What changed in this filing

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Item 1. Financial Statements

2024-05-10 compared with 2023-11-09 · 392 added, 533 removed, 1107 unchanged (46% of the section changed)

2 unchanged sentences

(Unaudited, in thousands, except per share data)

September 30,

Current assets:

Cash and cash equivalents

Restricted cash

Short-term investments

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

Accounts receivable, net of allowances for credit losses of $ 579 and $ 579 as of March 31, 2024 and December 31, 2023

Prepaid expenses and other current assets

Total current assets

Long-term investments

Property, plant and equipment, net

4 unchanged sentences

Accrued liabilities

Short-term loans

Total current liabilities

7 unchanged sentences

2,000 shares authorized;

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)

883 shares issued and outstanding as of March 31, 2024 and December 31, 2023 (Liquidation preference of $ 7,920 and $ 7,875 as of March 31, 2024 and December 31, 2023)

Common stock, $ 0.001 par value;

70,000 shares authorized;

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

44,399 and 44,239 shares issued and outstanding as of March 31, 2024 and December 31, 2023

Additional paid-in capital

10 unchanged sentences

Three Months Ended

Nine Months Ended

September 30,

Cost of revenue

3 unchanged sentences

Total operating expenses

Income (loss) from operations

Loss from operations

Interest expense, net

1 unchanged sentence

Other income, net

Income (loss) before provision (benefit) for income taxes

Provision (benefit) for income taxes

Net income (loss)

Loss before provision for income taxes

Provision for income taxes

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

Net income (loss) attributable to AXT, Inc.

Net loss attributable to AXT, Inc.

per common share:

4 unchanged sentences

Three Months Ended

Nine Months Ended

September 30,

Net income (loss)

Other comprehensive loss, net of tax:

Change in foreign currency translation loss, net of tax

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

Total other comprehensive loss, net of tax

Comprehensive income (loss) attributable to AXT, Inc.

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

Comprehensive income (loss) attributable to AXT, Inc.

Other comprehensive income (loss), net of tax:

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

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

Total other comprehensive income (loss), net of tax

Comprehensive loss attributable to AXT, Inc.

Comprehensive loss attributable to noncontrolling interests and redeemable noncontrolling interests

Comprehensive loss attributable to AXT, Inc.

See accompanying notes to condensed consolidated financial statements.

1 unchanged sentence

(Unaudited, in thousands)

Nine Months Ended

September 30,

Three Months Ended

Cash flows from operating activities:

Net income (loss)

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

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

Depreciation and amortization

2 unchanged sentences

(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 (used in) operating activities

Net cash 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 % of Jia Mei

Investments in non-marketable equity investments

Net cash used in investing activities

1 unchanged sentence

Proceeds from common stock options exercised

Proceeds from bank loans

Payments on bank loans

Proceeds from short-term bank loans

Payments on short-term bank loans

Proceeds from capital increase in subsidiary shares from noncontrolling interests

Proceeds from long-term loan

Payments on long-term loan

Net cash provided by financing activities

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

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

Cash and cash equivalents, and restricted cash at the beginning of the year

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

Effect of exchange rate changes on cash and restricted cash

Net increase (decrease) in cash and restricted cash

Cash and restricted cash at the beginning of the year

Cash and restricted cash at the end of the period

Supplemental disclosure of non-cash flow information:

Conversion of related party borrowings to Additional Paid-in Capital

Notes receivables paid to purchase fixed assets

Investment in subsidiary shares from noncontrolling interest

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

7 unchanged sentences

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

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

for all periods presented.

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

2 unchanged sentences

Actual results could differ materially from those estimates.

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 results of operations for the three months ended March 31, 2024 are not necessarily indicative of the results to be expected in the future or for the full fiscal year.

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

10 unchanged sentences

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

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

As of March 31, 2024 and December 31, 2023, we have three companies accounted for by the equity method.

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

5 unchanged sentences

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.

For the three months ended March 31, 2024, 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.

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

5 unchanged sentences

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

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

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

2 unchanged sentences

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

Tongmei’s ownership remained at 58.5 % after the April 2022 and May 2022 equity investments.

In July 2022, Tongmei and the minority investors further invested $ 0.8 million and $ 0.6 million in ChaoYang XinMei, respectively.

1 unchanged sentence

As a result, noncontrolling interests increased $ 610,000 and redeemable noncontrolling interests increased $ 57,000 .

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

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

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

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 ShuoMei 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.

4 unchanged sentences

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

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

In May 2023, ChaoYang ShuoMei received $ 1.0 million in funding from ChaoYang JinMei and $ 0.3 million in funding from one of the minority investors.

4 unchanged sentences

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 “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 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”), which 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.

2 unchanged sentences

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

In September 2023, Tongmei entered into another joint venture agreement with the same group of investors.

This new agreement called for additional investment of approximately $ 5.6 million, with Tongmei committing to fund approximately $ 2.3 million.

In December 2023, Tongmei made its initial additional 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.

4 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 Tongmei.

JinMei and BoYu and their 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 September 30, 2023, Tongmei’s noncontrolling interests and redeemable noncontrolling interests totaled approximately 14.5 %.

As of March 31, 2024, 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.

2 unchanged sentences

Investments and Fair Value Measurements

Our cash and cash equivalents consist of cash and instruments with original maturities of less than three months.

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

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

As of March 31, 2024 and December 31, 2023, our cash and debt investments are classified as follows (in thousands):

March 31, 2024

December 31, 2023

1 unchanged sentence

Cash and restricted cash

Cash equivalents:

Certificates of deposit 1

Total cash, restricted cash and cash equivalents

Investments (available-for-sale):

Certificates of deposit 1

Corporate bonds

Total investments

Total cash, restricted cash, cash equivalents and investments

Total cash, restricted cash and investments

Contractual maturities on investments:

Due within 1 year 2

Due after 1 through 5 years 4

Certificates of deposit with original maturities of less than three months.

Certificates of deposit with original maturities of more than three months.

Classified as “Short-term investments” in our condensed consolidated balance sheets.

Classified as “Long-term investments” in our condensed consolidated balance sheets.

We manage our debt investments as a single portfolio of highly marketable securities that is intended to be available to meet our current cash requirements.

1 unchanged sentence

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

There was an insignificant amount of gross unrealized losses on our available-for-sale debt securities as of September 30, 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 March 31, 2024, 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 September 30, 2023 (in thousands):

In Loss Position

1 unchanged sentence

Loss Position

As of September 30, 2023

As of March 31, 2024

Certificates of deposit

Corporate bonds

Total in loss position

5 unchanged sentences

Certificates of deposit

Corporate bonds

Total in loss position

1 unchanged sentence

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

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

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

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

by Tongmei in January 2023.

