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AmbarellaTable 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 EXCHANGEACT OF 1934For the fiscal year ended December 31, 2015OR☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE 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) 438-4700Securities registered pursuant to Section 12(b) of the Act:Title of each className 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 Act ☐ Yes ☒ NoIndicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ 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 Act of 1934during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirementsfor the past 90 days. ☒ Yes ☐ NoIndicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File requiredto be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that theregistrant was required to submit and post such files). ☒ Yes ☐ NoIndicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, andwill not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K orany amendment to this Form 10-K. ☐ Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See thedefinitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Act. (Check one):reporting company)Large accelerated filer ☐Accelerated filer ☒Non‑accelerated filer ☐(Do not check if a smaller reporting company)Smaller reporting company ☐ Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☒ NoThe aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing sale price of $2.52 for the common stock onJune 30, 2015 as reported on the Nasdaq Global Select Market, was approximately $69,585,000. Shares of common stock held by each officer, director and by eachperson who owns 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination ofaffiliate status is not a conclusive determination for other purposes.As of March 7, 2016, 32,341,176 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 2016 annual meeting of stockholders to be filed with the Commission pursuant toRegulation 14A not later than 120 days after the end of the fiscal year covered by this form are incorporated by reference into Part III of this Form 10-K report.Except for those portions specifically incorporated by reference herein, such document shall not be deemed to be filed with the Commission as part of this Form 10-K. Table of ContentsTABLE OF CONTENTS Page PART I Item 1. Business 2 Item 1A. Risk Factors 12 Item 1B. Unresolved Staff Comments 29 Item 2. Properties 30 Item 3. Legal Proceedings 30 Item 4. Mine Safety Disclosures 30 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of EquitySecurities 31 Item 6. Selected Consolidated Financial Data 33 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 34 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 48 Item 8. Consolidated Financial Statements and Supplementary Data 50 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 50 Item 9A. Controls and Procedures 50 Item 9B. Other Information 51 PART III Item 10. Directors, Executive Officers and Corporate Governance 53 Item 11. Executive Compensation 53 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 53 Item 13. Certain Relationships and Related Transactions, and Director Independence 53 Item 14. Principal Accountant Fees and Services 53 PART IV Item 15. Exhibits and Financial Statement Schedules 54 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 within the meaning of Section 21E of theSecurities Exchange Act of 1934, as amended. Statements relating to our expectations regarding results of operations,customer demand, customer qualifications of our products, our ability to expand our markets or increase sales, thedevelopment of new products, applications, enhancements or technologies, gross margins, expense levels, the impact of theadoption of certain accounting pronouncements, our investments in capital projects and our belief that we have adequatecash and investments to meet our needs over the next 12 months are forward-looking statements. Words such as “expects,”“anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “goals,” “should,” “continues,” “would,” “could” andsimilar expressions or variations of such words are intended to identify forward‑looking statements, but are not the exclusivemeans of identifying forward‑looking statements in this Annual Report. Additionally, statements concerning future matterssuch as our strategy, plans, industry trends and the impact of trends and economic cycles on our business are forward-lookingstatements. All forward-looking statements are based upon management’s views as of the date of this Annual Report and aresubject to risks and uncertainties that could cause actual results to differ materially from historical results or those anticipatedin such forward-looking statements. Such risks and uncertainties include those set forth under the section entitled “RiskFactors” in Item 1A below, as well as those discussed elsewhere in this Annual Report, and identify important factors thatcould disrupt or injure our business or cause actual results to differ materially from those predicted in any such forward-looking statements. These forward-looking statements are not guarantees of future performance. Readers are cautioned not to placeundue reliance on these forward-looking statements, which speak only as of the date hereof. Readers are urged to carefullyreview and consider the various disclosures made in this report, which attempt to advise interested parties of the risks andfactors that may affect our business, financial condition, results of operations and prospects. We undertake no obligation torevise or update any forward‑looking statements in order to reflect any development, event or circumstance that may ariseafter the date of this report. Item 1. BusinessAXT, Inc. (“AXT”, “we,” “us,” and “our” refer to AXT, Inc. and its consolidated subsidiaries) is a worldwidedeveloper and producer of high-performance compound and single element semiconductor substrates, also known as wafers.The dominant substrates used in producing semiconductor chips and other electronic circuits are made from silicon.However, certain chips may become too hot or perform their function too slowly if silicon is used as the base material.Alternative or specialty materials are used to replace silicon as the preferred base for the electronic circuits in these situations.We provide such alternative or specialty materials in the form of substrates or wafers, including compound and singleelement substrates. Our compound substrates combine indium with phosphorous (InP) or gallium with arsenic (GaAs). Oursingle element substrates are made from germanium (Ge). Historically, most of our revenue has been derived from sales ofsemi-insulating and semi-conducting GaAs substrates. However, in 2015, our revenue from sales of InP substrates was greaterthan our revenue from our sales of each type of GaAs substrates. We currently sell the following substrate products in thesizes and for the applications indicated:2 Table of ContentsSubstrates SubstrateDiameter Applications InP 2”, 3”, 4” •Fiber optic lasers and detectors•Data center connectivity•Silicon photonics•Opto Electronics ICs•Terrestrial solar cells (CPV)•Lasers•VCSELs (vertical cavity surface emitting lasers)GaAs (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 (LEDs)•Lasers•VCSELs (vertical cavity surface emitting lasers)•Printer heads•Optical couplersGe 2”, 4”, 6” •Satellite and terrestrial solar cells•Optical sensors and detectors We manufacture all of our products in the People’s Republic of China (PRC or China), which generally hasfavorable costs for facilities and labor compared with comparable facilities in the United States, Europe or Japan. Our supplychain includes partial ownership of ten companies in China (joint ventures). We believe this supply chain arrangementprovides us with pricing advantages, reliable supply and enhanced sourcing lead-times for key raw materials which arecentral to our final manufactured products. Our subsidiaries and joint venture companies produce products including 99.99%pure gallium (4N Ga), high purity gallium, arsenic, germanium, germanium dioxide, pyrolytic boron nitride (pBN) cruciblesand boron oxide (B2O3). Our ownership and the ownership held by our consolidated subsidiaries in these entities rangefrom 83% to 20%. We have board representation in all ten of these companies. We consolidate the joint ventures in which wehave either a controlling financial interest, or majority financial interest combined with the ability to exercise control insubstance over the operation or financial decisions made by the investee. We use the equity method to account for jointventures in which we have smaller financial interest and have the ability to exercise significant influence, but not control,over the investee. We purchase portions of the materials produced by these joint venture companies for our own use and thejoint venture companies sell the remainder of their production to third parties. We were incorporated in California in December 1986 and reincorporated in Delaware in May 1998. We changedour name from American Xtal Technology, Inc. to AXT, Inc. in July 2000. Our principal corporate office is located at 4281Technology Drive, Fremont, California 94538, and our telephone number at this address is (510) 438-4700.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 ofhigher performance non-silicon based substrates include GaAs, InP, gallium nitride (GaN), silicon carbide (SiC) and Ge.For example, integrated circuits for wireless handsets and other wireless devices, power amplifier integrated circuitsand some radio frequency integrated circuits are made with semi-insulating GaAs substrates. Semi-conducting GaAssubstrates are used to create opto-electronic products, including high brightness light emitting diodes (HBLEDs) that areoften used to backlight wireless handsets and liquid crystal display (LCD) TVs and also used for automotive3 Table of Contentspanels, signage, display and lighting applications. InP is a high performance semiconductor substrate used in broadband andfiber optic applications and data center connectivity. Ge substrates are used in applications such as solar cells for space andterrestrial photovoltaic applications.The AXT AdvantageWe believe that we benefit from the following advantages:·Key leadership in InP technology and revenue growth. We have invested in InP research and development for anumber of years and have developed a strong base of proprietary technology that we continue to expand. Weexperienced over 50% InP year on year revenue growth in 2015 as market applications and demand gainedtraction. We believe there are significant barriers to entry in the InP substrate market and we are a leadingprovider of such wafers or substrates. Further, we believe that this market will continue to expand and grow.·Low-cost manufacturing operation in China. We have manufactured all of our products in China since 2004,which generally has favorable costs for facilities and labor compared to costs of comparable facilities and laborin the United States, Japan or Europe. As of December 31, 2015, approximately 1,021 of our 1,045 employees(including employees at our consolidated joint venture companies) are located in China. Our primarycompetitors have their major manufacturing operations in Germany or Japan.·Our diverse product offering results in a broader range of customers and applications. We offer a diverserange of products, which enables us to have a broad range of customers. For the year ended December 31, 2015, only one customer accounted for over 10% of revenue and our five largest customers accounted for 40% of ourrevenue. We believe this diversity enabled us to recover quickly when a large portion of GaAs chips wasreplaced with silicon-on-insulator (SOI) chips in mobile phone switches, beginning in 2011. Further, webelieve this diversity gives us a greater likelihood to expand our business into new applications and marketsand benefit from growth in demand for substrates given our pre-established market positions in a broad range ofproduct applications.·We have partial ownership in ten companies in China that form our sophisticated, vertically integrated supplychain. We believe our subsidiaries and joint venture companies in China provide us with more reliable supplyand shorter lead-times for the raw materials central to our final manufactured products compared to third partyproviders. These materials include gallium, gallium alloys, indium phosphide poly-crystal, germanium,germanium dioxide, high purity arsenic, pyrolytic boron nitride crucibles (pBN) and boron oxide (B2O3). Webelieve this dedicated supply chain will enable us to meet increases in demand from our customers by providingan increased volume of raw materials quickly, efficiently and cost effectively.·Enhanced revenue diversity through the sale of special materials. Because our strategy allows oursubsidiaries to also sell in the open market to third parties, approximately a quarter of our total sales are fromnon-substrate products, providing further diversity in our customer base and business model.·Business model unique among current competitors. We believe we are the only publicly traded companyfocused on high-performance compound and single element semiconductor substrates. Most of our directcompetitors are either privately owned companies or divisions of large publicly traded companies. We believethe combination of access to U.S. capital markets, U.S.-based product quality standards and China-basedmanufacturing is an attractive business model to our customers who desire longevity and stability in theirsupply chain as well as competitive prices. ·Strong cash position with $44 million cash and investments. As a pure play substrate provider we have a strongcash position that enables us to make strategic investments in equipment, technology and resources. Ourcompetitive focus and flexibility is supported by the staying power that this cash ensures.4 Table of ContentsStrategyOur goal is to become the leading worldwide supplier of high-performance compound and single elementsemiconductor substrates. Key elements of our strategy include:Invest in growing InP revenue and protect our proprietary process technology. We are adding manufacturingcapacity for InP to support the revenue growth for this product line. Substrate products often have a very long product lifecycle and we believe the InP revenue growth trajectory could be similar to the GaAs product life cycle that ran for more than10 years. In addition to adding manufacturing capacity, we will continue to invest in InP crystal growth technology, waferprocessing technology, market development and customer support.Offer diverse products, including custom products. We believe AXT has a reputation in the market place forproviding a broad range of products, including custom products. We plan to further promote this brand image 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 wafersrange from one inch up to six inches. We also produce substrates with customer defined specifications which may range fromthickness or smoothness and may include adding special additional chemicals such as iron or sulfur. We believeproduct diversity can mitigate some of the impact of down cycles in our market because we are not dependent on a singleproduct or application for revenue.Many customers not just a few large customers. We seek to expand our customer base and avoid dependence onjust a few large customers. We believe our diverse product offering has resulted in a diverse customer base. For the yearended December 31, 2015, only one customer accounted for over 10% of revenue and our five largest customers accountedfor 40% of our revenue. We believe customer diversity provides a measure of stability in troubled market conditions.Customer diversification may also enable us to achieve a higher average selling price by reducing our dependence on largercustomers with pricing power.China-based manufacturing. We seek to leverage our China-based manufacturing advantage by increasingefficiencies in our manufacturing methods, systems and processes. In 1998 we decided to locate our manufacturing in Chinaand in 1999 we began to move our manufacturing facilities to the outskirts of Beijing. Approximately 98% of our employeesare based in China. This enables us to compete more effectively against our competitors who, by comparison, are inrelatively high cost locations such as Japan and Germany. We plan to further leverage these advantages by investing intraining and equipment to increase productivity and reduce cost. It is our strategy to combine the benefits of U.S.-basedquality and U.S.-based access to capital markets with China-based manufacturing.Increase productivity and profitability in our 10 subsidiaries/joint venture companies. AXT’s substrate productsare based on specialty materials, many of which are mined and refined in China. The supply and demand equation forspecialty materials can be complex and can be volatile. Our strategy to maintain a stable supply chain has been to establishand nurture startup companies in China where we have a majority ownership position or at least a significant equity position.Over the years we have established or invested in 10 companies that are an integral part of our supply chain. We willcontinue to provide strategic support to these companies and they, in turn, will continue to be the backbone of our supplychain. We plan to work closely with these companies to increase their productivity and improve their profitability as theycontinue to support AXT’s supply chain.Sell raw materials into the market place. We leverage the established capabilities of our 10 subsidiaries and jointventures by authorizing them to sell materials into the open market, including to some of our direct competitors.Promote AXT’s longevity and stability. We believe recent market trends, including the exit of one of our majorcompetitors in Japan from the gallium arsenide substrate market, has highlighted supply continuity concerns among ourcustomers. Since AXT was established in 1986 and has been a publicly traded company since 1998, we plan to promote ourlong operating history and highlight our position as a stable, reliable and long term provider of substrates and materials byamong other things, investing in research and development and high-end processing equipment.5 Table of ContentsMaterials of the future. The specialty materials substrate market is dynamic and subject to continued changes andcycles. We plan to use our deep knowledge and experience in specialty materials and wafer substrates to seek newapplications for existing substrates in our portfolio and explore additional materials that may be synergistic with ourknowledge base, customer needs and manufacturing lines.TechnologyWafers serve as a cornerstone in semiconductor device fabrication, on which integrated circuits and devices arefabricated. Wafers are sliced up from semiconducting ingots that are grown in the form of cylindrical shape single crystals.Depending on physical properties of the supporting materials, the performance of devices and circuits can be remarkablydifferent. AXT uses its’ proprietary Vertical Gradient Freeze (VGF) technique for growing single crystal Indium Phosphide(InP), Gallium Arsenide (GaAs) and Germanium (Ge) ingots used to produce state-of-the-art wafers for diverse electronic andopto-electronic device and circuit applications.InP and GaAs semiconducting compounds are formed combining elements from Groups III and V in the periodictable of elements, whereas Ge is a Group IV elemental semiconductor. Each of these materials has unique properties thatdetermine the best device and/or circuit applications. As a result of their special high electron mobility combined with theirdirect ban-gap properties, both InP and GaAs wafers have enjoyed dominant roles in the production of Light Emitting Diodes(LEDs), Solid-state Lasers and Power Amplifiers for mobile phones, to name a few applications. Ge wafers, on the other hand,have played a key role in the manufacturing of special solar cells known as Triple Junction Solar Cells (TJSCs) for space andterrestrial power generation. With the recent evolution in several applications InP lasers are projected to play a dominant role in theoptoelectronics arena, e.g. silicon photonics (where InP lasers are a key component) and autonomous cars (where specialwavelength InP-based lasers are used for object sensing and collision avoidance). Crystal growth process technologyfrequently contains steps and procedures that are considered proprietary secrets held by the producer, often includingmethods to control the temperature within the crucible. InP crystal growth relies on extreme pressure within the crucible. Assuch it requires not only temperature control methodologies, but also pressure control and stabilization processmethodologies, many of which are proprietary trade secrets. It is this combination of variables and the required methods tocontrol them that create a barrier to entry.We believe our long-term investment in InP research and development has resulted in a substantive body ofproprietary knowledge. In addition, to complement our VGF proprietary growth expertise, in July 2015, we acquired the InPproprietary process technology and crystal growth equipment from Crystacomm, Inc., thus adding the capability of growingpolycrystalline and large diameter single crystal InP ingots using the Crystacomm proprietary Liquid EncapsulatedCzochralski (LEC) technology. Crystacomm has a long history in development and experimentation in InP and thisacquisition transfers the proprietary technology to us. After growing the crystalline ingot, the material is then sawed into individual substrates or wafers. We havecontinued to invest in wafer processing technology covering each step in the process from sawing to edge smoothing to finalcleaning and we believe we have technology and trade secrets addressing the scope of wafer processing. One focus in ourrecent development programs has been on automation. In this regard, in October 2015, we announced that we had acquiredHitachi Metals’ automated equipment and the related intellectual property portfolio. A significant body of knowledge inthis portfolio is considered proprietary trade secrets. We expect to combine the acquired proprietary processing technologyand equipment with our existing wafer processing capabilities to better serve our existing and future customer base.ProductsWe design, develop, manufacture and distribute high-performance semiconductor substrates, also known as wafers. InP is a high-performance semiconductor substrate used in fiber optic lasers and detectors, data center connectivity, siliconphotonics, optoelectronic ICs, terrestrial solar cell (CPV), lasers and VCSELs. We make semi-6 Table of Contentsinsulating GaAs substrates used in making semiconductor chips in applications such as amplifiers and switches for wirelessdevices. Our semi-conducting GaAs substrates are used to create opto-electronic products including High Brightness LEDs,which are often used to backlight wireless handsets and LCD TVs and for automotive, signage, display and lightingapplications. 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:Substrates SubstrateDiameter Applications InP 2”, 3”, 4” •Fiber optic lasers and detectors•Data center connectivity•Silicon photonics•Opto Electronics ICs•Terrestrial solar cells (CPV)•Lasers•VCSELs (vertical cavity surface emitting lasers)GaAs (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 (LEDs)•Lasers•VCSELs (vertical cavity surface emitting lasers)•Printer heads•Optical couplersGe 2”, 4”, 6” •Satellite and terrestrial solar cells•Optical sensors and detectors Substrates. We currently sell compound substrates manufactured from InP and GaAs, as well as single‑elementsubstrates manufactured from Ge. We supply InP substrates in two-, three‑ and four-inch diameters, and Ge substrates in two-,four- and six-inch diameters. We supply both semi-insulating and semiconducting GaAs substrates in one -, two-, three‑, four-, five- and six-inch diameters. Many of our customers require customized specifications such as special levels of iron or sulfurdopants or the wafer thickness.We have a long operating history and offer a relatively broad range of products. We promote our product diversityas a way to differentiate ourselves in the market place. Some competitors provide only gallium arsenide substrates. Weprovide gallium arsenide and also indium phosphide and germanium substrates. Some competitors provide only six inchwafers. Our wafers range from one inch up to six inches. We also produce substrates with customer defined specificationswhich may range in thickness or smoothness and may include adding special additional chemicals such as iron or sulfur. Inaddition to our wafers or substrates we also generate revenue from our consolidated subsidiaries who sell raw materials. Product diversity can mitigate some of the down cycles in our market because we are not dependent on a single product orapplication for revenue. Materials. We have partial ownership in 10 companies 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 (7N Ga), gallium alloys, indium phosphide poly-crystal, germanium, germanium dioxide, high purity arsenic,pyrolytic boron nitride crucibles and boron oxide. 7 Table of ContentsCustomersBefore specialty material wafers can be processed in a typical wafer manufacturing facility that constructs theelectronic circuit on a chip, a thin layer of structured chemicals is grown on the surface of the substrate. This is called anepitaxial layer. We sell our substrates to companies that apply the epitaxial layer, who then in turn sell the modified wafersto the wafer fabs, chip design companies, LED manufacturers and others. Epitaxial layer companies that form our customer base are located in Europe, the United States and Asia. We alsosell product to universities and other research organizations who use specialty materials for experimentation in variousaspects of semiconducting and semi insulating applications.We have at times sold a significant portion of our products in any particular period to a limited number ofcustomers. One customer represented more than 10% of our revenue for the year ended December 31, 2015 while there was nocustomer who represented more than 10% of our revenue for the years ended December 2014 and 2013. Our top fivecustomers, although not the same five customers for each period, represented 40%, 34% and 31% of our revenue for the yearsended December 31, 2015, 2014 and 2013, respectively.There were three third-party customers for the raw materials products from our consolidated subsidiaries thataccounted for 13%, 13% and 13% of the revenue from raw materials sales for the year ended December 31, 2015 and threecustomers for the raw materials products from our subsidiaries and joint ventures that accounted for 20%, 13% and 11% ofthe revenue from raw materials sales for the year ended December 31, 2014 and three customers for the raw materials productsfrom our subsidiaries and joint ventures that accounted for 11%, 10% and 10% of the revenue from raw materials sales for theyear ended December 31, 2013. Our subsidiaries and joint ventures are a key strategic benefit for us as they further diversifyour sources of revenue.Manufacturing, Raw Materials and SuppliesWe manufacture all of our wafers/substrate products at our facilities in Beijing, China. We believe this locationgenerally has favorable costs for facilities and labor compared to the United States or compared to the location of some of ourcompetitors in Japan and Germany.We use a two-stage manufacturing process. The first stage deploys our VGF technology for the crystal growth ofsingle element or compound element ingots in diameters currently ranging from one inch to six inch. The growth processoccurs in high temperature furnaces built using our proprietary designs. Growing the crystalline elements into cylindricalingots can take four to twelve days, depending on the diameter and length of the ingot produced. The second stage includesslicing or sawing the ingot into wafers or substrates, then processing each substrate to strict specifications, includinggrinding to reduce the thickness and then polishing and cleaning each substrate. Many of the process steps utilizeproprietary knowledge and chemical baths.Wafers from each ingot will include some material that does not meet specifications or quality standards. Defectsmay occur as a result of inherent factors in the materials used in the crystalline growth process. They may also result fromvariances in the manufacturing process. We have many steps in our line that are partially or fully automated but othermanufacturing steps are performed manually. We intend to increase the level of automation. In 2015, we purchased waferprocessing equipment from Hitachi Metals that we expect will increase automation in our production line and, therefore,reduce variability and defects. In addition, we secured a manufacturing license from Hitachi Metals. This license includesdetailed work instructions for using the equipment purchased and allows us to apply the proprietary wafer processingtechnology at any step and on any form of equipment in our line. We expect to deploy this equipment in stages during 2016.Due to potential defects, yield is a key factor in our manufacturing cost. Other key elements are the initial cost of the rawmaterial elements, manufacturing equipment, factory loading, facilities and labor. Our Beijing facilities are approximately300,000 square feet and we employ approximately 677 employees at this site. We believe our current employee base isappropriate for our current production volume. In 2015, we also acquired equipment from an InP company, Crystacomm, thatspecializes in the LEC method of crystal growth. The Crystacomm equipment is being installed in our Fremont, CA facility.8 Table of ContentsWe have formed 10 subsidiaries and joint ventures companies in China that form the backbone of our supply chainmodel. These companies provide us with reliable supply and shorter lead-times for raw materials central to our manufacturedproducts including gallium, gallium alloys, indium phosphide poly-crystal, germanium, germanium dioxide, high purityarsenic, pBN and boron oxide . We believe that these subsidiaries and joint ventures have been and will continue to beadvantageous in allowing us to procure materials to support our planned growth. In addition, we purchase supply parts,components and raw materials from several other domestic and international suppliers. We depend on a single or limitednumber of suppliers for certain critical materials used in the production of our substrates, such as quartz tubing and polishingsolutions. We generally purchase our materials through standard purchase orders and not pursuant to long-term supplycontracts.Sales and MarketingWe sell our substrate products directly to customers through our direct salesforce in the United States and China andthrough independent sales representatives and distributors in Europe and other areas of Asia. Our direct salesforce isknowledgeable in the use of compound and single‑element substrates. Our application engineers work with customers duringall stages of the substrate manufacturing process, from developing the precise composition of the substrate throughmanufacturing and processing the substrate to the customer’s specifications. We believe that maintaining a close relationshipwith customers and providing them with ongoing engineering support improves customer satisfaction and will provide uswith a competitive advantage in selling other substrates to our customers. Six of our employees who frequently work withcustomers have PhDs in physics or material science, illustrating our serious commitment to customer support.International Sales. International sales are a substantial part of our business. Sales to customers outside NorthAmerica (primarily the United States) accounted for approximately 87%, 88% and 88% of our revenue during 2015, 2014and 2013, respectively. The primary markets for sales of our substrate products outside of the United States are to customerslocated in Asia and Western Europe.Our subsidiaries and joint venture companies 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 forMBE (Molecular Beam Epitaxy). These subsidiaries and joint ventures have their own separate sales forces and sell directlyto their own customers in addition to selling raw materials to us.Research 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 reducingmanufacturing costs. We also conduct research and development focusing on larger diameter wafers and in our history wehave consistently developed new products based on larger wafer diameters. Crystal growth of specialty earth materialsbecomes significantly more difficult as the ingot diameter increases because a consistent temperature, and in the case of InP,consistent control of the pressure, must be applied over a larger surface area. In 2015 we acquired certain proprietary crystalgrowth technology from Crystacomm.Our current substrate research and development activities focus on continued development and enhancement ofGaAs, InP and Ge substrates, including improved yield, enhanced surface and electrical characteristics and uniformity,greater substrate strength and increased crystal length. In 2015 we acquired a significant number of proprietary waferprocessing stations from Hitachi Metals. The Hitachi Metals purchase includes a license covering the use of the proprietaryequipment and Hitachi Metals’ proprietary wafer processing technology.Our three consolidated subsidiaries conduct research and development focusing on gallium alloys, galliumrefinement and pyrolytic boron nitride crucibles used in high temperature crystal growth.We have assembled a multi‑disciplinary team of skilled scientists, engineers and technicians to meet our researchand development objectives. Research and development expenses were $5.7 million in 2015, compared with $4.1 million in2014 and $3.4 million in 2013. 