AXT
Annual Report 2016

Download report
Bookmark report

More annual reports from AXT:

2023 Report
2022 Report
2021 Report
2020 Report
2019 Report

Peers and competitors of AXT:

Silex Systems Ltd
Aehr Test Systems
Rubicon Technology
KLA
Veeco Instruments

Plain-text annual report

Table 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, 2016OR☐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 $3.19 for the common stock onJune 30, 2016 as reported on the Nasdaq Global Select Market, was approximately $99,297,229. Shares of common stock held by each officer, director and by eachperson who owns 10% 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 February 27, 2017, 33,031,479 shares, $0.001 par value, of the registrant’s common stock were outstanding. Table of ContentsTABLE OF CONTENTS Page PART I Item 1. Business3Item 1A. Risk Factors 15Item 1B. Unresolved Staff Comments 34Item 2. Properties 34Item 3. Legal Proceedings 35Item 4. Mine Safety Disclosures 35 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of EquitySecurities 35Item 6. Selected Consolidated Financial Data 38Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 39Item 7A. Quantitative and Qualitative Disclosures About Market Risk 53Item 8. Consolidated Financial Statements and Supplementary Data 55Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 55Item 9A. Controls and Procedures 55Item 9B. Other Information 56 PART III Item 10. Directors, Executive Officers and Corporate Governance 58Item 11. Executive Compensation 61Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 77Item 13. Certain Relationships and Related Transactions, and Director Independence 79Item 14. Principal Accountant Fees and Services 80 PART IV Item 15. Exhibits and Financial Statement Schedules 81Item 16. Form 10-K Summary 116 1 Table of Contents PART 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, our plan to relocate our Chinamanufacturing operations, and our belief that we have adequate cash and investments to meet our needs over the next 12months are forward-looking statements. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,”“estimates,” “goals,” “should,” “continues,” “would,” “could” and similar expressions or variations of such words areintended to identify forward‑looking statements, but are not the exclusive means of identifying forward‑looking statementsin this Annual Report. Additionally, statements concerning future matters such as our strategy, plans, industry trends and theimpact of trends and economic cycles on our business are forward-looking statements. All forward-looking statements arebased upon management’s views as of the date of this Annual Report and are subject to risks and uncertainties that couldcause actual results to differ materially from historical results or those anticipated in such forward-looking statements. Suchrisks and uncertainties include those set forth under the section entitled “Risk Factors” in Item 1A below, as well as thosediscussed elsewhere in this Annual Report, and identify important factors that could disrupt or injure our business or causeactual 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. 2 Table of Contents 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 aswafers. Our consolidated subsidiaries produce and sell certain raw materials some of which are used in our substratemanufacturing process and some of which are sold to other companies. Our substrate wafers are used when a typical silicon substrate wafer cannot meet the conductive requirements of achip. 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. Inaddition, optoelectronic applications, such as LED lighting and chip-based lasers, do not use silicon substrates because theyrequire a wave form frequency that cannot be achieved using silicon. Alternative or specialty materials are used to replacesilicon as the preferred base in these situations. Our wafers provide such alternative or specialty materials. We have twoproduct lines: specialty material substrates and raw materials. Our compound substrates combine indium with phosphorous(indium phosphide: InP) or gallium with arsenic (gallium arsenide: GaAs). Our single element substrates are made fromgermanium (Ge).Our raw materials include both raw gallium and purified gallium. We use purified gallium in producing our GaAssubstrates and sell both raw gallium and purified gallium in the open market to other companies for use in magneticmaterials, high temperature thermometers and growing single crystal ingots including gallium arsenide, gallium nitride,gallium antimonide, gallium phosphide and other materials and alloys. We also produce pyrolytic boron nitride (pBN)crucibles used in the high temperature (typically in the range 500 C to 1,500 C) growth process of single crystal ingots andepitaxial layer growth in MBE (Molecular Beam Epitaxy) reactors. We use these pBN crucibles in our own ingot growthprocesses and also sell them in the open market to other companies. Our substrate product group generated 81%, 75% and72% of our revenue and our raw materials product group generated 19%, 25% and 28% for 2016, 2015 and 2014,respectively. 3 Table of ContentsThe following chart shows our substrate group and their materials, diameters and illustrative applications and showsour raw materials group primary products and illustrative uses and applications. Products Substrate Group Substrate Diameter Sample of Applications Indium Phosphide 2”, 3”, 4” • Fiber optic lasers and detectors (InP) • Passive Optical Networks (PONs) • Data center connectivity using light/lasers • Silicon photonics • Photonic ICs (PICs) • High efficiency terrestrial solar cells (CPV) • RF amplifier and switching (military wireless andpotential 5G) • Lasers • Infrared LED motion control • Infrared thermal imaging Gallium Arsenide 1”, 2”, 3”, 4”, 5”, 6” • Power amplifiers for wireless devices (GaAs - semi-insulating) • Direct broadcast television • High-performance transistors • Satellite communications • High efficiency solar cells for drones Gallium Arsenide 1”, 2”, 3”, 4”, 6” • 3-D sensing using VCSELs (GaAs - semi-conducting) • Data center communication using VCSELs • High brightness light emitting diodes (LEDs) • Lasers • Near-infrared sensors • Printer head lasers and LEDs • Laser machining, cutting and drilling • Optical couplers • Night vision goggles Germanium 2”, 4”, 6” • Satellite and terrestrial solar cells (Ge) • Optical sensors and detectors • Concentrated photo voltaic (CPV) cells for satellites • Multi-junction solar cells for satellites • Infrared detectors Raw Materials Group 4N raw gallium • Magnetic materials • High temperature thermometers • Low melting point alloys • Optical glass • Infrared detectors 6N+ purified gallium • Key material in single crystal ingots such as: - Gallium Arsenide (GaAs) - Gallium Nitride (GaN) - Gallium Antimonide (GaSb) - Gallium Phosphide (GaP) Boron trioxide (B2O3) • Encapsulant in the ingot growth of III-V compoundsemiconductors Gallium-Magnesium alloy • Used for the synthesis of organo-gallium compounds inepitaxial growth on semiconductor wafers pyrolytic boron nitride (pBN)crucibles • Used when growing single-crystal compoundsemiconductor ingots • Used when growing epitaxial layers in MBE reactors 4 Table of Contents 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 10 companies in China (subsidiaries/joint ventures). We believe this supply chainarrangement provides us with pricing advantages, reliable supply, market trend visibility and better sourcing lead-times forkey raw materials central to manufacturing our substrates. Our subsidiaries and joint venture companies produce materials,including pure raw gallium (4N Ga), high purity gallium (6N Ga), arsenic, germanium, germanium dioxide, pyrolytic boronnitride (pBN) crucibles and boron oxide (B2O3). Our ownership and the ownership held by our consolidated subsidiaries inthese entities range from 83% to 20%. We have board representation in all 10 of these companies. We consolidate thecompanies in which we have either a controlling financial interest, or majority financial interest combined with the ability toexercise substantive control over the operation or financial decisions made by the subsidiary. We use the equity method toaccount for companies in which we have smaller financial interest and have the ability to exercise significant influence, butnot control, over the subsidiary. We purchase portions of the materials produced by these joint venture companies for ourown use and sell the remainder of their production to third parties. The Beijing city government has announced that it will expand its offices into the area where our manufacturingfacility is located and we believe the Beijing city government intends to relocate thousands of government employees. TheBeijing city government desires to upgrade this area and has applied pressure on manufacturing companies that use restrictedmaterials to relocate, including us. It is our understanding that a master development plan of the area where ourmanufacturing facility is located has not yet been formally approved by the China central government and the timeline forrelocating our gallium arsenide wafer production operations at our current site has not yet been determined by the Chinacentral government. We are advised that the China central government intends to be