenue is recognized when control of the promised goods is transferred to our customer, which is either upon shipment from our dock, receipt at the customer’s dock, or removal from consignment inventory at the customer’s location, in an amount that reflects the consideration we expect to be entitled to receive in exchange for those goods.

Revenue is recognized when control of the promised goods is transferred to our customer, which is either upon shipment from our dock, receipt at the customer’s

dock, or removal from consignment inventory at the customer’s location, in an amount that reflects the consideration we expect to be entitled to receive in exchange for those goods.

Accounts Receivable and Allowance for Doubtful Accounts

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

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

We review at least quarterly, or when there are changes in credit risks, the likelihood of collection on our accounts receivable balances and provide an allowance for doubtful accounts receivable for any expected credit losses primarily based upon the age of these accounts.

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

As of September 30, 2022 and December 31, 2021, our accounts receivable, net balance was $38.1 million and $34.8 million, respectively, which was net of an allowance for doubtful accounts of $307,000 and $130,000, respectively.

As of March 31, 2023 and December 31, 2022, our accounts receivable, net balance was $21.3 million and $29.3 million, respectively, which was net of an allowance for doubtful accounts of $307,000 and $307,000, respectively.

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

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Warranty costs are accrued at the time revenue is recognized.

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

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

As of March 31, 2023 and December 31, 2022, accrued product warranties totaled $915,000 and $669,000, respectively.

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

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

As of September 30, 2022 and December 31, 2021, we had an inventory reserve of $23.0 million and $19.6 million, respectively, for excess and obsolete inventory and $42,000 and $66,000, respectively, for lower of cost or net realizable value reserves.

If actual demand for our products were to be substantially lower than estimated,

additional inventory adjustments for excess or obsolete inventory might be required, which could have a material impact on our business, financial condition and results of operations.

As of March 31, 2023 and December 31, 2022, we had an inventory reserve of $25.9 million and $24.7 million, respectively, for excess and obsolete inventory and $50,000 and $47,000, respectively, for lower of cost or net realizable value reserves.

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

Impairment of Investments

We classify marketable investments in debt securities as available-for-sale debt securities in accordance with Accounting Standards Codification (“ASC”) Topic 320, Investments - Debt Securities .

All available-for-sale debt securities with a quoted market value below cost (or adjusted cost) are reviewed in order to determine whether the decline is other-than-temporary.

All available-for-sale debt

securities with a quoted market value below cost (or adjusted cost) are reviewed in order to determine whether the decline is other-than-temporary.

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

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

There were no impairment charges during the three months ended March 31, 2023 and 2022.

Fair Value of Investments

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

We measure the fair value of these foreign currency hedges at each month end and quarter end using current exchange rates and in accordance with generally accepted accounting principles.

We measure the fair value of these

foreign currency hedges at each month end and quarter end using current exchange rates and in accordance with U.S.

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

As of September 30, 2022, the net change in fair value from the placement of the hedge to settlement at each month end during the quarter had a de minimis impact to the condensed consolidated results.

There have been no transfers between fair value measurement levels during the three months ended September 30, 2022 and 2021.

As of March 31, 2023, the net change in fair value from the placement of the hedge to settlement at each month end during the quarter had a de minimis impact to the condensed consolidated results.

There have been no transfers between fair value measurement levels during the three months ended March 31, 2023 and 2022.

Impairment of Long-Lived Assets

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

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

We had no “Assets held for sale” or any impairment of long-lived assets in the condensed consolidated balance sheets as of March 31, 2023 and December 31, 2022.

Stock-based Compensation

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The cost of restricted stock awards is determined using the fair value of our common stock on the date of grant.

The award of performance Restricted Stock covering Shares (the “Performance Award”) will be subject to vesting requirements relating to both the recipient of the Performance Award (the “Participant”) continuously remaining a Service Provider through specified dates and achievement of specified performance-based criteria (“Performance Goal”).

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

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

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

The Performance Criteria will be measured over the Company’s fiscal year 2022 or 2023.

The financial Performance Criteria are metrics based upon prior year-end actual results as compared to the Company’s current year-end actual results with respect to the 2022 Performance Awards or based upon the current year-end actual results with respect to the 2023 Performance Awards.

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

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Impact of the COVID-19 Pandemic

In March 2020, the World Health Organization declared the outbreak of COVID-19 to be a pandemic, which continues to spread throughout the world.