9 Table of ContentsCompetitionThe semiconductor substrate industry is characterized by rapid technological change and price erosion, as well asintense competition. We compete in the market for GaAs substrates with our expertise in VGF technology, product quality,response times and prices. However, we face actual and potential competition from a number of established companies thatmay have advantages not available to us, including substantially greater financial, technical and marketing resources; greatername recognition; and more established relationships in the industry, and they may utilize these advantages to expand theirproduct offerings more quickly, adapt to new or emerging technologies and changes in customer requirements more quickly,and devote greater resources to 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;·meeting customer specifications;·customer support; and·manufacturing capacity.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, including larger diameter wafers,and product features by us and our competitors;·the availability of adequate sources of raw materials;·protection of our proprietary methods, systems and process;·protection of our products by effective use of intellectual property laws; and·general economic conditions.The large majority of our customers specialize in epitaxial growth, a chemical layer grown on top of our wafers.Typically our customer or prospective customer has at least two substrate suppliers qualified for the production of itsproducts. Qualified suppliers must meet industry‑standard specifications for quality, on-time delivery and customer support.Once a substrate supplier has qualified with a customer, price, consistent quality and current and future product delivery leadtimes become the most important competitive factors. A supplier that cannot meet a customer’s current lead times or that acustomer perceives will not be able to meet future demand and provide consistent quality can lose market share. Our primarycompetition 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 competitorsare shipping high volumes of GaAs substrates manufactured using a technique similar to our VGF technique. In addition, wealso face competition from semiconductor device manufacturers that produce substrates for their own use, and fromcompanies, such as TriQuint Semiconductors, RFMD and Skyworks that are actively developing alternative materials andmarketing semiconductor devices using these alternative materials. For example, silicon-on-insulator (SOI) technology, asilicon wafer technology that produces satisfactory devices at lower cost, has been proven in the market. From 2011 to 2013,SOI technology displaced GaAs chips in key sectors, primarily the radio frequency (RF) switching function in cell phones. 10 Table of ContentsBecause of our vertically integrated, sophisticated supply chain through our subsidiaries and joint venturecompanies, we believe we are the only compound semiconductor substrate supplier to offer a full suite of raw materials. Webelieve this gives us a unique competitive advantage because we have greater control and stability over the neededmaterials. Further, we believe we have some advantage in manufacturing costs. Protection of our Intellectual PropertyOur success and the competitive position of our VGF technology depend on our ability to maintain our proprietarytrade secrets and other intellectual property protections. We rely on a combination of patents, trademark and trade secretlaws, 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 establishand maintain a position of technology leadership depends as much on the skills of our research and development personnelas upon the legal protections afforded our existing technologies. To protect our trade secrets, we take certain measures toensure their secrecy, such as executing non-disclosure agreements with our employees, customers and suppliers. However,reliance on trade secrets is only an effective business practice insofar as trade secrets remain undisclosed and a proprietaryproduct or process is not reverse engineered or independently developed.To date, we have been issued forty-four (44) patents that relate to our VGF products and processes, ten (10) in theUnited States (US), four (4) in Japan (JP), twenty-five (25) in China, one (1) in Europe, one (1) in Canada, one (1) in Korea,and two (2) in Taiwan. Patents have a protected life of 20 years from filing date. Our patents have expiration dates rangingfrom one expiration in 2016 to 2032. In some cases we may consider filing divisional, continuation or continuation-in-partof the existing patents for additional claims. We have two (2) US patent applications pending and seventeen (17) foreignpatent applications pending including patent applications in Europe (3), China (10) and Japan (4). Furthermore, in aggregate,our three consolidated joint venture companies have been issued 44 patents in China.In the normal course of business, we periodically receive and make inquiries regarding possible patent infringement.In dealing with such inquiries, it may become necessary or useful for us to obtain or grant licenses or other rights. However,there can be no assurance that such licenses or rights will be available to us on commercially reasonable terms. If we are notable to resolve or settle claims, obtain necessary licenses on commercially reasonable terms and/or successfully prosecute ordefend our position, our business, 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 inthe United States and Europe. These laws, rules and regulations govern the use, storage, discharge and disposal of hazardouschemicals during manufacturing, research and development and sales demonstrations. We maintain a number ofenvironmental, health and safety programs that are primarily preventive in nature. As part of these programs, we regularlymonitor ongoing compliance. If we fail to comply with applicable regulations, we could be subject to substantial liability forpersonal injury, clean-up efforts, fines and suspension or cessation of our operations. The regulatory landscape shifts andchanges in China as that country attempts to address its environmental pollution. Because we manufacture all of our productsin China, we are subject to an evolving regulatory administration requiring changes in our equipment and securing newpermits.EmployeesAs of December 31, 2015, we had approximately 702 employees, which consisted of approximately 25 employees inour headquarters in Fremont and approximately 677 employees in Beijing. In addition, our three consolidated subsidiarieshad, in total, approximately 343 employees. In aggregate, we and our subsidiaries had 1,045 employees, of whom 851 wereprincipally engaged in manufacturing, 121 in sales and administration, and 73 in research and development. Of these 1,045employees, 25 were located in the United States and 1,020 in China.11 Table of ContentsMost workers in China are represented by unions. As of December 31, 2015, 879 employees in China including employeesof our subsidiaries were represented by unions, but we have never experienced a work stoppage. We consider our relationswith our employees to be good.Geographical InformationPlease see Note 15 of our Notes to Consolidated Financial Statements for information regarding our foreignoperations, and see “Risks related to international aspects of our business” under Item 1A. Risk Factors for furtherinformation on risks attendant to our foreign operations and dependence.Available InformationOur principal executive offices are located at 4281 Technology Drive, Fremont, CA 94538, and our main telephonenumber at this address is (510) 438-4700. Our Internet website address is www.axt.com. Our website address is given solelyfor informational purposes; we do not intend, by this reference, that our website should be deemed to be part of this AnnualReport on Form 10-K or to incorporate the information available at our Internet address into this Annual Report onForm 10‑K.We file electronically with the Securities and Exchange Commission, or SEC, our annual reports on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant toSection 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended. We make these reports available free of chargethrough our Internet website as soon as reasonably practicable after we have electronically filed such material with the SEC.These reports can also be obtained from the SEC’s Internet website at www.sec.gov or at the SEC's Public Reference Room at100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public ReferenceRoom 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:I.Risks related to our general business;II.Risks related to international aspects of our business;III.Risks related to our financial results and capital structure;IV.Risks related to our intellectual property; andV.Risks related to compliance, environmental regulations and other legal matters.I.Risks Related to Our General BusinessSilicon substrates (wafers) are significantly lower in cost compared to substrates made from specialty materials and newsilicon-based technologies could allow silicon based substrates to replace specialty material based substrates for certainapplications.Historically silicon wafers or substrates are less expensive than specialty material substrates such as those that weproduce. Electronic circuit designers will generally consider silicon first and only turn to alternative materials if siliconcannot provide the required functionality in terms of power consumption, speed or other specifications. Beginning in 2011certain applications that had previously used GaAs substrates adopted a new silicon-based technology called Silicon OnInsulator, or SOI. SOI technology uses a silicon-insulator-silicon layered substrate in place of conventional silicon substratesin semiconductor manufacturing. SOI substrates cost less than GaAs substrates and although their performance is not asrobust as GaAs substrates in terms of power consumption, heat generation and speed they became acceptable in mobilephone and other applications that were previously dominated by GaAs12 Table of Contentssubstrates. The adoption of SOI resulted in decreased GaAs wafer demand, and decreased revenue. If SOI or similartechnologies 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 ourmanufacturing facilities. A number of factors and circumstances may reduce utilization rates, including periods of industryovercapacity, low levels of customer orders, operating inefficiencies, mechanical failures and disruption of operations due toexpansion, power interruptions, fire, flood or other natural disasters or calamities. Because many portions of ourmanufacturing costs are relatively fixed, high utilization rates are critical to our gross margins and operating results. If we failto achieve acceptable manufacturing volumes or experience product shipment delays, our results of operations will benegatively affected. During periods of decreased demand, we have underutilized our manufacturing lines. If we are unable toimprove utilization levels at our facilities during periods of decreased demand and correctly manage capacity, thefixed expense levels will have an adverse effect on our business, financial condition and results of operations. Our grossprofit margins have fluctuated from period to period, and these fluctuations are expected to continue in the future. Our grossprofit margin has fluctuated from 23.7% in the quarter ended March 31, 2015 to 17.1% for the quarter ended December 31,2015.In 2013, we concluded that incoming orders were insufficient and that we were significantly underutilizing ourfactory capacity. As a result, in February 2014, we announced a restructuring plan with respect to our wholly-ownedsubsidiary, Beijing Tongmei Xtal Technology Co, Ltd., or Tongmei, in order to better align manufacturing capacity withdemand. Under the restructuring plan, we posted a charge of approximately $907,000 in the 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 toreduce our manufacturing costs in the short-term and our gross margins would be negatively affected. In addition, lead timesrequired by our customers are shrinking which reduces our ability to forecast orders and properly balance our capacityutilization.Our gross margin has fluctuated historically and may decline due to several factors.Our gross profit margin has fluctuated from period to period as a result of shifts in product mix, the introduction ofnew products, decreases in average selling prices for products, utilization of our manufacturing capacity and our ability toreduce product costs. These fluctuations are expected to continue in the future.We do not control the prices at which our subsidiaries and other joint venture companies sell their raw materialsproducts to third parties. However, because we consolidate the results of three of these companies with our own, anyreduction in their gross margins could have a significant, adverse impact on our overall gross margins. One or more of ourcompanies has in the past, and may in the future, sell raw materials at significantly reduced prices in order to gain volumesales or sales to new customers. In addition, in the three months ended December 31, 2015, the market price of galliumdropped below our per unit inventory cost and we incurred an inventory write down under the lower of cost or marketaccounting rules. In such events, our gross margin may be adversely impacted. In addition, one of our consolidatedsubsidiaries has in the past been subject to capacity constraints requiring it to source product from other third party suppliersin order to meet customer demand, resulting in decreased gross margin and adversely impacting our gross margin. This jointventure may in the future continue to experience such capacity restraints, causing our gross margin, and consequently ouroperating 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,from semiconductor 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 and13 Table of Contentsmarketing semiconductor devices using these alternative materials. We believe that at least two of our major competitors areshipping high volumes of GaAs substrates manufactured using a technique similar to our VGF technology. Other competitorsmay develop and begin using similar technology. Sumitomo and JX also compete with us in the InP market. If we are unableto compete effectively, our revenue may not increase and we may not achieve profitability. We face many competitors thathave a number of significant advantages over us, including:·greater name recognition and market share in the business;·more manufacturing experience;·extensive intellectual property; and·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 toincrease in the future. Competitive pressures have resulted in reductions in the prices of our products, and continued orincreased competition could reduce our market share, require us to further reduce the prices of our products, affect our abilityto recover costs and result in reduced gross margins.In addition, new competitors have and may continue to emerge, such as a crystal growing company established by aformer employee in China that is supplying semi-conducting GaAs wafers to the LED market. Competition from sources suchas this could increase, 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 maybe adversely impacted.A critical factor in our product cost is yield. Our products are manufactured using complex technologies, and thenumber of usable 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 requiring manual manufacturing steps;·substrate breakage during the manufacturing process; and·equipment failure, power outages or variations in the manufacturing process.In addition, we may modify our process to meet a customer specification but this can impact our yield. If our yieldsdecrease, our revenue could decline if we are unable to produce product to our customers’ requirements. At the same time, ourmanufacturing costs could remain fixed, or could increase. We have experienced product shipment delays and difficulties inachieving acceptable yields on both new and older products, and delays and poor yields have adversely affected ouroperating results. We may experience similar problems in the future and we cannot predict when they may occur or theirduration or severity.If our manufacturing processes result in defects in our products making them unfit for use by our customers, ourproducts would be rejected, resulting in compensation costs paid to our customers, and possible disqualification. This couldlead to revenue loss and market share loss.14 Table of ContentsThe Chinese government has imposed, and may impose in the future, manufacturing restrictions and regulations that couldrequire us to move part of our manufacturing operations to a location outside of the Beijing area or temporarily cease orlimit manufacturing. Such restrictions would materially and adversely impact our results of operations and our financialcondition. The Beijing city government has announced that it will expand its offices into the area where our facility is located.The Beijing city government desires to upgrade this area and has begun to pressure some companies to relocate and, in someinstances, is providing financial incentives for such relocation. If, in the future, we relocate all or part of our operations, thiswould require us to form an orderly relocation plan to do so and our failure to properly execute such a plan could result indisruptions to our production and have an adverse impact on our results of operations and financial condition. Further, thecost of a new facility could be prohibitive. The Chinese government has in the past imposed temporary restrictions on manufacturing facilities, such as therestrictions imposed on polluting factories for the 2008 Olympics and the 2014 Asian Pacific Economic Cooperation(“APEC”) event. These restrictions included a shut-down of the transportation of materials and power plants to reduce airpollution. To reduce air pollution in Beijing, the Chinese government has sometimes limited the construction of new, orexpansion of existing, facilities by manufacturing companies in the Beijing area. If the government applied similarrestrictions to us, then such restrictions could have an adverse impact on our results of operations and our financialcondition. Our ability to supply current or new orders could be significantly impacted. Customers could then be required topurchase products from our competitors, causing our competitors to take market share from us. In addition, from time to time, the Chinese government issues new regulations, which may require additional actionson our part to comply. On February 27, 2015, the China State Administration of Work Safety updated its list of hazardoussubstances. The previous list, which was published in 2002, did not restrict the materials that we use in our wafers. The newlist added gallium arsenide. As a result of the newly published list, we were required to obtain a permit by May 1, 2015 tocontinue to manufacture our gallium arsenide substrate wafers. We initiated discussions with the local district agency toobtain the requisite permit. On May 4, 2015, we were instructed by the local district agency that because we had not yetreceived the requisite permit, we should cease manufacturing our gallium arsenide substrate wafers or we should obtainpermission to continue manufacturing our gallium arsenide substrate wafers from a municipal-level office, such as theBeijing municipal authority. The Beijing municipal authority accepted our application on May 7, 2015 and our applicationis still under review. There can be no assurances that we will receive the requisite permit from the Beijing municipalauthority or from any other Chinese governmental authority. If we do not receive the requisite permit to continue tomanufacture gallium arsenide substrate wafers, we may be required to cease manufacturing such wafers until we receive therequisite permit or move such manufacturing to a new location. A halt to our production of gallium arsenide substrate waferscould result in our furloughing approximately several hundred manufacturing employees. If we obtain the requisite permitafter halting our production, we might not be able to recommence manufacturing gallium arsenide substrate wafersimmediately because we may need to rebuild our supply chain and we may not be able to rehire our furloughedmanufacturing employees. We could also lose customers to our competitors because of our inability to supply galliumarsenide substrate wafers. Any of these could materially and adversely impact our results of operations and our financialcondition. Problems incurred in our 10 partially owned joint venture companies or investment partners could result in a materialadverse impact on our financial condition or results of operations.We have invested in subsidiaries and joint venture companies in China that produce materials including 99.99%pure gallium (4N Ga), high purity gallium (7N Ga), 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 theysell the remainder of their production to third parties. Our ownership and the ownership held by our consolidated subsidiariesin these entities ranges from 20% to 83%. We consolidate the companies in which we have a majority or controlling financialinterest and employ equity accounting for the companies in which we have a smaller ownership interest. Several ofcompanies occupy space within larger facilities owned and/or operated by one of the other venture partners. Several of theseventure partners are engaged in other manufacturing activities at or near the same facility. In some facilities, we share accessto certain functions, including water, hazardous waste treatment or air quality treatment. If any of our joint venture partners inany of these ventures experiences problems with its operations,15 Table of Contentsdisruptions of our joint venture operations could result, having a material adverse effect on the financial condition andresults of operation of our joint venture companies, and correspondingly on our financial condition or results of operations.For example, since gallium is a by-product of aluminum, our raw 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 reducedservices provided by the aluminum plant. Accordingly, in order to meet customer supply obligations, our joint venture mayhave to 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 tohave violated applicable laws, rules or regulations governing the use, storage, discharge or disposal of hazardous chemicalsduring manufacturing, research and development or sales demonstrations, the operations of our joint ventures could beadversely affected and we could be subject to substantial liability for clean-up efforts, personal injury and fines or suspensionor cessation of our joint venture operations as a result of the actions of the joint ventures or other venture partners.Employees working for our joint ventures or any of the other venture partners could bring litigation against us as a result ofactions taken at the joint venture or venture partner facilities, even though we are not directly controlling the operations,including actions for exposure to chemicals or other hazardous materials at the facilities of our joint ventures or the facilitiesof any venture partner that are shared by our joint ventures. While we would expect to defend ourselves vigorously in anylitigation that is brought against us, litigation is inherently uncertain and it is possible that our business, financial condition,results of operations or cash flows could be affected. Even if we are not deemed responsible for the actions of the jointventures or venture partners, litigation could be costly, time consuming to defend and divert management attention; inaddition, if we are deemed to be the most financially viable of the partners, plaintiffs may decide to pursue us for damages.Since all of our partially owned companies reside in China, their activities could subject us to a number of risksassociated with conducting 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 manufacture, export the products ofour joint venture companies or sell into particular jurisdictions or impose multiple conflicting tax laws andregulations;·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 practicesdo not protect 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 orexchange rates, taxation or employment; and·nationalization of foreign‑owned assets, including intellectual property.16 Table of ContentsOur revenue, gross margins and profitability can be hurt if the average sales price of the various raw materials in ourpartially owned companies decreases. Although the companies in our vertically integrated supply chain have historically made a positive contribution toour financial performance, the average selling prices for many of the raw materials produced have continued to decline andhave had a negative impact on our recent financial performance. In particular, the selling prices for 4N gallium and forgermanium have been driven down by oversupply and, in the second half of 2015, hurt our total revenue, reduced our grossmargin and contributed to our net loss. There can be no assurance that the oversupply will be corrected by the market.Further, in Q4 2015 one of our consolidated subsidiaries incurred a lower of cost or market inventory write down whichnegatively impacted our consolidated gross margin. If the pricing environment remains stressed by oversupply and our jointventure companies cannot reduce their production cost, then the reduced average selling prices of the raw materials producedby our joint venture companies will have a continuing adverse impact on our revenue, gross margins and net profit.Demand for our products may decrease if demand for the end-user applications decrease or if manufacturers downstreamin our supply 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 thedemand for end-user applications which utilize our products, as well as factors affecting the ability of the manufacturersdownstream in our supply chain to introduce and market their products successfully, including:·the competition such manufacturers face in their particular industries;·the technical, manufacturing, sales, 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 inour supply 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 asincreased competition, overcapacity, the introduction of new products and decreased sales of products incorporating ourproducts and as a result average selling prices for our products may decline over relatively short time periods. We have in thepast experienced, and in the future may experience, substantial period-to-period fluctuations in operating results due todeclining average selling prices. For example, on average, for the year ended December 31, 2015 we experienced averageselling price declines of approximately 5% to 15% depending on the substrates product. It is possible that the pace ofaverage selling price declines could accelerate beyond these levels for certain products in a commoditizing market. Weanticipate that average selling prices will decrease in the future in response to the unstable demand environment, productintroductions by competitors or us, or by other factors, including pricing pressures from significant customers. When ouraverage selling prices decline, our gross profits decline unless we are able to sell more products or reduce the cost tomanufacture our products. We generally attempt to combat average selling price declines by improving yields,manufacturing efficiency and working to reduce the costs of our raw materials and of manufacturing our products. We have inthe past and may in the future experience declining sales prices, which could negatively impact our revenues, gross profitsand 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.17 Table of ContentsWe may be unable to reduce the cost of our products sufficiently to enable us to compete with others. Our costreduction efforts may not allow us to keep pace with competitive pricing pressures and could adversely affect our margins. Inorder to remain competitive, we must continually reduce the cost of manufacturing our products through design andengineering changes. We cannot assure you that any changes effected by us will result in sufficient cost reductions to allowus to reduce the price of our products 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 rawmaterials or inconsistencies in our manufacturing processes. We have experienced quality control problems with some of ourproducts, which caused customers to return products to us, reduce orders for our products, or both. We believe that wecontinue to experience certain reduction in orders as a result of product quality issues. If we experience quality controlproblems, or experience these or other problems in new products, customers may cancel or reduce orders or purchase productsfrom our competitors and we may be unable to maintain or increase sales to our customers and sales of our products coulddecline. Defects in our products could cause us to incur higher manufacturing costs and suffer product returns and additionalservice expenses, all of which could adversely impact our operating results.If new products developed by us contain defects when released, our customers may be dissatisfied and we may suffernegative publicity or customer claims against us, lose sales or experience delays in market acceptance of our new products.The loss of one or more of our key substrate customers would significantly hurt our operating results.Although there was only one customer that represented more than 10% of our revenue for the year ended December31, 2015, we believe that a significant portion of our future revenue could to be derived from a limited number of substratecustomers. Most of our customers are not obligated to purchase a specified quantity of our products or to provide us withbinding forecasts of product purchases. In addition, our customers may reduce, delay or cancel orders at any time without anysignificant penalty. In the past, we have experienced slower bookings, significant push-outs and cancellation of orders fromcustomers. If we lose a major customer or if a customer cancels, reduces or delays orders, or reduces the prices paid for ourproducts, our revenue would decline. In addition, customers that have accounted for significant revenue in the past may notcontinue to generate revenue for us in any future period. Any delay in scheduled shipments of our products could causerevenue to fall below our expectations and the expectations of market analysts or investors, causing our stock price todecline.The cyclical nature of the semiconductor industry may limit our ability to maintain or increase net sales and operatingresults during industry downturns.The semiconductor industry is highly cyclical and periodically experiences significant economic downturnscharacterized by diminished product demand, resulting in production overcapacity and excess inventory in the markets weserve. A downturn can result in lower unit volumes and rapid erosion of average selling prices. The semiconductor industryhas experienced significant downturns, often in connection with, or in anticipation of, maturing product cycles of bothsemiconductor companies’ and their customers’ products or a decline in general economic conditions. This may adverselyaffect our results of operations and the value of our business.Our continuing business depends in significant part upon manufacturers of electronic and opto-electroniccompound semiconductor devices, as well as the current and anticipated market demand for these devices and products usingthese devices. As a supplier to the compound semiconductor industry, we are subject to the business cycles that characterizethe industry. The timing, length and volatility of these cycles are difficult to predict. The compound semiconductor industryhas historically been cyclical due to sudden changes in demand, the amount of manufacturing capacity and changes in thetechnology employed in compound semiconductors. The rate of changes in demand, including end demand, is high, and theeffect of these changes upon us occurs quickly, exacerbating the volatility of these cycles. These changes have affected thetiming and amounts of customers’ purchases and investments in new technology. These industry cycles create pressure onour revenue, gross margin and net income.18 Table of ContentsOur industry has in the past experienced periods of oversupply and that has resulted in significantly reduced pricesfor compound semiconductor devices and components, including our products, both as a result of general economic changesand overcapacity. When this occurs our operating results and financial condition are adversely affected. Oversupply causesgreater price competition and can cause our revenue, gross margins and net income to decline. During periods of weakdemand, customers typically reduce purchases, delay delivery of products and/or cancel orders of component parts such asour products. Further order cancellations, reductions in order size or delays in orders could occur and would materiallyadversely affect our business and results of operations. Actions to reduce our costs may be insufficient to align our structurewith prevailing business conditions. We may be required to undertake additional cost-cutting measures, and may be unableto invest in marketing, research and development and engineering at the levels we believe are necessary to maintain ourcompetitive position. Our failure to make these investments could seriously harm our business.We base our planned operating expenses in part on our expectations of future revenue, and a significant portion ofour expense is relatively fixed. If revenue for a particular quarter is lower than we expect, we likely will be unable toproportionately reduce our operating expenses for that quarter, which would harm our operating results. For example, in2013, we experienced significantly declining gross margins due to the allocation of fixed costs across a lower volume ofsales 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 inmanufacturing our products, including key materials such as quartz tubing from our vendor, Kaide, and polishing solutions.Although several of these raw materials are purchased from suppliers in which we hold an ownership interest, we generallypurchase these materials through standard purchase orders and not pursuant to long-term supply contracts, and no supplierguarantees supply of raw materials or equipment to us. If we lose any of our key suppliers, our manufacturing efforts could besignificantly hampered and we could be prevented from timely producing and delivering products to our customers. Prior toinvesting in our subsidiaries and joint