the final authority in this matter and iscommitted to having a master plan that is reasonable and orderly. We believe the China central government will undertake acomprehensive review of the master development plan, which will add time to the process. We are working with thegovernment and are forming a plan to identify a new manufacturing site, acquire land use rights for such site, construct afacility and move our gallium arsenide production line. We intend to complete this relocation by the end of 2018 or the firsthalf of 2019. The Beijing city government’s economic development bureau has requested that we consider maintaining ourindium phosphide production operations at our current site, along with our China headquarters and research anddevelopment (“R&D”) center. We believe we will still relocate our gallium arsenide and germanium production, but we mayavoid moving indium phosphide production if we elect to remain at our current site. Over time it may be more efficient toconsolidate all production at one site. In light of our discussion with the Beijing city government, we believe we may be able to relocate the portion of ourproduction facilities that we agree to relocate smoothly and safely and in a reasonable manner, without a material disruptionof supply to our customers. The anticipated relocation of all or part of our operations will require us to develop and executean orderly relocation plan. A failure to properly execute a relocation plan could result in disruption to our production andhave a material adverse impact on our revenue and our results of operations and financial condition. To date, we have not completed a land use rights purchase of our new manufacturing site. We do not yet haveconstruction bids or third party estimates for the relocation costs or construction costs of our future manufacturing facility,but we currently believe the land use rights purchase amount, relocation costs and facility construction costs will be in therange of $25 million to $35 million, but could be substantially more expensive. Further, we believe that we may recoversome of these costs by monetizing the vacated property at our current site in Beijing. We currently believe the soonest wecould monetize the vacated property is the year 2020. We were incorporated in California in December 1986 and reincorporated in Delaware in May 1998. The Companywent public in 1998. We changed our name from American Xtal Technology, Inc. to AXT, Inc. in July 2000. Our principalcorporate office is located at 4281 Technology Drive, Fremont, California 94538, and our telephone number at this address is(510) 438-4700. We have approximately 25 employees in our Fremont facility and approximately 661 employees in ourBeijing facility.5 Table of ContentsIndustry BackgroundCertain electronic and opto-electronic applications have performance requirements that exceed the capabilities ofconventional silicon substrates, also known as wafers, and often require high-performance compound, i.e. a mixture of twomaterials, or single element substrates. Examples of higher performance non-silicon based substrates include GaAs, InP,gallium nitride (GaN), silicon carbide (SiC) and Ge. One of the earliest broadly used alternative substrates was GaAs andGaAs substrates were the earliest substrates we produced.Semi-insulating GaAs is used to create various high speed microwave components, including power amplifier chipsin cell phones, satellite communications and broadcast television. Semi-conducting GaAs substrates are used to create opto-electronic products, including high brightness light emitting diodes (HBLEDs) that are often used to backlight wirelesshandsets and liquid crystal display (LCD) TVs and also used for automotive panels, signage, display and lightingapplications. A possible new application for semi-conducting GaAs is 3-D sensing using VCSELs (vertical cavity surfaceemitting lasers), an array of lasers on a single chip that could be used in cell phones and other devices. InP is a highperformance semiconductor substrate used in broadband and fiber optic applications and data center connectivity. In recentyears InP demand has increased. Ge substrates are used in applications such as solar cells for space and terrestrialphotovoltaic applications.The AXT AdvantagesWe 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. Thereare significant barriers to entry in the InP substrate market and currently there are only three leading providers,including AXT. Further, we believe that this market will continue to expand and grow and we have been addingcapacity to take advantage of this expansion.·Key provider of low defect density GaAs which can be used to make 3-D sensing chips. The potentialdeployment of 3-D sensing in cell phones and other devices requires GaAs substrates with low etch pit density(EPD) (i.e., low defect densities.) The requirement of low EPD is a barrier to entry and we believe there are alimited number of potential substrate providers that can meet this requirement, which includes AXT.·Proprietary process technology drives manufacturing. In our industry, the single crystal growth process andthe wafer manufacturing process incorporate proprietary process technology. We have a substantial body ofproprietary process technology and this creates a barrier to entry as evidenced by the small number of suppliersof InP wafers or GaAs low EPD wafers.·Low-cost manufacturing operation in China. Since 2004, we have manufactured all of our products in China,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, 2016, approximately 969 of our 994 employees(including employees at both our Beijing facility as well as our consolidated joint venture companies) arelocated in China. Our primary competitors have their major manufacturing operations in Germany or Japan. Ourpresence in China also enables us to closely manage our raw materials supply chain.·We are experienced at adding capacity quickly to take advantage of growing and changing market trends. Inrecent years we have quickly added capacity for InP substrates, enabling us to grow that business. We believethat expansion is less difficult in China than in Japan or Germany where our major competitors arelocated. High volume emerging market applications may require rapid expansion and we believe we are well-positioned to respond to increased demand.6 Table of Contents·We are the only compound semiconductor substrate supplier to have a position in raw materials. We havepartial ownership in 10 companies in China that form an integral part of our supply chain. We believe oursubsidiaries and joint venture companies in China provide us with more reliable supply and shorter lead-timesfor the raw materials central to our final manufactured products compared to third party providers. We believethat this dedicated supply chain will enable us to meet increases in demand from our customers by providing anincreased volume of raw materials quickly, efficiently and cost effectively.·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, 2016,no customer accounted for over 10% of revenue and our five largest customers accounted for 35% 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, thisdiversity gives us a greater opportunity to expand our business into new applications and markets and benefitfrom growth in demand for substrates given our pre-established market positions in a broad range of productapplications.·Enhanced revenue diversity through the sale of special materials. Because our strategy allows our subsidiariesto also sell raw materials in the open market to third parties, approximately one fifth 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 companyproducing InP, GaAs and Ge substrates. Our direct competitors are either privately owned companies ordivisions within large publicly traded companies. We believe the combination of access to U.S. capital markets,U.S.-based product quality standards, but China-based manufacturing and a unique strategy for the supply ofmany of the raw materials we need is an attractive business model to our customers who desire longevity andstability in their supply chain as well as competitive prices.·Strong cash position with $54 million in cash and investments. As a pure play substrate provider, we have astrong cash position that enables us to make strategic investments in facilities, capacity, equipment, technologyand resources. Our competitive focus and flexibility is supported by the staying power that this cash ensures.7 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:Position AXT to benefit from emerging InP markets. As cloud-based data centers combine integrated circuits andInP-based lasers to transfer data through light, we believe there could be increased demand for InP substrates, which couldcomplement our sales in the fiber-to-home and office markets. We believe there are also other possible applications for InPsubstrates in the future, which could include 5G cell phones and driverless cars.Add InP capacity and continue InP R&D. We are adding manufacturing capacity for InP to support our expectedgrowth for this product line. Substrate products often have long product life cycles and we believe the InP product life cyclecould be similar to the GaAs product life cycle that has run for over 10 years. In addition to adding manufacturing capacity,we are continuing to invest in InP crystal growth technology and wafer processing technology. For example, we aredeveloping six-inch diameter ingots and improving the relative flatness of the wafer surface to improve performance.Position AXT to benefit from 3-D sensing applications. We are continuing to develop semi-conducting GaAs six-inch diameter wafers with low etch pitch density. The GaAs substrate requirements for 3-D sensing application include verylow defect densities. As 3-D sensing applications develop, we believe there is a potential for high volumes for this product.Secure the option to increase GaAs capacity when we finalize the relocation plans for manufacturing thissubstrate. The planned relocation of our GaAs manufacturing lines presents a strategic opportunity to ensure at the new sitethe ability to increase capacity in the future should market demands justify such capacity expansion and we intend to reviewthe capacity expansion requirements as we proceed.