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Applied MaterialsTABLE OF CONTENTSUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549Form 10-K(Mark One)☒☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2014ORooTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to Commission file number: 000-24085AXT, INC.(Exact name of registrant as specified in its charter)Delaware94-3031310(State or other jurisdiction ofincorporation or organization)(I.R.S. EmployerIdentification No.)4281 Technology Drive, Fremont, California94538(Address of principal executive offices)(Zip Code)Registrant’s telephone number, including area code: (510) 683-5900Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registeredCommon Stock, $0.001 par valueThe NASDAQ Stock Market LLCSecurities registered pursuant to Section 12(g) of the Act:NoneIndicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Acto Yes ☒ NoIndicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.o Yes ☒ NoIndicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Actof 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. ☒ Yes o NoIndicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive DataFile required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or forsuch shorter period that the registrant was required to submit and post such files). ☒ Yes o NoIndicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not containedherein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in PartIII of this Form 10-K or any amendment to this Form 10-K. oIndicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reportingcompany. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Act. (Check one):Large acceleratedfiler oAccelerated filer ☒Non-accelerated filer o(Do not check if a smaller reporting company)Smaller reporting company oIndicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes ☒ NoThe aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing sale price of $2.14 for the commonstock on June 30, 2014 as reported on the Nasdaq Global Market, was approximately $53,550,000. Shares of common stock held by each officer,director and by each person who owns 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to beaffiliates. This determination of affiliate status is not a conclusive determination for other purposes.As of March 3, 2015, 32,840,752 shares, $0.001 par value, of the registrant’s common stock were outstanding.DOCUMENTS INCORPORATED BY REFERENCEPortions of the definitive proxy statement for the registrant’s 2015 annual meeting of stockholders to be filed with theCommission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this form areincorporated by reference into Part III of this Form 10-K report. Except for those portions specifically incorporated by referenceherein, such document shall not be deemed to be filed with the Commission as part of this Form 10-K. TABLE OF CONTENTSTABLE OF CONTENTSPagePART I Item 1. Business 2 Item 1A. Risk Factors 10 Item 1B. Unresolved Staff Comments 24 Item 2. Properties 24 Item 3. Legal Proceedings 24 Item 4. Mine Safety Disclosures 24 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 25 Item 6. Selected Consolidated Financial Data 26 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 27 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 40 Item 8. Consolidated Financial Statements and Supplementary Data 41 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 41 Item 9A. Controls and Procedures 41 Item 9B. Other Information 42 PART III Item 10. Directors, Executive Officers and Corporate Governance 44 Item 11. Executive Compensation 44 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 44 Item 13. Certain Relationships and Related Transactions, and Director Independence 44 Item 14. Principal Accountant Fees and Services 44 PART IV Item 15. Exhibits and Financial Statement Schedules 45 1 TABLE OF CONTENTSPART IThis Annual Report (including the following section regarding Management’s Discussion and Analysis of FinancialCondition and Results of Operations) contains forward-looking statements regarding our business, financial condition, results ofoperations and prospects. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “goals,”“should,” “continues,” “would,” “could” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this Annual Report. Additionally,statements concerning future matters such as our strategy, plans and investments, industry trends, the impact of trends andeconomic cycles on our business, customer demand, the development of new products, applications, enhancements ortechnologies, sales levels, expense levels, planned investments and other statements regarding matters that are not historical areforward-looking statementsAlthough forward-looking statements in this Annual Report reflect the good faith judgment of our management, suchstatements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherentlysubject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed inor anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomesinclude without limitation those discussed under the heading “Risk Factors” in Item 1A below, as well as those discussedelsewhere in this Annual Report. Readers are urged not to place undue reliance on these forward-looking statements, which speakonly as of the date of this Annual Report. We undertake no obligation to revise or update any forward-looking statements in orderto reflect any event or circumstance that may arise after the date of this Annual Report. Readers are urged to carefully review andconsider the various disclosures made in this Annual Report, which attempt to advise interested parties of the risks and factors thatmay affect our business, financial condition, results of operations and prospects.Item 1. BusinessAXT, Inc. (“AXT”, “we,” “us,” and “our” refer to AXT, Inc. and all of its subsidiaries) is a worldwide developer and producer ofhigh-performance compound and single element semiconductor substrates, also known as wafers. The dominant substrates used inproducing semiconductor chips are made from silicon. However, certain chips may become too hot or perform their function tooslowly if silicon is used as the base material. Alternative or specialty materials are used to replace silicon as the preferred base forthe electronic circuit in these situations. We provide such alternative or specialty materials in the form of substrates or wafers,including compound and single element substrates. Our compound substrates combine gallium with arsenic (GaAs) or combineindium with phosphorous (InP). Our single element substrates are made from germanium (Ge). Most of our revenue is from sales ofGaAs substrates. We currently sell the following substrate products in the sizes and for the applications indicated:SubstratesSubstrateDiameterApplicationsGaAs (semi-insulating)1”, 2”, 3”, 4”, 5”, 6”•Power amplifiers and radio frequency integrated circuits forwireless handsets (cell phones)•Direct broadcast television•High-performance transistors•Satellite communicationsGaAs (semi-conducting)1”, 2”, 3”, 4”, 6”•High brightness light emitting diodes•Lasers•Optical couplersInP2”, 3”, 4”•Broadband and fiber optic communicationsGe2”, 4”, 6”•Satellite and terrestrial solar cells•Optical applicationsWe manufacture all of our semiconductor substrates using our proprietary vertical gradient freeze (VGF) technology. Wemanufacture all of our products in the People’s Republic of China (PRC or China), which generally has favorable costs for facilitiesand labor compared with comparable facilities in the United States, Europe or Japan. Our supply chain includes AXT subsidiariesand joint ventures in China. We believe this supply chain arrangement provides us pricing advantages, reliable supply andenhanced sourcing lead-times for key raw materials which are central to our final manufactured products. Our subsidiaries and jointventures produce products including 99.99% pure gallium (4N Ga), high purity gallium, arsenic, germanium, germanium dioxide,pyrolytic boron nitride (pBN)2 TABLE OF CONTENTScrucibles and boron oxide (B2O3). Our ownership and the ownership held by our consolidated subsidiaries in these entities rangesfrom 20% to 83%. We consolidate, for accounting purposes, the joint ventures in which we have majority or controlling financialinterest and significant influence on management, and employ equity accounting for the joint ventures in which we have a smallerownership interest. We purchase portions of the materials produced by these joint ventures for our own use and the joint venturessell the remainder of their production to third parties. We use our direct sales force in the United States and China, and independentsales representatives in Europe and other parts of Asia to market and sell our substrates.We were incorporated in California in December 1986 and reincorporated in Delaware in May 1998. We changed our namefrom American Xtal Technology, Inc. to AXT, Inc. in July 2000. Our principal corporate office is located at 4281 TechnologyDrive, Fremont, California 94538, and our telephone number at this address is(510) 683-5900.Industry BackgroundCertain electronic and opto-electronic applications have performance requirements that exceed the capabilities ofconventional silicon substrates and often require high-performance compound or single element substrates. Examples of higherperformance non-silicon based substrates include GaAs, InP, gallium nitride (GaN), silicon carbide (SiC) and Ge.For example, power amplifiers and radio frequency integrated circuits for wireless handsets and other wireless devices aremade with semi-insulating GaAs substrates. Semi-conducting GaAs substrates are used to create opto-electronic products includinghigh brightness light emitting diodes (HBLEDs) that are often used to backlight wireless handsets and liquid crystal display (LCD)TVs and are also used for automotive panels, signage, display and lighting applications. InP is a high performance semiconductorsubstrate used in broadband and fiber optic applications. Ge substrates are used in emerging applications such as solar cells forspace and terrestrial photovoltaic applications.The AXT AdvantageWe believe that we benefit from the following advantages:•Low-cost manufacturing operation in China. We have manufactured all of our products in China since 2004, whichgenerally has favorable costs for facilities and labor compared to comparable facilities in the United States, Japan orEurope. As of December 31, 2014, approximately 1,071 of our 1,095 employees (including employees at ourconsolidated joint ventures) are in China. Our primary competitors have their major manufacturing operations inGermany or Japan and have limited manufacturing operations in China.•Our diverse product offering results in a broader range of customers and applications. We offer a diverse range ofproducts which enables us to have a broad range of customers. For the year ended December 31, 2014, no customeraccounted for over 10% of revenue and our five largest customers accounted for 34% of our revenue. We believe thisdiversity enabled us to recover more quickly when a large portion of GaAs chips was replaced with silicon-on-insulator(SOI) chips in mobile phone switches beginning in 2011. Further, we believe this diversity gives us a greater likelihoodto grow our business in new applications and benefit from growth in demand for substrates given our pre-establishedmarket positions in a broad range of product applications.•We have 10 joint ventures and subsidiaries in China that form our sophisticated, vertically integrated supply chain. Webelieve our subsidiaries and joint ventures in China provide us with more reliable supply and shorter lead-times for theraw materials central to our final manufactured products compared to third party providers. These materials includegallium, gallium alloys, indium phosphide poly-crystal, germanium, germanium dioxide, high purity arsenic, pyrolyticboron nitride crucibles (pBN) and boron oxide (B2O3). We believe this dedicated supply chain will enable us to meetincreases in demand from our customers by providing an increased volume of raw materials quickly, efficiently and costeffectively.•Enhanced revenue diversity through the sale of special materials. Because our strategy allows our subsidiaries to alsosell in the open market to third parties, approximately a quarter of our total sales are from non-substrate products,providing further diversity in our customer base and business model.•Business model unique among current competitors. We are the only publicly traded company focused on high-performance compound and single element semiconductor substrates. Most of our direct competitors3 TABLE OF CONTENTSare either privately owned or are a small division of large publicly traded companies. We believe the combination ofaccess to U.S. capital markets, U.S.-based product quality standards and China-based manufacturing is an attractivebusiness model to our customers who desire longevity and stability in their supply chain as well as low cost.StrategyOur goal is to become the leading worldwide supplier of high-performance compound and single element semiconductorsubstrates. Key elements of our strategy include:Offer diverse products, including custom products. We believe AXT has a reputation in the market place for providing a broadrange of products, including custom products. We plan to further promote this brand image as a way to differentiate ourselves inthe market place. Some competitors provide only gallium arsenide substrates. We provide gallium arsenide and also indiumphosphide and germanium substrates. Some competitors provide only six inch wafers. Our wafers range from one inch up to sixinches. We also produce substrates with customer defined specifications which may range from thickness or smoothness and mayinclude adding special additional chemicals such as iron or sulfur. We believe product diversity can mitigate some of the impact ofdown cycles in our market because we are not dependent on a single product or application for revenue.Many customers not just a few large customers. We seek to expand our customer base and avoid dependence on just a fewlarge customers. We believe our diverse product offering has resulted in a diverse customer base. For the year ended December 31,2014, no customer accounted for over 10% of revenue and our five largest customers accounted for 34% of our revenue. Webelieve customer diversity provides a measure of stability in troubled market conditions. Customer diversification may also enableus to achieve a higher average selling price by reducing our dependence on larger customers with pricing power.China-based manufacturing. We seek to leverage our China-based manufacturing advantage by increasing efficiencies in ourmanufacturing methods, systems and processes. In 1998 we decided to locate our manufacturing in China and in 1999 we began tomove our manufacturing to facilities on the outskirts of Beijing. Approximately 97% of our employees are based in China. Thisenables us to compete more effectively against our competitors who, by comparison, are in relatively high cost locations such asJapan and Germany. We plan to further leverage these advantages by investing in training and equipment to increase productivityand reduce cost. It is our strategy to combine the benefits of U.S.-based quality and U.S.-based access to capital markets withChina-based manufacturing.Increase productivity and profitability in our 10 subsidiaries/joint ventures. AXT’s substrate products are based on specialtymaterials, many of which are mined and refined in China. The supply and demand equation for specialty materials can be complexand can be volatile. Our strategy to maintain a stable supply chain has been to establish and nurture startup companies in Chinawhere we have a significant or majority ownership position or at least a significant equity position. Over the years we haveestablished or invested in 10 companies who are an integral part of our supply chain. We will continue to provide strategic supportto these companies and they, in turn, will continue to be the backbone of our supply chain. We plan to work closely with thesecompanies to increase their productivity and profitability as they continue to support AXT’s supply chain.Sell raw materials into the market place. We leverage the established capabilities of our 10 subsidiaries and joint ventures byauthorizing them to sell materials into the open market, including to some of our direct competitors. For the year ended December31, 2014 approximately a quarter of our consolidated revenue was derived from the sale of raw materials to third parties.Promote AXT’s longevity and stability. We believe recent market trends, including the exit of one of our major competitors inJapan from the gallium arsenide substrate market, has highlighted supply continuity concerns among our customers. Since AXTwas established in 1986 and has been a publicly traded company since 1998, we plan to promote our long operating history andhighlight our position as a stable, reliable and long term provider of substrates and materials by among other things, investing inresearch and development and high-end processing equipment.Materials of the future. The specialty materials substrate market is dynamic and subject to continued changes and cycles. Weplan to use our deep knowledge and experience in specialty materials and wafer substrates to seek new applications for existingsubstrates in our portfolio and explore additional materials that may be synergistic with our knowledge base, customer needs andmanufacturing lines.4 TABLE OF CONTENTSTechnologyThere are basically three technologies for crystal growth in our business: Vertical Gradient Freeze (VGF), Liquid EncapsulatedCzochralski (LEC), and Czochralski (CZ). Our core technologies include our proprietary VGF technology used to produce high-quality crystals that are processed into compound substrates or wafers. Our subsidiaries and joint venture companies have refiningand processing technologies which enables them to produce materials we use in the manufacture of our products. Our VGF technology is designed to control the crystal-growth process with minimal temperature variation and is the currenttechnology we use to produce our GaAs, InP and Ge substrates. Unlike traditional methods, our VGF technology places the hotcompound melt above the cool crystal, and minimizes the temperature gradient between the crystal and the melt which reduces theturbulence at the interface of the melt and the solid crystal. In comparison, in the LEC method the melt and crystal are inverted,there is a higher temperature gradient between the melt and the crystal, and more turbulence at the interface of the melt and solidcrystal. These aspects of the VGF technology enable us to grow crystals that have a relatively low defect density and highuniformity. The crystal and the resulting substrate are mechanically strong, resulting in lower breakage rates during a customer’smanufacturing process. Since the temperature gradient is controlled electronically rather than by physical movement, the sensitivecrystal is not disturbed as it may be during some of our competitors’ VGF-like growth processes. In addition, the melt and growingcrystal are contained in a closed chamber, which isolates the crystal from the outside environment to reduce potentialcontamination. This substrate isolation allows for more precise control of the gallium-to-arsenic ratio, resulting in betterconsistency and uniformity of the crystals.We believe that our proprietary VGF technology offers several benefits for producing our GaAs substrates when compared totraditional crystal growing technologies. The Horizontal Bridgman (HB) process is the traditional method for producing semi-conducting GaAs substrates for opto-electronic applications, but because of the techniques used to hold the GaAs melt, the HBtechnique cannot be used cost-effectively to produce substrates greater than three inches in diameter. In addition, the HB techniquehouses the GaAs melt in a quartz container during the growth process, which can contaminate the GaAs melt with siliconimpurities, making it unsuitable for producing semi-insulating GaAs substrates.We believe our VGF technology also offers advantages over the LEC method for producing semi-insulating GaAs substratesfor wireless applications. Unlike the VGF process, the LEC process can result in greater turbulence in the melt, and at a temperaturegradient that is significantly higher than VGF, which can cause LEC-grown crystals to have a higher dislocation density than VGF-grown crystals, resulting in a higher rate of breakage during the device manufacturing process. However, the LEC technique can beuseful for GaAs semi-conducting substrates since the LED application specifications and requirements are less stringent than thoseof wireless applications.ProductsWe design, develop, manufacture and distribute high-performance semiconductor substrates, also known as wafers. We makesemi-insulating GaAs substrates used in making semiconductor chips in applications such as5 TABLE OF CONTENTSamplifiers and switches for wireless devices. Our semi-conducting GaAs substrates are also used to create opto-electronic productsincluding High Brightness LEDs, which are often used to backlight wireless handsets and LCD TVs and for automotive, signage,display and lighting applications. InP is a high-performance semiconductor substrate used in broadband and fiber opticapplications. Ge substrates are used in emerging applications such as triple junction solar cells for space and terrestrialphotovoltaic applications and for optical applications.The table below sets forth our products and selected applications:ProductApplicationsSubstratesElectronicOpto-electronicGaAs•Cellular phones•LEDs•Direct broadcast television•Lasers•High-performance transistors•Optical couplers•Satellite communications•CPVInP•Fiber optic communications•Lasers•Satellite communications•CPV•High-performance transistors•Photonics•Automotive collision avoidance radarGe•Satellite and terrestrial solar cells•Optical applicationsSubstrates. We currently sell compound substrates manufactured from GaAs and InP, as well as single-element substratesmanufactured from Ge. We supply both semi-insulating and semiconducting GaAs substrates in one -, two-, three-, four-, five- andsix-inch diameters. We supply InP substrates in two-, three- and four-inch diameters, and Ge substrates in two-, four- and six-inchdiameters. Many of our customers require customized specifications such as special levels of iron or sulfur dopants or the waferthickness.We have a long operating history and offer a relatively broad range of products. We promote our product diversity as a way todifferentiate ourselves in the market place. Some competitors provide only gallium arsenide substrates. We provide galliumarsenide and also indium phosphide and germanium substrates. Some competitors provide only six inch wafers. Our wafers rangefrom one inch up to six inches. We also produce substrates with customer defined specifications which may range in thickness orsmoothness and may include adding special additional chemicals such as iron or sulfur. In addition to our wafers or substrates wealso generate revenue from our consolidated subsidiaries who sell raw materials. Product diversity can mitigate some of the downcycles in our market because we are not dependent on a single product or application for revenue.Materials. We have 10 subsidiaries and joint ventures in China that sell raw materials that may be used in substratemanufacturing or for other purposes. These companies produce products including 99.99% pure gallium (4N Ga), high puritygallium, gallium alloys, indium phosphide poly-crystal, germanium, germanium dioxide, high purity arsenic, pyrolytic boronnitride crucibles and boron oxide.CustomersBefore specialty material wafers can be processed in a typical wafer manufacturing facility that constructs the electroniccircuit on a chip, a thin layer of structured chemicals must be grown on the surface of the substrate. This is called an epitaxial layer.We sell our substrates to companies that apply the epitaxial layer, who then in turn sell the modified wafers to the wafer fabs, chipdesign companies, LED manufacturers and others.Epitaxial layer companies that form our customer base are located in Europe, the United States and Asia. We also sell productto universities and other research organizations who use specialty materials for experimentation in various aspects ofsemiconducting and semi insulating applications.We have at times sold a significant portion of our products in any particular period to a limited number of customers.However, no customer represented more than 10% of our revenue for the years ended December 31, 2014 and 2013. IQE Grouprepresented approximately 17% of our revenue for the year ended December 31, 2012. Our top five customers, although not thesame five customers for each period, represented 34%, 31% and 37% of our revenue for the years ended December 31, 2014, 2013and 2012, respectively.There were three third-party customers for the raw materials products from our subsidiaries and joint ventures that accountedfor 20%, 13% and 11% of the revenue from raw materials sales for the year ended December 31, 2014,6 TABLE OF CONTENTSthree customers for the raw materials products from our subsidiaries and joint ventures that accounted for 11%, 10% and 10% of therevenue from raw materials sales for the year ended December 31, 2013 and one customer for the raw materials products from oursubsidiaries and joint ventures that accounted for 19% of the revenue from raw materials sales for the year ended December 31,2012. Our subsidiaries and joint ventures are a key strategic benefit for us as they further diversify our sources of revenue.Manufacturing, Raw Materials and SuppliesWe manufacture all of our wafers/substrate products at our facilities in Beijing, China. We believe this location generally hasfavorable costs for facilities and labor compared to the United States or compared to the location of some of our competitors inJapan and Germany.We use a two-stage manufacturing process. The first stage deploys our VGF technology for the crystal growth of singleelement or compound element ingots in diameters currently ranging from one inch to six inch. The growth process occurs in hightemperature furnaces built using our proprietary designs. Growing the crystalline elements into cylindrical ingots can take four totwelve days, depending on the diameter and length of the ingot produced. The second stage includes slicing or sawing the ingotinto wafers or substrates, then processing each substrate to strict specifications, including grinding to reduce the thickness and thenpolishing and cleaning each substrate. Many of the process steps utilize proprietary knowledge and chemical baths.Wafers from each ingot will include some material that does not meet specifications or quality standards. Defects may occur asa result of inherent factors in the materials used in the crystalline growth process. They may also result from variances in themanufacturing process. We have many steps in our line that are partially or fully automated but other manufacturing steps areperformed manually. We intend to increase the level of automation. Due to potential defects, yield is a key factor in ourmanufacturing cost. Other key elements are the initial cost of the raw material elements, manufacturing equipment, factory loading,facilities and labor. Our Beijing facilities are approximately 300,000 square feet and we employ approximately 705 employees atthis site. In the first quarter of 2014, we instituted a reduction in force and other cost savings steps and in connection with thisrestructuring plan we incurred charges of approximately $907,000. We believe our current employee base is appropriate for ourcurrent production volume.We have formed 10 subsidiaries and joint ventures in China that form the backbone of our supply chain model. Thesecompanies provide us with reliable supply and shorter lead-times for raw materials central to our manufactured products includinggallium, gallium alloys, indium phosphide poly-crystal, germanium, germanium dioxide, high purity arsenic, pBN and boronoxide. We believe that these subsidiaries and joint ventures have been and will continue to be advantageous in allowing us toprocure materials to support our planned growth. In addition, we purchase supply parts, components and raw materials from severalother domestic and international suppliers. We depend on a single or limited number of suppliers for certain critical materials usedin the production of our substrates, such as quartz tubing and polishing solutions. We generally purchase our materials throughstandard purchase orders and not pursuant to long-term supply contracts.Sales and MarketingWe sell our substrate products directly to customers through our direct salesforce in the United States and Asia and throughindependent sales representatives and distributors in Europe and some parts of Asia. Our direct salesforce is knowledgeable in theuse of compound and single-element substrates. Our application engineers work with customers during all stages of the substratemanufacturing process, from developing the precise composition of the substrate through manufacturing and processing thesubstrate to the customer’s specifications. We believe that maintaining a close relationship with customers and providing themwith ongoing engineering support improves customer satisfaction and will provide us with a competitive advantage in sellingother substrates to our customers.International Sales. International sales are a substantial part of our business. Sales to customers outside North America(primarily the United States) accounted for 88% of our revenue in 2014 and 2013 and 83% of our revenue in 2012. The primarymarkets for sales of our substrate products outside of the United States are to customers located in Asia and Western Europe.Our subsidiaries and joint ventures sell specialty raw materials including 4N, 5N, 6N, 7N and 8N gallium, boron oxide,germanium, arsenic, germanium dioxide, pyrolytic boron nitride crucibles used in crystal growth and parts for MBE (MolecularBeam Epitaxy). These subsidiaries and joint ventures have their own separate sales forces and sell directly to their own customersin addition to selling raw materials to us.7 TABLE OF CONTENTSResearch and DevelopmentTo maintain and improve our competitive position, we focus our research and development efforts on designing newproprietary processes and products, improving the performance of existing products, increasing yields and reducing manufacturingcosts. We have assembled a multi-disciplinary team of skilled scientists, engineers and technicians to meet our research anddevelopment objectives.Our current substrate research and development activities focus on continued development and enhancement of GaAs, InP andGe substrates, including improved yield, enhanced surface and electrical characteristics and uniformity, greater substrate strengthand increased crystal length. During 2014, we continued to focus research and development resources to reduce surface qualityproblems we experienced with our substrates for some customers, particularly related to surface morphology. Although some majorproblems related to surface quality have been resolved, we still need to continue to improve in this area and expect that this effortin research and development will continue in 2015. One of our joint ventures has been working on research and developmentprojects to qualify for a government incentive program for reduced future tax rates in China and will continue this effort in 2015.Research and development expenses were $4.1 million in 2014, compared with $3.4 million in 2013 and $3.5 million in2012.CompetitionThe semiconductor substrate industry is characterized by rapid technological change and price erosion, as well as intensecompetition. We compete in the market for GaAs substrates with our expertise in VGF technology, product quality, response timesand prices. However, we face actual and potential competition from a number of established companies who may have advantagesnot available to us including substantially greater financial, technical and marketing resources; greater name recognition; andmore established relationships in the industry and they may utilize these advantages to expand their product offerings morequickly, adapt to new or emerging technologies and changes in customer requirements more quickly, and devote greater resourcesto the marketing and sale of their products.We believe that the primary competitive factors in the markets in which our substrate products compete are:•quality;•price;•performance;•manufacturing capacity;•meeting customer specifications; and•customer support and satisfaction.Our ability to compete in target markets also depends on factors such as:•the timing and success of the development and introduction of new products and product features by us and ourcompetitors;•the availability of adequate sources of raw materials;•protection of our products by effective use of intellectual property laws; and•general economic conditions.A compound semiconductor substrate customer typically has two or three substrate suppliers that it has qualified for theproduction of its products. These qualified suppliers must meet industry-standard specifications for quality, on-time delivery andcustomer support. Once a substrate supplier has qualified with a customer, price, consistent quality and current and future productdelivery lead times become the most important competitive factors. A supplier that cannot meet customers’ current lead times orthat a customer perceives will not be able to meet future demand and provide consistent quality can lose current market share. Ourprimary competition in the market for compound semiconductor substrates includes Freiberger Compound Materials, JX, Umicore,Sumitomo Electric Industries and China Crystal Technology Corp., (CCTC). We believe that at least two of our competitors areshipping high volumes of GaAs substrates manufactured using a technique similar to our VGF technique. In addition, we also facecompetition from semiconductor device manufacturers that produce substrates for their own use, and from8 TABLE OF CONTENTScompanies, such as TriQuint Semiconductors, RFMD and Skyworks that are actively developing alternative materials to GaAs andmarketing semiconductor devices using these alternative materials. Furthermore, silicon-on-insulator (SOI) technology, a siliconwafer technology that produces higher performing and lower power consumption devices, has been proven in the market. In 2011to 2013, SOI technology displaced GaAs chips in key sectors, primarily the radio frequency (RF) switching function in cell phones.However, because of our vertically integrated, sophisticated supply chain through our subsidiaries and joint ventures, webelieve we are the only compound semiconductor substrate supplier to offer a full suite of raw materials and we believe that thisgives us a strong competitive advantage in our marketplace.Protection of our Intellectual PropertyOur success and the competitive position of our VGF technology depend on our ability to maintain our proprietary tradesecrets and other intellectual property protections. We rely on a combination of patents, trademark and trade secret laws, non-disclosure agreements and other intellectual property protection methods to protect our proprietary technology. We believe that,due to the rapid pace of technological innovation in the markets for our products, our ability to establish and maintain a positionof technology leadership depends as much on the skills of our research and development personnel as upon the legal protectionsafforded our existing technologies. To protect our trade secrets, we take certain measures to ensure their secrecy, such as executingnon-disclosure agreements with our employees, customers and suppliers. However, reliance on trade secrets is only an effectivebusiness practice insofar as trade secrets remain undisclosed and a proprietary product or process is not reverse engineered orindependently developed.To date, we have been issued thirty (30) patents that relate to our VGF products and processes, nine (9) in the United States(US), four (4) in Japan (JP), fourteen (14) in China (CN), one (1) in Europe (EP), one (1) in Canada (CA), and one (1) in Korea (KR),which expire in 2016 (1 US), 2017 (1 US), 2018 (1 CN), 2021 (6 CN), 2020 (4 CN), 2022 (1 US, 1 CA, 1 EP, 2 JP, 1 KR), 2027 (2US), 2028 (1 US, 3 CN), 2029 (1 JP), 2030(1 US, 1 JP), and 2032 (2 US). We have one (1) US patent application pending and ten(10) foreign patent applications pending in Europe (1), China (5), Japan (2) and Taiwan (2).In the normal course of business, we periodically receive and make inquiries regarding possible patent infringement. Indealing with such inquiries, it may become necessary or useful for us to obtain or grant licenses or other rights. However, there canbe no assurance that such licenses or rights will be available to us on commercially reasonable terms. If we are not able to resolve orsettle claims, obtain necessary licenses on commercially reasonable terms and/or successfully prosecute or defend our position, ourbusiness, financial condition and results of operations could be materially and adversely affected.Environmental RegulationsWe are subject to federal, state and local environmental laws and regulations, including laws in China as well as in the UnitedStates and Europe. These laws, rules and regulations govern the use, storage, discharge and disposal of hazardous chemicals duringmanufacturing, research and development and sales demonstrations. We maintain a number of environmental, health and safetyprograms that are primarily preventive in nature. As part of these programs, we regularly monitor ongoing compliance. If we fail tocomply with applicable regulations, we could be subject to substantial liability for personal injury, clean-up efforts, fines andsuspension or cessation of our operations.EmployeesAs of December 31, 2014, we had approximately 729 employees which consisted of approximately 24 employees in ourheadquarters in Fremont and approximately 705 employees in Beijing. In addition, our three consolidated subsidiaries and jointventures had, in total, approximately 366 employees. In aggregate, we and our subsidiaries had 1,095 employees, of whom 906were principally engaged in manufacturing, 122 in sales and administration, and 67 in research and development. Of theseemployees, 24 were located in the United States and 1,071 in China.As of December 31, 2014, 907 employees in China were represented by unions, but we have never experienced a workstoppage. We consider our relations with our employees to be good.9 TABLE OF CONTENTSGeographical InformationPlease see Note 15 of our Notes to Consolidated Financial Statements for information regarding our foreign