What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-03-15 compared with 2023-03-16 · 98 added, 89 removed, 306 unchanged (38% of the section changed)

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As such, sales commissions and other related expenses are expensed as incurred, given that the expected period of benefit is less than one year.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts Receivable and Allowance for Credit Losses

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

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

We review at least quarterly, or when there are changes in credit risks, the likelihood of collection on our accounts receivable balances and provide an allowance for credit losses.

We measure the expected credit losses on a collective (pool) basis when similar delinquency status exist.

We evaluate receivables from U.S.

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Foreign business practices generally require us to allow customer payment terms that are longer than those accepted in the United States.

We assess the probability of collection based on a number of factors, including the length of time a receivable balance has been outstanding, our past history with the customer and their credit-worthiness.

We exercise judgment when determining the adequacy of our reserves as we evaluate historical bad debt trends, general economic conditions in the United States and internationally, and changes in customer financial conditions.

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

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

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

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.

In accordance with ASC 326-20’s current expected credit loss impairment model, we exercise judgment when determining the adequacy of our reserves as we evaluate historical bad debt trends, general economic conditions in the United States and internationally, and reasonable and supportable forecasts of future economic conditions.

Uncollectible receivables are recorded as provision for credit losses 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 December 31, 2023 and 2022, our accounts receivable, net balance was $19.3 million and $29.3 million, respectively, which was net of an allowance for credit losses of $579,000 and $307,000 as of December 31, 2023 and 2022, respectively.

During 2023, we increased the allowance for credit losses by $272,000.

During 2022, we increased the allowance for credit losses by $177,000 .

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

Warranty Reserve

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As of December 31, 2023 and 2022, accrued product warranties totaled $703,000 and $669,000, respectively.

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

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

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

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

We routinely evaluate the levels of our inventory in light of current market conditions in order to identify excess and obsolete inventory, and we provide a

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

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

As of December 31, 2023 and 2022, we had an inventory reserve of $21.9 million and $24.7 million, respectively, for excess and obsolete inventory and $78,000 and $47,000, respectively, for lower of cost or net realizable value reserves.

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We also invest in equity instruments of privately held raw material companies in China for business and strategic purposes.

Investments in our unconsolidated joint venture raw material companies are classified as other assets and accounted for under either the equity or cost method, depending on whether we have the ability to exercise significant influence over their operations or financial decisions.

Investments in our unconsolidated PRC joint venture raw material companies are classified as other assets and accounted for under either the equity or fair value method, depending on whether we have the ability to exercise significant influence over their operations or financial decisions.

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

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

For the year ended December 31, 2023, one of our PRC joint venture raw material companies assessed one of its equity investments was fully impaired.

For the year ended December 31, 2023, we also divested our equity investment in a PRC joint venture.

The impairment and divesture resulted in a total of $1.9 million in impairment charges in our financial results.

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

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Share-based awards granted include stock options and restricted stock awards.

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

We utilize the Black-Scholes option

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

Historical volatility of our stock price was used while the expected term for our options was estimated based on historical option exercise behavior and post-vesting forfeitures of options, and the contractual term, the vesting period and the expected term of the outstanding options.

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

ASC 740 also requires that deferred tax assets be

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

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

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

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

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

Our annual revenue decreased in 2023 from $141.1 million in 2022 to $75.8 million in 2023 a decrease of 46.3%.

Our annual revenue increased in 2022 from $137.4 million in 2021 to $141.1 million in 2022 an increase of 2.7%.

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

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

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

In 2023, our gross margin decreased from 36.9% of total revenue in 2022 to 17.6% of total revenue in 2023.

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

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

We believe we are now beginning to see a recovery in our markets.

We are seeing increased orders.

The gallium arsenide market, which was the first of our markets to go into a correction, appears to have largely worked through excess inventory.

Years Ended Dec.

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Total revenue

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

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

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

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

Revenue decreased $65.3 million, or 46.3%, in 2023 from $141.1 million in 2022.