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 diameter wafers. Ourwafers range from one inch to up to six inches in diameter. We also produce substrates with customer defined specificationswhich may range from thickness or smoothness and may include adding special additional elements such as iron orsulfur. We believe product diversity can mitigate some of the impact of down cycles in our market because we are notdependent on a single product or application for revenue.Many customers not just a few large customers. We seek to expand our customer base and avoid dependence onjust a few large customers. We believe our diverse product offering has resulted in a diverse customer base. For the year endedDecember 31, 2016, no customer accounted for over 10% of revenue and our five largest customers accounted for 35% of ourrevenue. We believe customer diversity provides a measure of stability in troubled market conditions. Customerdiversification may also enable us to achieve a higher average selling price by reducing our dependence on larger customerswith pricing power.Sustain manufacturing efficiencies. We seek to continue to leverage our China-based manufacturing advantage byincreasing efficiencies in our manufacturing methods, systems and processes. Our strategy is to combine the benefits of U.S.-based quality control and access to U.S. capital markets with our China-based manufacturing operations.Increase productivity and seek profitability in our 10 subsidiaries/joint venture companies. The supply anddemand equation for specialty materials can be complex and volatile. Over the years, we have established or invested in 10companies that are an integral part of our supply chain. We will continue to provide strategic support to these companies andthey, in turn, will continue to be the backbone of our supply chain. We plan to work closely with these companies to increasetheir productivity and achieve profitability as they continue to support AXT’s supply chain.8 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 optical devicesare fabricated. Wafers are sliced up from semiconducting ingots that are grown in a cylindrical form. The diameter and lengthof an ingot will vary depending on the type of material and the growth process used. An ingot may be either single-crystalline (also referred to as single element) or multi-crystalline (also referred to as compound elements). Single-crystallinewafers typically have better material parameters. Depending on physical properties of the materials in a wafer, theperformance of devices and circuits can be remarkably different.AXT uses its proprietary vertical gradient freeze (VGF) technique for growing single crystal Indium Phosphide (InP),Gallium Arsenide (GaAs) and Germanium (Ge) ingots. After growing the crystalline ingot, the ingot is then sawed intoindividual substrates or wafers. Before specialty material wafers can be used, a thin layer of structured chemicals is grown onthe surface of the substrate. This is called an epitaxial layer. We sell the majority of our substrates to companies thatspecialize in applying the epitaxial layer. The wafers are then used to produce state-of-the-art electronic and opto-electronicdevices 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 AXT considers proprietary trade secrets. It is this combination of variables and the requiredmethods to control 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 that proprietary technology to us. A number of Crystacomm’s proprietary methods can also be used inour VGF processes.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 a license covering the use of the proprietary equipment and Hitachi Metals’proprietary wafer processing technology. A significant body of knowledge in this portfolio is considered proprietary tradesecrets. We have combined the acquired proprietary processing technology and equipment with our existing waferprocessing capabilities to better serve our existing and future customer base.9 Table of ContentsIdeally, all the atoms in a wafer or substrate are arrayed in a specific periodic order. However, sensitivities in theingot growth process will cause some atoms to be improperly aligned and these are referred to as dislocations. The aggregatenumber of dislocations in a wafer is referred to as the dislocation density. Dislocation densities can be seen as a group of tinymarks or pits under a microscope by etching the wafer with acid and each wafer has an “etch pit density” (“EPD”). Certainmicro devices, such as the array used for 3-D sensing, require wafers with very low EPD. AXT considers the processtechnology we use to achieve low EPD as proprietary process technology and we are one of only a few substratemanufacturing companies that can produce low EPD wafers.ProductsWe have two product lines: specialty material substrates and raw materials. We design, develop, manufacture and distributehigh-performance semiconductor substrates, also known as wafers. Through our subsidiaries in our supply chain, we also sellcertain raw materials. InP is a high-performance semiconductor substrate used in fiber optic lasers and detectors, passiveoptical networks (PONs), data center connectivity, silicon photonics, photonic ICs (PICs), terrestrial solar cell (CPV), lasers,RF amplifiers (military wireless), infrared motion control and infrared thermal imaging. We make semi-insulating GaAssubstrates used in making semiconductor chips in applications such as power amplifiers for wireless devices, high-performance transistors and high efficiency solar cells for drones. Our semi-conducting GaAs substrates are used to createopto-electronic products, which include High Brightness LEDs that are often used to backlight wireless handsets and LCDTVs and for automotive, signage, display and lighting applications. Our semi-conducting GaAs substrates could be used tocreate opto-electronic products for 3-D sensing using VCSELs. Ge substrates are used in emerging applications, such as triplejunction solar cells for space and terrestrial photovoltaic applications and for optical applications. 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 a special wafer thickness.Raw Materials. Our consolidated subsidiaries produce and sell certain raw materials, some of which are used in oursubstrate manufacturing process and some of which are sold to other companies. Our raw materials include both raw galliumand purified gallium. We use purified gallium to produce our GaAs substrates and sell both raw gallium and purified galliumin the open market to other companies for use in magnetic materials, high temperature thermometers and single crystalingots, including gallium arsenide, gallium nitride, gallium antimonide, gallium phosphide and other materials andalloys. We also produce pyrolytic boron nitride (pBN) crucibles used in the high temperature (typically in the range 500 Cto 1,500 C) growth process of single crystal ingots and epitaxial layer growth in MBE reactors. We use these pBN cruciblesin our own ingot growth processes and also sell them in the open market to other companies. We promote our product diversity as a way to differentiate ourselves in the market place. Some competitors provideonly gallium arsenide substrates. We provide gallium arsenide and also indium phosphide and germanium substrates. Somecompetitors provide only six-inch wafers. Our wafers range from one inch to up to six inches in diameter. We also producesubstrates with customer defined specifications, which may range in thickness or smoothness and may include adding specialadditional materials, such as iron or sulfur. In addition to our wafers or substrates, we also generate revenue from ourconsolidated subsidiaries that sell raw materials. Product diversity can mitigate some of the down cycles in our marketbecause we are not dependent on a single product or application for revenue. 