operations, andsee “Risks related to international aspects of our business” under Item 1A. Risk Factors for further information on risks attendant toour foreign operations and dependence.Available InformationOur principal executive offices are located at 4281 Technology Drive, Fremont, CA 94538, and our main telephone number atthis address is (510) 683-5900. Our Internet website address is www.axt.com. Our website address is given solely for informationalpurposes; we do not intend, by this reference, that our website should be deemed to be part of this Annual Report on Form 10-K orto incorporate the information available at our Internet address into this Annual Report on Form 10-K.We file electronically with the Securities and Exchange Commission, or SEC, our annual reports on Form 10-K, quarterlyreports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or15(d) of the Securities Exchange Act of 1934, as amended. We make these reports available free of charge through our Internetwebsite as soon as reasonably practicable after we have electronically filed such material with the SEC. These reports can also beobtained from the SEC’s Internet website at www.sec.gov or at the SEC's Public Reference Room at 100 F Street, N.E., Washington,D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.Item 1A. Risk FactorsFor ease of reference, we have divided these risks and uncertainties into the following general categories:•Risks related to our general business;•Risks related to international aspects of our business;•Risks related to our financial results and capital structure;•Risks related to our intellectual property; and•Risks related to compliance and other legal matters.Risks Related to Our General BusinessSilicon substrates are significantly lower in cost compared to substrates made from specialty materials and new silicon-basedtechnologies could allow silicon based substrates to replace specialty material based substrates for certain applications.Historically silicon wafers or substrates are less expensive than specialty material substrates such as those that we produce.Electronic designers will generally consider silicon first and only turn to alternative materials if silicon cannot provide the requiredfunctionality in terms of power consumption, speed or other specifications. Beginning in 2011 certain applications that hadpreviously used GaAs substrates adopted a new silicon-based technology called Silicon On Insulator, or SOI. SOI technology usesa silicon-insulator-silicon layered substrate in place of conventional silicon substrates in semiconductor manufacturing. SOIproducts cost less than GaAs substrates and although their performance is not as robust as GaAs substrates in terms of powerconsumption, heat generation and speed it is still acceptable in mobile phone and other applications that were previouslydominated by GaAs substrates. The adoption of SOI has resulted in decreased GaAs wafer demand, and decreased revenue. If SOI orsimilar technologies gain more widespread market acceptance, or are used in more applications, our business and operating resultscould be significantly and adversely affected.Underutilizing our manufacturing facilities may result in declines in our gross margins.An important factor in our success is the extent to which we are able to utilize the available capacity in our manufacturingfacilities. A number of factors and circumstances may reduce utilization rates, including periods of industry overcapacity, lowlevels of customer orders, operating inefficiencies, mechanical failures and disruption of operations due to expansion, powerinterruptions, fire, flood or other natural disasters or calamities. Because many portions of our manufacturing costs are relativelyfixed, high utilization rates are critical to our gross margins and operating results. If we fail to achieve acceptable manufacturingvolumes or experience product shipment delays, our10 TABLE OF CONTENTSresults of operations will be negatively affected. During periods of decreased demand, we have underutilized our manufacturinglines. If we are unable to improve utilization levels at our facilities during periods of decreased demand and correctly managecapacity, the fixed expense levels will have an adverse effect on our business, financial condition and results of operations. Ourgross profit margins have fluctuated from period to period, and these fluctuations are expected to continue in the future. Within thelast two years, our gross profit margin has fluctuated from 15.6% in the quarter ended March 31, 2013 to 25.4% for the quarterended December 31, 2014.In 2013, we concluded that incoming orders were insufficient and that we were significantly underutilizing our factorycapacity. As a result, in February 2014, we announced a restructuring plan with respect to our wholly-owned subsidiary, BeijingTongmei Xtal Technology Co, Ltd., or Tongmei, in order to better align manufacturing capacity with demand. Under therestructuring plan, we posted a charge of approximately $907,000 in first quarter of 2014.If we receive fewer customer orders than forecasted or if our customers delay or cancel orders, we may not be able to reduce ourmanufacturing costs in the short-term and our gross margins would be negatively affected. In addition, lead times required by ourcustomers are shrinking which reduces our ability to forecast orders and properly balance our capacity utilization.Our gross margin has fluctuated historically and may decline due to several factors.Our gross product margin has fluctuated from period to period as a result of shifts in product mix, the introduction of newproducts, decreases in average selling prices for products, utilization of our manufacturing capacity and our ability to reduceproduct costs. These fluctuations are expected to continue in the future.We do not control the prices at which our subsidiaries and joint venture companies sell their raw materials products to thirdparties. However, as we consolidate the results of three of these companies with our own, any reduction in their gross margins couldhave a significant, adverse impact on our overall gross margins. One or more of our companies has in the past, and may in thefuture, sell raw materials at significantly reduced prices in order to gain volume sales or sales to new customers. In such an event,our gross margin may be adversely impacted. In addition, one of our consolidated subsidiaries has in the past been subject tocapacity constraints requiring it to source product from other third party suppliers in order to meet customer demand, resulting indecreased gross margin and adversely impacting our gross margin. This joint venture may in the future continue to experience suchcapacity restraints, causing our gross margin, and consequently our operating results, to be adversely impacted.Intense competition in the markets for our products could prevent us from increasing revenue and sustaining profitability.The markets for our products are intensely competitive. We face competition for our substrate products from othermanufacturers of substrates, such as Freiberger Compound Materials, JX, Umicore, Sumitomo Electric Industries and CCTC, fromsemiconductor device manufacturers that produce substrates for their own use, and from companies, such as TriQuintSemiconductors, RFMD and Skyworks that are actively developing alternative materials to GaAs and marketing semiconductordevices using these alternative materials. We believe that at least two of our major competitors are shipping high volumes of GaAssubstrates manufactured using a technique similar to our VGF technology. Other competitors may develop and begin using similartechnology. If we are unable to compete effectively, our revenue may not increase and we may be unable to remain profitable. Weface many competitors that have a number of significant advantages over us, including:•greater name recognition and market share in the business;•more manufacturing experience;•extensive intellectual property;•significantly greater financial, technical and marketing resources.Our competitors could develop new or enhanced products that are more effective than our products.The level and intensity of competition has increased over the past years and we expect competition to continue to increase inthe future. Competitive pressures have resulted in reductions in the prices of our products, and continued or increased competitioncould reduce our market share, require us to further reduce the prices of our products, affect our ability to recover costs and result inreduced gross margins.11 TABLE OF CONTENTSIn addition, new competitors have and may continue to emerge, such as a crystal growing company established by a formeremployee in China that is supplying semi-conducting GaAs wafers to the LED market. Competition from sources such as this couldincrease, particularly if these competitors are able to obtain large capital investments.If we have low product yields, the shipment of our products may be delayed and our product cost and operating results may beadversely impacted.A critical factor in our product cost is yield. Our products are manufactured using complex technologies, and the number ofusable substrates we produce can fluctuate as a result of many factors, including:•impurities in the materials used;•contamination of the manufacturing environment;•quality control and inconsistency in quality levels;•lack of automation and inconsistent processing resulting from manual manufacturing steps;•substrate breakage during the manufacturing process;•equipment failure, power outages or variations in the manufacturing process; andIn addition, we may modify our process to meet a customer specification but this can impact our yield. If our yields decrease,our revenue could decline if we are unable to produce product to our customers’ requirements. At the same time, our manufacturingcosts could remain fixed, or could increase. We have experienced product shipment delays and difficulties in achieving acceptableyields on both new and older products, and delays and poor yields have adversely affected our operating results. We mayexperience similar problems in the future and we cannot predict when they may occur or their duration or severity.If our manufacturing processes result in defects in our products making them unfit for use by our customers, our productswould be rejected, resulting in compensation costs paid to our customers, and possible disqualification. This could lead to revenueloss and market share loss.Problems incurred by our subsidiaries and joint ventures or venture partners could result in a material adverse impact on ourfinancial condition or results of operations.We have invested in subsidiaries and joint venture operations in China that produce products including 99.99% pure gallium(4N Ga), high purity gallium, arsenic, germanium, germanium dioxide, pyrolytic boron nitride (pBN) crucibles and boron oxide(B2O3). We purchase a portion of the materials produced by these companies for our use and they sell the remainder of theirproduction to third parties. Our ownership and the ownership held by our consolidated subsidiaries in these entities ranges from20% to 83%. We consolidate the companies in which we have a majority or controlling financial interest and employ equityaccounting for the joint ventures in which we have a smaller ownership interest. Several of these joint ventures occupy spacewithin larger facilities owned and/or operated by one of the other venture partners. Several of these venture partners are engaged inother manufacturing activities at or near the same facility. In some facilities, we share access to certain functions, including water,hazardous waste treatment or air quality treatment. If any of our joint venture partners in any of these ventures experiencesproblems with its operations, disruptions of our joint venture operations could result, having a material adverse effect on thefinancial condition and results of operation of our joint ventures, and correspondingly on our financial condition or results ofoperations. For example, since gallium is a by-product of aluminum, our gallium joint venture in China, which is housed in andreceives services from an affiliated aluminum plant, could generate lower production of gallium as a result of reduced by-productservices provided by the aluminum plant. Accordingly, in order to meet customer supply obligations, our joint venture may haveto source materials from another independent third party supplier, resulting in reduced gross margin.In addition, if any of our joint ventures or venture partners with which our joint ventures share facilities is deemed to haveviolated applicable laws, rules or regulations governing the use, storage, discharge or disposal of hazardous chemicals duringmanufacturing, research and development or sales demonstrations, the operations of our joint ventures could be adversely affectedand we could be subject to substantial liability for clean-up efforts, personal injury and fines or suspension or cessation of our jointventure operations as a result of the actions of the joint ventures or other venture partners. Employees working for our jointventures or any of the other venture partners could bring litigation against us as a result of actions taken at the joint venture orventure partner facilities, even12 TABLE OF CONTENTSthough we are not directly controlling the operations, including actions for exposure to chemicals or other hazardous materials atthe facilities of our joint ventures or the facilities of any venture partner that are shared by our joint ventures. While we wouldexpect to defend ourselves vigorously in any litigation that is brought against us, litigation is inherently uncertain and it ispossible that our business, financial condition, results of operations or cash flows could be affected. Even if we are not deemedresponsible for the actions of the joint ventures or venture partners, litigation could be costly, time consuming to defend and divertmanagement attention; in addition, if we are deemed to be the most financially viable of the partners, plaintiffs may decide topursue us for damages.Since all of our joint venture activity occurs in China, these activities could subject us to a number of risks associated withconducting operations internationally, including:•difficulties in managing geographically disparate operations;•difficulties in enforcing agreements through non-U.S. legal systems;•unexpected changes in regulatory requirements that may limit our ability to export the venture products or sell intoparticular jurisdictions or impose multiple conflicting tax laws and regulations;•political and economic instability, civil unrest or war;•terrorist activities that impact international commerce;•difficulties in protecting our intellectual property rights, particularly in countries where the laws and practices do notprotect proprietary rights to as great an extent as do the laws and practices of the United States;•changing laws and policies affecting economic liberalization, foreign investment, currency convertibility or exchangerates, taxation or employment; and•nationalization of foreign owned assets, including intellectual property.Demand for our products may decrease if demand for the end-user applications decrease or if manufacturers downstream in oursupply chain experience difficulty manufacturing, marketing or selling their products.Our products are used as components in electronic products. Accordingly, demand for our products is subject to the demandfor end-user applications which utilize our products, as well as factors affecting the ability of the manufacturers downstream in oursupply chain to introduce and market their products successfully, including:•the competition such manufacturers face in their particular industries;•the technical, manufacturing, sales and marketing and management capabilities of such manufacturers;•the financial and other resources of such manufacturers; and•the inability of such manufacturers to sell their products if they infringe third party intellectual property rights.If demand for the end-user applications for which our products are used decreases, or if manufacturers downstream in oursupply chain are unable to develop, market and sell their products, demand for our products will decrease.The average selling prices of our products may decline over relatively short periods, which may reduce our gross margins.The market for our products is characterized by declining average selling prices resulting from factors such as increasedcompetition, overcapacity, the introduction of new products and decreased sales of products incorporating our products and as aresult average selling prices for our products may decline over relatively short time periods. We have in the past experienced, andin the future may experience, substantial period-to-period fluctuations in operating results due to declining average selling prices.On average, for the year ended December 31, 2014 we experienced average selling price declines of approximately 5% to 10%depending on the product. It is possible that the pace of average selling price declines could accelerate beyond these levels forcertain products in a commoditizing market. We anticipate that average selling prices will decrease in the future in response to theunstable demand environment, product introductions by competitors or us, or by other factors, including pricing pressures fromsignificant customers. When our average selling prices decline, our gross profits decline unless we are able to13 TABLE OF CONTENTSsell more products or reduce the cost to manufacture our products. We generally attempt to combat average selling price declinesby improving yields, manufacturing efficiency and working to reduce the costs of our raw materials and of manufacturing ourproducts. We have in the past and may in the future experience declining sales prices, which could negatively impact our revenues,gross profits and financial results. We therefore need to sell our current products in increasing volumes to offset any decline in theiraverage selling prices, and introduce new products, which we may not be able to do, or do on a timely basis.We may be unable to reduce the cost of our products sufficiently to enable us to compete with others. Our cost reductionefforts may not allow us to keep pace with competitive pricing pressures and could adversely affect our margins. In order to remaincompetitive, we must continually reduce the cost of manufacturing our products through design and engineering changes. Wecannot assure you that any changes effected by us will result in sufficient cost reductions to allow us to reduce the price of ourproducts to remain competitive or improve our gross margins.Defects in our products could diminish demand for our products.Our products are complex and may contain defects, including defects resulting from impurities inherent in our raw materials orinconsistencies in our manufacturing processes. We have experienced quality control problems with some of our products, whichcaused customers to return products to us, reduce orders for our products, or both. We believe that we continue to experiencecertain reduction in orders as a result of product quality issues. If we continue to experience quality control problems, orexperience these or other problems in new products, customers may cancel or reduce orders or purchase products from ourcompetitors and we may be unable to maintain or increase sales to our customers and sales of our products could decline. Defects inour products could cause us to incur higher manufacturing costs and suffer product returns and additional service expenses, all ofwhich could adversely impact our operating results.If new products developed by us contain defects when released, our customers may be dissatisfied and we may suffer negativepublicity or customer claims against us, lose sales or experience delays in market acceptance of our new products.The Chinese government has previously imposed manufacturing restrictions that, if imposed again in the future, could materiallyand adversely impact our results of operations and our financial condition.The Chinese government has in the past imposed restrictions on manufacturing facilities, such as the restrictions imposed onpolluting factories for the 2008 Olympics and the 2014 APEC event, including a shut-down of transportation of materials andpower plants to reduce air pollution. If, in the future, restrictions are imposed that include our operations, our ability to supplycurrent or new orders would be significantly impacted. Customers could then be required to purchase product from our competitors,causing our competitors to take market share from us. Restrictions on transportation of materials could limit our ability to transportour raw materials or products, and could result in bottlenecks at shipping ports, limiting our ability to deliver products to ourcustomers. During periods of such restrictions, we may increase our stock of critical materials (such as arsenic, gallium, and otherchemicals) for use during the period that these restrictions are likely to last, which will increase our use of cash and increase ourinventory level, such as occurred during 2008. Any of these restrictions could materially and adversely impact our results ofoperations and our financial condition.To reduce pollution in Beijing, the Chinese government has sometimes limited the addition or expansion of facilities bymanufacturing companies in the Beijing area. If the government applied restrictions on us it could have an adverse impact on ourresults of operations and our financial condition.The loss of one or more of our key substrate customers would significantly hurt our operating results.Although no customer represented more than 10% of our revenue for the years ended December 31, 2013 and 2014, we expectthat a significant portion of our future revenue will continue to be derived from a limited number of substrate customers. Most ofour customers are not obligated to purchase a specified quantity of our products or to provide us with binding forecasts of productpurchases. In addition, our customers may reduce, delay or cancel orders at any time without any significant penalty. In the past, wehave experienced slower bookings, significant push-outs and cancellation of orders from customers. If we lose a major customer orif a customer cancels, reduces or delays orders, or reduces the prices paid for our products, our revenue would decline. In addition,customers that have accounted for significant revenue in the past may not continue to generate revenue for us in any future period.Any delay in scheduled shipments of our products could cause revenue to fall below our expectations and the expectations ofmarket analysts or investors, causing our stock price to decline.14 TABLE OF CONTENTSThe cyclical nature of the semiconductor industry may limit our ability to maintain or increase net sales and operating resultsduring industry downturns.The semiconductor industry is highly cyclical and periodically experiences significant economic downturns characterized bydiminished product demand, resulting in production overcapacity and excess inventory in the markets we serve. A downturn canresult in lower unit volumes and rapid erosion of average selling prices. The semiconductor industry has experienced significantdownturns, often in connection with, or in anticipation of, maturing product cycles of both semiconductor companies’ and theircustomers’ products or a decline in general economic conditions. This may adversely affect our results of operations and the valueof our business.Our continuing business depends in significant part upon manufacturers of electronic and opto-electronic compoundsemiconductor devices, as well as the current and anticipated market demand for these devices and products using these devices.As a supplier to the compound semiconductor industry, we are subject to the business cycles that characterize the industry. Thetiming, length and volatility of these cycles are difficult to predict. The compound semiconductor industry has historically beencyclical due to sudden changes in demand, the amount of manufacturing capacity and changes in the technology employed incompound semiconductors. The rate of changes in demand, including end demand, is high, and the effect of these changes upon usoccurs quickly, exacerbating the volatility of these cycles. These changes have affected the timing and amounts of customers’purchases and investments in new technology. These industry cycles create pressure on our revenue, gross margin and net income.Our industry has in the past experienced periods of oversupply and that has resulted in significantly reduced prices forcompound semiconductor devices and components, including our products, both as a result of general economic changes andovercapacity. When this occurs our operating results and financial condition are adversely affected. Oversupply causes greaterprice competition and can cause our revenue, gross margins and net income to decline. During periods of weak demand, customerstypically reduce purchases, delay delivery of products and/or cancel orders of component parts such as our products. Further ordercancellations, reductions in order size or delays in orders could occur and would materially adversely affect our business andresults of operations. Actions to reduce our costs may be insufficient to align our structure with prevailing business conditions. Wemay be required to undertake additional cost-cutting measures, and may be unable to invest in marketing, research anddevelopment and engineering at the levels we believe are necessary to maintain our competitive position. Our failure to make theseinvestments could seriously harm our business.We base our planned operating expenses in part on our expectations of future revenue, and a significant portion of ourexpense is relatively fixed. If revenue for a particular quarter is lower than we expect, we likely will be unable to proportionatelyreduce our operating expenses for that quarter, which would harm our operating results. For example, in 2013, we experiencedsignificantly declining gross margins due to the allocation of fixed costs across a lower volume of sales than anticipated.We purchase critical raw materials and parts for our equipment from single or limited sources, and could lose sales if thesesources fail to fill our needs.We depend on a limited number of suppliers for certain raw materials, components and equipment used in manufacturing ourproducts, including key materials such as quartz tubing from our vendor, Kaide, and polishing solutions. Although several of theseraw materials are purchased from suppliers in which we hold an ownership interest, we generally purchase these materials throughstandard purchase orders and not pursuant to long-term supply contracts, and no supplier guarantees supply of raw materials orequipment to us. If we lose any of our key suppliers, our manufacturing efforts could be significantly hampered and we could beprevented from timely producing and delivering products to our customers. Prior to investing in our subsidiaries and jointventures, we sometimes experienced delays obtaining critical raw materials and spare parts, including gallium, due to shortages ofthese materials and we could experience such delays again in the future due to shortages of materials and may be unable to obtainan adequate supply of materials. These shortages and delays could result in higher materials costs and cause us to delay or reduceproduction of our products. If we have to delay or reduce production, we could fail to meet customer delivery schedules and ourrevenue and operating results could suffer.If we do not successfully develop new products to respond to rapidly changing customer requirements, our ability to generaterevenue, obtain new customers, and retain existing customers may suffer.Our success depends on our ability to offer new products and product features that incorporate leading technology andrespond to technological advances. In addition, our new products must meet customer needs and compete effectively on quality,price and performance. The life cycles of our products are difficult to predict. The15 TABLE OF CONTENTSmarkets for our products are characterized by rapid technological change, changing customer needs and evolving industrystandards. If our competitors introduce products employing new technologies or performance characteristics, our existing productscould become obsolete and unmarketable. During the past few years, we have seen our competitors selling more substratesmanufactured using a crystal growth technology similar to ours, which has eroded our technological differentiation.The development of new products can be a highly complex process, and we may experience delays in developing andintroducing new products. Any significant delay could cause us to fail to timely introduce and gain market acceptance of newproducts. Further, the costs involved in researching, developing and engineering new products could be greater than anticipated. Ifwe fail to offer new products or product enhancements or fail to achieve higher quality products, we may not generate sufficientrevenue to offset our development costs and other expenses or meet our customers’ requirements.Our substrate products have a long qualification cycle that makes it difficult to plan our expenses and forecast our results.New customers typically place orders with us for our substrate products three months to a year or more after our initial contactwith them. The sale of our products may be subject to delays due to our customers’ lengthy internal approval and evaluationprocesses. During this time, we may incur substantial expenses and expend sales, marketing and management efforts while thecustomers evaluate our products. These expenditures may not result in sales of our products. If we do not achieve anticipated salesin a period as expected, we may experience an unplanned shortfall in our revenue. As a result, we may not be able to coverexpenses, causing our operating results to be adversely effected. In addition, if we fail to meet the product qualificationrequirements of the customer, we may not have another opportunity to sell products to this customer for many months or evenyears. In the current competitive climate, the average qualification and sales cycle for our products has lengthened even further andis expected to continue to make it difficult for us to forecast our future sales accurately. We anticipate that sales of any futuresubstrate products will also have lengthy sales cycles and will, therefore, be subject to risks substantially similar to those inherentin the lengthy sales cycles of our current substrate products.If any of our facilities are damaged by occurrences such as fire, explosion or natural disaster, we might not be able tomanufacture our products.The ongoing operation of our manufacturing and production facilities in China is critical to our ability to meet demand forour products. If we are not able to use all or a significant portion of our facilities for prolonged periods for any reason, we would notbe able to manufacture products for our customers. For example, a fire or explosion caused by our use of combustible chemicalsand high temperatures during our manufacturing processes or power interruption caused by severe weather conditions could rendersome or all of our facilities inoperable for an indefinite period of time. Actions outside of our control, such as earthquakes or othernatural disasters, could also damage our facilities, rendering them inoperable. If we are unable to operate our facilities andmanufacture our products, we would lose customers and revenue and our business would be harmed.The financial condition of our customers may affect their ability to pay amounts owed to us.Many of our customers are undercapitalized and cope with cash flow issues. We frequently allow our customers extendedpayment terms after shipping products to them. Subsequent to our shipping a product, some customers have been unable to makepayments when due, reducing our cash balances and causing us to incur charges to allow for a possibility that some accounts mightnot be paid. Customers may also be forced to file for bankruptcy. If our customers do not pay their accounts we will be required toincur charges that would reduce our earnings.We have made and may continue to make strategic investments in raw materials suppliers, which may not be successful and mayresult in the loss of all or part of our investment.We have made investments through our subsidiaries and joint ventures in raw material suppliers in China, which provide uswith opportunities to gain supplies of key raw materials that are important to our substrate business. These affiliates each have amarket beyond that provided by us. We do not have influence over all of these companies and in some we have made only astrategic, minority investment. We may not be successful in achieving the financial, technological or commercial advantage uponwhich any given investment is premised, and we could end up losing all or part of our investment.16 TABLE OF CONTENTSWe depend on the continuing efforts of our senior management team and other key personnel. If we lose members of our seniormanagement team or other key personnel, or are unable to successfully, recruit and train qualified personnel, our ability tomanufacture and sell our products could be harmed.Our future success depends on the continuing services of members of our senior management team and other key personnel.Our industry is characterized by high demand and intense competition for talent, and the turnover rate can be high. We compete forqualified management and other personnel with other semiconductor companies. Our employees could leave our company withlittle or no prior notice and would be free to work for a competitor. If one or more of our senior executives or other key personnelwere unable or unwilling to continue in their present positions, we may not be able to replace them easily or at all, and other seniormanagement may be required to divert attention from other aspects of the business. The loss of any of these individuals or ourability to attract or retain qualified personnel could adversely affect our business.Our results of operations may suffer if we do not effectively manage our inventory.We must manage our inventory of raw materials, work-in-process and finished goods effectively to meet changing customerrequirements, while keeping inventory costs down and improving gross margins. Although we seek to maintain sufficientinventory levels of certain materials to guard against interruptions in supply and to meet our near term needs, and have to datebeen able to obtain sufficient supplies of materials in a timely manner, in the future, we may experience shortages of certain keymaterials. Some of our products and supplies have in the past and may in the future become obsolete while in inventory due tochanging customer specifications, or become excess inventory due to decreased demand for our products and an inability to sellthe inventory within a foreseeable period. Furthermore, if market prices drop below the prices at which we value inventory, we mayneed to take a charge for a reduction in inventory values. We have in the past had to take inventory valuation and impairmentcharges. Any future unexpected changes in demand or increases in costs of production that cause us to take additional charges forun-saleable, obsolete or excess inventory, or to reduce inventory values, could adversely affect our results of operations.Financial market volatility and adverse changes in the domestic and global economic environment could have a significantadverse impact on our business, financial condition and operating results.We are subject to the risks arising from adverse changes and uncertainty in domestic and global economies. Uncertain globaleconomic conditions and low or negative growth in China, Europe and the United States, along with volatility in the financialmarkets, increasing national debt and fiscal concerns in various regions, pose challenges to our industry. Although we remain well-capitalized, the cost and availability of funds may be adversely affected by illiquid credit markets. Turbulence in U.S. andinternational markets and economies may adversely affect our liquidity, financial condition and profitability. Another severe orprolonged economic downturn could result in a variety of risks to our business, including:•increased volatility in our stock price;•increased volatility in foreign currency exchange rates;•delays in, or curtailment of, purchasing decisions by our customers or potential customers either as a result of overalleconomic uncertainty or as a result of their inability to access the liquidity necessary to engage in purchasing initiatives;•increased credit risk associated with our customers or potential customers, particularly those that may operate inindustries most affected by the economic downturn; and•impairment of our intangible or other assets.In the recent past we experienced delays in customer purchasing decisions and disruptions in normal volume of customerorders that we believe were in part due to the uncertainties in the global economy and an adverse impact on consumer spending.During challenging and uncertain economic times and in tight credit markets, many customers delay or reduce technologypurchases. Should similar events occur again, our business and operating results could be significantly and adversely affected.Global economic conditions may have an impact on our business and financial condition in ways that we currently cannotpredict.Our operations and financial results depend on worldwide economic conditions and their impact on levels of businessspending, which had deteriorated significantly in many countries and regions in previous years.17 TABLE OF CONTENTSUncertainties in the financial and credit markets may cause our customers to postpone deliveries of ordered systems and placementof new orders and extended uncertainties may reduce future sales of our products and services. The revenue growth andprofitability of our business depends on the overall demand for our substrates, and we are particularly dependent on the marketconditions for the wireless, solid state illumination, fiber optics and telecommunications industries. Because the end users of ourproducts are primarily large companies whose businesses fluctuate with general economic and business conditions, a softening ofdemand for products that use our substrates, caused by a weakening economy, may result in decreased revenue. Customers mayfind themselves facing excess inventory from earlier purchases, and may defer or reconsider purchasing products due to thedownturn in their business and in the general economy. If market conditions deteriorate, we may experience increased collectiontimes and greater write-offs, either of which could have a material adverse effect on our profitability and our cash flow.Future tightening of credit markets and concerns regarding the availability of credit may make it more difficult for ourcustomers to raise capital, whether debt or equity, to finance their purchases of capital equipment or of the products we sell. Delaysin our customers’ ability to obtain such financing, or the unavailability of such financing, would adversely affect our product salesand revenues and therefore harm our business and operating results. We cannot predict the timing, duration of or effect on ourbusiness of any future economic downturn or the timing or strength of any subsequent recovery.We may not be able to identify additional complementary joint ventures.We believe that continuing to invest in additional joint ventures will be important to remaining competitive in ourmarketplace and ensuring a supply of critical raw materials. However, we may not be able to identify additional complementaryjoint venture opportunities or, even once opportunities are identified, we may not be able to reach agreement on the terms of theventure with the other venture partners. Additional joint ventures could cause us to incur contingent liabilities or other expenses,any of which could adversely affect our financial condition and operating results.The effect of terrorist threats and actions on the general economy could decrease our revenue.Developed countries such as the United States and China continue to be on alert for terrorist activity. The potential near- andlong-term impact terrorist activities may have in regards to our suppliers, customers and markets for our products and the economyis uncertain. There may be embargos of ports or products, or destruction of shipments or our facilities, or attacks that affect ourpersonnel. There may be other potentially adverse effects on our operating results due to significant events that we cannot foresee.Since we perform all of our manufacturing operations in China, terrorist activity or threats against U.S.