What changed in this filing

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Item 1. Financial Statements

2023-11-09 compared with 2023-08-09 · 341 added, 262 removed, 1299 unchanged (32% 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 $ 291 and $ 307 as of June 30, 2023 and December 31, 2022

Accounts receivable, net of allowances of $ 243 and $ 307 as of September 30, 2023 and December 31, 2022

Prepaid expenses and other current assets

16 unchanged sentences

2,000 shares authorized;

883 shares issued and outstanding as of June 30, 2023 and December 31, 2022 (Liquidation preference of $ 7,787 and $ 7,699 as of June 30, 2023 and December 31, 2022)

883 shares issued and outstanding as of September 30, 2023 and December 31, 2022 (Liquidation preference of $ 7,831 and $ 7,699 as of September 30, 2023 and December 31, 2022)

Common stock, $ 0.001 par value;

70,000 shares authorized;

43,657 and 43,554 shares issued and outstanding as of June 30, 2023 and December 31, 2022

43,644 and 43,554 shares issued and outstanding as of September 30, 2023 and December 31, 2022

Additional paid-in capital

10 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Cost of revenue

19 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Net income (loss)

9 unchanged sentences

(Unaudited, in thousands)

Six Months Ended

Nine Months Ended

September 30,

Cash flows from operating activities:

Net income (loss)

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

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

Depreciation and amortization

1 unchanged sentence

Stock-based compensation

Loss on disposal of equipment

Return of equity method investments (dividends)

(Gain) Loss on disposal of equipment

Return of equity method investments as dividends

Equity in income of unconsolidated joint ventures

6 unchanged sentences

Other long-term liabilities

Net cash provided by operating activities

Net cash provided by (used in) operating activities

Cash flows from investing activities:

Purchases of property, plant and equipment

Purchases of available-for-sale debt securities

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

Proceeds from sales of equity securities - 15 % Jia Mei

Proceeds from sales of equity securities - 15 % of Jia Mei

Investments in non-marketable equity investments

Net cash used in investing activities

13 unchanged sentences

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

Sales of land and building to unconsolidated joint venture

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

12 unchanged sentences

Actual results could differ materially from those estimates.

The results of operations for the three and six months ended June 30, 2023 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 2022 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 16, 2023 and our Quarterly Report on Form 10-Q for the three months ended March 31, 2023 filed with the SEC on May 10, 2023.

The results of operations for the three and nine months ended September 30, 2023 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 2022 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 16, 2023 and our Quarterly Reports on Form 10-Q for the three months ended March 31, 2023 and June 30, 2023 filed with the SEC on May 10, 2023 and August 9, 2023, respectively.

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 June 30, 2023 and December 31, 2022, we have four and five companies, respectively, accounted for by the equity method.

In May 2023, we sold 15 % of our equity investment in Emeishan Jia Mei High Purity Metals Co., Ltd.

(“Jia Mei”) to a third party.

We now own 10 % of Jia Mei and no longer have significant influence over its operations and financial policies.

As of May 2023, we no longer report Jia Mei as an equity investment in our condensed consolidated balance sheet.

As of September 30, 2023 and December 31, 2022, we have four and five companies, respectively, accounted for by the equity method.

In May 2023, we reduced our ownership in Emeishan Jia Mei High Purity Metals Co., Ltd.

(“Jia Mei”) from 25 % to 10 % by selling a portion of our Jia Mei shares to an unrelated third party for approximately $ 827,000 .

As a result of our decreased ownership and the fact that we do not have the ability to exercise significant influence over Jia Mei’s operations, as of May 2023, we no longer reported Jia Mei as an equity investment in our condensed consolidated balance sheets.

Our Jia Mei investment was re-measured to fair value at the time of sale.

1 unchanged sentence

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

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

For the three and six months ended June 30, 2023, expenses associated with ChaoYang LiMei had a de minimis impact on our condensed consolidated financial statements.

When warranted by favorable market conditions, 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, 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.

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

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

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

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

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

In May 2021, Tongmei and 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.

3 unchanged sentences

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

In April 2022, Tongmei entered into a capital increase agreement (the “Capital Increase Agreement”) with minority investors to further invest $ 4.5 million in ChaoYang XinMei.

In April 2022, Tongmei entered into a capital increase agreement (the “Capital Increase Agreement”) with minority investors to further invest approximately $ 4.5 million in ChaoYang XinMei.

Tongmei’s portion of the investment was approximately $ 2.6 million, of which $ 1.1 million was invested in April 2022 and $ 0.8 million was invested in May 2022.

6 unchanged sentences

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

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

The agreement calls for a total investment of approximately $ 4.4 million, of which ChaoYang JinMei will fund approximately $ 3.3 million for a 75 percent ownership of ChaoYang ShuoMei.

In April 2022, ChaoYang JinMei signed a joint venture agreement with certain investors to fund a new company, ChaoYang ShuoMei, our consolidated subsidiary (the “ChaoYang ShouMei Joint Venture Agreement”).

The ChaoYang ShuoMei Joint Venture Agreement called for a total investment of approximately $ 4.4 million, of which ChaoYang JinMei would fund approximately $ 3.3 million for a 75 percent ownership of ChaoYang ShuoMei.

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

6 unchanged sentences

As a result, noncontrolling interests increased $ 0.4 million and redeemable noncontrolling interests increased $ 75,000 .

In August 2023, ChaoYang ShuoMei received $ 0.6 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 $ 44,000 .

ChaoYang JinMei has completed its investment obligations under the ChaoYang ShuoMei Joint Venture Agreement.

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.

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

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 “ChaoYang KaiMei Joint Venture 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.

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

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

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

In each of July 2023 and August 2023, Tongmei made an investment of approximately $ 0.6 million in ChaoYang KaiMei.

These contributions culminated in the fulfillment of all of Tongmei’s financial obligations under the ChaoYang KaiMei Joint Venture Agreement.

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

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

2 unchanged sentences

In preparation for Tongmei’s application for a listing of shares in an initial public offering (the “IPO”) on the Shanghai Stock Exchange’s Sci-Tech innovAtion boaRd (the “STAR Market”), in late December 2020, we reorganized our entity structures in China.

JinMei and BoYu and its subsidiaries were assigned to Tongmei and effectively merged with Tongmei although they retained their own respective legal entity status and are wholly owned subsidiaries of

JinMei and BoYu and its subsidiaries were assigned to Tongmei and effectively merged with Tongmei although they retained their own respective legal entity status and are wholly owned subsidiaries of Tongmei.

The 33 % minority interest stakeholders of BoYu converted their ownership to a 7.59 % minority interest in Tongmei.

6 unchanged sentences

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

As of June 30, 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.

As of September 30, 2023, Tongmei’s noncontrolling interests and redeemable noncontrolling interests totaled approximately 14.5 %.

We remain the controlling stakeholder of Tongmei and hold a majority of the board of director positions of Tongmei.

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

Since Tongmei is 85.5 % owned by us, and the transaction was between common interest holders, the transaction was accounted for at net book value and resulted in an increase of $ 1.2 million to noncontrolling interests and $ 1.2 million to redeemable noncontrolling interests.

Investments and Fair Value Measurements

1 unchanged sentence

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

As of June 30, 2023 and December 31, 2022, our cash, cash equivalents and debt investments are classified as follows (in thousands):

June 30, 2023

As of September 30, 2023 and December 31, 2022, our cash, cash equivalents and debt investments are classified as follows (in thousands):

September 30, 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 June 30, 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.

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

The following table summarizes the fair value and gross unrealized losses related to available-for-sale debt securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of June 30, 2023 (in thousands):

In Loss Position

1 unchanged sentence

Loss Position

As of June 30, 2023

As of September 30, 2023

Certificates of deposit

13 unchanged sentences

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 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.