ventures, we sometimes experienced delays obtaining critical raw materials and spareparts, including gallium, due to shortages of these materials and we could experience such delays again in the future due toshortages of materials and may be unable to obtain an adequate supply of materials. These shortages and delays could resultin higher materials costs and cause us to delay or reduce production of our products. If we have to delay or reduceproduction, we could fail to meet customer delivery schedules and our revenue and operating results could suffer.If we do not successfully develop new products to respond to rapidly changing customer requirements, our ability togenerate revenue, obtain new customers, and retain existing customers may suffer.Our success depends on our ability to offer new products, including larger diameter substrates, and product featuresthat incorporate leading technology and respond to technological advances. In addition, our new products must meetcustomer needs and compete effectively on quality, price and performance. The life cycles of our products are difficult topredict. The markets for our products are characterized by rapid technological change, changing customer needs andevolving industry standards. If our competitors introduce products employing new technologies or performancecharacteristics, our existing products could become obsolete and unmarketable. During the past few years, we have seen ourcompetitors selling more substrates manufactured using a crystal growth technology similar to ours, which has eroded ourtechnological differentiation.The development of new products can be a highly complex process, and we may experience delays in developingand introducing new products. Any significant delay could cause us to fail to timely introduce and gain market acceptance ofnew products. Further, the costs involved in researching, developing and engineering new products could be greater thananticipated. If we fail to offer new products or product enhancements or fail to achieve higher quality products, we may notgenerate sufficient revenue to offset our development costs and other expenses or meet our customers’ requirements.19 Table of ContentsOur 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 ourinitial contact with them. The sale of our products may be subject to delays due to our customers’ lengthy internal approvaland evaluation processes. During this time, we may incur substantial expenses and expend sales, marketing and managementefforts while the customers evaluate our products. These expenditures may not result in sales of our products. If we do notachieve anticipated sales in a period as expected, we may experience an unplanned shortfall in our revenue. As a result, wemay not be able to cover expenses, causing our operating results to be adversely effected. In addition, if we fail to meet theproduct qualification requirements of the customer, we may not have another opportunity to sell products to this customer formany months or even years. In the current competitive climate, the average qualification and sales cycle for our products haslengthened even further and is expected to continue to make it difficult for us to forecast our future sales accurately. Weanticipate that sales of any future substrate products will also have lengthy sales cycles and will, therefore, be subject to riskssubstantially similar to those inherent in 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 meetdemand for our products. If we are not able to use all or a significant portion of our facilities for prolonged periods for anyreason, we would not be able to manufacture products for our customers. For example, a fire or explosion caused by our use ofcombustible chemicals and high temperatures during our manufacturing processes or power interruption caused by severeweather conditions could render some or all of our facilities inoperable for an indefinite period of time. Actions outside ofour control, such as earthquakes or other natural disasters, could also damage our facilities, rendering them inoperable. If weare unable to operate our facilities and manufacture our products, we would lose customers and revenue and our businesswould be harmed.If China places restrictions on freight and transportation routes and on port of entry and departure this could result inshipping delays or increased costs for shipping. In August 2015 there was an explosion at the Port of Tianjin, China. As a result of this incident the governmentplaced some restrictions on importing certain materials and on freight routes used to transport these materials. Weexperienced some modest disruption from these restrictions. If the government were to place additional restrictions on thetransportation of materials, then our ability to transport our raw materials or products could be limited and result inbottlenecks at shipping ports, affecting our ability to deliver products to our customers. During periods of such restrictions,we may increase our stock of critical materials (such as arsenic, gallium, and other chemicals) for use during the period thatthese restrictions are likely to last, which will increase our use of cash and increase our inventory level. Any of theserestrictions could materially and adversely impact our results of operations and our financial condition.The financial condition of our customers may affect their ability to pay amounts owed to us.Many of our customers may be undercapitalized and cope with cash flow issues. Because of competitive marketconditions, we frequently allow our customers extended payment terms when shipping products to them. Subsequent to ourshipping a product, some customers have been unable to make payments when due, reducing our cash balances and causingus to incur charges to allow for a possibility that some accounts might not be paid. Customers may also be forced to file forbankruptcy. If our customers do not pay their accounts we will be required to incur 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 andmay result 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, whichprovide us with opportunities to gain supplies of key raw materials that are important to our substrate business.20 Table of ContentsThese affiliates each have a market beyond that provided by us. We do not have influence over all of these companies and insome we have made only a strategic, minority investment. We may not be successful in achieving the financial,technological or commercial advantage upon which any given investment is premised, and we could end up losing all or partof our investment.We depend on the continuing efforts of our senior management team and other key personnel. If we lose members of oursenior management team or other key personnel, or are unable to successfully recruit and train qualified personnel, ourability to manufacture and sell our products could be harmed.Our future success depends on the continuing services of members of our senior management team and other keypersonnel. Our industry is characterized by high demand and intense competition for talent, and the turnover rate can behigh. We compete for qualified management and other personnel with other semiconductor companies. Our employeescould leave our company with little or no prior notice and would be free to work for a competitor. If one or more of oursenior executives or other key personnel were unable or unwilling to continue in their present positions, we may not be ableto replace them easily or at all, and other senior management may be required to divert attention from other aspects of thebusiness. The loss of any of these individuals or our ability to attract or retain qualified personnel could adversely affect ourbusiness.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 changingcustomer requirements, while keeping inventory costs down and improving gross margins. Although we seek to maintainsufficient inventory levels of certain materials to guard against interruptions in supply and to meet our near term needs, andhave to date been able to obtain sufficient supplies of materials in a timely manner, in the future, we may experienceshortages of certain key materials. Some of our products and supplies have in the past and may in the future become obsoletewhile in inventory due to changing customer specifications, or become excess inventory due to decreased demand for ourproducts and an inability to sell the inventory within a foreseeable period. This would result in charges that reduce our grossprofit. Furthermore, if market prices drop below the prices at which we value inventory, we may need to take a charge for areduction in inventory values in accordance with the lower of cost or market valuation rule. We have in the past had to takeinventory valuation and impairment charges. Any future unexpected changes in demand or increases in costs of productionthat cause us to take additional charges for un-saleable, obsolete or excess inventory, or to reduce inventory values, couldadversely affect our results of operations.Financial market volatility and adverse changes in the domestic and global economic environment could have asignificant adverse 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 global economic conditions and low or negative growth in China, Europe and the United States, along withvolatility in the financial markets, increasing national debt and fiscal concerns in various regions, pose challenges to ourindustry. Currently China’s economy is slowing and this could impact our financial performance. 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 severeor prolonged 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 ofoverall economic uncertainty or as a result of their inability to access the liquidity necessary to engage inpurchasing initiatives;·increased credit risk associated with our customers or potential customers, particularly those that may operate inindustries most affected by the economic downturn; and21 Table of Contents·impairment of our intangible or other assets.In the recent past we experienced delays in customer purchasing decisions and disruptions in normal volume ofcustomer orders that we believe were in part due to the uncertainties in the global economy and an adverse impact onconsumer spending. During challenging and uncertain economic times and in tight credit markets, many customers delay orreduce technology purchases. Should similar events occur again, our business and operating results could be significantlyand 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 ofbusiness spending, which had deteriorated significantly in many countries and regions in previous years. Uncertainties in thefinancial and credit markets may cause our customers to postpone deliveries of ordered systems and placement of new ordersand extended uncertainties may reduce future sales of our products and services. The revenue growth and profitability of ourbusiness depends on the overall demand for our substrates, and we are particularly dependent on the market conditions forthe wireless, solid‑state illumination, fiber optics and telecommunications industries. Because the end users of our productsare 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. Customersmay find themselves facing excess inventory from earlier purchases, and may defer or reconsider purchasing products due tothe downturn in their business and in the general economy. If market conditions deteriorate, we may experience increasedcollection times and greater write-offs, either of which could have a material adverse effect on our profitability and our cashflow.Future tightening of credit markets and concerns regarding the availability of credit may make it more difficult forour customers to raise capital, whether debt or equity, to finance their purchases of capital equipment or of the products wesell. Delays in our customers’ ability to obtain such financing, or the unavailability of such financing, would adversely affectour product sales and revenues and therefore harm our business and operating results. We cannot predict the timing, durationof or effect on our business 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.Although we are not currently pursuing additional joint ventures, in the future we might continue to invest inadditional joint ventures in order to remain competitive in our marketplace and ensure a supply of critical raw materials.However, we may not be able to identify additional complementary joint venture opportunities or, even once opportunitiesare identified, we may not be able to reach agreement on the terms of the venture with the other venture partners. Additionaljoint ventures could cause us to incur contingent liabilities or other expenses, any of which could adversely affect ourfinancial 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 potentialnear- and long-term impact terrorist activities may have in regards to our suppliers, customers and markets for our productsand the economy is uncertain. There may be embargos of ports or products, or destruction of shipments or our facilities, orattacks that affect our personnel. There may be other potentially adverse effects on our operating results due to significantevents that we cannot foresee. Since we perform all of our manufacturing operations in China, terrorist activity or threatsagainst U.S.‑owned enterprises are a particular concern to us.22 Table of ContentsII.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 ourinternational sales involves significant risks.Our revenue growth depends in part on the expansion of our international sales and operations. International salesrepresented over 80% of our revenue in each of the past three years since 2013. We expect that sales to customers outside theUnited States, particularly sales to customers in Japan, Taiwan and China, will continue to represent a significant portion ofour revenue.Currently, a significant percentage of our revenue is to customers headquartered in Asia. All of our manufacturingfacilities and most of our suppliers are also located outside the United States. Managing our overseas operations presentschallenges, including periodic regional economic downturns, trade balance issues, varying business conditions anddemands, political instability, variations in enforcement of intellectual property and contract rights in different jurisdictions,differences in the ability to develop relationships with suppliers and other local businesses, changes in U.S. and internationallaws and regulations including U.S. export restrictions, fluctuations in interest and currency exchange rates, the ability toprovide sufficient levels of technical support in different locations, cultural differences, shipping delays and terrorist acts oracts of war, among other risks. Many of these challenges are present in China, which represents a large potential market forsemiconductor devices. Global uncertainties with respect to: (i) economic growth rates in various countries; (ii) sustainabilityof demand for electronics products; (iii) capital spending by semiconductor manufacturers; (iv) price weakness for certainsemiconductor devices; (v) changing and tightening environmental regulations and (vi) political instability in regions wherewe have operations may also affect our business, financial condition and results of operations.Our 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 inRenminbi and our Japanese customers which are denominated in Japanese yen. Increases in the value of the U.S. dollar couldincrease the price of our products in non-U.S. markets and make our products more expensive than competitors’ products inthese markets.Denominating some sales in Japanese yen subjects us to fluctuations in the exchange rates between the U.S. dollarand the Japanese yen. For example, in the second half of 2014, the exchange rate of Japanese yen to U.S. dollar moved from101.55 to 119.95 from June 30, 2014 to December 31, 2014. As a result, in 2014 we incurred foreign currency transactionexchange losses which are included in “other income (expense), net” on the consolidated statements of operations of $1.0million. We incur transaction gains or losses resulting from the purchase and sale activities denominated in foreigncurrencies other than functional currencies at the respective consolidated entities. We accumulate translation gain or lossesresulting from marking certain balance sheet assets and liabilities to the current market rate for23 Table of Contentsthose consolidated entities whose functional currencies are other than the reporting currency, which are recorded ascomponent of “accumulated other comprehensive income (loss)” on the consolidated balance sheets.The functional currency of our Chinese subsidiary and joint ventures is the local currency. If we do not effectivelymanage the risks associated with international sales, our revenue, cash flows and financial condition could be adverselyaffected.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,unexpected changes in regulatory requirements, any of which could reduce our gross margins. For example, in July 2012, wereceived notice of retroactive value-added taxes (VATs) levied by the tax authorities in China which applied for the periodfrom July 1, 2011 to June 30, 2012. We expensed the retroactive VATs of approximately $1.3 million in the quarter endedJune 30, 2012, which resulted in a decrease in our gross margins. These VATs will continue to negatively impact our grossmargins for the future quarters. Given the relatively fluid regulatory environment in China, there could be additional tax orother regulatory changes in the future. Any such changes could directly and materially adversely impact our financial resultsand general business condition.Our operating results depend in large part on continued customer acceptance of our substrate products manufactured inChina and 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 pastexperienced quality problems with our China‑manufactured products. Our previous quality problems caused us to losemarket share to our competitors, as some customers reduced their orders from us until our surface quality was as good andconsistent as that offered by competitors and instead allocated their requirements for compound semiconductor substrates toour competitors. If we are unable to continue to achieve customer qualifications for our products, or if we are unable tocontrol product quality, customers may not increase 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, regulatory or economic environments may affect our financial performance.Our financial performance may be affected by changes in China’s political, social, regulatory or economicenvironments. The role of the Chinese central and local governments in the Chinese economy is significant. Chinese policiestoward economic liberalization, and laws and policies affecting technology companies, foreign investment, currencyexchange rates, taxation structure and other matters could change, resulting in greater restrictions on our ability to dobusiness and operate our manufacturing facilities in China. Any imposition of surcharges or any increase in Chinese tax ratesor reduction or elimination of Chinese tax benefits could hurt our operating results. The Chinese government could revoke,terminate or suspend our operating license for reasons related to environmental control over the use of hazardous materials,labor complaints, national security and similar reasons without compensation to us. If the Chinese government were to takeany of these actions, we would be prevented from conducting all or part of our business. Any failure on our part to complywith governmental regulations could result in the loss of our ability to manufacture our products.If there are power shortages in China, we may have to temporarily close our China operations, which would adverselyimpact our 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 in electrical supply has caused sporadic outages among residential and commercial consumers causing theChinese government to implement tough measures to ease the energy shortage. If further problems with power shortagesoccur in the future, we may be required to make temporary closures of our operations or of our subsidiary and joint ventureoperations. We may be unable to manufacture our products and would then be unable to meet customer orders except frominventory on hand. As a result, our revenue could be adversely impacted, and our relationships with our24 Table of Contentscustomers could suffer, impacting our ability to generate future revenue. In addition, if power is shut off at any of ourfacilities at any time, either voluntarily or as a result of unplanned brownouts, during certain phases of our manufacturingprocess including our crystal growth phase, the work in process may be ruined and rendered unusable, causing us to incurcosts that will not be covered by revenue, and negatively impacting our cost of revenue and gross margins. An outbreak of a contagious disease such as Ebola, Severe Acute Respiratory Syndrome (SARS) or the Avian Flu mayadversely impact 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 totemporarily close our manufacturing operations. Similarly, if one or more of our key suppliers is required to close for anextended period, we might not have enough raw material inventories to continue manufacturing operations. In addition,while we possess management skills among our China staff that enable us to maintain our manufacturing operations withminimal on-site supervision from our U.S.‑based staff, our business could also be harmed if travel to or from China and theUnited States is restricted or inadvisable. If our manufacturing operations were closed for a significant period, we could loserevenue and market share, which would depress our financial performance and could be difficult to recapture. Finally, if oneof our key customers is required to close for an extended period, we might not be able to ship product to them, our revenuewould decline and our financial performance would suffer.III.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,cash equivalents and investment balances.We anticipate that our existing cash resources will fund our operations and purchases of capital equipment, as wellas provide adequate working capital for the next twelve months. However, our liquidity is affected by many factorsincluding, among others, the extent to which we pursue additional capital expenditures, the level of our production, andother factors related to the uncertainties of the industry and global economies. If we fail to manage business contractionssuccessfully we may draw down our cash reserves, which would adversely affect our financial condition, reduce our valueand possibly impinge our ability to raise debt and equity funding in the future, at a time when we might need to raiseadditional cash. Accordingly, there can be no assurance that events in the future will not require us to seek additional capitalor, if required, that such capital would be available on terms acceptable to us, if at all. As part of our effort to reduce costs, wemay lose key staff, production resources and technology that we will need to replenish when end markets recover. Theseevents 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 stockprice to decline.We have experienced, and may continue to experience, significant fluctuations in our revenue, gross margins andearnings. Our quarterly and annual revenue and operating results have varied significantly in the past and may varysignificantly in the future due to a number of factors, including:·our ability to develop, manufacture and deliver high quality products in a timely and cost-effective manner;·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;25 Table of Contents·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 ordersonce booked;·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 meaningfulindicators of our future performance.A substantial percentage of our operating expenses are fixed, and we may be unable to adjust spending tocompensate for an unexpected shortfall in revenue. As a result, any delay in generating revenue could cause our operatingresults to fall below the expectations 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 stockprice may decline.We provide public guidance on our expected operating and financial results. Although we believe that thisguidance provides our stockholders, investors and analysts with a better understanding of our expectations for the future,such guidance is comprised of forward-looking statements subject to the risks and uncertainties described in this report andin our other public filings and public statements. Our actual results may not meet the guidance we have provided. If ouroperating or financial results do not meet our guidance or the expectations of investment analysts, our stock price maydecline.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 theholders of common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stockthat may be issued in the future. The issuance of shares of preferred stock could have the effect of making it more difficult fora third party to acquire a majority of our outstanding voting stock. We have no present intention to issue additional shares ofpreferred stock.Provisions in our amended and restated certificate of incorporation and amended and restated bylaws may have theeffect of delaying or preventing a merger, acquisition or change of control, or changes in our management, which couldadversely affect the market 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 specialmeeting of our stockholders.26 Table of ContentsFurthermore, because we are incorporated in Delaware, we are subject to the provisions of Section 203 of theDelaware General Corporation Law. These provisions prohibit us from engaging in any business combination with anyinterested 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:·66/3% of the shares of voting stock not owned by the interested stockholder approve the merger orcombination, or·the board of directors approves the merger or combination or the transaction which resulted in the stockholderbecoming an 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 pastclosed below the $1.00 minimum per share bid price required for continued inclusion on The Nasdaq Global Select Marketunder Marketplace Rule 5450(a). If the bid price of our common stock remains below $1.00 per share for thirty consecutivebusiness days, 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 thetrading of our common stock. If a delisting of our common stock were to occur, our common stock would trade on the OTCBulletin Board or on the “pink sheets” maintained by the National Quotation Bureau, Inc. Such alternatives are generallyconsidered to be less efficient markets, and our stock price, as well as the liquidity of our common stock, may be adverselyimpacted as a result. Delisting from The Nasdaq Global Select Market could also have other negative results, including thepotential loss of confidence by suppliers and employees, the loss of institutional investor interest and fewer businessdevelopment opportunities, as well as the loss of liquidity for our stockholders.IV.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 technologynecessary to our business. The markets in which we compete are comprised of competitors that in some cases hold substantialpatent portfolios covering aspects of products that could be similar to ours. We could become subject to claims that we areinfringing patent, trademark, copyright or other proprietary rights of others. We have in the past been involved in lawsuitsalleging patent infringement, and could in the future be involved in similar litigation. For example, we entered into asettlement agreement with Sumitomo Electric Industries in 2011 to settle its claim of patent infringement.If we are unable to protect our intellectual property, including our proprietary process technology, we may lose valuableassets or incur costly litigation.We rely on a combination of patents, copyrights, trademarks, trade secrets and trade secret laws, non-disclosureagreements and other intellectual property protection methods to protect our proprietary technology. However, we believethat, due to the rapid pace of technological innovation in the markets for our products, our ability to establish and maintain aposition of technology leadership also depends on the skills of our development personnel. We believe that our internal,non-patented proprietary process technology methods, systems and processes are a valuable and critical element of ourintellectual property. We must establish and maintain safeguards to avoid the theft of these processes. Despite our efforts toprotect our intellectual property, third parties can develop products or processes similar to ours. Our means of protecting ourproprietary rights may not be adequate, and our competitors may independently develop similar technology, duplicate ourproducts or design around our patents. We believe that at least two of our competitors have begun to ship GaAs substratesproduced using a process similar to our VGF process. Our competitors may also develop and patent improvements to the VGFtechnology upon which we rely, and thus may limit any exclusivity we enjoy by virtue of our patents or trade secrets.27 2 Table of ContentsIt is possible that pending or future United States or foreign patent applications made by us will not be approved,that our issued patents will not protect our intellectual property, or that third parties will challenge our ownership rights orthe validity of our patents. In addition, the laws of some foreign countries may not protect our proprietary rights to as great anextent as do the laws of the United States and it may be more difficult to monitor the use of our intellectual property. Ourcompetitors may be able to legitimately ascertain non-patented proprietary technology embedded in our systems. If thisoccurs, we may not be able to prevent 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 orknow-how or to determine their scope, validity or enforceability. Enforcing or defending our proprietary technology isexpensive, could cause us to divert resources and may not prove successful. Our protective measures may prove inadequateto protect our proprietary rights, and if we fail to enforce or protect our rights, we could lose valuable assets.V.Risks Related to Compliance and Other Legal MattersWe need to continue to improve or implement our systems, procedures and controls.We rely on certain manual processes for data collection and information processing, as do our joint venturecompanies. If we fail to manage these procedures properly or fail to effectively manage a transition from manual processes toautomated processes, our systems and controls may be disrupted. To manage our business effectively, we may need toimplement additional management information systems, further develop our operating, administrative, financial andaccounting systems and controls, add experienced senior level managers, and maintain close coordination among ourexecutive, 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 areport of management on the effectiveness of our internal control over financial reporting. Ongoing compliance with thisrequirement is complex, costly and time-consuming. If: (1) we fail to maintain effective internal control over financialreporting; or (2) our management does not timely assess the adequacy of such internal control, we could be subject toregulatory sanctions and the public’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 operatinglocations, including laws and regulations of China, such as laws and regulations related to the development, manufacture anduse of our products, the use of hazardous materials, the operation of our facilities, and the use of our real property. These lawsand regulations govern the use, storage, discharge and disposal of hazardous chemicals during manufacturing, research anddevelopment, and sales demonstrations. If we fail to comply with applicable regulations, we could be subject to substantialliability for clean-up efforts, personal injury and fines or suspension or be forced to cease our operations, and/or suspend orterminate the development, manufacture or use of certain of our products, the use of our facilities, or the use of our realproperty, each of which could have a material adverse effect on our business, financial condition and results of operations.From time to time, the Chinese government issues new regulations, which may require additional actions on our partto comply. On February 27, 2015, the China State Administration of Work Safety updated its list of hazardoussubstances. The previous list, which was published in 2002, did not restrict the materials that we use in our wafers. The newlist added gallium arsenide. As a result of the newly published list, we were required to obtain a permit by May 1, 2015 tocontinue to manufacture our gallium arsenide substrate wafers. We initiated discussions with the local district agency toobtain the requisite permit. On May 4, 2015, we were instructed by the local district agency that because we had not yetreceived the requisite permit, we should cease manufacturing our gallium arsenide substrate wafers or we should obtainpermission to continue manufacturing our gallium arsenide substrate wafers from a municipal-level office, such as theBeijing municipal authority. The Beijing municipal authority accepted our application on May 7, 2015 and28 Table of Contentsour application is still under review. There can be no assurances that we will receive the requisite permit from the Beijingmunicipal authority or from any other Chinese governmental authority. If we do not receive the requisite permit to continueto manufacture gallium arsenide substrate wafers, we may be required to cease manufacturing such wafers until we receive therequisite permit or move such manufacturing to a new location. A halt to our production of gallium arsenide substrate waferscould result in our furloughing approximately several hundred manufacturing employees. If we obtain the requisite permitafter halting our production, we might not be able to recommence manufacturing gallium arsenide substrate wafersimmediately because we may need to rebuild our supply chain and we may not be able to rehire our furloughedmanufacturing employees. We could also lose customers to our competitors because of our inability to supply galliumarsenide substrate wafers. Any of these could materially and adversely impact our results of operations and our financialcondition. In addition, in 2005, a complaint was filed against us alleging personal injury, general negligence, intentional tort,wage loss and other damages, including punitive damages, as a result of exposure of plaintiffs to high levels of galliumarsenide in gallium arsenide wafers, and methanol. Other current and/or former employees could bring litigation against us inthe future. Although we have in place engineering, administrative and personnel protective equipment programs to addressthese issues, our ability to expand or continue to operate our present locations could be restricted or we could be required toacquire costly remediation equipment or incur other significant expenses if we were found liable for failure to comply withenvironmental and safety regulations. Existing or future changes in laws or regulations in the United States and China mayrequire us to incur significant expenditures or liabilities, or may restrict our operations. In addition, our employees could beexposed to chemicals or other hazardous materials at our facilities and we may be subject to lawsuits seeking damages forwrongful death or personal injuries allegedly 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 ourbusiness, financial condition, results of operations or cash flows could be affected in any particular period by litigationpending and any additional litigation brought against us. In addition, future litigation could divert management’s attentionfrom our business and operations, causing our business and financial results to suffer. We could incur defense or settlementcosts in excess of the insurance covering these litigation matters, or that could result in significant judgments against us orcause us to incur costly settlements, in excess of our insurance limits. Item 1B. Unresolved Staff CommentsNone.29 Table of ContentsItem 2. PropertiesOur principal properties as of March 7, 2016 are as follows: Square Location Feet Principal Use OwnershipFremont, CA 19,467 Administration Operating lease, expires November 2017Beijing, China 300,000 Production and Administration Owned by AXT / TongmeiXianxi, China 56,500 Production Owned by Beijing JiYa SemiconductorMaterial, Co., Ltd.