10 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. Some customers do both the epitaxial layer andwafer fabrication.Epitaxial layer companies that form our customer base are located in Asia, the United States and Europe. We alsosell our products to universities and other research organizations who use specialty materials for experimentation in variousaspects of semiconducting and semi insulating applications. Our customers that purchase raw materials are located in Asia,the United States and Europe.We have at times sold a significant portion of our products in any particular period to a limited number ofcustomers. However, no customer represented more than 10% of our revenue for the year ended December 31, 2016. Onecustomer, IQE Group, represented more than 12% of our revenue for the year ended December 31, 2015 while there was nocustomer who represented more than 10% of our revenue for the year ended December 31, 2014. Our top five customers,although not the same five customers for each period, represented 35%, 40% and 34% of our revenue for the years endedDecember 31, 2016, 2015 and 2014, respectively.There were four third-party customers for the raw materials products from our consolidated subsidiaries that eachaccounted for over 10% of the revenue from raw materials sales for the year ended December 31, 2016 and three customers forthe raw materials products from our consolidated subsidiaries that accounted for over 10% of the revenue from raw materialssales for each of the years ended December 31, 2015 and December 31, 2014. Our subsidiaries and joint ventures are a keystrategic benefit for us as they further diversify our sources of revenue.Manufacturing, Raw Materials and SuppliesWe manufacture all of our wafers/substrate products at our facilities in Beijing, China. We believe this 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 wafer manufacturing process. The first stage deploys our VGF technology for the crystal growthof single element or compound element ingots in diameters currently ranging from one inch to six inches. The growthprocess occurs in high temperature furnaces built using our proprietary designs. Growing the crystalline elements intocylindrical ingots can take four to twelve days, depending on the diameter and length of the ingot produced. The crystalgrowth stage utilizes AXT proprietary process technology. The second stage includes slicing or sawing the ingot into wafersor substrates, then processing each substrate to strict specifications, including grinding to reduce the thickness and thenpolishing, beveling the edges and cleaning each substrate. Many of the wafer processing steps use chemical baths andproperly cleaning the wafer is a critical process. The wafer processing stage utilizes AXT proprietary process technology.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 deployed the equipment handling four-inch wafers inour InP line in 2016. The equipment for six-inch wafers will be deployed after we finalize the plan to relocate our galliumarsenide line. Due to potential defects, yield is a key factor in our manufacturing cost. Other key elements are the initial costof the raw material elements, manufacturing equipment, factory loading, facilities and labor. Our Beijing facilities areapproximately 300,000 square feet and, as of December 31, 2016, we employed approximately11 Table of Contents661 employees at this site. In 2015, we also acquired equipment from an InP company, Crystacomm, that specializes in theLEC method of crystal growth. We have 10 partially owned subsidiaries and joint ventures companies in China that form the backbone of oursupply chain model. These companies provide us with reliable supply, market trend visibility, and shorter lead-times for rawmaterials central to our manufactured products, including gallium, gallium alloys, indium phosphide poly-crystal, arsenic,germanium, germanium dioxide, high purity arsenic, pBN and boron oxide. We believe that these subsidiaries and jointventures have been and will continue to be advantageous 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 limited number of suppliers for certain critical materials used in the production of our substrates,such as quartz tubing, arsenic and polishing solutions. We generally purchase our materials through standard purchase ordersand not pursuant to long-term supply contracts.Sales and MarketingWe sell our substrate products directly to customers through our direct salesforce in the United States and 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. Specialty material wafers are scientificallycomplicated. Our application engineers must work closely with customers during all stages of the substrate manufacturingprocess, from developing the precise composition of the substrate through manufacturing and processing the substrate to thecustomer’s specifications. We believe that maintaining a close relationship with customers and providing them withengineering support improves customer satisfaction and provides us with a competitive advantage in selling. Six of ouremployees who frequently work with customers have PhDs in physics or material science.International Sales. International sales are a substantial part of our business. Sales to customers outside NorthAmerica (primarily the United States) accounted for approximately 90%, 87% and 88% of our revenue during 2016, 2015and 2014, 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. These subsidiaries and joint ventures have their own separate sales forces and sell directly to their own customers inaddition 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 pressure, must be applied over a larger surface area. In 2015, we acquired certain proprietary InP crystalgrowth technology and equipment from Crystacomm. There are several proprietary process steps that we believe we canadopt at AXT. We originally planned to deploy the equipment at our Fremont facility, but have subsequently decided todeploy it in China due to restrictions on the use of red phosphorus placed upon our Fremont facility by various governmentagencies.Certain micro devices, such as the array used for 3-D sensing, require GaAs wafers with very low etch pit density. Inanticipation of a growth in demand for low EPD six-inch wafers, we have focused our development efforts on increasing ouryield of such wafers. 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 wafer12 Table of Contentsprocessing stations from Hitachi Metals. The Hitachi Metals purchase includes a license covering the use of the proprietaryequipment and Hitachi Metals’ proprietary wafer processing technology. A particular focus of the equipment and processtechnology is on cleaning the wafers. It is important to remove any residual cleaning agents from each wafer to ensure thatthe epitaxial growth process is not encumbered by residual chemicals on the wafer.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 $5.9 million in 2016, compared with $5.7 million in2015 and $4.1 million in 2014.CompetitionThe semiconductor substrate industry is characterized by narrow technological boundaries, price erosion andgenerally intense competition. Certain substrates, such as low quality substrates for LED lighting, compete almost entirely onprice. Other products, such as InP and low EPD GaAs wafers, have fewer competitors and quality is a key competitive factorin addition to price. We face actual and potential competition from a number of established companies who have theadvantage of greater name recognition and more established relationships in the industry. In some cases, competitors havesubstantially greater financial, technical and marketing resources. 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. A critical element is technical support extended tothe customer or prospective customer and we attempt to counter possible advantages of name recognition or size withsuperior technical support through the use of employees who have PhDs in physics or material science.We believe that the primary competitive factors in the markets in which our substrate products compete are:·quality;·price;·customer technical support;·performance;·meeting customer specifications; 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, which impact end markets using substrates.13 Table of ContentsThe 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 and single element semiconductor substrates includes Freiberger CompoundMaterials (“Freiberger”), Japan Energy (“JX”), Umicore, Sumitomo Electric Industries (“Sumitomo”) and China CrystalTechnology Corp., (“CCTC”). We believe that at least two of our competitors are shipping high volumes of GaAs substratesmanufactured using a technique similar to our VGF technique. In addition, we also face competition from semiconductordevice manufacturers that produce substrates for their own use, and for other companies, such as Skyworks and Qorvo, thatare actively exploring alternative materials and marketing semiconductor devices using these alternative materials. Forexample, silicon-on-insulator (SOI) technology, a silicon 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 radiofrequency (RF) switching function in cell phones. Because 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. In the event of a significant increase indemand we believe our raw materials supply chain strategy and our ability to rapidly increase capacity can provide us someadvantage. Intellectual PropertyOur success and the competitive position of our VGF technology depend on our ability to maintain our proprietaryprocess technology secrets and other intellectual property protections. We rely on a combination of patents, trademark andtrade secret laws, non-disclosure agreements and other intellectual property protection methods to protect our proprietarytechnology. We believe that, due to the rapid pace of