3 unchanged sentences

Therefore, the January 2023 bank loans and June 2023 bank loans, along with the respective time deposits, are classified as short-term investments in our condensed consolidated balance sheets.

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

As of June 30, 2023, $ 10.8 million was included in restricted cash in our condensed consolidated balance sheets.

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

As of September 30, 2023, $ 10.8 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 $ 11.8 million and $ 14.6 million as of June 30, 2023 and December 31, 2022, respectively.

As of June 30, 2023, there were four companies accounted for under the equity method.

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 $ 13.2 million and $ 14.6 million as of September 30, 2023 and December 31, 2022, respectively.

As of September 30, 2023, there were four companies accounted for under the equity method.

One of our equity investments, Beijing JiYa Semiconductor Material Co., Ltd.

1 unchanged sentence

This resulted in a $ 754,000 impairment charge in our second quarter 2023 financial results.

Except as mentioned above, there were no impairment charges for the remainder of these investments during the three and six months ended June 30, 2023 and 2022.

In May 2023, we reduced our ownership in Jia Mei from 25 % to 10 % by selling a portion of our Jia Mei shares to a third party for approximately $ 827,000 .

Except as mentioned above, there were no impairment charges for the remainder of these investments during the three and nine months ended September 30, 2023 and 2022.

In May 2023, we reduced our ownership in Jia Mei from 25 % to 10 % by selling a portion of our Jia Mei shares to an unrelated third party for approximately $ 827,000 .

As a result of our decreased ownership and the fact that we do not have the ability to exercise significant influence over Jia Mei’s operations, we adopted the fair value method of accounting to report Jia Mei’s financial statements.

1 unchanged sentence

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

As of June 30, 2023, our investments in this unconsolidated company had a carrying value of $ 551,000 and were included in “Other assets” in the condensed consolidated balance sheets.

As of September 30, 2023, our investments in this unconsolidated company had a carrying value of $ 551,000 and were included in “Other assets” in the condensed consolidated balance sheets.

As a result of the share sale, we recognized a gain of $ 575,000 .

Additionally, in accordance with ASC 321-10-35-2, we adjusted the investment in Jia Mei to its fair value at the time of electing the fair value method, which resulted in a gain of $ 383,000 .

The gain resulting from the sale and the subsequent remeasurement was incorporated as a component of “Equity in income of unconsolidated joint ventures” in the condensed consolidated statements of operations for the three months ended June 30, 2023.

Fair Value Measurements

1 unchanged sentence

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

As of June 30, 2023 and December 31, 2022, the total unrealized loss, net of tax, included in accumulated other comprehensive income was immaterial.

As of September 30, 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.

4 unchanged sentences

On a recurring basis, we measure certain financial assets and liabilities at fair value, primarily consisting of our short-term and long-term debt investments.

The type of instrument valued based on quoted market prices in active markets include our money market funds, which are generally classified within Level 1 of the fair value hierarchy.

The type of instrument valued based on quoted market prices in active markets includes our money market funds, which are generally classified within Level 1 of the fair value hierarchy.

We classify our available-for-sale debt securities, including certificates of deposit and corporate bonds, as having Level 2 inputs.

2 unchanged sentences

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 June 30, 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 and six months ended June 30, 2023.

There have been no transfers between fair value measurements levels during the three and six months ended June 30, 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 June 30, 2023 (in thousands):

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

As of September 30, 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 and nine months ended September 30, 2023.

There have been no transfers between fair value measurements levels during the three and nine months ended September 30, 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 September 30, 2023 (in thousands):

Quoted Prices in

4 unchanged sentences

Observable Inputs

June 30, 2023

September 30, 2023

Certificates of deposit

13 unchanged sentences

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

We did not record any other-than-temporary impairment charges for these investments during the three and six months ended June 30, 2023 and 2022, respectively.

We did not record any other-than-temporary impairment charges for these investments during the three and nine months ended September 30, 2023 and 2022, respectively.

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

September 30,

Raw materials

1 unchanged sentence

Finished goods

As of June 30, 2023 and December 31, 2022, carrying values of inventories were net of inventory reserves of $ 26.8 million and $ 24.7 million, respectively, for excess and obsolete inventory and $ 75,000 and $ 47,000 , respectively, for lower of cost or net realizable value reserves.

As of September 30, 2023 and December 31, 2022, carrying values of inventories were net of inventory reserves of $ 24.7 million and $ 24.7 million, respectively, for excess and obsolete inventory and $ 127,000 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 June 30, 2023, the balance of construction in progress was $ 40.7 million, of which $ 33.7 million was related to our buildings in our new Dingxing and Kazuo locations, $ 3.7 million was for manufacturing equipment purchases not yet placed in service and $ 3.2 million was for construction in progress for our other consolidated subsidiaries.

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

As of September 30, 2023, the balance of construction in progress was $ 42.1 million, of which $ 35.4 million was related to our buildings in our new Dingxing and Kazuo locations, $ 3.5 million was for manufacturing equipment purchases not yet placed in service and $ 3.2 million was for construction in progress for our other consolidated subsidiaries.

Accrued Liabilities

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

September 30,

Payable in connection with construction in progress

1 unchanged sentence

Preferred stock dividends payable

Other tax payable

Accrued product warranty

Accrued professional services

Other tax payable

Advances from customers

Current portion of operating lease liabilities

Other personnel-related costs

Accrued income taxes

Advances from customers

Accrual for sales returns

Accrued income taxes

Other accrued liabilities

1 unchanged sentence

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

As of June 30, 2023 and December 31, 2022, amounts payable of $ 98,000 and $ 103,000 , respectively, were included in “Accounts payable ” in our condensed consolidated balance sheets.

As of September 30, 2023 and December 31, 2022, amounts payable of $ 97,000 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.

15 unchanged sentences

In January 2023, ChaoYang KaiMei paid to ChaoYang LiMei $ 1.5 million.

As of June 30, 2023, $ 0 million was included in “Prepaid expenses and other current assets” in our condensed consolidated balance sheets.

As of September 30, 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 June 30, 2023, the investments are summarized below (in thousands):

As of September 30, 2023, the investments are summarized below (in thousands):

Investment Balance as of

September 30,

Nanjing JinMei Gallium Co., Ltd.

19 unchanged sentences

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

As of June 30, 2023, Tongmei’s noncontrolling interests and redeemable noncontrolling interests totaled approximately 14.5 %.

As of September 30, 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.

8 unchanged sentences

Additionally, in accordance with ASC 321-10-35-2, we adjusted the investment in Jia Mei to its fair value at the time of electing the fair value method.

The gain from the sale and the subsequent remeasurement includes the following:

(in thousands)

7 unchanged sentences

Gain on retained noncontrolling investment due to remeasurement ( 10 %)

The Jia Mei investment is reviewed for other-than-temporary declines in value on a quarterly basis.

We did not record any other-than-temporary impairment charges for Jia Mei investment during the three and nine months ended September 30, 2023.

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

1 unchanged sentence

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

As of August 2020, we referred to

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

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

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

8 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 $ 11.8 million and $ 14.6 million as of June 30, 2023 and December 31, 2022, respectively.

As of June 30, 2023, our respective ownership interests in Dongfang, ChaoYang KaiMei, JiYa, Xiaoyi XingAn Gallium Co., Ltd (“Xiaoyi XingAn”) and Jia Mei was 46 %, 40 %, 39 %, 25 %, and 10 %, respectively.

For AXT’s minority investment entities that are not consolidated, the investment balances are included in “Other assets” in our condensed consolidated balance sheets and totaled $ 13.2 million and $ 14.6 million as of September 30, 2023 and December 31, 2022, respectively.