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.

When the May 2022 bank loan under the credit facility matured, we utilized the same time deposit of $ 3.9 million as collateral for a new bank loan of $ 3.5 million from the Bank of Beijing in June 2023.

Furthermore, during June 2023, we placed another time deposit of $ 1.5 million at the Bank of Beijing as collateral for a bank loan of $ 1.4 million received by Tongmei.

Each of the bank loans has a term of 12 months.

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 balance.

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

These balances have been excluded from the Company’s cash balance.

As of March 31, 2024, $ 13.8 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 $ 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.

The investment balances for the non-consolidated companies are accounted for under the equity method, included in “Other assets” in the condensed consolidated balance sheets, totaled $ 13.2 million and $ 12.5 million as of March 31, 2024 and December 31, 2023, respectively.

As of March 31, 2024, there were three 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 nine months ended September 30, 2023 and 2022.

Except as mentioned above, there were no impairment charges for the remainder of these investments during the three months ended March 31, 2024 and 2023.

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.

Our investments under the fair value method are reviewed for other-than-temporary declines in value on a quarterly basis.

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 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.

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 March 31, 2024, 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 and nine months ended September 30, 2023.

Additionally, in accordance with Accounting Standards Codification (“ASC”) 321-10-35-2, we adjusted the investment in Jia Mei to its fair value at the time of the sale, which resulted in a gain of $ 383,000 .

Fair Value Measurements

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

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

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

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

As of March 31, 2024 and December 31, 2023, 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.

Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), establishes three levels of inputs that may be used to measure fair value.

ASC 820, Fair Value Measurements and Disclosures , establishes three levels of inputs that may be used to measure fair value.

Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets of the asset or identical assets.

8 unchanged sentences

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):

As of March 31, 2024, the net change in fair value from the placement of the hedge to settlement at each month end during the quarter had a de minimis impact on the condensed consolidated results.

There were no changes in valuation techniques or related inputs in the three months ended March 31, 2024.

There have been no transfers between fair value measurements levels during the three months ended March 31, 2024.

The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis in accordance with ASC 820 as of March 31, 2024 (in thousands):

Quoted Prices in

4 unchanged sentences

Observable Inputs

September 30, 2023

March 31, 2024

Certificates of deposit

Corporate bonds

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

7 unchanged sentences

Certificates of deposit

Corporate bonds

Items Measured at Fair Value on a Nonrecurring Basis

1 unchanged sentence

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 nine months ended September 30, 2023 and 2022, respectively.

We did not record any other-than-temporary impairment charges for these investments during the three months ended March 31, 2024 and 2023, respectively.

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

September 30,

Raw materials

1 unchanged sentence

Finished goods

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.

As of March 31, 2024 and December 31, 2023, carrying values of inventories were net of inventory reserves of $ 22.2 million and $ 21.9 million, respectively, for excess and obsolete inventory and $ 213,000 and $ 78,000 , respectively, for lower of cost or net realizable value reserves.

Property, Plant and Equipment, Net

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

September 30,

Property, plant and equipment:

6 unchanged sentences

Construction in progress

As of September 30, 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.

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 for our other consolidated subsidiaries.

As of March 31, 2024, the balance of construction in progress was $ 36.9 million, of which $ 29.4 million was related to our buildings in our new Dingxing and Kazuo locations, $ 2.9 million was for manufacturing equipment purchases not yet placed in service and $ 4.6 million was for construction in progress for our other consolidated subsidiaries.

As of December 31, 2023, the balance of construction in progress was $ 38.5 million, of which $ 31.2

million was for our buildings in our new Dingxing and Kazuo locations, $ 3.1 million was for manufacturing equipment purchases not yet placed in service and $ 4.2 million was for our 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

Accrued compensation and related charges

Preferred stock dividends payable

Accrued product warranty

Accrued professional services

Payable in connection with construction in progress

Other tax payable

Advances from customers

Accrued product warranty

Accrued professional services

Current portion of operating lease liabilities

Other personnel-related costs

Accrual for sales returns

Accrued income taxes

Accrual for sales returns

Other accrued liabilities

Related Party Transactions

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 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.

8 unchanged sentences

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

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

In July 2022, Tongmei and the minority investors further invested $ 0.8 million and $ 0.6 million in ChaoYang XinMei, respectively.

1 unchanged sentence

As a result, noncontrolling interests increased $ 610,000 and redeemable noncontrolling interests increased $ 57,000 .

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

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

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

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

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

As of March 31, 2024, $ 0 million was included in “Prepaid expenses and other current assets” in our condensed consolidated balance sheets.

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

5 unchanged sentences

These companies form part of our overall supply chain strategy.

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

As of March 31, 2024, the investments are summarized below (in thousands):

Investment Balance as of

September 30,

Nanjing JinMei Gallium Co., Ltd.

3 unchanged sentences

ChaoYang XinMei High Purity Semiconductor Materials Co., Ltd.

Donghai County Dongfang High Purity Electronic Materials Co., Ltd.

Beijing JiYa Semiconductor Material Co., Ltd.

2 unchanged sentences

Emeishan Jia Mei High Purity Metals Co., Ltd.

* These percentages reflect the ownership currently in effect upon the completion of the reorganization in China and the ownership in effect upon the completion of the new capital funding by private equity investors in January 2021.

** In preparation for Tongmei’s application for a listing of shares in an IPO on the STAR Market, in late December 2020 we reorganized our entity structures in China.

JinMei and BoYu and its subsidiaries, previously organized under AXT, Inc., 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.

JinMei and BoYu and their subsidiaries, previously organized under AXT, Inc., 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.

5 unchanged sentences

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

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

As of March 31, 2024, 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.

5 unchanged sentences

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 .

Considering our decreased ownership and we no longer have significant influence over its operations and financial policies, we adopted the fair value method of accounting to report Jia Mei’s financial statements.

Considering our decreased ownership and we no longer have significant influence over its operations and financial policies, we adopted the fair value method of accounting to report

on the investment in Jia Mei.

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.

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

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 consolidated statements of operations in the second quarter of 2023.

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

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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 %.

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

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

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

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

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

As a result, our ownership of BoYu increased from 63 % to 67 %.

We continue to consolidate BoYu as we have a controlling financial interest and have majority control of the board and accordingly no gain was recognized as a result of this equity transaction.

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

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

In this regard, our two consolidated raw material companies, JinMei and BoYu, and its subsidiaries, were assigned to Tongmei in December 2020.

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

We did not record any other-than-temporary impairment charges for Jia Mei investment during the three months ended March 31, 2024.

In November 2023, our 46 % equity ownership interest in Donghai County Dongfang High Purity Electronic Materials Co., Ltd.