technological innovation in the markets for our products, our ability toestablish and maintain a position of technology leadership depends as much on the skills of our research and developmentpersonnel as upon the legal protections afforded our existing technologies. To protect our trade secrets, we take certainmeasures to ensure 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 aproprietary product or process is not reverse engineered or independently developed.To date, we have been issued 42 patents that relate to our VGF products and processes, eight in the United States,five in Japan, 24 in China, one in Canada, one in Korea, and two in Taiwan. A U.S. patent has a protected life of 20 years fromthe filing date. Our patents have expiration dates ranging from 2017 to 2032. In some cases we may consider filingdivisional, continuation or continuation-in-part of the existing patents for additional claims. We have two U.S. patentapplications pending and 15 foreign patent applications pending, including three in Europe, nine in China, two in Japan andone in the Patent Cooperation Treaty stage. Furthermore, in aggregate, our three consolidated joint venture companies havebeen issued 46 patents in China, including five issued patents for JiYa, 19 issued patents for JinMei and 22 issued patents forBoYu.We entered into a technology license and royalty agreement with Sumitomo, effective December 3, 2010, with aterm 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.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 reasonable14 Table of Contentsterms and/or successfully prosecute or defend our position, our business, financial condition and results of operations couldbe 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, 2016, we had approximately 686 employees, which consisted of approximately 25 employees inour headquarters in Fremont and approximately 661 employees in Beijing. In addition, our three consolidated subsidiarieshad, in total, approximately 308 employees. In aggregate, we and our subsidiaries had 994 employees, of whom 813 wereprincipally engaged in manufacturing, 115 in sales and administration, and 66 in research and development. Of these 994employees, 25 were located in the United States and 969 in China.Most workers in China are represented by unions. As of December 31, 2016, 853 employees in China including employees ofour subsidiaries were represented by unions, but we have never experienced a work stoppage. We consider our relations withour 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 Factors For ease of reference, we have divided these risks and uncertainties into the following general categories:I.Risks related to our general business;15 Table of ContentsII.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 2011,certain 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 GaAs substrates. The adoption of SOI resulted in decreasedGaAs wafer demand, and decreased revenue. If SOI or similar technologies gain more widespread market acceptance, or areused in more applications, our sales of specialty material based substrates could be reduced and our business and operatingresults could be significantly and adversely affected.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 the cost of raw materials, shifts inproduct mix, the introduction of new products, decreases in average selling prices for products, utilization of ourmanufacturing capacity and our ability to reduce 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 sold, and may in the future sell, raw materials at significantly reduced prices in order to gainvolume sales or sales to new customers. In addition, in the three months ended December 31, 2015, the market price ofgallium dropped below our per unit inventory cost and we incurred an inventory write down under the lower of cost ormarket accounting 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 consolidated grossmargin. This joint venture may in the future continue to experience such capacity restraints, causing our gross margin, andconsequently our operating results, to be adversely impacted.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 demand16 Table of Contentsand correctly manage capacity, the fixed expense levels will have an adverse effect on our business, financial condition andresults of operations. Our gross profit margins have fluctuated from period to period, and these fluctuations are expected tocontinue in the future. Our gross profit margin has fluctuated from 17.1% for the quarter ended December 31, 2015 to 37.1%in the quarter ended December 31, 2016.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.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:·poor control of furnace temperature and pressure;·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.A current example where yield is of special concern is for our six-inch semi-conducting gallium arsenide substrates,which can be used for manufacturing opto-electronic devices in cell phones, enabling 3-D sensing. This application requiresvery low defect densities, also called etch pit densities, and our yields will be lower than the yields achieved for the samesubstrate when it will be used in other applications. If we are unable to achieve the targeted quantity of low defect densitysubstrates, then our manufacturing costs would increase and our gross margins would be negatively impacted.In addition, we may modify our process to meet a customer specification, but this can impact our yields. If our yieldsdecrease, our revenue could decline if we are unable to produce products to our customers’ requirements. At the same time,our manufacturing costs could remain fixed, or could increase. Lower yields negatively impact our gross margin. We haveexperienced product shipment delays and difficulties in achieving acceptable yields on both new and older products, anddelays and poor yields have adversely affected our operating results. We may experience similar problems in the future andwe cannot predict when they may occur or their duration or severity.If our manufacturing processes result in defects in our products making them unfit for use by our customers, ourproducts would be rejected, resulting in compensation costs paid to our customers, and possible disqualification. This couldlead to revenue loss and market share loss.17 Table of ContentsRisks exist in relocating our gallium arsenide manufacturing operations. The Chinese government has imposed, and may impose in the future, manufacturing restrictions and regulations thatrequire us to move part of our manufacturing operations to a location outside of the Beijing area or temporarily cease or limitmanufacturing. If we are required to relocate our manufacturing operations or cease or limit our manufacturing, suchrestrictions would materially and adversely impact our results of operations and our financial condition. The Beijing city government has announced that it will expand its offices into the area where our manufacturingfacility is located and we believe the Beijing city government intends to relocate thousands of government employees. TheBeijing city government desires to upgrade this area and has applied pressure on manufacturing companies that use restrictedmaterials to relocate, including us. It is our understanding that a master development plan of the area where ourmanufacturing facility is located has not yet been formally approved by the China central government and the timeline forrelocating our gallium arsenide wafer production operations at our current site has not yet been determined by the Chinacentral government. We are working with the government and are forming a plan to identify a new manufacturing site,acquire land use rights for such a site, construct a facility and move our gallium arsenide production line. We intend tocomplete this relocation by the end of 2018 or the first half of 2019. The anticipated relocation of all or part of our manufacturing operations will require us to develop and execute anorderly relocation plan. A failure to properly execute a relocation plan could result in disruption to our production and havea material adverse impact on our revenue and our results of operations and financial condition. Once we complete the relocation of our gallium arsenide product line and commence manufacturing operations atour future manufacturing facility, we may be required to qualify our products with some of our customers. If we fail to meetthe product qualification requirements of a customer, we may lose sales to that customer and may not have the opportunity tosell future products to that customer. Our reputation may also be damaged. Any loss of sales could have a material adverseeffect on our revenue and our results of operations and financial condition. We expect many of the key employees who are employed at our current manufacturing facility to relocate to the newmanufacturing site and assist with the transition. There can be no assurances that the key employees will relocate or that wewill be able to hire qualified employees for our new manufacturing facility. A loss of key employees and our inability to hirequalified employees for our new manufacturing facility could disrupt our production, which could materially and adverselyimpact our results of operations and our financial condition. To date, we have not completed a land use rights purchase of our new manufacturing site. We do not yet haveconstruction bids or third party estimates for the relocation costs of construction costs of our future manufacturing facility,but we currently believe the land use rights purchase amount, relocation costs and facility construction costs will be in therange of $25 million to $35 million, but could be substantially more expensive. There can be no assurances that we mayrecover some or all of these costs by monetizing the vacated property at our current site in Beijing. 