The $63.6 million decrease in wafer substrate sales was the result of lower demand for InP wafer substrates for 5G applications, data center upgrades (silicon photonics) and consumer related applications, lower demand for our GaAs wafer substrates as the result of decreased demand for LED products, industrial lasers and other applications requiring low defect densities in the wafer substrate and lower demand for our Ge wafer substrates from our customers in China.

The $1.7 million raw materials revenue decrease as compared to the same period in 2022 was primarily the result of decreased revenue from pBN crucibles and pBN-based OLED manufacturing tools sold by BoYu, one of our consolidated raw material companies, partially offset by increased sales of purified gallium.

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

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

GaAs revenue also grew as the result of increased demand for LED products, industrial lasers and other applications requiring low defect densities in the wafer substrate.

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

The $14.6 million raw materials revenue increase as compared to the same period in 2020 was primarily the result of increased revenue from sales of purified gallium and favorable pricing.

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

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

The $4.3 million raw materials revenue decrease as compared to the same period in 2021 was primarily the result of decreased revenue from sales of purified gallium and unfavorable pricing, partially offset by increased demand for pBN crucibles and pBN-based OLED manufacturing tools sold by BoYu, one of our consolidated raw material companies.

Revenue by Geographic Region

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Total revenue

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

Sales to customers located outside of North America represented approximately 90%, 86% and 90% of our revenue during 2023, 2022 and 2021, respectively.

Revenue from customers in China decreased in 2023 by 28.2%, primarily due to lower demand for Ge and InP wafer substrates and GaAs wafer substrates used in wireless and LED applications and pBN crucibles sold by one of our consolidated subsidiaries, partially offset by increased demand for refined gallium.

Revenue from customers in Taiwan decreased in 2023 by 69.9%, primarily due to lower demand for InP wafer substrates and GaAs wafer substrates used in wireless applications, partially offset by increased demand for Ge wafer substrates.

Revenue from customers in Japan decreased in 2023 by 60.4% as a result of lower demand for InP and Ge wafer substrates, GaAs wafer substrates used in LED and wireless applications, pBN crucibles sold by one of our consolidated subsidiaries and refined gallium.

Revenue from customers in Asia Pacific decreased by 8.9% as a result of decreased demand for GaAs wafer substrates used in wireless applications and refined gallium, partially offset by increased demand for InP wafer substrates and pBN crucibles sold by one of our consolidated subsidiaries.

Revenue from customers in Europe decreased in 2023 by 40.2%, primarily due to lower demand for GaAs wafer substrates used in LED and wireless applications, InP and Ge wafer substrates and pBN crucibles sold by one of our consolidated subsidiaries.

Revenue from customers in North America decreased in 2023 by 67.7% primarily due to lower demand for InP wafer substrates and GaAs wafer substrates used in LED and wireless applications, partially offset by increased demand for pBN crucibles sold by one of our consolidated subsidiaries.

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

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

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

Revenue from customers in North America increased by 64.2% primarily due to increased demand for our InP wafer substrates and pBN crucibles sold by one of our consolidated subsidiaries, partially offset by lower demand for our GaAs and Ge wafer substrates.

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

In addition, revenue from InP, GaAs and Ge wafer substrates increased.

Revenue from customers in Taiwan increased in 2021 by 2.2%, primarily due to an increase in demand for wireless applications using GaAs wafer substrates, partially offset by a decline in InP revenue in Taiwan that was transferred to North America.

Revenue from customers in Japan increased in 2021 by 32.6% as a result of increased demand for InP wafer substrates, partially offset by lower demand for pBN crucibles sold by one of our consolidated subsidiaries and GaAs used in wireless applications.

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

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

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

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

Revenue from customers in North America increased by 64.2% primarily due to increased demand for our

InP wafer substrates and pBN crucibles sold by one of our consolidated subsidiaries, partially offset by lower demand for our GaAs and Ge wafer substrates.

Year Ended Dec.

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Gross Profit %

Gross profit increased $4.7 million in 2022 as compared to 2021.

Gross profit decreased $38.8 million in 2023 as compared to 2022.

Gross margin in 2023 was 17.6% as compared to 36.9% in 2022.

The increase in gross profit is attributed to higher revenue resulting in fixed costs being spread over more units and a favorable change in product mix.