(“Dongfang”) was sold to a third party for consideration valued at approximately $ 0.6 million, including raw materials, equipment, and vehicle.

As a result, our equity ownership interest of Dongfang decreased from 46 % to 0 %.

The loss resulting from the sale was incorporated as a component of “Equity in income of unconsolidated joint ventures” in the consolidated statements of operations in the fourth quarter of 2023.

The loss from the sale includes the following:

(in thousands)

Fair value of the consideration received

Carrying value of 46 % of Donghai County Dongfang High Purity Electronic Materials Co., Ltd.

Loss recognized on sale of 46 % of Donghai County Dongfang High Purity Electronic Materials Co., Ltd.

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

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

For AXT’s minority investment entities that are not consolidated, the investment balances are included in “Other assets” in our 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.

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 $ 12.5 million as of March 31, 2024 and December 31, 2023, respectively.

As of March 31, 2024, our ownership interests inChaoYang KaiMei, JiYa, Xiaoyi XingAn Gallium Co., Ltd (“Xiaoyi XingAn”) and Jia Mei were 40 %, 39 %, 25 %, and 10 %, respectively.

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

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

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

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.

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

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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 nine months ended September 30, 2023 and 2022:

The equity investment entities had the following summarized statements of operations information (in thousands) for the three months ended March 31, 2024 and 2023:

Three Months Ended

Nine Months Ended

September 30,

Operating income

Our portion of the income and losses from these minority investment entities that are not consolidated and are accounted for under the equity method was 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.

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 $ 0.9 million and $ 1.0 million, respectively, for the three months ended March 31, 2024 and 2023.

Stockholders’ Equity

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(in thousands)

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

The changes in stockholders’ equity by component for the three months ended March 31, 2024 are as follows:

Comprehensive

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Balance as of March 31, 2024

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 June 30, 2023

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:

Net loss and Other comprehensive loss attributable to redeemable noncontrolling interests were $ 71,000 and $ 189,000 , respectively, for the three months ended March 31, 2024 and are not shown in the table above.

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

Comprehensive

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Balance as of December 31, 2022

Common stock options exercised

Investment in subsidiary with noncontrolling interest

Investment in subsidiary with redeemable noncontrolling interest

Noncontrolling interest portion of Tongmei stock-based compensation

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Tongmei stock-based compensation

Investment in subsidiary from noncontrolling interest

Other comprehensive income

Balance as of March 31, 2023

Common stock options exercised

Investment in subsidiary with noncontrolling interest

Noncontrolling interest portion of Tongmei stock-based compensation

Stock-based compensation

Tongmei stock-based compensation

Other comprehensive income (loss)

Balance as of June 30, 2022

Common stock options exercised

Investment in subsidiary with noncontrolling interest

Noncontrolling interest portion of Tongmei stock-based compensation

Stock-based compensation

Tongmei stock-based compensation

Other comprehensive income (loss)

Balance as of September 30, 2022

Net income and Other comprehensive loss attributable to redeemable noncontrolling interests 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 .

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

There were no reclassification adjustments from accumulated other comprehensive income (loss) for the three months ended March 31, 2024 and 2023 .

Stock Repurchase Program

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No shares were repurchased from 2016 through 2023 .

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.

During the three months ended March 31, 2024, we did no t repurchase any shares under the approved stock repurchase program.

As of March 31, 2024, approximately $ 2.7 million remained available for future repurchases under this program.

Currently, we do not plan to repurchase additional shares.

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Three Months Ended

Nine Months Ended

September 30,

Cost of revenue

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Net effect on net income (loss)

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 September 30, 2023 and December 31, 2022 due to the immateriality of the amount.

As of March 31, 2024, the unamortized compensation costs related to unvested stock options granted to employees under our stock option plan was $ 0 .

We did not capitalize any stock-based compensation to inventory as of March 31, 2024 and December 31, 2023 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 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):

There were no options granted in the three months ended March 31, 2024 and 2023.

The following table summarizes the stock option transactions during the three months ended March 31, 2024 (in thousands, except per share data):

Stock Options

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Canceled and expired

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.

Balance as of March 31, 2024

Options vested as of March 31, 2024 and unvested options expected to vest, net of forfeitures

Options exercisable as of March 31, 2024

The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on our closing price of $ 4.59 on March 28, 2024, which would have been received by the option holder had all option holders exercised their options on that date.

Restricted stock awards

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

A summary of activity related to restricted stock awards for the three months ended March 31, 2024 is presented below (in thousands, except per share data):

Weighted-Average

Non-vested as of January 1, 2024

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.

Non-vested as of March 31, 2024

As of March 31, 2024, 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 1.3 years.

At-Risk, Performance Shares

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

In March 2023 and February 2024, the Company issued at-risk, performance shares classified as equity awards.

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

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

All performance shares, if earned, are still subject to annual vesting over a four-year period, except that no shares are vested on the first anniversary because the performance measurement is based on year-end results for the year 2022 and 2023, respectively.

The financial performance metric for the at-risk, performance shares issued in February 2024 is based upon the Company’s year-end actual results in 2024.

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

on the first anniversary because the performance measurement is based on year-end results for the year 2023 and 2024, respectively.

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

The fair value per share of the at-risk, performance shares classified as equity awards granted in February 2024 and March 2023 was $ 2.28 and $ 3.71 , respectively.

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

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

On February 17, 2021, the Compensation Committee approved the grant to Gary Fischer, our Chief Financial Officer and Corporate Secretary, of 38,475 at-risk, performance shares under the Plan.

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

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

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

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

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

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

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

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

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

Fischer would be eligible to vest.

Any shares that are not eligible to vest are forfeited.

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

Young and 32,100 for Mr.

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

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

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

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

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

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

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

If the minimum financial metric for fiscal year 2023 is achieved, then based upon a performance formula, a corresponding portion of the 223,590 shares issued to Dr.

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

Fischer would be eligible to vest.

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

If the target financial metric was exceeded and an additional financial metric for fiscal year 2023 is achieved, then 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 for fiscal year 2023 is not achieved, then these awards are forfeited.

On February 20, 2024, the Compensation Committee met and certified that the minimum revenue metric for fiscal year 2023 was not achieved.

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

On February 20, 2024, the Compensation Committee recommended, and the Board approved, the grant to Dr.

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

On February 20, 2024, the Compensation Committee approved the grant to Gary Fischer of 77,600 at-risk, performance shares under the Plan.

If the minimum financial metric for fiscal year 2024 is achieved, then based upon a performance formula, a corresponding portion of the 223,590 shares issued to Dr.

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

Fischer would be eligible to vest.

If the target financial metric is exceeded, then 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 for fiscal year 2024 is not achieved, then these awards are forfeited.