-owned enterprises are aparticular concern to us.Risks Related to International Aspects of Our BusinessWe derive a significant portion of our revenue from international sales, and our ability to sustain and increase our internationalsales involves significant risks.Our revenue growth depends in part on the expansion of our international sales and operations. International sales represented88% of our revenue in 2014 and 2013 and 83% of our revenue in 2012. We expect that sales to customers outside the UnitedStates, particularly sales to customers in Japan, Taiwan and China, will continue to represent a significant portion of our revenue.Currently, a significant percentage of our revenue is to customers headquartered in Asia. All of our manufacturing facilitiesand most of our suppliers are also located outside the United States. Managing our overseas operations presents challenges,including periodic regional economic downturns, trade balance issues, varying business conditions and demands, politicalinstability, variations in enforcement of intellectual property and contract rights in different jurisdictions, differences in the abilityto develop relationships with suppliers and other local businesses, changes in U.S. and international laws and regulationsincluding U.S. export restrictions, fluctuations in interest and currency exchange rates, the ability to provide sufficient levels oftechnical support in different locations, cultural differences, shipping delays and terrorist acts or acts of war, among other risks.Many of these challenges are present in China, which represents a large potential market for semiconductor devices. Globaluncertainties with respect to: (i) economic growth rates in various countries; (ii) sustainability of demand for electronics products;(iii) capital spending by semiconductor manufacturers; (iv) price weakness for certain semiconductor devices; and (v) politicalinstability in regions where we have operations may also affect our business, financial condition and results of operations.18 TABLE OF CONTENTSOur dependence on international sales involves a number of risks, including:•changes in tariffs, import restrictions, export restrictions, or other trade barriers;•unexpected changes in regulatory requirements;•longer periods to collect accounts receivable;•changes in export license requirements;•political and economic instability;•unexpected changes in diplomatic and trade relationships; and•foreign exchange rate fluctuations.Our sales are denominated in U.S. dollars, except for sales to our Chinese customers which are denominated in Renminbi andour Japanese customers which are denominated in Japanese yen. Increases in the value of the U.S. dollar could increase the price ofour products in non-U.S. markets and make our products more expensive than competitors’ products in these markets.Denominating some sales in Japanese yen subjects us to fluctuations in the exchange rates between the U.S. dollar and theJapanese yen. For example, in the second half of 2014, the exchange rate of Japanese yen to U.S. dollar moved from 101.55 to119.95 from June 30, 2014 to December 31, 2014. We incurred foreign currency transaction exchange losses which are included in“other income (expense), net” on the consolidated statements of operations of $1.0 million, $1.3 million and $445,000 for theyears ended December 31, 2014, 2013 and 2012 respectively. The functional currency of our Chinese subsidiary and joint venturesis the local currency. We incur transaction gains or losses resulting from consolidation of expenses incurred in local currencies forthese entities, as well as in translation of the assets and liabilities of their assets at each balance sheet date. If we do not effectivelymanage the risks associated with international sales, our revenue, cash flows and financial condition could be adversely affected.Changes in tariffs, import or export restrictions, Chinese regulations or other trade barriers may reduce gross margins.We may incur increases in costs due to changes in tariffs, import or export restrictions, or other trade barriers, unexpectedchanges in regulatory requirements, any of which could reduce our gross margins. For example, in July 2012, we received notice ofretroactive value-added taxes (VATs) levied by the tax authorities in China which applied for the period from July 1, 2011 to June30, 2012. We expensed the retroactive VATs of approximately $1.3 million in the quarter ended June 30, 2012, which resulted in adecrease in our gross margins. These VATs will continue to negatively impact our gross margins for the future quarters. Given therelatively fluid regulatory environment in China, there could be additional tax or other regulatory changes in the future. Any suchchanges could directly and materially adversely impact our financial results and general business condition.Our operating results depend in large part on continued customer acceptance of our substrate products manufactured in Chinaand continued improvements in product quality.We manufacture all of our products in China, and source most of our raw materials in China. We have in the past experiencedquality problems with our China-manufactured products. Our previous quality problems caused us to lose market share to ourcompetitors, as some customers reduced their orders from us until our surface quality was as good and consistent as that offered bycompetitors and instead allocated their requirements for compound semiconductor substrates to our competitors. If we are unable tocontinue to achieve customer qualifications for our products, or if we continue to experience quality problems, customers may notincrease purchases of our products, our China facility will become underutilized, and we will be unable to achieve revenue growth.Changes in China’s political, social and economic environment may affect our financial performance.Our financial performance may be affected by changes in China’s political, social and economic environment. The role of theChinese central and local governments in the Chinese economy is significant. Chinese policies toward economic liberalization,and laws and policies affecting technology companies, foreign investment, currency exchange rates, taxation structure and othermatters could change, resulting in greater restrictions on our ability to do business and operate our manufacturing facilities inChina. Any imposition of surcharges or any increase in Chinese tax rates or reduction or elimination of Chinese tax benefits couldhurt our operating results. The Chinese19 TABLE OF CONTENTSgovernment could revoke, terminate or suspend our operating license for national security and similar reasons withoutcompensation to us. If the Chinese government were to take any of these actions, we would be prevented from conducting all orpart of our business. Any failure on our part to comply with governmental regulations could result in the loss of our ability tomanufacture our products in China.If there are power shortages in China, we may have to temporarily close our China operations, which would adversely impactour ability to manufacture our products and meet customer orders, and would result in reduced revenue.In the past, China has faced power shortages resulting in power demand outstripping supply in peak periods. Instability inelectrical supply has caused sporadic outages among residential and commercial consumers causing the Chinese government toimplement tough measures to ease the energy shortage. If further problems with power shortages occur in the future, we may berequired to make temporary closures of our subsidiary and joint venture operations. We may be unable to manufacture our productsand would then be unable to meet customer orders except from inventory on hand. As a result, our revenue could be adverselyimpacted, and our relationships with our customers could suffer, impacting our ability to generate future revenue. In addition, ifpower is shut off at the facilities for our China joint ventures at any time, either voluntarily or as a result of unplanned brownouts,during certain phases of our manufacturing process including our crystal growth phase, the work in process may be ruined andrendered unusable, causing us to incur costs that will not be covered by revenue, and negatively impacting our cost of revenue andgross margins.An outbreak of a contagious disease such as Ebola, Severe Acute Respiratory Syndrome (SARS) or the Avian Flu may adverselyimpact our manufacturing operations and some of our key suppliers and customers.Any reoccurrence of SARS or an outbreak of a contagious disease, such as Avian Flu, or Ebola, may cause us to temporarilyclose our manufacturing operations. Similarly, if one or more of our key suppliers is required to close for an extended period, wemight not have enough raw material inventories to continue manufacturing operations. In addition, while we possess managementskills among our China staff that enable us to maintain our manufacturing operations with minimal on-site supervision from ourU.S.-based staff, our business could also be harmed if travel to or from China and the United States is restricted or inadvisable. Ifour manufacturing operations were closed for a significant period, we could lose revenue and market share, which would depressour financial performance and could be difficult to recapture. Finally, if one of our key customers is required to close for anextended period, we might not be able to ship product to them, our revenue would decline and our financial performance wouldsuffer.Risks Related to Our Financial Results and Capital StructureIf we fail to manage periodic contractions, we may utilize our cash balances, resulting in the decline of our existing cash, cashequivalents and investment balances.We anticipate that our existing cash resources will fund our operations and purchases of capital equipment, as well as provideadequate working capital for the next twelve months. However, our liquidity is affected by many factors including, among others,the extent to which we pursue additional capital expenditures, the level of our production, and other factors related to theuncertainties of the industry and global economies. If we fail to manage business contractions successfully we may draw down ourcash reserves, which would adversely affect our financial condition, reduce our value and possibly impinge our ability to raise debtand equity funding in the future, at a time when we might need to raise additional cash. Accordingly, there can be no assurance thatevents in the future will not require us to seek additional capital or, if required, that such capital would be available on termsacceptable to us, if at all. As part of our effort to reduce costs, we may lose key staff, production resources and technology that wewill need to replenish when end markets recover. These events could reduce our ability to grow profitably as markets recover.Unpredictable fluctuations in our operating results could disappoint analysts or our investors, which could cause our stock priceto decline.We have experienced, and may continue to experience, significant fluctuations in our revenue and earnings. Our quarterly andannual revenue and operating results have varied significantly in the past and may vary significantly in the future due to a numberof factors, including:•our ability to develop, manufacture and deliver high quality products in a timely and cost-effective manner;20 TABLE OF CONTENTS•decline in general economic conditions or downturns in the industry in which we compete;•fluctuations in demand for our products;•expansion of our manufacturing capacity;•expansion of our operations in China;•limited availability and increased cost of raw materials;•the volume and timing of orders from our customers, and cancellations, push-outs and delays of customer orders oncebooked;•fluctuation of our manufacturing yields;•decreases in the prices of our or our competitors’ products;•costs incurred in connection with any future acquisitions of businesses or technologies; and•increases in our expenses, including expenses for research and development.Due to these factors, we believe that period-to-period comparisons of our operating results may not be meaningful indicatorsof our future performance.A substantial percentage of our operating expenses are fixed, and we may be unable to adjust spending to compensate for anunexpected shortfall in revenue. As a result, any delay in generating revenue could cause our operating results to fall below theexpectations of market analysts or investors, which could also cause our stock price to decline.If our operating results and financial performance do not meet the guidance that we have provided to the public, our stock pricemay decline.We provide public guidance on our expected operating and financial results. Although we believe that this guidance providesour stockholders, investors and analysts with a better understanding of our expectations for the future, such guidance is comprisedof forward-looking statements subject to the risks and uncertainties described in this report and in our other public filings andpublic statements. Our actual results may not meet the guidance we have provided. If our operating or financial results do not meetour guidance or the expectations of investment analysts, our stock price may decline.We have adopted certain anti-takeover measures that may make it more difficult for a third party to acquire us.Our board of directors has the authority to issue up to 2,000,000 shares of preferred stock and to determine the price, rights,preferences and privileges of those shares without any further vote or action by the stockholders. The rights of the holders ofcommon stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may beissued in the future. The issuance of shares of preferred stock could have the effect of making it more difficult for a third party toacquire a majority of our outstanding voting stock. We have no present intention to issue additional shares of preferred stock.Provisions in our amended and restated certificate of incorporation and amended and restated bylaws may have the effect ofdelaying or preventing a merger, acquisition or change of control, or changes in our management, which could adversely affect themarket price of our common stock. The following are some examples of these provisions:•the division of our board of directors into three separate classes, each with three-year terms;•the right of our board to elect a director to fill a space created by a board vacancy or the expansion of the board;•the ability of our board to alter our amended and restated bylaws; and•the requirement that only our board or the holders of at least 10% of our outstanding shares may call a special meeting ofour stockholders.Furthermore, because we are incorporated in Delaware, we are subject to the provisions of Section 203 of the Delaware GeneralCorporation Law. These provisions prohibit us from engaging in any business combination with21 TABLE OF CONTENTSany interested stockholder (a stockholder who owns 15% or more of our outstanding voting stock) for a period of three yearsfollowing the time that such stockholder became an interested stockholder, unless:•662/3% of the shares of voting stock not owned by the interested stockholder approve the merger or combination, or•the board of directors approves the merger or combination or the transaction which resulted in the stockholder becomingan interested stockholder.Our common stock may be delisted from The Nasdaq Global Select Market, which could negatively impact the price of ourcommon stock and our ability to access the capital markets.Our common stock is listed on The Nasdaq Global Select Market. The bid price of our common stock has in the past closedbelow the $1.00 minimum per share bid price required for continued inclusion on The Nasdaq Global Select Market underMarketplace Rule 5450(a). If the bid price of our common stock remains below $1.00 per share for thirty consecutive businessdays, we could be subject to delisting from the Nasdaq Global Select Market.Any delisting from The Nasdaq Global Select Market could have an adverse effect on our business and on the trading of ourcommon stock. If a delisting of our common stock were to occur, our common stock would trade on the OTC Bulletin Board or onthe “pink sheets” maintained by the National Quotation Bureau, Inc. Such alternatives are generally considered to be less efficientmarkets, and our stock price, as well as the liquidity of our common stock, may be adversely impacted as a result. Delisting fromThe Nasdaq Global Select Market could also have other negative results, including the potential loss of confidence by suppliersand employees, the loss of institutional investor interest and fewer business development opportunities, as well as the loss ofliquidity for our stockholders.Risks Related to Our Intellectual PropertyIntellectual property infringement claims may be costly to resolve and could divert management attention.Other companies may hold or obtain patents on inventions or may otherwise claim proprietary rights to technology necessaryto our business. The markets in which we compete are comprised of competitors that in some cases hold substantial patentportfolios covering aspects of products that could be similar to ours. We could become subject to claims that we are infringingpatent, trademark, copyright or other proprietary rights of others. We have in the past been involved in lawsuits alleging patentinfringement, and could in the future be involved in similar litigation. For example, we entered into a settlement agreement withSumitomo Electric Industries in 2011 to settle a claim of patent infringement.If we are unable to protect our intellectual property, we may lose valuable assets or incur costly litigation.We rely on a combination of patents, copyrights, trademark and trade secret laws, non-disclosure agreements and otherintellectual property protection methods to protect our proprietary technology. However, we believe that, due to the rapid pace oftechnological innovation in the markets for our products, our ability to establish and maintain a position of technology leadershipalso depends on the skills of our development personnel. Despite our efforts to protect our intellectual property, third parties candevelop products or processes similar to ours. Our means of protecting our proprietary rights may not be adequate, and ourcompetitors may independently develop similar technology, duplicate our products or design around our patents. We believe thatat least two of our competitors have begun to ship GaAs substrates produced using a process similar to our VGF process. Ourcompetitors may also develop and patent improvements to the VGF technology upon which we rely, and thus may limit anyexclusivity we enjoy by virtue of our patents or trade secrets.It is possible that pending or future United States or foreign patent applications made by us will not be approved, that ourissued patents will not protect our intellectual property, or that third parties will challenge our ownership rights or the validity ofour patents. In addition, the laws of some foreign countries may not protect our proprietary rights to as great an extent as do thelaws of the United States and it may be more difficult to monitor the use of our intellectual property. Our competitors may be ableto legitimately ascertain non-patented proprietary technology embedded in our systems. If this occurs, we may not be able toprevent the development of technology substantially similar to ours.We may have to resort to costly litigation to enforce our intellectual property rights, to protect our trade secrets or know-howor to determine their scope, validity or enforceability. Enforcing or defending our proprietary22 TABLE OF CONTENTStechnology is expensive, could cause us to divert resources and may not prove successful. Our protective measures may proveinadequate to protect our proprietary rights, and if we fail to enforce or protect our rights, we could lose valuable assets.Risks Related to Compliance and Other Legal MattersWe need to continue to improve or implement our systems, procedures and controls.Our operations in China and our efforts to grow our business place a significant strain on our operations and managementresources. We rely on certain manual processes in our operations and in connection with consolidation of our financial results. Ifwe fail to manage these operations or fail to effectively manage a transition from manual processes to automated processes, ouroperations may be disrupted.To manage our business effectively, we may need to implement additional management information systems, further developour operating, administrative, financial and accounting systems and controls, add experienced senior level managers, and maintainclose coordination among our executive, engineering, accounting, marketing, sales and operations organizations.We are subject to internal control evaluations and attestation requirements of Section 404 of the Sarbanes-Oxley Act.Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we must include in our Annual Report on Form 10-K a report ofmanagement on the effectiveness of our internal control over financial reporting. Ongoing compliance with this requirement iscomplex, costly and time-consuming. If: (1) we fail to maintain effective internal control over financial reporting; or (2) ourmanagement does not timely assess the adequacy of such internal control, we could be subject to regulatory sanctions and thepublic’s perception of us may be adversely impacted.If we fail to comply with environmental and safety regulations, we may be subject to significant fines or forced to cease ouroperations; in addition, we could be subject to suits for personal injuries caused by hazardous materials.We are subject to federal, state and local environmental and safety laws and regulations in all of our operating locations,including laws and regulations of China, such as laws and regulations related to the development, manufacture and use of ourproducts, the operation of our facilities, and the use of our real property. These laws and regulations govern the use, storage,discharge and disposal of hazardous chemicals during manufacturing, research and development, and sales demonstrations. If wefail to comply with applicable regulations, we could be subject to substantial liability for clean-up efforts, personal injury and finesor suspension or be forced to cease our operations, and/or suspend or terminate the development, manufacture or use of certain ofour products, the use of our facilities, or the use of our real property, each of which could have a material adverse effect on ourbusiness, financial condition and results of operations.For example, in 2005, a complaint was filed against us alleging personal injury, general negligence, intentional tort, wage lossand other damages, including punitive damages, as a result of exposure of plaintiffs to high levels of gallium arsenide in galliumarsenide wafers, and methanol. Other current and/or former employees could bring litigation against us in the future. Although wehave put in place engineering, administrative and personnel protective equipment programs to address these issues, our ability toexpand or continue to operate our present locations could be restricted or we could be required to acquire costly remediationequipment or incur other significant expenses if we were found liable for failure to comply with environmental and safetyregulations. Existing or future changes in laws or regulations in the United States and China may require us to incur significantexpenditures or liabilities, or may restrict our operations. In addition, our employees could be exposed to chemicals or otherhazardous materials at our facilities and we may be subject to lawsuits seeking damages for wrongful death or personal injuriesallegedly caused by exposure to chemicals or hazardous materials at our facilities.Litigation is inherently uncertain and while we would expect to defend ourselves vigorously, it is possible that our business,financial condition, results of operations or cash flows could be affected in any particular period by litigation pending and anyadditional litigation brought against us. In addition, future litigation could divert management’s attention from our business andoperations, causing our business and financial results to suffer. We could incur defense or settlement costs in excess of theinsurance covering these litigation matters, or that could result in significant judgments against us or cause us to incur costlysettlements, in excess of our insurance limits.23 TABLE OF CONTENTSItem 1B. Unresolved Staff CommentsNone.Item 2. PropertiesOur principal properties as of February 28, 2015 are as follows:LocationSquareFeetPrincipal UseOwnershipFremont, CA19,467AdministrationOperating lease, expires November 2017Beijing, China300,000Production andAdministrationOwned by AXT / TongmeiXianxi, China56,500ProductionOwned by Beijing JiYa Semiconductor Material, Co.,Ltd.*Xianxi, China7,500AdministrationOwned by Beijing JiYa Semiconductor Material, Co.,Ltd.*Beijing, China2,000AdministrationOperating lease by Beijing JiYa SemiconductorMaterial, Co., Ltd., expires February 2016Nanjing, China22,000ProductionOwned by Nanjing Jin Mei Gallium Co., Ltd.*Nanjing, China5,700R&D and AdministrationOwned by Nanjing Jin Mei Gallium Co., Ltd.*Nanjing, China3,900ProductionOwned by Nanjing Jin Mei Gallium Co., Ltd.*Beijing, China14,720ProductionOwned by Bo Yu Semiconductor Vessel CraftworkTechnology Co., Ltd.Beijing, China7,600Production andAdministrationOperating leases by Bo Yu Semiconductor VesselCraftwork Technology Co., Ltd., expire in various termsuntil June 2018.*Joint ventures in which we hold an interest and consolidate in our financial statements. We hold a 46% interest in Beijing JiYa SemiconductorMaterial Co., Ltd., a 83% interest in Nanjing Jin Mei Gallium Co., Ltd., and a 70% interest in Beijing BoYu Semiconductor Vessel CraftworkTechnology Co., Ltd.We consider each facility to be in good operating condition and adequate for its present use, and believe that each facility hassufficient plant capacity to meet its current and anticipated operating requirements.Item 3. Legal ProceedingsFrom time to time we may be involved in judicial or administrative proceedings concerning matters arising in the ordinarycourse of business. We do not expect that any of these matters, individually or in the aggregate, will have a material adverse effecton our business, financial condition, cash flows or results of operation.Item 4. Mine Safety DisclosuresNot applicable.24 TABLE OF CONTENTSPART IIItem 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesOur common stock has been trading publicly on the NASDAQ Global Market (NASDAQ) under the symbol “AXTI” since May20, 1998, the date we consummated our initial public offering, and beginning on January 3, 2011, our common stock begantrading on the NASDAQ Global Select Market under the same symbol. The following table sets forth the range of high and lowsales prices of the common stock for the periods indicated, as reported by NASDAQ.HighLow2014 First Quarter$2.67 $2.20 Second Quarter$2.32 $2.06 Third Quarter$3.04 $2.04 Fourth Quarter$2.88 $2.08 2013First Quarter$3.43 $2.73 Second Quarter$3.04 $2.50 Third Quarter$2.86 $2.27 Fourth Quarter$2.64 $2.10 As of March 3, 2015, there were 75 holders of record of our common stock. Because many shares of AXT’s common stock areheld by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of beneficial owners ofour common stock.We have never paid or declared any cash dividends on our common stock and do not anticipate paying cash dividends in theforeseeable future. Dividends accrue on our outstanding Series A preferred stock at the rate of $0.20 per annum per share of Series Apreferred stock. The 883,000 shares of $0.001 par value Series A preferred stock issued and outstanding as of both December 31,2014 and 2013 are valued at $3,532,000 and are non-voting and non-convertible preferred stock with a 5.0% cumulative annualdividend rate payable when declared by our board of directors, and $4 per share liquidation preference over common stock, andmust be paid before any distribution is made to common stockholders. These preferred shares were issued to Lyte Optronics, Inc.stockholders in connection with the completion of our acquisition of Lyte Optronics, Inc. on May 28, 1999.Issuer Purchases of Equity SecuritiesOn October 27, 2014, our Board of Directors approved a stock repurchase program pursuant to which we may repurchase up to$5.0 million of our outstanding common stock. These purchases can be made from time to time in the open market and are fundedfrom our existing cash balances and cash generated from operations.On February 21, 2013, our Board of Directors approved a stock repurchase program pursuant to which we could repurchase upto $6.0 million of our outstanding common stock through February 27, 2014. The purchases could be made from time to time inthe open market and were to be funded from our existing cash balances and cash generated from operations. During 2013, werepurchased approximately 285,000 shares at an average price of $2.52 per share for a total purchase price of $716,000 under thestock repurchase program. As of December 31, 2013, approximately $5.3 million remained available for future repurchases underthis program. No shares were repurchased in 2014 under this program and the plan expired on February 27, 2014.During three months ended December 31, 2014, we did not repurchase any shares of our common stock. During the year endedDecember 31, 2014, we did not repurchase any shares of our common stock.25 TABLE OF CONTENTSComparison of Stockholder ReturnSet forth below is a line graph comparing the annual percentage change in the cumulative total return to the stockholders ofthe Company on our common stock with the CRSP Total Return Index for the Nasdaq Stock Market (U.S. Companies) and theNasdaq Electronic Components Index for the period commencing December 31, 2009 and ending December 31, 2014. 12/0912/1012/1112/1212/1312/14AXT, Inc. 100.00 321.23 128.31 86.46 80.31 86.15 NASDAQ Composite 100.00 117.61 118.70 139.00 196.83 223.74 NASDAQ Electronic Components 100.00 115.58 104.51 104.38 144.39 190.64 Item 6. Selected Consolidated Financial DataThe following selected consolidated financial data is derived from and should be read in conjunction with our consolidatedfinancial statements and related notes set forth in Item 8 below, and in our previously filed reports on Form 10-K. See also Item 7.“Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further information relating toitems reflecting our results of operations and financial condition.26 TABLE OF CONTENTSYears Ended December 31,20142013201220112010(in thousands, except per share data)Statements of Operations Data: Revenue$83,499 $85,335 $88,374 $104,121 $95,493 Cost of revenue 66,332 73,507 63,522 59,339 58,998 Gross profit 17,167 11,828 24,852 44,782 36,495 Operating expenses: Selling, general, and administrative 14,970 16,066 15,419 14,836 13,972 Research and development 4,144 3,424 3,468 2,473 2,339 Restructuring charge 907 — — — — Total operating expenses 20,021 19,490 18,887 17,309 16,311 Income (loss) from operations (2,854) (7,662) 5,965 27,473 20,184 Interest income, net 483 408 518 449 53 Equity in earnings of unconsolidated joint ventures 1,528 1,377 1,281 741 259 Other income (expense), net 361 (748) (761) (45) 2,203 Income (loss) before provision for income taxes (482) (6,625) 7,003 28,618 22,699 Provision for income taxes 215 188 853 2,795 2,323 Net income (loss) (697) (6,813) 6,150 25,823 20,376 Less: Net income attributable to noncontrolling interest 691 1,145 3,040 5,503 1,723 Net income (loss) attributable to AXT, Inc.