As of September 30, 2023, our respective ownership interests

in Dongfang, ChaoYang KaiMei, JiYa, Xiaoyi XingAn Gallium Co., Ltd (“Xiaoyi XingAn”) and Jia Mei was 46 %, 40 %, 39 %, 25 %, and 10 %, respectively.

These minority investment entities are not considered variable interest entities because:

10 unchanged sentences

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

The equity investment entities had the following summarized statements of operations information (in thousands) for the three and six months ended June 30, 2023 and 2022:

The equity investment entities had the following summarized statements of operations information (in thousands) for the three and nine months ended September 30, 2023 and 2022:

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Operating income

Our portion of the income and losses from these minority investment entities that are not consolidated and are accounted for under the equity method was a loss of $ 18,000 and an income of $ 2.2 million for the three months ended June 30, 2023 and 2022, respectively.

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 $ 1.0 million and $ 3.3 million, respectively, for the six months ended June 30, 2023 and 2022.

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 $ 0.4 million and $ 2.0 million, respectively, for the three months ended September 30, 2023 and 2022.

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 $ 1.4 million and $ 5.3 million, respectively, for the nine months ended September 30, 2023 and 2022.

Stockholders’ Equity

1 unchanged sentence

(in thousands)

The changes in stockholders’ equity by component for the three and six months ended June 30, 2023 are as follows:

The changes in stockholders’ equity by component for the three and nine months ended September 30, 2023 are as follows:

Comprehensive

21 unchanged sentences

Balance as of June 30, 2023

Net loss and Other comprehensive loss attributable to redeemable noncontrolling interests were $ 302,000 and $ 630,000 , respectively, for the three months ended June 30, 2023 and $ 451,000 and $ 560,000 , respectively, for the six months ended June 30, 2023 and are not shown in the table above.

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

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

Stock-based compensation

Tongmei stock-based compensation

Other comprehensive income (loss)

Balance as of September 30, 2023

Net loss and Other comprehensive loss attributable to redeemable noncontrolling interests were $ 356,000 and $ 55,000 , respectively, for the three months ended September 30, 2023 and $ 807,000 and $ 615,000 , respectively, for the nine months ended September 30, 2023 and are not shown in the table above.

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

Comprehensive

17 unchanged sentences

Tongmei stock-based compensation

Other comprehensive income

Other comprehensive income (loss)

Balance as of June 30, 2022

Net income and Other comprehensive loss attributable to redeemable noncontrolling interests were $ 549,000 and $ 575,000 , respectively, for the three months ended June 30, 2022, and $ 967,000 and $ 529,000 , respectively, for the six months ended June 30, 2022 not shown in the table above.

There were no reclassification adjustments from accumulated other comprehensive income (loss) for the three and six months ended June 30, 2023 and 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 were $ 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 not shown in the table above.

There were no reclassification adjustments from accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2023 and 2022 .

Stock Repurchase Program

3 unchanged sentences

No shares were repurchased from 2016 through 2022.

During the three and six months ended June 30, 2023, we did no t repurchase any shares under the approved stock repurchase program.

As of June 30, 2023, approximately $ 2.7 million remained available for future repurchases under this program.

During the three and nine months ended September 30, 2023, we did no t repurchase any shares under the approved stock repurchase program.

As of September 30, 2023, approximately $ 2.7 million remained available for future repurchases under this program.

Currently, we do not plan to repurchase additional shares.

1 unchanged sentence

We account for stock-based compensation in accordance with the provisions of ASC Topic 718, Compensation-Stock Compensation (“ASC 718”), which established accounting for stock-based awards exchanged for employee services.

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

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

Stock-based compensation cost is measured at each grant date, based on the fair value of the award, and is recognized as expense over the employee’s requisite service period of the award.

All of our stock compensation is accounted for as an equity instrument.

1 unchanged sentence

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Cost of revenue

2 unchanged sentences

Net effect on net income (loss)

As of June 30, 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 $ 7,000 .

As of September 30, 2023, the unamortized compensation costs related to unvested stock options granted to employees under our stock option plan was approximately $ 18,000 , net of estimated forfeitures of $ 2,000 .

These costs will be amortized on a straight-line basis over a weighted-average period of approximately 0.1 years and will be adjusted for subsequent changes in estimated forfeitures.

We did not capitalize any stock-based compensation to inventory as of June 30, 2023 and December 31, 2022 due to the immateriality of the amount.

We did not capitalize any stock-based compensation to inventory as of September 30, 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 and six months ended June 30, 2023 and 2022.

The following table summarizes the stock option transactions during the six months ended June 30, 2023 (in thousands, except per share data):

There were no options granted in the three and nine months ended September 30, 2023 and 2022.

The following table summarizes the stock option transactions during the nine months ended September 30, 2023 (in thousands, except per share data):

Stock Options

1 unchanged sentence

Canceled and expired

Balance as of June 30, 2023

Options vested as of June 30, 2023 and unvested options expected to vest, net of forfeitures

Options exercisable as of June 30, 2023

The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on our closing price of $ 3.44 on June 30, 2023, which would have been received by the option holder had all option holders exercised their options on that date.

Balance as of September 30, 2023

Options vested as of September 30, 2023 and unvested options expected to vest, net of forfeitures

Options exercisable as of September 30, 2023

The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on our closing price of $ 2.40 on September 29, 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 six months ended June 30, 2023 is presented below (in thousands, except per share data):

A summary of activity related to restricted stock awards for the nine months ended September 30, 2023 is presented below (in thousands, except per share data):

Weighted-Average

Non-vested as of January 1, 2023

Non-vested as of June 30, 2023

As of June 30, 2023, the unamortized compensation costs related to unvested restricted stock awards was approximately $ 4.0 million, which is to be amortized on a straight-line basis over a weighted-average period of approximately 1.3 years.

Non-vested as of September 30, 2023

As of September 30, 2023, the unamortized compensation costs related to unvested restricted stock awards was approximately $ 3.5 million, which is to be amortized on a straight-line basis over a weighted-average period of approximately 1.1 years.

At-Risk, Performance Shares

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

Fischer would be

eligible to vest.

Fischer would be eligible to vest.

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 June 30, 2023 is presented below (in thousands, except per share data):

A summary of the status of our unvested at-risk, performance shares as of September 30, 2023 is presented below (in thousands, except per share data):

Weighted-Average

Non-vested as of January 1, 2023

Non-vested as of June 30, 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 June 30, 2023, there was $ 0.3 million of unrecognized compensation expense related to unvested at-risk, performance shares that is expected to be recognized over a weighted-average period of 1.0 years.

Non-vested as of September 30, 2023

As of September 30, 2023, there was $ 0.2 million of unrecognized compensation expense related to unvested at-risk, performance shares that is expected to be recognized over a weighted-average period of 0.6 years.

Net Income (Loss) Per Share

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Net income (loss) attributable to AXT, Inc.

10 unchanged sentences

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 June 30, 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.

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

9 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Product Type:

3 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Geographical region:

4 unchanged sentences

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

No customers represented 10 % of our revenue for the three months ended June 30, 2023 and one customer, Landmark, represented 12 % of our revenue for the three months ended June 30, 2022.

Our top five customers, although not the same five customers for each period, represented 24 % and 35 % of our revenue for the three months ended June 30, 2023 and 2022, respectively.

No customers represented 10 % of our revenue for the six months ended June 30, 2023 and one customer, Landmark, represented 11 % of our revenue for the six months ended June 30, 2022.

Our top five customers, although not the same five customers for each period, represented 24 % and 32 % of our revenue for the six months ended June 30, 2023 and 2022, respectively.

No customers represented 10 % of our revenue for the three months ended September 30, 2023 and one customer, Landmark, represented 18 % of our revenue for the three months ended September 30, 2022.