A summary of the status of our unvested at-risk, performance shares as of March 31, 2024 is presented below (in thousands, except per share data):

Weighted-Average

Non-vested as of January 1, 2024

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

Non-vested as of March 31, 2024

(1) The number of shares presented is based on achieving 100% of the targeted financial performance metric as defined in the at-risk, performance shares agreement.

As of March 31, 2024, there was $ 0.4 million of unrecognized compensation expense related to unvested at-risk, performance shares that is expected to be recognized over a weighted-average period of 1.81 years.

Net Loss Per Share

Basic net income (loss) per share is computed using the weighted-average number of common shares outstanding during the periods less shares of common stock subject to repurchase and non-vested stock awards.

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Three Months Ended

Nine Months Ended

September 30,

Net income (loss) attributable to AXT, Inc.

Net loss attributable to AXT, Inc.

Preferred stock dividends

Net income (loss) available to common stockholders

Net loss available to common stockholders

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

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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 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.

The 883,000 shares of $ 0.001 par value Series A preferred stock issued and outstanding as of March 31, 2024 and December 31, 2023, valued at $ 3,532,000 , are non-voting and non-convertible preferred stock with a 5.0 % cumulative annual dividend rate payable when declared by the Board of Directors and a $ 4 per share liquidation preference over common stock, which must be paid before any distribution is made to common stockholders.

These preferred shares were issued to Lyte Optronics, Inc.

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

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

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

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

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Three Months Ended

Nine Months Ended

September 30,

Product Type:

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Three Months Ended

Nine Months Ended

September 30,

Geographical region:

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

September 30,

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

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Significant Customers

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.

One customer represented 12 % of our revenue for the three months ended March 31, 2024 and no customers represented 10 % of our revenue for the three months ended March 31, 2023.

Our top five customers, although not the same five customers for each period, represented 33 % and 28 % of our revenue for the three months ended March 31, 2024 and 2023, 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 September 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 March 31, 2024 , and no customers accounted for more than 10 % of our accounts receivable as of December 31, 2023.

Commitments and Contingencies

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

The following table reflects the change in our warranty accrual which is included in “Accrued liabilities” in the condensed consolidated balance sheets, during the three and nine months ended September 30, 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 months ended March 31, 2024 and 2023 (in thousands):

Three Months Ended

Nine Months Ended

September 30,

Beginning accrued product warranty

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

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

As of March 31, 2024, we do not have any outstanding purchase orders that will incur a penalty if cancelled by the Company.

Legal Proceedings

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Other Income (expense), Net

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.

Other income (expense), net for the three months ended March 31, 2024 and 2023, includes a grant of $ 1.0 million and $ 0.5 million, respectively, from government agencies as awards for technological innovation.

In addition, we incurred a foreign currency transaction exchange gain of $ 58,000 and a loss of $ 213,000 for the three months ended March 31, 2024 and 2023, 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.

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

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

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

Income tax expense for the three months ended March 31, 2024 includes no interest and penalties.

As of March 31, 2024, we have no accrued interest and penalties related to uncertain tax positions.

We file income tax returns in the U.S.

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

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.

Provision for income taxes for the three months ended March 31, 2024 was mostly related to our wholly owned China subsidiaries and our partially owned subsidiaries in China.

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

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had been fully offset by utilization of federal and state net operating loss carryforwards.

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.

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

Under the 2017 Tax Cuts and Jobs Act, 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.

or 15 years for research conducted in a foreign jurisdiction.

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

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

We do not have any material contract assets as of March 31, 2024.

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

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

September 30,

The following table reflects the contract liabilities balance, which is included in “Accrued liabilities” on the condensed consolidated balance sheets, as of March 31, 2024 and December 31, 2023 (in thousands):

Contract liabilities

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.

During the three months ended March 31, 2024, the Company recognized $ 127,000 of revenue that was included in the contract balances as of December 31, 2023.

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

Disaggregated Revenue

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

Bank Loans and Line of Credit

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

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

September 30,

Bank of China (1)

Loans and Line of Credit

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

The following table represents short-term bank loans as of March 31, 2024 and December 31, 2023 (in thousands, except interest rate data):

Bank of China (1)

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Bank of Communications (1)

Bank of Communications (5)

China Merchants Bank (1)

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Industrial Bank (1)

Bank of Communications (1)

NanJing Bank (1)

Collateral for the above bank loans and line of credit

(1) Baoding Tongmei’s land use rights and all of its buildings located at its facility in Dingxing, China.

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

(1) Not collateralized.

(2) ChaoYang LiMei time deposit.

(3) 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 .

(4) 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.

Long-term Loa ns

On January 30, 2024, the Company secured a new line of credit amounting to $ 9.7 million, structured as a five-year bank loan.

The credit facility bears interest at a rate of 6.5 % per annum on the amount drawn from the line of credit.

The credit facility is collateralized by the real estate properties owned by ChaoYang Tongmei.

In January 2024, the Company borrowed $ 5.8 million against the credit facility.

The intended use of the credit facility is for construction projects.

As of March 31, 2024, $ 5.6 million is included in “Other long-term liabilities” and $ 277,000 is included in “Short-term loans” in our consolidated balance sheets.

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 March 31, 2024, $ 1.4 million associated with this financing arrangement is included in “Other long-term liabilities” and $ 554,000 is included in “Short-term loans” in our consolidated balance sheets.

As of March 31, 2024, the maturities of our long-term loan liabilities in five years (excluding short-term loans) are as follows (in thousands):

Maturity of long term loans

In summary, short-term loans of $ 49.0 million included under “Short-term loans” in our condensed consolidated balance sheet at March 31, 2024, consisted of $ 48.2 million of short-term bank loans and $ 0.8 million of the current portion of long-term debt.

Long-term loans of $ 7.0 million included under “Other long-term liabilities” in our condensed consolidated balance sheet at March 31, 2024 consisted of $ 5.6 million in a five-year bank loan and $ 1.4 million in a loan secured by ChaoYang XinMei.

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

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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 remaining lease obligations relate to 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.

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A lease is classified as a finance lease if any one of the following criteria are met:

the lease transfers ownership of the asset by the end of the lease term, the lease contains an option to purchase the asset that is reasonably certain to be exercised, the lease term is for a major part of the remaining useful life of the asset or the present value of the lease payments equals or exceeds substantially all of the fair value of the asset.

the lease transfers ownership of the asset by the end of the lease term, the lease

contains an option to purchase the asset that is reasonably certain to be exercised, the lease term is for a major part of the remaining useful life of the asset or the present value of the lease payments equals or exceeds substantially all of the fair value of the asset.