The decrease in gross profit is attributed to lower revenue resulting in fixed costs being spread over less units and an unfavorable change in product mix.

Gross profit increased $4.7 million in 2022 as compared to 2021.

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% of total revenue

Selling, general and administrative expenses decreased $2.8 million, or 11.1%, to $22.8 million for 2023 compared to $25.7 million for 2022.

The lower selling, general and administrative expenses were primarily from lower personnel-related expenses, stock compensation expenses and outside commissions, partially offset by higher professional service expenses and D&O insurance costs.

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

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

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

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

Research and Development Expenses

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% of total revenue

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

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

Research and development expenses decreased $1.8 million, or 13.2%, to $12.1 million in 2023 from $13.9 million in 2022.

The decrease in research and development expenses in 2023 was primarily due to lower personnel-related expenses and development expenses for 8-inch GaAs and 6-inch InP wafer substrates and the development of new features for certain of our GaAs and InP wafer substrates and new product testing.

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

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

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

Interest Expense, Net

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

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

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

Equity in income of unconsolidated joint ventures decreased $4.1 million to an income of $1.9 million in 2023 from an income of $6.0 million in 2022 as our unconsolidated joint ventures reported worse performance in 2023 as compared to 2022.

The decreased income in 2023 includes total impairment charges of $1.9 million on two of our equity investments.

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% of total revenue

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

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

Other income, net decreased $1.3 million to an income of $2.2 million for 2023 as compared to an income of $3.5 million in 2022, primarily due to foreign exchange gains of $0.2 million in 2023 compared to foreign exchange gains of $1.6 million in 2022 and compensation received from the China government by one of our consolidated subsidiaries for relocating its facilities to Kazuo in 2022.

losses of $434,000 in 2021 and compensation received from the China government by one of our consolidated subsidiaries for relocating its facilities to Kazuo in 2022 as compared to 2021.

Provision for Income Taxes

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Additionally, there is uncertainty of generating future profit in the U.S., which has resulted in our deferred tax assets being fully reserved.

We have accrued approximately $855,000 in federal income tax for AXT-Tongmei for the year ended December 31, 2022, which has no net operating loss carryover.

We did not incur any federal income tax liability for AXT-Tongmei in 2023, due to its financial loss.

Our estimated tax rate can vary greatly from year to year because of the change or benefit in the mix of taxable income between our U.S.

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Due to our uncertainty regarding our future profitability, we recorded a valuation allowance against our net deferred tax assets of $17.5 million and $11.9 million for the years 2023 and 2022, respectively.

Net Income Attributable to Noncontrolling Interests and Redeemable Noncontrolling Interests

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

Years Ended Dec.

($ in thousands)

Net income attributable to noncontrolling interests and redeemable noncontrolling interests

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

% of total revenue

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

(ChaoYang XinMei”).

The decrease in noncontrolling interests and redeemable noncontrolling interests’ share of income to a loss for 2023 as compared to 2022 was primarily due to losses at four of our consolidated subsidiaries in China, partially offset by a profit from our other consolidated subsidiary in China.

The increase in noncontrolling interests and redeemable noncontrolling interests’ share of income for 2022 as compared to 2021 was primarily due to the structural changes of the legal entities in China (see Note 1 to our consolidated financial statements) and to a lesser degree, losses generated by our consolidated subsidiary, ChaoYang XinMei.

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Net change in cash, restricted cash and cash equivalents

Cash and cash equivalents—beginning year

Cash, restricted cash and cash equivalents—beginning year

Cash, restricted cash and cash equivalents—end of year

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Short-term investments and long-term investments are comprised of money market accounts, certificates of deposit, corporate bonds and notes, and government securities.

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

As of December 31, 2023, we and our consolidated joint ventures held approximately $42.0 million in cash and investments in bank accounts outside the United States.

Total cash, restricted cash and cash equivalents, short-term and long-term investments decreased by $0.6 million in 2023.

As of December 31, 2023, our principal source of liquidity was $52.3 million, which consisted of cash, restricted cash and cash equivalents of $50.1 million and short-term investments of $2.1 million.