$(1,388)$(7,958)$3,110 $20,320 $18,653 Net income (loss) attributable to AXT, Inc. per common share: Basic$(0.05)$(0.25)$0.09 $0.63 $0.60 Diluted$(0.05)$(0.25)$0.09 $0.61 $0.57 Shares used in per share calculations: Basic 32,452 32,700 32,144 31,872 31,008 Diluted 32,452 32,700 32,865 33,061 32,512 December 31,20142013201220112010(in thousands)Balance Sheet Data: Cash and cash equivalents$28,814 $24,961 $30,634 $26,156 $23,724 Investments 20,123 22,644 19,461 14,486 17,251 Working capital 88,422 84,114 93,376 92,220 82,116 Total assets 161,517 163,822 167,589 162,488 140,251 Current liabilities 14,771 15,426 13,096 10,883 14,839 Long-term debt, net of current portion — — — — — Stockholders’ equity 144,688 145,546 150,914 147,049 119,804 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsIn addition to historical information, the following discussion contains forward-looking statements that are subject to risksand uncertainties. Actual results may differ substantially from those referred to herein due to a number of factors, including but notlimited to risks described in the section entitled Item 1A. “Risk Factors” and elsewhere in this Annual Report. This discussionshould be read in conjunction with Item 6. “Selected Consolidated Financial Data” and our consolidated financial statements andrelated notes included elsewhere in this Form 10-K.27 TABLE OF CONTENTSOn August 11, 2014, we announced the appointment of Mr. Gary L. Fischer as the Company’s Vice President, Chief FinancialOfficer and Corporate Secretary, effective as of August 11, 2014. Dr. Morris S. Young, Chief Executive Officer of the Companyrelinquished his role as Interim Chief Financial Officer and Corporate Secretary of the Company, effective as of August 11, 2014.Restructuring ChargesOn February 25, 2014, we announced a restructuring plan with respect to our wholly-owned subsidiary, Beijing Tongmei XtalTechnology Co, Ltd., or Tongmei, in order to better align manufacturing capacity with demand. Under the restructuring plan,Tongmei implemented certain workforce reductions with respect to its manufacturing facility in China. We reduced the workforceat Tongmei by approximately 93 positions that were no longer required to support production and operations, or approximately 11percent of our workforce. We recorded a restructuring charge of approximately $907,000 related to the reduction in force forseverance-related expenses. This restructuring plan and reduction in force has been completed as of March 31, 2014.Critical Accounting Policies and EstimatesWe prepare our consolidated financial statements in accordance with accounting principles generally accepted in the UnitedStates of America. Accordingly, we make estimates, assumptions and judgments that affect the amounts reported on ourconsolidated financial statements. These estimates, assumptions and judgments about future events and their effects on our resultscannot be determined with certainty, and are made based upon our historical experience and on other assumptions that are believedto be reasonable under the circumstances. These estimates may change as new events occur or additional information is obtained,and we may periodically be faced with uncertainties, the outcomes of which are not within our control and may not be known for aprolonged period of time.We have identified the policies below as critical to our business operations and understanding of our financial condition andresults of operations. Critical accounting policies are material to the presentation of our consolidated financial statements andrequire us to make difficult, subjective or complex judgments that could have a material effect on our financial condition andresults of operations. They may require us to make assumptions about matters that are highly uncertain at the time of the estimate.Different estimates that we could have used, or changes in the estimate that are reasonably likely to occur, may have a materialimpact on our financial condition or results of operations. We also refer you to Note 1 to our consolidated financial statementsincluded elsewhere in this Form 10-K.Revenue RecognitionWe manufacture and sell high-performance compound semiconductor substrates and sell certain raw materials includinggallium, germanium dioxide, and pBN crucibles. After we ship our products, there are no remaining obligations or customeracceptance requirements that would preclude revenue recognition. Our products are typically sold pursuant to a purchase orderplaced by our customers, and our terms and conditions of sale do not require customer acceptance. We recognize revenue uponshipment and transfer of title of products to our customers, which is either upon shipment from our dock, receipt at the customer’sdock, or removal from consignment inventory at the customer’s location, provided that we have received a signed purchase order,the price is fixed or determinable, title and risk of ownership have transferred, collection of resulting receivables is probable, andproduct returns are reasonably estimable. We do not provide training, installation or commissioning services.We provide for future returns based on historical experience, current economic trends and changes in customer demand at thetime revenue is recognized.Accounts Receivable, Allowance for Doubtful Accounts and Allowance for sales returnsWe periodically review the likelihood of collection on our accounts receivable balances and provide an allowance fordoubtful accounts receivable primarily based upon the age of these accounts. We evaluate receivables from U.S. customers with anemphasis on balances in excess of 90 days and for receivables from customers located outside the U.S. with an emphasis onbalances in excess of 120 days and establish a reserve on the receivable balances if needed. The reason for the difference in theevaluation of receivables between foreign and U.S. customers is that U.S. customers have historically made payments in a shorterperiod of time than foreign customers. Foreign business practices generally require us to allow customer payment terms that arelonger than those accepted in the United States. We assess the probability of collection based on a number of factors, including thelength of time a receivable balance has been outstanding, our past history with the customer and their creditworthiness.28 TABLE OF CONTENTSAs of December 31, 2014 and December 31, 2013, our accounts receivable, net balance was $17.9 million and $14.9 million,respectively, which was net of an allowance for doubtful accounts of $410,000 and $869,000, respectively. During 2014, wedecreased this allowance for doubtful accounts by $459,000 primarily for improved collections worldwide. During 2013 weincreased our allowance for doubtful accounts by $869,000 primarily because of the poor financial condition of a few customers inChina. No amounts have been written off. If actual uncollectible accounts differ substantially from our estimates, revisions to theestimated allowance for doubtful accounts would be required, which could have a material impact on our financial results for futureperiods.The allowance for sales returns is also deducted from gross accounts receivable. During 2014, we utilized $410,000 andcharged an additional $183,000 resulting in the allowance for sales returns of $413,000 as of December 31, 2014. During 2013, weutilized $189,000 and charged an additional $130,000 resulting in the allowance for sales returns of $186,000 as of December 31,2013. During 2012, we utilized $426,000 and charged an additional $547,000 resulting in the allowance for sales returns of$245,000 as of December 31, 2012.Warranty ReserveWe maintain a warranty reserve based upon our claims experience during the prior 12 months. Warranty costs are accrued atthe time revenue is recognized. As of December 31, 2014 and 2013, accrued product warranties totaled $802,000 and $1.0 million,respectively. The decrease in accrued product warranties is primarily attributable to decreased claims for quality issues experiencedby some customers. If actual warranty costs differ substantially from our estimates, revisions to the estimated warranty liabilitywould be required, which could have a material impact on our financial condition and results of operations for future periods.Inventory ValuationInventories are stated at the lower of cost or market. Cost is determined using the weighted average cost method. Ourinventory consists of raw materials as well as finished goods and work-in-process that include material, labor and manufacturingoverhead costs. Given the nature of our substrate products, and the materials used in the manufacturing process, the wafers andingots comprising work-in-process may be held in inventory for up to two years and three years, respectively, as the risk ofobsolescence for these materials is low. We routinely evaluate the levels of our inventory in light of current market conditions inorder to identify excess and obsolete inventory, and we provide a valuation allowance for certain inventories based upon the ageand quality of the product and the projections for sale of the completed products. As of December 31, 2014 and 2013, we had aninventory reserve of $11.2 million and $11.0 million, respectively, for excess and obsolete inventory. If actual demand for ourproducts were to be substantially lower than estimated, additional inventory adjustments for excess or obsolete inventory might berequired, which could have a material impact on our business, financial condition and results of operations.Impairment of InvestmentsWe classify our investments in debt and equity securities as available-for-sale securities in accordance with ASC topic 320,Investments—Debt and Equity Securities (“ASC 320”). All available-for-sale securities with a quoted market value below cost (oradjusted cost) are reviewed in order to determine whether the decline is other-than-temporary. Factors considered in determiningwhether a loss is temporary include the magnitude of the decline in market value, the length of time the market value has beenbelow cost (or adjusted cost), credit quality, and our ability and intent to hold the securities for a period of time sufficient to allowfor any anticipated recovery in market value.We invest in equity instruments of privately-held companies in China for business and strategic purposes. These investmentsare classified as other assets and are accounted for under the cost method as we do not have the ability to exercise significantinfluence over their operations. We monitor our investments for impairment and record reductions in carrying value when events orchanges in circumstances indicate that the carrying value may not be recoverable. Determination of impairment is highlysubjective and is based on a number of factors, including an assessment of the strength of investee’s management, the length oftime and extent to which the fair value has been less than our cost basis, the financial condition and near-term prospects of theinvestee, fundamental changes to the business prospects of the investee, share prices of subsequent offerings, and our intent andability to hold the investment for a period of time sufficient to allow for any anticipated recovery in our carrying value. We had nowrite-downs in 2014, 2013 and 2012.Fair Value of InvestmentsASC topic 820, Fair Value Measurement (“ASC 820”) establishes three levels of inputs that may be used to measure fairvalue.29 TABLE OF CONTENTSLevel 1 instruments represent quoted prices in active markets. Therefore, determining fair value for Level 1 instruments doesnot require significant management judgment, and the estimation is not difficult.Level 2 instruments include observable inputs other than Level 1 prices, such as quoted prices for comparable instruments inmarkets with insufficient volume or infrequent transactions (less active markets), issuer credit ratings, non-binding marketconsensus prices that can be corroborated with observable market data, model-derived valuations in which all significant inputs areobservable or can be derived principally from or corroborated with observable market data for substantially the full term of theassets or liabilities, or quoted prices for similar assets or liabilities. These Level 2 instruments require more management judgmentand subjectivity compared to Level 1 instruments, including:•Determining which instruments are most comparable to the instrument being priced requires management to identify asample of similar securities based on the coupon rates, maturity, issuer, credit rating, and instrument type, andsubjectively select an individual security or multiple securities that are deemed most similar to the security being priced.•Determining which model-derived valuations to use in determining fair value requires management judgment. Whenobservable market prices for identical securities or similar securities are not available, we price our marketable debtinstruments using non-binding market consensus prices that are corroborated with observable market data or pricingmodels, such as discounted cash flow models, with all significant inputs derived from or corroborated with observablemarket data.Level 3 instruments include unobservable inputs to the valuation methodology that are significant to the measurement of fairvalue of assets or liabilities. The determination of fair value for Level 3 instruments requires the most management judgment andsubjectivity. As of December 31, 2014 and 2013, we did not have any assets or liabilities required to be carried at fair valuewithout observable market values that would require a high level of judgment to determine fair value (Level 3 assets).Impairment of Long-Lived AssetsWe evaluate the recoverability of property, equipment and intangible assets in accordance with ASC topic 360, Property,Plant and Equipment (“ASC 360”). When events and circumstances indicate that long-lived assets may be impaired, we comparethe carrying value of the long-lived assets to the projection of future undiscounted cash flows attributable to such assets. In theevent that the carrying value exceeds the future undiscounted cash flows, we record an impairment charge against income equal tothe excess of the carrying value over the asset’s fair value. Fair values are determined based on quoted market values, discountedcash flows or internal and external appraisals, as applicable. Assets held for sale are carried at the lower of carrying value orestimated net realizable value. We had no “Assets held for sale” on the consolidated balance sheet as of December 31, 2014 and2013.Stock Based CompensationWe account for stock-based compensation in accordance with ASC topic 718, Stock-based Compensation (“ASC 718”). Share-based awards granted include stock options and restricted stock awards. We utilize the Black-Scholes option pricing model toestimate the grant date fair value of stock options, which requires the input of highly subjective assumptions, including estimatingstock price volatility and expected term. Historical volatility of our stock price was used while the expected term for our optionswas estimated based on historical option exercise behavior and post-vesting forfeitures of options, and the contractual term, thevesting period and the expected term of the outstanding options. Further, we apply an expected forfeiture rate in determining theamount of share-based compensation. We use historical forfeitures to estimate the rate of future forfeitures. Changes in these inputsand assumptions can materially affect the measure of estimated fair value of our stock compensation. The cost of restricted stockawards is determined using the fair value of our common stock on the date of grant.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 vestingperiod, which is generally three years or four years. Stock-based compensation expense is recorded in cost of revenue, research anddevelopment, and selling, general and administrative expenses. (see Note 1—Summary of Significant Accounting Policies—Stock-Based Compensation).30 TABLE OF CONTENTSIncome TaxesWe account for income taxes in accordance with ASC topic 740, Income Taxes (“ASC 740”) which requires that deferred taxassets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases ofrecorded assets and liabilities. ASC 740 also requires that deferred tax assets be reduced by a valuation allowance if it is morelikely than not that a portion of the deferred tax asset will not be realized.We provide for income taxes based upon the geographic composition of worldwide earnings and tax regulations governingeach region, particularly China. The calculation of tax liabilities involves significant judgment in estimating the impact ofuncertainties in the application of complex tax laws, particularly in foreign countries such as China.See Note 13—”Income Taxes” in the consolidated financial statements for additional information.Results of OperationsOverviewWe were founded in 1986 to commercialize and enhance our proprietary vertical gradient freeze (VGF) technology forproducing high-performance compound semiconductor substrates or wafers. We have one operating segment: our substratebusiness and the sale raw materials used to make such substrates or other related products. We recorded our first substrate sales in1990 and our substrate division currently sells gallium arsenide (GaAs), indium phosphide (InP) and germanium (Ge) substrates tomanufacturers of semiconductor devices for use in applications such as fiber optic and wireless telecommunications, light emittingdiodes (LEDs), lasers and for solar cells for space and terrestrial photovoltaic applications. We also sell raw materials includinggallium and germanium through our participation in majority- and minority-owned subsidiaries and joint ventures.Operating ResultsWe manufacture all of our semiconductor substrates using our proprietary vertical gradient freeze (VGF) technology. Our GaAssubstrate product line generates the most revenue as compared to Ge, InP or raw material sales. We manufacture all of our productsin the People’s Republic of China (PRC or China), which generally has favorable costs for facilities and labor compared tocomparable facilities in the United States, Japan or Europe. Our supply chain includes AXT subsidiaries and joint ventures inChina, which provide us pricing advantages, reliable supply and enhanced sourcing lead-times for key raw materials which arecentral to our final manufactured products.We have experienced declining annual revenue in the last three years, primarily as a result of silicon chips replacing GaAschips in the mobile phone switching function. Previous to certain recent innovations silicon chips did not perform adequately inthis function due to power consumption, heat and speed issues. The application of the silicon-on-insulator technique overcamethese deficiencies and provided a lower cost solution for mobile phone switches. We believe that this transition in the mobilephone switches starting in 2011 was largely completed in late 2013 and early 2014. Mobile phones continue to use GaAs chips inother functions, primarily in the power amplifier function, and we are currently developing a GaAs substrate to meet thespecifications for this function. The decline in revenue in 2014 compared to 2013 was partially mitigated by revenue growth in ourInP and raw material product lines. As a result of the disruption in the GaAs substrate market caused by silicon-on-insulator, aleading Japanese competitor exited the market in 2014 and we believe this also contributed to the smaller decline in our revenuebecause customers turned to AXT and other suppliers to fulfill their GaAs substrate needs. We believe our product and customerdiversity partially mitigated the declines in GaAs revenue.In the first quarter of 2014 we reduced our work force by approximately 11% and embarked on a number of additional costreduction programs, primarily in our manufacturing group which has the highest costs as compared to research and development orselling and administrative expenses. These steps helped to reduce our net loss from $8.0 million in 2013 to a net loss of $1.4million in 2014. They also contributed to improved gross margins which moved from 13.9 percent in 2013 to 20.6 percent in 2014.As we look ahead to 2015, we believe that certain applications and products can become strong revenue drivers but a numberof these are still in the early stage of development or limited production downstream and we are unable to predict if and when theseapplications may become stronger drivers of revenue. We also intend to invest in manufacturing equipment that will increaseautomation and therein decrease the number of manually operated processing steps in our production flow. We believe this canimprove our manufacturing yields, product quality and product consistency.31 TABLE OF CONTENTSRevenue2013 to 20142012 to 2013Years Ended Dec. 31,Increase(Decrease)Increase(Decrease)201420132012% Change% ChangeRevenue$83,499 $85,335 $88,374 $(1,836) (2.2)%$(3,039) (3.4)%Revenue decreased $1.8 million, or 2.2%, to $83.5 million in 2014 from $85.3 million in 2013. The revenue decrease resultedfrom decreased demand for our substrate materials, particularly for our Ge substrates which in 2013 were stronger than 2014because of a Concentrated Photovoltaic (CPV) solar installation in South Africa. The decline in sales of Ge substrates was partiallyoffset by an increase in 2014 in sales of InP substrates and in sales of raw materials. GaAs revenue decreased in 2014 by a modestamount, in the low single digits. GaAs revenue in the past several years has seen larger decreases as a result of silicon-based chips,or SOI, capturing a large portion of the switching function in mobile phones. For example, the year on year decline from 2012 to2013 was 22% for GaAs. In light of the relatively modest decline in 2014 compared to previous years, we believe the disruptionscaused by the introduction of SOI in mobile phone switches business have largely concluded. However there can be no assurancesthat other applications currently using our substrates will not be challenged by less expensive silicon-based wafers or otheralternative technologies.Revenue decreased by $3.0 million or 3.4%, to $85.3 million in 2013 from $88.4 million in 2012. The decrease in revenuewas primarily due to the softer demand from our current customer base in the LED market and reduced orders from a few bigcustomers as demand fell in the wireless market compared to 2012.Revenue by Geographic Region2013 to 20142012 to 2013Years Ended Dec. 31,Increase(Decrease)Increase(Decrease)201420132012% Change% Change($ in thousands, except percentages)North America*$10,292 $10,665 $15,391 $(373) (3.5)%$(4,726) (30.7)%% of total revenue 12% 12% 17% Europe (primarily Germany) 21,535 21,387 18,170 148 0.7% 3,217 17.7%% of total revenue 26% 25% 21% Japan 11,550 9,041 9,346 2,509 27.8% (305) (3.3)%% of total revenue 14% 11% 11% Taiwan 11,464 10,131 10,985 1,333 13.2% (854) (7.8)%% of total revenue 14% 12% 12% China 17,451 24,946 19,815 (7,495) (30.0)% 5,131 25.9%% of total revenue 21% 29% 22% Asia Pacific (excluding China, Japanand Taiwan) 11,207 9,165 14,667 2,042 22.3% (5,502) (37.5)%% of total revenue 13% 11% 17% Total revenue$83,499 $85,335 $88,374 $(1,836) (2.2)%$(3,039) (3.4)%*Primarily the United States.Sales to customers located outside of North America represented approximately 88%, 88% and 83% of our revenue during2014, 2013 and 2012, respectively.We increased our sales in Japan, Taiwan and Asia Pacific in 2014 by $2.5 million, $1.3 million and $2.0 million respectively.Increases in Japan resulted from a strategic focus of our selling and business development efforts initiated late in 2013. Thisstrategic focus delivered modest benefits the first half of 2014 and more substantial benefits in second half of 2014. Increases inTaiwan and Asia Pacific resulted from generally a more active market for our products with existing customers and the addition of asales professional assigned to these regions. Further,32 TABLE OF CONTENTSwe assigned additional resources for technical support to assist our customers in characterizing the products we delivered. In 2014revenue from customers in China decreased substantially primarily due to decreased substrate revenue and raw material revenue. In2014 revenue in North America and Europe was generally unchanged over 2013.In 2013 revenue from customers located in North America decreased from 2012 by $4.7 million, or 30.7%. This decrease in2013 was primarily due to decreased demand for raw materials primarily from 4N raw gallium and decreased demand for GaAssubstrates, reflecting the changes in the mobile phone market. The decrease in North America in 2013 was partially offset byincreased demand for InP substrates used in the optical networking industry. In 2013 revenue from customers in the Asia Pacificregion (excluding China, Japan and Taiwan) decreased by $5.5 million, or 37.5%. This decrease was primarily due to decreasedsales of GaAs substrates to customers in Singapore, partially offset by increased sales of Ge substrates to customers in Malaysia. In2013 revenue from customers in China increased by $5.1 million, or 25.9%. China revenue in 2013 increased across all of ourproduct lines. In 2013 revenue from customers located in Europe increased by $3.2 million, or 17.7%. The increase in Europe wasprimarily due to increased sales of Ge substrates and raw material sales to customers in Germany, partially offset by decreaseddemand for GaAs substrates from customers in Germany. In 2013 revenue in Japan and Taiwan was generally unchanged over2012.Gross Margin2013 to 20142012 to 2013Years Ended Dec. 31,Increase(Decrease)Increase(Decrease)201420132012% Change% Change($ in thousands, except percentages)Gross profit$17,167 $11,828 $24,852 $5,339 45.1%$(13,024) (52.4)%Gross Margin % 20.6% 13.9% 28.1%Gross margin increased to 20.6% of total revenue in 2014 from 13.9% of total revenue in 2013. Gross margin increasedprimarily due to product mix and implementation of cost-saving activities during 2014. The 2014 quarter gross margin for the firstquarter to the fourth quarter were 14.1%, 19.4%, 23.0% and 25.4%, respectively.Gross margin decreased to 13.9% of total revenue in 2013 from 28.1% of total revenue in 2012. Lower revenue and loweraverage selling prices due to product mix and customer mix negatively impacted the gross margins for substrates for 2013. The2013 quarter gross margin for the first quarter to the fourth quarter of 15.6%, 13.5%, 11.9% and 15.1%, respectively, respectively.Selling, General and Administrative Expenses2013 to 20142012 to 2013Years Ended Dec. 31,Increase(Decrease)Increase(Decrease)201420132012% Change% Change($ in thousands, except percentages)Selling, general and administrativeexpenses$14,970 $16,066 $15,419 $(1,096) (6.8)%$647 4.2%% of total revenue 17.9% 18.8% 17.4% Selling, general and administrative expenses decreased $1.1 million to $15.0 million for 2014 compared to $16.1 million for2013. This decrease in 2014 primarily resulted from the implementation of cost-saving activities and a decrease in bad debtexpense. These items were partially offset by an increase in professional services of $613,000 related to an investigation of certainpotential related-party transactions, and higher personnel related costs. We expect our selling, general administrative expenses toincrease in the first quarter of 2015 due to higher professional services expense incurred of approximately $1.2 million related tothe investigation.Selling, general and administrative expenses increased $647,000 to $16.1 million for 2013 compared to $15.4 million for2012. This increase in 2013 was primarily due to an increase in bad debt expense and higher rent expense primarily from earlytermination penalty of our lease for our U.S. office, partially offset by decreased sales commission expenses resulting from lowerrevenue and lower office supply expenses.33 TABLE OF CONTENTSResearch and Development Expenses2013 to 20142012 to 2013Years Ended Dec. 31,Increase(Decrease)Increase(Decrease)201420132012% Change% Change($ in thousands, except percentages)Research and development expenses$4,144 $3,424 $3,468 $720 21.0%$(44) (1.3)%% of total revenue 5.0% 4.0% 3.9% Research and development expenses increased $720,000, or 21.0%, to $4.1 million for 2014 from $3.4 million for 2013.Research and development expenses increased primarily due to higher product development and testing costs and personnelrelated costs, partially offset by lower consulting expenses for product testing. We expect our rate of expenditures on research anddevelopment costs in 2015 to be stable as we, and our consolidated subsidiaries and joint ventures maintain our research anddevelopment efforts.Research and development expenses decreased $44,000, or 1.3%, to $3.4 million for 2013 from $3.5 million for 2012.Research and development expenses decreased slightly primarily due to lower personnel related costs including the fact that nobonuses were paid due to lack of achievement of financial metrics and lower product development and testing costs, partially offsetby higher consulting expenses for product testing.Restructuring ChargesIn the first quarter of 2014, we reduced the workforce at Tongmei by approximately 93 positions that are no longer required tosupport production and operations, or approximately 11 percent of the workforce. We recorded a restructuring charge ofapproximately $907,000 related to the reduction in force for severance-related expenses. This restructuring plan and reduction inforce has been completed as of March 31, 2014.Interest Income, Net2013 to 20142012 to 2013Years Ended Dec. 31,Increase(Decrease)Increase(Decrease)201420132012% Change% Change($ in thousands, except percentages)Interest income, net$483 $408 $518 $75 18.4%$(110) (21.2)%% of total revenue 0.6% 0.5% 0.6% Interest income, net increased $75,000 to $483,000 for 2014 from $408,000 for 2013 primarily due to higher interest incomeearned by one of our subsidiaries from their bank deposits.Interest income, net decreased $110,000 to $408,000 for 2013 from $518,000 for 2012 primarily due to lower returns fromvarious investment portfolio mix, lower investment balances and lower interest income earned by our consolidated joint venturesfrom their bank.Equity in Earnings of Unconsolidated Joint Ventures2013 to 20142012 to 2013Years Ended Dec. 31,Increase(Decrease)Increase(Decrease)201420132012% Change% Change($ in thousands, except percentages)Equity in earnings ofunconsolidated joint ventures$1,528 $1,377 $1,281 $151 11.0%$96 7.5%% of total revenue 1.8% 1.6% 1.5% Equity in earnings of unconsolidated joint ventures is primarily net income from our minority-owned joint ventures that arenot consolidated. Equity in earnings of unconsolidated joint ventures increased $151,000 to $1.5 million for 2014 from $1.4million for 2013 primarily due to higher net income from improved performance of our minority-owned joint ventures that are notconsolidated.Equity in earnings of unconsolidated joint ventures increased $96,000 to $1.4 million for 2013 from $1.3 million for 2012primarily due to higher net income recorded by our consolidated joint ventures from their minority investments.34 TABLE OF CONTENTSOther Income (Expense), Net2013 to 20142012 to 2013Years Ended Dec. 31,Increase(Decrease)Increase(Decrease)201420132012% Change% Change($ in thousands, except percentages)Other income (expense), net$361 $(748)$(761)$1,109 NM $13 1.7%% of total revenue 0.4% (0.9)% (0.9)% NM = % not meaningfulOther income, net increased $1.1 million to a profit net income of $361,000 for 2014 from net expense of $748,000 for 2013primarily due to a larger gain recognized from the sale of Intelligent Epitaxy Technology, Inc (IntelliEpi) common stock in 2014,lower withholding tax on foreign dividends from our consolidated joint ventures and lower foreign exchange losses in 2014.Other expense, net decreased $13,000 to $748,000 for 2013 from $761,000 for 2012 primarily due to the gain recognized fromthe sale of our 35% ownership in our cost method investee (IntelliEpi) in its pre-IPO placement in Taiwan, In addition, in 2013 wedid not have a loss on disposal of equipment as we did in 2012, this was partially offset by higher foreign exchange losses in 2013.Provision for (benefit from) Income Taxes2013 to 20142012 to 2013Years Ended Dec. 31,Increase(Decrease)Increase(Decrease)201420132012% Change% Change($ in thousands, except percentages)Provision for income taxes$215 $188 $853 $27 14.4%$(665) (78.0)%% of total revenue 0.3% 0.2% 1.0% Provision for income taxes for 2014 was $215,000, which was mostly related to our China subsidiary and our China jointventure operations. The slight increase in provision for income taxes from 2013 to 2014 was primarily due to higher taxableincome for state tax purposes in the U.S. Besides the state tax liabilities, no income taxes or benefit have been provided for U.S.operations due to the loss in the U.S. and the uncertainty of generating future profit in the U.S. which has resulted in our deferredtax asset being fully reserved. Our estimated tax rate can vary greatly from year to year because of the change or benefit in the mixof taxable income between our U.S. and China based operations.Provision for income taxes for 2013 was $188,000, which was mostly related to our China subsidiary and our China jointventure operations. The decrease in provision for income taxes from 2012 to 2013 was due to decreased net income of our foreignsubsidiaries as well as lower taxable income for state tax purposes in the U.S. Furthermore, the provision for income taxes waspartially offset by tax refunds received by our China joint ventures. Besides the state tax liabilities, no income taxes or benefithave been provided for U.S. operations due to the loss in the U.S. and the uncertainty of generating future profit in the U.S. whichhas resulted in our deferred tax asset being fully reserved. Our estimated tax rate can vary greatly from year to year because of thechange or benefit in the mix of taxable income between our U.S. and China based operations.Due to our uncertainty regarding our future profitability, we recorded a full valuation allowance against our net deferred taxassets of $62 million in 2014, $58 million in 2013 and $51 million in 2012.35 TABLE OF CONTENTSNoncontrolling Interest2013 to 20142012 to 2013Years Ended Dec. 31,Increase(Decrease)Increase(Decrease)201420132012% Change% Change($ in thousands, except percentages)Noncontrolling interest$691 $1,145 $3,040 $(454) (39.7)%$(1,895) (62.3)%% of total revenue 0.8% 1.3% 3.4% Noncontrolling interest in earnings of consolidated joint ventures for the years ended December 31, 2014, 2013 and 2012were $691,000, $1.1 million and $3.0 million, respectively. The decrease in noncontrolling interest from 2014 to 2013 and 2012 to2013 was due to lower profitability from our China joint venture operations as profits from raw materials sales have decreased dueto decreased selling prices.Liquidity and Capital ResourcesYears Ended December 31,201420132012($ in thousands)Net cash provided by (used in): Operating activities$3,824 $2,509 $21,302 Investing activities 142 (6,212) (13,168)Financing activities (32) (2,513) (3,792)Effect of exchange rate changes (81) 543 136 Net change in cash and cash equivalents 3,853 (5,673) 4,478 Cash and cash equivalents—beginning period 24,961 30,634 26,156 Cash and cash equivalents—end of period 28,814 24,961 30,634 Short and long-term investments—end of period 20,123 22,644 19,461 Total cash, cash equivalents and short-term and long-term investments$48,937 $47,605 $50,095 We consider cash and cash equivalents, short-term investments and long-term investments as liquid and available for usewithin two years in our current operations. Short-term investments and long-term investments are comprised of U.S. governmentsecurities and investment-grade corporate notes and bonds. Also included in short-term investments is our investment in commonstock of IntelliEPI, a Taiwan publicly-traded company. In 2013, we re-categorized our IntelliEPI investment from cost methodinvestment to available-for–sale security as they completed their initial public offering in 2013.As of December 31, 2014, our principal sources of liquidity were $48.9 million, an increase of $1.3 million from $47.6 millionas of December 31, 2013. This $48.9 million consisted of cash and cash equivalents of $28.8 million, short-term investments of$12.3 million and long-term investments of $7.8 million. In 2014 cash and cash equivalents increased $3.8 million. Short andlong-term investments decreased by $2.5 million to $20.1 million from $22.6 million. The increase in cash and cash equivalentswas primarily due to net cash provided by operating activities of $3.8 million and by net cash provided by investing activities of$142,000, offset by net cash used in financing activities of $32,000 and the effect of exchange rate changes of $81,000. As ofDecember 31, 2014, we and our consolidated joint ventures held approximately $18.3 million in cash and investments in foreignbank accounts. This consists of $10.2 million held by our wholly owned subsidiary in China and $8.1 million held by our threepartially owned consolidated subsidiaries in China. Of this $18.3 million, approximately $13.9 million is not available for use inthe United States without paying United States income taxes.As of December 31, 2013, our principal sources of liquidity were $47.6 million of cash and investments, a decrease of $2.5million from $50.1 million as of December 31, 2012. This $47.6 million consisted of cash and cash equivalents of $25.0 million,short-term investments of $12.5 million and long-term investments of $10.1 million. In 2013 cash and cash equivalents decreased$5.7 million. Short-term and long-term investments increased by $3.2 million to $22.6 million from $19.5 million. The $5.7million combined decrease in cash and cash equivalents was primarily due to net cash provided by operating activities of $2.5million, offset by net cash used in investing activities of $6.2 million and net cash used in financing activities of $2.5 million. Asof December 31, 2013, we and36 TABLE OF CONTENTSour consolidated joint ventures held approximately $18.7 million in cash and investments in foreign bank accounts which is notavailable for use in the United States without paying United States income taxes.Net cash provided by operating activities of $3.8 million for 2014 was primarily comprised of our net loss of $697,000,adjusted for non-cash items of depreciation and amortization of $5.6 million, stock-based compensation of $1.1 million, provisionfor doubtful accounts of $9,000, amortization of marketable securities premium of $432,000, offset by gain on sales of investmentof $1.3 million, a gain on disposal of property, plant and equipment of $13,000 and a net change of $1.4 million in assets andliabilities. The $1.4 million net change in assets and liabilities primarily resulted from a $479,000 decrease in inventories, a $2.4million decrease in prepaid expenses and other current assets, offset by a $3.0 million increase in accounts receivable, a $255,000increase in other assets, a $979,000 decrease in accounts payable, a $742,000 increase in accrued liabilities and a $833,000decrease in other long-term liabilities.Net cash provided by operating activities of $2.5 million for 2013 was primarily comprised of our net loss of $6.8 million,adjusted for non-cash items of depreciation and amortization of $5.5 million, stock-based compensation of $1.3 million, provisionfor doubtful accounts of $869,000, amortization of marketable securities premium of $518,000, offset by gain on sale of costmethod investment of $811,000, a gain on disposal of property, plant and equipment of $9,000 and a net change of $2.0 million inassets and liabilities. The $2.0 million net change in assets and liabilities primarily resulted from a $1.4 million decrease ininventories, a $645,000 increase in prepaid expenses and other current assets, a $2.2 million decrease in accounts receivable, a $1.9million increase in other assets, a $2.2 million increase in accounts payable, a $899,000 decrease in accrued liabilities and a$373,000 decrease in other long-term liabilities.Net cash provided by operating activities of $21.3 million for 2012 was primarily comprised of our net income of $6.2million, adjusted for non-cash items of depreciation and amortization of $3.9 million, stock-based compensation of $1.2 million,amortization of marketable securities premium of $323,000, a loss on disposal of property, plant and equipment of $195,000 and anet change of $9.5 million in assets and liabilities. The $9.5 million net change in assets and liabilities primarily resulted from a$5.7 million decrease in inventories, a $1.8 million decrease in prepaid expenses and other current assets, a $54,000 decrease inaccounts receivable, a $174,000 increase in other assets, a $2.6 million increase in accounts payable, a $461,000 increase inaccrued liabilities and a $900,000 decrease in other long-term liabilities.Net cash provided by investing activities of $142,000 for 2014 was primarily from the sale of investments totaling $13.9million offset by the purchase of investments totaling $11.8 million and the purchase of property, plant and equipment of $2.0million.Net cash used in investing activities of $6.2 million for 2013 was primarily from the purchase of property, plant andequipment of $5.4 million mainly for our China facilities and the purchase of investments totaling $14.1 million offset by the saleof investments totaling $12.5 million.Net cash used in investing activities of $13.2 million for 2012 was primarily from the purchase of property, plant andequipment of $7.1 million mainly in our China facilities, loan from our consolidated joint venture to its equity investment entityof $875,000 and the purchase of investments totaling $12.1 million offset by the sale of investments totaling $6.9 million.In January 2012, we increased the credit facility line of credit, secured by the marketable securities, with a bank from $3.0million to $10.0 million at an annual interest rate of 1.65% above the current 30-day LIBOR (London Interbank Offered Rate). Asof December 31, 2014 and 2013, we had not used the line of credit.Net cash used in financing activities was $32,000 for 2014, which consisted of $166,000 net dividends paid by ourconsolidated joint ventures, partially offset by net proceeds of $134,000 on the issuance of common stock pursuant to stock optionexercises.Net cash used in financing activities was $2.5 million for 2013, which consisted of $2.3 million net dividends paid by ourconsolidated joint ventures and $716,000 of repurchases of shares of our common stock, partially offset by net proceeds of$532,000 on the issuance of common stock pursuant to stock option exercises.Net cash used in financing activities was $3.8 million for 2012, which consisted of $4.1 million net dividends paid by ourconsolidated joint ventures, partially offset by net proceeds of $294,000 on the issuance of common stock pursuant to stock optionexercises.37 TABLE OF CONTENTSOn February 21, 2013, our Board of Directors approved a stock repurchase program pursuant to which we may repurchase upto $6.0 million of our outstanding common stock through February 27, 2014. These purchases can be made from time to time in theopen market and are funded from our existing cash balances and cash generated from operations. During 2013, we repurchasedapproximately 285,000 shares at an average price of $2.51 per share for a total purchase price of $716,000 under the stockrepurchase program. As of December 31, 2013, approximately $5.3 million remained available for future repurchases under thisprogram. No shares were repurchased in 2014 under this program and the plan expired on February 27, 2014.On October 27, 2014, our Board of Directors approved a stock repurchase program pursuant to which we may repurchase up to$5.0 million of our outstanding common stock. These purchases can be made from time to time in the open market and are fundedfrom our existing cash balances and cash generated from operations. See Item 