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

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

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

As of March 31, 2024, the maturities of our operating lease liabilities (excluding short-term leases) are as follows (in thousands):

Maturity of Lease Liabilities

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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)

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

Nine Months Ended

September 30,

Three Months Ended

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

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Three Months Ended

Nine Months Ended

September 30,

Operating lease

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public company.

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):

The components of the change in redeemable noncontrolling interests for the three months ended March 31, 2024 are presented in the following table (in thousands):

Balance as of January 1, 2024

Investment in subsidiary with redeemable noncontrolling interest

Equity issuance costs incurred

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Effect of foreign currency translation attributable to redeemable noncontrolling interests

Balance as of September 30, 2023

Balance as of March 31, 2024

Recent Accounting Pronouncements

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

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

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

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

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

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

In September 2022, FASB issued Accounting Standards Update No.

2022-04, Liabilities—Supplier Finance Programs (Subtopic 405-50):

Disclosure of Supplier Finance Program Obligations, to enhance the transparency about the use of supplier finance programs for investors.

The amendments in this Update require that a buyer in a supplier finance program disclose sufficient information about the program to allow a user of financial statements to understand the program’s nature, activity during the period, changes from period to period, and potential magnitude.

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

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

In November 2023, the Financial Accounting Standards Board (“FASB”) released ASU 2023-07— Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures, aiming to enhance the transparency and relevance of segment information provided in financial statements.

The amendments in this update require that a public entity disclose significant segment expenses, and profit or loss and assets, among other disclosures, for each reportable segment, on an annual and interim basis.

The update is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024.

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

In December 2023, FASB issued ASU 2023-09— Income Taxes (Topic 740):

Improvements to Income Tax Disclosures, to help investors better understand an entity’s exposure to potential changes in jurisdictional tax legislation and the ensuing risks and opportunities.

Furthermore, the update improves to assess income tax information that affects cash flow forecasts and capital allocation decisions.

The update is effective for public business entities for annual periods beginning after December 15, 2024, on a prospective basis.

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

In March 2024, FASB released ASU 2024-01— Compensation—Stock Compensation (Topic 718).

The update adds an illustrative example aimed at clarifying the scope application of a profit interest award in accordance with Topic 718.

The update is effective for annual periods beginning after December 15, 2024, and interim periods within those annual periods.

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

Subsequent Event

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 repaid $ 2.7 million of existing loans in October 2023.

In April 2024, Tongmei obtained $ 691,000 in a new one-year bank loan with an annual interest rate of 3.5 %.

The bank loan is unsecured.

On May 6, 2024, a putative shareholder class action was filed in U.S.

District Court for the Eastern District of New York.

Nowakowsky vs.

AXT, Inc., 1:24-cv-03341-DLI-JRC.

Named as defendants are the Company, Morris Young, and Gary Fischer.

The case alleges claims under the Securities Exchange Act of 1934.

That Court has ordered the case to be transferred to the Northern District of California, where the Company’s headquarters is located.

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

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

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

This Quarterly Report on Form 10-Q of AXT, Inc.

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

and its consolidated subsidiaries) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Statements relating to our expectations regarding results of operations, market and customer demand for our products, customer qualifications of our products, our ability to expand our markets or increase sales, emerging applications using chips or devices fabricated on our substrates, including the use of InP wafer substrates in artificial intelligence (“AI”) applications, the development and adoption of new products, applications, enhancements or technologies, the life cycles of our products and applications, product yields and gross margins, expense levels, the impact of the adoption of certain accounting pronouncements, our investments in capital projects, ramping production at our new sites, potential severance costs with respect to any reduction in our work force, our ability to have new customers qualify substrates from our new manufacturing locations in China, our ability to utilize or increase our manufacturing capacity, and our belief that we have adequate cash and investments to meet our needs over the next 12 months are forward-looking statements.

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

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Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “goals,” “should,” “continues,” “would,” “could” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this Quarterly Report on Form 10-Q.

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

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

Our forward-looking statements are based upon assumptions that are subject to uncertainties and factors relating to the Company’s operations and business environment, which could cause actual results to differ materially from those expressed or implied in the forward-looking statements contained in this Quarterly Report on Form 10-Q.

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

the continuing effects of COVID-19 or other outbreaks of a contagious disease;

the availability of COVID-19 vaccines;

COVID-19 or other outbreaks of a contagious disease;

the availability of current COVID-19 vaccines;

tariffs and other trade war issues;

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

export restrictions in China;

the financial performance of our partially owned supply chain companies;

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

This discussion should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations included in

our Annual Report on Form 10-K for the year ended December 31, 2022 and the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

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

and its consolidated subsidiaries) is a worldwide materials science company that develops and produces high-performance compound and single element semiconductor substrates, also known as wafers.

This discussion should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our

Annual Report on Form 10-K for the year ended December 31, 2023 and the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

AXT is a worldwide materials science company that develops and produces high-performance compound and single element semiconductor substrates, also known as wafers.

Two of our consolidated subsidiaries produce and sell certain raw materials some of which are used in our substrate manufacturing process and some of which are sold to other companies.

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

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

Data centers use InP devices for high-speed optical data transmission.

We believe the growth of AI applications will increase the need for high-speed data transfer, which may lead to an increase in InP substrate demand from such data centers.

Currently, InP substrates are being used in certain consumer products, including proximity sensors in mobile devices, biometric wearables and other health monitoring applications.

In recent years, InP demand has increased.

Semi-insulating GaAs substrates are used to create various high-speed microwave components, including power amplifier chips used in cell phones, satellite communications and broadcast television applications.

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

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

Semi-conducting GaAs substrates are used to create opto-electronic products, such as light emitting diodes (LEDs) that are used in a wide range of applications, including automotive lighting, horticulture, signage, display, sensors and machine vision.

Semi-conducting GaAs substrates are also used in making industrial lasers.

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

Ge substrates are used in applications such as solar cells for space and terrestrial photovoltaic applications.

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We use these pBN crucibles in our own ingot growth processes and they are also sold in the open market to other companies.

The second consolidated company converts raw gallium to purified gallium.

A second consolidated company converts raw gallium to purified gallium.

We use purified gallium in producing our GaAs substrates and it is also sold in the open market to other companies for use in producing magnetic materials, high temperature thermometers, single crystal ingots, including gallium arsenide, gallium nitride, gallium antimonite and gallium phosphide ingots, and other materials and alloys.

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• Data center connectivity using light/lasers

• High-speed data transfer in data centers to support AI applications

• 5G communications

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• Screen displays using micro-LEDs

1”, 2”, 3”, 4”, 5", 6”, 8”

1”, 2”, 3”, 4”, 5”, 6”, 8”

• Printer head lasers and LEDs

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• Used when growing single-crystal compound semiconductor ingots

• Used as effusion rings growing OLED tools

• Used as effusion rings when growing OLED tools

pBN insulating parts

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• Used when growing epitaxial layers in Molecular Beam Epitaxy (MBE) reactors

All of our products are manufactured in the People’s Republic of China (PRC or China) by our PRC subsidiaries and PRC joint ventures.