In March 2020, the World Health Organization declared the outbreak of COVID-19 to be a pandemic, which continues to be an ongoing pandemic.

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

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

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

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

Results of Operations

Three Months Ended

Nine Months Ended

September 30,

Product Type:

($ in thousands)

Raw materials and other

Total revenue

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Revenue decreased $20.2 million, or 51.1%, to $19.4 million for the three months ended March 31, 2023 from $39.7 million for the three months ended March 31, 2022.

The substrate revenue decrease for the three months ended March 31, 2023 as compared to the same period in 2022 was primarily the result of lower demand for InP wafer substrates due to softening in data center, consumer and telecommunications and GaAs wafer substrates reflecting the overall slow-down across a number of applications particularly in China.

Raw materials sales decreased $2.0 million, or 25.2%, to $5.9 million for the three months ended March 31, 2023 as compared to the same period in 2022.

The decrease in raw materials revenue for the three months ended March 31, 2023 as compared to the same period in 2022 was primarily the result of a decrease in sales of pBN crucibles and decreased sales of refined gallium resulting from weaker market demand.

Revenue by Geographic Region

Three Months Ended

September 30,

($ in thousands)

9 unchanged sentences

Total revenue

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

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

Revenue in China decreased $9.4 million for the three months ended March 31, 2023, primarily due to lower demand for our GaAs, InP and Ge wafer substrates and refined gallium sold by one of our consolidated subsidiaries.

Revenue in Taiwan decreased $4.4 million, primarily due to lower demand for our InP and GaAs wafer substrates.

Revenue in Japan decreased $1.3 million primarily due to lower demand for our InP and GaAs wafer substrates and pBN crucibles sold by one of our consolidated subsidiaries.

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

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

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

Nine Months Ended

September 30,

($ in thousands)

% of total revenue

Asia Pacific (excluding China, Taiwan and Japan)

% of total revenue

Europe (primarily Germany)

% of total revenue

North America (primarily the United States)

% of total revenue

Total revenue

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

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

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

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

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

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

Revenue in Asia Pacific decreased $0.7 million, primarily due to lower demand for our GaAs and pBN crucibles sold by one of our consolidated subsidiaries.

Revenue in Europe decreased $2.8 million, primarily due to lower demand for our GaAs, Ge and InP wafer substrates and pBN crucibles sold by one of our consolidated subsidiaries.

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

Three Months Ended

Nine Months Ended

September 30,

($ in thousands)

Gross Profit %

Gross profit increased $3.3 million, or 28.5%, to $14.8 million for the three months ended September 30, 2022 from $11.5 million for the three months ended September 30, 2021.

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

Gross margin as a percent of revenue increased due to improved yields in crystal growth for our wafer substrates, the recycling of remnants of indium phosphide processing material, higher gross margin for our two raw material companies and a change in product mix that was more favorable to gross margin.

Gross profit increased $8.3 million, or 23.4%, to $43.5 million for the nine months ended September 30, 2022 from $35.3 million for the nine months ended September 30, 2021.

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

Gross profit decreased $8.2 million, or 61.6%, to $5.1 million for the three months ended March 31, 2023 from $13.3 million for the three months ended March 31, 2022.

The decrease in gross profit is the result of lower revenue across all product lines.

Gross margin as a percentage of revenue decreased due to under absorbed factory overhead, partially offset by cost savings as a result of recycling InP materials.

Selling, General and Administrative Expenses

Three Months Ended

Nine Months Ended

September 30,

($ in thousands)

Selling, general and administrative expenses

% of total revenue

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

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

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

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

Selling, general and administrative expenses decreased $0.5 million, or 7.7%, to $6.0 million for the three months ended March 31, 2023 from $6.5 million for the three months ended March 31, 2022.

The lower selling, general and administrative expenses were primarily from a decrease in personnel-related expenses and outside commissions, partially offset by an increase in professional services.

Research and Development

Three Months Ended

Nine Months Ended

September 30,

($ in thousands)

Research and development

% of total revenue

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

The increase in research and development expenses for the three months ended September 30, 2022 was primarily due to personnel-related expenses and development expenses for 8-inch GaAs and 6-inch InP wafer substrates and development of new features for certain of our GaAs and InP wafer substrates.

Research and development expenses increased $2.7 million, or 35.4%, to $10.3 million for the nine months ended September 30, 2022 from $7.6 million for the nine months ended September 30, 2021.