Our top five customers, although not the same five customers for each period, represented 31 % and 40 % of our revenue for the three months ended September 30, 2023 and 2022, respectively.

No customers represented 10 % of our revenue for the nine months ended September 30, 2023 and one customer, Landmark, represented 14 % of our revenue for the nine months ended September 30, 2022 .

Our top five customers, although not the same five customers for each period, represented 25 % and 33 % of our revenue for the nine months ended September 30, 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.

No customers accounted for 10 % of our accounts receivable balance as of June 30, 2023 , and two customers accounted for more than 10 % of our accounts receivable as of December 31, 2022.

No customers accounted for 10 % of our accounts receivable balance as of September 30, 2023 , and two customers accounted for more than 10 % of our accounts receivable as of December 31, 2022.

Commitments and Contingencies

9 unchanged sentences

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

The following table reflects the change in our warranty accrual which is included in “Accrued liabilities” in the condensed consolidated balance sheets, during the three and six months ended June 30, 2023 and 2022 (in thousands):

The following table reflects the change in our warranty accrual which is included in “Accrued liabilities” in the condensed consolidated balance sheets, during the three and nine months ended September 30, 2023 and 2022 (in thousands):

Three Months Ended

Six 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.

Under certain conditions, the Dingxing

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

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

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

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

6 unchanged sentences

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

As of June 30, 2023, we do not have any outstanding purchase orders that will incur a penalty if cancelled by the Company.

As of September 30, 2023, we do not have any outstanding purchase orders that will incur a penalty if cancelled by the Company.

Legal Proceedings

2 unchanged sentences

Other Income (expense), Net

Other income (expense), net for the three months ended June 30, 2023 and 2022, includes a grant of $ 1.3 million and $ 0 million, respectively, from government agencies as awards for technological innovation and job creation.

Other income (expense), net for the six months ended June 30, 2023 and 2022, includes a grant of $ 1.8 million and $ 0.2 million, respectively, from government agencies as awards for technological innovation and job creation.

In addition, we incurred a foreign currency transaction exchange gain of $ 10,000 and $ 230,000 for the three months ended June 30, 2023 and 2022, respectively.

We incurred a foreign currency transaction exchange loss of $ 203,000 and a gain of $ 2,000 for the six months ended June 30, 2023 and 2022, respectively.

Other income (expense), net for the three months ended September 30, 2023 and 2022, includes a grant of $ 0.1 million and $ 0 million, respectively, from government agencies as awards for technological innovation and job creation.

Other income (expense), net for the nine months ended September 30, 2023 and 2022, includes a grant of $ 1.9 million and $ 0.2 million, respectively, from government agencies as awards for technological innovation and job creation.

In addition, we incurred a foreign currency transaction exchange gain of $ 146,000 and $ 540,000 for the three months ended September 30, 2023 and 2022, respectively.

We incurred a foreign currency transaction exchange loss of $ 57,000 and a gain of $ 542,000 for the nine months ended September 30, 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 six months ended June 30, 2023 includes no interest and penalties.

As of June 30, 2023, we have no accrued interest and penalties related to uncertain tax positions.

Income tax expense for the three and nine months ended September 30, 2023 includes no interest and penalties.

As of September 30, 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 six months ended June 30, 2023 was mostly related to our wholly owned China subsidiaries and our partially owned subsidiaries in China.

Provision for income taxes for the three and nine months ended September 30, 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.

2 unchanged sentences

Under the 2017 Tax Cuts and Jobs Act (TCJA), research and experimental (“R&E”), expenditures incurred or paid for tax years beginning after December 31, 2021 will no longer be immediately deductible for tax purposes.

Instead, businesses are now required to capitalize and amortize R&E expenditures over a period of five years for research

conducted within the U.S.

businesses are now required to capitalize and amortize R&E expenditures over a period of five years for research conducted within the U.S.

or 15 years for research conducted in a foreign jurisdiction.

21 unchanged sentences

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

We do not have any material contract assets as of June 30, 2023.

We do not have any material contract assets as of September 30, 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 June 30, 2023 and December 31, 2022 (in thousands):

The following table reflects the contract liabilities balance, which is included in “Accrued liabilities” on the condensed consolidated balance sheets, as of September 30, 2023 and December 31, 2022 (in thousands):

September 30,

Contract liabilities

During the three and six months ended June 30, 2023, the Company recognized $ 3,000 and $ 277,000 , respectively, of revenue that was included in the contract balances as of December 31, 2022.

During the three and nine months ended September 30, 2023, the Company recognized $ 1,000 and $ 278,000 , respectively, 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 June 30, 2023 and December 31, 2022 (in thousands, except interest rate data):

The following table represents bank loans as of September 30, 2023 and December 31, 2022 (in thousands, except interest rate data):

September 30,

Bank of China (1)

12 unchanged sentences

NingBo Bank (5)

Industrial Bank (5)

Collateral for the above bank loans and line of credit

6 unchanged sentences

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

The majority of our lease obligations relate to our lease agreement for a nitrogen system to be used during the manufacturing process for our facility in Dingxing, China.

The equipment lease became effective in August 2019 and will expire in July 2029.

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

The remainder relate to our lease agreement for our facility in Fremont, California with approximately 19,467 square feet, which was scheduled to expire in 2020.

The majority of our lease obligations relate to our lease agreement for our facility in Fremont, California with approximately 19,467 square feet, which was scheduled to expire in 2020.

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

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.

Furthermore, in September 2023, we entered into another agreement to extend the lease for an additional five years , commencing December 2023.

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

The remainder relate to our lease agreement for a nitrogen system to be used during the manufacturing process for our facility in Dingxing, China.

The equipment lease became effective in August 2019 and will expire in July 2029.

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

All other operating leases have a term of 12 months or less.

16 unchanged sentences

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

As of June 30, 2023, the maturities of our operating lease liabilities (excluding short-term leases) are as follows (in thousands):

As of September 30, 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):

Six Months Ended

Nine Months Ended

September 30,

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

2 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Operating lease

18 unchanged sentences

public company.

The components of the change in redeemable noncontrolling interests for the six months ended June 30, 2023 are presented in the following table (in thousands):

The components of the change in redeemable noncontrolling interests for the nine months ended September 30, 2023 are presented in the following table (in thousands):

Balance as of January 1, 2023

5 unchanged sentences

Effect of foreign currency translation attributable to redeemable noncontrolling interests

Balance as of June 30, 2023

Balance as of September 30, 2023

Recent Accounting Pronouncements

12 unchanged sentences

Subsequent Event

In July 2023, the Company obtained $ 4.2 million in new one-year bank loans with interest rates ranging from 3.8 % to 4.3 %.

In October and November 2023, the Company obtained a total of $ 3.5 million in new one-year bank loans with interest rates ranging from 3.45 % to 3.8 %.

The new bank loans are unsecured.

The Company also repaid $ 2.8 million of an existing loan in July 2023.

Tongmei made an investment in July 2023 and August 2023, of approximately $ 0.6 million each in one of our equity investments, ChaoYang KaiMei.

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

The Company repaid $ 2.7 million of existing loans in October 2023.

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

23 unchanged sentences

tariffs and other trade war issues;

the timing and receipt of China export permits for gallium arsenide and germanium substrates;

the financial performance of our partially owned supply chain companies;

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• Photonic Integrated circuits (PICs)

• High efficiency terrestrial solar cells (CPV)

• Thermo-Photovoltaics (TPVs)

• RF amplifier and switching (military wireless & 5G)

17 unchanged sentences

• Screen displays using micro-LEDs

1”, 2”, 3”, 4”, 5", 6”

1”, 2”, 3”, 4”, 5", 6”, 8”

• Printer head lasers and LEDs

73 unchanged sentences

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

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.

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.