5, Market for Registrant’s Common Equity, RelatedStockholder Matters and Issuer Purchases of Equity Securities in Part II.We believe that we have adequate cash and investments to meet our needs 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. There can be no assurance thatsuch additional capital will be available or, if available it will be on terms acceptable to us.Cash from operations could be affected by various risks and uncertainties, including, but not limited to those set forth belowunder Item 1A. “Risk Factors” above.Off-Balance Sheet ArrangementsWe do not have any off-balance sheet financing arrangements and have never established any special purpose entities. Wehave not entered into any options on non-financial assets.Contractual ObligationsWe lease certain office space, manufacturing facilities and equipment under long-term operating leases expiring at variousdates through December 2025. The lease agreement for the facility at Fremont, California with approximately 27,760 square feetcommenced on December 1, 2008 for a term of seven years, with an option by us to cancel the lease after five years, upon forfeitureof the security deposit and payment of one-half of the fifth year’s rent. On June 28, 2013, we sent a notice to terminate the leaseeffective November 30, 2013 with an early termination penalty of $142,000 which was recorded as an expense in the third quarterof 2013. On August 2, 2013, we signed a new lease agreement for the current facility with reduced footage of 20,767 square feet,which commenced on December 1, 2013 for a term of two years. The reduced square footage, the reduced rate per square foot, andthe expected reduced operating costs, would save us approximately $382,000 during 2014 and 2015. In September 2014, wesigned an amendment to the current lease to further reduce square footage to 19,467 square feet and to extend the term of the leasetwo more years. Total rent expenses under these operating leases were approximately $260,000, $638,000 and $447,000 for theyears ended December 31, 2014, 2013 and 2012, respectively.We entered into a royalty agreement with a competitor effective December 3, 2010 with a term of eight years, terminatingDecember 31, 2018. We and our related companies are granted a worldwide, nonexclusive, royalty bearing, irrevocable license tocertain patents for the term on the agreement. We shall pay a total of $7.0 million royalty payment over eight years that began in2011 based on future royalty bearing sales. This agreement contains a clause that allows us to claim for credit, starting in 2013, inthe event that the royalty bearing sales for the year is lower than a pre-determined amount set forth in this agreement. Royaltyexpense under this agreement was $577,000 which was net of claim for credit of $223,000 and $530,000 which was net of claim forcredit of $270,000 for the years ended December 31, 2014 and 2013, respectively. Royalty expense was $1.4 million for the yearsended December 31, 2012. These expenses were included in cost of revenue.38 TABLE OF CONTENTSThe following table summarizes our contractual obligations as of December 31, 2014 (in thousands):Payments due by periodContractual ObligationsTotalLess than 1 year1-3years3-5yearsMore than5 yearsOperating leases$766 $260 $323 $57 $126 Royalty agreement 2,525 800 1,150 575 — Total$3,291 $1,060 $1,473 $632 $126 Selected Quarterly Results of OperationsThe following table sets forth unaudited quarterly results for the eight quarters ended December 31, 2014. The information foreach of these quarters is unaudited but has been prepared on the same basis as the audited consolidated financial statements. Webelieve that all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts statedbelow to present fairly such quarterly information. The operating results for any quarter are not necessarily indicative of results forany subsequent period.Quarters Ended(in thousands, exceptfor per share amounts)Dec. 31,2014Sept. 30,2014June 30,2014Mar. 31,2014Dec. 31,2013Sept. 30,2013June 30,2013Mar. 31,2013Revenue$19,567 $23,138 $21,449 $19,345 $18,603 $20,521 $23,831 $22,380 Cost of revenue 14,596 17,820 17,289 16,627 15,790 18,075 20,746 18,896 Gross profit 4,971 5,318 4,160 2,718 2,813 2,446 3,085 3,484 Operating expenses: Selling, general and administrative 4,341 3,505 3,688 3,436 3,631 4,303 4,207 3,925 Research and development 1,222 1,160 987 775 797 766 1,039 822 Restructuring charge — — — 907 — — — — Total operating expenses 5,563 4,665 4,675 5,118 4,428 5,069 5,246 4,747 Income (loss) from operations (592) 653 (515) (2,400) (1,615) (2,623) (2,161) (1,263)Interest income, net 123 106 127 127 272 55 50 31 Equity in earnings of unconsolidatedjoint ventures 26 390 625 487 278 346 471 282 Other income (expense), net 111 (236) 476 10 (257) (47) 381 (825)Income (loss) before provision forincome taxes (332) 913 713 (1,776) (1,322) (2,269) (1,259) (1,775)Provision for (benefit from) incometaxes (39) 43 152 59 (134) (204) (342) 184 Net income (loss) (293) 870 561 (1,835) (1,188) (2,065) (1,601) (1,959)Less: Net income attributable tononcontrolling interest (18) (226) (242) (205) (40) (230) (434) (441)Net income (loss) attributable to AXT,Inc$(311)$644 $319 $(2,040)$(1,228)$(2,295)$(2,035)$(2,400)Net income (loss) attributable to AXT,Inc. per common share: Basic$(0.01)$0.02 $0.01 $(0.06)$(0.04)$(0.07)$(0.06)$(0.08)Diluted$(0.01)$0.02 $0.01 $(0.06)$(0.04)$(0.07)$(0.06)$(0.08)Weighted average number of commonshares outstanding: Basic 32,558 32,504 32,381 32,364 32,628 32,366 32,382 32,297 Diluted 32,558 32,738 32,597 32,364 32,628 32,366 32,382 32,297 39 TABLE OF CONTENTSRecent Accounting PronouncementsRecent accounting pronouncements are detailed in Note 1 to our Consolidated Financial Statements included in this AnnualReport on Form 10-K.Item 7A. Quantitative and Qualitative Disclosures about Market RiskForeign Currency RiskA significant portion of our business is conducted in currencies other than the U.S. dollar. Foreign exchange losses could havea material adverse effect on our operating results and cash flows. If we do not effectively manage the risks associated with thiscurrency risk, our revenue, cash flows and financial condition could be adversely affected. During 2014, we recorded net foreignexchange losses of $1.0 million, included as part of other income (expense), net in our consolidated statements of operations. Inaddition, we recorded unrealized foreign currency charges of $377,000 related to financial statement translations which areincluded in the balance of “accumulated other comprehensive income” on our consolidated balance sheets. We incurred foreigncurrency transaction exchange gains and losses due to operations in general. In the future we may experience foreign exchangelosses on our non-functional currency denominated receivables and payables to the extent that we have not mitigated ourexposure. Foreign exchange losses could have a materially adverse effect on our operating results and cash flows.Our product sales to Japanese customers are typically invoiced in Japanese yen. As such we have foreign exchange exposureon our accounts receivable and on any Japanese yen denominated cash deposits. In 2014, the yen depreciated against the dollar,moving from approximately 105.24 to 119.95. The major portion of our 2014 exchange loss is attributable to the yen’s movement.The functional currency for our foreign operations is the Renminbi, the local currency of China. Since most of our operationsare conducted in China, most of our costs are incurred in Chinese Renminbi, which subjects us to fluctuations in the exchange ratesbetween the U.S. dollar and the Chinese Renminbi. We incur transaction gains or losses resulting from consolidation of expensesincurred in local currencies for our Chinese subsidiaries, including our joint ventures, as well as in translation of the assets andliabilities at each balance sheet date. Our financial results could be adversely affected by factors such as changes in foreigncurrency exchange rates or weak economic conditions in foreign markets, including the revaluation by China of the Renminbi, andany future adjustments that China may make to its currency such as any move it might make to a managed float system withopportunistic interventions. We may also experience foreign exchange losses on our non-functional currency denominatedreceivables and payables.Interest Rate RiskCash and cash equivalents 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):InstrumentBalance asofDecember31,2014CurrentInterestRateProjected AnnualInterestIncome/(Expense)Proforma 10%Interest RateDeclineIncome/(Expense)Proforma 10%Interest RateIncreaseIncome/(Expense)Cash$28,791 0.75%$216 $194 $238 Cash equivalents 23 0.01 0 0 0 Investment in debt and equityinstruments 19,369 2.76 535 481 588 $751 $675 $826 The primary objective of our investment activities is to preserve principal while maximizing income without significantlyincreasing risk. Financial instruments that potentially subject us to concentration of credit risk consist primarily of cash and cashequivalents, short-term investments, and trade accounts receivable. We invest primarily in money market accounts, certificates ofdeposits, corporate bonds and notes, and government securities. We are exposed to credit risks in the event of default by the issuersto the extent of the amount recorded on the consolidated balance sheets. These securities are generally classified as available-for-sale and consequently are recorded on the40 TABLE OF CONTENTSbalance sheet at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensiveincome, net of estimated tax. Our cash, cash equivalents and short-term investments and long-term investments are in high-qualitysecurities placed with major banks and financial institutions and commercial paper. We have no investments in auction ratesecurities.Credit RiskWe perform periodic credit evaluations of our customers’ financial condition and generally do not require collateral. Twocustomers accounted for 11% and 10% of our trade accounts receivable balance as of December 31, 2014 while one customeraccounted for 20% of our trade accounts receivable balance as of December 31, 2013.Equity RiskWe maintain minority investments directly, and indirectly through our consolidated joint ventures in privately-heldcompanies located in China. These minority investments are reviewed for other than temporary declines in value on a quarterlybasis. These investments are classified as other assets in the consolidated balance sheets and are either accounted for under the costmethod or under the equity method as we do not have the ability to exercise significant influence over their operations. Wemonitor our investments for impairment and record reductions in carrying value when events or changes in circumstances indicatethat the carrying value may not be recoverable. Reasons for other than temporary declines in value include whether the relatedcompany would have insufficient cash flow to operate for the next 12 months, significant changes in the operating performanceand changes in market conditions. As of December 31, 2014 and 2013, the direct minority investments totaled $200,000 and$325,000, and the indirect minority investments by our consolidated joint ventures totaled $4.0 million and $3.4 million,respectively.Item 8. Consolidated Financial Statements and Supplementary DataThe consolidated financial statements, related notes thereto and financial statement schedule required by this item are listedand set forth beginning on page 47, and are incorporated by reference here. Supplementary financial information regardingquarterly financial information required by this item is set forth under the caption “Selected Quarterly Results of Operations” inItem 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and is incorporated byreference here.Item 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNone.Item 9A. Controls and ProceduresEvaluation of disclosure controls and procedures.Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated theeffectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by thisAnnual Report on Form 10-K. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer have concludedthat our disclosure controls and procedures as defined under Exchange Act Rules 13a-15(e) and 15d-15(e) were effective at thereasonable assurance level to ensure that information required to be disclosed in our Securities Exchange Act reports is recorded,processed, summarized and reported within the time periods specified by the Securities and Exchange Commission and isaccumulated and communicated to management, including our Chief Executive Officer and our Chief Financial Officer, asappropriate to allow timely decisions regarding required disclosure.Our disclosure controls and procedures include components of our internal control over financial reporting. Management’sassessment of the effectiveness of our internal control over financial reporting is expressed at the level of reasonable assurancebecause a control system, no matter how well designed and operated, can provide only reasonable assurance that the controlsystem’s objectives will be met.Management’s report on internal control over financial reportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting, as suchterm is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a processdesigned by, or under the supervision of, our Chief Executive Officer and Chief41 TABLE OF CONTENTSFinancial Officer, and implemented by our Board of Directors, management and other personnel to provide reasonable assuranceregarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance withaccounting principles generally accepted in the United States. Internal control over financial reporting includes those policies andprocedures that:•pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions anddispositions of our assets;•provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements inaccordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of ourmanagement and directors; and•provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition ofour assets that could have a material effect on the financial statements.Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate becauseof changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer,has assessed the effectiveness of our internal control over financial reporting as of December 31, 2014 based on the criteriaestablished in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of theTreadway Commission (COSO). Management has concluded that our internal control over financial reporting was effective as ofDecember 31, 2014.Our independent registered public accounting firm, Burr Pilger Mayer, Inc. has audited the consolidated financial statementsincluded in this Annual Report on Form 10-K and has issued its report on the effectiveness of our internal control over financialreporting as of December 31, 2014.Changes in internal control over financial reporting.There were no changes in our internal control over financial reporting that occurred during the year ended December 31, 2014that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.Item 9B. Other InformationNone.42 TABLE OF CONTENTSReport of Independent Registered Public Accounting FirmTo the Board of Directors and Stockholders ofAXT, Inc.We have audited AXT, Inc. and its subsidiaries’ (the “Company”) internal control over financial reporting as of December 31,2014, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internalcontrol over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included inthe accompanying Management’s Report on Internal Control over Financial Reporting appearing in item 9A. Our responsibility isto express an opinion on the company’s internal control over financial reporting based on our audit.We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal controlover financial reporting was maintained in all material respects. Our audit of internal control over financial reporting includedobtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, andtesting and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also includedperforming such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonablebasis for our opinion.A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions ofthe assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of thecompany are being made only in accordance with authorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’sassets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate becauseof changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as ofDecember 31, 2014, based on criteria established in Internal Control—Integrated Framework (2013) issued by the COSO.We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),the consolidated balance sheets of AXT, Inc. and subsidiaries as of December 31, 2014 and 2013 and the related consolidatedstatements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in theperiod ended December 31, 2014 and our report dated March 13, 2015, expressed an unqualified opinion./s/ Burr Pilger Mayer, Inc.San Jose, CaliforniaMarch 13, 201543 TABLE OF CONTENTSPART IIIThe United States Securities and Exchange Commission (“SEC”) allows us to include information required in this report byreferring to other documents or reports we have already or will soon be filing. This is called “Incorporation by Reference.” Weintend to file our definitive proxy statement for our annual meeting of stockholders to be held on May 21, 2015 (the “ProxyStatement”) pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report, and certaininformation therein is incorporated in this report by reference.Item 10. Directors, Executive Officers and Corporate GovernanceThe information required by this item with respect to identification of directors is incorporated by reference to the informationcontained in the section captioned “Information About our Board of Directors” in the Proxy Statement. The information withrespect to our executive officers, is incorporated by reference to the information contained in the section captioned “ExecutiveOfficers” in the Proxy Statement. Information with respect to Items 405 of Regulation S-K is incorporated by reference to theinformation contained in the sections of the Proxy Statement captioned “Section 16(a) Beneficial Ownership ReportingCompliance.” There will be no disclosure under Item 407(c)(3). Information with respect to Items 407(d)(4) and 407(d)(5) isincorporated by reference to the information contained in the sections of the Proxy Statement captioned “Corporate Governance—Committees of the Board of Directors.”The Board of Directors of AXT, Inc. has adopted a Code of Conduct and Ethics (the “Code”) that applies to our principalexecutive officers, principal financial officer, and corporate controller, as well as other employees. A copy of this Code has beenposted on our Internet website at www.axt.com. Any amendments to, or waivers from, a provision of our Code that applies to ourprincipal executive officer, principal financial officer, controller, or persons performing similar functions and that relates to anyelement of the Code enumerated in paragraph (b) of Item 406 of Regulation S-K shall be disclosed by posting such information onour website.Item 11. Executive CompensationThe information required by this Item is incorporated herein by reference to information set forth in our Proxy Statement underthe section entitled “Executive Compensation and Other Matters.”Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersThe information required by this Item is incorporated herein by reference to information set forth in our Proxy Statement underthe section entitled “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation PlanInformation.”Item 13. Certain Relationships and Related Transactions and Director IndependenceInformation required by this item will be set forth in our Proxy Statement under the headings “Compensation CommitteeInterlocks and Insider Participation” and “Certain Relationships and Related Transactions,” which information is incorporatedherein by reference.Item 14. Principal Accountant Fees and ServicesThe information required by this Item is incorporated herein by reference to information set forth in our Proxy Statement underthe section entitled “Ratification of Appointment of Independent Registered Public Accountants.”44 TABLE OF CONTENTSPART IVItem 15. Exhibits and Financial Statement Schedules(a) The following documents are filed as part of this report:(1) Financial Statements:INDEX TO CONSOLIDATED FINANCIAL STATEMENTSReport of Independent Registered Public Accounting Firm, Burr Pilger Mayer, Inc. 46 Consolidated Balance Sheets 47 Consolidated Statements of Operations 48 Consolidated Statements of Comprehensive Income 49 Consolidated Statements of Stockholders’ Equity 50 Consolidated Statements of Cash Flows 51 Notes to Consolidated Financial Statements 52 (2) Financial Statement SchedulesAll schedules have been omitted because the required information is not applicable or because the information required isincluded in the consolidated financial statements or notes thereto.(b) ExhibitsSee Index to Exhibits attached elsewhere to this Form 10-K. The exhibits listed in the accompanying Index to Exhibits arefiled as part of, or incorporated by reference into, this report on Form 10-K.45 TABLE OF CONTENTSReport of Independent Registered Public Accounting FirmTo the Board of Directors and Stockholders ofAXT, Inc.We have audited the accompanying consolidated balance sheets of AXT, Inc. and its subsidiaries (the “Company”) as ofDecember 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income (loss), stockholders’equity, and cash flows for each of the three years in the period ended December 31, 2014. The Company’s management isresponsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financialstatements based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (UnitedStates). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financialposition of AXT, Inc. and its subsidiaries as of December 31, 2014 and 2013, and the results of its operations and its cash flows foreach of the three years in the period ended December 31, 2014, in conformity with accounting principles generally accepted in theUnited States of America.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),the Company’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), andour report dated March 13, 2015, expressed an unqualified opinion./s/ Burr Pilger Mayer, Inc.San Jose, CaliforniaMarch 13, 201546 TABLE OF CONTENTSAXT, INC.CONSOLIDATED BALANCE SHEETS(In thousands, except per share data)December 31,20142013ASSETS Current assets Cash and cash equivalents$28,814 $24,961 Short-term investments 12,340 12,499 Accounts receivable, net of allowances of $823 and $1,054 as of December 31, 2014 and 2013 17,864 14,943 Inventories 38,574 39,127 Related party notes receivable - current 171 — Prepaid expenses and other current assets 5,430 8,010 Total current assets 103,193 99,540 Long-term investments 7,783 10,145 Property, plant and equipment, net 33,862 37,621 Related party notes receivable – long-term 1,704 1,715 Other assets 14,975 14,801 Total assets$161,517 $163,822 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities Accounts payable$7,137 $8,140 Accrued liabilities 7,634 7,286 Total current liabilities 14,771 15,426 Long-term portion of royalty payments 1,725 2,525 Other long-term liabilities 333 325 Total liabilities 16,829 18,276 Commitments and contingencies (Note 17) Stockholders’ equity: Preferred stock, $0.001 par value; 2,000 shares authorized; 883 shares issued and outstanding as ofDecember 31, 2014 and 2013 (Liquidation preference of $6.3 million and $6.1 million as ofDecember 31, 2014 and 2013) 3,532 3,532 Common stock, $0.001 par value; 70,000 shares authorized; 32,837 and 32,605 shares issued andoutstanding as of December 31, 2014 and 2013 32 32 Additional paid-in-capital 195,419 194,156 Accumulated deficit (68,393) (67,005)Accumulated other comprehensive income 7,673 8,953 Total AXT, Inc. stockholders’ equity 138,263 139,668 Noncontrolling interests 6,425 5,878 Total stockholders’ equity 144,688 145,546 Total liabilities and stockholders’ equity$161,517 $163,822 See accompanying notes to consolidated financial statements.47 TABLE OF CONTENTSAXT, INC.CONSOLIDATED STATEMENTS OF OPERATIONS(In thousands, except per share data)Years Ended December 31,201420132012Revenue$83,499 $85,335 $88,374 Cost of revenue 66,332 73,507 63,522 Gross profit 17,167 11,828 24,852 Operating expenses: Selling, general, and administrative 14,970 16,066 15,419 Research and development 4,144 3,424 3,468 Restructuring charge 907 — — Total operating expenses 20,021 19,490 18,887 Income (loss) from operations (2,854) (7,662) 5,965 Interest income, net 483 408 518 Equity in earnings of unconsolidated joint ventures 1,528 1,377 1,281 Other income (expense), net 361 (748) (761)Income (loss) before provision for income taxes (482) (6,625) 7,003 Provision for income taxes 215 188 853 Net income (loss) (697) (6,813) 6,150 Less: Net income attributable to noncontrolling interest (691) (1,145) (3,040)Net income (loss) attributable to AXT, Inc$(1,388)$(7,958)$3,110 Net income (loss) attributable to AXT, Inc. per common share: Basic$(0.05)$(0.25)$0.09 Diluted$(0.05)$(0.25)$0.09 Weighted average number of common shares outstanding: Basic 32,452 32,700 32,144 Diluted 32,452 32,700 32,865 See accompanying notes to consolidated financial statements.48 TABLE OF CONTENTSAXT, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)(In thousands)Years Ended December 31,201420132012Net Income (loss)$(697)$(6,813)$6,150 Other comprehensive income (loss), net of tax:Change in cumulative foreign currency translation adjustment, net of tax (377) 1,568 207 Change in unrealized gain (loss) on available-for-sale investments, net of tax (964) 1,682 85 Total other comprehensive income (loss), net of tax (1,341) 3,250 292 Comprehensive income (loss) (2,038) (3,563) 6,442 Less: Comprehensive income attributable to noncontrolling interest (630) (1,475) (3,117)Comprehensive income (loss) attributable to AXT, Inc$(2,668)$(5,038)$3,325 See accompanying notes to consolidated financial statements.49 TABLE OF CONTENTSAXT, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(In thousands)Common StockPreferredStockShares$AdditionalPaid InCapitalAccumulatedDeficitOtherComprehensiveIncome/(loss)AXT, Inc.stockholders’equityNoncontrollinginterestsTotalstockholders’equityShares$January 1, 2012 883 3,532 32,222 32 191,554 (62,157) 5,818 138,779 8,270 147,049 Common stockoptions exercised 136 294 294 294 Stock-basedcompensation 1,215 1,215 1,215 Issuance of commonstock in the form ofrestricted stock 113 Comprehensiveincome: Net income 3,110 3,110 3,040 6,150 Dividend declared byjoint ventures (4,086) (4,086)Change in unrealized(loss) gain onmarketablesecurities 85 85 85 Currency translationadjustment 130 130 77 207 Balance as ofDecember 31, 2012 883 3,532 32,471 32 193,063 (59,047) 6,033 143,613 7,301 150,914 Common stockoptions exercised 331 532 532 532 Common stockrepurchased (285) (716) (716) (716)Stock-basedcompensation 1,277 1,277 1,277 Issuance of commonstock in the form ofrestricted stock 88 Comprehensiveincome: Net income (loss) (7,958) (7,958) 1,145 (6,813)Net dividend declaredby joint ventures (2,898) (2,898)Change in unrealized(loss) gain onmarketablesecurities 1,682 1,682 1,682 Currency translationadjustment 1,238 1,238 330 1,568 Balance as ofDecember 31, 2013 883 $3,532 32,605 $32 $194,156 $(67,005)$8.953 $139,668 $5,878 $145,546 Common stockoptions exercised 111 134 134 134 Common stockrepurchased Stock-basedcompensation 1,129 1,129 1,129 Issuance of commonstock in the form ofrestricted stock 121 Comprehensiveincome: Net income (loss) (1.388) (1,388) 691 (697)Net dividend declaredby joint ventures (83) (83)Change in unrealized(loss) gain onmarketablesecurities (964) (964) (964)Currency translationadjustment (316) (316) (61) (377)Balance as ofDecember 31, 2014 883 $3,532 32,837 $32 195,419 (68,393) 7,673 (138,263) (6,425) 144,688 See accompanying notes to consolidated financial statements.50 TABLE OF CONTENTSAXT, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)Years Ended December 31,201420132012Cash flows from operating activities: Net income (loss)$(697)$(6,813)$6,150 Adjustments to reconcile net income (loss) to net cash provided by operations: Depreciation and amortization 5,639 5,470 3,927 Amortization of marketable securities premium 432 518 323 Stock-based compensation 1,129 1,277 1,215 Provision for doubtful accounts 9 869 — Realized gain on sale of investments (1,263) — — Gain on sale of cost method investment — (811) — Loss (gain) on disposal of property, plant and equipment (13) (9) 195 Changes in assets and liabilities: Accounts receivable, net (2,959) 2,160 54 Inventories 479 1,439 5,659 Prepaid expenses and other current assets 2,393 (645) 1,784 Other assets (255) (1,859) (174)Accounts payable (979) 2,185 2,608 Accrued liabilities 742 (899) 461 Other long-term liabilities (833) (373) (900)Net cash provided by operating activities 3,824 2,509 21,302 Cash flows from investing activities: Purchases of property, plant and equipment (1,971) (5,424) (7,079)Proceeds from disposal of property, plant and equipment 13 — 2 Purchases of available for sale securities (11,828) (14,092) (12,116)Proceeds from sales and maturities of available for sale securities 13,928 12,486 6,900 Repayment from (Loans to) related parties — 818 (875)Net cash provided by (used in) investing activities 142 (6,212) (13,168)Cash flows from financing activities: Proceeds from common stock options exercised 134 532 294 Repurchase of the Company’s common stock, including commission — (716) — Dividends paid by joint ventures (166) (2,329) (4,086)Net cash used in financing activities (32) (2,513) (3,792)Effect of exchange rate changes on cash and cash equivalents (81) 543 136 Net increase (decrease) in cash and cash equivalents 3,853 (5,673) 4,478 Cash and cash equivalents at the beginning of the year 24,961 30,634 26,156 Cash and cash equivalents at the end of the year$28,814 $24,961 $30,634 Supplemental disclosures: Income taxes paid$293 $782 $1,729 See accompanying notes to consolidated financial statements.51 TABLE OF CONTENTSAXT, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNote 1. The Company and Summary of Significant Accounting PoliciesThe CompanyAXT, Inc. (“AXT”, “we,” “us,” and “our” refer to AXT, Inc. and all of its subsidiaries) is a worldwide developer and producer ofhigh-performance compound and single element semiconductor substrates, also known as wafers. The dominant substrates used inproducing semiconductor chips are made from silicon. However, certain chips may become too hot or perform their function tooslowly if silicon is used as the base material. Alternative or specialty materials are used to replace silicon as the preferred base forthe electronic circuit in these situations. We provide such alternative or specialty materials in the form of substrates or wafers,including compound and single element substrates. Our compound substrates combine gallium with arsenic (GaAs) or combineindium with phosphorous (InP). Our single element substrates are made from germanium (Ge).We manufacture all of our semiconductor substrates using our proprietary vertical gradient freeze (VGF) technology. Wemanufacture all of our products in the People’s Republic of China (PRC or China), which generally has favorable costs for facilitiesand labor compared with comparable facilities in the United States, Europe or Japan. Our supply chain includes AXT subsidiariesand joint ventures in China, which provide us pricing advantages, reliable supply and enhanced sourcing lead-times for key rawmaterials which are central to our final manufactured products. These companies produce products including 99.99% pure gallium(4N Ga), high purity gallium, arsenic, germanium, germanium dioxide, pyrolytic boron nitride (pBN) crucibles and boron oxide(B2O3). Our ownership and the ownership held by our consolidated subsidiaries in these entities ranges from 20% to 83%. Weconsolidate, for accounting purposes, the joint ventures in which we have majority or controlling financial interest and significantinfluence on management, and employ equity accounting for the joint ventures in which we have a smaller ownership interest. Wepurchase portions of the materials produced by these joint ventures for our own use and the joint ventures sell the remainder oftheir production to third parties. We use our direct sales force in the United States and China, and independent sales representativesin Europe and other parts of Asia to market and sell our substrates.Principles of ConsolidationThe consolidated financial statements include the accounts of AXT, our wholly-owned subsidiary, Beijing Tongmei XtalTechnology Co., Ltd., and our majority-owned subsidiaries, Beijing JiYa Semiconductor Material Co., Ltd., Nanjing Jin MeiGallium Co., Ltd. and Beijing BoYu Semiconductor Vessel Craftwork Technology Co., Ltd. All significant inter-companyaccounts and transactions have been eliminated. Investments in business entities in which we do not have control, but have theability to exercise significant influence over operating and financial policies (generally 20-50% ownership), are accounted for bythe equity method. For majority-owned subsidiaries, we reflect the noncontrolling interest of the portion we do not own on ourcondensed consolidated balance sheets in stockholders’ equity and in our condensed consolidated statements of operations.Use of EstimatesThe preparation of financial statements in conformity with accounting principles generally accepted in the United States ofAmerica requires management to make estimates, judgments and assumptions. We believe that the estimates, judgments, andassumptions upon which it relies are reasonable based on information available at the time that these estimates, judgments, andassumptions are made. These estimates, judgments, and assumptions can affect the reported amounts of assets and liabilities as ofthe date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. To theextent there are material differences between these estimates and actual results, our consolidated financial statements would beaffected.Fair Value of Financial InstrumentsThe carrying amounts of certain of our financial instruments including cash and cash equivalents, accounts receivable, short-term investments and long-term investments, accounts payable and accrued liabilities approximate fair value due to their shortmaturities. Certain cash equivalents and investments are required to be adjusted to fair value on a recurring basis. See Note 2.52 TABLE OF CONTENTSFair Value of InvestmentsASC topic 820, Fair value measurement (“ASC 820”) establishes three levels of inputs that may be used to measure fair value.Level 1 instruments represent quoted prices in active markets. Therefore, determining fair value for Level 1 instruments doesnot require significant management judgment, and the estimation is not difficult.Level 2 instruments include observable inputs other than Level 1 prices, such as quoted prices for comparable instruments inmarkets with insufficient volume or infrequent transactions (less active markets), issuer credit ratings, non-binding marketconsensus prices that can be corroborated with observable market data, model-derived valuations in which all significant inputs areobservable or can be derived principally from or corroborated with observable market data for substantially the full term of theassets or liabilities, or quoted prices for similar assets or liabilities. These Level 2 instruments require more management judgmentand subjectivity compared to Level 1 instruments, including:•Determining which instruments are most comparable to the instrument being priced requires management to identify asample of similar securities based on the coupon rates, maturity, issuer, credit rating, and instrument type, andsubjectively select an individual security or multiple securities that are deemed most similar to the security being priced.