The increase in research and development expenses for the nine months ended September 30, 2022 was primarily due to personnel-related expenses, travel and development expenses for 8-inch GaAs and 6-inch InP wafer substrates and development of new features for certain of our GaAs and InP wafer substrates.

Research and development expenses increased $0.4 million, or 13.8%, to $3.6 million for the three months ended March 31, 2023 from $3.2 million for the three months ended March 31, 2022.

The increase in research and development expenses for the three months ended March 31, 2023 was primarily due to development expenses for 8-inch GaAs and 6-inch InP wafer substrates and development of new features for certain of our GaAs and InP wafer substrates.

Interest Expense, Net

Three Months Ended

Nine Months Ended

September 30,

($ in thousands)

Interest expense, net

% of total revenue

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

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

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

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

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

Interest expense, net increased $214,000 to $397,000 for the three months ended March 31, 2023 from $183,000 for the three months ended March 31, 2022.

Interest expense, net increased primarily due to increased debt during the three months ended March 31, 2023 as compared to the three months ended March 31, 2022.

Equity in Income of Unconsolidated Joint Ventures

Three Months Ended

Nine Months Ended

September 30,

Equity in Income

September 30,

Equity in Income

($ in thousands)

Equity in income of unconsolidated joint ventures

% of total revenue

The equity in income of unconsolidated joint venture companies was income of $2.0 million for the three months ended September 30, 2022 as compared to income of $1.1 million for the three months ended September 30, 2021.

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

The equity in income of unconsolidated joint venture companies was income of $5.3 million for the nine months ended September 30, 2022 as compared to income of $3.7 million for the nine months ended September 30, 2021.

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

Other Income, Net

The equity in income of unconsolidated joint venture companies was income of $1.0 million for the three months ended March 31, 2023 as compared to income of $1.1 million for the three months ended March 31, 2022.

The decrease in income of $91,000 is primarily due to lower sales volume at two raw gallium companies.

Other Income (expense), Net

Three Months Ended

Nine Months Ended

September 30,

($ in thousands)

Other Income (Expense)

($ in thousands)

Other income, net

Other income (expense), net

% of total revenue

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

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

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

Other income, net increased primarily due to a grant of $0.2 million received from a Chinese provincial government agency as an award for relocating to its province in March 2022, compared to a grant of $0.1 million in March 2021 and a foreign exchange loss of $185,000 for the nine months ended September 2021 compared to a gain of $542,000 for the nine months ended September 2022.

Provision for (benefit from) Income Taxes

Other income (expense), net increased $291,000 to an income of $282,000 for the three months ended March 31, 2023 from an expense of $9,000 for the three months ended March 31, 2022.

Other income (expense), net

increased primarily due to compensation received from the China government by one of our consolidated subsidiaries for establishing its facilities in Kazuo.

Provision for Income Taxes

Three Months Ended

Nine Months Ended

September 30,

($ in thousands)

Provision for (benefit from) income taxes

Provision for income taxes

% of total revenue

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

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

Provision for income taxes decreased $512,000, or 77.6%, to $148,000 for the three months ended March 31, 2023 as compared to $660,000 for the three months ended March 31, 2022.

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

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

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

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

subsidiary, AXT-Tongmei.

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or 15 years for research conducted in a foreign jurisdiction.

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

We capitalize the R&E expense for our Delaware corporation and amortize it over five years.

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

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

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

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

Net Income Attributable to Noncontrolling Interests and Redeemable Noncontrolling Interests

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

The Inflation Reduction Act imposes 1% exercise tax on stock buy backs and 15% minimum tax on corporations with over $1 billion in profit.

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

Net Income (loss) Attributable to Noncontrolling Interests and Redeemable Noncontrolling Interests

Three Months Ended

Net income attributable to

Nine Months Ended

Net income attributable to

noncontrolling interests and

Net (income) loss attributable to

noncontrolling interests and

September 30,

redeemable noncontrolling interests

September 30,

redeemable noncontrolling interests

($ in thousands)

Net income attributable to noncontrolling interests and redeemable noncontrolling interests

Net (income) loss attributable to noncontrolling interests and redeemable noncontrolling interests

% of total revenue

Net income attributable to noncontrolling interests and redeemable noncontrolling interests increased $275,000 or 39.5% to $971,000 for the three months ended September 30, 2022, from $696,000 for the three months ended September 30, 2021, primarily due to the structural changes of the legal entities in China (see Note 1) and partially offset by losses generated by ChaoYang XinMei.