*Xianxi, China 7,500 Administration Owned by Beijing JiYa SemiconductorMaterial, Co., Ltd.*Beijing, China 2,000 Administration Operating lease by Beijing JiYa SemiconductorMaterial, Co., Ltd., expires February 2016Nanjing, China 22,000 Production Owned by Nanjing Jin Mei Gallium Co., Ltd.*Nanjing, China 5,700 R&D and Administration Owned by Nanjing Jin Mei Gallium Co., Ltd.*Nanjing, China 3,900 Production Owned by Nanjing Jin Mei Gallium Co., Ltd.*Beijing, China 14,720 Production Owned by BoYu Semiconductor Vessel CraftworkTechnology Co., Ltd.*Beijing, China 7,600 Production and Administration Operating leases by BoYu Semiconductor VesselCraftwork Technology Co., Ltd., expire in variousterms until June 2018.* *Joint ventures in which we hold an interest and consolidate in our financial statements. We hold a 46% interest inBeijing JiYa Semiconductor Material Co., Ltd., a 83% interest in Nanjing Jin Mei Gallium Co., Ltd., and a 70% interestin Beijing BoYu Semiconductor Vessel Craftwork Technology Co., Ltd.We consider each facility to be in good operating condition and adequate for its present use, and believe that eachfacility has sufficient 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 theordinary course of business. We do not expect that any of these matters, individually or in the aggregate, will have a materialadverse effect on our business, financial condition, cash flows or results of operation. Item 4. Mine Safety DisclosuresNot applicable.30 Table of ContentsPART II Item 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 Select Market (NASDAQ) under the symbol“AXTI” since May 20, 1998, the date we consummated our initial public offering, and beginning on January 3, 2011, ourcommon stock began trading on the NASDAQ Global Select Market under the same symbol. The following table sets forththe range of high and low sales prices of the common stock for the periods indicated, as reported by NASDAQ. High Low 2015 First Quarter$3.05$2.36Second Quarter $2.70 $2.22 Third Quarter $2.59 $1.91 Fourth Quarter $2.70 $1.90 2014 First Quarter $2.67 $2.20 Second Quarter $2.32 $2.06 Third Quarter $3.04 $2.04 Fourth Quarter $2.88 $2.08 As of March 7, 2016, there were 72 holders of record of our common stock. Because many shares of AXT’s commonstock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number ofbeneficial owners of our common stock.We have never paid or declared any cash dividends on our common stock and do not anticipate paying cashdividends in the foreseeable future. Dividends accrue on our outstanding Series A preferred stock at the rate of $0.20 perannum per share of Series A preferred stock. The 883,000 shares of $0.001 par value Series A preferred stock issued andoutstanding as of both December 31, 2015 and 2014 are valued at $3,532,000 and are non-voting and non-convertiblepreferred stock with a 5.0% cumulative annual dividend rate payable when declared by our board of directors, and $4 pershare liquidation preference over common stock, and must 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 acquisitionof Lyte Optronics, Inc. on May 28, 1999.Issuer Purchases of Equity SecuritiesOn February 21, 2013, our Board of Directors approved a stock repurchase program pursuant to which we couldrepurchase up to $6.0 million of our outstanding common stock through February 27, 2014. The purchases could be madefrom time to time in the open market and were to be funded from our existing cash balances and cash generated fromoperations. During 2013, we repurchased approximately 285,000 shares at an average price of $2.52 per share for a totalpurchase price of $716,000 under the stock repurchase program. As of December 31, 2013, approximately $5.3 millionremained available for future repurchases under this program. No shares were repurchased in 2014 under this program and theplan expired on February 27, 2014.On October 27, 2014, our Board of Directors approved a stock repurchase program pursuant to which we mayrepurchase up to $5.0 million of our outstanding common stock. These repurchases can be made from time to time in theopen market and are funded from our existing cash balances and cash generated from operations. During 2015, werepurchased approximately 908,000 shares at an average price of $2.52 per share for a total purchase price of approximately$2.3 million under the stock repurchase program. As of December 31, 2015, approximately $2.7 million remained availablefor future repurchases under this program. The following table provides additional details regarding our repurchase activityduring the three months ended December 31, 2015:31 Table of Contents Approximately Dollar Total Number of Shares Value of Shares that Purchased as Part of May Yet be Purchased Total Number of Shares Average Price Paid per Publicly Announced Under the Plans or Period Purchased Share Plans or Programs Programs (in thousands) October 1, 2015 -October 31, 2015 16,588 $1.97 16,588 $2,714 November 1, 2015 -November 30, 2015 — $ — — $2,714 December 1, 2015 -December 31, 2015 — $ — — $2,714 Comparison of Stockholder ReturnSet forth below is a line graph comparing the annual percentage change in the cumulative total return to thestockholders of the Company on our common stock with the CRSP Total Return Index for the Nasdaq Stock Market (U.S.Companies) and the Nasdaq Electronic Components Index for the period commencing December 31, 2010 and endingDecember 31, 2015. 32 Table of Contents 12/10 12/11 12/12 12/13 12/14 12/15 AXT, Inc. 100 39.94 26.92 25.00 26.82 23.75 NASDAQ Composite 100 100.53 116.9 166 188.78 199.95 NASDAQ Electronic Components 100 90.64 91.50 127.54 167.91 168.98 Item 6. Selected Consolidated Financial DataThe following selected consolidated financial data is derived from and should be read in conjunction with ourconsolidated financial statements and related notes set forth in Item 8 below, and in our previously filed reports onForm 10‑K. See also Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” forfurther information relating to items reflecting our results of operations and financial condition. Year Ended December 31, 2015 2014 2013 2012 2011 (in thousands, except per share data) Statements of Operations Data: Revenue$77,502$83,499$85,335$88,374$104,121Cost of revenue 60,673 66,332 73,507 63,522 59,339 Gross profit 16,829 17,167 11,828 24,852 44,782 Operating expenses: Selling, general, and administrative 16,064 14,970 16,066 15,419 14,836 Research and development 5,664 4,144 3,424 3,468 2,473 Restructuring charge — 907 — — — Total operating expenses 21,728 20,021 19,490 18,887 17,309 Income (loss) from operations (4,899) (2,854) (7,662) 5,965 27,473 Interest income, net 412 483 408 518 449 Equity in earnings of unconsolidated joint ventures 462 1,528 1,377 1,281 741 Other income (expense), net 2,023 361 (748) (761) (45) Income (loss) before provision for income taxes (2,002) (482) (6,625) 7,003 28,618 Provision for income taxes 531 215 188 853 2,795 Net income (loss) (2,533) (697) (6,813) 6,150 25,823 Less: Net (income) loss attributable to noncontrollinginterests 305 (691) (1,145) (3,040) (5,503) Net income (loss) attributable to AXT, Inc. $(2,228) $(1,388) $(7,958) $3,110 $20,320 Net income (loss) attributable to AXT, Inc. per commonshare: Basic $(0.07) $(0.05) $(0.25) $0.09 $0.63 Diluted $(0.07) $(0.05) $(0.25) $0.09 $0.61 Shares used in per share calculations: Basic 32,183 32,452 32,700 32,144 31,872 Diluted 32,183 32,452 32,700 32,865 33,061 December 31, 2015 2014 2013 2012 2011 (in thousands) Balance Sheet Data: Cash and cash equivalents $24,875 $28,814 $24,961 $30,634 $26,156 Investments 19,128 20,123 22,644 19,461 14,486 Working capital 84,047 88,422 84,114 93,376 92,220 Total assets 151,896 161,517 163,822 167,589 162,488 Current liabilities 12,841 14,771 15,426 13,096 10,883 Long-term debt, net of current portion — — — — — Stockholders’ equity 137,561 144,688 145,546 150,914 147,049 33 Table of ContentsItem 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 subjectto risks and uncertainties. Actual results may differ substantially from those referred to herein due to a number of factors,including but not limited to risks described in the section entitled Item 1A. “Risk Factors” and elsewhere in this AnnualReport. This discussion should be read in conjunction with Item 6. “Selected Consolidated Financial Data” and ourconsolidated financial statements and related notes included elsewhere in this Form 10-K.On August 11, 2014, we announced the appointment of Mr. Gary L. Fischer as the Company’s Vice President, ChiefFinancial Officer and Corporate Secretary, effective as of August 11, 2014. Dr. Morris S. Young, Chief Executive Officer ofthe Company relinquished his role as Interim Chief Financial Officer and Corporate Secretary of the Company, effective as ofAugust 11, 2014.On April 17, 2015, Mr. Davis Zhang notified us of his decision to resign as our President, China Operations. Hisresignation was effective May 15, 2015.On June 29, 2015, we announced the appointment of Dr. Hong Q. Hou as the Company’s Chief Operating Officer.On January 6, 2016, Dr. Hou notified us of his decision to resign as Chief Operating Officer of the Company. His resignationwas effective January 8, 2016. Restructuring ChargesOn February 25, 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, Tongmei implemented certain workforce reductions with respect to its manufacturing facility in China. We reduced the workforce at Tongmei by approximately 93 positions that were no longer required to support production andoperations, or approximately 11 percent of our workforce. We recorded a restructuring charge of approximately $907,000related to the reduction in force for severance-related expenses. This restructuring plan and reduction in force has beencompleted as of March 31, 2014. Critical Accounting Policies and EstimatesWe prepare our consolidated financial statements in accordance with accounting principles generally accepted inthe United States of America. Accordingly, we make estimates, assumptions and judgments that affect the amounts reportedon our consolidated financial statements. These estimates, assumptions and judgments about future events and their effectson our results cannot be determined with certainty, and are made based upon our historical experience and on otherassumptions that are believed to be reasonable under the circumstances. These estimates may change as new events occur oradditional information is obtained, and we may periodically be faced with uncertainties, the outcomes of which are notwithin our control and may not be known for a prolonged period of time.We have identified the policies below as critical to our business operations and understanding of our financialcondition and results of operations. Critical accounting policies are material to the presentation of our consolidated financialstatements and require us to make difficult, subjective or complex judgments that could have a material effect on ourfinancial condition and results of operations. They may require us to make assumptions about matters that are highlyuncertain at the time of the estimate. Different estimates that we could have used, or changes in the estimate that arereasonably likely to occur, may have a material impact on our financial condition or results of operations. We also refer youto Note 1 to our consolidated financial statements included elsewhere in this Form 10-K.Revenue RecognitionWe manufacture and sell high-performance compound semiconductor substrates including indium phosphide, semi-conducting and semi-insulating gallium arsenide and germanium wafers, and our three consolidated subsidiaries sell certainraw materials including 99.99% pure gallium (4N Ga), high purity gallium (7N Ga), pyrolytic boron nitride (pBN) cruciblesand boron oxide (B2O3). After we ship our products, there are no remaining obligations or customer34 Table of Contentsacceptance requirements that would preclude revenue recognition. Our products are typically sold pursuant to a purchaseorder placed by our customers, and our terms and conditions of sale do not require customer acceptance. We recognizerevenue upon shipment and transfer of title of products to our customers, which is either upon shipment from our dock,receipt at the customer’s dock, or removal from consignment inventory at the customer’s location, provided that we havereceived a valid purchase order, the price is fixed or determinable, title and risk of ownership have transferred, collection ofresulting receivables is probable, and product returns are reasonably estimable. We do not provide training, installation orcommissioning services.We provide for future returns based on historical experience, current economic trends and changes in customerdemand at the time 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 allowancefor doubtful accounts receivable primarily based upon the age of these accounts. We evaluate receivables from U.S.customers with an emphasis on balances in excess of 90 days and for receivables from customers located outside the U.S. withan emphasis on balances in excess of 120 days and establish a reserve on the receivable balances if needed. The reason forthe difference in the evaluation of receivables between foreign and U.S. customers is that U.S. customers have historicallymade payments in a shorter period of time than foreign customers. Foreign business practices generally require us to allowcustomer payment terms that are longer than those accepted in the United States. We assess the probability of collectionbased on a number of factors, including the length of time a receivable balance has been outstanding, our past history withthe customer and their creditworthiness.As of December 31, 2015 and 2014, our accounts receivable, net balance was $18.5 million and $17.9 million,respectively, which was net of an allowance for doubtful accounts of $561,000 and $410,000, respectively. During 2015, weincreased this allowance for doubtful accounts by $151,000 primarily because of the poor financial condition of a fewcustomers. During 2014, we decreased this allowance for doubtful accounts by $459,000 primarily because of improvedcollections from customers. No amounts have been written off. If actual uncollectible accounts differ substantially from ourestimates, revisions to the estimated allowance for doubtful accounts would be required, which could have a material impacton our financial results for future periods.The allowance for sales returns is also deducted from gross accounts receivable. During 2015, we utilized $423,000and charged an additional $434,000 resulting in the ending balance of allowance for sales returns of $424,000 as ofDecember 31, 2015. During 2014, we utilized $410,000 and charged an additional $183,000 resulting in the allowance forsales returns of $413,000 as of December 31, 2014.Warranty ReserveWe maintain a warranty reserve based upon our claims experience during the prior twelve months and any pendingclaims and returns of which we are aware. Warranty costs are accrued at the time revenue is recognized. As of December 31,2015 and 2014, accrued product warranties totaled $497,000 and $802,000, respectively. The decrease in accrued productwarranties is primarily attributable to decreased claims for quality issues experienced by some customers and reduction inestimated replacement costs. If actual warranty costs or pending new claims differ substantially from our estimates, revisionsto the estimated warranty liability would be required, which could have a material impact on our financial condition andresults 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 andmanufacturing 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 lightof current market conditions in order to identify excess and obsolete inventory, and we provide a35 Table of Contentsvaluation allowance for certain inventories based upon the age and quality of the product and the projections for sale of thecompleted products. As of December 31, 2015 and 2014, we had an inventory reserve of $12.0 million and $11.2 million,respectively, for excess and obsolete inventory. If actual demand for our products were to be substantially lower thanestimated, additional inventory adjustments for excess or obsolete inventory might be required, which could have a materialimpact on our business, financial condition and results of operations.Impairment of InvestmentsWe classify marketable investments in debt and equity securities as available-for-sale securities in accordance withASC topic 320, Investments—Debt and Equity Securities (“ASC 320”). All available-for-sale securities with a quoted marketvalue below cost (or adjusted cost) are reviewed in order to determine whether the decline is other-than-temporary. Factorsconsidered in determining whether a loss is temporary include the magnitude of the decline in market value, the length oftime the market value has been below cost (or adjusted cost), credit quality, and our ability and intent to hold the securitiesfor a period of time sufficient to allow for any anticipated recovery in market value.We also invest in equity instruments of privately-held companies in China for business and strategic purposes.Investments in our non-consolidated joint venture companies are classified as other assets and accounted for under either theequity or cost method, depending on whether we have the ability to exercise significant influence over their operations orfinancial decisions. 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 lengthof time and extent to which the fair value has been less than our cost basis, the financial condition and near-term prospects ofthe investee, fundamental changes to the business prospects of the investee, share prices of subsequent offerings, and ourintent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in our carryingvalue. We had no write‑downs in 2015, 2014 and 2013.Fair Value of InvestmentsASC topic 820, Fair Value Measurement (“ASC 820”) establishes three levels of inputs that may be used to measurefair value.Level 1 instruments represent quoted prices in active markets. Therefore, determining fair value for Level 1instruments does not 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 forcomparable instruments in markets with insufficient volume or infrequent transactions (less active markets), issuer creditratings, non-binding market consensus prices that can be corroborated with observable market data, model-derivedvaluations in which all significant inputs are observable or can be derived principally from or corroborated with observablemarket data for substantially the full term of the assets or liabilities, or quoted prices for similar assets or liabilities. TheseLevel 2 instruments require more management judgment and subjectivity compared to Level 1 instruments, including:·Determining which instruments are most comparable to the instrument being priced requires management to identifya sample 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 beingpriced.·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 withobservable market data.Level 3 instruments include unobservable inputs to the valuation methodology that are significant to themeasurement of fair value of assets or liabilities. The determination of fair value for Level 3 instruments requires the36 Table of Contentsmost management judgment and subjectivity. We place short-term foreign currency hedges that are intended to offset thepotential cash exposure related to fluctuations in the exchange rate between the United States dollar and Japanese yen. Wemeasure the fair value of these foreign currency hedges at each month end and quarter end using current exchange rates andin accordance with generally accepted accounting principles. At quarter end any foreign currency hedges not settled arenetted in “accrued liabilities” on the consolidated balance sheet and classified as Level 3 assets and liabilities. As ofDecember 31, 2015 the net change in fair value from the placement of the hedge to settlement at each month end during thequarter had a de minimis impact to the consolidated results. 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 beimpaired, we compare the carrying value of the long-lived assets to the projection of future undiscounted cash flowsattributable to such assets. In the event that the carrying value exceeds the future undiscounted cash flows, we record animpairment charge against income equal to the excess of the carrying value over the asset’s fair value. Fair values aredetermined based on quoted market values, discounted cash flows or internal and external appraisals, as applicable. Assetsheld for sale are carried at the lower of carrying value or estimated net realizable value. We had no “Assets held for sale” onthe consolidated balance sheet as of December 31, 2015 and 2014.Stock-Based CompensationWe account for stock-based compensation in accordance with ASC topic 718, Stock-based Compensation (“ASC718”). Share-based awards granted include stock options and restricted stock awards. We utilize the Black‑Scholes optionpricing model to estimate the grant date fair value of stock options, which requires the input of highly subjectiveassumptions, including estimating stock price volatility and expected term. Historical volatility of our stock price was usedwhile the expected term for our options was estimated based on historical option exercise behavior and post-vestingforfeitures of options, and the contractual term, the vesting period and the expected term of the outstanding options. Further,we apply an expected forfeiture rate in determining the amount of share-based compensation. We use historical forfeitures toestimate the rate of future forfeitures. Changes in these inputs and assumptions can materially affect the measure of estimatedfair value of our stock compensation. The cost of restricted stock awards is determined using the fair value of our commonstock on the date of grant.We recognize the compensation costs net of an estimated forfeiture rate over the requisite service period of theoptions award, which is generally the vesting term of four years. Compensation expense for restricted stock awards isrecognized over the vesting period, which is generally three years or four years. Stock-based compensation expense isrecorded in cost of revenue, research and development, and selling, general and administrative expenses. (see Note 1—Summary of Significant Accounting Policies—Stock‑Based Compensation).Income TaxesWe account for income taxes in accordance with ASC topic 740, Income Taxes (“ASC 740”) which requires thatdeferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between thebook and tax bases of recorded assets and liabilities. ASC 740 also requires that deferred tax assets be reduced by a valuationallowance if it is more likely 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 regulationsgoverning each region, particularly China. The calculation of tax liabilities involves significant judgment in estimating theimpact of uncertainties 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.37 Table of ContentsResults of OperationsOverviewWe were founded in 1986 to commercialize and enhance our proprietary vertical gradient freeze (VGF) technologyfor producing high-performance compound semiconductor substrates or wafers. We have one operating segment: oursubstrate business and the sale of raw materials used to make such substrates or other related products. We recorded our firstsubstrate sales in 1990 and our substrate products currently include indium phosphide (InP), gallium arsenide (GaAs) andgermanium (Ge) substrates used to produce semiconductor devices for use in applications such as fiber optic and wirelesstelecommunications, light emitting diodes (LEDs), lasers and for solar cells for space and terrestrial photovoltaicapplications. We also sell raw materials, including gallium and germanium, through our participation in majority‑ andminority‑owned subsidiaries and joint ventures.Operating ResultsWe manufacture all of our products in the People’s Republic of China (PRC or China), which generally hasfavorable costs for facilities and labor compared to the costs of comparable facilities and labor in the United States, Japan orEurope. Our supply chain includes AXT subsidiaries and joint venture companies in China, which provide us with reliablesupply and enhanced sourcing lead-times for key raw materials, which are central to our final manufactured products.We have experienced declining annual revenue in recent years, primarily as a result of silicon chips replacing GaAschips in the mobile phone switching function. Prior to certain recent innovations, silicon chips did not perform adequatelyin this function due to power consumption, heat and speed issues. The development of the silicon-on-insulator techniqueovercame these deficiencies and provided a lower cost solution for mobile phone switches beginning in 2011. The declinein GaAs revenue is partially mitigated by revenue growth in our InP wafers. InP revenue has experienced over 50% year-on-year revenue growth in the last two years. We believe our product and customer diversity also mitigates the decline in GaAsrevenue.In the first quarter of 2014, we reduced our work force by approximately 11% and embarked on a number ofadditional cost reduction programs, primarily in our manufacturing group, which has the highest costs as compared toresearch and development or selling and administrative expenses. In 2015, we invested in wafer manufacturing equipmentthat will increase automation and decrease the number of manually operated processing steps in our production flow. Webelieve this can improve our manufacturing yields, product quality and product consistency. We will continue to focus onour InP products as we believe this product line can continue to be an engine for growth and better gross margins.Revenue 2014 to 2015 2013 to 2014 Years Ended Dec. 31 Increase Increase 2015 2014 2013 (Decrease) % Change (Decrease) % Change Total revenue $77,502 $83,499 $85,335 $(5,997) (7.2)% $(1,836) (2.2)% Revenue decreased $6.0 million, or 7.2%, to $77.5 million in 2015 from $83.5 million in 2014. The revenuedecrease resulted from a decrease in sales of our GaAs substrate materials, particularly from GaAs wafers used to produceLEDs. The LED market encountered severe pricing pressure and we withdrew from the lower performance segment of theLED market, resulting in lower sales of GaAs wafers. In addition raw material sales decreased due to a reduction of theaverage selling price of gallium. Ge substrate sales decreased as a result of a slowdown in the satellite solar cell market. Thisdecrease in revenue was partially offset by the increased demand for our InP substrates as a result of expanding applicationsin the marketplace, such as fiber optic lasers and data connectivity. 38 Table of ContentsRevenue decreased $1.8 million, or 2.2%, to $83.5 million in 2014 from $85.3 million in 2013. The revenuedecrease resulted from decreased demand for our substrate materials, particularly for our Ge substrates which in 2013 werestronger than 2014 because of a Concentrated Photovoltaic (CPV) solar installation in South Africa. The decline in sales ofGe substrates was partially offset by an increase in 2014 in sales of InP substrates and in sales of raw materials. GaAs revenuedecreased in 2014 by a modest amount, in the low single digits.Revenue by Geographic Region Year Ended Dec. 31, 2014 to 2015 2013 to 2014 Increase Increase 2015 2014 2013 (Decrease) % Change (Decrease) % Change ($ in thousands) Europe (primarily Germany) $19,518 $21,535 21,387 $(2,017) (9.4)%$148 0.7% % of total revenue 25% 26% 25% Taiwan 13,799 $11,464 10,131 2,335 20.4% 1,333 13.2% % of total revenue 18% 14% 12% China 13,728 $17,451 24,946 (3,723) (21.3)% (7,495) (30.0)% % of total revenue 18% 21% 29% Asia Pacific (excluding China,Taiwan and Japan) 11,482 $11,207 9,165 275 2.5% 2,042 22.3% % of total revenue 15% 13% 11% North America (primarily the UnitedStates) 9,837 $10,292 10,665 (455) (4.4)% (373) (3.5)% % of total revenue 13% 12% 12% Japan 9,138 $11,550 9,041 (2,412) (20.9)% 2,509 27.8% % of total revenue 11% 14% 11% Total revenue $77,502 $83,499 $85,335 $(5,997) (7.2)%$(1,836) (2.2)% *Primarily the United States.Sales to customers located outside of North America represented approximately 87%, 88% and 88% of our revenueduring 2015, 2014 and 2013, respectively.Revenue from customers in China decreased primarily due to decreased sales of our GaAs substrates for LEDapplications and raw materials. Revenue from Japan decreased primarily due to decreased sales of GaAs substrates when acertain epi customer terminated its GaAs epi processing. In addition, the Japanese yen further weakened against the dollar in2015. Revenue from customers in Europe decreased primarily due to decreased sales of our Ge substrates in solar cells andoptical sensors applications. Revenue increased in Taiwan primarily due to increased sales of InP. Our decrease in revenuewas partially offset by the increased demand for our InP substrates in all regions as a result of expanding applications in themarketplace, such as fiber optic lasers and data connectivity. We increased our sales in Japan, Taiwan and Asia Pacific in 2014 by $2.5 million, $1.3 million and $2.0 millionrespectively. Increases in Japan resulted from a strategic focus of our selling and business development efforts initiated latein 2013. This strategic focus delivered modest benefits the first half of 2014 and more substantial benefits in second half of2014. Increases in Taiwan and Asia Pacific resulted from generally a more active market for our products with existingcustomers and the addition of a sales professional assigned to these regions. Further, we assigned additional resources fortechnical support to assist our customers in characterizing the products we delivered. In 2014 revenue from customers inChina decreased substantially primarily due to decreased substrate revenue and raw material revenue. In 2014 revenue inNorth America and Europe was generally unchanged over 2013.39 Table of ContentsGross Margin 2014 to 2015 2013 to 2014 Year Ended Dec. 31, Increase 2015 2014 2013 (Decrease) % Change (Decrease) % Change ($ in thousands) Gross profit$16,829$17,167$11,828$(338)(2.0)%$5,33945.1%Gross Margin % 21.7% 20.6% 13.9% Gross margin increased to 21.7% of total revenue in 2015 from 20.6% of total revenue in 2014. Gross marginincreased primarily due to a change in product mix, lower material costs and the continuation of a company-wide cost-savingcampaign, which was first implemented in 2014. The 2015 quarterly gross margins for the first quarter to the fourth quarterwere 23.7%, 20.9%, 25.1% and 17.1%, respectively. In the fourth quarter of 2015 our gross margin declined from theprevious quarter as a result of a lower-of-cost-or-market inventory write down at one of our consolidated subsidiaries due to adecline of the market price of gallium.Gross margin increased to 20.6% of total revenue in 2014 from 13.9% of total revenue in 2013. Gross marginincreased primarily due to product mix and the implementation of cost-saving activities during 2014. The 2014 quarterlygross margins for the first quarter to the fourth quarter were 14.1%, 19.4%, 23.0% and 25.4%, respectively. Selling, General and Administrative Expenses 2014 to 2015 2013 to 2014 Years Ended Dec. 31 Increase Increase 2015 2014 2013 (Decrease) % Change (Decrease) % Change ($ in thousands) Selling, general and administrativeexpenses $16,064 $14,970 $16,066 $1,094 7.3%$(1,096) (6.8)%% of total revenue 20.7% 17.9% 18.8% Selling, general and administrative expenses increased $1.1 million, or 7.3%, to $16.1 million for 2015 compared to$15.0 million for 2014. The increase in 2015 primarily resulted from an increase in professional services of $0.7 millionrelated to an investigation of certain potential related-party transactions, which was completed in the second quarter of 2015, an increase in consulting services and higher stock-based compensation expenses. The increase was partially offset by