20 unchanged sentences

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 June 30, 2023;

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

14 unchanged sentences

Approximately 10% of our revenue derives from importing our wafers into the United States and we expect the volume to increase.

For the six months ended June 30, 2023 and 2022, we paid approximately $701,000 and $1.6 million, respectively, in tariffs.

For the nine months ended September 30, 2023 and 2022, we paid approximately $768,000 and $2.6 million, respectively, in tariffs.

The future impact of tariffs and trade wars is uncertain.

6 unchanged sentences

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

For the six months ended June 30, 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 $3.7 million.

For the nine months ended September 30, 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 $3.7 million.

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.

1 unchanged sentence

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

For the six months ended June 30, 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.

For the nine months ended September 30, 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.

21 unchanged sentences

● 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.

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.

22 unchanged sentences

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

11 unchanged sentences

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

As of June 30, 2023 and December 31, 2022, our accounts receivable, net balance was $19.9 million and $29.3 million, respectively, which was net of an allowance for doubtful accounts of $291,000 and $307,000, respectively.

As of September 30, 2023 and December 31, 2022, our accounts receivable, net balance was $18.9 million and $29.3 million, respectively, which was net of an allowance for doubtful accounts of $243,000 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.

2 unchanged sentences

Warranty costs are accrued at the time revenue is recognized.

As of June 30, 2023 and December 31, 2022, accrued product warranties totaled $852,000 and $669,000, respectively.

As of September 30, 2023 and December 31, 2022, accrued product warranties totaled $876,000 and $669,000, respectively.

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

5 unchanged sentences

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

As of June 30, 2023 and December 31, 2022, we had an inventory reserve of $26.8 million and $24.7 million, respectively, for excess and obsolete inventory and $75,000 and $47,000, respectively, for lower of cost or net realizable value reserves.

As of September 30, 2023 and December 31, 2022, we had an inventory reserve of $24.7 million and $24.7 million, respectively, for excess and obsolete inventory and $127,000 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.

1 unchanged sentence

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.

our ability and intent to hold the securities for a period of time sufficient to allow for any anticipated recovery in market value.

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.

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

6 unchanged sentences

This resulted in a $754,000 impairment charge in our financial results for the quarter ended June 30, 2023.

Except as mentioned above, there were no impairment charges for the remainder of these investments during the three and six months ended June 30, 2023 and 2022.

Except as mentioned above, there were no impairment charges for the remainder of these investments during the three and nine months ended September 30, 2023 and 2022.

Fair Value of Investments

12 unchanged sentences

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

As of June 30, 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 June 30, 2023 and 2022.

As of September 30, 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 September 30, 2023 and 2022.

Impairment of Long-Lived Assets

4 unchanged sentences

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

We had no “Assets held for sale” or any impairment of long-lived assets in the condensed consolidated balance sheets as of June 30, 2023 and December 31, 2022.

We had no “Assets held for sale” or any impairment of long-lived assets in the condensed consolidated balance sheets as of September 30, 2023 and December 31, 2022.

Stock-based Compensation

13 unchanged sentences

We recognize the compensation costs net of an estimated forfeiture rate over the requisite service period of the options award, which is generally the vesting term of four years.

Compensation expense for restricted stock awards is recognized over the vesting period, which is generally one, three or four years.

Compensation expense for restricted stock awards is

recognized over the vesting period, which is generally one, three or four years.

Stock-based compensation expense is recorded in cost of revenue, research and development, and selling, general and administrative expenses.

14 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Product Type:

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Total revenue

Revenue decreased $20.9 million, or 52.9%, to $18.6 million for the three months ended June 30, 2023 from $39.5 million for the three months ended June 30, 2022.

The substrate revenue decrease for the three months ended June 30, 2023 as compared to the same period in 2022 was primarily the result of lower demand for InP wafer substrates due to softening demand in data center, consumer and telecommunications applications and lower demand for GaAs and Ge wafer substrates reflecting the overall slowdown across a number of applications particularly in China.

Raw materials sales decreased $225,000, or 2.9%, to $7.6 million for the three months ended June 30, 2023 as compared to the same period in 2022.

The decrease in raw materials revenue for the three months ended June 30, 2023 as compared to the same

period in 2022 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 decreased $41.1 million, or 52.0%, to $38.0 million for the six months ended June 30, 2023 from $79.1 million for the six months ended June 30, 2022.

The substrate revenue decrease for the six months ended June 30, 2023 as compared to the same period in 2022 was primarily the result of lower demand for InP wafer substrates due to softening demand in data center, consumer and telecommunications applications and lower demand for GaAs and Ge wafer substrates reflecting the overall slowdown across a number of applications particularly in China.

Raw materials sales decreased $2.2 million, or 14.1%, to $13.5 million for the six months ended June 30, 2023 as compared to the same period in 2022.

The decrease in raw materials revenue for the six months ended June 30, 2023 as compared to the same period in 2022 was primarily the result of a decrease in sales of pBN crucibles and refined gallium resulting from weaker market demand.

Revenue decreased $17.8 million, or 50.6%, to $17.4 million for the three months ended September 30, 2023 from $35.2 million for the three months ended September 30, 2022.

The substrate revenue decrease for the three months ended September 30, 2023 as compared to the same period in 2022 was primarily the result of lower demand for InP wafer substrates due to softening demand in data center, consumer and telecommunications applications and lower demand for GaAs and Ge wafer substrates reflecting the overall slowdown across a number of applications.

materials sales decreased $1.3 million, or 16.1%, to $7.0 million for the three months ended September 30, 2023 as compared to the same period in 2022.

The decrease in raw materials revenue for the three months ended September 30, 2023 as compared to the same period in 2022 was primarily the result of a decrease in sales of pBN crucibles and refined gallium resulting from weaker market demand.

Revenue decreased $59.0 million, or 51.6%, to $55.4 million for the nine months ended September 30, 2023 from $114.3 million for the nine months ended September 30, 2022.

The substrate revenue decrease for the nine months ended September 30, 2023 as compared to the same period in 2022 was primarily the result of lower demand for InP wafer substrates due to softening demand in data center, consumer and telecommunications applications and lower demand for GaAs and Ge wafer substrates reflecting the overall slowdown across a number of applications, particularly in China.

Raw materials sales decreased $3.6 million, or 14.8%, to $20.5 million for the nine months ended September 30, 2023 as compared to the same period in 2022.

The decrease in raw materials revenue for the nine months ended September 30, 2023 as compared to the same period in 2022 was primarily the result of a decrease in sales of pBN crucibles and refined gallium resulting from weaker market demand.

Revenue by Geographic Region

Three Months Ended

September 30,

($ in thousands)

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Total revenue

Revenue in China decreased $8.2 million for the three months ended June 30, 2023, primarily due to lower demand for our GaAs, InP and Ge wafer substrates and pBN crucibles sold by one of our consolidated subsidiaries partially offset by increased sales of refined gallium sold by one of our consolidated subsidiaries.

Revenue in Taiwan decreased $5.6 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 partially offset by increased sales of refined gallium sold by one of our consolidated subsidiaries.

Revenue in Asia Pacific increased $75,000, primarily due to higher demand for our GaAs wafer substrates and pBN crucibles sold by one of our consolidated subsidiaries partially offset by lower demand for our InP wafer substrates.

Revenue in China decreased $2.0 million for the three months ended September 30, 2023, primarily due to lower demand for our GaAs and Ge wafer substrates and refined gallium sold by one of our consolidated subsidiaries partially offset by increased sales of pBN crucibles sold by one of our consolidated subsidiaries.

Revenue in Taiwan decreased $5.3 million, primarily due to lower demand for our InP wafer substrates, partially offset by higher demand for GaAs and Ge wafer substrates.