Net income attributable to noncontrolling interests and redeemable noncontrolling interests increased $1.5 million or 119.4% to $2.8 million for the nine months ended September 30, 2022, from $1.3 million for the nine months ended September 30, 2021, primarily due to the structural changes of the legal entities in China (see Note 1) and partially offset by losses generated by ChaoYang XinMei.

Net income (loss) attributable to noncontrolling interests and redeemable noncontrolling interests decreased $1.1 million or 139.4% to a loss of $318,000 for the three months ended March 31, 2023, from income of $807,000 for the three months ended March 31, 2022, primarily due to lower profitability from our consolidated joint venture companies in China as sales decreased due to a reduction in raw materials sales.

Liquidity and Capital Resources

2 unchanged sentences

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

As of March 31, 2023, our principal source of liquidity was $53.6 million, which consisted of cash, restricted cash and cash equivalents of $44.9 million and investments of $8.7 million.

In the three months ended March 31, 2023, cash, restricted cash and cash equivalents increased by $3.5 million and investments decreased by $2.8 million.

The increase in cash, restricted cash and cash equivalents of $3.5 million in the three months ended March 31, 2023 was primarily due to net cash provided by financing activities of $5.8 million and the effect of exchange rate changes of $19,000, partially offset by net cash used in operating activities of $1.5 million and net cash used in investing activities of $0.7 million.

As of March 31, 2023, we and our consolidated joint ventures in China held approximately $40.4 million in cash and investments in foreign bank accounts.

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

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

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

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

Net cash used in operating activities of $1.5 million for the three months ended March 31, 2023 was primarily comprised of a net loss before income attributable to noncontrolling interest and redeemable noncontrolling interests of $3.7 million, income from equity method investments of $1.0 million, partially offset by the adjustment for non-cash items of depreciation and amortization of $2.1 million, stock-based compensation of $0.9 million and a net change of $0.1 million in operating assets and liabilities.

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

Net cash used in investing activities of $0.7 million for the three months ended March 31, 2023 was primarily from the purchase of property, plant and equipment of $3.6 million, partially offset by proceeds from sales and maturities of available-for-sale debt securities of $2.9 million.

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

Net cash provided by financing activities was $5.8 million for the three months ended March 31, 2023, which consisted of proceeds from short-term loans of $18.4 million, capital increase in subsidiary shares from noncontrolling interest of $0.2 million and common stock option exercised of $8,000, partially offset by repayment of short-term loan of $12.8 million.

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

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

2 unchanged sentences

Since 2015, no shares were repurchased under this program.

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

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

During the three months ended March 31, 2023, we did not repurchase any shares under the approved stock

repurchase program.

As of March 31, 2023, approximately $2.7 million remained available for future repurchases under this program.

Currently, we do not plan to repurchase additional shares.

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

For the nine months ended September 30, 2022 and 2021, the aggregate dividends paid to us, directly or to an intermediate entity within our corporate structure, by our PRC subsidiaries and PRC raw material joint ventures were approximately $2.9 million and $774,000, respectively.

For the nine months ended September 30, 2022 and 2021, the aggregate dividends paid to minority shareholders by our PRC subsidiaries and PRC raw material joint ventures were approximately $0 and $0, respectively.

For the nine months ended September 30, 2022, no transfers, dividends, or distributions have been made to date between the Company and its PRC subsidiaries, or to investors, except for the settlement of amounts owed under our transfer pricing arrangements in the ordinary course of business.

For the three months ended March 31, 2023 and 2022, 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 $0 and $0, respectively.

For the three months ended March 31, 2023 and 2022, the aggregate dividends paid to minority shareholders by our PRC subsidiaries and PRC raw material joint ventures were approximately $0 and $0, respectively.

For the three months ended March 31, 2023, no transfers, dividends, or distributions have been made to date between the Company and its PRC subsidiaries, or to investors, except for the settlement of amounts owed under our transfer pricing arrangements in the ordinary course of business.

We have no current intentions to distribute to our investors earnings under our corporate structure.

11 unchanged sentences

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

Subject to review and approval by the CSRC and other authorities, Tongmei expects to accomplish this goal in the fourth quarter of 2022.