All of our substrate products and raw material products are manufactured in the People’s Republic of China (PRC or China) by our PRC subsidiaries and PRC joint ventures.

The PRC generally has favorable costs for facilities and labor compared with comparable facilities in the United States, Europe or Japan.

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We purchase portions of the materials produced by these companies for our own use and they sell the remainder of their production to third parties.

The Beijing city government is moving its offices into the district where our original manufacturing facility is currently located and is in the process of moving thousands of government employees into this district.

In 2015, the Beijing city government announced its decision to move most of its offices to the Tongzhou district where our original manufacturing facility is currently located.

The Beijing city government has moved thousands of government employees into this district.

The government has constructed showcase tower buildings and overseen the establishment of new apartment complexes, retail stores and restaurants.

A large park, named Green Heart City Park, was built across the street from our facility and Universal Studios has developed an amusement park within a few miles of our facility.

To create room and upgrade the district, the city instructed virtually all existing manufacturing companies, including AXT, to relocate all or some of their manufacturing lines.

To create room and upgrade the district, the city instructed virtually all existing manufacturing companies, including Tongmei, to relocate all or some of their manufacturing lines.

We were instructed to relocate our gallium arsenide manufacturing lines.

For reasons of manufacturing efficiency, we elected to also move part of our germanium manufacturing line.

Our indium phosphide manufacturing line, as well as various administrative and sales functions, will remain primarily at our original site.

Our indium phosphide manufacturing line, as well as various administrative and sales functions, remain primarily at our original site.

Begun in 2017, the relocation of our gallium arsenide production lines is now completed.

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

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

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

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

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

We believe our ability to add capacity gives us a competitive advantage.

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

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

We believe our success in the relocation and our ability to add capacity in the future gives us competitive advantages.

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

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

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

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

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

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

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

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

By December 31,

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

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

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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.

The government approved the approximately $49 million investment in its entirety on January 25, 2021.

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

(“BoYu”) and its subsidiaries were assigned to Tongmei in December 2020.

(“BoYu”) and their subsidiaries were assigned to Tongmei in December 2020.

As of June 30, 2021, AXT-Tongmei, Inc., a wholly owned subsidiary of AXT, was assigned to Tongmei.

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

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

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

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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 September 30, 2023;

The following organization chart depicts the consolidated structure as of March 31, 2024;

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

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

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

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

In the ordinary course of business, our PRC subsidiaries and PRC joint ventures require permits and licenses to operate in the PRC.

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Approximately 5% of our revenue derives from importing our wafers into the United States and we expect the volume to increase.

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

For the three months ended March 31, 2024 and 2023, we paid approximately $65,000 and $447,000, respectively, in tariffs.

The future impact of tariffs and trade wars is uncertain.

Effective as of August 1, 2023, the PRC government instituted a requirement for export licenses for gallium and germanium-related materials and the derivative products using these materials.

Tongmei is required to apply for export licenses for gallium arsenide and germanium wafer substrates and each application must state the end use of the product exported.

These regulations have required a new level of administration by Tongmei.

In some cases, the PRC government has not issued the requisite licenses and our shipments have been delayed.

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

First, we capitalize our investments in our PRC subsidiaries.

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

We licensed to our PRC subsidiaries intellectual property and received from our PRC subsidiaries royalty payments or one-time fees.

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

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

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

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

For the 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.

In the past, we sold to our PRC subsidiaries capital equipment that we purchased at the request of our PRC subsidiaries and for which we were reimbursed by the applicable PRC subsidiary.

In recent years, Tongmei purchases capital equipment from suppliers in Taiwan, Japan, China, Europe or South Korea.

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

For the three months ended March 31, 2024, the aggregate dividends paid to the Company, directly or to an intermediate entity within our corporate structure, by our PRC subsidiaries and PRC raw material joint ventures were $0.

For the year ended December 31, 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 approximately $4.3 million.

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

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.

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

For the three months ended March 31, 2024 and the year ended December 31, 2023, 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 earnings to our investors under our corporate structure.

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

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

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

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

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

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

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

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

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

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On December 16, 2021, the PCAOB issued a report on its determinations that the PCAOB is unable to inspect or investigate completely registered public accounting firms headquartered in the PRC and Hong Kong because of positions taken by PRC authorities in those jurisdictions.

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

BPM is headquartered in the United States and not in the PRC or Hong Kong.

As such, BPM is subject to the determinations announced by the PCAOB.

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

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

On December 15, 2022, the PCAOB vacated its

2021 determinations that the positions taken by authorities in the PRC and Hong Kong prevented it from inspecting and investigating completely registered public accounting firms headquartered in those jurisdictions.

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

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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.

Accounts Receivable and Allowance for Doubtful Accounts

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 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 exists.

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 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.

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 March 31, 2024 and December 31, 2023, our accounts receivable, net balance was $25.1 million and $19.3 million, respectively, which was net of an allowance of $579,000 and $579,000, respectively.

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

1 unchanged sentence

Warranty costs are accrued at the time revenue is recognized.

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.

As of March 31, 2024 and December 31, 2023, accrued product warranties totaled $495,000 and $703,000, respectively.

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

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

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

As of September 30, 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.

As of March 31, 2024 and December 31, 2023, we had an inventory reserve of $22.2 million and $21.9 million, respectively, for excess and obsolete inventory and $213,000 and $78,000, 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.

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

All available-for-sale debt

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

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

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

Investments in our unconsolidated joint venture 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 the joint venture company’s operations or financial decisions.

Investments in our unconsolidated PRC joint venture 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 the joint venture company’s 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 each company’s management, the length of time and extent to which the fair value has been less than our cost basis, the financial condition and near-term prospects of the company, fundamental changes to the business prospects of the company, share prices of subsequent offerings, and our intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in our carrying value.

We hold 39% ownership interest in JiYa.

During the second quarter of 2023, JiYa assessed one of its equity investments was fully impaired, leading it to write the asset balance down to zero.

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 nine months ended September 30, 2023 and 2022.

business prospects of the company, share prices of subsequent offerings, and our intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in our carrying value.

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.

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 year ended December 31, 2023.

Except as mentioned above, there were no impairment charges for the remainder of these investments during the three months ended March 31, 2024 and 2023.

Fair Value of Investments

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

As of September 30, 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.

As of March 31, 2024, the net change in fair value from the placement of the hedge to settlement at each month end during the quarter had a de minimis impact to the condensed consolidated results.