•Determining which model-derived valuations to use in determining fair value requires management judgment. Whenobservable market prices for identical securities or comparable securities are not available, we price our marketable debtinstruments using non-binding market consensus prices that are corroborated with observable market data or pricingmodels, such as discounted cash flow models, with all significant inputs derived from or corroborated with observablemarket data.Level 3 instruments include unobservable inputs to the valuation methodology that are significant to the measurement of fairvalue of assets or liabilities. The determination of fair value for Level 3 instruments requires the most management judgment andsubjectivity. As of December 31, 2014, we did not have any assets or liabilities required to be carried at fair value withoutobservable market values that would require a high level of judgment to determine fair value (Level 3 assets).Foreign Currency TranslationThe functional currencies of our Chinese subsidiaries are the local currencies. Transaction gains and losses resulting fromtransactions denominated in currencies other than the U.S. dollar or in the functional currencies of our subsidiaries are included in“other income (expense), net” for the periods presented. The transaction losses for the years ended December 31, 2014, 2013 and2012 totaled $1.0 million, $1.3 million and $445,000, respectively.The assets and liabilities of the subsidiaries are translated at the rates of exchange on the balance sheet date. Revenue andexpense items are translated at the average rate of exchange for the period. Gains and losses from foreign currency translation areincluded in “other comprehensive income (loss)” in consolidated statements of comprehensive income (loss).Revenue RecognitionWe recognize revenue upon the shipment of our products to customers when:•we have received a signed purchase order placed by our customers,•the price is fixed or determinable,•title and risk of ownership has transferred to our customers upon shipment from our dock, receipt at customer’s dock, orremoval from consignment inventory at customer’s location,•collection of resulting receivables is probable, and•product returns are reasonably estimable.We do not provide training, installation or commissioning services. Our terms and conditions of sale do not require customeracceptance. We assess the probability of collection based on a number of factors including past history with the customer andcredit worthiness. We provide for future returns based on historical experience,53 TABLE OF CONTENTScurrent economic trends and changes in customer demand at the time revenue is recognized. Additionally, we do not providepayment discounts to customers. We present our revenue net of any taxes assessed by any governmental authority.Accounting for Sales Taxes in Net RevenuesWe record sales taxes collected on sales of our products and for amounts not yet remitted to tax authorities as accruedliabilities on our consolidated balance sheets.Risks and Concentration of Credit RiskOur business is very dependent on the semiconductor industry, which is highly cyclical and has historically experienceddownturns as a result of economic changes, overcapacity, and technological advancements. Significant technological changes inthe industry or customer requirements, or the emergence of competitive products with new capabilities or technologies, couldadversely affect operating results. In addition, a significant portion of our revenues and net income is derived from internationalsales. Fluctuations of the United States dollar against foreign currencies and changes in local regulatory or economic conditions,particularly in an emerging market such as China, could adversely affect operating results.We depend on a single or limited number of suppliers for certain critical materials used in the production of our substrates,such as quartz tubing and polishing solutions. We generally purchase these materials through standard purchase orders and notpursuant to long-term supply contracts.Financial instruments that potentially subject us to concentration of credit risk consist primarily of cash equivalents, short-term investments, and trade accounts receivable. We invest primarily in money market accounts, commercial paper instruments,and investment grade securities with high quality financial institutions. The composition and maturities are regularly monitored bymanagement. Such deposits are in excess of the amount of the insurance provided by the federal government on such deposits. Weare exposed to credit risks in the event of default by the issuers to the extent of the amount recorded on the consolidated balancesheets.We perform ongoing credit evaluations of our customers’ financial condition, and limit the amount of credit extended whendeemed necessary, but generally do not require collateral. The credit risk in our accounts receivable is mitigated by our creditevaluation process and the geographical dispersion of sales transactions. Two customers accounted for 11% and 10% of our tradeaccounts receivable balance as of December 31, 2014. One customer accounted for 20% of our trade accounts receivable balance asof December 31, 2013.No customer represented more than 10% of our revenue for the year ended December 31, 2014 and 2013 while one customerrepresented 17% of revenue for the year ended December 31, 2012. Our top five customers, although not the same five customersfor each period, represented 34%, 31% and 37% of revenue for the years ended December 31, 2014, 2013 and 2012, respectively.We believe that in the future we could have a greater concentration of sales.Cash and Cash EquivalentsWe consider investments in highly liquid instruments purchased with an original maturity of three months or less to be cashequivalents. Cash equivalents consist primarily of money market funds. Cash and cash equivalents are stated at cost, whichapproximates fair value.Short-Term and Long-Term InvestmentsWe classify our investments in debt and equity securities as available-for-sale securities in accordance with ASC topic 320,Investments - Debt and Equity Securities (“ASC 320”). Short-term and long-term investments are comprised of available-for-salemarketable debt securities, which consist primarily of certificates of deposit, U.S. government securities, and investment-gradecorporate notes and bonds. These investments are reported at fair value as of the respective balance sheet dates with unrealizedgains and losses included in accumulated other comprehensive income within stockholders’ equity on the consolidated balancesheets. The amortized cost of securities is adjusted for amortization of premiums and accretion of discounts to maturity. Suchamortization is included in “other income (expense), net” in the consolidated statements of operations. Realized gains and lossesand declines in value judged to be other than temporary on available-for-sale securities are also included in “other income(expense), net” in the consolidated statements of operations. The cost of securities sold is based upon the specific identificationmethod.54 TABLE OF CONTENTSAccounts Receivable and Allowance for Doubtful Accounts and Sales ReturnsAccounts receivable are recorded at the invoiced amount and are not interest bearing. We periodically review the likelihoodof collection on our accounts receivable balances and provide an allowance for doubtful accounts receivable primarily based uponthe age of these accounts. We evaluate receivables from U.S. customers with an emphasis on balances in excess of 90 days and forreceivables from customers located outside the U.S. with an emphasis on balances in excess of 120 days and reserve allowance onthe receivable balances if needed. The reason for the difference in the evaluation of receivables between foreign and U.S. customersis that U.S. customers have historically made payments in a shorter period of time than foreign customers. Foreign businesspractices generally require us to allow customer payment terms that are longer than those accepted in the United States. We assessthe 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 these reserves as we evaluate historical bad debt trends, generaleconomic conditions in the United States and internationally, and changes in customer financial conditions. Uncollectiblereceivables are recorded as bad debt expense when all efforts to collect have been exhausted and recoveries are recognized whenthey are received. As of December 31, 2014 and December 31, 2013, our accounts receivable, net, balance was $17.9 million and$14.9 million, respectively, which was net of an allowance for doubtful accounts of $410,000 and $869,000, respectively. During2014, we decreased this allowance for doubtful accounts by $459,000 primarily for improved collections worldwide. During 2013we increased our allowance for doubtful accounts by $869,000 primarily because of the poor financial condition of a fewcustomers in China. No amounts have been written off. 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 financialresults for future periods.The allowance for sales returns is also deducted from gross accounts receivable. During 2014, we utilized $410,000 andcharged an additional $183,000 resulting in the allowance for sales returns of $413,000 as of December 31, 2014. During 2013, weutilized $189,000 and charged an additional $130,000 resulting in the allowance for sales returns of $186,000 as of December 31,2013. During 2012, we utilized $426,000 and charged an additional $547,000 resulting in the allowance for sales returns of$245,000 as of December 31, 2012.Warranty ReserveWe maintain a warranty reserve based upon our claims experience during the prior twelve months. Warranty costs are accruedat the time revenue is recognized. As of December 31, 2014 and 2013, accrued product warranties totaled $802,000 and $1.0million, respectively. The decrease in accrued product warranties is primarily attributable to decreased claims for quality issuesexperienced by some customers. If actual warranty costs differ substantially from our estimates, revisions to the estimated warrantyliability would be required, which could have a material impact on our financial condition and results of operations for futureperiods.InventoriesInventories are stated at the lower of cost (approximated by standard cost) or market. Cost is determined using the weightedaverage cost method. Our inventory consists of raw materials as well as finished goods and work-in-process that include material,labor and manufacturing overhead costs. Given the nature of our substrate products, and the materials used in the manufacturingprocess, the wafers and ingots comprising work-in-process may be held in inventory for up to two years and three years,respectively, as the risk of obsolescence for these materials is low. We routinely evaluate the levels of our inventory in light ofcurrent market conditions in order to identify excess and obsolete inventory, and we provide a valuation allowance for certaininventories based upon the age and quality of the product and the projections for sale of the completed products.Property, Plant and EquipmentProperty, plant and equipment are stated at cost less accumulated depreciation computed using the straight-line method overthe estimated economic lives of the assets, which vary from 3 to 27.5 years. Leasehold improvements are amortized using thestraight-line method over the shorter of the estimated useful life or the term of the lease. We generally depreciate computers,software, office equipment, furniture and fixtures over 3 years, automobiles over 5 years, leasehold and building improvementsover 10 years, or lease term if shorter, and buildings over 27.5 years. Repairs and maintenance costs are expensed as incurred.55 TABLE OF CONTENTSImpairment of Long-Lived AssetsWe evaluate the recoverability of property, equipment and intangible assets in accordance with ASC topic 360, Property,Plant and Equipment (“ASC 360”). When events and circumstance indicate that long-lived assets may be impaired, ourmanagement compares the carrying value of the long-lived assets to the projection of future undiscounted cash flows attributableto such assets. In the event that the carrying value exceeds the future undiscounted cash flows, we record an impairment chargeagainst income equal to the excess of the carrying value over the asset’s fair value. Fair values are determined based on quotedmarket values, discounted cash flows or internal and external appraisals, as applicable. We did not recognize any impairmentcharges of long-lived assets in 2014, 2013 and 2012.Impairment of InvestmentsAll available-for-sale securities are periodically reviewed for impairment. Investments are considered to be impaired when itsfair value is less than its amortized cost basis and it is more likely than not that we will be required to sell the impaired securitybefore recovery of its amortized cost basis. Factors considered in determining whether a loss is temporary include the magnitude ofthe decline in market value, the length of time the market value has been below cost (or adjusted cost), credit quality, and ourability and intent to hold the securities for a period of time sufficient to allow for any anticipated recovery in market value.We also invest in equity instruments of privately-held companies for business and strategic purposes. These investments areclassified as other assets and are accounted for under the equity or cost method as we do not have the ability to exercise significantinfluence over their operations. We monitor our investments for impairment and record reductions in carrying value when events orchanges in circumstances indicate that the carrying value may not be recoverable. Determination of impairment is highlysubjective and is based on a number of factors, including an assessment of the strength of investee’s management, the length oftime and extent to which the fair value has been less than our cost basis, the financial condition and near-term prospects of theinvestee, fundamental changes to the business prospects of the investee, share prices of subsequent offerings, and our intent andability to hold the investment for a period of time sufficient to allow for any anticipated recovery in our carrying value. Weestimate fair value of our cost method investments considering available information such as pricing in recent rounds of financing,current cash positions, earnings and cash flow forecasts, recent operational performance and any other readily available marketdata.Segment ReportingWe operate in one segment for the design, development, manufacture and distribution of high-performance compoundsemiconductor substrates and sale of materials. In accordance with ASC topic 280, Segment Reporting, our chief operatingdecision-maker has been identified as our Chief Executive Officer, who reviews operating results to make decisions aboutallocating resources and assessing our performance for the Company. While we obtain financial statements from all of our jointventures in order to prepare our consolidated financial statements, we do not review them either individually or in the aggregatewhen making operating decisions for our business. We discuss revenue and capacity for both AXT and our joint venturescollectively, when determining capacity constraints and need for raw materials in our business, and consider their capacity whendetermining our strategic and product marketing and advertising strategies. While we consolidate our majority-owned jointventures, we do not allocate resources to any of them, nor allocate any portion of overhead, interest and other income, interestexpense or taxes to them. We therefore have determined that our joint venture operations do not constitute an operating segment.Since we operate in one segment, all financial segment and product line information can be found in the condensed consolidatedfinancial statements.Stock-Based CompensationWe have employee stock option plans, which are described more fully in Note 11—Employee Benefit Plans and Stock-basedCompensation. We account for stock-based compensation in accordance with the provisions of ASC topic 718, Compensation-Stock Compensation (“ASC 718”). We utilize the Black-Scholes option pricing model to determine the fair value of the stockoptions granted. Stock-based compensation cost is measured at each grant date, based on the fair value of the award, and isrecognized as expense and as an increase in additional paid-in-capital over the requisite service period of the award.56 TABLE OF CONTENTSResearch and DevelopmentResearch and development costs consist primarily of salaries including stock-based compensation expense and relatedpersonnel costs, depreciation, materials and product testing and are expensed as incurred.Advertising CostsAdvertising costs, included in selling, general and administrative expenses, are expensed as incurred. Advertising costs for theyears ended December 31, 2014, 2013, and 2012 were $10,000, $12,000 and $19,000, respectively.Shipping and Handling costsWe include fees billed to customers and costs incurred for shipping and handling as a component of cost of sales.Income TaxesWe account for income taxes in accordance with ASC topic 740, Income Taxes (“ASC 740”) which requires that deferred taxassets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases ofrecorded assets and liabilities. ASC 740 also requires that deferred tax assets be reduced by a valuation allowance if it is morelikely than not that a portion of the deferred tax asset will not be realized. The impact of ASC 740 is more fully described in Note13.Comprehensive Income (loss)We report comprehensive income (loss) in accordance with the provisions of ASC topic 220 Comprehensive Income (“ASC220”) which establishes standards for reporting comprehensive income or loss and its components in the financial statements. Thecomponents of other comprehensive income consist of unrealized gains and losses on marketable securities and foreign currencytranslation adjustments. Comprehensive income is presented in the consolidated statements of comprehensive income (loss).Net Income (loss)Per ShareBasic net income (loss) per share is computed using the weighted average number of common shares outstanding during theperiods less shares of common stock subject to repurchase and non-vested stock awards. Diluted net income (loss) per share iscomputed using the weighted average number of common shares outstanding and potentially dilutive common shares outstandingduring the periods. The dilutive effect of outstanding stock options and restricted stock awards is reflected in diluted earnings pershare by application of the treasury stock method. Potentially dilutive common shares consist of common shares issuable upon theexercise of stock options and vesting of restricted stock awards.Recent Accounting PronouncementsIn May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. ASU 2014-09 outlines a singlecomprehensive model for accounting for revenue arising from contracts with customers and supersedes most current revenuerecognition guidance. ASU 2014-09 requires an entity to recognize revenue to depict the transfer of promised goods or services tocustomers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods orservices. ASU 2014-09 will be effective for annual and interim reporting periods beginning after December 15, 2016. The impacton our financial condition, results of operations and cash flows as a result of the adoption of ASU 2014-09 has not yet beendetermined.57 TABLE OF CONTENTSNote 2. Cash, Cash Equivalents and InvestmentsOur cash, cash equivalents and investments are classified as follows (in thousands):December 31, 2014December 31, 2013AmortizedCostGrossUnrealizedGainGrossUnrealized(Loss)FairValueAmortizedCostGrossUnrealizedGainGrossUnrealized(Loss)FairValueClassified as: Cash$28,791 $— $— $28,791 $24,852 $— $— $24,852 Cash equivalents: Money market fund 23 — — 23 109 — — 109 Total cash and cashequivalents 28,814 — — 28,814 24,961 — — 24,961 Investments(available forsale): Certificates ofDeposit 10,195 1 (13) 10,183 6,320 2 (4) 6,318 Corporate bonds 9,214 1 (29) 9,186 14,276 8 (6) 14,278 Corporate equitysecurity 44 710 — 754 125 1,923 — 2,048 Total investments 19,453 712 (42) 20,123 20,721 1,933 (10) 22,644 Total cash, cashequivalents andinvestments$48,267 $712 $(42)$48,937 $45,682 $1,933 $(10)$47,605 Contractual maturitieson investments: Due within 1 year$11,631 $12,340 $10,569 $12,499 Due after 1 through 5years 7,822 7,783 10,152 10,145 $19,453 $20,123 $20,721 $22,644 We manage our investments as a single portfolio of highly marketable securities that is intended to be available to meet ourcurrent cash requirements. We have no investments in auction rate securities. Proceeds from sales of available-for-sale investmentsfor the year ended December 31, 2014 were $1.3 million. Gross realized gains from sales of available-for-sale investments for theyear ended December 31, 2014 were $1.3 million. There were no sales of available-for-sales securities and no realized gains andlosses for the year ended December 31, 2013 and 2012.Also included in short-term investments at December 31, 2014 is our investment in common stock of Intelligent EpitaxyTechnology, Inc (IntelliEPI), a Taiwan publicly-traded company. We began classifying this asset as an available-for- sale securityupon its initial public offering (IPO) in 2013. Prior to the IPO in 2013, during the third and fourth quarter of 2013, we sold some ofour stock in IntelliEPI and realized a gain of approximately $800,000. An unrealized gain of $1.6 million net of tax was recordedin 2013 for the write-up to market valuation. In 2014, we sold additional IntelliEpi stock and realized a gain of approximately $1.3million. An unrealized gain of $710,000 net of tax remains as of December 31, 2014 for IntelliEpi stock still held. These securitiesare valued at fair market value at December 31, 2014. There is no assurance that the Company will realize this value when thesecurities are sold in the future.The gross unrealized losses related to our portfolio of available-for-sale securities were primarily due to changes in interestrates and market and credit conditions of the underlying securities. We have determined that the gross unrealized losses on some ofour available-for-sale securities as of December 31, 2014 are temporary in nature. We periodically review our investment portfolioto identify and evaluate investments that have indications of possible impairment. Factors considered in determining whether aloss is temporary include the magnitude of the decline in market value, the length of time the market value has been below cost (oradjusted cost), credit quality, and our ability and intent to hold the securities for a period of time sufficient to allow for anyanticipated recovery in market value.58 TABLE OF CONTENTSThe following table summarizes the fair value and gross unrealized losses related to available-for-sale securities, aggregatedby investment category and length of time that individual securities have been in a continuous unrealized loss position as ofDecember 31, 2014 (in thousands):In Loss Position< 12 monthsIn Loss Position> 12 monthsTotal InLoss PositionFairValueGrossUnrealized(Loss)FairValueGrossUnrealized(Loss)FairValueGrossUnrealized(Loss)Investments: Certificates of deposit$4,492 $(13)$— $— $4,492 $(13)Corporate bonds 3,770 (27) 4,309 (2) 8,079 (29)Total in loss position$8,262 $(40)$4,309 $(2)$12,571 $(42)The following table summarizes the fair value and gross unrealized losses related to available-for-sale securities, aggregatedby investment category and length of time that individual securities have been in a continuous unrealized loss position as ofDecember 31, 2013 (in thousands):In Loss Position< 12 monthsIn Loss Position> 12 monthsTotal InLoss PositionFairValueGrossUnrealized(Loss)FairValueGrossUnrealized(Loss)FairValueGrossUnrealized(Loss)Investments: Certificates of deposit$3,425 $(4)$720 $(0)$4,145 $(4)Corporate bonds 4,473 (5) 3,711 (1) 8,184 (6)Total in loss position$7,898 $(9)$4,431 $(1)$12,329 $(10)Investments in Privately-held CompaniesWe have made strategic investments in private companies located in China in order to gain access at a competitive cost to rawmaterials that are critical to our substrate business (see Note 6). The investment balances for all of these companies, includingminority investments indirectly in privately-held companies made by our consolidated joint ventures, accounted for under theequity method are included in “other assets” in the consolidated balance sheets and totaled $12.1 million and $10.9 million as ofDecember 31, 2014 and December 31, 2013, respectively.We also maintain minority investments in companies which are accounted for under the cost method as we do not have theability to exercise significant influence over their operations. Our investments under the cost method are reviewed for other thantemporary declines in value on a quarterly basis. We monitor our investments for impairment and record reductions in carryingvalue when events or changes in circumstances indicate that the carrying value may not be recoverable. As of December 31, 2014and 2013, our investments in these unconsolidated companies had a carrying value of $200,000 and were also included in “otherassets” in the condensed consolidated balance sheets.Fair Value MeasurementsASC topic 820, Fair value measurement (“ASC 820”) 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 oridentical assets. Level 2 instrument valuations are obtained from readily-available pricing sources for comparable instruments.Level 3 instrument valuations are obtained from unobservable inputs in which there is little or no market data, which require us todevelop our own assumptions. As of December 31, 2014, we did not have any Level 3 assets or liabilities. On a recurring basis, wemeasure certain financial assets and liabilities at fair value, primarily consisting of our short-term and long-term investments.The type of instrument valued based on quoted market prices in active markets include our money market funds, which aregenerally classified within Level 1 of the fair value hierarchy. Other than corporate equity securities which are based on quotedmarket prices and classified as Level 1, we classify our available-for-sale securities including certificates of deposit, corporatebonds as having Level 2 inputs. The valuation techniques used to measure the fair value of these financial instruments havingLevel 2 inputs were derived from quoted market prices, broker or dealer59 TABLE OF CONTENTSquotations, or alternative pricing sources with reasonable levels of price transparency. There were no changes in valuationtechniques or related inputs in the year ended December 31, 2014. There have been no transfers between fair value measurementlevels during the year ended December 31, 2014.The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis in accordancewith ASC 820 as of December 31, 2014 (in thousands):Balance as ofDecember 31,2014Quoted PricesinActive MarketsofIdentical Assets(Level 1)SignificantOtherObservableInputs(Level 2)Assets: Cash equivalents and investments: Money market fund$23 $23 $— Corporate equity securities 754 754 — Certificates of deposit 10,183 — 10,183 Corporate bonds 9,186 — 9,186 Total$ 20,146 $ 777 $ 19,369 Liabilities$— $— $— The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis in accordancewith ASC 820 as of December 31, 2013 (in thousands):Balance as ofDecember 31,2013Quoted PricesinActive MarketsofIdentical Assets(Level 1)SignificantOtherObservableInputs(Level 2)Assets: Cash equivalents and investments: Money market fund$109 $109 $— Corporate equity securities 2,048 2,048 — Certificates of deposit 6,318 — 6,318 Corporate bonds 14,278 — 14,278 Total$ 22,753 $ 2,157 $ 20,596 Liabilities$— $— $— Items Measured at Fair Value on a Nonrecurring BasisCertain assets that are subject to nonrecurring fair value measurements are not included in the table above. These assetsinclude investments in privately-held companies accounted for by equity and cost method (See Note 6). We did not record other-than-temporary impairment charges for these investments during 2014.Note 3. InventoriesThe components of inventory are summarized below (in thousands):As of December 31,20142013Inventories: Raw materials$18,990 $21,063 Work in process 16,222 14,027 Finished goods 3,362 4,037 $38,574 $39,127 As of December 31, 2014 and 2013, carrying values of inventories were net of inventory reserve of $11.2 million and $11.0million, respectively, for excess and obsolete inventory.Note 4. Related Party TransactionsIn August 2011, our consolidated joint venture, Beijing JiYa Semiconductor Material Co., Ltd. (JiYa), entered into a non-interest bearing note agreement in the amount of $1.7 million with one of its equity investment entities. The original term of theloan was for two years and ten months with 3 periodic principal payments required. After60 TABLE OF CONTENTSvarious amendments to the terms of the note, in December 2013 the parties agreed to delay all principal repayment until December2016. As of December 31, 2014 and December 31, 2013, we included $1.7 million in “Related party notes receivable – long term”in our consolidated balance sheets.Beginning in 2012, JiYa is contractually obligated under an agency sales agreement to sell raw material on behalf of one of itsequity investment entities. JiYa bills the customers and remits the receipts, net of its portions of sales commission, to this equityinvestment entity. For the year ended December 31, 2014 and 2013, JiYa has recorded $0 and $23,000 of income from agency salesrespectively, which was included in “other expense, net” in our condensed consolidated statements of operations. As of December31, 2014 and December 31, 2013, there were no amounts payable to this equity investment entity.JiYa also purchases raw materials from one of its equity investment entities for production in the ordinary course of business.As of December 31, 2014 and 2013, amounts payable of $1.8 million and $1.5 million, respectively, were included in “accountspayable” in our condensed consolidated balance sheets.Beginning in 2012, our consolidated joint venture, Nanjing Jin Mei Gallium Co., Ltd. (Jin Mei), is contractually obligatedunder an agency sales agreement to sell raw material on behalf of its equity investment entity. Jin Mei bills the customers andremits the receipts, net of its portions of sales commission, to this equity investment entity. For the year ended December 31, 2014and 2013, Jin Mei has recorded $20,000 and $128,000 income from agency sales, respectively, which were included in “otherincome (expense), net” in the consolidated statements of operations.In March 2012, our wholly-owned subsidiary, Beijing Tongmei Xtal Technology Co., Ltd. (Tongmei), entered into anoperating lease for the land it owns with our consolidated joint venture Beijing BoYu Semiconductor Vessel CraftworkTechnology Co., Ltd. The lease agreement for the land of approximately 22,081 square feet commenced on January 1, 2012 for aterm of 10 years with annual lease payments of $24,000 subject to a 5% increase at each third year anniversary. The annual leasepayment is due by January 31 of each year.Tongmei has paid $120,000 on behalf of Donghai County Dongfang High Purity Electronic Materials Co., Ltd., its equityinvestment entity, to purchase materials. In 2014, an agreement was signed between Tongmei and Dongfang to set the date ofrepayment on December 31, 2015. As of December 31, 2014, this balance was included in “Related party notes receivable – shortterm” in our consolidated balance sheets.In April 2014, Tongmei loaned an additional of $49,000 to Dongfang. The loan bears interest at 6.15% per annum and theprincipal and interest totaling $171,000 as of December 31, 2014 is due on December 31, 2015. As of December 31, 2014, thisbalance, including both principal and interest, was included in “Related party notes receivable – short term” in our consolidatedbalance sheets.Tongmei also purchases raw materials from one of our equity investment entities for production in the ordinary course ofbusiness. As of December 31, 2014 and 2013, amounts payable of $513,000 and $0, respectively, were included in “accountspayable” 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. This policy applies to all of our employees and directors, oursubsidiaries and our joint ventures. Our executive officers retain board seats on the Board of Directors of the companies in whichwe have invested in our China joint ventures. See Note 6 for further details.61 TABLE OF CONTENTSNote 5. Property, Plant and Equipment, NetThe components of our property, plant and equipment are summarized below (in thousands):As of December 31,20142013Property, plant and equipment: Building$30,469 $30,369 Machinery and equipment 41,900 40,764 Leasehold improvements 5,070 4,493 Construction in progress 1,918 2,879 79,357 78,505 Less: accumulated depreciation and amortization (45,495) (40,884)$33,862 $37,621 Depreciation and amortization expense was $5.6 million, $5.5 million and $3.9 million for the years ended 2014, 2013, and2012 respectively.Note 6. Investments in Privately-held CompaniesWe have made strategic investments in private companies located in China in order to gain access to raw materials at acompetitive cost that are critical to our substrate business.Our investments are summarized below (in thousands):Investment Balance as ofCompanyDecember 31,2014December 31,2013AccountingMethodOwnershipPercentageBeijing JiYa Semiconductor Material Co., Ltd$ 3,331 $ 3,331 Consolidated46%Nanjing Jin Mei Gallium Co., Ltd 592 592 Consolidated83%Beijing BoYu Semiconductor Vessel Craftwork TechnologyCo., Ltd 1,346 1,346 Consolidated70%$5,269 $5,269 Donghai County Dongfang High Purity Electronic MaterialsCo., Ltd.$1,723 $1,900 Equity46%Xilingol Tongli Germanium Co. Ltd 5,351 4,692 Equity25%Emeishan Jia Mei High Purity Metals Co., Ltd 1,021 945 Equity25%$8,095 $7,537 Our ownership of Beijing JiYa Semiconductor Material Co., Ltd. (JiYa) is 46%. We continue to consolidate JiYa as we havesignificant influence in management and have majority control of the board. Our Chief Executive Officer is chairman of the JiYaboard and two other of our employees are also members of the board.Our ownership of Nanjing Jin Mei Gallium Co., Ltd. (Jin Mei) is 83%. We continue to consolidate Jin Mei as we havesignificant influence in management and have majority control of the board. Our Chief Executive Officer is chairman of the JinMei board and two other of our employees are also members of the board.Our ownership of Beijing BoYu Semiconductor Vessel Craftwork Technology Co., Ltd (BoYu) is 70%. We continue toconsolidate BoYu as we have a significant influence in management and have majority control of the board. Our Chief ExecutiveOfficer is chairman of the BoYu board and two other of our employees are also members of the board.Although we have representation on the boards of directors of each of these companies, the daily operations of each of thesecompanies are managed by local management and not by us. Decisions concerning their respective short term strategy andoperations, any capacity expansion and annual capital expenditures, and decisions concerning sales of finished product, are madeby local management with some inputs from us.62 TABLE OF CONTENTSDuring 2014, 2013 and 2012, the three consolidated joint ventures generated $3.0 million, $3.5 million and $7.4 million ofincome, respectively, of which $691,000, $1.1 million and $3.0 million, respectively was allocated to minority interests, resultingin $2.3 million, $2.4 million and $4.4 million, respectively to our net income.For the three equity investment entities that are not consolidated, the investment balances are included in “other assets” in ourconsolidated balance sheets and totaled $8.1 million and $7.5 million as of December 31, 2014 and 2013, respectively. We own46% of the ownership interests in one of these companies and 25% in each of the other two companies. These three companies arenot considered variable interest entities because:•all three companies have sustainable businesses of their own;•our voting power is proportionate to our ownership interests;•we only recognize our respective share of the losses and/or residual returns generated by the companies if they occur; and•we do not have controlling financial interest in, do not maintain operational or management control of, do not control theboard of directors of, and are not required to provide additional investment or financial support to any of thesecompanies.These three equity investment entities generated for AXT equity earnings of $569,000, $270,000 and $379,000 for the yearsended December 31, 2014, 2013, and 2012, respectively, and was recorded as “equity in earnings of unconsolidated jointventures” in the consolidated statements of operations.Net income recorded from all of the consolidated joint ventures and these equity investment entities was $2.9 million, $2.6million and $4.7 million for the years ended December 31, 2014, 2013 and 2012, respectively.We also maintain minority investments indirectly in privately-held companies by our consolidated joint ventures. Theseminority investments are accounted for under the equity method in the books of our consolidated joint ventures. As of December31, 2014 and 2013, our consolidated joint ventures included these minority investments in “other assets” in the consolidatedbalance sheets with a carrying value of $4.0 million and $3.4 million, respectively.All the minority investment entities that accounted for under the equity method had the following summarized operatinginformation (in thousands) for the years ended December 31, 2014, 2013 and 2012, respectively.Years EndedDecember 31,Our share for theYears EndedDecember 31,201420132012201420132012Net Revenue$47,824 $41,257 $32,858 $11,887 $10,240 $8,091 Gross profit 21,436 13,836 11,057 5,340 3,328 2,643 Operating income 9,046 8,174 6,310 2,059 1,820 1,409 Net income 6,765 6,315 5,665 1,528 1,377 1,281 All the minority investment entities that accounted for under the equity method had the following summarized balance sheetinformation (in thousands) as of December 31, 2014 and 2013, respectively.As of December 31,20142013Current assets$31,482 $22,139 Noncurrent assets 39,275 38,941 Current liabilities 19,923 15,289 Noncurrent liabilities 169 2,296 All the minority investment entities that are not consolidated and accounted for under the equity method generated for AXTequity earnings of $1.5 million, $1.4 million and $1.3 million for the years ended December 31, 2014, 2013 and 2012,respectively. Dividends received from these minority investment entities were $325,000, $396,000 and $277,000 for the yearsended December 31, 2014, 2013 and 2012, respectively. Undistributed retained earnings relating to our investments in all theseminority investment entities were $6.5 million and $5.3 million as of December 31, 2014 and 2013, respectively.63 TABLE OF CONTENTSNote 7. Other InvestmentsAs of December 31, 2014, we maintain minority investments in one privately-held company accounted for under the costmethod as we do not have the ability to exercise significant influence over its operations. Our investments in this privately-heldcompany is reviewed for other than temporary declines in value on a quarterly basis. We monitor our investments for impairmentand record reductions in carrying value when events or changes in circumstances indicate that the carrying value may not berecoverable. Reasons for other than temporary declines in value include whether the related company would have insufficient cashflow to operate for the next twelve months, significant changes in the operating performance and changes in market conditions. Wehad one company which is accounted for under the cost method in 2014 and 2013. As of December 31, 2014 and 2013, our costmethod investments had a carrying value of $200,000, and are included in “other assets” in the consolidated balance sheets.Note 8. Accrued LiabilitiesThe components of accrued liabilities are summarized below (in thousands):As of December 31,20142013Accrued compensation and related charges$2,656 $1,762 Accrued product warranty 802 1,048 Current portion of royalty payments 800 800 Accrued professional services 509 543 Dividends payable by consolidated joint ventures 563 649 Accrued income taxes 119 125 Other accrued liabilities 2,185 2,359 $7,634 $7,286 Note 9. DebtWe have an unused credit facility with a bank that provides for a line of credit of $10.0 million as of December 31, 2014 and2013, respectively, which is secured by marketable securities we have with the bank and shown as short-term and long-terminvestments of $15.1 million on our consolidated balance sheets. The annual interest rate is 1.65% over the current 30-day LIBOR(London Interbank Offered Rate). The annual interest rate was approximately 1.9% as of December 31, 2014. There were nooutstanding borrowings under this line of credit as of December 31, 2014 and 2013.Note 10. Stockholders’ Equity and Stock Repurchase ProgramStockholders’ EquityThe 883,000 shares of $0.001 par value Series A preferred stock issued and outstanding as of December 31, 2014 and 2013,valued at $3,532,000 are non-voting and non-convertible preferred stock with a 5.0% cumulative annual dividend rate payablewhen declared by the board of directors and $4 per share liquidation preference over common stock, and must be paid before anydistribution is made to common stockholders. These preferred shares were issued to Lyte Optronics, Inc. stockholders in connectionwith the completion of our acquisition of Lyte Optronics, Inc. on May 28, 1999.There were no reclassification adjustments from accumulated other comprehensive income for the years ended December 31,2014 and 2013.Stock