In 2023, cash, restricted cash and cash equivalents increased by $8.8 million and short-term investments decreased by $9.3 million.

The increase in cash, restricted cash and cash equivalents of $8.8 million in 2023 was primarily due to net cash provided by operating activities of $3.4 million and financing activities of $8.6 million, partially offset by net cash used in investing activities of $2.6 million and the effect of exchange rate changes of $0.6 million.

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

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

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

As of December 31, 2021, our principal source of liquidity was $51.8 million, which consisted of cash and cash equivalents of $36.8 million and short-term and long-term investments of $15.0 million.

In 2021, cash and cash equivalents decreased by $35.8 million and short-term and long-term investments increased by $9.0 million.

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

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

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

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

Net cash provided by operating activities of $3.4 million for 2023 was primarily comprised of net change in operating assets and liabilities of $7.0 million, adjustment of non-cash items of depreciation and amortization of $8.7 million, return of equity method investments (dividends) of $4.3 million, stock-based compensation of $3.5 million, deferred tax assets of $0.6 million, provision for credit losses of $0.3 million and loss on sale of equity investment of $0.2 million, offset in part by our net loss of $19.2 million and income from equity method investments of $2.1 million.

The $7.0 million net change in operating assets and liabilities primarily resulted from a decrease in accounts receivable of $9.3 million, a $1.1 million decrease in inventories and a $0.4 million decrease in other assets, offset in part by a $1.9 million decrease in accrued liabilities, a $1.0 million decrease in other long-term liabilities, including royalties, a $0.7 million increase in prepaid expenses and other current assets, and a decrease in accounts payable of $0.2 million.

marketable securities premium of $0.1 million.

The $35.2 million net change in operating assets and liabilities primarily resulted from a $31.4 million increase in inventories, a $5.5 million decrease in accounts payable, a $3.5 million increase in prepaid expenses and other current assets, a $2.1 million decrease in accrued liabilities, and a $0.5 million increase in other assets offset in part by a $4.5 million decrease in accounts receivable and a $3.3 million increase in other long-term liabilities, including royalties.

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

The $30.3 million net change in operating assets and liabilities primarily resulted from a $12.4 million increase in inventories, a $9.7 million increase in accounts receivable, a $6.3 million increase in other assets, a $3.4 million decrease in accrued liabilities, a $1.2 million decrease in other long-term liabilities, including royalties, and a $0.8 million increase in prepaid expenses and other current assets, offset in part by a $3.6 million increase in accounts payable.

Net cash provided by operating activities of $5.9 million for 2020 was primarily comprised of our net income of $5.0 million, an adjustment of non-cash items of depreciation and amortization of $4.3 million, stock-based compensation of $2.6 million, provision for doubtful accounts of $0.2 million, loss on disposal of equipment of $0.1 million, offset in part by our net change in operating assets and liabilities of $6.3 million and gain on equity method investments of $0.1 million.

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

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

Net cash used in investing activities of $2.6 million for 2023 was primarily due to property, plant and equipment of $10.5 million in preparation for our new manufacturing sites, additional equipment for our Beijing site and equipment and facility costs incurred by our consolidated subsidiaries and investments in non-marketable equity investments of $2.5 million, which were partially offset by proceeds from maturities and sales of available-for-sale debt securities of $9.6 million and proceeds from sales of equity securities of $0.8 million.

Net cash used in investing activities of $38.8 million for 2021 was primarily due to property, plant and equipment of $29.6 million in preparation for our new manufacturing sites, additional equipment for our Beijing site and equipment and facility costs incurred by our consolidated subsidiaries and the purchases of marketable investment securities of $9.6 million, which were partially offset by proceeds from maturities and sales of available-for-sale debt securities of $0.5 million.

Net cash provided by financing activities was $8.6 million for 2023 which mainly consisted of the proceeds of $56.5 million from short-term loans in China, $0.7 million from the capital increase in subsidiary shares from noncontrolling interest, and $0.6 million from a long-term loan in China, which were partially offset by payments on short-term loans of $49.2 million.

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

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

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

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.