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 Cooperationevent. These restrictions included a shut-down of the transportation of materials and power plants to reduce air pollution. Toreduce air pollution in Beijing, the Chinese government has sometimes limited the construction of new, or expansion ofexisting, facilities by manufacturing companies in the Beijing area. If the government applied similar restrictions to us, thensuch restrictions could have an adverse impact on our results of operations and our financial condition. Our ability to supplycurrent or new orders could be significantly impacted. Customers could then be required to purchase products from ourcompetitors, 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 instructed to obtain a permit to continue tomanufacture our gallium arsenide substrate wafers. The Beijing municipal authority accepted our18 Table of Contentspermit application in May 2015, but has not issued to us the requisite permit while we continue to make preparations in goodfaith to eventually relocate our gallium arsenide production. If our application is denied in the future then our galliumarsenide production could be disrupted, which could materially and adversely impact our results of operations and ourfinancial condition. 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 and opto-electronic products. Accordingly, demand for ourproducts is subject to the demand for end-user applications which utilize our products, as well as factors affecting the abilityof the manufacturers downstream 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 in oursupply chain are unable to develop, market and sell their products, demand for our products will decrease. For example, inthe second half of 2016 manufacturers producing and selling passive optical network devices known as EPONs and GPONsexperienced a slowdown in demand resulting in surplus inventory on hand. This resulted in a slowdown of sales of our InPsubstrates. We expect similar cycles of strong demand and then lower demand will occur for various InP, GaAs or Gesubstrates in the future.Our 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 and in 2016, negatively impacted ourfinancial results. In 2016 the seven companies accounted for under the equity method of accounting contributed a loss of$2.0 million to our financial statements. Low selling prices for raw materials continue and will have a detrimental impact onour 2017 financial performance. There can be no assurance that the oversupply will be corrected by the market. Further, inthe fourth quarter of 2015, one of our consolidated subsidiaries incurred a lower of cost or market inventory write down,which negatively impacted our consolidated gross margin. If the pricing environment remains stressed by oversupply and ourjoint venture companies cannot reduce their production cost, then the reduced average selling prices of the raw materialsproduced by our joint venture companies will have a continuing adverse impact on our revenue, gross margins and net profit.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 10 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 smaller19 Table of Contentsownership interest. Several of these companies occupy space within larger facilities owned and/or operated by one of theother venture partners. Several of these venture partners are engaged in other manufacturing activities at or near the samefacility. In some facilities, we share access to certain functions, including water, hazardous waste treatment or air qualitytreatment. If any of our joint venture partners in any of these ventures experiences problems with its operations, disruptionsof our joint venture operations could result, having a material adverse effect on the financial condition and results ofoperation of our joint venture companies, and correspondingly on our financial condition or results of operations. Forexample, since gallium is a by-product of aluminum, our raw gallium joint venture in China, which is housed in and receivesservices from an affiliated aluminum plant, could generate lower production of gallium as a result of reduced servicesprovided by the aluminum plant. Accordingly, in order to meet customer supply obligations, our supply chain may have tosource 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, 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.20 Table of ContentsIntense 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, JX, Umicore, Sumitomo and CCTC and from companies, such as Qorvo andSkyworks, that are actively considering alternative materials to GaAs and marketing semiconductor devices using thesealternative materials. We believe that at least two of our major competitors are shipping high volumes of GaAs substratesmanufactured using a technique similar to our VGF technology. Other competitors may develop and begin using similartechnology. Sumitomo and JX also compete with us in the InP market. If we are unable to compete effectively, our revenuemay not increase and we may not achieve profitability. We face many competitors that have a number of significantadvantages 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.The average selling prices of our substrates may decline over relatively short periods, which may reduce our revenue andgross margins.Since the market for our products is characterized by declining average selling prices resulting from various factors,such as increased competition, overcapacity, the introduction of new products and decreased sales of products incorporatingour products, the average selling prices for our products may decline over relatively short time periods. We have in the pastexperienced, and in the future may experience, substantial period-to-period fluctuations in operating results due to decliningaverage selling prices. For example, for the year ended December 31, 2016, we experienced an average selling price declineof our substrate selling prices of approximately 5% to 10%, depending on the substrate product. It is possible that the pace ofthe decline of average selling prices 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 revenue and gross profit decline, unless we are able to sell more products or reduce thecost to manufacture our products. We generally attempt to combat an average selling price decline by improving yields andmanufacturing efficiencies and working to reduce the costs of our raw materials and of manufacturing our products. We havein the past, and may in the future, experience declining selling prices, which could negatively impact our revenues, grossprofits and financial results. We, therefore, need to sell our current products in increasing volumes to offset any decline intheir average selling prices, and introduce new products, which we may not be able to do, or do on a timely basis.21 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 work to reduce the cost of manufacturing our products. There is noassurance that any changes effected by us will result in sufficient cost reductions to allow us to reduce the price of ourproducts to remain competitive or improve our gross margins.Defects in our products could diminish demand for our products.Our products are complex and may contain defects, including defects resulting from impurities inherent in our 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. If we experience qualitycontrol problems, or experience these or other problems in new products, customers may cancel or reduce orders or purchaseproducts from our competitors and we may be unable to maintain or increase sales to our customers and sales of our productscould decline. Defects in our products could cause us to incur higher manufacturing costs and suffer product returns andadditional service expenses, all of which could adversely impact our operating results. If new products developed by uscontain defects when released, our customers may be dissatisfied and we may suffer negative publicity or customer claimsagainst us, lose sales or experience delays in market acceptance of our new products.Our substrate products have a long qualification cycle that makes it difficult to forecast our revenue.New customers typically place orders with us for our substrate products three months to a year or more after ourinitial contact with them. In addition, existing customers may be slow to purchase our products. The sale of our products issubject to our customers’ lengthy internal evaluation and approval processes. During this time, we may incur substantialexpenses and expend sales, marketing and management efforts while the customers evaluate our products. Theseexpenditures may not result in sales of our products. If we do not achieve anticipated sales in a period as expected, we mayexperience an unplanned shortfall