Revenue in Japan decreased $2.1 million, primarily due to lower demand for our InP and GaAs wafer substrates and pBN crucibles sold by one of our consolidated subsidiaries, partially offset by increased sales of Ge wafer substrates.

Revenue in Asia Pacific increased $129,000, 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 GaAs wafer substrates.

Revenue in Europe decreased $2.6 million, primarily due to lower demand for our GaAs and InP wafer substrates and pBN crucibles sold by one of our consolidated subsidiaries, partially offset by increased demand for our Ge wafer substrates.

Revenue in North America decreased $3.6 million, primarily due to lower demand for our InP and GaAs wafer substrates partially offset by increased sales of pBN crucibles sold by one of our consolidated subsidiaries.

Six Months Ended

Revenue in North America decreased $5.9 million, primarily due to lower demand for our InP and GaAs wafer substrates and pBN crucibles sold by one of our consolidated subsidiaries.

Nine Months Ended

September 30,

($ in thousands)

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Total revenue

Revenue in China decreased $17.5 million for the six months ended June 30, 2023, primarily due to lower demand for our GaAs, Ge and InP wafer substrates and refined gallium and pBN crucibles sold by two of our consolidated subsidiaries.

Revenue in Taiwan decreased $10.0 million, primarily due to lower demand for our InP and GaAs wafer substrates.

Revenue in Japan decreased $2.6 million primarily due to lower demand for our InP and GaAs wafer substrates and pBN crucibles sold by one of our consolidated subsidiaries, partially offset by higher demand for refined gallium sold by one of our consolidate subsidiaries.

Revenue in Asia Pacific decreased by $0.6 million, primarily due to decreased demand for our GaAs wafer substrates and pBN crucibles sold by one of our consolidated subsidiaries.

Revenue in Europe decreased by $5.1 million primarily due to decreased demand for our GaAs, InP and Ge wafer substrates and pBN crucibles sold by one of our consolidated subsidiaries.

Revenue in North America decreased by $5.3 million primarily due to lower demand for our InP and GaAs wafer substrates.

Revenue in China decreased $19.5 million for the nine months ended September 30, 2023, primarily due to lower demand for our GaAs, Ge and InP wafer substrates and refined gallium and pBN crucibles sold by two of our consolidated subsidiaries.

Revenue in Taiwan decreased $15.4 million, primarily due to lower demand for our InP and GaAs wafer substrates, partially offset by higher demand for our Ge wafer substrates.

Revenue in Japan decreased $4.7 million, primarily due to lower demand for our InP and GaAs wafer substrates and pBN crucibles sold by one of our consolidated subsidiaries, partially offset by higher demand for refined gallium sold by one of our consolidated subsidiaries.

Revenue in Asia Pacific decreased $0.5 million, primarily due to decreased demand for our GaAs wafer substrates and refined gallium sold by one of our consolidated subsidiaries, partially offset by higher demand for our InP wafer substrates.

Revenue in Europe decreased $7.7 million, primarily due to decreased demand for our GaAs, InP and Ge wafer substrates and pBN crucibles sold by one of our consolidated subsidiaries.

Revenue in North America decreased $11.2 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

Six Months Ended

Nine Months Ended

September 30,

($ in thousands)

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Gross Profit %

Gross profit decreased $13.7 million, or 88.9%, to $1.7 million for the three months ended June 30, 2023 from $15.4 million for the three months ended June 30, 2022.

Gross profit decreased $12.9 million, or 87.4%, to $1.9 million for the three months ended September 30, 2023 from $14.8 million for the three months ended September 30, 2022.

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

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Further, our raw material business had lower gross margins as we were working through higher priced inventory in Q3 2023.

This was especially impactful as raw material sales made up more than 40% of our total revenue in Q2 2023.

Gross profit decreased $21.9 million, or 76.3%, to $6.8 million for the six months ended June 30, 2023 from $28.7 million for the six months ended June 30, 2022.

This was especially impactful as raw material sales made up approximately 40% of our total revenue in Q3 2023.

Gross profit decreased $34.8 million, or 80.0%, to $8.7 million for the nine months ended September 30, 2023 from $43.5 million for the nine months ended September 30, 2022.

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

1 unchanged sentence

In addition, a shift in product mix had a negative impact on gross margin.

Further, our raw material business had lower gross margins as we were working through higher priced inventory in Q2 2023.

This was especially impactful as raw material sales made up more than 40% of our total revenue in Q2 2023.

Further, our raw material business had lower gross margins as we were working through higher priced inventory in Q2 and Q3 2023.

especially impactful as raw material sales made up approximately 37% of our total revenue for the nine months ended September 30, 2023.

Selling, General and Administrative Expenses

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

($ in thousands)

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% of total revenue

Selling, general and administrative expenses decreased $0.9 million, or 13.0%, to $5.8 million for the three months ended June 30, 2023 from $6.7 million for the three months ended June 30, 2022.

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

Selling, general and administrative expenses decreased $1.4 million, or 10.4%, to $11.8 million for the six months ended June 30, 2023 from $13.1 million for the six months ended June 30, 2022.

Selling, general and administrative expenses decreased $0.9 million, or 13.8%, to $5.7 million for the three months ended September 30, 2023 from $6.6 million for the three months ended September 30, 2022.

The lower selling, general and administrative expenses were primarily from a decrease in personnel-related expenses, office supplies, provision for bad debt allowance and outside commissions, partially offset by an increase in professional services.

Selling, general and administrative expenses decreased $2.3 million, or 11.6%, to $17.4 million for the nine months ended September 30, 2023 from $19.7 million for the nine months ended September 30, 2022.

Research and Development

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

($ in thousands)

2 unchanged sentences

% of total revenue

Research and development expenses decreased $0.7 million, or 20.6%, to $2.7 million for the three months ended June 30, 2023 from $3.5 million for the three months ended June 30, 2022.

The decrease in research and development expenses for the three months ended June 30, 2023 was primarily due to a reduction in materials and floor stock issued to research and development as we await additional feedback from customers on the performance of our 8-inch GaAs wafer substrates.

Research and development expenses decreased $0.3 million, or 4.2%, to $6.3 million for the six months ended June 30, 2023 from $6.6 million for the six months ended June 30, 2022.

The decrease in research and development expenses for the six months ended June 30, 2023 was primarily due to a reduction in materials and floor stock issued to research and development as we await additional feedback from customers on the performance of our 8-inch GaAs wafer substrates.

Research and development expenses decreased $0.7 million, or 19.6%, to $2.9 million for the three months ended September 30, 2023 from $3.6 million for the three months ended September 30, 2022.

The decrease in research and development expenses for the three months ended September 30, 2023 was primarily due to a reduction in materials and floor stock issued to research and development as we await additional feedback from customers on the performance of our 8-inch GaAs wafer substrates and personnel-related expenses.

Research and development expenses decreased $1.0 million, or 9.7%, to $9.3 million for the nine months ended September 30, 2023 from $10.3 million for the nine months ended September 30, 2022.

The decrease in research and development expenses for the nine months ended September 30, 2023 was primarily due to a reduction in materials and floor stock issued to research and development as we await additional feedback from customers on the performance of our 8-inch GaAs wafer substrates and personnel-related expenses.

Interest Expense, Net

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

($ in thousands)

2 unchanged sentences

% of total revenue

Interest expense, net increased $177,000, or 94.1%, to $365,000 for the three months ended June 30, 2023 from $188,000 for the three months ended June 30, 2022.

Interest expense, net increased primarily due to increased debt levels and higher interest rates during the three months ended June 30, 2023 as compared to the three months ended June 30, 2022.

Interest expense, net increased $391,000, or 105.4%, to $762,000 for the six months ended June 30, 2023 from $371,000 for the six months ended June 30, 2022.