There have been no transfers between fair value measurement levels during the three months ended March 31, 2024 and 2023.

Impairment of Long-Lived Assets

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

We had no “Assets held for sale” or any impairment of long-lived assets in the condensed consolidated balance sheets as of September 30, 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 March 31, 2024 and December 31, 2023.

Stock-based Compensation

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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.

1 unchanged sentence

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.

We provide for income taxes based upon the geographic composition of worldwide earnings and tax regulations governing each region, particularly China.

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Three Months Ended

Nine Months Ended

September 30,

Product Type:

($ in thousands)

Raw materials and other

Total revenue

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 increased $3.3 million, or 16.9%, to $22.7 million for the three months ended March 31, 2024 from $19.4 million for the three months ended March 31, 2023.

The substrate revenue increase for the three months ended March 31, 2024 as compared to the same period in 2023 was primarily the result of higher demand for GaAs wafer substrates due to increased demand across a number of applications and higher demand for InP wafer substrates reflecting strong growth from data center applications and continued improvement in passive optical networks.

Raw materials sales decreased $0.1 million, or 2.2%, to $5.8 million for the three months ended March 31, 2024 as compared to the same period in 2023.

The decrease in raw materials revenue for the three months ended March 31, 2024 as compared to the same period in 2023 was primarily the result of a decrease in sales of pBN crucibles resulting from weaker market demand, partially offset by increased sales of refined gallium resulting from stronger market demand.

Revenue by Geographic Region

Three Months Ended

September 30,

($ in thousands)

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Total revenue

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 $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)

% of total revenue

Asia Pacific (excluding China, Taiwan and Japan)

% of total revenue

Europe (primarily Germany)

% of total revenue

North America (primarily the United States)

% of total revenue

Total revenue

Revenue in China 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.

Revenue in China increased $3.4 million for the three months ended March 31, 2024, primarily due to higher demand for our GaAs and InP wafer substrates and refined gallium, partially offset by lower demand for our Ge wafer substrates and pBN crucibles sold by one of our consolidated subsidiaries.

Revenue in Taiwan increased $2.1 million, primarily due to higher demand for our GaAs and InP wafer substrates, partially offset by lower demand for our Ge wafer substrates.

Revenue in Japan decreased $0.5 million, primarily due to lower demand for our GaAs and Ge wafer substrates and pBN crucibles sold by one of our consolidated subsidiaries, partially offset by higher demand for our InP wafer substrates.

Revenue in Asia Pacific decreased $0.3 million, primarily due to decreased demand for our GaAs and InP 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 Europe increased $0.2 million, primarily due to increased demand for our GaAs and Ge wafer substrates and pBN crucibles sold by one of our consolidated subsidiaries, partially offset by lower demand for our InP wafer substrates.

Revenue in North America decreased $1.6 million, primarily due to lower demand for our InP, GaAs and Ge wafer substrates and pBN crucibles sold by one of our consolidated subsidiaries.

Three Months Ended

Nine Months Ended

September 30,

($ in thousands)

Gross Profit %

Gross profit 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.

Gross margin as a percentage of revenue decreased due to lower unit volume across all product lines, which resulted in under absorbed factory overhead, partially offset by cost savings as a result of recycling InP materials.

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 Q3 2023.

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.

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 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.

Gross profit increased $1.0 million, or 19.3%, to $6.1 million for the three months ended March 31, 2024 from $5.1 million for the three months ended March 31, 2023.

The increase in gross profit is the result of higher revenue for our wafer substrates.

Gross margin as a percentage of revenue increased due to higher unit volume across all wafer substrate and a favorable shift in product mix.

Selling, General and Administrative Expenses

Three Months Ended

Nine Months Ended

September 30,

($ in thousands)

Selling, general and administrative expenses

% of total revenue

Selling, general and administrative expenses 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.

Selling, general and administrative expenses increased $0.3 million, or 4.6%, to $6.2 million for the three months ended March 31, 2024 from $6.0 million for the March 31, 2023.

The higher selling, general and administrative expenses were primarily from an increase in compensation related expenses and outside commissions.

Research and Development

Three Months Ended

Nine Months Ended

September 30,

($ in thousands)

Research and development

% of total revenue

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.

Research and development expenses decreased $0.4 million, or 10.6%, to $3.2 million for the three months ended March 31, 2024 from $3.6 million for the three months ended March 31, 2023.

The decrease in research and development expenses for the three months ended March 31, 2024 was primarily due to a reduction in new product testing costs as the recycling project advanced.

Interest Expense, Net

Three Months Ended

Nine Months Ended

September 30,

($ in thousands)

Interest expense, net

% of total revenue

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.

Interest expense, net decreased $48,000, or 12.1%, to $349,000 for the three months ended March 31, 2024 from $397,000 for the three months ended March 31, 2023.

Interest expense, net decreased primarily due to increased interest income during the three months ended March 31, 2024 as compared to the three months ended March 31, 2023.

Equity in Income of Unconsolidated Joint Ventures

Three Months Ended

Nine Months Ended

September 30,

Equity in Income

September 30,

Equity in Income

($ in thousands)

Equity in income of unconsolidated joint ventures

% of total revenue

The equity in income of unconsolidated joint venture companies was income of $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.

The equity in income of unconsolidated joint venture companies was income of $0.9 million for the three months ended March 31, 2024 as compared to income of $1.0 million for the three months ended March 31, 2023.

The decrease in income of $0.1 million is primarily due to lower net income at one raw gallium company.

Other Income, Net

Three Months Ended

Nine Months Ended

September 30,

($ in thousands)

Other income, net

% of total revenue

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

Other income, net increased $750,000, or 266%, to an income of $1.0 million for the three months ended March 31, 2024 from an income of $282,000 for the three months ended March 31, 2023.

Other income, net increased primarily due to compensation received from the China government by our consolidated subsidiaries for technological innovation of $957,000 in the three months ended March 31, 2024 compared to $473,000 in the three months ended March 31, 2023, and a foreign exchange gain of $58,000 in the three months ended March 31, 2024 compared to a loss of $213,000 in the three months ended March 31, 2023.

Provision for Income Taxes

Three Months Ended

Nine Months Ended

September 30,

($ in thousands)

Provision (benefit) for income taxes

Provision for income taxes

% of total revenue

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.

Provision for income taxes increased $126,000, or 85.1%, to a provision of $274,000 for the three months ended March 31, 2024 as compared to a provision of $148,000 for the three months ended March 31, 2023.

The tax expense recorded for the three months ended March 31, 2024 is the result of foreign taxes and certain state taxes.

No income tax is provided for our U.S.