in our revenue. As a result, our operating results would be adversely affected. In addition,if we fail to meet the product qualification requirements of the customer, we may not have another opportunity to sell thatproduct to that customer for many months or even years. In the current competitive climate, the average qualification andsales cycle for our products has lengthened even further and is expected to continue to make it difficult for us to forecast ourfuture sales accurately. We anticipate that sales of any future substrate products will also have lengthy qualification periodsand will, therefore, be subject to risks substantially similar to those inherent in the lengthy sales cycles of our currentsubstrate products.The loss of one or more of our key substrate customers would significantly hurt our operating results.Although no customer represented more than 10% of our revenue for year ended December 31, 2016, we did haveone customer over 10% of revenue for the year ended December 31, 2015 and if we were to lose a major customer it wouldnegatively impact our revenue. Most of our customers are not obligated to purchase a specified quantity of our products or toprovide us with binding forecasts of product purchases. In addition, our customers may reduce, delay or cancel orders at anytime without any significant penalty. In the past, we have experienced a slowdown in bookings, significant push-outs andcancellation of orders from customers. If we lose a major customer or if a customer cancels, reduces or delays orders, orreduces the prices paid for our products, our revenue would decline. In addition, customers that have accounted forsignificant revenue in the past may not continue to generate revenue for us in any future period. Any loss of customers or anydelay in scheduled shipments of our products could cause revenue to fall below our expectations and the expectations ofmarket analysts or investors, causing our stock price to decline.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 cycles22 Table of Contentsof both semiconductor companies’ and their customers’ products or a decline in general economic conditions. This mayadversely affect 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.Our 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. 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, low defect densitysubstrates and product features that incorporate leading technology and respond to technological advances. In addition, ournew products must meet customer needs and compete effectively on quality, price and performance. The markets for ourproducts are characterized by rapid technological change, changing customer needs and evolving industry standards. If ourcompetitors introduce products employing new technologies or performance characteristics, our existing products couldbecome obsolete and unmarketable. During the past few years, we have seen our competitors selling more substratesmanufactured using a crystal growth technology similar to ours, which has eroded our technological differentiation.The development of new products can be a highly complex process, and we may experience delays in 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.23 Table of ContentsWe 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 ten raw material suppliers in China, whichprovide us with opportunities to gain supplies of key raw materials that are important to our substrate business. Theseaffiliates each have a market beyond that provided by us. We do not have influence over all of these companies and in somewe have made only a strategic, minority investment. We may not be successful in achieving the financial, technological orcommercial advantage upon which any given investment is premised, and we could end up losing all or part of ourinvestment. As a result of sharp declines in the average selling price of materials in 2016 the seven companies accounted forunder the equity method of accounting contributed a loss of $2.0 million to our financial statements.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, and polishing solutions. Although several ofthese raw materials are purchased from suppliers in which we hold an ownership interest, we generally purchase thesematerials through standard purchase orders and not pursuant to long-term supply contracts, and no supplier guaranteessupply 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 and we could experience such delays again in the future due to shortages of materials or for otherreasons and may be unable to obtain an adequate supply of materials. Delays in receiving equipment or materials 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.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 invest in additional jointventures in order to remain competitive in our marketplace and ensure a supply of critical raw materials. However, we maynot be able to identify additional complementary joint venture opportunities or, even once opportunities are identified, wemay not be able to reach agreement on the terms of the venture with the other venture partners. Additional joint venturescould cause us to incur contingent liabilities or other expenses, any of which could adversely affect our financial conditionand operating results.If any of our facilities are damaged by occurrences such as fire, explosion, power outage or natural disaster, we might notbe able to manufacture 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.24 Table of ContentsIf 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 restrictions on importing certain materials and on freight routes used to transport these materials. We experiencedsome modest disruption from these restrictions. If the government were to place additional restrictions on the transportationof materials, then our ability to transport our raw materials or products could be limited and result in bottlenecks at shippingports, affecting our ability to deliver products to our customers. During periods of such restrictions, we may increase ourstock of critical materials (such as arsenic, gallium, and other chemicals) for use during the period that these restrictions arelikely to last, which will increase our use of cash and increase our inventory level. Any of these restrictions could materiallyand 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 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 specialty material companies andsemiconductor companies. Our employees could leave our company with little or no prior notice and would be free to workfor a competitor. If one or more of our senior executives or other key personnel were unable or unwilling to continue in theirpresent positions, we may not be able to replace them easily or at all, and other senior management may be required to divertattention from other aspects of the business. The loss of any of these individuals or our ability to attract or retain qualifiedpersonnel could adversely affect our business.Our results of operations may suffer if we do not effectively manage our inventory.We must manage our inventory of raw materials, work-in-process and finished goods effectively to meet 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 and gross margin. Furthermore, if market prices drop below the prices at which we value inventory, we may need totake a charge for a reduction in inventory values in accordance with the lower of cost or market valuation rule. We have inthe past had to take inventory valuation and impairment charges. Any future unexpected changes in demand or increases incosts of production that cause us to take additional charges for un-saleable, obsolete or excess inventory, or to reduceinventory values, could adversely affect our results of operations.25 Table of ContentsFinancial 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 and political conditions and low or negative growth in China, Europe and the United States,along with volatility in the financial markets, increasing national debt and fiscal concerns in various regions, posechallenges to our industry. Currently China’s economy is slowing and this could impact our financial performance. Althoughwe remain well-capitalized, the cost and availability of funds may be adversely affected by illiquid credit markets.Turbulence in U.S. and international markets and economies may adversely affect our liquidity, financial condition andprofitability. Another severe or 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; and·impairment of our intangible or other assets.In the past we experienced delays in customer purchasing decisions and disruptions in normal volume of customerorders that we believe were in part due to the uncertainties in the global economy and an adverse impact on consumerspending. During challenging and uncertain economic times and in tight credit markets, many customers delay or reducetechnology purchases. Should similar events occur again, our business and operating results could be significantly andadversely affected.Global economic and political conditions may have an impact on our business and financial condition in ways that wecurrently cannot predict.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.26 Table of ContentsThe 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.II.