Repurchase ProgramOn February 21, 2013, our Board of Directors approved a stock repurchase program pursuant to which we may repurchase upto $6.0 million of our outstanding common stock through February 27, 2014. These purchases can be made from time to time in theopen market and are funded from our existing cash balances and cash generated from operations. During 2013, we repurchasedapproximately 285,000 shares at an average price of $2.51 per share for a total purchase price of $716,000 under the stockrepurchase program. As of December 31, 2013, approximately $5.3 million remained available for future repurchases under thisprogram. No shares were repurchased in 2014 under this program and the plan expired on February 27, 2014.64 TABLE OF CONTENTSOn October 27, 2014, our Board of Directors approved a stock repurchase program pursuant to which we may repurchase up to$5.0 million of our outstanding common stock. These purchases can be made from time to time in the open market and are fundedfrom our existing cash balances and cash generated from operations. See Item 5, Market for Registrant’s Common Equity, RelatedStockholder Matters and Issuer Purchases of Equity Securities in Part II.Note 11. Employee Benefit Plans and Stock-based CompensationStock Option Plans and Equity Incentive PlansIn July 1997, our board of directors approved the 1997 Stock Option Plan (“1997 Plan”), which provides for the grant ofincentive and non-qualified stock options to our employees, consultants and directors. Under the 1997 Plan, 5,423,583 shares ofcommon stock have been authorized for issuance. Options granted under the 1997 Plan are generally for periods not to exceed tenyears (five years if the option is granted to a 10% stockholder) and are granted at the fair market value of the stock at the date ofgrant as determined by the board of directors. Options granted under the 1997 Plan generally vest 25% at the end of one year and2.1% each month thereafter, with full vesting after four years.In May 2007, our shareholders approved our 2007 Equity Incentive Plan (the “2007 Plan”). The 2007 Plan is a restatement ofthe 1997 Plan which expired in 2007. The 1,928,994 share reserve of the 1997 Plan became the reserve of the 2007 Plan, togetherwith 1,300,000 additional shares approved for issuance under the 2007 Plan. In May 2013, the shareholders approved anadditional 2,000,000 shares to be issued under the 2007 plan. Awards may be made under the 2007 Plan are stock options, stockappreciation rights, restricted stock, restricted stock units, performance shares, performance units, deferred compensation awardsand other stock-based awards. Stock options and stock appreciation rights awarded under the 2007 Plan may not be repricedwithout stockholder approval. Stock options and stock appreciation rights may not be granted below fair market value. Stockoptions or stock appreciation rights generally shall not be fully vested over a period of less than three years from the date of grantand cannot be exercised more than 10 years from the date of grant. Restricted stock, restricted stock units, and performance awardsgenerally shall not vest faster than over a three-year period (or a twelve-month period if vesting is based on a performancemeasure). In December 2008, the 2007 Plan was amended to comply with the applicable requirements under Section 409A of theInternal Revenue Code. As of December 31, 2014, approximately 1,003,000 shares were available for grant under the 2007 Plan.65 TABLE OF CONTENTSStock OptionsThe following summarizes our stock option activity under the 2007 Plan, and the related weighted average exercise pricewithin each category for each of the years ended December 31, 2012, 2013 and 2014 (in thousands, except per share data):Stock OptionsNumber ofOptionsOutstandingWeighted-averageExercisePriceWeighted-averageRemainingContractualLifeAggregateIntrinsicValue(in years)Balance as of January 1, 2012 2,380 $3.25 6.25 $3,456 Granted 592 3.32 Exercised (136) 2.17 Canceled and expired (109) 4.25 Balance as of December 31, 2012 2,727 3.28 6.71 $1,353 Granted 488 2.38 Exercised (331) 1.62 Canceled and expired (213) 3.60 Balance as of December 31, 2013 2,671 $3.29 6.71 $893 Granted 712 2.40 Exercised (111) 1.21 Canceled and expired (74) 5.18 Balance as of December 31, 2014 3,198 $3.12 6.95 $1,247 Options vested and expected to vest as ofDecember 31, 2014 3,198 $3.12 6.95 $1,247 Options exercisable as of December 31, 2014 1,859 $3.46 5.48 $821 The options outstanding and exercisable as of December 31, 2014 were in the following exercise price ranges (in thousands,except per share data):Options Outstanding as ofDecember 31, 2014Options Vested andExercisable as ofDecember 31, 2014Range ofExercise PriceSharesWeighted-averageExercise PriceWeighted-averageRemainingContractual LifeSharesWeighted-AverageExercise Price$1.33 - $1.59 401 $1.52 3.33 401 $1.52 $1.91 - $1.91 4 $1.91 0.87 4 $1.91 $2.04 - $2.04 333 $2.04 4.82 333 $2.04 $2.14 - $2.29 252 $2.26 9.40 0 $0.00 $2.36 - $2.36 428 $2.36 8.84 116 $2.36 $2.47 - $2.47 460 $2.47 9.84 0 $0.00 $2.91 - $2.91 444 $2.91 7.85 231 $2.91 $3.18 - $4.09 29 $3.85 6.31 20 $3.84 $4.79 - $4.79 330 $4.79 6.82 262 $4.79 $4.81 - $7.82 517 $5.79 5.17 492 $5.80 3,198 $3.12 6.95 1,859 $3.46 There were 111,000, 331,000 and 136,000 options exercised in the years ended December 31, 2014, 2013 and 2012,respectively. The total intrinsic value of options exercised for the years ended December 31, 2014, 2013 and 2012 was $105,000,$331,000 and $392,000, respectively.66 TABLE OF CONTENTSAs of December 31, 2014, the total unamortized stock-based compensation cost related to unvested stock options granted toemployees under our stock option plans was approximately $1.6 million, net of estimated forfeitures of $57,000. This cost is beingamortized on a straight-line basis over a weighted-average period of approximately 2.8 years and will be adjusted for subsequentchanges in estimated forfeitures. We did not capitalize any stock-based compensation to inventory as of December 31, 2014 and2013, as the amounts are not significant.Restricted Stock AwardsA summary of activity related to restricted stock awards for the years ended December 31, 2014, 2013 and 2012 is presentedbelow:Stock AwardsSharesWeighted-AverageGrant DateFair ValueNon-vested as of January 1, 2012 223,127 $4.47 Granted 113,768 $3.18 Vested (98,172)$3.42 Non-vested as of December 31, 2012 238,723 $4.27 Granted 103,636 $2.52 Vested (85,127)$4.56 Forfeited (16,000)$4.03 Non-vested as of December 31, 2013 241,232 $3.44 Granted 121,044 $2.34 Vested (100,779)$4.01 Non-vested as of December 31, 2014 261,497 $2.71 Total grant date fair value of stock awards vested during the years ended December 31, 2014, 2013 and 2012 was $405,000,$389,000 and $336,000, respectively. As of December 31, 2014, we had $596,000 of unrecognized compensation expense relatedto restricted stock awards, which will be recognized over the weighted average period of 2.5 years.Common StockThe following number of shares of common stock were reserved and available for future issuance at December 31, 2014:Options outstanding 3,197,840 Restricted stock awards outstanding 261,497 Stock available for future grant: 2007 Equity Incentive Plan 1,002,898 Total 4,462,235 67 TABLE OF CONTENTSStock-based CompensationWe recorded $1.1 million, $1.3 million and $1.2 million of stock-based compensation in our consolidated statements ofoperations for the years ended December 31, 2014, 2013 and 2012, respectively. The following table summarizes compensationcosts related to our stock-based compensation awards (in thousands, except per share data):Years Ended December 31,201420132012Stock-based compensation in the form of employee stock options and restricted stock,included in: Cost of revenue$18 $22 $78 Selling, general and administrative 938 1,091 1,000 Research and development 173 164 137 Total stock-based compensation 1,129 1,277 1,215 Tax effect on stock-based compensation — — — Net effect on net income$1,129 $1,277 $1,215 Shares used in computing basic net income per share 32,452 32,700 32,144 Shares used in computing diluted net income per share 32,452 32,700 32,865 Effect on basic net income per share$(0.03)$(0.04)$(0.04)Effect on diluted net income per share$(0.03)$(0.04)$(0.04)We estimate the fair value of stock options using a Black-Scholes valuation model. There were 712,000, 488,000 and 592,000stock options granted with weighted-average grant date fair value of $1.17, $1.09 and $1.79 per share during 2014, 2013 and 2012,respectively. The fair value of options granted was estimated at the date of grant using the following weighted-averageassumptions:Years EndedDecember 31,201420132012Expected term (in years) 4.1 4.0 4.0 Volatility 63.20% 59.20% 72.87%Expected dividend 0% 0% 0%Risk-free interest rate 1.85% 0.98% 0.57%The expected term for stock options is based on the observed historical option exercise behavior and post-vesting forfeituresof options by our employees, and the contractual term, the vesting period and the expected term of the outstanding options.Expected volatility is based on the historical volatility of our Company’s common stock. The dividend yield of zero is based onthe fact that we have never paid cash dividends and have no present intention to pay cash dividends. The risk-free interest rates aretaken from the Daily Federal Yield Curve Rates as of the grant dates as published by the Federal Reserve and represent the yieldson actively traded Treasury securities for terms equal to the expected term of the options.Retirement Savings PlanWe have a 401(k) Savings Plan (“Savings Plan”) which qualifies as a thrift plan under Section 401(k) of the Internal RevenueCode. All full-time U.S. employees are eligible to participate in the Savings Plan after 90 days from the date of hire. Employeesmay elect to reduce their current compensation by up to the statutory prescribed annual limit and have the amount of suchreduction contributed to the 401(k) Plan. We provide matching to employee contributions up to 4% of the employees’ base pay ifemployees contribute at least 6% of their base pay. If the contribution rate is less than 6% of the base pay, the matching percentageis prorated. Our contributions to the 401(k) retirement savings plans were $115,000, $110,000 and $900,000 for the years endedDecember 31, 2014, 2013 and 2012, respectively.68 TABLE OF CONTENTSNote 12. GuaranteesIndemnification AgreementsWe have entered into indemnification agreements with our directors and officers that require us to indemnify our directors andofficers against liabilities that may arise by reason of their status or service as directors or officers, other than liabilities arising fromwillful misconduct of a culpable nature; to advance their expenses incurred as a result of any proceeding against them as to whichthey could be indemnified; and to obtain directors’ and officers’ insurance if available on reasonable terms, which we currentlyhave in place.Product WarrantyWe provide warranties for our products for a specific period of time, generally twelve months, against material defects. Weprovide for the estimated future costs of warranty obligations in cost of sales when the related revenue is recognized. The accruedwarranty costs represent the best estimate at the time of sale of the total costs that we expect to incur to repair or replace productparts that fail while still under warranty. The amount of accrued estimated warranty costs are primarily based on historicalexperience as to product failures as well as current information on repair costs. On a quarterly basis, we review the accrued balancesand update the historical warranty cost trends. The following table reflects the change in our warranty accrual which is included in“accrued liabilities” on the condensed consolidated balance sheets, during 2014 and 2013 (in thousands):Years EndedDecember 31,20142013Beginning accrued warranty and related costs$1,048 $588 Accruals for warranties issued during the year 865 789 Adjustments related to pre-existing warranties including expirations and changes in estimates (467) 412 Cost of warranty repair (644) (741)Ending accrued warranty and related costs$802 $1,048 Note 13. Income TaxesConsolidated income before provision for income taxes includes non-U.S. income of approximately $12.8 million, $16.7million and $16.3 million for the years ended December 31, 2014, 2013 and 2012, respectively. We recorded a current taxprovision of $215,000, $188,000 and $853,000 for the years ended December 31, 2014, 2013 and 2012, respectively. Thecomponents of the provision (benefit) for income taxes are summarized below (in thousands):Years Ended December 31,201420132012Current: Federal$— $— $— State 2 13 (113)Foreign 213 175 966 Total current 215 188 853 Deferred: Federal — — — State — — — Total deferred — — — Total net provision for income taxes$215 $188 $853 69 TABLE OF CONTENTSA reconciliation of the effective income tax rates and the U.S. statutory federal income tax rate is summarized below:Years Ended December 31,201420132012Statutory federal income tax rate 35.0% 35.0% 35.0%State income taxes, net of federal tax benefits (0.2) (0.1) (1.0)Change in valuation allowance (695.8) (111.8) 23.3 Stock compensation (26.3) (1.4) 1.5 Foreign rate differences 758.6 85.3 (72.5)Dividend from PRC investee (169.8) (19.6) 30.1 Net loss from privately-held PRC investments 45.6 2.5 (2.6)Other 14.4 7.3 (1.6)Effective tax rate (38.5%) (2.8%) 12.2%Deferred tax assets and liabilities are summarized below (in thousands):As of December 31,20142013Deferred tax assets: Net operating loss$55,654 $51,818 Accruals and reserves not yet deductible 4,517 4,985 Credits 1,488 1,488 61,659 58,291 Deferred tax liabilities: Valuation of investment portfolio — (288) — (288)Net deferred tax assets 61,659 58,003 Valuation allowance (61,659) (58,003)Net deferred tax assets$— $— As of December 31, 2014, we have federal and state net operating loss carryforwards of approximately $165.7 million and $5.6million, respectively, which will expire beginning in 2022 and 2017, respectively. In addition, we have federal tax creditcarryforwards of approximately $1.5 million, which will be expired beginning in 2019.The deferred tax assets valuation allowance as of December 31, 2014 is attributed to U.S. federal, and state deferred tax assets,which result primarily from future deductible accruals, reserves, net operating loss carryforwards, and tax credit carryforwards. Webelieve that, based on a number of factors, the available objective evidence creates sufficient uncertainty regarding therealizability of the deferred tax assets such that a full valuation allowance has been recorded. These factors include our history oflosses related to domestic operations, and the lack of carryback capacity to realize deferred tax assets. The valuation allowanceincreased by $4.0 million and increased by $7.0 million for the years ended December 31, 2014 and 2013, respectively.Our consolidated subsidiaries in China have enjoyed various tax holidays since 2000. Benefits under the tax holidays vary byjurisdiction.In accordance with Section 382 of the Internal Revenue Code, the amounts of and benefits from net operating loss and taxcredit carryforwards may be impaired or limited in certain circumstances. Events which cause limitations in the amount of netoperating losses or credits that we may utilize in any one year include, but are not limited to, a cumulative ownership change ofmore that 50% as defined, over a three year period.As a result of the implementation of Interpretation 48, we recognized $16.4 million of liability for unrecognized tax benefits.Of this amount, none was accounted for as a reduction to the January 1, 2007 balance of retained earnings. The amount decreasedtax loss carryforwards in the U.S., which are fully offset by a valuation allowance.70 TABLE OF CONTENTSWe recognize interest and penalties related to uncertain tax positions in income tax expense. Income tax expense for the yearended December 31, 2014 includes no interest and penalties. As of December 31, 2014, we have no accrued interest and penaltiesrelated to uncertain tax positions.We file income tax returns in the U.S. federal, various states and foreign jurisdictions. We have substantially concluded allU.S. federal and state income tax matters through December 31, 2013.Deferred tax liabilities have not been recognized for $67.6 million of undistributed earnings of our foreign subsidiaries atDecember 31, 2014. We have made no provision for U.S. income taxes on undistributed earnings of certain foreign subsidiariesbecause it is our intention to permanently reinvest such earnings in its foreign subsidiaries. If such earnings were distributed, wewould be subject to additional U.S. income tax expense. Determination of the amount of unrecognized deferred income taxliability related to these earnings is not practicable. As of December 31, 2014, the company and its consolidated joint ventureshold approximately $18.3 million in cash and investments in foreign bank accounts of which $13.9 million is not available for usein the United States without paying income taxes.A reconciliation of the beginning and ending amount of the gross unrecognized tax benefits is as follows (in thousands):Gross unrecognized tax benefits balance as of December 31, 2013$16,403 Add: Additions based on tax positions related to the current year — Additions for tax positions of prior years — Gross unrecognized tax benefits balance as of December 31, 2014$16,403 Excluding the effects of recorded valuation allowances for deferred tax assets, $16.4 million of the unrecognized tax benefitwould favorably impact the effective tax rate in future periods if recognized.Note 14. Net Income per ShareA reconciliation of the numerators and denominators of the basic and diluted net income per share calculations is as follows(in thousands, except per share data):Years Ended December 31,201420132012Numerator: Net income (loss) attributable to AXT, Inc$(1,388)$(7,958)$3,110 Less: Preferred stock dividends (177) (177) (177)Net income (loss) to common stockholders$(1,565)$(8,135)$2,933 Denominator: Weighted average common shares (basic) 32,452 32,700 32,144 Effect of dilutive securities: Common stock options — — 689 Restricted stock awards — — 32 Weighted average common shares (dilutive) 32,452 32,700 32,865 Basic net income (loss) per share: Net income attributable to AXT, Inc$(0.05)$(0.25)$0.10 Net income to common stockholders$(0.05)$(0.25)$0.09 Diluted net income (loss) per share: Net income attributable to AXT, Inc$(0.05)$(0.25)$0.09 Net income to common stockholders$(0.05)$(0.25)$0.09 Options excluded from diluted net income per share as the impact is anti-dilutive 2,772 2,671 1,056 Restricted stock excluded from diluted net income per share as the impactis anti-dilutive 252 241 13 71 TABLE OF CONTENTSNote 15. Segment Information and Foreign OperationsSegment InformationWe operate in one segment for the design, development, manufacture and distribution of high-performance compoundsemiconductor substrates and sale of materials. In accordance with ASC topic 280, Segment Reporting, our chief operatingdecision-maker has been identified as the Chief Executive Officer, who reviews operating results to make decisions aboutallocating resources and assessing performance for the Company. Since we operate in one segment, all financial segment andproduct line information can be found in the consolidated financial statements.Geographical InformationThe following table represents revenue amounts (in thousands) reported for products shipped to customers in thecorresponding geographic region:Years Ended December 31,201420132012Product revenue: Europe (primarily Germany)$21,535 $21,387 $18,170 China 17,451 24,946 19,815 North America (primarily the United States) 10,292 10,665 15,391 Japan 11,550 9,041 9,346 Taiwan 11,464 10,131 10,985 Asia Pacific (excluding China, Japan and Taiwan) 11,207 9,165 14,667 $83,499 $85,335 $88,374 Long-lived assets consist primarily of property, plant and equipment, and are attributed to the geographic location in whichthey are located. Long-lived assets by geographic region were as follows (in thousands):As of December 31,20142013Long-lived assets: United States of America$136 $204 China 33,726 37,417 $33,862 $37,621 Note 16. Foreign Exchange Contracts and Transaction Gains/LossesAs of December 31, 2014, and 2013, we had no outstanding commitments with respect to foreign exchange contracts.We incurred foreign currency transaction exchange losses which are included in “other income (expense), net” on theconsolidated statements of operations of $1.0 million, $1.3 million and $445,000 for the years ended December 31, 2014, 2013and 2012 respectively.Note 17. Commitments and ContingenciesLegal MattersWe are subject to legal proceedings and claims, either asserted or unasserted, that arise in the ordinary course of business.While the outcome of these proceedings and claims cannot be predicted with certainty, management does not believe that theoutcome of any of these legal matters will have a material adverse effect on our consolidated financial position, results ofoperations or cash flows.LeasesWe lease certain office space, warehouse facilities and equipment under long-term operating leases expiring at various datesthrough December 2025. The majority of our lease obligations relates to our lease agreement for the facility in Fremont, Californiawith approximately 19,467 square feet. The original lease commenced on72 TABLE OF CONTENTSDecember 1, 2008 for a term of seven years, with an option by us to cancel the lease after five years, upon forfeiture of the securitydeposit and payment of one-half of the fifth year’s rent. On June 28, 2013, we sent a notice to terminate the lease effectiveNovember 30, 2013 with an early termination penalty of $142,000 which was recorded as an expense in the third quarter of 2013.On August 2, 2013, we signed a new lease agreement for the current facility with reduced footage of 20,767 square feet, whichcommenced on December 1, 2013 for a term of two years. The reduced square footage, the reduced rate per square foot, and theexpected reduced operating costs, would save us approximately total $382,000 during 2014 and 2015. In September 2014, wesigned an amendment to the current lease to further reduce square footage to 19,467 square feet and to extend the term of the leasetwo more years. Total rent expenses under these operating leases were $260,000, $638,000 and $447,000 for the years endedDecember 31, 2014, 2013 and 2012, respectively. Total minimum lease payments under these leases as of December 31, 2014 aresummarized below (in thousands):LeasePayments2015$260 2016 165 2017 159 2018 30 2019 26 Thereafter 126 $766 Royalty AgreementWe entered into a royalty agreement with a competitor effective December 3, 2010 with a term of eight years, terminatingDecember 31, 2018. We and our related companies are granted a worldwide, nonexclusive, royalty bearing, irrevocable license tocertain patents for the term on the agreement. We shall pay a total of $7.0 million royalty payment over eight years that began in2011 based on future royalty bearing sales. This agreement contains a clause that allows us to claim for credit, starting in 2013, inthe event that the royalty bearing sales for the year is lower than a pre-determined amount set forth in this agreement. Royaltyexpense under this agreement was $577,000 which was net of claim for credit of $223,000 and $530,000 which was net of claim forcredit of $270,000 for the years ended December 31, 2014 and 2013, respectively. Royalty expense was $1.4 million for the yearended December 31, 2012. These expenses were included in cost of revenue. Total royalty payments under this agreement as ofDecember 31, 2014 are summarized below (in thousands):RoyaltyPayments2015 800 2016 575 2017 575 2018 575 $2,525 73 TABLE OF CONTENTSNote 18. Unaudited Quarterly Consolidated Financial DataQuarterFirstSecondThirdFourth(in thousands, except per share data)2014: Revenue$19,345 $21,449 $23,138 $19,567 Gross profit 2,718 4,160 5,318 4,971 Net income (loss) attributable to AXT, Inc (2,040) 319 644 (311)Net (loss) attributable to AXT, Inc per share, basic$(0.06)$0.01 $0.02 $(0.01)Net (loss) attributable to AXT, Inc per share, diluted$(0.06)$0.01 $0.02 $(0.01)2013: Revenue$22,380 $22,831 $20,521 $18,603 Gross profit 3,484 3,085 2,446 2,813 Net (loss) attributable to AXT, Inc (2,400) (2,035) (2,295) (1,228)Net (loss) attributable to AXT, Inc per share, basic$(0.08)$(0.06)$(0.07)$(0.04)Net (loss) attributable to AXT, Inc per share, diluted$(0.08)$(0.06)$(0.07)$(0.04)Note 19. Restructuring ChargesOn February 25, 2014, we announced a restructuring plan with respect to our wholly-owned subsidiary, Beijing Tongmei XtalTechnology Co, Ltd. (“Tongmei”) in order to better align manufacturing capacity with demand. Under the restructuring plan,Tongmei implemented certain workforce reductions with respect to its manufacturing facility in China. We also announced that therestructuring plan would be completed by March 31, 2014, depending on local legal requirements.In the first quarter of 2014, we reduced the workforce at Tongmei by approximately 93 positions that were no longer requiredto support production and operations, or approximately 11 percent of the workforce. Accordingly, we recorded a restructuringcharge of approximately $907,000 related to the reduction in force for severance-related expenses. As of March 31, 2014, wecompleted this restructuring plan and the reduction in force.Note 20. Subsequent EventsOn February 23, 2015, the Board of Directors announced that, pursuant to an anonymous whistleblower complaint, our AuditCommittee has conducted an investigation of certain potential related-party transactions involving Davis Zhang, our President,China Operations. The investigation did not conclude that there was any intentional misconduct by Mr. Zhang, or that he receivedany improper benefit from these transactions. Further, the investigation did not reveal any inaccuracies in our financial statementsresulting from these transactions. However, the investigation identified certain historical related-party transactions that were notpreviously disclosed in our filings with the Securities and Exchange Commission. We have filed a Current Report on Form 8-K onFebruary 23, 2015 to disclose such historical related-party transactions.On February 20, 2015, the Board waived any potential inconsistencies with our Code of Conduct and Ethics arising from thetransactions identified in the investigation. Also, the Audit Committee approved the related-party nature of such transactions to theextent it had not previously approved such transactions. The Board and Audit Committee specified that such waiver and approvalwould have retroactive effect to the date of commencement of the transactions covered by such waiver and approval. We expect toincur additional professional services expense related to the investigation of approximately $1.2 million in the first quarter of2015.74 TABLE OF CONTENTSSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned, thereto duly authorized.AXT, Inc.By:/s/ GARY L. FISCHERChief Financial Officer and Corporate Secretary(Principal Financial Officer)Date: March 13, 2015POWER OF ATTORNEYKNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes andappoints Morris S. Young and Gary L. Fischer, and each of them, his true and lawful attorney-in-fact and agent, with full power ofsubstitution, each with power to act alone, to sign and execute on behalf of the undersigned any and all amendments to this Reporton Form 10-K, and to perform any acts necessary in order to file the same, with all exhibits thereto and other documents inconnection therewith with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power andauthority to do and perform each and every act and thing requested and necessary to be done in connection therewith, as fully toall intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent,or their or his or her substitutes, shall do or cause to be done by virtue hereof.Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the followingpersons on behalf of the registrant and in the capacities and on the dates indicated.SignatureTitleDate/s/ MORRIS S. YOUNGChief Executive Officer and DirectorMarch 13, 2015Morris S. Young(Principal Executive Officer)/s/ GARY L. FISCERChief Financial Officer and Corporate SecretaryMarch 13, 2015Gary L. Fischer(Principal Financial Officer andPrincipal Accounting Officer)/s/ JESSE CHENChairman of the Board of DirectorsMarch 13, 2015Jesse Chen/s/ DAVID C. CHANGDirectorMarch 13, 2015David C. Chang/s/ LEONARD LEBLANCDirectorMarch 13, 2015Leonard LeBlanc/s/ NAI-YU PAIDirectorMarch 13, 2015Nai-yu Pai75 TABLE OF CONTENTSAXT, Inc.EXHIBITSTOFORM 10-K ANNUAL REPORTFor the Year Ended December 31, 2014ExhibitNumberDescription3.1(1)Restated Certificate of Incorporation3.2(2)Certificate of Amendment of Certificate of Incorporation3.3(3)Certificate of Amendment to the Restated Certificate of Incorporation3.4(4)Certificate of Designation, Preferences and Rights of Series A Preferred Stock (which is incorporated herein by reference to Exhibit2.1 to the registrant’s form 8-K datedMay 28, 1999).3.5(5)Second Amended and Restated By Laws3.6(6)Amended and Restated Section 5.1 of Article V of the Second Amended and Restated Bylaws of AXT, Inc.3.7(7)Certificate of Amendment to By Laws4.1(8)Rights Agreement dated April 24, 2001 by and between AXT, Inc. and ComputerShare Trust Company, Inc.10.1(9)*Form of Indemnification Agreement for directors and officers10.2(10)*1997 Stock Option Plan and forms of agreements thereunder10.3(11)Purchase and Sale Agreement by and between Limar Realty Corp #23 and AXT, Inc. dated April 199810.4(12)Bond Purchase Contract between Dain Rauscher Incorporated and AXT, Inc. dated December 1, 199810.5(13)Remarketing Agreement between Dain Rauscher Incorporated and AXT, Inc. dated December 1, 199810.6(14)Reimbursement Agreement between Wells Fargo Bank National Association and AXT, Inc. dated April 7, 200310.7(15)Asset purchase agreements dated September 4, 2003 by and between Dalian Luming Science and Technology Group, Ltd and AXT,Inc. and by and between Lumei Optoelectronics Corp., AXT, Inc., Lyte Optronics, Inc., Beijing Tongmei Xtal Technology andXiamen Advanced Semiconductor Co., Ltd.10.8(16)*Agreement respecting severance payment between the Company and Dr. Morris S. Young.10.9(17)*Employment agreement between the Company and Mr. Davis Zhang10.10(18)Purchase and Sale Agreement by and between Car West Auto Body, Inc., a California corporation and AXT, Inc. dated February19, 200810.11(19)Lease agreement dated July 2, 2008 between AXT, Inc. and T. Drive Partners, L.P., a California partnership10.12(20)**6-inch Supply Agreement dated December 31, 2008 between AXT, Inc. and IQE plc10.13(21)**4-inch Supply Agreement dated December 31, 2008 between AXT, Inc. and IQE plc10.14(22)2007 Equity Incentive Plan (amended December 8, 2008)10.15(23)*Forms of agreements under the 2007 Equity Incentive Plan10.17(25)*Employment Letter Agreement between the Company and Mr. Davis Zhang10.18(26)*Employment Letter Agreement between the Company and Mr. Robert G. Ochrym10.19*2015 Executive Bonus Plan10.20(27)**Supply Agreement signed January 29, 2010 between AXT, Inc. and AZUR SPACE Solar Power GmbH10.24(28)Credit Line Account Application and Agreement for Organizations and Businesses between AXT, Inc. and UBS Bank USA datedDecember 15, 200810.25(29)Notice of Credit Line Account Increase between AXT, Inc. and UBS Bank USA dated January 17, 201210.26(30)*Amended and Restated Employment Offer Letter between the Company and Dr. Morris S. Young dated December 4, 201210.27*Employment Letter Agreement between the Company and Mr. Gary L. Fischer12.1Computation of Ratio of Earnings to Fixed Charges21.1(31)List of Subsidiaries23.1Consent of Independent Registered Public Accounting Firm, Burr Pilger Mayer, Inc24.1Power of Attorney (see signature page) TABLE OF CONTENTSExhibitNumberDescription31.1Certification by principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2Certification by principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1Certification by Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002101.INS†XBRL Instance.101.SCH†XBRL Taxonomy Extension Schema.101.CAL†XBRL Taxonomy Extension Calculation Linkbase.101.DEF†XBRL Taxonomy Extension Definition Linkbase.101.LAB†XBRL Taxonomy Extension Label Linkbase.101.PRE†XBRL Taxonomy Extension Presentation Linkbase.(1)Incorporated by reference to exhibit 3.1 to registrant’s Form 10-K filed with the SEC on March 31, 1999.(2)Incorporated by reference to exhibit 3.1 to registrant’s Form 10-Q filed with the SEC on August 14, 2000.(3)Incorporated by reference to exhibit 3.4 to registrant’s Form 10-Q filed with SEC on August 5, 2004.(4)Incorporated by reference to exhibit 3.1 to registrant’s Form 8-K filed with the SEC on June 14, 1999.(5)Incorporated by reference to exhibit 3.4 to registrant’s Form 8-K filed with the SEC on May 30, 2001.(6)Incorporated by reference to exhibit 99.2 to registrant’s Form 8-K filed with the SEC on August 1, 2007.(7)Incorporated by reference to exhibit 3.1 to registrant’s Form 8-K filed with the SEC on October 26, 2010.(8)Incorporated by reference to exhibit 4.2 to registrant’s Form 8-K filed with the SEC on May 30, 2001.(9)Incorporated by reference to exhibit 10.1 to registrant’s Registration Statement on Form S-1 filed with the SEC on March 17, 1998.(10)Incorporated by reference to exhibit 10.3 to registrant’s Registration Statement on Form S-1 filed with the SEC on March 17, 1998.(11)Incorporated by reference to exhibit 10.7 to registrant’s Registration Statement on Amendment No. 2 to Form S-1 filed with the SEC on May11, 1998.(12)Incorporated by reference to exhibit 10.10 to registrant’s Form 10-K filed with the SEC on March 31, 1999.(13)Incorporated by reference to exhibit 10.11 to registrant’s Form 10-K filed with the SEC on March 31, 1999.(14)Incorporated by reference to exhibit 10.15 to registrant’s Form 10-Q filed with the SEC on May 9, 2003.(15)Incorporated by reference to exhibit 10.16 to registrant’s Form 10-Q filed with the SEC on November 13, 2003.(16)Incorporated by reference to exhibit 99.1 to registrant’s Form 8-K filed with the SEC on March 30, 2005.(17)Incorporated by reference to exhibit 99.1 to registrant’s Form 8-K filed with the SEC on January 17, 2006.(18)Incorporated by reference to exhibit 10.25 to registrant’s Form 8-K filed with the SEC on February 20, 2008.(19)Incorporated by reference to exhibit 10.28 to registrant’s Form 8-K filed with the SEC on July 8, 2008.(20)Incorporated by reference to exhibit 10.29 to registrant’s Form 8-K filed with the SEC on January 5, 2009.(21)Incorporated by reference to exhibit 10.30 to registrant’s Form 8-K filed with the SEC on January 5, 2009.(22)Incorporated by reference to exhibit 10.31 to registrant’s Form 10-K filed with the SEC on March 31, 2009.(23)Incorporated by reference to exhibit 10.20 to registrant’s Form 10-K filed with the SEC on March 22, 2010.(24)Incorporated by reference to exhibit 10.22 to registrant’s Form 10-K filed with the SEC on March 22, 2010.(25)Incorporated by reference to exhibit 10.23 to registrant’s Form 10-K filed with the SEC on March 22, 2010.(26)Incorporated by reference to exhibit 10.24 to registrant’s Form 10-K filed with the SEC on March 22, 2010.(27)Incorporated by reference to exhibit 10.31 to registrant’s Form 8-K filed with the SEC on February 2, 2010.(28)Incorporated by reference to exhibit 10.23 to registrant’s Form 10-K filed with the SEC on March 15, 2012.(29)Incorporated by reference to exhibit 10.24 to registrant’s Form 10-K filed with the SEC on March 15, 2012.(30)Incorporated by reference to exhibit 10.1 to registrant’s Form 8-K filed with the SEC on December 4, 2012.(31)Incorporated by reference to exhibit 21.1 to registrant’s Registration Statement on Amendment No. 1 toForm S-3 filed with the SEC on July 28, 2006.*Management contract or compensatory plan.**Confidential treatment has been requested of the SEC for portions of the exhibit.†XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus forpurposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of1934, and is otherwise not subject to liability under these sections. Exhibit 10.19(27) AXT, INC. FISCAL 2015 EXECUTIVE INCENTIVE BONUS PLAN The following are the terms of the 2015 Executive Bonus Plan approved by the Compensation Committee of the Board of Directors of AXT, Inc. (the“Company”) on February 20, 2015 (the “Plan”). A. Purpose 1. The terms of the Plan have been established to attract, motivate, retain and reward the Company’s executive officers and other officers ofthe Company for driving the Company to achieve specific corporate objectives. 2. The Plan provides for the payment of quarterly cash bonuses based upon Company financial targets and individual performance targetobjectives. B. Eligibility 1. Those eligible to participate in the Plan are the officers of the Company subject to Section 16 of the Securities Exchange Act of 1934, asamended and any other officers of the Company designated by the Compensation Committee (each, an “Officer” and collectively, the “Officers”). C. Determination of Bonus Amounts 1. The Compensation Committee has determined that each individual Officer will have an “Individual Bonus Percentage” and an“Individual Target Bonus” as defined below, which will vary depending on such Officer’s position and responsibilities in the Company. 2. Bonuses payable will be determined based upon achievement of corporate financial targets (the “Corporate Targets”) and individualtargets established for each Officer (the “Individual Targets”). Achievement of the Corporate Targets will represent 70% of the total bonus, andachievement of the Individual Targets will represent 30% of the total bonus. The Corporate Targets shall be comprised of four financial targets: (1) totalrevenue (“Total Revenue Target”), (2) gross profit (“Gross Profit Target”), (3) operating expense (“Operating Expense Target”) and (4) net income(“Net Income Target”). The actual quarterly Corporate Targets are set forth in the operating plan for the year ending December 31, 2015, and approvedby the Board of Directors (the “2015 Operating Plan”). 3. The Corporate Targets are weighted 10% for each of the Total Revenue Target, Gross Profit Target and Operating Expense Target and40% for the Net Income Target for a total of 70% of the total bonus. The Individual Bonus Earned (as defined below) for each quarter will depend on the“Corporate Target Achievement Multiplier” which shall equal the sum of: (a) actual total revenue for such quarter divided by the Total Revenue Targetfor the quarter multiplied by 0.10; (b) actual gross profit for such quarter divided by the Gross Profit Target for the quarter multiplied by 0.10; (c) actualoperating expense for such quarter divided by Operating Expense Target multiplied by 0.10; and (e) actual net income for such quarter divided by theNet Income Target multiplied by 0.40 (subject to Section 6 below). 