lowerpersonnel related costs and lower facilities maintenance cost resulting from the implementation of cost-saving activities. Selling, general and administrative expenses decreased $1.1 million to $15.0 million for 2014 compared to$16.1 million for 2013. This decrease in 2014 primarily resulted from the implementation of cost-saving activities and adecrease in bad debt expense. These items were partially offset by an increase in professional services of $613,000 related toan investigation of certain potential related-party transactions, and higher personnel related costs.Research and Development Expenses 2014 to 2015 2013 to 2014 Years Ended Dec. 31 Increase Increase 2015 2014 2013 (Decrease) % Change (Decrease) % Change ($ in thousands) Research and development$5,664$4,144$3,424$1,52036.7%$72021.0%% of total revenue 7.3% 5.0% 4.0% 40 Table of ContentsResearch and development expenses increased $1.5 million, or 36.7%, to $5.7 million for 2015 from $4.1 millionfor 2014. Research and development expenses increased primarily due to higher product development and testing costs andpersonnel related costs, partially offset by lower consulting expenses for product testing.Research and development expenses increased $720,000, or 21.0%, to $4.1 million for 2014 from $3.4 million for2013. Research and development expenses increased primarily due to higher product development and testing costs andpersonnel related costs, partially offset by lower 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 longerrequired to support production and operations, or approximately 11 percent of the workforce. We recorded a restructuringcharge of approximately $907,000 related to the reduction in force for severance-related expenses. This restructuring planand reduction in force has been completed as of March 31, 2014. We had no restructuring charges in 2015.Interest Income, Net 2014 to 2015 2013 to 2014 Years Ended Dec. 31 Increase Increase 2015 2014 2013 (Decrease) % Change (Decrease) % Change ($ in thousands) Interest income, net $412 $483 $408 $(71) (14.7)%$75 18.4%% of total revenue 0.5% 0.6% 0.5% Interest income, net decreased $71,000 to $412,000 for 2015 from $483,000 for 2014. The decrease was primarilydue to lower returns from our mix of investment securities held due to lower market interest rates.Interest income, net increased $75,000 to $483,000 for 2014 from $408,000 for 2013 primarily due to higherinterest income earned by one of our subsidiaries from their bank deposits.Equity in Earnings of Unconsolidated Joint Venture Companies 2014 to 2015 2013 to 2014 Years Ended Dec. 31 Increase Increase 2015 2014 2013 (Decrease) % Change (Decrease) % Change ($ in thousands) Equity in earnings of unconsolidatedjoint ventures$462$1,528$1,377$(1,066)(69.8)%$15111.0%% of total revenue 0.6% 1.8% 1.6% Equity in earnings of unconsolidated joint ventures is primarily net income from our seven minority-owned jointventures that are not consolidated. Equity in earnings of unconsolidated joint ventures decreased $1.1 million to $462,000for 2015 from $1.5 million for 2014 primarily due to lower net income from declining average selling prices and sellingvolume in the raw materials businesses.Equity in earnings of unconsolidated joint ventures increased $151,000 to $1.5 million for 2014 from $1.4 millionfor 2013 primarily due to higher net income from improved performance of our minority-owned joint ventures that are notconsolidated.41 Table of ContentsOther Income (Expense), Net 2014 to 2015 2013 to 2014 Years Ended Dec. 31 Increase Increase 2015 2014 2013 (Decrease) % Change (Decrease) % Change ($ in thousands) Other income (expense), net$2,023$361$(748)$1,662460.4%$1,109(148.3)%% of total revenue 2.6% 0.4% (0.9)% Other income, net increased $1.7 million to $2.0 million for 2015 from $361,000 for 2014 primarily due to a foreignexchange gain of $717,000 in 2015 as compared to a foreign exchange loss of $1.0 million in 2014 and from manufacturingsubsidies received from several government agencies in China. These items were offset by a lower gain recognized from thesales of common stock of Intelligent Epitaxy Technology, Inc (“IntelliEpi”), a Taiwan publicly traded company in 2015 inwhich we recognized $859,000 gain as compared to 2014 in which we recognize $1.3 million gain. Other income, net increased $1.1 million to a profit of $361,000 for 2014 from net expense of $748,000 for 2013primarily due to a larger gain recognized from the sale of IntelliEpi common stock in 2014, lower withholding tax on foreigndividends from our consolidated joint ventures and lower foreign exchange losses in 2014. Provision for Income Taxes 2014 to 2015 2013 to 2014 Years Ended Dec. 31 Increase Increase 2015 2014 2013 (Decrease) % Change (Decrease) % Change ($ in thousands) Provision for income taxes $531 $215 $188 $316 147.0%$27 14.4%% of total revenue 0.7% 0.3% 0.2% Provision for income taxes for 2015 was $531,000, which was mostly related to our China subsidiary and our Chinajoint venture operations. No income taxes or benefits have been provided for U.S. operations due to the loss in the U.S. andthe uncertainty of generating future profit in the U.S. which has resulted in our deferred tax asset being fully reserved. Ourestimated tax rate can vary greatly from year to year because of the change or benefit in the mix of taxable income betweenour U.S. and China based operations.Provision for income taxes for 2014 was $215,000, which was mostly related to our China subsidiary and our Chinajoint venture operations. The slight increase in provision for income taxes from 2013 to 2014 was primarily due to highertaxable income for state tax purposes in the U.S. Besides the state tax liabilities, no income taxes or benefit have beenprovided for U.S. operations due to the loss in the U.S. and the uncertainty of generating future profit in the U.S. which hasresulted in our deferred tax asset being fully reserved.Due to our uncertainty regarding our future profitability, we recorded a full valuation allowance against our netdeferred tax assets of $66 million in 2015, $62 million in 2014 and $58 million in 2013.42 Table of ContentsNoncontrolling Interests 2014 to 2015 2013 to 2014 Years Ended Dec. 31 Increase Increase 2015 2014 2013 (Decrease) % Change (Decrease) % Change ($ in thousands) Noncontrolling interests$(305)$691$1,145$(996)(144.1)%$(454)(39.7)%% of total revenue (0.4)% 0.8% 1.3% Noncontrolling interest in (losses) earnings of consolidated joint ventures for the years ended December 31, 2015, 2014 and 2013 were $(305,000), $691,000 and $1.1 million, respectively. The downward trend in noncontrolling interest’sshare of earnings from 2013 to 2015 and eventual switch to a share of losses from in 2015 was due to lower profitability fromour China joint venture operations as profits from sales of raw materials have decreased due to declining average sellingprices, which also led to a write down in inventory at one of the consolidated joint ventures. Liquidity and Capital Resources Year Ended December 31, 2015 2014 2013 ($ in thousands) Net cash provided by (used in): Operating activities $1,878 $3,497 $2,992 Investing activities (2,483) 469 (6,695) Financing activities (2,234) (32) (2,513) Effect of exchange rate changes (1,100) (81) 543 Net change in cash and cash equivalents (3,939) 3,853 (5,673) Cash and cash equivalents—beginning year 28,814 24,961 30,634 Cash and cash equivalents—end of year 24,875 28,814 24,961 Short and long-term investments—end of year 19,128 20,123 22,644 Total cash, cash equivalents and short-term and long-term investments $44,003 $48,937 $47,605 We consider cash and cash equivalents, short-term investments and long-term investments as liquid and availablefor use within two years in our current operations. Short-term investments and long-term investments are comprised of U.S.government securities and investment-grade corporate notes and bonds. Also included in short-term investments is ourinvestment in common stock of IntelliEpi and GCS Holdings, Inc. (“GHI”). In 2013, we re-categorized our IntelliEpiinvestment from the cost method to short-term investments as IntelliEpi completed its initial public offering in 2013. In2015, we re-categorized our GHI investment from the cost method to short-term investments when we determined that therewas sufficient trading volume in the exchange for the stock to be determined readily marketable.As of December 31, 2015, our principal source of liquidity was $44.0 million, which consisted of cash and cashequivalents of $24.9 million, short-term investments of $11.4 million and long-term investments of $7.7 million. In 2015,cash and cash equivalents decreased by $3.9 million and short-term and long-term investments decreased by $1.0 million. The decrease in cash and cash equivalents of $3.9 million in 2015 was primarily due to net cash used in investing activitiesof $2.5 million, net cash used in financing activities of $2.2 million, the effect of exchange rate changes of $1.1 million, andwas partially offset by net cash provided by operating activities of $1.9 million. As of December 31, 2015, we and ourconsolidated joint ventures held approximately $22.3 million in cash and investments in foreign bank accounts. Thisconsists of $16.8 million held by our wholly owned subsidiary in China and $5.5 million held by our three partially-ownedconsolidated subsidiaries in China. Of this $22.3 million, approximately $15.9 million would not be available for use in theUnited States without paying United States income taxes. We believe that the current value of our net operating loss carryforward would offset the taxes due.43 Table of ContentsAs of December 31, 2014, our principal sources of liquidity were $48.9 million, an increase of $1.3 million from$47.6 million as 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 and long-term investments decreased by $2.5 million to $20.1 million from $22.6 million. The increase incash and cash equivalents was primarily due to net cash provided by operating activities of $3.5 million and by net cashprovided by investing activities of $469,000, offset by net cash used in financing activities of $32,000 and the effect ofexchange rate changes of $81,000. As of December 31, 2014, we and our consolidated joint ventures held approximately$18.3 million in cash and investments in foreign bank accounts. This consists of $10.2 million held by our wholly ownedsubsidiary in China and $8.1 million held by our three partially owned consolidated subsidiaries in China. Of this $18.3million, approximately $13.9 million is not available for use in the United States without paying United States income taxes.Net cash provided by operating activities of $1.9 million for 2015 was primarily comprised of an adjustment of non-cash items of depreciation of $5.5 million, amortization of marketable securities premium of $218,000, stock-basedcompensation of $1.3 million, provision for doubtful accounts of $211,000, loss on disposal property and equipment of$17,000 offset by our net loss of $2.5 million, realized gain on sales of investments of $859,000, gain on equity investmentsof $462,000 and a net change of $1.6 million in assets and liabilities. The $1.6 million net change in operating assets andliabilities primarily resulted from a $1.4 million decrease in prepaid expenses and other current assets, a $542,000 decrease inother assets, offset by a $1.1 million increase in accounts receivable, a $1.1 million decrease in accrued liabilities, an$813,000 decrease in other long-term liabilities, and a $485,000 decrease in accounts payable.Net cash provided by operating activities of $3.5 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 $1.1million, provision for doubtful accounts of $9,000, amortization of marketable securities premium of $432,000, offset bygain on sales of investment of $1.3 million, a gain on disposal of property, plant and equipment of $13,000 and a net changeof $211,000 in operating assets and liabilities. The $211,000 net change in operating assets and liabilities primarily resultedfrom a $479,000 decrease in inventories, a $2.4 million decrease in prepaid expenses and other current assets, a $946,000decrease in other assets, offset by a $3.0 million increase in accounts receivable, a $979,000 decrease in accounts payable, a$742,000 increase in accrued liabilities and a $833,000 decrease in other long-term liabilities.Net cash provided by operating activities of $3.0 million for 2013 was primarily comprised of our net loss of $6.8million, adjusted for non-cash items of depreciation and amortization of $5.5 million, stock‑based compensation of $1.3million, provision for doubtful accounts of $869,000, amortization of marketable securities premium of $518,000, offset bygain on sale of cost method investment of $811,000, a gain on disposal of property, plant and equipment of $9,000 and a netchange of $3.9 million in operating assets and liabilities. The $3.9 million net change in operating assets and liabilitiesprimarily resulted from a $1.4 million decrease in inventories, a $645,000 increase in prepaid expenses and other currentassets, a $2.2 million decrease in accounts receivable, a $2.2 million increase in accounts payable, a $899,000 decrease inaccrued liabilities and a $373,000 decrease in other long-term liabilities.Net cash used in investing activities of $2.5 million for 2015 was primarily from the purchases of marketableinvestment securities of $12.8 million and the purchase of property, plant and equipment of $4.2 million and investment innon-marketable equity investments of $162,000, partially offset by proceeds from maturities and sales of available-for-salessecurities of $14.3 million and dividends received from equity method investments of $305,000.Net cash provided by investing activities of $469,000 for 2014 was primarily from the sale of investments totaling$13.9 million offset by the purchase of investments totaling $11.8 million and the purchase of property, plant and equipmentof $2.0 million. Net cash used in investing activities of $6.7 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 bythe sale of investments totaling $12.5 million.44 Table of ContentsNet cash used in financing activities was $2.2 million for 2015, which consisted of $2.3 million for the repurchase ofthe Company’s common stock, including commission and fees, and $112,000 net dividends paid by our joint ventures,partially offset by net proceeds of $165,000 on the issuance of common stock pursuant to stock option exercises.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 stockoption exercises.Net cash used in financing activities was $2.5 million for 2013, which consisted of $2.3 million net dividends paidby our consolidated joint ventures and $716,000 of repurchases of shares of our common stock, partially offset by netproceeds of $532,000 on the issuance of common stock pursuant to stock option exercises.On February 21, 2013, our Board of Directors approved a stock repurchase program pursuant to which we mayrepurchase up to $6.0 million of our outstanding common stock through February 27, 2014. These purchases can be madefrom time to time in the open market and are funded from our existing cash balances and cash generated from operations.During 2013, we repurchased approximately 285,000 shares at an average price of $2.51 per share for a total purchase priceof $716,000 under the stock repurchase program. As of December 31, 2013, approximately $5.3 million remained availablefor future repurchases under this program. No shares were repurchased in 2014 under this program and the plan expired onFebruary 27, 2014.On October 27, 2014, our Board of Directors approved a stock repurchase program pursuant to which we mayrepurchase up to $5.0 million of our outstanding common stock. These repurchases can be made from time to time in theopen market and are funded from our existing cash balances and cash generated from operations. During 2015, werepurchased approximately 908,000 shares at an average price of $2.52 per share for a total purchase price of approximately$2.3 million under the stock repurchase program. As of December 31, 2015, approximately $2.7 million remained availablefor future repurchases under this program. See Item 5, Market for Registrant’s Common Equity, Related Stockholder Mattersand Issuer Purchases of Equity Securities in Part II.We believe that we have adequate cash and investments to meet our needs over the next twelve months. If our salesdecrease, however, our ability to generate cash from operations will be adversely affected which could adversely affect ourfuture liquidity, require us to use cash at a more rapid rate than expected, and require us to seek additional capital. There canbe no assurance that such 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 setforth below under Item 1A. “Risk Factors” above. Line of Credit Prior to 2015, we had an unused credit facility with a bank that provided for a line of credit of $10.0 million. Theline of credit was secured by marketable securities we had with the bank at that time. This line of credit was never used andthere were no outstanding borrowings under this line of credit as of September 30, 2015 and December 31, 2014. This line ofcredit was terminated in January 2015 when we closed our investment account with this institution and moved all of ourfunds from this bank to a different bank. Off-Balance Sheet ArrangementsWe did not have any off-balance sheet financing arrangements and have never established any special purposeentities as defined under SEC Regulation S-K Item 303(a)(4)(ii). We have not entered into any options on non-financialassets.45 Table of ContentsContractual ObligationsWe lease certain office space, warehouse facilities and equipment under long-term operating leases expiring atvarious dates through December 2025. The majority of our lease obligations relates to our lease agreement for the facility inFremont, California with approximately 19,467 square feet. Total rent expenses under these operating leases wereapproximately $313,000, $260,000 and $638,000 for the years ended December 31, 2015, 2014 and 2013, respectively.We entered into a royalty agreement with a competitor effective December 3, 2010 with a term of eight years,terminating December 31, 2018. We and our related companies are granted a worldwide, nonexclusive, royalty bearing,irrevocable license to certain patents for the term of the agreement. We shall pay up to $7.0 million as a royalty payment overeight years that began in 2011, based on future royalty bearing sales. The royalty agreement contains a clause that allows usto claim a credit, starting in 2013, in the event that the royalty bearing sales for the year are lower than a pre-determinedamount set forth in the agreement. Royalty expense under the agreement was $583,000, which was net of claim for credit of$217,000 for the year ended December 31, 2015. Royalty expense for the years ended December 31, 2014 and 2013 were$577,000, which was net of claim for credit of $223,000, and $530,000, which was net of claim for credit of $270,000,respectively. The following table summarizes our contractual obligations as of December 31, 2015 (in thousands): Payments due by period 1-3 4-5 More than Contractual Obligations Total Less than 1 year years years 5 years Operating leases $533 $173 $206 $57 $97 Royalty agreement 1,725 575 1,150 — — Total $2,258 $748 $1,356 $57 $97 Selected Quarterly Results of OperationsThe following table sets forth unaudited quarterly results for the eight quarters ended December 31, 2015. Theinformation for each of these quarters is unaudited but has been prepared on the same basis as the audited consolidatedfinancial statements. We believe that all necessary adjustments, consisting only of normal recurring adjustments, have46 Table of Contentsbeen included in the amounts stated below to present fairly such quarterly information. The operating results for any quarterare not necessarily indicative of results for any subsequent period. Quarters Ended (in thousands, except Dec. 31, Sept. 30, June. 30, Mar 31, Dec. 31, Sept. 30, June. 30, Mar 31, for per share amounts) 2015 2015 2015 2015 2014 2014 2014 2014 Revenue $18,057 $18,371 $21,010 $20,064 $19,567 $23,138 $21,449 $19,345 Cost of revenue 14,967 13,766 16,625 15,315 14,596 17,820 17,289 16,627 Gross profit 3,090 4,605 4,385 4,749 4,971 5,318 4,160 2,718 Operating expenses: Selling, general andadministrative 3,379 3,659 3,775 5,251 4,341 3,505 3,688 3,436 Research anddevelopment 1,377 1,657 1,389 1,241 1,222 1,160 987 775 Restructuring charge — — — — — — — 907 Total operatingexpenses 4,756 5,316 5,164 6,492 5,563 4,665 4,675 5,118 Income (loss) fromoperations (1,666) (711) (779) (1,743) (592) 653 (515) (2,400) Interest income, net 105 102 108 97 123 106 127 127 Equity in earnings (losses)of unconsolidated jointventures (315) 167 410 200 26 390 625 487 Other income (expense),net 268 496 626 633 111 (236) 476 10 Income (loss) beforeprovision for incometaxes (1,608) 54 365 (813) (332) 913 713 (1,776) Provision for (benefitfrom) income 197 7 241 86 (39) 43 152 59 taxes Net income (loss) (1,805) 47 124 (899) (293) 870 561 (1,835) Less: Net (income) lossattributable tononcontrollinginterest 562 (5) (127) (125) (18) (226) (242) (205) Net income (loss)attributable to AXT, Inc $(1,243) $42 $(3) $(1,024) $(311) $644 $319 $(2,040) Net income (loss)attributable to AXT, Inc.per common share: Basic $(0.04) $(0.00) $(0.00) $(0.03) $(0.01) $0.02 $0.01 $(0.06) Diluted $(0.04) $(0.00) $(0.00) $(0.03) $(0.01) $0.02 $0.01 $(0.06) Weighted average numberof common sharesoutstanding: Basic 31,951 31,988 32,242 32,553 32,558 32,504 32,381 32,364 Diluted 31,951 31,988 32,242 32,553 32,558 32,738 32,597 32,364 47 Table of ContentsRecent Accounting PronouncementsRecent accounting pronouncements are detailed in Note 1 to our Consolidated Financial Statements included inthis Annual Report 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 losseshave had a material adverse effect on our operating results and cash flows in the past and could have a material adverse effecton our operating results and cash flows in the future. If we do not effectively manage the risks associated with this currencyrisk, our revenue, cash flows and financial condition could be adversely affected. During 2015, we recorded a foreignexchange gain of $717,000, included as part of other income (expense), net in our consolidated statements of operations.During 2014, we recorded net foreign exchange losses of $1.0 million, included as part of other income (expense), net in ourconsolidated statements of operations. In addition, we recorded unrealized foreign currency charges of $377,000 related tofinancial statement translations which are included in the balance of “accumulated other comprehensive income” on ourconsolidated balance sheets. We incurred foreign currency transaction exchange gains and losses due to operations ingeneral. In the future we may experience foreign exchange losses on our non-functional currency denominated receivablesand payables to the extent that we have not mitigated our exposure. Foreign exchange losses could have a materially adverseeffect on our operating results and cash flows. Our product sales to Japanese customers are typically invoiced in Japanese yen. As such we have foreign exchangeexposure on our accounts receivable and on any Japanese yen denominated cash deposits. In 2014 and the first half of 2015,the Japanese yen depreciated against the dollar. The major portion of our 2014 exchange loss is attributable to the Japaneseyen’s movement. To partially protect us against fluctuations in foreign currency resulting from accounts receivable in Japanese yen,starting in 2015, we instituted a foreign currency hedging program. We place short term hedges that are intended to offset thepotential cash exposure related to fluctuations in the exchange rate between the United States dollar and Japanese yen. Wemeasure the fair value of these hedges at each month end and quarter end using current exchange rates and in accordancewith generally accepted accounting principles. At quarter end any foreign currency hedges not settled are netted on theconsolidated balance sheet and classified as Level 3 assets and liabilities. As of December 31, 2015 the net change in fairvalue from the placement of the hedge to settlement at each month end during the quarter had a de minimis impact to theconsolidated results. The functional currency for our foreign operations is the Renminbi, the local currency of China, and in the future wemay establish short term hedges covering Renminbi. Most of our operations are conducted in China and most of our costs areincurred in Chinese Renminbi, which subjects us to fluctuations in the exchange rates between the U.S. dollar and theChinese Renminbi. We incur transaction gains or losses resulting from consolidation of expenses incurred in local currenciesfor our Chinese subsidiaries, including our joint ventures, as well as in translation of the assets and liabilities at each balancesheet date. Our financial results could be adversely affected by factors such as changes in foreign currency exchange rates orweak economic conditions in foreign markets, including the revaluation by China of the Renminbi, and any futureadjustments 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. We currently are using a hedging program to minimize the effects of currency fluctuations relating to theJapanese yen. While we may apply this program to other currencies, such as the Chinese Renminbi, our hedging position ispartial and may not exist at all in the future. It may not succeed in minimizing our foreign currency fluctuation risks. Ourprimary objective in holding these instruments is to reduce the volatility of earnings and cash flows associated with changesin foreign currency. The program is not designated for trading or speculative purposes. The company may choose not tohedge certain foreign exchange exposures for a variety of reasons, including but not limited to accounting considerationsand the prohibitive economic cost of hedging particular exposures.48 Table of Contents Interest Rate RiskCash and cash equivalents earning interest and certain variable rate debt instruments are subject to interest ratefluctuations. The following table sets forth the probable impact of a 10% change in interest rates (in thousands): Proforma 10% Proforma 10% Balance as of Current Projected Annual Interest Rate Interest Rate December 31, Interest Interest Decline Increase Instrument 2015 Rate Income/(Expense) Income/(Expense) Income/(Expense) Cash and cash equivalents $24,875 0.85% $211 $190 $232 Investments in marketable debt 18,496 1.95% 361 325 397 $572 $515 $629 The primary objective of our investment activities is to preserve principal while maximizing income withoutsignificantly increasing risk. Financial instruments that potentially subject us to concentration of credit risk consist primarilyof cash and cash equivalents, short-term investments, and trade accounts receivable. We invest primarily in money marketaccounts, certificates of deposits, corporate bonds and notes, and government securities. We are exposed to credit risks in theevent of default by the issuers to the extent of the amount recorded on the consolidated balance sheets. These securities aregenerally classified as available-for-sale and consequently are recorded on the balance sheet at fair value with unrealizedgains or losses reported as a separate component of accumulated other comprehensive income, net of estimated tax. Our cash,cash equivalents and short-term investments and long-term investments are in high-quality securities placed with majorbanks and financial institutions and commercial paper. We have no investments in auction rate securities.Credit RiskWe perform ongoing credit evaluations of our customers’ financial condition, and limit the amount of creditextended when deemed necessary, but generally do not require collateral. One customer accounted for over 10% of ouraccounts receivable balance as of December 31, 2015 while two customers each accounted for over 10% of our accountsreceivable balance as of December 31, 2014.Equity RiskWe maintain minority investments in privately-held companies located in China either invested directly by us andour wholly-own subsidiary or indirectly through our consolidated joint ventures. These minority investments are reviewedfor other than temporary declines in value on a quarterly basis. These investments are classified as other assets in theconsolidated balance sheets and accounted for under either the equity or cost method, depending on whether we have theability to exercise significant influence over their operations or financial decisions. We monitor our investments forimpairment and record reductions in carrying value when events or changes in circumstances indicate that the carrying valuemay not be recoverable. Reasons for other than temporary declines in value include whether the related company would haveinsufficient cash flow to operate for the next twelve months, significant changes in the operating performance and changes inmarket conditions. As of December 31, 2015 and 2014, our direct minority investments under the cost method totaled $0 and$200,000, respectively, our direct minority investments under the equity method totaled $7.9 million and $8.1 million,respectively, and our indirect minority investments by our consolidated joint ventures totaled $4.1 million and $4.0 million,respectively. 49 Table of ContentsItem 8. Consolidated Financial Statements and Supplementary DataThe consolidated financial statements, related notes thereto and financial statement schedules required by this itemare listed and set forth beginning on page 56, and are incorporated by reference here. Supplementary financial informationregarding quarterly financial information required by this item is set forth under the caption “Selected Quarterly Results ofOperations” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and isincorporated by reference 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, evaluatedthe effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered bythis Annual Report on Form 10-K. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer haveconcluded that our disclosure controls and procedures as defined under Exchange Act Rules 13a-15(e) and 15d-15(e) wereeffective at the reasonable assurance level to ensure that information required to be disclosed in our Securities Exchange Actreports is recorded, processed, summarized and reported within the time periods specified by the Securities and ExchangeCommission and is accumulated and communicated to management, including our Chief Executive Officer and our ChiefFinancial Officer, as appropriate to allow timely decisions regarding required disclosure.Our disclosure controls and procedures include components of our internal control over financial reporting.Management’s assessment of the effectiveness of our internal control over financial reporting is expressed at the level ofreasonable assurance because a control system, no matter how well designed and operated, can provide only reasonableassurance that the control system’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 such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is aprocess designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and implementedby our Board of Directors, management and other personnel to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for external purposes in accordance with accounting principlesgenerally accepted in the United States. Internal control over financial reporting includes those policies and procedures 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 financialstatements in accordance with GAAP, and that receipts and expenditures are being made only in accordancewith authorizations of our management and directors; and·provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use ordisposition of our assets that could have a material effect on the consolidated 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 controls50 Table of Contentsmay become inadequate because of changes in conditions, or that the degree of compliance with the policies or proceduresmay deteriorate.Our management, under the supervision and with the participation of our Chief Executive Officer and ChiefFinancial Officer, has assessed the effectiveness of our internal control over financial reporting as of December 31, 2015based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). Management has concluded that our internal control over financialreporting was effective as of December 31, 2015.Our independent registered public accounting firm, Burr Pilger Mayer, Inc. has audited the consolidated financialstatements included in this Annual Report on Form 10-K and has issued its report on the effectiveness of our internal controlover financial reporting as of December 31, 2015.Changes in internal control over financial reporting.There were no changes in our internal control over financial reporting that occurred during the year endedDecember 31, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financialreporting. Item 9B. Other InformationNone.51 Table of ContentsReport of Independent Registered Public Accounting FirmTo the Board of Directors and Stockholders ofAXT, Inc.We have audited the internal control over financial reporting of AXT, Inc. and its subsidiaries’ (the Company”) as ofDecember 31, 2015, based on the criteria established in Internal Control—Integrated Framework (2013 Framework ) issuedby the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management isresponsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting included in the accompanying Management’s Report on Internal Control overFinancial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reportingbased 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 whethereffective internal control over financial reporting was maintained in all material respects. Our audit of internal control overfinancial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that amaterial weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on theassessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. Webelieve that our audit provides a reasonable basis for our opinion.A company’s internal control over financial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles. A company’s internal control over financial reporting includes those policiesand procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and thatreceipts and expenditures of the company are being made only in accordance with authorizations of management anddirectors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detectmisstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures maydeteriorate.In our opinion, the Company maintained, in all material respects, effective internal control over financial reportingas of December 31, 2015, based on criteria established in Internal Control—Integrated Framework (2013 Framework) issuedby 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, 2015 and 2014 and therelated consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for each of the threeyears in the period ended December 31, 2015 and our report dated March 11, 2016, expressed an unqualified opinion. /s/ Burr Pilger Mayer, Inc.San Jose, CaliforniaMarch 11, 201652 Table of ContentsPART IIIThe United States Securities and Exchange Commission (“SEC”) allows us to include information required in thisreport by referring to other documents or reports we have already or will soon be filing. This is called “Incorporation byReference.” We intend to file our definitive proxy statement for our annual meeting of stockholders to be held on May 26,2016 (the “Proxy Statement”) pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered bythis report, and certain information 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 theinformation contained in the section captioned “Information About our Board of Directors” in the Proxy Statement. Theinformation with respect to our executive officers, is incorporated by reference to the information contained in the sectioncaptioned “Executive Officers” in the Proxy Statement. Information with respect to Items 405 of Regulation S-K isincorporated by reference to the information contained in the sections of the Proxy Statement captioned “Section 16(a)Beneficial Ownership Reporting Compliance.” There will be no disclosure under Item 407(c)(3). Information with respect toItems 407(d)(4) and 407(d)(5) is incorporated by reference to the information contained in the sections of the ProxyStatement 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 ourprincipal executive officers, principal financial officer, and corporate controller, as well as other employees. A copy of thisCode has been posted on our Internet website at www.axt.com. Any amendments to, or waivers from, a provision of our Codethat applies to our principal executive officer, principal financial officer, controller, or persons performing similar functionsand that relates to any element of the Code enumerated in paragraph (b) of Item 406 of Regulation S-K shall be disclosed byposting such information on our website. Item 11. Executive CompensationThe information required by this Item is incorporated herein by reference to information set forth in our ProxyStatement under the 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 ProxyStatement under the section entitled “Security Ownership of Certain Beneficial Owners and Management” and “EquityCompensation Plan Information.” 