Interest expense, net increased primarily due to increased debt levels and higher interest rates during the six months ended June 30, 2023 as compared to the six months ended June 30, 2022

Interest expense, net increased $82,000, or 27.4%, to $381,000 for the three months ended September 30, 2023 from $299,000 for the three months ended September 30, 2022.

Interest expense, net increased primarily due to increased debt levels and higher interest rates during the three months ended September 30, 2023 as compared to the three months ended September 30, 2022.

Interest expense, net increased $473,000, or 70.6%, to $1.1 million for the nine months ended September 30, 2023 from $670,000 for the nine months ended September 30, 2022.

Interest expense, net increased primarily due to increased debt levels and higher interest rates during the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022.

Equity in Income of Unconsolidated Joint Ventures

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Equity in Income

September 30,

Equity in Income

3 unchanged sentences

% of total revenue

The equity in income of unconsolidated joint venture companies was income of $0.9 million for the three months ended June 30, 2023 as compared to income of $2.2 million for the three months ended June 30, 2022.

The decrease in income of $1.2 million is primarily due to lower sales volume at two raw gallium companies and an impairment loss recorded by JiYa, partially offset by a gain in the sale of 15% of our shares in Jia Mei.

The equity in income of unconsolidated joint venture companies was income of $2.0 million for the six months ended June 30, 2023 as compared to income of $3.3 million for the six months ended June 30, 2022 The decrease in income of $1.3 million is primarily due to lower sales volume at two raw gallium companies and an impairment loss recorded by JiYa in Q2 2023, partially offset by a gain in the sale of 15% of our shares in Jia Mei in Q2 2023.

The equity in income of unconsolidated joint venture companies was income of $0.4 million for the three months ended September 30, 2023 as compared to income of $2.0 million for the three months ended September 30, 2022.

The decrease in income of $1.6 million is primarily due to lower sales volume at two raw gallium companies.

The equity in income of unconsolidated joint venture companies was income of $2.3 million for the nine months ended September 30, 2023 as compared to income of $5.3 million for the nine months ended September 30, 2022.

The decrease in income of $3.0 million is primarily due to lower sales volume at two raw gallium companies and an impairment loss recorded by JiYa in Q2 2023, partially offset by a gain in the sale of 15% of our shares in Jia Mei in Q2 2023.

Other Income, Net

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

($ in thousands)

2 unchanged sentences

% of total revenue

Other income, net increased $483,000, or 164.3%, to an income of $777,000 for the three months ended June 30, 2023 from an income of $294,000 for the three months ended June 30, 2022.

Other income, net increased primarily due to compensation received from the China government by our consolidated subsidiaries for technological innovation and job creation partially offset by a foreign exchange gain of $10,000 in June 2023 compared to a gain of $230,000 in June 2022.

Other income, net increased $774,000, or 271.6%, to an income of $1.1 million for the six months ended June 30, 2023 from an income of $285,000 for the six months ended June 30, 2022.

Other income, net increased primarily due to compensation received from the China government by our consolidated subsidiaries for technological innovation and job creation partially offset by a foreign exchange loss of $203,000 in June 2023 compared to a gain of $2,000 in June 2022.

Other income, net decreased $734,000, or 76.7%, to an income of $223,000 for the three months ended September 30, 2023 from an income of $957,000 for the three months ended September 30, 2022.

Other income, net decreased primarily due to compensation received from the China government by our consolidated subsidiaries for technological innovation and job creation of $97,000 in the three months ended September 30, 2023 compared to $169,000 in the three months ended September 30, 2022 and a foreign exchange gain of $146,000 in the three months ended September 30, 2023 compared to a gain of $540,000 in the three months ended September 30, 2022.

Other income, net increased $40,000, or 3.2%, to an income of $1.3 million for the nine months ended September 30, 2023 from an income of $1.2 million for the nine months ended September 30, 2022.

Other income, net increased primarily due to compensation received from the China government by our consolidated subsidiaries for technological innovation and job creation partially offset by a foreign exchange loss of $57,000 in the nine months ended September 30, 2023 compared to a gain of $542,000 in the three months ended September 30, 2022.

Provision (benefit) for Income Taxes

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

($ in thousands)

2 unchanged sentences

% of total revenue

Provision (benefit) for income taxes decreased $1.2 million, or 113.5%, to a benefit of $139,000 for the three months ended June 30, 2023 as compared to a provision of $1.0 million for the three months ended June 30, 2022.

The tax benefit recorded for the three months ended June 30, 2023 is the result of Super R&D deductions taken by our China subsidiaries.

Provision for income taxes decreased $1.7 million, or 99.5%, to $9,000 for the six months ended June 30, 2023 as compared to $1.7 million for the six months ended June 30, 2022.

Provision (benefit) for income taxes decreased $0.6 million, or 120.2%, to a benefit of $101,000 for the three months ended September 30, 2023 as compared to a provision of $0.5 million for the three months ended September 30, 2022.

The tax benefit recorded for the three months ended September 30, 2023 is the result of Super R&D deductions taken by our China subsidiaries.

Provision (benefit) for income taxes decreased $2.3 million, or 104.2%, to a benefit of $92,000 for the nine months ended September 30, 2023 as compared to a provision of $2.2 million for the nine months ended September 30, 2022.

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

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We 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 (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.

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.

The Inflation Reduction Act has no impact on us, since we have no plan to buy back additional shares of our common stock and our profit is not over $1 billion.

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

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Net (income) loss attributable to

Six Months Ended

Nine Months Ended

Net (income) loss attributable to

1 unchanged sentence

noncontrolling interests and

September 30,

redeemable noncontrolling interests

September 30,

redeemable noncontrolling interests

3 unchanged sentences

% of total revenue

Net income (loss) attributable to noncontrolling interests and redeemable noncontrolling interests decreased $1.3 million or 126.4% to a loss of $264,000 for the three months ended June 30, 2023, from income of $999,000 for the three months ended June 30, 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.

Net income (loss) attributable to noncontrolling interests and redeemable noncontrolling interests decreased $2.4 million, or 132.2%, to a loss of $0.6 million for the six months ended June 30, 2023, from income of $1.8 million for the six months ended June 30, 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.

Net (income) loss attributable to noncontrolling interests and redeemable noncontrolling interests decreased $1.6 million or 161.0% to a loss of $592,000 for the three months ended September 30, 2023, from income of $971,000 for the three months ended September 30, 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.

Net (income) loss attributable to noncontrolling interests and redeemable noncontrolling interests decreased $4.0 million, or 142.3%, to a loss of $1.2 million for the nine months ended September 30, 2023, from income of $2.8 million for the nine months ended September 30, 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

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

As of June 30, 2023, our principal source of liquidity was $49.6 million, which consisted of cash, restricted cash and cash equivalents of $40.9 million and investments of $8.7 million.

In the six months ended June 30, 2023, cash, restricted cash and cash equivalents decreased by $0.5 million and investments decreased by $2.7 million.

The decrease in cash, restricted cash and cash equivalents of $0.5 million in the six months ended June 30, 2023 was primarily due to the effect of exchange rate changes of $1.8 million and net cash used in investing activities of $3.1 million, partially offset by net cash provided by operating activities of $2.8 million and financing activities of $1.7 million.

As of June 30, 2023, we and our consolidated joint ventures in China held approximately $38.1 million in cash and investments in foreign bank accounts.

As of June 30, 2022, our principal source of liquidity was $57.2 million, which consisted of cash, restricted cash and cash equivalents of $44.9 million and investments of $12.2 million.

In the six months ended June 30, 2022, cash, restricted cash and cash equivalents increased by $8.2 million and investments decreased by $2.8 million.