4. The determination of the quarterly bonus based on the achievement of the Total Revenue Target, Gross Profit Target and OperatingExpense Target shall be subject to the following: ·The percentage of the bonus resulting from the achievement of the Total Revenue, Gross Profit Target and Operating Expense Target ranges from 80%to 120%. ·No portion of the quarterly bonus with respect to such Corporate Target will be paid if the achievement of such Corporate Target is less than 90% ofthe 2015 Operating Plan amount for such Corporate Target. ·At 90% achievement of the 2015 Operating Plan for such Corporate Target, 80% of the Quarterly Individual Target Bonus with respect to suchCorporate Target shall be payable. ·At 120% achievement of the 2015 Operating Plan for such Corporate Target, 100% of the Quarterly Individual Target Bonus with respect to suchCorporate Target shall be payable. ·At 150% achievement or greater of the 2015 Operating Plan for such Corporate Target, 120% of the Quarterly Individual Target Bonus with respect tosuch Corporate Target shall be payable. This will be the maximum amount payable for each such Corporate Target. ·Accordingly, for each 1.5% increase in the performance for each Corporate Target against the 2015 Operating Plan over the minimum 90% threshold,the bonus will increase by 1% until a maximum bonus equal to 120% of the Quarterly Individual Target Bonus relating to such Corporate Target isearned. ·The parameters described above are summarized in the following table: Total Revenue, Gross Profit, Operating Expense If achieve<90%90%100%120%150%Bonus0%80%86.67%100%120% 4. The determination of the quarterly bonus based on the achievement of the Net Income Target shall be subject to the following: ·The quarterly bonus based on the achievement of the Net Income Target shall be 0% of the Quarterly Individual Target Bonus (with respect to NetIncome) when actual Net Income is less than 70% of the budgeted Net Income for such quarter under the 2015 Operating Plan. ·The quarterly bonus based on the achievement of the Net Income Target shall be 100% of the Quarterly Individual Target Bonus (with respect to NetIncome) when actual Net Income is 100% of the budgeted Net Income for such quarter under the 2015 Operating Plan. ·For each percentage improvement in the actual Net Income for the quarter over the minimum 70% threshold, the percentage of the QuarterlyIndividual Target Bonus payable will increase by 1% up to a maximum total bonus payable of 120% of the Quarterly Individual Target Bonus(relating to Net Income) when actual Net Income is 120% or greater than the budgeted Net Income for such quarter set forth in the 2015 OperatingPlan. ·The parameters described above are summarized in the following table: Net IncomeIf achieve<70%70%100%120%Bonus0%70%100%120% 5. The determination of the quarterly bonus shall also be subject to the following: ·In the event that actual Net Income is negative for any particular quarter, no bonus shall be payable for such quarter. ·In no event shall the achievement of any individual Corporate Target represent more than 120% of such Corporate Target for such quarter. Thismeans that the achievement of each of the Total Revenue Target, Gross Profit Target and Operating Expense Target shall not result in the paymentof a bonus relating to such Corporate Target exceeding 12% of the Quarterly Individual Bonus Target in any quarter. The Individual Targets shallnot represent more than 30% of the Individual Bonus Earned by any Officer in any quarter. Therefore, the maximum total quarterly bonus earned byany Officer in any quarter is 114% of the Quarterly Individual Target Bonus (the sum of 12% 12% 12% 48% and 30 %). 6. Achievement of the Individual Targets, representing 30% of the Plan, shall be determined each quarter by the Chief Executive Officerfor all Officers other than the Chief Executive Officer, pursuant to objectives established by the Chief Executive Officer for each such Officer.Achievement of the Individual Targets by the Chief Executive Officer shall be determined each quarter by the Compensation Committee, based uponobjectives established by the Compensation Committee each quarter for the Chief Executive Officer. D. Individual Target Percentages 1. “Individual Bonus Percentage” means the percentage of a respective Officer’s base salary that is targeted as a bonus payment under thePlan assuming exactly one hundred percent achievement by the Company of each of the Corporate Targets and Individual Targets (as defined below).The Individual Bonus Percentage for each Officer is set as a percentage of base salary and varies based upon the Officer’s position and responsibilities.The Individual Bonus Percentage for each Officer under the Plan is as follows: NameTarget BonusMorris S. Young75Davis Zhang50Gary Fischer50Robert Ochrym45 2. “Individual Target Bonus” for each fiscal year means the amount equal to a respective Officer’s base salary multiplied by such Officer’sIndividual Bonus Percentage. The “Quarterly Individual Target Bonus” shall be the Individual Target Bonus divided by four. The “Individual BonusEarned” means the amount equal to Individual Target Bonus multiplied by the Corporate Target Achievement Multiplier. 3. In the 2015 Plan, the Individual Targets would represent 30% of the total bonus. E. Plan Changes 1. The Board or the Compensation Committee may modify the financial performance goals at any time based on changes in businessconditions during the year and may grant bonuses to Officers even if the financial performance goals are not met. In its discretion, the CompensationCommittee may, either at the time it grants an award under the Plan or at any time thereafter, provide for the adjustment of the award formula applicableto an award granted to any participant under the Plan to reflect such participant’s individual performance in his or her position with the Company orsuch other factors as the Compensation Committee may determine. Notwithstanding the attainment of any performance goal under the Plan, theCompensation Committee shall have the discretion, on the basis of such criteria as it may establish, to reduce the amount of or to eliminate any finalaward that would otherwise be paid, and retains the absolute discretion to amend, modify or terminate the Plan at any time. 2. Nothing in this Plan will interfere with or limit in any way the right of the Company or the right of any individual to terminate theemployment relationship at any time, with or without cause. Exhibit 10.27 Corporate Office: 4281 Technology Drive Fremont, CA 94538 Ph: 510-438-4700 Fax: 510-353-0668 www.axt.com August 11, 2014 Gary L. Fischer Dear Gary: It is my pleasure to offer you a permanent employment position with AXT, Inc. (“AXT” or the “Company”), as contemplated by the ConsultingAgreement between you and the AXT dated June 2, 2014 (the “Consulting Agreement”), on the following terms set forth in this letter (the “Offer Letter”). 1.Employment and Duties You will be employed by AXT as its Vice President and Chief Financial Officer (“CFO”). You will be employed on a full-time basis and will reportto AXT’s Chief Executive Officer (“CEO”). Your duties and responsibilities will be consistent with your title and position as AXT’s CFO, and any otherduties assigned or requested by the CEO, including, without limitation, responsibility for AXT’s accounting, tax, insurance, human resources, legal, facilities,and investor relations functions, as well as for the reports required of AXT as a public company and compliance with the Sarbanes-Oxley Act. In addition, youwill assist the CEO with corporate activities, including, without limitation, mergers and acquisitions, investments and strategic and financial planning. Youwill devote your full time, ability, attention, energy, knowledge, skill, and productive employment time solely to performing your duties as an employee ofAXT. You will comply with all of AXT’s rules and policies. 2.Start Date If you accept this offer, you will assume your role as CFO on August 11, 2014. 3.Compensation (a) Base Salary. In consideration for your services to AXT under this Offer Letter, you will receive an annual base salary of $250,000, paid in UnitedStates dollars in equal biweekly installments in accordance with AXT’s normal payroll practices, from which AXT will withhold and deduct all applicabletaxes to the extent required by law. Your base salary will be annually reviewed by the Company, which may be adjusted based upon various factorsincluding, but not limited to, your and the Company’s performance. (b) Stock Option. The Compensation Committee (the “Committee”) of the Board of Directors (the “Board”) of AXT has granted to you a stockoption award (the “Option”) to purchase 200,000 shares of AXT common stock (“Shares”) pursuant to AXT’s 2007 Equity Incentive Plan and the standardform of stock option agreement thereunder. The exercise price per Share of the Option is equal to the closing price of AXT common stock on August 4, 2014,the effective grant date of the Option. The Option will be scheduled to vest as to twenty-five percent (25%) of the Shares subject to the Option on June 2,2015, and, thereafter, 1/48th of the Shares subject to the Option will vest on the second day of each month thereafter, subject to your continued employmentwith AXT through each applicable vesting date. No right to any Shares is earned or accrued until such time that vesting occurs, nor does the grant confer anyright to continue vesting or employment. (c) Annual Bonus. You will be eligible to participate in bonus plans as approved for your position by the Board or Committee. (d) Business Expenses. AXT will reimburse you for customary, ordinary, and necessary business expenses as are incurred by you in the performanceof your duties and activities associated with promoting or doing AXT’s business, in accordance with AXT’s expense reimbursement policy as may be in effectfrom time to time. All expenses as described in this paragraph will be subject to presentation by you of such documentation as may be reasonably necessaryto substantiate that all such expenses were incurred in the performance of your duties. (e) Directors and Officers Insurance. Directors and Officers Insurance currently is maintained by AXT and, to the extent that such insurance remainsavailable to AXT upon terms acceptable to AXT, AXT will use its best commercial efforts to continue to maintain such insurance at such levels as the Boardmay approve from time to time. (f) Vacation and Sick Leave. You will be eligible to accrue up to fifteen (15) days of vacation each year of your employment. Your accrual ofvacation and sick leave will be pursuant to AXT’s policies on the same terms as other, similarly situated executives, provided that at no time will you bepermitted to have accrued more than thirty (30) days of vacation. At any time you accrue this amount of vacation, you will not earn additional vacation untilyou use vacation time so that your accrual drops below this thirty (30) day maximum. You agree to schedule your vacations at times that are approved by theCEO. (g) Benefits. You will be eligible for health insurance, retirement, and other benefits on the same basis as other similarly situated employees of AXT.Your participation in the Company’s 401(k) plan will, to the extent allowed by the terms of the plan, be fully vested from the commencement of youremployment.-2- 4.Outside Activities (a)While employed by AXT, and unless otherwise agreed in writing, you will not: (i) undertake any other form of employment or other activity that may negatively affect the performance of your duties as an employee ofAXT; and (ii) directly or indirectly, either as an employee, employer, consultant, agent, principal, partner, shareholder, corporate officer, director, or inany other capacity, engage or assist any third party in engaging in any business competitive with the business of AXT or any parent, subsidiary or affiliate. (b) During the ninety (90) period immediately after you assume your role as CFO, you are permitted to continue to provide limited consultingservices to Trivium Corporate Solutions, provided that (i) such limited consulting services do not conflict with Section 4(a) and your duties, obligations and responsibilities as an employee ofAXT; and (ii) you do not perform such limited consulting services during regular work hours. 5.Proprietary Rights and Confidentiality, Code of Business Conduct and Ethics, and Insider Trading Policy If you have not already done so, you will be required to sign and comply with AXT’s Proprietary Information and Inventions Agreement (the “PIIA”),Code of Business Conduct and Ethics, and Insider Trading Policy. 6.Termination of Employment (a) At-will Employment. The Company is excited about your joining and looks forward to a beneficial and productive relationship. Nevertheless,you should be aware that your employment with the Company is for no specified period and constitutes at-will employment. As a result, you are free to resignat any time, for any reason or for no reason. Similarly, the Company is free to conclude its employment relationship with you at any time, with or withoutcause, and with or without notice. We request that, in the event of resignation, you give the Company at least six weeks’ notice. (b) Resignation from All Positions. Upon termination of your employment for any reason whatsoever, you automatically will deemed to haveresigned from all offices and directorships then held with AXT or any of its affiliates. -3- (c) Change in Control Severance. If a Change in Control of AXT (as defined in Appendix A attached hereto) takes place, and within twelve (12)months thereafter you incur an Involuntary Termination, as defined in Appendix A, then, subject to the terms and conditions set forth in Appendix A, AXTwill provide you with the following: (i) Accrued Payments. All accrued but unpaid vacation, expense reimbursements, wages, and other benefits due to you under any AXT-provided plans, policies, and arrangements as of the date of Involuntary Termination (the “Termination Date”); (ii) Cash Severance. A lump sum cash severance payment in a gross amount equal to twelve (12) months of your then-current annual basesalary; (iii) Health Benefits. If you, and any of your spouse and/or dependents (“Family Members”), have coverage on the Termination Dateunder a group health plan sponsored by the Company, the Company will reimburse you the total applicable premium cost for continued group health plancoverage under the Consolidated Omnibus Budget Reconciliation Act of 1986, as amended (“COBRA”) for a period of twelve (12) months following theInvoluntary Termination, provided that you validly elect and are eligible to continue coverage under COBRA for you and your Family Members, and,provided further, that if the Company determines in its sole discretion that it cannot provide the COBRA reimbursement benefits without potentiallyviolating applicable laws (including, without limitation, Section 2716 of the Public Health Service Act and the Employee Retirement Income Security Act of1974, as amended), the Company in lieu thereof will provide to you a taxable lump sum payment in an amount equal to the monthly COBRA premium thatyou would be required to pay to continue the group health coverage in effect on the Termination Date (which amount will be based on the premium for thefirst month of COBRA coverage) for a period of twelve (12) months following the Termination Date, which payment will be made regardless of whether youelect COBRA continuation coverage; and (iv) Equity Award Vesting Acceleration. One hundred percent (100%) vesting acceleration of your then-outstanding and unvested equityawards granted by AXT as of immediately prior to the Involuntary Termination. 7.Arbitration (a) Arbitration Required. Any dispute, claim, or controversy arising out of or related to your employment with AXT or the termination of thatemployment shall be resolved exclusively through final and binding arbitration. This agreement to arbitrate includes all state, federal and foreign statutory orcommon law claims, including but not limited to discrimination claims arising under the California Fair Employment and Housing Act, Title VII of the CivilRights Act of 1964, the Americans with Disabilities Act, and the Age Discrimination in Employment Act, or under the California Labor Code. Any demandfor arbitration must be made within one (1) year of the termination of employment, provided, however, that if a claim arose under a statute providing for alonger time to file a claim, that statute shall govern. (b) Costs or Fees. All administrative costs of the arbitration, such as arbitrator and court reporting fees, shall be divided equally between AXT andyou, unless otherwise required by law. Each party shall bear its other costs of arbitration, including attorney’s fees, provided, however, that the arbitrator(s)may award attorney’s fees to the prevailing party under the provisions of any applicable law. -4- (c) Representation. You may, but are not required to, have an attorney represent you in preparation for and during the arbitration. If you decide touse an attorney, you shall be solely responsible for the payment of attorney’s fees and costs, subject to any statutory authority of the arbitrator to orderreimbursement by AXT. (d) Arbitration Procedure. All disputes subject to arbitration under this Offer Letter shall be resolved by a single arbitrator selected by the parties, andjudgment on the award rendered by the arbitrator(s) may be entered by any court having jurisdiction thereof. The arbitrator shall have the authority to makeany award that would be made by a court, but the arbitrator shall not have the authority to amend, modify, supplement or change the terms and conditions ofemployment set forth in this Offer Letter or AXT’s policies. (e) Location. The location of the arbitration shall be Alameda County or San Francisco, California. (f) Waiver of Right to Jury Trial. You agree that if for any reason any dispute or controversy between you and AXT arising from or related to youremployment or the termination of your employment is resolved in court rather than through arbitration, then, to the extent permitted by law, trial of thatdispute will be to a judge sitting without a jury, and you specifically waive any right you may have to trial by jury of any such dispute or controversy. (g) Survival. Your agreement to arbitrate and the terms of this Section will survive the termination of your employment with AXT. (h) Employee Acknowledgment. YOU UNDERSTAND THAT YOU ARE ELECTING TO RESOLVE ANY DISPUTE, CLAIM OR CONTROVERSYDESCRIBED IN SECTION 7(a), ABOVE, IN AN ARBITRAL FORUM RATHER THAN A JUDICIAL FORUM AND THAT YOU ARE GIVING UP THERIGHT TO A JURY TRIAL OF ANY SUCH DISPUTE, CLAIM, OR CONTROVERSY. 8.Miscellaneous (a) Modification. Any modification of the terms of this Offer Letter will be effective only if and to the extent such modification is in a writing andsigned by you and by the CEO. (b) Assignment. In view of the personal nature of the services you will perform by AXT, you cannot assign or transfer any of your rights orobligations under this Offer Letter. (c) Severability. If any of the provisions (or any part of any provision) of this Offer Letter are found to be unenforceable, then the remainingprovisions (or part(s) thereof) shall nonetheless remain in full force and effect. (d) Entire Agreement. The terms of this Offer Letter (which includes the Appendix A attached hereto), along with the PIIA and any other agreementsrelating to proprietary rights between you and the Company, constitute the entire agreement between AXT and you pertaining to the subject matter hereofand supersede all prior or contemporaneous written or verbal agreements and understandings in connection with the subject matter hereof, including, withoutlimitation, the Consulting Agreement (except as to any proprietary rights). -5- (e) Governing Law. Your rights and obligations as an employee of AXT will be governed by the laws of the State of California without regard to thechoice-of-law provisions thereof. In any action relating to your employment by AXT, including one to compel arbitration or to enforce an arbitration awardunder Section 7, AXT and you specifically consent to the jurisdiction of the federal and state courts located in Alameda County, California. If you wish to accept this offer of employment, please sign and date this Offer Letter in the space provided below. By signing below, youacknowledge that you have received no inducements or representations other than those contained in this Offer Letter that caused you to accept this offer ofemployment. We look forward to your continued contributions to AXT. Sincerely, /s/ Morris S. Young Dr. Morris S. YoungChief Executive Officer Agreed to and accepted: Signature:/s/ Gary L. Fischer Printed Name:Gary L. Fischer Date:August 11, 2014 -6- Appendix A The following additional provisions will apply to your Offer Letter, including with respect to the severance benefits set forth in Sections 6(c)(ii) through 6(c)(iv) (the “Severance”) of your Offer Letter. A. “Cause” Definition. For purposes of your Offer Letter, “Cause” means any one or more of the following: (i) You commit any act of fraud, misappropriation, theft, dishonesty, or other act of moral turpitude; (ii) You breach or neglect the duties you are required to perform under the terms of the Offer Letter; (iii) You engage in willful misconduct in the performance of your duties hereunder, commit insubordination (in the sole, reasonable discretionof the CEO or the Board), or otherwise fail to perform your duties hereunder as directed by the CEO or the Board; and (iv) You are guilty of, convicted of, or plead guilty or nolo contendere to, a felony, crime of moral turpitude or other serious offense. B. “Change in Control” Definition. For purposes of your Offer Letter, “Change in Control” means the occurrence of any of the following events: (i) Change in Ownership of the Company. A change in the ownership of the Company which occurs on the date that any one person, or morethan one person acting as a group (“Person”), acquires ownership of the stock of the Company that, together with the stock held by such Person, constitutesmore than 50% of the total voting power of the stock of the Company; or (ii) Change in Effective Control of the Company. If the Company has a class of securities registered pursuant to Section 12 of the SecuritiesExchange Act of 1934, as amended, a change in the effective control of the Company which occurs on the date that a majority of members of the Board isreplaced during any twelve (12) month period by members of the Board whose appointment or election is not endorsed by a majority of the members of theBoard prior to the date of the appointment or election. For purposes of this subsection (ii), if any Person is considered to be in effective control of theCompany, the acquisition of additional control of the Company by the same Person will not be considered a Change in Control; or (iii) Change in Ownership of a Substantial Portion of the Company’s Assets. A change in the ownership of a substantial portion of theCompany’s assets which occurs on the date that any Person acquires (or has acquired during the twelve (12) month period ending on the date of the mostrecent acquisition by such person or persons) assets from the Company that have a total gross fair market value equal to or more than 50% of the total grossfair market value of all of the assets of the Company immediately prior to such acquisition or acquisitions. For purposes of this subsection (iii), gross fairmarket value means the value of the assets of the Company, or the value of the assets being disposed of, determined without regard to any liabilitiesassociated with such assets. For purposes of this Section B, persons will be considered to be acting as a group if they are owners of a corporation that enters into a merger,consolidation, purchase or acquisition of stock, or similar business transaction with the Company. Notwithstanding the foregoing, a transaction will not be deemed a Change in Control unless the transaction qualifies as a change in control eventwithin the meaning of Section 409A (as defined below). C. “Good Reason” Definition. For purposes of your Offer Letter, “Good Reason” means the occurrence of one or more of the following, without yourwritten consent: (i) A material diminution in your base compensation, other than as part of a general reduction in the base compensation of all similarly situatedemployees; (ii) A material diminution in your authority, duties or responsibilities; (iii) A material diminution in the authority, duties or responsibilities of the CEO or the requirement that you report to a corporate officer oremployee other than the CEO or the Board; (iv) A material diminution in the budget over which you retain authority; (v) A material change in the geographic location at which you must perform services; and (vi) Any other action or inaction that constitutes a material breach by the Company of this Offer Letter. Notwithstanding any other provision of this Offer Letter to the contrary, your resignation will not be for Good Reason unless: (a) you notify theCompany in writing of the condition that you believe constitutes Good Reason within ninety (90) days after the initial existence thereof (which noticereasonably identifies such condition and the details regarding its existence), (b) the Company fails to remedy such condition within thirty (30) days after thedate on which it receives such notice (the “Cure Period”), and (c) you terminate employment with the Company (and its subsidiaries and affiliates) withintwelve (12) months of the initial existence of the conditions giving rise to Good Reason. D. “Involuntary Termination” Definition. For purposes of your Offer Letter, “Involuntary Termination” means either (i) the Company terminates youremployment without Cause; or (ii) you resign for Good Reason. E. Release of Claims. As a condition to receiving the Severance, you will be required to sign a waiver and release of all claims arising out of youremployment with AXT and its subsidiaries and affiliates (the “Release”). The Release will be in a form specified by AXT. The Release will include specificinformation regarding the amount of time you will have to consider the terms of the Release and return the signed agreement to AXT; provided, however, thatin all cases the Release must become effective and irrevocable no later than the sixtieth (60th) day following the date of termination of your employmentwith AXT (the “Release Deadline Date”). If the Release does not become effective and irrevocable by the Release Deadline Date, you will forfeit any right tothe Severance. In no event will the Severance be paid to you until the Release becomes effective and irrevocable. F. Severance Payment Timing. Provided that the Release becomes effective and irrevocable by the Release Deadline Date and subject to Section Gbelow, the Severance will be paid, or in the case of installments, will commence, within ten (10) days following the date that the Release becomes effectiveand irrevocable (such payment date, the “Severance Start Date”), and any Severance otherwise payable to you during the period immediately following yourtermination of employment with AXT through the Severance Start Date will be paid in a lump sum to you on the Severance Start Date, with any remainingpayments to be made as provided in your Offer Letter. G. Section 409A. (i) Notwithstanding anything to the contrary in your Offer Letter (including this Appendix A), no Severance to be paid to you, if any, that, whenconsidered together with any other severance payments or separation benefits, are considered deferred compensation under Section 409A of the InternalRevenue Code of 1986, as amended, and the final regulations and any guidance promulgated thereunder (“Section 409A”) (together, the “DeferredPayments”) will be paid or provided until you have a “separation from service” within the meaning of Section 409A. Similarly, no Severance payable to you,if any, that otherwise would be exempt from Section 409A pursuant to Treasury Regulation Section 1.409A-1(b)(9) will be payable until you have a“separation from service” within the meaning of Section 409A. (ii) It is intended that the Severance will not constitute Deferred Payments but rather will be exempt from Section 409A as a payment that wouldfall within the “short-term deferral period” as described in subsection (iv) below or resulting from an involuntary separation from service as described insubsection (v) below. In no event will you have discretion to determine the taxable year of payment of any Deferred Payment. Any Severance that would beconsidered Deferred Payments will be paid on, or in the case of installments, commence on, the sixty-first (61st) day following your separation from service,or if later, such time as required by subsection (iii) below. Further, except as required by subsection (iii) below, any Severance that otherwise would have beenpaid to you during the sixty (60) day period immediately following your separation from service but for the preceding sentence will be paid to you on thesixty-first (61st) day following your separation from service and any remaining payments will be made as provided in your Offer Letter. (iii) Notwithstanding anything to the contrary in your Offer Letter (including this Appendix A), if you are a “specified employee” within themeaning of Section 409A at the time of your separation from service (other than due to death), then the Deferred Payments, if any, that are payable within thefirst six (6) months following your separation from service, will become payable on the date six (6) months and one (1) day following the date of yourseparation from service. All subsequent Deferred Payments, if any, will be payable in accordance with the payment schedule applicable to each payment orbenefit. Notwithstanding anything herein to the contrary, in the event of your death following your separation from service, but before the six (6) monthanniversary of the separation from service, then any payments delayed in accordance with this paragraph will be payable in a lump sum as soon asadministratively practicable after the date of your death and all other Deferred Payments will be payable in accordance with the payment schedule applicableto each payment or benefit. Each payment and benefit payable under your Offer Letter is intended to constitute a separate payment under Section 1.409A-2(b)(2) of the Treasury Regulations. (iv) Any amount paid under your Offer Letter that satisfies the requirements of the “short-term deferral” rule set forth in Section 1.409A-1(b)(4)of the Treasury Regulations will not constitute Deferred Payments for purposes of subsection (i) above. (v) Any amount paid under your Offer Letter that qualifies as a payment made as a result of an involuntary separation from service pursuant toSection 1.409A-1(b)(9)(iii) of the Treasury Regulations that does not exceed the Section 409A Limit (as defined below) will not constitute Deferred Paymentsfor purposes of subsection (i) above. The foregoing provisions are intended to comply with or be exempt from the requirements of Section 409A so that none of the payments andbenefits to be provided under your Offer Letter will be subject to the additional tax imposed under Section 409A, and any ambiguities herein will beinterpreted to so comply or be exempt. Notwithstanding anything to the contrary in your Offer Letter, AXT reserves the right to amend the Offer Letter as itdeems necessary or advisable, in its sole discretion and without your consent, to comply with Section 409A or to avoid income recognition under Section409A prior to the actual payment of the Severance or imposition of any additional tax. In no event will AXT reimburse you for any taxes that may be imposedon you as result of Section 409A. For purposes of this Section G, “Section 409A Limit” means two (2) times the lesser of: (a) your annualized compensation based upon the annualrate of pay paid to you during your taxable year preceding your taxable year of your termination of employment as determined under, and with suchadjustments as are set forth in, Treasury Regulation Section 1.409A-1(b)(9)(iii)(A)(1) and any Internal Revenue Service guidance issued with respect thereto;or (b) the maximum amount that may be taken into account under a qualified plan pursuant to Section 401(a)(17) of the Internal Revenue Code of 1986, asamended, for the year in which your employment is terminated. Exhibit 12.1 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Fiscal Year Ended December 31, 2008 2009 2010 2011 2012 2013 2014 (dollars in thousands)Ratio of earnings to fixed charges Earnings: Earnings available for fixed charges ($38) ($1,596) $20,184 $27,473 $5,965 ($7,662) ($2,854)Add: Fixed charges 231 64 74 — 1 1 — Total income/(loss) for computation of ratio $193 ($1,532) $20,258 $27,473 $5,966 ($7,661) ($2,854) Fixed charges: Total interest expense $193 $47 $57 $0 $1 $1 $0 Interest factor in rents a 38 17 17 — — — — Total fixed charges $231 $64 $74 $0 $1 $1 $0 Ratio of earnings to fixed charges b 0.84 (23.94) 273.76 NM 5,966.00 (7,661.00) NM (a) Interest component of rental expense is estimated based on interest on tenant improvement loan at 4%, which is considered a reasonable approximation ofthe interest factor. (b) In 2009, earnings were weak from the global financial crisis. In 2011 and 2014, there were no fixed charge . NM = ratio not meaningful Exhibit 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-143366, 333-38858 and333-67297) and Form S-3 (No. 333-175820) of AXT, Inc. of our reports dated March 13, 2015 relating to the consolidated financialstatements and the effectiveness of internal control over financial reporting as of December 31, 2014, which appear in this Form 10-K./s/ Burr Pilger Mayer, Inc.San Jose, CaliforniaMarch 13, 2015 Exhibit 31.1CERTIFICATION PURSUANT TO 18 U.S.C. RULE 13a-14(a)/15d-14(a)AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002I, Morris S. Young, certify that:1.I have reviewed this annual report on Form 10-K of AXT, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present inall material respects, the financial condition, results of operations and cash flows of the registrant as of, and for, theperiods presented in this report;4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (asdefined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designedunder our supervision, to ensure that material information relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularly during the period in which this reportis being prepared;(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting tobe designed under our supervision, to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accountingprinciples;(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report ourconclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered bythis report based on such evaluation; and(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred duringthe registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that hasmaterially affected, or is reasonably likely to materially affect, the registrant’s internal control over financialreporting; and5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal controlover financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (orpersons performing the equivalent functions):(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financialreporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize andreport financial information; and(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in theregistrant’s internal control over financial reporting.March 13, 2015/s/ Morris S. YoungMorris S. YoungChief Executive Officer(Principal Executive Officer) Exhibit 31.2CERTIFICATION PURSUANT TO 18 U.S.C. RULE 13a-14(a)/15d-14(a)AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002I, Gary L. Fischer, certify that:1.I have reviewed this annual report on Form 10-K of AXT, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present inall material respects, the financial condition, results of operations and cash flows of the registrant as of, and for, theperiods presented in this report;4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (asdefined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designedunder our supervision, to ensure that material information relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularly during the period in which this reportis being prepared;(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting tobe designed under our supervision, to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accountingprinciples;(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report ourconclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered bythis report based on such evaluation; and(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred duringthe registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that hasmaterially affected, or is reasonably likely to materially affect, the registrant’s internal control over financialreporting; and5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal controlover financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (orpersons performing the equivalent functions):(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financialreporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize andreport financial information; and(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in theregistrant’s internal control over financial reporting.March 13, 2015/s/ GARY L. FISCHERGary L. FischerChief Financial Officer and Corporate Secretary(Principal Financial Officer andPrincipal Accounting Officer) Exhibit 32.1CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of AXT, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2014 asfiled with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certifies, pursuant to18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:(1)The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m);and(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results ofoperations of the Company.March 13, 2015/s/ Morris S. YoungMorris S. YoungChief Executive Officer(Principal Executive Officer) Exhibit 32.2CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of AXT, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2014 asfiled with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certifies, pursuant to18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:(1)The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m);and(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results ofoperations of the Company.March 13, 2015/s/ GARY L. FISCHERGary L. FischerChief Financial Officer andCorporate Secretary(Principal Financial Officer andPrincipal Accounting Officer)
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