These repurchases can be made from time to time in the open market and are funded from our existing cash balances and cash generated from operations.

During 2015, we repurchased approximately 908,000 shares at an average price of $2.52 per share for a total purchase price of approximately $2.3 million under the stock repurchase program.

During 2015, we

repurchased approximately 908,000 shares at an average price of $2.52 per share for a total purchase price of approximately $2.3 million under the stock repurchase program.

No shares were repurchased during 2023, 2022 and 2021 under this program.

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

For the years ended December 31, 2022, 2021 and 2020, the aggregate dividends paid to us, directly or to an intermediate entity within our corporate structure, by our PRC subsidiaries and PRC raw material joint ventures were approximately $2.9 million, $774,000 and $0, respectively.

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

Ltd., respectively.

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

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

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

For the years ended December 31, 2023, 2022 and 2021, the aggregate dividends paid to us, directly or to an intermediate entity within our corporate structure, by our PRC subsidiaries and PRC raw material joint ventures were approximately $4.3 million, $2.9 million and $774,000, respectively.

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

(“Xiaoyi XingAn”).

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

(“JiYa”), respectively.

In April 2023 and November 2023, Xiaoyi XingAn distributed a dividend of $1.8 million, and JiYa distributed dividends of $2.0 million and $0.5 million, respectively.

For the years ended December 31, 2023 and 2022, there were no dividends paid to minority shareholders by our PRC subsidiaries or PRC raw material joint ventures.

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

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

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

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

Pursuant to the Capital Investment Agreements with the Investors, each Investor has the right to require AXT to redeem any or all Tongmei shares held by such Investor at the original purchase price paid by such Investor, without interest, in the event the IPO fails to pass the audit of the Shanghai Stock Exchange, is not approved by the CSRC or Tongmei cancels the IPO application.

The aggregate redemption amount is approximately $49 million.

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

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

The process of going public on the STAR Market includes several

periods of review and, therefore, is a lengthy process.

Subject to review and approval by the CSRC and other authorities, Tongmei hopes to accomplish this goal in the coming months.

14 unchanged sentences

Bank of China (1)

Bank of China (5)

Bank of China (3)

Bank of Communications (2)

1 unchanged sentence

China Merchants Bank (5)

Bank of Beijing (4)

4 unchanged sentences

Industrial and Commercial Bank of China (6)

Bank of China (5)

NingBo Bank (5)

Industrial Bank (5)

Bank of Communications (5)

Collateral for the above bank loans and line of credit

1 unchanged sentence

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

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

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

(3) ChaoYang LiMei time deposit.

(4) AXT time deposit.

(5) Not collateralized.

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

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

In addition, the December 2023 loan attracts a guarantee fee amounting to 0.7% of the loan amount.

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Contractual Obligations

We lease certain office space, warehouse facilities and equipment 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.

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 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.

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.

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

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

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

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

Total rent expenses under these operating leases charged to selling, general and administrative were approximately $510,000, $458,000 and $431,000 for the years ended December 31, 2023, 2022 and 2021, respectively, primarily related to our Fremont facility.

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

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

Total rent expenses under these operating leases charged to cost of revenue were approximately $285,000, $303,000 and $296,000 for the years ended December 31, 2023, 2022 and 2021, respectively, primarily related to the nitrogen system at our facility in Dingxing.

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

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For the years ended December 31, 2023 and 2022, the royalty expense under the Cross License Agreement was not considered material to our consolidated financial statements.

In December 2023, one of our consolidated subsidiaries, ChaoYang XinMei secured a loan of approximately $2.1 million from an unrelated financing company.

According to the agreement, ChaoYang XinMei temporarily transferred ownership of its production line and related equipment to the financing company, while retaining the right to use the property for production.

At the end of the 30-month contractual period, ChaoYang XinMei holds the option to repurchase the production line and related equipment for $14.00.

As of December 31, 2023, $2.1 million associated with this financing arrangement is included in Other long-term liabilities in our consolidated balance sheets.

Land Purchase and Investment Agreement

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

What changed 10-K

Item 7. Management’s Discussion and Analysis