The increase in cash, restricted cash and cash equivalents of $8.2 million in the six months ended June 30, 2022 was primarily due to net cash provided by financing activities of $22.0 million and operating activities of $5.5 million, partially offset by net cash used in investing activities of $18.4 million and the effect of exchange rate changes of $1.0 million.

As of June 30, 2022, we and our consolidated joint ventures in China held approximately $31.5 million in cash and investments in foreign bank accounts.

Net cash provided by operating activities of $2.8 million for the six months ended June 30, 2023 was primarily comprised of a net change of $3.9 million in operating assets and liabilities, the adjustment for non-cash items of depreciation and amortization of $4.2 million, return of equity method investments (dividends) of $3.7 million, stock-based compensation of $1.8 million and deferred tax assets of $0.1 million, partially offset by a net loss before income attributable to noncontrolling interest and redeemable noncontrolling interests of $9.0 million and income from equity method investments of $2.0 million.

Net cash provided by operating activities of $5.5 million for the six months ended June 30, 2022 was primarily comprised of a net income before income attributable to noncontrolling interest and redeemable noncontrolling interests of $10.5 million, the adjustment for non-cash items of depreciation and amortization of $4.0 million and stock-based compensation of $2.2 million, partially offset by a net change of $8.1 million in operating assets and liabilities and income from equity method investments of $3.3 million.

Net cash used in investing activities of $3.1 million for the six months ended June 30, 2023 was primarily from the purchase of property, plant and equipment of $6.8 million, partially offset by proceeds from sales and maturities of available-for-sale debt securities of $2.9 million and proceeds from sale of equity securities of $0.8 million.

Net cash used in investing activities of $18.4 million for the six months ended June 30, 2022 was primarily from the purchase of property, plant and equipment of $20.9 million, partially offset by proceeds from sales and maturities of available-for-sale debt securities of $2.5 million.

Net cash provided by financing activities was $1.7 million for the six months ended June 30, 2023, which consisted of proceeds from short-term loans of $28.8 million, capital increase in subsidiary shares from noncontrolling interests of $0.5 million and common stock option exercised of $10,000, partially offset by repayment of short-term loans of $27.7 million.

Net cash provided by financing activities was $22.0 million for the six months ended June 30, 2022, which consisted of proceeds from short-term loan of $23.4 million, capital increase in subsidiary shares from noncontrolling interest of $1.3 million and common stock option exercised of $0.1 million, partially offset by repayment of short-term loan of $2.8 million.

As of September 30, 2023, our principal source of liquidity was $43.6 million, which consisted of cash, restricted cash and cash equivalents of $39.3 million and investments of $4.3 million.

In the nine months ended September 30, 2023, cash, restricted cash and cash equivalents decreased by $2.0 million and investments decreased by $7.2 million.

The decrease in cash, restricted cash and cash equivalents of $2.0 million in the nine months ended September 30, 2023 was primarily due to net cash used in investing activities of $4.8 million and the effect of exchange rate changes of $1.4 million, partially offset by cash provided by financing activities of $2.2 million and net cash provided by operating activities of $2.0 million.

As of September 30, 2023, we and our consolidated joint ventures in China held approximately $30.2 million in cash and investments in foreign bank accounts.

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.

Net cash provided by operating activities of $2.0 million for the nine months ended September 30, 2023 was primarily comprised of a net change of $6.8 million in operating assets and liabilities, the adjustment for non-cash items of depreciation and amortization of $6.4 million, return of equity method investments (dividends) of $3.7 million, stock-based compensation of $2.7 million and deferred tax assets of $0.1 million, partially offset by net loss before income attributable to noncontrolling interest and redeemable noncontrolling interests of $15.4 million and income from equity method investments of $2.3 million.

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 investing activities of $4.8 million for the nine months ended September 30, 2023 was primarily from the purchase of property, plant and equipment of $11.2 million and investments in non-marketable equity investments of $1.9 million, partially offset by proceeds from sales and maturities of available-for-sale debt securities of $7.4 million and proceeds from sale of equity securities 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 provided by financing activities was $2.2 million for the nine months ended September 30, 2023, which consisted of proceeds from short-term loans of $42.2 million, a capital increase in subsidiary shares from noncontrolling interests of $0.7 million and common stock options exercised of $10,000, partially offset by repayment of short-term loans of $40.7 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, a capital increase in subsidiary shares from noncontrolling interest of $2.2 million and common stock options exercised of $0.5 million, partially offset by repayment of short-term loan of $9.8 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 six months ended June 30, 2023, we did not repurchase any shares under the approved stock repurchase program.

As of June 30, 2023, approximately $2.7 million remained available for future repurchases under this program.

During the nine months ended September 30, 2023, we did not repurchase any shares under the approved stock repurchase program.

As of September 30, 2023, approximately $2.7 million remained available for future repurchases under this program.

Currently, we do not plan to repurchase additional shares.

13 unchanged sentences

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

For the six months ended June 30, 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 $3.7 million and $1.3 million, respectively.

For the six months ended June 30, 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 six months ended June 30, 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.

For the nine months ended September 30, 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 $3.7 million and $2.9 million, respectively.

For the nine months ended September 30, 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 nine months ended September 30, 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.

8 unchanged sentences

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

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

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

The STAR Market IPO remains subject to review and approval by the CSRC and other authorities.

4 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 June 30, 2023 and December 31, 2022 (in thousands, except interest rate data):

The following table represents bank loans as of September 30, 2023 and December 31, 2022 (in thousands, except interest rate data):

September 30,

Bank of China (1)

12 unchanged sentences

NingBo Bank (5)

Industrial Bank (5)

Collateral for the above bank loans and line of credit

5 unchanged sentences

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

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

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

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

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

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

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

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

On May 17, 2022, the SEC declared the Shelf Registration Statement effective.

We believe that we have adequate cash and investments to meet our operating needs and capital expenditures over the next twelve months.

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

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 the section entitled “Risk Factors” in Item 1A below.

22 unchanged sentences

Off-Balance Sheet Arrangements

As of June 30, 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).

As of September 30, 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

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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 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.

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.

7 unchanged sentences

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

As of June 30, 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.

As of September 30, 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.

18 unchanged sentences

Interest Rate

September 30,

Cash, cash equivalents and restricted cash

3 unchanged sentences

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

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

We are exposed to credit

risks in the event of default by the issuers to the extent of the amount recorded on the condensed consolidated balance sheets.

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

3 unchanged sentences

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

No customers accounted for 10% of our accounts receivable balance as of June 30, 2023 and two customers accounted for more than 10% of our accounts receivable as of December 31, 2022.

No customers accounted for 10% of our accounts receivable balance as of September 30, 2023 and two customers accounted for more than 10% of our accounts receivable as of December 31, 2022.

Impairment of Equity Investment Risk

As part of our supply chain strategy, we maintain minority investments in privately-held raw material companies located in China either invested directly by us or by one of our supply chain companies in China.

These minority investments are reviewed for other than temporary declines in value on a quarterly basis.

These minority investments are reviewed for otherthan-temporary declines in value on a quarterly basis.

These investments are classified as other assets in the condensed consolidated balance sheets and accounted for under either the equity or fair value method, depending on whether we have the ability to exercise significant influence over the raw material company’s operations or financial decisions.

1 unchanged sentence

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.

Our minority investments under the equity method as of June 30, 2023 and December 31, 2022 totaled $11.8 million and $14.6 million, respectively.

Our minority investment under the fair value method as of June 30, 2023 and December 31, 2022 totaled $0.6 million and $0, respectively.

Our minority investments under the equity method as of September 30, 2023 and December 31, 2022 totaled $13.2 million and $14.6 million, respectively.

Our minority investment under the fair value method as of September 30, 2023 and December 31, 2022 totaled $0.6 million and $0, respectively.

See Note 7 for a discussion on the new fair value method investment.

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