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

1 unchanged sentence

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

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

September 30,

The following table represents bank loans as of March 31, 2023 and December 31, 2022 (in thousands, except interest rate data):

Bank of China (1)

Bank of China (5)

Bank of China (3)

Bank of Communications (2)

China Merchants Bank (3)

Bank of Communications (5)

China Merchants Bank (5)

5 unchanged sentences

Industrial and Commercial Bank of China (6)

Bank of China (5)

NingBo Bank (5)

2 unchanged sentences

(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.

(3) ChaoYang LiMei time deposit.

(4) AXT time deposit.

3 unchanged sentences

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

We currently expect to use the net proceeds from the sale of securities under the shelf registration

statement for working capital, capital expenditures and other general corporate purposes.

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

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

2 unchanged sentences

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

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

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

Contract to Purchase Goods and Services

15 unchanged sentences

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

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

However, the agreement does state that each party has a right to seek from the other party compensation for losses.

Further, there is no specific penalty contemplated if either party breaches the agreement, however the agreement does state that each party has a right to seek from the other party compensation for losses.

Under certain conditions, the Dingxing local government may purchase the land and building at the appraised value.

2 unchanged sentences

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

In addition, BoYu has a similar agreement with the city of Kazuo.

The total investment targeted by BoYu in Kazuo is approximately $8 million in value, assets and capital.

Off-Balance Sheet Arrangements

As of September 30, 2022, we did not have any off-balance sheet financing arrangements and have never established any special purpose entities as defined under SEC Regulation S-K Item 303(a)(4)(ii).

As of March 31, 2023, we did not have any off-balance sheet financing arrangements and have never established any special purpose entities as defined under SEC Regulation S-K Item 303(a)(4)(ii).

QUANTITATIVE AND QUALITATIV E DISCLOSURES ABOUT MARKET RISK

3 unchanged sentences

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

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

Although during 2022, we recorded a foreign exchange gain of $1.6 million, during 2021 and 2020 we recorded net foreign exchange loss of $434,000 and $411,000, respectively, included as part of other income, net in our condensed consolidated statements of operations.

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

5 unchanged sentences

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

We measure the fair value of these hedges at each month end and quarter end using current exchange rates and in accordance with generally accepted accounting principles.

We measure the fair value of these hedges at each month end and quarter end using current exchange rates and in accordance with U.S.

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

As of September 30, 2022 and December 31, 2021, the net change in fair value from the placement of the hedge to settlement at each month end during the quarter had a de minimis impact to the condensed consolidated results.

As of March 31, 2023 and December 31, 2022, the net change in fair value from the placement of the hedge to settlement at each month end during the quarter had a de minimis impact to the condensed consolidated results.

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

10 unchanged sentences

The company may choose not to hedge certain foreign exchange exposures for a variety of reasons, including but not limited to accounting considerations and the prohibitive economic cost of hedging particular exposures.

However, even with our hedging program, we still experience gains and losses on foreign exchange from time to time.

However, even with our hedging program, we still experience losses on foreign exchange from time to time.

Interest Rate Risk

5 unchanged sentences

Interest Rate

September 30,

Cash, cash equivalents and restricted cash

Investments in marketable debt

Investments in marketable debt securities

The primary objective of our investment activities is to preserve principal while maximizing income without significantly increasing risk.

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

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

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

1 unchanged sentence

These securities are generally classified as available-for-sale and consequently are recorded on the balance sheet at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income (loss), net of estimated tax, further reduced by a valuation allowance for expected credit losses, if any.

Our cash, cash equivalents and restricted cash, short-term investments and long-term investments are in high-quality instruments placed with major banks and financial institutions and commercial paper.

cash equivalents and short-term investments and long-term investments are in high-quality instruments placed with major banks and financial institutions and commercial paper.

We have no investments in auction rate securities.

1 unchanged sentence

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

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

No customers accounted for 10% of our accounts receivable balance as of March 31, 2023 and two customers accounted for more than 10% of our accounts receivable as of December 31, 2022.

Impairment of Equity Investment Risk

4 unchanged sentences

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

As of September 30, 2022 and December 31, 2021, we did not maintain any direct investments under the cost method.

Our minority investments under the equity method as of September 30, 2022 and December 31, 2021 totaled $13.7 million and $10.2 million, respectively.

As of March 31, 2023 and December 31, 2022, we did not maintain any direct investments under the cost method.

Our minority investments under the equity method as of March 31, 2023 and December 31, 2022 totaled $16.5 million and $14.6 million, respectively.

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

What changed 10-Q

Item 1. Financial Statements