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 “CompensationCommittee Interlocks and Insider Participation” and “Certain Relationships and Related Transactions,” which information isincorporated herein 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 ProxyStatement under the section entitled “Ratification of Appointment of Independent Registered Public Accountants.”53 Table of ContentsPART IV Item 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. 55 Consolidated Balance Sheets 56 Consolidated Statements of Operations 57 Consolidated Statements of Comprehensive Loss 58 Consolidated Statements of Stockholders’ Equity 59 Consolidated Statements of Cash Flows 60 Notes to Consolidated Financial Statements 61 (2)Financial Statement SchedulesAll schedules have been omitted because the required information is not applicable or because the informationrequired is included 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 toExhibits are filed as part of, or incorporated by reference into, this report on Form 10-K.54 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 of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive loss, stockholders’equity, and cash flows for each of the three years in the period ended December 31, 2015. The Company’s management isresponsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.We conducted our audits 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 theconsolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well as evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for our opinion.In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, thefinancial position of AXT, Inc. and its subsidiaries. as of December 31, 2015 and 2014, and the results of its operations andits cash flows for each of the three years in the period ended December 31, 2015, in conformity with accounting principlesgenerally accepted in the United 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, 2015, based on criteriaestablished in Internal Control—Integrated Framework (2013 Framework) issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO), and our report dated March 11, 2016, expressed an unqualified opinionthereon./s/ Burr Pilger Mayer, Inc.San Jose, CaliforniaMarch 11, 201655 Table of ContentsAXT, INC.CONSOLIDATED BALANCE SHEETS(In thousands, except per share data) December 31, 2015 2014 ASSETS Current assets Cash and cash equivalents $24,875 $28,814 Short-term investments 11,437 12,340 Accounts receivable, net of allowances of $985 and $823 as of December 31, 2015 and 2014 18,468 17,864 Inventories 38,012 38,574 Related party notes receivable – current — 171 Prepaid expenses and other current assets 4,096 5,430 Total current assets 96,888 103,193 Long-term investments 7,691 7,783 Property, plant and equipment, net 31,422 33,862 Related party notes receivable – long-term 1,781 1,704 Other assets 14,114 14,975 Total assets $151,896 $161,517 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $6,460 $7,137 Accrued liabilities 6,381 7,634 Total current liabilities 12,841 14,771 Long-term portion of royalty payments 1,150 1,725 Other long-term liabilities 344 333 Total liabilities 14,335 16,829 Commitments and contingencies (Note 17) Stockholders’ equity: Preferred stock Series A, $0.001 par value; 2,000 shares authorized; 883 shares issued andoutstanding as of December 31, 2015 and 2014 (Liquidation preference of $6.5 million and$6.3 million as of December 31, 2015 and 2014.) 3,532 3,532 Common stock, $0.001 par value; 70,000 shares authorized; 32,548 and 32,837 shares issuedand outstanding as of December 31, 2015 and 2014 32 32 Additional paid-in-capital 194,646 195,419 Accumulated deficit (70,621) (68,393) Accumulated other comprehensive income 4,382 7,673 Total AXT, Inc. stockholders’ equity 131,971 138,263 Noncontrolling interests 5,590 6,425 Total stockholders’ equity 137,561 144,688 Total liabilities and stockholders’ equity $151,896 $161,517 See accompanying notes to consolidated financial statements.56 Table of ContentsAXT, INC.CONSOLIDATED STATEMENTS OF OPERATIONS(In thousands, except per share data) Year Ended December 31, 2015 2014 2013 Revenue $77,502 $83,499 $85,335 Cost of revenue 60,673 66,332 73,507 Gross profit 16,829 17,167 11,828 Operating expenses: Selling, general, and administrative 16,064 14,970 16,066 Research and development 5,664 4,144 3,424 Restructuring charge — 907 — Total operating expenses 21,728 20,021 19,490 Loss from operations (4,899) (2,854) (7,662) Interest income, net 412 483 408 Equity in earnings of unconsolidated joint ventures 462 1,528 1,377 Other income (expense), net 2,023 361 (748) Loss before provision for income taxes (2,002) (482) (6,625) Provision for income taxes 531 215 188 Net loss (2,533) (697) (6,813) Less: Net (income) loss attributable to noncontrolling interests 305 (691) (1,145) Net loss attributable to AXT, Inc. $(2,228) $(1,388) $(7,958) Net loss attributable to AXT, Inc. per common share: Basic $(0.07) $(0.05) $(0.25) Diluted $(0.07) $(0.05) $(0.25) Weighted average number of common shares outstanding: Basic 32,183 32,452 32,700 Diluted 32,183 32,452 32,700 See accompanying notes to consolidated financial statements.57 Table of ContentsAXT, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS(In thousands) Year Ended December 31, 2015 2014 2013 Net loss $(2,533) $(697) $(6,813) Other comprehensive income (loss), net of tax: Change in foreign currency translation gain (loss), net of tax (3,425) (377) 1,568 Change in unrealized loss (gain) on available-for-sale investments, net of tax (313) (964) 1,682 Total other comprehensive income (loss), net of tax (3,738) (1,341) 3,250 Comprehensive loss (6,271) (2,038) (3,563) Less: Comprehensive (income) loss attributable to noncontrolling interests 752 (630) (1,475) Comprehensive loss attributable to AXT, Inc. $(5,519) $(2,668) $(5,038) See accompanying notes to consolidated financial statements. 58 Table of ContentsAXT, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(In thousands) Common Stock Preferred Additional Other AXT, Inc. Total Stock Paid-In Accumulated Comprehensive Stockholders’ Noncontrolling Stockholders’ Shares $ Shares $ Capital Deficit Income Equity Interests Equity January 1, 2013 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 ofcommonstock in the form ofrestricted stock 88 Net income (loss) (7,958) (7,958) 1,145 (6,813) Net dividenddeclared by jointventures (2,898) (2,898) Othercomprehensiveincome 2,920 2,920 330 3,250 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 ofcommonstock in the form ofrestricted stock 121 Net income (loss) (1,388) (1,388) 691 (697) Net dividenddeclared by jointventures (83) (83) Othercomprehensive loss (1,280) (1,280) (61) (1,341) Balance as ofDecember 31, 2014 883 3,532 32,837 32 195,419 (68,393) 7,673 138,263 6,425 144,688 Common stockoptions exercised 119 165 165 165 Common stockrepurchased (908) (2,287) (2,287) (2,287) Restricted stockawards canceled (47) Stock-basedcompensation 1,349 1,349 1,349 Issuance ofcommonstock in the form ofrestricted stock 547 Net loss (2,228) (2,228) (305) (2,533) Net dividenddeclared by jointventures (83) (83) Othercomprehensive loss (3,291) (3,291) (447) (3,738) Balance as ofDecember 31, 2015 883 $3,532 32,548 $32 $194,646 $(70,621) $4,382 $131,971 $5,590 $137,561 See accompanying notes to consolidated financial statements. 59 Table of ContentsAXT, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands) Year Ended December 31, 2015 2014 2013 Cash flows from operating activities: Net loss $(2,533) $(697) $(6,813) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 5,494 5,639 5,470 Amortization of marketable securities premium 218 432 518 Stock-based compensation 1,349 1,129 1,277 Provision for doubtful accounts 211 9 869 Realized gain on sale of investments (859) (1,263) — Gain on sale of cost method investment — — (811) Loss (gain) on disposal of equipment 17 (13) (9) Income from equity method investments, net (462) (1,528) (1,377) Changes in operating assets and liabilities: Accounts receivable (1,076) (2,959) 2,160 Inventories (45) 479 1,439 Prepaid expenses and other current assets 1,405 2,393 (645) Other assets 542 946 1 Accounts payable (485) (979) 2,185 Accrued liabilities* (1,085) 742 (899) Other long-term liabilities (813) (833) (373) Net cash provided by operating activities 1,878 3,497 2,992 Cash flows from investing activities: Purchases of equipment (4,150) (1,971) (5,424) Proceeds from sale of equipment 2 13 — Purchases of available for sale securities (12,787) (11,828) (14,092) Proceeds from sales and maturities of available for sale securities 14,309 13,928 12,486 Investments in non-marketable equity investments (162) — (782) Dividends received from equity method investments 305 327 299 Repayment of related party note receivable — — 818 Net cash provided by (used in) investing activities (2,483) 469 (6,695) Cash flows from financing activities: Proceeds from common stock options exercised 165 134 532 Repurchase of the Company’s common stock, including commission (2,287) — (716) Dividends paid by joint ventures to their minority share holders (112) (166) (2,329) Net cash used in financing activities (2,234) (32) (2,513) Effect of exchange rate changes on cash and cash equivalents (1,100) (81) 543 Net (decrease) increase in cash and cash equivalents (3,939) 3,853 (5,673) Cash and cash equivalents at the beginning of the year 28,814 24,961 30,634 Cash and cash equivalents at the end of the year $24,875 $28,814 $24,961 Supplemental disclosures: Income taxes paid $284 $293 $782 * Dividend accrued but not paid by joint ventures of $534, $563 and $651 was included in accrued liabilities as of December 31, 2015, 2014and 2013, respectively See accompanying notes to consolidated financial statements.60 Table of ContentsAXT, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNote 1. The Company and Summary of Significant Accounting PoliciesThe CompanyAXT, Inc. and its subsidiaries (“we, “the Company”, or “AXT”) is a developer and producer of high-performancecompound and single element semiconductor substrates, also known as wafers. The dominant substrates used in producingsemiconductor chips are made from silicon. However, certain chips may become too hot or perform their function too slowlyif silicon is used as the base material. Alternative or specialty materials are used to replace silicon as the preferred base for theelectronic 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 indium with phosphorous (InP) orcombine gallium with arsenic (GaAs). Our single element substrates are made from germanium (Ge).Our headquarters is in Fremont, California in the San Francisco Bay Area. We manufacture all of our products in thePeople’s Republic of China and our supply chain includes AXT’s subsidiaries and joint venture companies in China. Thesecompanies produce products that include 99.99% pure gallium (4N Ga), high purity gallium, arsenic, germanium, germaniumdioxide, pyrolytic boron nitride (pBN) crucibles and boron oxide (B2O3). Our ownership and the ownership by ourconsolidated subsidiaries in these entities range from 83% to 20%. We consolidate the joint ventures in which we have eithera controlling financial interest, or majority financial interest combined with the ability to exercise control in substance overthe operation or financial decisions made by the investee. We use the equity method to account for joint ventures in whichwe have smaller financial interest and have the ability to exercise significant influence, but not control, over the investee. Wepurchase portions of the materials produced by these joint ventures for our own use and the joint ventures sell the remainderof their production to third parties. Principles of ConsolidationThe consolidated financial statements include the accounts of AXT, our wholly-owned subsidiary, Beijing TongmeiXtal Technology Co., Ltd., and our majority-owned, or significantly controlled subsidiaries, Beijing JiYa SemiconductorMaterial Co., Ltd., Nanjing Jin Mei Gallium Co., Ltd. and Beijing BoYu Semiconductor Vessel Craftwork Technology Co.,Ltd. All significant inter‑company accounts and transactions have been eliminated. Investments in business entities in whichwe do not have controlling interest, but have the ability to exercise significant influence over operating and financialpolicies (generally 20-50% ownership), are accounted for by the equity method. For partially-owned subsidiaries that weconsolidate, we reflect the noncontrolling interest of the portion we do not own on our consolidated balance sheets instockholders’ equity and in our consolidated statements of operations.Use of EstimatesThe preparation of financial statements in conformity with accounting principles generally accepted in the UnitedStates of America requires management to make estimates, judgments and assumptions. We believe that the estimates,judgments, and assumptions upon which management relies are reasonable based on information available at the time thatthese estimates, judgments, and assumptions are made. These estimates, judgments, and assumptions can affect the reportedamounts of assets and liabilities as of the date of the consolidated financial statements as well as the reported amounts ofrevenues and expenses during the periods presented. To the extent there are material differences between these estimates andactual results, our consolidated financial statements would be affected.Fair Value of Financial InstrumentsThe carrying amounts of certain of our financial instruments including cash and cash equivalents, accountsreceivable, short-term investments and long-term investments, accounts payable and accrued liabilities approximate fair61 Table of Contentsvalue due to their short maturities. Certain cash equivalents and investments are required to be adjusted to fair value on arecurring basis. See Note 2.Fair Value of InvestmentsASC topic 820, Fair value measurement (“ASC 820”) establishes three levels of inputs that may be used to measurefair value.Level 1 instruments represent quoted prices in active markets. Therefore, determining fair value for Level 1instruments does not 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 comparableinstruments in markets with insufficient volume or infrequent transactions (less active markets), issuer credit ratings, non-binding market consensus prices that can be corroborated with observable market data, model-derived valuations in whichall significant inputs are observable or can be derived principally from or corroborated with observable market data forsubstantially the full term of the assets or liabilities, or quoted prices for similar assets or liabilities. These Level 2instruments require more management judgment and subjectivity compared to Level 1 instruments, including:·Determining which instruments are most comparable to the instrument being priced requires management to identifya sample 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 beingpriced.·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 marketabledebt instruments using non-binding market consensus prices that are corroborated with observable market data orpricing models, such as discounted cash flow models, with all significant inputs derived from or corroborated withobservable market data.Level 3 instruments include unobservable inputs to the valuation methodology that are significant to themeasurement of fair value of assets or liabilities. The determination of fair value for Level 3 instruments requires the mostmanagement judgment and subjectivity. We place short-term foreign currency hedges that are intended to offset the potentialcash exposure related to fluctuations in the exchange rate between the United States dollar and Japanese yen. We measure thefair value of these foreign currency hedges at each month end and quarter end using current exchange rates and in accordancewith generally accepted accounting principles. At quarter end any foreign currency hedges not settled are netted in “accruedliabilities” on the consolidated balance sheet and classified as Level 3 assets and liabilities. As of December 31, 2015 the netchange in fair value from the placement of the hedge to settlement at each month end during the quarter had a de minimisimpact to the consolidated results.Foreign Currency TranslationThe functional currency of our Chinese subsidiaries is the Renminbi, the local currency of China. Transaction gainsand losses resulting from transactions denominated in currencies other than the U.S. dollar or in the functional currencies ofour subsidiaries are included in “other income (expense), net” for the years presented. The transaction gains for the yearended December 31, 2015 totaled $717,000 and the transaction losses for the years ended December 31, 2014 and 2013totaled $1.0 million and $1.3 million, respectively.The assets and liabilities of the subsidiaries are translated at the rates of exchange on the balance sheet date.Revenue and expense items are translated at the average rate of exchange for the period. Gains and losses from foreigncurrency translation are included in “other comprehensive income (loss)” in the consolidated statements of comprehensiveincome (loss).62 Table of ContentsRevenue RecognitionWe manufacture and sell high-performance compound semiconductor substrates and sell certain raw materialsincluding gallium, germanium dioxide, and pBN crucibles. After we ship our products, there are no remaining obligations orcustomer acceptance requirements that would preclude revenue recognition. Our products are typically sold pursuant to apurchase order placed by our customers. We recognize revenue upon shipment and transfer of title of products to ourcustomers, which is either upon shipment from our dock, receipt at the customer’s dock, or removal from consignmentinventory at the customer’s location, provided that we have received a valid purchase order, the price is fixed ordeterminable, title and risk of ownership have transferred, collection of resulting receivables is probable, and product returnsare reasonably estimable. Revenue is net of any taxes assessed by any governmental authority. We do not provide training,installation or commissioning services. We assess the probability of collection based on a number of factors including pasthistory with the customer and credit worthiness. We do not provide payment discounts. We provide for future returns basedon historical experience, current economic trends and changes in customer demand at the time revenue is recognized. 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 asaccrued liabilities on our consolidated balance sheets.Risks and Concentration of Credit RiskOur business is very dependent on the semiconductor, lasers and fiber optics industries which can be highly cyclicaland experience downturns as a result of economic changes, overcapacity, and technological advancements. Significanttechnological changes in the industry or customer requirements, or the emergence of competitive products with newcapabilities or technologies, could adversely affect our operating results. In addition, a significant portion of our revenuesand net income is derived from international sales. Fluctuations of the United States dollar against foreign currencies andchanges in local regulatory or economic conditions, particularly in an emerging market such as China, could adversely affectoperating results.We depend on a single or limited number of suppliers for certain critical materials used in the production of oursubstrates, such as quartz tubing and polishing solutions. We generally purchase these materials through standard purchaseorders and not pursuant 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 paperinstruments, and investment grade securities with high quality financial institutions. The composition and maturities areregularly monitored by management. Such deposits are in excess of the amount of the insurance provided by the federalgovernment on such deposits. We are exposed to credit risks in the event of default by the issuers to the extent of the amountrecorded on the consolidated balance sheets.We perform ongoing credit evaluations of our customers’ financial condition, and limit the amount of creditextended when deemed necessary, but generally do not require collateral. The credit risk in our accounts receivableis mitigated by our credit evaluation process and the geographical dispersion of sales transactions. One customer accountedfor 22% of our trade accounts receivable as of December 31, 2015 and two customers accounted for 11% and 10% of ouraccounts receivable balance as of December 31, 2014.One customer, IQE Group, represented 12% of our revenue for the year ended December 31, 2015 while no customerrepresented more than 10% of our revenue for the years ended December 31, 2014 and 2013. Our top five customers,although not the same five customers for each period, represented 40%, 34% and 31% of revenue for the years endedDecember 31, 2015, 2014 and 2013, respectively. We believe that in the future we could have a greater concentration ofsales.63 Table of ContentsCash and Cash EquivalentsWe consider investments in highly liquid instruments purchased with an original maturity of three months or less tobe cash equivalents. Cash equivalents consist primarily of certificate of deposits. Cash and cash equivalents are stated at cost,which approximates fair value.Short-Term and Long-Term InvestmentsWe classify our investments in marketable debt and equity securities as available-for-sale securities in accordancewith ASC topic 320, Investments - Debt and Equity Securities (“ASC 320”). Short-term and long-term investments arecomprised of available-for-sale marketable debt securities, which consist primarily of certificates of deposit, corporate bondsand notes, and government securities. These investments are reported at fair value as of the respective balance sheet dateswith unrealized gains and losses included in accumulated other comprehensive income within stockholders’ equity on theconsolidated balance sheets. The amortized cost of securities is adjusted for amortization of premiums and accretion ofdiscounts to maturity. Such amortization is included in “other income (expense), net” in the consolidated statements ofoperations. Realized gains and losses and declines in value judged to be other than temporary on available-for-sale securitiesare also included in “other income (expense), net” in the consolidated statements of operations. The cost of securities sold isbased upon the specific identification method.Accounts Receivable and Allowance for Doubtful Accounts and Sales ReturnsAccounts receivable are recorded at the invoiced amount and are not interest bearing. We periodically review thelikelihood of collection on our accounts receivable balances and provide an allowance for doubtful accounts receivableprimarily based upon the age of these accounts. We evaluate receivables from U.S. customers with an emphasis onbalances in excess of 90 days and for receivables from customers located outside the U.S. with an emphasis on balances inexcess of 120 days and establish a reserve allowance 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 ashorter period of time than foreign customers. Foreign business practices generally require us to allow customer paymentterms that are longer than those accepted in the United States. We assess the probability of collection based on a number offactors, including the length of time a receivable balance has been outstanding, our past history with the customer and theircredit worthiness.We exercise judgment when determining the adequacy of these reserves as we evaluate historical bad debt trends,general economic conditions in the United States and internationally, and changes in customer financial conditions.Uncollectible receivables are recorded as bad debt expense when all efforts to collect have been exhausted and recoveries arerecognized when they are received. As of December 31, 2015 and 2014, our accounts receivable, net balance was $18.5million and $17.9 million, respectively, which was net of an allowance for doubtful accounts of $561,000 and $410,000,respectively. During 2015, we increased this allowance for doubtful accounts by $151,000 primarily because of the poorfinancial condition of a few customers. During 2014, we decreased this allowance for doubtful accounts by $459,000primarily for improved collections from customers. No amounts have been written off. If actual uncollectible accounts differsubstantially from our estimates, revisions to the estimated allowance for doubtful accounts would be required, which couldhave a material impact on our financial results for future periods.The allowance for sales returns is also deducted from gross accounts receivable. During 2015, we utilized $423,000and charged an additional $434,000 resulting in an ending balance for the allowance for sales returns of $424,000 as ofDecember 31, 2015. During 2014, we utilized $410,000 and charged an additional $183,000 resulting in the allowance forsales returns of $413,000 as of December 31, 2014.Warranty ReserveWe maintain a warranty reserve based upon our claims experience during the prior twelve months and any pendingclaims and returns of which we are aware. Warranty costs are accrued at the time revenue is recognized. As of December 31,2015 and 2014, accrued product warranties totaled $497,000 and $802,000, respectively. The decrease in accrued productwarranties is primarily attributable to decreased claims for quality issues experienced by some64 Table of Contentscustomers. If actual warranty costs or pending new claims differ substantially from our estimates, revisions to the estimatedwarranty liability would be required, which could have a material impact on our financial condition and results of operationsfor future periods.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 includematerial, labor and manufacturing overhead costs. Given the nature of our substrate products, and the materials used in themanufacturing process, the wafers and ingots comprising work-in-process may be held in inventory for up to two years andthree years, respectively, as the risk of obsolescence for these materials is low. We routinely evaluate the levels of ourinventory in light of current market conditions in order to identify excess and obsolete inventory, and we provide a valuationallowance for certain inventories based upon the age and quality of the product and the projections for sale of the completedproducts.Property, Plant and EquipmentProperty, plant and equipment are stated at cost less accumulated depreciation computed using the straight-linemethod over the estimated economic lives of the assets, which vary from 1 to 27.5 years. Leasehold improvements areamortized using the straight-line method over the shorter of the estimated useful life or the term of the lease. We generallydepreciate computer, software, office equipment, furniture and fixtures 3 to 5 years, machinery and equipment 1 to 5 years,automobiles 5 to 10 years, leasehold and building improvements over 10 years, or lease term if shorter, and buildings over27.5 years. Repairs and maintenance costs are expensed as incurred.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 circumstance indicate that long-lived assets may be impaired,our management compares the carrying value of the long-lived assets to the projection of future undiscounted cash flowsattributable to such assets. In the event that the carrying value exceeds the future undiscounted cash flows, we record animpairment charge against income equal to the excess of the carrying value over the asset’s fair value. Fair values aredetermined based on quoted market values, discounted cash flows or internal and external appraisals, as applicable. We didnot recognize any impairment charges of long-lived assets in 2015, 2014 and 2013.Impairment of InvestmentsAll available-for-sale securities are periodically reviewed for impairment. An investment is considered to beimpaired when its fair value is less than its amortized cost basis and it is more likely than not that we will be required to sellthe impaired security before recovery of its amortized cost basis. Factors considered in determining whether a loss istemporary 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.We also invest in equity instruments of privately-held companies in China for business and strategic purposes.Investments in our non-consolidated joint venture companies are classified as other assets and accounted for under either theequity or cost method, depending on whether we have the ability to exercise significant influence over their operations orfinancial decisions. 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 lengthof time and extent to which the fair value has been less than our cost basis, the financial condition and near-term prospects ofthe investee, fundamental changes to the business prospects of the investee, share prices of subsequent offerings, and ourintent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in our carryingvalue. We estimate fair value of our cost method investments considering available information65 Table of Contentssuch as pricing in recent rounds of financing, current cash positions, earnings and cash flow forecasts, recent operationalperformance and any other readily available market data.Segment ReportingWe operate in one segment for the design, development, manufacture and distribution of high-performancecompound semiconductor substrates and sale of materials. In accordance with ASC topic 280, Segment Reporting, our chiefoperating decision-maker has been identified as our Chief Executive Officer, who reviews operating results to make decisionsabout allocating resources and assessing our performance for the Company. We discuss revenue and capacity for both AXTand our joint ventures collectively, when determining capacity constraints and need for raw materials in our business, andconsider their capacity when determining our strategic and product marketing and advertising strategies. While weconsolidate our majority-owned or significantly controlled joint ventures, we do not allocate any portion of overhead,interest and other income, interest expense or taxes to them. We therefore have determined that our joint venture operationsdo not constitute an operating segment. Since we operate in one segment, all financial segment and product line informationcan be found in the consolidated financial statements.Stock‑Based CompensationWe have employee stock option plans, which are described more fully in Note 11—Employee Benefit Plans andStock-based Compensation. 