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

had been fully offset by utilization of federal and state net operating loss carryforwards.

has been fully offset by utilization of federal and state net operating loss carryforwards.

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

1 unchanged sentence

and China-based operations.

Under the 2017 Tax Cuts and Jobs Act (the “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.

Under the 2017 Tax Cuts and Jobs Act, 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.

2 unchanged sentences

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

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.

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Net (income) loss attributable to

Nine Months Ended

Net (income) loss attributable to

noncontrolling interests and

September 30,

redeemable noncontrolling interests

September 30,

redeemable noncontrolling interests

($ in thousands)

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

% of total revenue

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.

Net (income) loss attributable to noncontrolling interests and redeemable noncontrolling interests increased $353,000 or 111.0% to an income of $35,000 for the three months ended March 31, 2024, from a loss of $318,000 for the three months ended March 31, 2023, primarily due to higher profitability from our consolidated joint venture companies in China as sales increased.

Liquidity and Capital Resources

We consider cash and cash equivalents and short-term investments as liquid and available for use within one year in our current operations.

We consider cash and short-term investments as liquid and available for use within one year in our current operations.

Short-term investments are comprised of U.S.

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

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.

As of March 31, 2024, our principal source of liquidity was $ 41.3 million, which consisted of cash and restricted cash of $ 39.6 million and investments of $ 1.7 million.

In the three months ended March 31, 2024, cash and restricted cash decreased by $10.5 million and investments decreased by $0.5 million.

The decrease in cash and restricted cash of $10.5 million in the three months ended March 31, 2024 was primarily due to net cash used in operating activities of $8.8 million and net cash used in investing activities of $3.9 million, partially offset by net cash provided by financing activities of $2.0 million and the effect of exchange rate changes of $0.2 million.

As of March 31, 2024, we and our consolidated joint ventures in China held approximately $34.7 million in cash and investments in foreign bank accounts.

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

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

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

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

Net cash used in operating activities of $8.8 million for the three months ended March 31, 2024 was primarily comprised of a net change of $8.9 million in operating assets and liabilities, a net loss before income attributable to noncontrolling interest and redeemable noncontrolling interests of $2.0 million, and income from equity method investments of $0.9 million, partially offset by the adjustment for non-cash items of depreciation and amortization of $2.2 million and stock-based compensation of $0.8 million.

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

Net cash used in investing activities of $3.9 million for the three months ended March 31, 2024 was primarily from the purchase of property, plant and equipment of $4.4 million, partially offset by proceeds from sales and maturities of available-for-sale debt securities of $0.5 million.

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

Net cash provided by financing activities was $2.0 million for the three months ended March 31, 2024, which consisted of proceeds from short-term loans of $12.9 million, long-term loan of $5.9 million and common stock options exercised of $20,000, partially offset by repayment of short-term loans of $16.5 million and repayment of long-term loan of $0.2 million.

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

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

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Since 2015, no shares were repurchased 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.

During the three months ended March 31, 2024, we did not repurchase any shares under the approved stock repurchase program.

As of March 31, 2024, approximately $2.7 million remained available for future repurchases under this program.

Currently, we do not plan to repurchase additional shares.

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As of December 31, 2015, the Series A preferred stock had cumulative dividends of $2.9 million and we include such cumulative dividends in “Accrued liabilities” in our condensed consolidated balance sheets .

At the time we pay this accrued liability, our cash and cash equivalents will be reduced.

At the time we pay this accrued liability, our cash will be reduced.

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

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

For the nine months ended September 30, 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.

For the three months ended March 31, 2024 and 2023, we were not paid any dividends, directly or to an intermediate entity within our corporate structure, by our PRC subsidiaries and PRC raw material joint.

For the three months ended March 31, 2024 and 2023, there were no dividends paid to minority shareholders by our PRC subsidiaries or PRC raw material joint ventures.

For the three months ended March 31, 2024, 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.

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public company.

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

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

September 30,

Bank of China (1)

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

The following table represents short-term bank loans as of March 31, 2024 and December 31, 2023 (in thousands, except interest rate data):

Bank of China (1)

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Bank of Communications (1)

Bank of Communications (5)

China Merchants Bank (1)

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Industrial Bank (1)

Bank of Communications (1)

NanJing Bank (1)

Collateral for the above bank loans and line of credit

(1) Baoding Tongmei’s land use rights and all of its buildings located at its facility in Dingxing, China.

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

(1) Not collateralized.

(2) ChaoYang LiMei time deposit.

(3) 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.

(4) 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.

On January 30, 2024, the Company secured a new line of credit amounting to $9.7 million, structured as a five-year bank loan.

The credit facility bears interest at a rate of 6.5% per annum on the amount drawn from the line of credit.

The credit facility is collateralized by the real estate properties owned by ChaoYang Tongmei.

In January 2024, the Company borrowed $5.8 million against the credit facility.

The intended use of the credit facility is for construction of fixed assets.

As of March 31, 2024, $5.6 million is included in “Other long-term liabilities” and $277,000 is included in “Short-term loans” in our consolidated balance sheets.

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

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 March 31, 2024, $1.4 million is included in “Other long-term liabilities” and $554,000 is included in “Short-term loans” in our consolidated balance sheets.

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.

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

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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.

We believe that we have adequate cash and investments to meet our operating needs and capital expenditures over the next 12 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.

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.

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Off-Balance Sheet Arrangements

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).

As of March 31, 2024, 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.

During 2023 and 2022, we recorded a foreign exchange gain of $0.2 million and $1.6 million, respectively, and during 2021 we recorded a net foreign exchange loss of $0.4 million, 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.

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

As of September 30, 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 March 31, 2024 and December 31, 2023, the net change in fair value from the placement of the hedge to settlement at each month end during the quarter had a de minimis impact to the condensed consolidated results.

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.

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Interest Rate Risk

Cash, cash equivalents and restricted cash earning interest and certain variable rate debt instruments are subject to interest rate fluctuations.

Cash and restricted cash earning interest and certain variable rate debt instruments are subject to interest rate fluctuations.

The following table sets forth the probable impact of a 10% change in interest rates (in thousands):

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Interest Rate

September 30,

Cash, cash equivalents and restricted cash

Cash and restricted cash

Investments in marketable debt securities

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

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

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

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.

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

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

We have no investments in auction rate securities.

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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 September 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 March 31, 2024 and December 31, 2023.

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 otherthan-temporary declines in value on a quarterly basis.

These minority investments are reviewed for other than-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.

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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 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.

Our minority investments under the equity method as of March 31, 2024 and December 31, 2023 totaled $13.2 million and $12.5 million, respectively.

Our minority investment under the fair value method as of March 31, 2024 and December 31, 2023 totaled $0.6 million and $0.6 million, 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