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 fairvalue of the stock options granted. Stock‑based compensation cost is measured at each grant date, based on the fair value ofthe award, and is recognized as expense and as an increase in additional paid-in-capital over the requisite service period ofthe award.Research and DevelopmentResearch and development costs consist primarily of salaries, including stock-based compensation expense andrelated personnel 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. Advertisingcosts for the years ended December 31, 2015, 2014 and 2013 were $10,000, $10,000 and $12,000, 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 thatdeferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between thebook and tax bases of recorded assets and liabilities. ASC 740 also requires that deferred tax assets be reduced by a valuationallowance if it is more likely than not that a portion of the deferred tax asset will not be realized. The impact of ASC 740 ismore fully described in Note 13.Comprehensive Income (loss)We report comprehensive income (loss) in accordance with the provisions of ASC topic 220 Comprehensive Income(“ASC 220”) which establishes standards for reporting comprehensive income or loss and its components in the financialstatements. The components of other comprehensive income include unrealized gains and losses on marketable66 Table of Contentssecurities and foreign currency translation adjustments. Comprehensive income (loss) is presented in the consolidatedstatements of comprehensive income (loss).Net Income (loss) Per ShareBasic net income (loss) per share is computed using the weighted average number of common shares outstandingduring the periods less shares of common stock subject to repurchase and non-vested stock awards. Diluted net income (loss)per share is computed using the weighted average number of common shares outstanding and potentially dilutive commonshares outstanding during the periods. The dilutive effect of outstanding stock options and restricted stock awards isreflected in diluted earnings per share by application of the treasury stock method. Potentially dilutive common sharesconsist of common shares issuable upon the exercise of stock options and vesting of restricted stock awards.Recent Accounting PronouncementsIn January 2016, the FASB issued ASU 2016-01, which made changes to the accounting for financial instrumentsthat primarily affect equity investments, financial liabilities under the fair value option, and the presentation and disclosurerequirements for financial instruments. The amendments in this update supersede the guidance to classify equity securitieswith readily determinable fair values into different categories (that is, trading or available-for-sale) and require equitysecurities to be measured at fair value with changes in the fair value recognized through net income. The standard amendsfinancial reporting by providing relevant information about an entity’s equity investments and reducing the number of itemsthat are recognized in other comprehensive income. This update will be effective for the annual periods beginning afterDecember 15, 2017, and interim periods within those annual periods. We are currently assessing the impact of the futureadoption of this standard on our consolidated financial statements.In May 2014, the FASB issued ASU 2014-09, which applies to any entity that either enters into contracts withcustomers to transfer goods or services or enters into contracts for the transfer of non-financial assets, unless those contractsare within the scope of other standards, superseding the existing revenue recognition requirements in ASC Topic 605“Revenue Recognition.” Pursuant to ASU 2014-09, an entity should recognize revenue to depict the transfer of promisedgoods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled inexchange, as applied through a multi-step process to achieve that core principle. Subsequently, the FASB approved a deferralincluded in ASU 2015-14 that permits public entities to apply the amendments in ASU 2014-09 for annual reporting periodsbeginning after December 15, 2017, including interim reporting periods therein, and that would also permit public entities toelect to adopt the amendments as of the original effective date as applicable to reporting periods beginning after December15, 2016. The new guidance allows for the amendment to be applied either retrospectively to each prior reporting periodpresented or retrospectively as a cumulative-effect adjustment as of the date of adoption. We are currently evaluating theimpact that the adoption of ASU 2014-09 and ASU 2015-14 may have on our consolidated financial statements and have notelected a transition method as of the year ended December 31, 2015.67 Table of ContentsNote 2. Cash, Cash Equivalents and InvestmentsOur cash and cash equivalents consist of cash and instruments with original maturities of less than 90 days. Ourinvestments consist of instruments with original maturities of more than 90 days. As of December 31, 2015 and, 2014, ourcash, cash equivalents and investments are classified as follows (in thousands): December 31, 2015 December 31, 2014 Gross Gross Gross Gross Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair Cost Gain (Loss) Value Cost Gain (Loss) Value Classified as: Cash $10,289 $ — $ — $10,289 $22,337 $ — $ — $22,337 Cash equivalents: Certificates of deposit 14,586 — — 14,586 6,454 — — 6,454 Money market fund — — — — 23 — — 23 Total cash and cashequivalents 24,875 — — 24,875 28,814 — — 28,814 Investments (available forsale): Certificates of deposit 9,795 1 (13) 9,783 10,195 1 (13) 10,183 Corporate bonds 8,776 — (63) 8,713 9,214 1 (29) 9,186 Corporate equitysecurities 200 432 — 632 44 710 — 754 Total investments 18,771 433 (76) 19,128 19,453 712 (42) 20,123 Total cash, cashequivalents andinvestments $43,646 $433 $(76) $44,003 $48,267 $712 $(42) $48,937 Contractual maturities oninvestments: Due within 1 year $11,022 $11,437 $11,631 $12,340 Due after 1 through 5 years 7,749 7,691 7,822 7,783 $18,771 $19,128 $19,453 $20,123 1.Certificate of deposit with original maturities of less than 90 days.2.Certificate of deposit with original maturities of more than 90 days. We manage our investments as a single portfolio of highly marketable securities that is intended to be available tomeet our current cash requirements. We have no investments in auction rate securities. Certificates of deposit and corporatebonds are typically held until maturity. Corporate equity securities have no maturity and may be sold at any time. Ourholding of corporate equity securities consists of common stock of GCS Holdings, Inc. (“GHI”) (previously GlobalCommunication Semiconductors, Inc), a Taiwan publicly-traded company. Previously, we also owned the common stock ofIntelligent Epitaxy Technology, Inc. (“IntelliEpi”). We began classifying IntelliEpi stock as an available-for-sale securityupon its initial public offering in 2013. We sold our remaining IntelliEpi stock in the second quarter of 2015. As ofDecember 31, 2015, we no longer hold any IntelliEpi stock. In 2015, our cash proceeds from sales of available-for-saleinvestments were $902,000, our cost was $43,000 and our gross realized gain from sales of available-for-sale investmentswas $859,000. In 2014, our cash proceeds from sales of available-for-sale investments were $1.3 million, our costwas $82,000 and our gross realized gain from sales of available-for-sale investments was $1.3 million. There were no sales ofavailable-for-sales securities and no realized gains and losses for the year ended December 31, 2013.We began classifying GHI as an available-for-sale security in the second quarter of 2015 when we determined thatthere was sufficient trading volume in the exchange for the stock to be deemed readily marketable. An unrealized gainof $432,000 net of tax was recorded as of December 31, 2015. This security is valued at fair market value at68 12 Table of ContentsDecember 31, 2015 and will be marked to market with changes through other comprehensive income until sold. There is noassurance that we will realize this value when the stock is sold in the future.The gross unrealized losses related to our portfolio of available-for-sale securities were primarily due to changes ininterest rates and market and credit conditions of the underlying securities. We have determined that the gross unrealizedlosses on some of our available-for-sale securities as of December 31, 2015 are temporary in nature. We periodically reviewour investment portfolio to identify and evaluate investments that have indications of possible impairment. Factorsconsidered in determining whether a loss is temporary include the magnitude of the decline in market value, the length oftime the market value has been below cost (or adjusted cost), credit quality, and our ability and intent to hold the securitiesfor a period of time sufficient to allow for any anticipated recovery in market value.A portion of our investments would generate a loss if we sold them on December 31, 2015. The following tablesummarizes the fair value and gross unrealized losses related to available-for-sale securities, aggregated by investmentcategory and length of time that individual securities have been in a continuous unrealized loss position as of December 31,2015 (in thousands): In Loss Position In Loss Position Total In < 12 months > 12 months Loss Position Gross Gross Gross Fair Unrealized Fair Unrealized Fair Unrealized As of December 31, 2015 Value (Losses) Value (Losses) Value (Losses) Investments: Certificates of deposit $4,509 $(11) $3,543 $(2) $8,052 $(13) Corporate bonds 6,866 (56) 1,847 (7) 8,713 $(63) Total in loss position $11,375 $(67) $5,390 $(9) $16,765 $(76) The following table summarizes the fair value and gross unrealized losses related to available-for-sale securities,aggregated by investment category and length of time that individual securities have been in a continuous unrealized lossposition as of December 31, 2014 (in thousands): In Loss Position In Loss Position Total In < 12 months > 12 months Loss Position Gross Gross Gross Fair Unrealized Fair Unrealized Fair Unrealized As of December 31, 2014 Value (Loss) Value (Loss) Value (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) Investments in Privately-held CompaniesWe have made strategic investments in private companies located in China in order to gain access at a competitivecost to raw materials that are critical to our substrate business (see Note 6). The investment balances for all of thesecompanies, including minority investments indirectly in privately-held companies made by our consolidated subsidiariesaccounted for under the equity method, are included in “other assets” in the consolidated balance sheets and totaled $12.1million and $12.1 million as of December 31, 2015 and December 31, 2014, respectively.As noted above, in the second quarter of 2015, we re-classified our minority investment in one company, which wasaccounted for under the cost method, as available-for- sale short-term investments and written-up to market value. As ofDecember 31, 2015, we no longer maintain any investments under the cost method. As of December 31, 2014 and 2013, ourinvestments in this unconsolidated company had a carrying value of $200,000 and were also included in “other assets” in theconsolidated balance sheets.69 Table of ContentsFair Value MeasurementsWe invest primarily in money market accounts, certificates of deposits, corporate bonds and notes, and governmentsecurities. ASC topic 820, Fair value measurement (“ASC 820”), establishes three levels of inputs that may be used tomeasure fair value. Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchangemarkets of the asset or similar assets. Level 2 instrument valuations are obtained from readily-available, observable pricingsources for comparable instruments. Level 3 instrument valuations are obtained from unobservable inputs in which there islittle or no market data, which require us to develop our own assumptions. On a recurring basis, we measure certain financialassets 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 are generally classified within Level 1 of the fair value hierarchy. Other than corporate equity securities which arebased on quoted market prices and classified as Level 1, we classify our available-for-sale securities including certificates ofdeposit and corporate bonds as having Level 2 inputs. The valuation techniques used to measure the fair value of thesefinancial instruments having Level 2 inputs were derived from bank statements, quoted market prices, broker or dealerstatements or quotations, or alternative pricing sources with reasonable levels of price transparency. There were no changesin valuation techniques or related inputs in the year ended December 31, 2015. There have been no transfers between fairvalue measurement levels during the year ended December 31, 2015.We place short-term foreign currency hedges that are intended to offset the potential cash exposure related tofluctuations in the exchange rate between the United States dollar and Japanese yen. We measure the fair value of theseforeign currency hedges at each month end and quarter end using current exchange rates and in accordance with generallyaccepted accounting principles. At quarter end any foreign currency hedges not settled are netted in “accrued liabilities” onthe consolidated balance sheet and classified as Level 3 assets and liabilities. As of December 31, 2015, the net change in fairvalue from the placement of the hedge to settlement at each month end during the quarter had a de minimis impact to theconsolidated results.The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis inaccordance with ASC 820 as of December 31, 2015 (in thousands): Quoted Prices in Significant Active Markets of Significant Other Unobservable Balance as of Identical Assets Observable Inputs Inputs December 31, 2015 (Level 1) (Level 2) (Level 3) Assets: Cash equivalents and investments: Certificates of deposit $9,783 $ — $9,783 $ — Corporate bonds 8,713 — 8,713 — Corporate equity securities 632 632 — — Total $19,128 $632 $18,496 $ — Liabilities: Foreign currency hedge obligations $36 $— $— $36 70 Table of ContentsThe following table summarizes our financial assets and liabilities measured at fair value on a recurring basis inaccordance with ASC 820 as of December 31, 2014 (in thousands): Quoted Prices in Significant Active Markets of Significant Other Unobservable Balance as of Identical Assets Observable Inputs Inputs December 31, 2014 (Level 1) (Level 2) (Level 3) Assets: Cash equivalents and investments: Money market fund $23 $23 $— $ — Certificates of deposit 10,183 — 10,183 — Corporate bonds 9,186 — 9,186 — Corporate equity securities 754 754 — — Total $20,146 $777 $19,369 $ — 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. Theseassets include investments in privately-held companies accounted for by equity and cost method (See Note 6). We did notrecord other-than-temporary impairment charges for these investments during 2015.Note 3. InventoriesThe components of inventory are summarized below (in thousands): December 31, December 31, 2015 2014 Inventories: Raw materials $19,532 $18,990 Work in process 16,007 16,222 Finished goods 2,473 3,362 $38,012 $38,574 As of December 31, 2015 and 2014, carrying values of inventories were net of inventory reserve of $12.0 millionand $11.2 million, respectively, for excess and obsolete inventory.Note 4. Related Party TransactionsIn August 2011, our consolidated joint venture, Beijing JiYa Semiconductor Material Co., Ltd. (“JiYa”), enteredinto a non-interest bearing note agreement in the amount of $1.6 million for a loan to one of its equity investment entities.The original term of the loan was for two years and ten months with three periodic principal payments required. After variousamendments to the terms of the note, in December 2013 the parties agreed to delay all principal repayment until December2017. As of December 31, 2015 and December 31, 2014, we included $1.6 million and $1.7 million million respectively, in“Related party notes receivable – long term” in our consolidated balance sheets. JiYa also purchases raw materials from one of its equity investment entities for production in the ordinary course ofbusiness. As of December 31, 2015 and 2014, amounts payable of $2.4 million and $1.8 million, respectively, were includedin “accounts payable” in our consolidated balance sheets.JiYa also sells raw materials to one of its equity investment entities for production in the ordinary course ofbusiness. As of December 31, 2015 and 2014, amounts receivable of $473,000 and $350,000, respectively, were included in“accounts receivable” in our consolidated balance sheets.71 Table of ContentsBeginning in 2012, our consolidated joint venture, Nanjing Jin Mei Gallium Co., Ltd. (“Jin Mei”), is contractuallyobligated under an agency sales agreement to sell raw material on behalf of its equity investment entity. Jin Mei bills thecustomers and remits the receipts, net of its portions of sales commission, to this equity investment entity. For the year endedDecember 31, 2015 and 2014, Jin Mei has recorded $1,000 and $20,000 income from agency sales, respectively, which wereincluded in “other income (expense), net” in the consolidated statements of operations.In March 2012, our wholly-owned subsidiary, Beijing Tongmei Xtal Technology Co., Ltd. (“Tongmei”), enteredinto an operating lease for the land it owns with our consolidated joint venture Beijing BoYu Semiconductor VesselCraftwork Technology Co., Ltd. The lease agreement for the land of approximately 22,081 square feet commenced onJanuary 1, 2012 for a term of 10 years with annual lease payments of $24,000 subject to a 5% increase at each third yearanniversary. The annual lease payment is due by January 31 of each year.Tongmei has paid $114,000 on behalf of Donghai County Dongfang High Purity Electronic Materials Co., Ltd.(“Dongfang”), its equity investment entity, to purchase materials. The original agreement was signed between Tongmei andDongfang in 2014 and the date of repayment was set on December 31, 2015. In 2015, both parties agreed to delay the date ofrepayment to December 31, 2017. As of December 31, 2015, this balance was included in “Related party notes receivable– long term” in our consolidated balance sheets.In April 2014, Tongmei loaned an additional of $46,000 to Dongfang. The loan bears interest at 6.15% per annumand the principal and interest totaling $51,000 as of December 31, 2015 is due on December 31, 2017. As of December 31,2015, this balance, including both principal and interest, was included in “Related party notes receivable – long term” in ourconsolidated balance sheets. Tongmei also purchases raw materials from one of our equity investment entities for production in the ordinarycourse of business. As of December 31, 2015 and 2014, amounts payable of $70,000 and $513,000, respectively, wereincluded in “accounts payable” in our consolidated balance sheets. Beijing Kaide Quartz Co. Ltd. (“Kaide”) has been a supplier of customized quartz tubes to the Company since 2004.Beijing XiangHeMing Trade Co. Ltd., (“XiangHeMing”) is a significant shareholder of Kaide. XiangHeMing was previouslyowned by, among others, certain immediate family members of Davis Zhang, our former President, China Operations, until atleast sometime in 2004, at which time the official Chinese government records indicate that Mr. Zhang’s immediate familymembers transferred their ownership of XiangHeMing to a third party. However, we are currently unable to conclusivelydetermine whether Mr. Zhang’s immediate family members retained any economic interest in XiangHeMing after thetransfer. As of December 31, 2015 and 2014, amounts payable to Kaide of $379,000 and $730,000, respectively, wereincluded in “accounts payable” in our consolidated balance sheets. 72 Table of ContentsOur Related Party Transactions Policy seeks to prohibit all conflicts of interest in transactions between relatedparties and us, unless they have been approved by our Board of Directors. This policy applies to all of ouremployees, directors, and our consolidated subsidiaries. Our executive officers retain board seats on the board of directors ofthe companies in which we have invested in our China joint ventures. See Note 6 for further details.Note 5. Property, Plant and Equipment, NetThe components of our property, plant and equipment are summarized below (in thousands): As of December 31, 2015 2014 Property, plant and equipment: Building $30,388 $30,469 Machinery and equipment 40,899 41,900 Leasehold improvements 5,059 5,070 Construction in progress 3,596 1,918 79,942 79,357 Less: accumulated depreciation and amortization (48,520) (45,495) $31,422 $33,862 Depreciation and amortization expense was $5.5 million, $5.6 million and $5.5 million for the years ended 2015,2014, and 2013 respectively.Note 6. Investments in Privately-held CompaniesWe have made strategic investments in private companies located in China in order to gain access at a competitivecost to raw materials that are critical to our substrate business. Our consolidated subsidiaries have also made investments inprivate companies. These companies form part of our overall supply chain.Our direct investments are summarized below (in thousands): Investment Balance as of December 31, December 31, Accounting Ownership Company 2015 2014 Method Percentage Beijing JiYa Semiconductor Material Co., Ltd. $3,331 $3,331 Consolidated 46%Nanjing Jin Mei Gallium Co., Ltd. 592 592 Consolidated 83%Beijing BoYu Semiconductor Vessel Craftwork Technology Co.,Ltd. 1,346 1,346 Consolidated 70% $5,269 $5,269 Donghai County Dongfang High Purity Electronic Materials Co.,Ltd. $1,524 $1,723 Equity 46%Xilingol Tongli Germanium Co. Ltd. 5,343 5,351 Equity 25%Emeishan Jia Mei High Purity Metals Co., Ltd. 1,081 1,021 Equity 25% $7,948 $8,095 Our ownership of Beijing JiYa Semiconductor Material Co., Ltd. (“JiYa”) is 46%. We continue to consolidate JiYaas we are the founding and the largest shareholder, we appoint the general manager and controller and have the ability toexercise control in substance over the long-term strategic decisions made. Our Chief Executive Officer is chairman of theJiYa board and we have appointed one other representative, Davis Zhang, to serve on the board. Mr. Zhang was an executiveofficer of AXT for 27 years. Further, our Chief Financial Officer, Gary Fischer, is on the board of supervisors of JiYa.73 Table of ContentsOur ownership of Nanjing Jin Mei Gallium Co., Ltd. (“Jin Mei”) is 83%. We continue to consolidate Jin Mei as wehave a controlling financial interest and have majority control of the board. Our Chief Executive Officer is chairman of theJin Mei board and we have appointed two other representatives to serve on the board.Our ownership of Beijing BoYu Semiconductor Vessel Craftwork Technology Co., Ltd (BoYu) is 70%. We continueto consolidate BoYu as we have a controlling financial interest and have majority control of the board. Our Chief ExecutiveOfficer is chairman of the BoYu board and we have appointed two other representatives to serve on the board.Although we have representation on the boards of directors of each of these companies, the daily operations of eachof these companies are managed by local management and not by us. Decisions concerning their respective short- termstrategy and operations, any capacity expansion and annual capital expenditures, and decisions concerning sales of finishedproduct, are made by local management with regular guidance and input from us.During 2015, 2014 and 2013, the three consolidated joint ventures generated $0.8 million, $3.0 million and$3.5 million of income, respectively, of which a loss of $0.3 million, a gain of $0.7 million and a gain of $1.1 million,respectively were allocated to noncontrolling interests, resulting in $1.2 million, $2.3 million and $2.4 million of income,respectively, to our net income.For AXT’s three minority investment entities that are not consolidated, the investment balances are included in“other assets” in our consolidated balance sheets and totaled $7.9 million and $8.1 million as of December 31, 2015 and2014, respectively. We own 46% of the ownership interests in one of these companies and 25% in each of the other twocompanies. These three companies are not 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 theyoccur; and·we do not have controlling financial interest in, do not maintain operational or management control of, do notcontrol the board of directors of, and are not required to provide additional investment or financial support to any ofthese companies.These three equity investment entities generated for AXT an equity loss of $43,000 for the year ended December 31,2015 $569,000 and $270,000 for the years ended December 31, 2014, and 2013, respectively, which was recorded as “equityin earnings of unconsolidated joint ventures” in the consolidated statements of operations.Net income recorded from all of the consolidated joint ventures and these three equity investment entities was $1.1million, $2.9 million and $2.6 million for the years ended December 31, 2015, 2014, and 2013, respectively.We also maintain four minority investments indirectly in privately-held companies through our consolidated jointventures. Our subsidiary, Jiya, has three investments. Our subsidiary, Jinmei, has one investment. These minority investmentsare accounted for under the equity method in the books of our consolidated joint ventures. As of December 31, 2015 and2014, our consolidated joint ventures included these minority investments in “other assets” in the consolidated balancesheets with a carrying value of $4.1 million and $4.0 million, respectively.AXT’s three direct minority investment entities and the three minority investments of Jiya and the one minorityinvestment of Jinmei are not consolidated and are accounted for under the equity method and had the following summarizedincome information (in thousands) for the years ended December 31, 2015, 2014 and 2013, respectively:74 Table of Contents Our share for the Year Ended Year Ended December 31, December 31, 2015 2014 2013 2015 2014 2013 Net revenue $36,259 $47,824 $41,257 $9,112 $11,887 $10,240 Gross profit 8,327 21,436 13,836 1,954 5,340 3,328 Operating income 2,494 9,046 8,174 494 2,059 1,820 Net income 2,371 6,765 6,315 462 1,528 1,377 These seven minority investment entities that are not consolidated, but rather are accounted for under the equitymethod and had the following summarized balance sheet information (in thousands) for the years ended December 31, 2015and 2014, respectively: As of December 31, 2015 2014 Current assets $32,097 $31,482 Noncurrent assets 35,917 39,275 Current liabilities 18,185 19,923 Noncurrent liabilities 571 169 Our portion of the entity earnings from these seven minority investment entities that are not consolidated and areaccounted for under the equity method were $462,000, $1.5 million and $1.4 million for the years ended December 31, 2015,2014 and 2013, respectively. Dividends received from these minority investment entities were $305,000, $327,000 and$396,000 for the years ended December 31, 2015, 2014 and 2013, respectively. Undistributed retained earnings relating toour investments in all these minority investment entities were $6.6 million and $6.5 million as of December 31, 2015 and2014, respectively.Note 7. Other InvestmentsDuring the second quarter of 2015, we re-classified our sole minority investment under the cost method as anavailable-for-sale security when we determined that there was sufficient trading volume in the exchange for the stock to bedeemed readily marketable. As of December 31, 2015, we do not maintain any investments under the cost method. As ofDecember 31, 2014, our investments in this unconsolidated company had a carrying value of $200,000 and were 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, 2015 2014 Accrued compensation and related charges $2,129 $2,656 Accrued professional services 709 509 Current portion of royalty payments 575 800 Dividends payable by consolidated joint ventures 534 563 Accrued product warranty 497 802 Accrued income taxes 225 119 Other accrued liabilities 1,712 2,185 $6,381 $7,634 Note 9. DebtPrior to 2015, we had an unused credit facility with a bank that provided for a line of credit of $10.0 million. Theline of credit was secured by marketable securities we had with the bank at that time. This line of credit was never used andthere were no outstanding borrowings under this line of credit as of December 31, 2015 and 2014. This line of75 Table of Contentscredit was terminated in January 2015 when we closed our investment account with this institution and moved all of ourfunds from this bank to a different bank.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, 2015and 2014, valued at $3,532,000 are non-voting and non-convertible preferred stock with a 5.0% cumulative annual dividendrate payable when declared by the board of directors and $4 per share liquidation preference over common stock, and must bepaid 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.Stock Repurchase ProgramOn February 21, 2013, our Board of Directors approved a stock repurchase program pursuant to which we mayrepurchase up to $6.0 million of our outstanding common stock through February 27, 2014. These purchases were to be madefrom time to time in the open market and were funded from our existing cash balances and cash generated from operations.During 2013, we repurchased approximately 285,000 shares at an average price of $2.51 per share for a total purchase priceof $716,000 under the stock repurchase program. As of December 31, 2013, approximately $5.3 million remained availablefor future repurchases under this program. No shares were repurchased in 2014 under this program and the plan expired onFebruary 27, 2014.On October 27, 2014, our Board of Directors approved a stock repurchase program pursuant to which we mayrepurchase up to $5.0 million of our outstanding common stock. These repurchases can be made from time to time in theopen market and are funded from our existing cash balances and cash generated from operations. During 2015, werepurchased approximately 908,000 shares at an average price of $2.52 per share for a total purchase price of approximately$2.3 million under the stock repurchase program. As of December 31, 2015, approximately $2.7 million remained availablefor future repurchases under this program. See Item 5, Market for Registrant’s Common Equity, Related Stockholder Mattersand 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 thegrant of incentive and non-qualified stock options to our employees, consultants and directors. Under the 1997 Plan,5,423,583 shares of common stock have been authorized for issuance. Options granted under the 1997 Plan are generally forperiods not to exceed ten years (five years if the option is granted to a 10% stockholder) and are granted at the fair marketvalue of the stock at the date of grant as determined by the board of directors. Options granted under the 1997 Plan generallyvest 25% at the end of one year and 2.1% 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 arestatement of the 1997 Plan which expired in 2007. The 1,928,994 share reserve of the 1997 Plan became the reserve of the2007 Plan, together with 1,300,000 additional shares approved for issuance under the 2007 Plan. In May 2013, theshareholders approved an additional 2,000,000 shares to be issued under the 2007 plan. Awards may be made under the 2007Plan are stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performanceunits, deferred compensation awards and other stock‑based awards. Stock options and stock appreciation rights awardedunder the 2007 Plan may not be repriced without stockholder approval. Stock options and stock appreciation rights may notbe granted below fair market value. Stock options or stock appreciation rights generally shall not be fully vested over aperiod of less than three years from the date of grant and cannot be exercised more than 10 years from the date of grant.Restricted stock, restricted stock units, and performance awards generally shall not vest faster than over a three-year period(or a twelve‑month period if vesting is based on a performance measure). In76 Table of ContentsDecember 2008, the 2007 Plan was amended to comply with the applicable requirements under Section 409A of the InternalRevenue Code.In May 2015, our shareholders approved our 2015 Equity Incentive Plan (the “2015 Plan”). The 2015 Plan is areplacement of the 2007 Plan. Awards that may be made under the 2015 Plan are stock options, stock appreciation rights,restricted stock, restricted stock units, performance shares, performance units, deferred compensation awards and otherstock‑based awards. Stock options and stock appreciation rights awarded under the 2015 Plan may not be repriced withoutstockholder approval. Stock options and stock appreciation rights may not be granted below fair market value. Stock optionsor stock appreciation rights generally shall not be fully vested over a period of less than four years from the date of grant andcannot be exercised more than 10 years from the date of grant. Restricted stock, restricted stock units, and performanceawards generally shall not vest faster than over a three-year period (or a twelve‑month period if vesting is based on aperformance measure). However, options granted to consultants and restricted stock awards granted to independent boardmembers typically vest in one year and the Plan does allow for similar vesting to employees. As of December 31, 2015,approximately 2,822,000 shares were available for grant under the 2015 Plan.Stock OptionsThe following table summarizes the stock option transactions for each of the years ended December 31, 2013, 2014and 2015 (in thousands, except per share data): Weighted- average Weighted- Remaining Number of average Contractual Aggregate Options Exercise Life Intrinsic Stock Options Outstanding Price (in years) Value Balance as of January 1, 2013 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 Granted 866 2.19 Exercised (119) 1.38 Canceled and expired (166) 3.03 Balance as of December 31, 2015 3,779 $2.97 6.26 $764 Options vested as of December 31, 2015 and unvested optionsexpected to vest, net of forfeitures 3,691 $2.99 6.19 $742 Options exercisable as of December 31, 2015 2,237 $3.42 4.41 $453 77 Table of ContentsThe options outstanding and exercisable as of December 31, 2015 were in the following exercise price ranges (inthousands, except per share data): Options Vested and Options Outstanding as of Exercisable as of December 31, 2015 December 31, 2015 Weighted‑‑average Range of Weighted‑‑average Remaining Weighted‑‑Average Exercise Price Shares Exercise Price Contractual Life Shares Exercise Price $1.59-$2.04 623 $1.83 2.32 623 $1.83 $2.14-$2.14 52 $2.14 8.33 21 $2.14 $2.18-$2.18 846 $2.18 9.50 — $ — $2.29-$2.29 200 $2.29 8.42 75 $2.29 $2.36-$2.36 383 $2.36 7.17 215 $2.36 $2.47-$2.47 399 $2.47 8.48 120 $2.47 $2.51-$2.51 20 $2.51 9.33 13 $2.51 $2.91-$2.91 408 $2.91 5.81 329 $2.91 $3.18-$4.81 386 $4.72 4.19 384 $4.73 $4.92-$7.82 462 $5.87 3.78 457 $5.87 3,779 $2.97 6.26 2,237 $3.42 There were 119,000, 111,000 and 331,000 options exercised in the years ended December 31, 2015, 2014 and2013, respectively. The total intrinsic value of options exercised for the years ended December 31, 2015, 2014 and 2013, was$118,000, $105,000 and $331,000, respectively.As of December 31, 2015, the unamortized compensation costs related to unvested stock options granted toemployees under our stock option plan was approximately $1.4 million, net of estimated forfeitures of $94,000. These costswill be amortized on a straight-line basis over a weighted-average period of approximately 3.1 years and will be adjusted forsubsequent changes in estimated forfeitures. We did not capitalize any stock‑based compensation to inventory as ofDecember 31, 2015 and 2014, due to the immateriality of the amount.Restricted Stock AwardsA summary of activity related to restricted stock awards for the years ended December 31, 2013, 2014 and 2015 ispresented below (in thousands, except per share data): Weighted-Average Grant Date Stock Awards Shares Fair Value Non-vested as of January 1, 2013 239 $4.27 Granted 104 $2.52 Vested (85) $4.56 Forfeited (16) $4.03 Non-vested as of December 31, 2013 241 $3.44 Granted 121 $2.34 Vested (101) $4.01 Forfeited — — Non-vested as of December 31, 2014 261 $2.71 Granted 547 $2.42 Vested (215) $2.81 Forfeited (47) $2.47 Non-vested as of December 31, 2015 546 $2.39 Total grant date fair value of stock awards vested during the years ended December 31, 2015, 2014 and 2013 was$605,000, $405,000 and $389,000, respectively. As of December 31, 2015, we had $1.2 million of unrecognized78 Table of Contentscompensation expense related to restricted stock awards, which will be recognized over the weighted average period of1.8 years.Common StockThe following number of shares of common stock were reserved and available for future issuance at December 31,2015 (in thousands, except per share data): Options outstanding 3,779 Restricted stock awards outstanding 546 Stock available for future grant: 2015 Equity Incentive Plan 2,822 Total 7,147 Stock-based CompensationWe recorded $1.3 million, $1.1 million and $1.3 million of stock‑based compensation in our consolidatedstatements of operations for the years ended December 31, 2015, 2014 and 2013, respectively. The following tablesummarizes compensation costs related to our stock‑based compensation awards (in thousands, except per share data): Year Ended December 31, 2015 2014 2013 Stock‑based compensation in the form of employee stock options and restricted stock,included in: Cost of revenue $20 $18 $22 Selling, general and administrative 1,148 938 1,091 Research and development 181 173 164 Total stock-based compensation 1,349 1,129 1,277 Tax effect on stock-based compensation — — — Net effect on net income (loss) $1,349 $1,129 $1,277 Shares used in computing basic net income per share 32,183 32,452 32,700 Shares used in computing diluted net income per share 32,183 32,452 32,700 Effect on basic net income per share $(0.04) $(0.03) $(0.04) Effect on diluted net income per share $(0.04) $(0.03) $(0.04) We estimate the fair value of stock options using a Black‑Scholes valuation model. There were 866,000, 712,000and 488,000 stock options granted with weighted‑average grant date fair value of $0.88, $1.17 and $1.09 per share during2015, 2014 and 2013, respectively. The fair value of options granted was estimated at the date of grant using the followingweighted‑average assumptions: Year Ended December 31, 2015 2014 2013 Expected term (in years)3.9 4.1 4 Volatility51.1% 63.2% 59.2%Expected dividend —% —% —%Risk-free interest rate1.75% 1.85% 0.98% The expected term for stock options is based on the observed historical option exercise behavior and post-vestingforfeitures of options by our employees, and the contractual term, the vesting period and the expected term of theoutstanding options. Expected volatility is based on the historical volatility of our Company’s common stock. The dividendyield of zero is based on the fact that we have never paid cash dividends and have no present intention to pay cashdividends. The risk-free interest rates are taken from the Daily Federal Yield Curve Rates as of the grant dates as79 Table of Contentspublished by the Federal Reserve and represent the yields on actively traded Treasury securities for terms equal to theexpected 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 InternalRevenue Code. All full-time U.S. employees are eligible to participate in the Savings Plan after 90 days from the date of hire.Employees may elect to reduce their current compensation by up to the statutory prescribed annual limit and have theamount of such reduction contributed to the 401(k) Plan. We provide matching to employee contributions up to 4% of theemployees’ base pay if employees contribute at least 6% of their base pay. If the contribution rate is less than 6% of the basepay, the matching percentage is prorated. Our contributions to the 401(k) retirement savings plans were $125,000, $115,000and $110,000 for the years ended December 31, 2015, 2014 and 2013, respectively.Note 12. GuaranteesIndemnification AgreementsWe have entered into indemnification agreements with our directors and officers that require us to indemnify ourdirectors and officers against liabilities that may arise by reason of their status or service as directors or officers, other thanliabilities arising from willful misconduct of a culpable nature; to advance their expenses incurred as a result of anyproceeding against them as to which they could be indemnified; and to obtain directors’ and officers’ insurance if availableon reasonable terms, which we currently have in place.Product WarrantyWe provide warranties for our products for a specific period of time, generally twelve months, against materialdefects. We provide for the estimated future costs of warranty obligations in cost of sales when the related revenue isrecognized. The accrued warranty costs represent the best estimate at the time of sale of the total costs that we expect to incurto repair or replace product parts that fail while still under warranty. The amount of accrued estimated warranty costs areprimarily based on historical experience as to product failures as well as current information on repair costs. On a quarterlybasis, we review the accrued balances and update the historical warranty cost trends. The following table reflects the changein our warranty accrual which is included in “accrued liabilities” on the consolidated balance sheets, during 2015 and 2014(in thousands): Year Ended December 31, 2015 2014 Beginning accrued warranty and related costs $802 $1,048 Accruals for warranties issued 662 865 Adjustments related to pre-existing warranties including expirations and changes in estimates (238) (467) Cost of warranty repair (729) (644) Ending accrued warranty and related costs $497 $802 Note 13. Income TaxesConsolidated income before provision for income taxes includes non-U.S. income of approximately $15.2 million,$12.8 million and $16.7 million for the years ended December 31, 2015, 2014 and 2013, respectively. We80 Table of Contentsrecorded a current tax provision of $531,000, $215,000 and $188,000 for the years ended December 31, 2015, 2014 and2013, respectively. The components of the provision (benefit) for income taxes are summarized below (in thousands): Year Ended December 31, 2015 2014 2013 Current: Federal $— $— $— State 2 2 13 Foreign 529 213 175 Total current 531 215 188 Deferred: Federal — — — State — — — Total deferred — — — Total net provision for income taxes $531 $215 $188 A reconciliation of the effective income tax rates and the U.S. statutory federal income tax rate is summarized below: Year Ended December 31, 2015 2014 2013 Statutory federal income tax rate 35.0% 35.0% 35.0%State income taxes, net of federal tax benefits — (0.2) (0.1) Change in valuation allowance (209.4) (695.8) (111.8) Stock-based compensation (6.5) (26.3) (1.4) Foreign rate differences 213.8 758.6 85.3 Dividend from PRC investee (57.8) (169.8) (19.6) Net loss from privately-held PRC investments 1.1 45.6 2.5 Other (0.1) 14.4 7.3 Effective tax rate (23.9)% (38.5)% (2.8)% Deferred tax assets and liabilities are summarized below (in thousands): As of December 31, 2015 2014 Deferred tax assets: Net operating loss $60,538 $55,654 Accruals and reserves not yet deductible 3,723 4,517 Credits 1,488 1,488 65,749 61,659 Deferred tax liabilities: Valuation of investment portfolio — — — — Net deferred tax assets 65,749 61,659 Valuation allowance (65,749) (61,659) Net deferred tax assets $— $— As of December 31, 2015, we have federal and state net operating loss carryforwards of approximately$179.8 million and $1.7 million, respectively, which will expire beginning in 2022 and 2017, respectively. In addition, wehave federal tax credit carryforwards of approximately $1.5 million, which will expire beginning in 2019.The deferred tax assets valuation allowance as of December 31, 2015 is attributed to U.S. federal, and state deferredtax assets, which result primarily from future deductible accruals, reserves, net operating loss carryforwards, and tax creditcarryforwards. We believe that, based on a number of factors, the available objective evidence creates81 Table of Contentssufficient uncertainty regarding the realizability of the deferred tax assets such that a full valuation allowance has beenrecorded. These factors include our history of losses related to domestic operations, and the lack of carryback capacity torealize deferred tax assets. The valuation allowance increased by $4.1 million and increased by $3.7 million for the yearsended December 31, 2015 and 2014, respectively.Our consolidated subsidiaries in China have enjoyed various tax holidays since 2000. Benefits under the taxholidays vary by jurisdiction.In accordance with Section 382 of the Internal Revenue Code, the amounts of and benefits from net operating lossand tax credit carryforwards may be impaired or limited in certain circumstances. Events which cause limitations in theamount of net operating losses or credits that we may utilize in any one year include, but are not limited to, a cumulativeownership change of more than 50% as defined, over a three year period.During fiscal year 2015, the amount of gross unrecognized tax benefits decreased by $1.8 million. The total amountof unrecognized tax benefits was $14.6 million as of December 31, 2015. The Company recognizes interest and penaltiesrelated to uncertain tax positions as part of the income tax provision. To date, such interest and penalties have not beenmaterial.We recognize interest and penalties related to uncertain tax positions in income tax expense. Income tax expense forthe year ended December 31, 2015 includes no interest and penalties. As of December 31, 2015, we have no accrued interestand penalties related to uncertain tax positions.We file income tax returns in the U.S. federal, various states and foreign jurisdictions. We have substantiallyconcluded all U.S. federal and state income tax matters through December 31, 2001.Deferred tax liabilities have not been recognized for $80.5 million of undistributed earnings of our foreignsubsidiaries at December 31, 2015. We have made no provision for U.S. income taxes on undistributed earnings of certainforeign subsidiaries because it is our intention to permanently reinvest such earnings in its foreign subsidiaries. If suchearnings were distributed, we would be subject to additional U.S. income tax expense. Determination of the amount ofunrecognized deferred income tax liability related to these earnings is not practicable. As of December 31, 2015, we and ourconsolidated joint ventures held approximately $22.3 million in cash and investments in foreign bank accounts. Thisconsists of $16.8 million held by our wholly owned subsidiary in China and $5.5 million held by our three partially-ownedconsolidated subsidiaries in China. Of this $22.3 million, approximately $15.9 million would not be available for use in theUnited States without paying United States income taxes.A reconciliation of the beginning and ending amount of the gross unrecognized tax benefits is as follows (inthousands):Gross unrecognized tax benefits balance as of December 31, 2014 $16,403 Add: Additions based on tax positions related to the current year — Additions for tax positions of prior years — Less: Decrease related to lapse of statute of limitations (1,846) Gross unrecognized tax benefits balance as of December 31, 2015 $14,557 Excluding the effects of recorded valuation allowances for deferred tax assets, $14.6 million of the unrecognized taxbenefit would favorably impact the effective tax rate in future periods if recognized.82 Table of ContentsNote 14. Net Income per ShareA reconciliation of the numerators and denominators of the basic and diluted net income per share calculations is asfollows (in thousands, except per share data): Year ended December 31, 2015 2014 2013 Numerator: Net loss attributable to AXT, Inc $(2,228) $(1,388) $(7,958) Less: Preferred stock dividends (177) (177) (177) Net loss available to common stockholders $(2,405) $(1,565) $(8,135) Denominator: Denominator for basic net loss per share - weighted average common shares 32,183 32,452 32,700 Effect of dilutive securities: Common stock options — — — Restricted stock awards — — — Denominator for dilutive net loss per common shares 32,183 32,452 32,700 Basic net loss per share: Net income attributable to AXT, Inc $(0.07) $(0.05) $(0.25) Net income to common stockholders $(0.07) $(0.05) $(0.25) Diluted net loss per share: Net income attributable to AXT, Inc $(0.07) $(0.05) $(0.25) Net income to common stockholders $(0.07) $(0.05) $(0.25) Options excluded from diluted net loss per share as the impact is anti-dilutive 3,779 2,772 2,671 Restricted stock excluded from diluted net loss per share as the impact is anti-dilutive 546 252 241 Note 15. Segment Information and Foreign OperationsSegment InformationWe operate in one segment for the design, development, manufacture and distribution of high-performancecompound semiconductor substrates and sale of materials. In accordance with ASC topic 280, Segment Reporting, our chiefoperating decision‑maker has been identified as the Chief Executive Officer, who reviews operating results to make decisionsabout allocating resources and assessing performance for the Company. Since we operate in one segment, all financialsegment and product 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: Year Ended December 31, 2015 2014 2013 Europe (primarily Germany)$19,518 $21,535 $21,387 Taiwan 13,799 11,464 10,131 China 13,728 17,451 24,946 Asia Pacific (excluding China, Taiwan and Japan) 11,482 11,207 9,165 North America (primarily the United States) 9,837 10,292 10,665 Japan 9,138 11,550 9,041 Total$77,502 $83,499 $85,335 83 Table of ContentsLong-lived assets consist primarily of property, plant and equipment, and are attributed to the geographic locationin which they are located. Long-lived assets, net of depreciation, by geographic region were as follows (in thousands): As of December 31, 2015 2014 Long-lived assets by geographic region: North America $542 $136 China 30,880 33,726 $31,422 $33,862 Note 16. Other Income (expense)The components of other income (expense) are summarized below (in thousands): Year Ended December 31, 2015 2014 2013Foreign exchange gain (loss) $717 $(999) $(1,253)Gain on sales of investments 859 1,263 —Other income (expense) 447 97 505 $2,023 $361 $(748) Foreign Exchange Contracts and Transaction Gains/LossesTransaction gains and losses resulting from transactions denominated in currencies other than the U.S. dollar or inthe functional currencies of our subsidiaries are included in “other income (expense), net” for the periods presented. Thetransaction gains for the year ended December 31, 2015 totaled $717,000 and the transaction losses for the years endedDecember 31, 2014 and 2013 totaled $1.0 million and $1.3 million, respectively.To partially protect us against fluctuations in foreign currency resulting from accounts receivable inJapanese yen from our Japanese customers, starting in 2015, we instituted a foreign currency hedging program. We placeshort term hedges that are intended to offset the potential cash exposure related to fluctuations in the exchange rate betweenthe United States dollar and Japanese yen. We measure the fair value of these hedges at each month end and quarter endusing current exchange rates and in accordance with generally accepted accounting principles. At quarter end any foreigncurrency hedges not settled are netted on the consolidated balance sheet and classified as Level 3 assets and liabilities. As ofDecember 31, 2015 the net change in fair value from the placement of the hedge to settlement at each month end during thequarter had a de minimis impact to the consolidated results. As of December 31, 2015, our outstanding commitments withrespect to foreign exchange contracts were $36,000. As of December 31, 2014, we had no outstanding commitments withrespect to foreign exchange contracts.Gain on Sales of InvestmentsGain on sales investments were derived from the realized gain from the sales of our IntelliEpi common stock, anavailable-for-sales investment, in the Taiwan stock exchange market in year ended December 31, 2015 and 2014. As ofDecember 31, 2015, we no longer hold any IntelliEpi stock.84 Table of ContentsNote 17. Commitments and ContingenciesLegal MattersWe are subject to legal proceedings and claims, either asserted or unasserted, that arise in the ordinary course ofbusiness. While the outcome of these proceedings and claims cannot be predicted with certainty, management does notbelieve that the outcome of any of these legal matters will have a material adverse effect on our consolidated financialposition, results of operations or cash flows.LeasesWe lease certain office space, warehouse facilities and equipment under long-term operating leases expiring atvarious dates through December 2025. The majority of our lease obligations relates to our lease agreement for the facility inFremont, California with approximately 19,467 square feet. Total rent expenses under these operating leases were $313,000, $260,000 and $638,000 for the years ended December 31, 2015, 2014 and 2013, respectively. Total minimum leasepayments under these leases as of December 31, 2015 are summarized below (in thousands): Lease Payments 2016 $173 2017 167 2018 39 2019 30 2020 27 Thereafter 97 $533 Royalty AgreementWe entered into a royalty agreement with a competitor effective December 3, 2010 with a term of eightyears, terminating December 31, 2018. We and our related companies are granted a worldwide, nonexclusive,royalty bearing, irrevocable license to certain patents for the term on the agreement. We shall pay up to $7.0 millionroyalty payment over eight years that began in 2011 based on future royalty bearing sales. This agreement containsa clause that allows us to claim a credit, starting in 2013, in the event that the royalty bearing sales for the year islower than a pre-determined amount set forth in this agreement. Royalty expense under this agreement was$583,000 which was net of claim for credit of $217,000 for the year ended December 31, 2015. Royalty expense foryears ended December 31, 2014 and 2013 were $577,000 which was net of claim for credit of $223,000 and$530,000 which was net of claim for credit of $270,000, respectively. These expenses were included in cost ofrevenue. Total maximum, remaining royalty payments under this agreement as of December 31, 2015 aresummarized below (in thousands): Royalty Payments 2016 $575 2017 575 2018 575 $1,725 85 Table of ContentsNote 18. Unaudited Quarterly Consolidated Financial Data Quarter First Second Third Fourth (in thousands, except per share data) 2015: Revenue $20,064 $21,010 $18,371 $18,057 Gross profit 4,749 4,385 4,605 3,090 Net income (loss) attributable to AXT, Inc (1,024) (3) 42 (1,243) Net (loss) attributable to AXT, Inc per share, basic $(0.03) $(0.00) $(0.00)*$(0.04) Net (loss) attributable to AXT, Inc per share, diluted $(0.03) $(0.00) $(0.00)*$(0.04) 2014: Revenue $19,345 $21,449 $23,138 $19,567 Gross profit 2,718 4,160 5,318 4,971 Net (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) * Net loss to AXT, Inc. per common share resulted due to the accrual of preferred dividend liquidation preference during the three months endedSeptember 30, 2015. Note 19. Restructuring ChargesOn February 25, 2014, we announced a restructuring plan with respect to our wholly-owned subsidiary, BeijingTongmei Xtal Technology Co, Ltd. (“Tongmei”) in order to better align manufacturing capacity with demand. Under therestructuring plan, Tongmei implemented certain workforce reductions with respect to its manufacturing facility in China.We also announced that the restructuring plan would be completed by March 31, 2014, depending on local legalrequirements. In the first quarter of 2014, we reduced the workforce at Tongmei by approximately 93 positions that were nolonger required to support production and operations, or approximately 11 percent of the workforce. Accordingly, werecorded a restructuring charge of approximately $907,000 related to the reduction in force for severance-related expenses.As of March 31, 2014, we completed this restructuring plan and the reduction in force. We had no restructuring charges in2015.Note 20. Whistleblower Complaint and InvestigationOn February 23, 2015, the Board of Directors announced that, pursuant to an anonymous whistleblower complaint,our Audit Committee conducted an investigation of certain potential related-party transactions involving Davis Zhang, ourformer President, China Operations. The investigation did not conclude that there was any intentional misconduct by Mr.Zhang, or that he received any improper benefit from these transactions. Further, the investigation did not reveal anyinaccuracies in our financial statements resulting from these transactions. However, the investigation identified certainhistorical related-party transactions that were not previously disclosed in our filings with the Securities and ExchangeCommission (“SEC”). We have filed a Current Report on Form 8-K with the SEC on February 23, 2015 to disclose suchhistorical related-party transactions.On February 20, 2015, the Board waived any potential inconsistencies with our Code of Conduct and Ethics arisingfrom the transactions identified in the investigation. Also, the Audit Committee approved the related-party nature of suchtransactions to the extent it had not previously approved such transactions. The Board and Audit Committee specified thatsuch waiver and approval would have retroactive effect to the date of commencement of the transactions covered by suchwaiver and approval. We have incurred approximately $1.8 million of professional service fees during the course of thisinvestigation. 86 Table of ContentsSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereto duly authorized. AXT, Inc. By:/s/ GARY L. FISCHER Chief Financial Officer and Corporate Secretary(Principal Financial Officer) Date: March 11, 2016POWER OF ATTORNEYKNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutesand appoints Morris S. Young and Gary L. Fischer, and each of them, his true and lawful attorney-in-fact and agent, with fullpower of substitution, each with power to act alone, to sign and execute on behalf of the undersigned any and allamendments to this Report on Form 10-K, and to perform any acts necessary in order to file the same, with all exhibits theretoand other documents in connection therewith with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requested and necessary to be done inconnection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirmingall 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 thefollowing persons on behalf of the registrant and in the capacities and on the dates indicated.Signature Title Date /s/ MORRIS S. YOUNG Chief Executive Officer and Director March 11, 2016Morris S. Young (Principal Executive Officer) /s/ GARY L. FISCHER Chief Financial Officer and Corporate Secretary March 11, 2016Gary L. Fischer (Principal Financial Officer andPrincipal Accounting Officer) /s/ JESSE CHEN Chairman of the Board of Directors March 11, 2016Jesse Chen /s/ DAVID C. CHANG Director March 11, 2016David C. Chang /s/ LEONARD LEBLANC Director March 11, 2016Leonard LeBlanc 87 Table of ContentsAXT, Inc.EXHIBITSTOFORM 10-K ANNUAL REPORTFor the Year Ended December 31, 2015ExhibitNumber Description3.1(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 hereinby reference to Exhibit 2.1 to the registrant’s form 8-K dated May 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 andTechnology Group, Ltd and AXT, Inc. and by and between Lumei Optoelectronics Corp., AXT, Inc., LyteOptronics, Inc., Beijing Tongmei Xtal Technology and Xiamen Advanced Semiconductor Co., Ltd.10.8(16)* Agreement respecting severance payment between the Company and Dr. Morris S. Young.10.9(17) Purchase and Sale Agreement by and between Car West Auto Body, Inc., a California corporation andAXT, Inc. dated February 19, 200810.10(18) Lease agreement dated July 2, 2008 between AXT, Inc. and T. Drive Partners, L.P., a California partnership10.11(19)** 6-inch Supply Agreement dated December 31, 2008 between AXT, Inc. and IQE plc10.12(20)** 4-inch Supply Agreement dated December 31, 2008 between AXT, Inc. and IQE plc10.13(21) 2007 Equity Incentive Plan (amended December 8, 2008)10.14(22)* Forms of agreements under the 2007 Equity Incentive Plan10.15(23)* Employment Letter Agreement between the Company and Mr. Robert G. Ochrym10.16(24)** Supply Agreement signed January 29, 2010 between AXT, Inc. and AZUR SPACE Solar Power GmbH10.17(25) Credit Line Account Application and Agreement for Organizations and Businesses between AXT, Inc. andUBS Bank USA dated December 15, 200810.18(26) Notice of Credit Line Account Increase between AXT, Inc. and UBS Bank USA dated January 17, 201210.19(27)* Amended and Restated Employment Offer Letter between the Company and Dr. Morris S. Young datedDecember 4, 201210.20(28)* Employment Letter Agreement between the Company and Mr. Gary L. Fischer10.21(29)* 2015 Equity Incentive Plan10.22(30)* Executive Incentive Plan12.1 Computation of Ratio of Earnings to Fixed Charges88 Table of Contents21.1 List of Subsidiaries23.1 Consent of Independent Registered Public Accounting Firm, Burr Pilger Mayer, Inc24.1 Power of Attorney (see signature page)31.1 Certification by principal executive officer pursuant to Section 302 of the Sarbanes‑Oxley Act of 200231.2 Certification by principal financial officer pursuant to Section 302 of the Sarbanes‑Oxley Act of 200232.1 Certification by Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant toSection 906 of the Sarbanes‑Oxley Act of 200232.2 Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant toSection 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 Form 8-K filed with the SEC on October 31, 2014.(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 onMay 11, 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 10.25 to registrant’s Form 8-K filed with the SEC on February 20, 2008.(18)Incorporated by reference to exhibit 10.28 to registrant’s Form 8-K filed with the SEC on July 8, 2008.(19)Incorporated by reference to exhibit 10.29 to registrant’s Form 8-K filed with the SEC on January 5, 2009.(20)Incorporated by reference to exhibit 10.30 to registrant’s Form 8-K filed with the SEC on January 5, 2009.(21)Incorporated by reference to exhibit 10.31 to registrant’s Form 10-K filed with the SEC on March 31, 2009.(22)Incorporated by reference to exhibit 10.20 to registrant’s Form 10-K filed with the SEC on March 22, 2010.(23)Incorporated by reference to exhibit 10.24 to registrant’s Form 10-K filed with the SEC on March 22, 2010.(24)Incorporated by reference to exhibit 10.31 to registrant’s Form 8-K filed with the SEC on February 2, 2010.(25)Incorporated by reference to exhibit 10.23 to registrant’s Form 10-K filed with the SEC on March 15, 2012.(26)Incorporated by reference to exhibit 10.24 to registrant’s Form 10-K filed with the SEC on March 15, 2012.(27)Incorporated by reference to exhibit 10.1 to registrant’s Form 8-K filed with the SEC on December 4, 2012.(28)Incorporated by reference to exhibit 10.1 to registrant’s Form 8-K filed with the SEC on August 12, 2014.(29)Incorporated by reference to appendix A to the registrant’s Definitive Proxy Statement on Schedule 14A filed with the SEC on April 8,2015.(30)Incorporated by reference to exhibit 10.1 to registrant’s Form 8-K filed with the SEC on February 26, 2016. *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 registrationstatement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposesof section 18 of the Securities Exchange Act of 1934, and is otherwise not subject to liability under these sections. 89 Exhibit 12.1 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Fiscal Year Ended December 31, 2008 2009 2010 2011 2012 2013 2014 2015 (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) $0 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) $0 Fixed charges: Total interest expense $193 $47 $57 $0 $1 $1 $0 $0 Interest factor in rents 38 17 17 — — — — — Total fixed charges $231 $64 $74 $0 $1 $1 $0 $0 Ratio of earnings to fixed charges 0.84 (23.94) 273.76 NM 5,966.00 (7,661.00) NM NM (a)Interest component of rental expense is estimated based on interest on tenant improvement loan at 4%, which is considered a reasonableapproximation of the interest factor. In 2010, the full amount of the tenant improvement was paid off. (b)In 2009, earnings were weak from the global financial crisis. Between 2011 and 2015, there were no fixed charge . NM = ratio not meaningful ab Exhibit 21.1Subsidiaries of the Registrant OwnershipName PercentageBeijing Tongmei Xtal Technology 100Beijing Ji Ya Semiconductor Material Co., Ltd * 46Nanjing Jin Mei Gallium Co., Ltd 83Beijing BoYu Manufacturing Co., Ltd 70 * AXT’s ownership of this subsidiary was 51% at inception, reduced to 46% at December 31, 2005 as 5% ownershipwas given to Ji Ya’s management upon fulfillment of certain conditions. AXT continue to consolidate JiYa as weare the founding shareholder, the largest shareholder, we appoint the general manager and controller and have theability to exercise control in substance over the long term strategic decisions made. continues to consolidate thissubsidiary as it has significant influence over management and majority control of its board of directors. 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, 333-38858,333-67297, 333-204478 and 333-188788) of AXT, Inc. of our reports dated March 11, 2016 relating to the consolidated financialstatements and the effectiveness of internal control over financial reporting as of December 31, 2015, which appear in thisForm 10-K. /s/ Burr Pilger Mayer, Inc.San Jose, CaliforniaMarch 11, 2016 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 amaterial fact necessary to make the statements made, in light of the circumstances under which such statements weremade, not misleading 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, fairlypresent in all material respects, the financial condition, results of operations and cash flows of the registrant as of,and for, the periods presented in this report;4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controlsand procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financialreporting (as defined 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 internalcontrol over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board ofdirectors (or persons 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 11, 2016/s/ Morris S. Young Morris S. Young Chief 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 material factnecessary to make the statements made, in light of the circumstances under which such statements were made, not misleadingwith 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 in allmaterial respects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periodspresented 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 (as definedin 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 designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period in which this report is being prepared;(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designedunder our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generally accepted accounting principles;(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusionsabout the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based onsuch evaluation; and(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during theregistrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materiallyaffected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control overfinancial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or personsperforming the equivalent functions):(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reportingwhich are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financialinformation; and(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’sinternal control over financial reporting.March 11, 2016/s/ GARY L. FISCHER Gary L. Fischer Chief Financial Officer and Corporate Secretary (Principal Financial Officer and Principal 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 31,2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned herebycertifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002, that, tothe 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 conditionand results of operations of the Company.Date: March 11, 2016By:/s/ Morris S. Young Morris S. Young Chief 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 31,2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned herebycertifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002, that, tothe 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 conditionand results of operations of the Company.Date: March 11, 2016By:/s/ Gary L. Fischer Gary L. Fischer Chief Financial Officer and Corporate Secretary (Principal Financial Officer and Principal Accounting Officer)
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