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. Typically over 80%of our revenue is from international sales. We expect that sales to customers outside the United States, particularly sales tocustomers in Japan, Taiwan and China, will continue to represent a significant portion of our revenue.Currently, a significant percentage of our revenue is to customers headquartered in Asia. All of our 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 and perceptions of U.S. companies,shipping delays and terrorist acts or acts of war, among other risks. Many of these challenges are present in China, whichrepresents a large potential market for semiconductor devices. Global uncertainties with respect to: (i) economic growth ratesin various countries; (ii) sustainability of demand for electronics products; (iii) capital spending by semiconductormanufacturers; (iv) price weakness for certain semiconductor devices; (v) changing and tightening environmental regulationsand (vi) political instability in regions where we have operations may also affect our business, financial condition and resultsof 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.27 Table of ContentsDenominating 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 for those consolidated entitieswhose functional currencies are other than the reporting currency, which are recorded as component of “accumulated othercomprehensive income (loss)” on the consolidated balance sheets. Although we have instituted a foreign currency hedgingprogram, we still experience losses on foreign exchange from time to time.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.Uncertainty regarding the United States’ foreign policy under the new administration could disrupt our business. We manufacture our substrates in China and, in 2016, approximately 90% of our sales are to customers locatedoutside of the United States. Further, we have partial ownership of 10 companies in China as part of our supply chain. TheUnited States’ foreign policy under the new administration could create uncertainty and caution in the international businesscommunity, resulting in possible disruptions in manufacturing, import/export, trade tariffs, sales, investments or otherbusiness activity. Such disruptions could have an adverse impact on our financial performance. 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 of our customers reduced their orders from us until our wafer surface quality was asgood and as consistent as that offered by our competitors and instead allocated their requirements for compoundsemiconductor substrates to our competitors. If we are unable to continue to achieve customer qualifications for our products,or if we are unable to control product quality, customers may not increase purchases of our products, our China facility willbecome 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 Chinese28 Table of Contentsgovernment could revoke, terminate or suspend our operating license for reasons related to environmental control over theuse of hazardous materials, labor complaints, national security and similar reasons without compensation to us. If the Chinesegovernment were to take any of these actions, we would be prevented from conducting all or part of our business. Any failureon our part to comply with governmental regulations could result in the loss of our ability to manufacture our products.The Beijing city government has announced that it will expand its offices into the area where our manufacturingfacility is located and we believe the Beijing city government intends to relocate thousands of government employees. TheBeijing city government desires to upgrade this area and has applied pressure on manufacturing companies that use restrictedmaterials to relocate, including us. It is our understanding that a master development plan of the area where ourmanufacturing facility is located has not yet been formally approved by the China central government and the timeline forrelocating our gallium arsenide wafer production operations at our current site has not yet been determined by the Chinacentral government. We are working with the government and are forming a plan to identify a new manufacturing site,acquire land use rights, construct a facility and move our gallium arsenide production line. We intend to complete thisrelocation by the end of 2018 or the first half of 2019.The anticipated relocation of all or part of our operations will require us to develop and execute an orderlyrelocation plan. A failure to properly execute a relocation plan could result in disruption to our production and have amaterial adverse impact on our revenue and our results of operations and financial condition.Our international operations are exposed to potential adverse tax consequence in China. Our international operations create a risk of potential adverse tax consequences. Taxes on income in our China-based companies are dependent upon acceptance of our operational practices and intercompany transfer pricing by local taxauthorities as being on an arm's length basis. Due to inconsistencies among taxing authorities in application of the arm'slength standard, transfer pricing challenges by tax authorities could, if successful, materially increase our consolidatedincome tax expense. We are subject to tax audits in China and an audit could result in the assessment of additional incometax against us. This could have a material adverse effect on our operating results or cash flows in the period or periods forwhich that determination is made and could result in increases to our overall tax expense in subsequent periods. Varioustaxing agencies in China are increasingly focused on tax reform and other legislative action to increase tax revenue. Inaddition to risks regarding income tax we have in the past been retroactively assessed value added taxes (“VAT” or sales tax)and such VAT assessments could occur again in the future.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 our customers couldsuffer, impacting our ability to generate future revenue. In addition, if power is shut off at any of our facilities at any time,either voluntarily or as a result of unplanned brownouts, during certain phases of our manufacturing process including ourcrystal growth phase, the work in process may be ruined and rendered unusable, causing us to incur costs that will not becovered 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 an29 Table of Contentsextended 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 StructureWe may utilize our cash balances for relocation, expansion, or to offset a business downturn resulting in the decline of ourexisting cash, cash equivalents and investment balances, and if we need additional capital, those funds may not beavailable on acceptable terms, or at all.Our liquidity is affected by many factors including, among others, our plans to secure land use rights and construct anew facility for the relocation of our gallium arsenide manufacturing operations, the extent to which we pursue on-goingcapital expenditures, the level of our production, the level of profits or losses, and other factors related to the uncertainties ofthe industry and global economies. Our relocation expenditures and any negative cash flow effects of these other factors willdraw down our cash reserves, which could adversely affect our financial condition, reduce our value and possibly impingeour ability to raise debt and equity funding in the future, at a time when we might need to raise additional cash or elect toraise additional cash. Accordingly, there can be no assurance that events will not require us to seek additional capital or, ifrequired, that such capital would be available on terms acceptable to us, if at all.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;·disruptions during the relocation of our gallium arsenide product line;·fluctuation of our manufacturing yields;·decreases in the prices of our or our competitors’ products;·fluctuations in demand for our products;·the volume and timing of orders from our customers, and cancellations, push-outs and delays of customer ordersonce booked;·decline in general economic conditions or downturns in the industry in which we compete;·expansion of our manufacturing capacity;·expansion of our operations in China;·limited availability and increased cost of raw materials;·costs incurred in connection with any future acquisitions of businesses or technologies; and30 Table of Contents·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 800,000 shares of preferred stock in addition to theoutstanding shares of Series A preferred stock and to determine the price, rights, preferences and privileges of those shareswithout any further vote or action by the stockholders. The rights of the holders of common stock will be subject to, and maybe adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance ofshares of preferred stock could have the effect of making it more difficult for a third party to acquire a majority of ouroutstanding voting stock. We have no present intention to issue additional shares of preferred stock.Provisions in our restated certificate of incorporation and amended and restated bylaws may have the effect ofdelaying or preventing a merger, acquisition or change of control, or changes in our management, which could adverselyaffect 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.Furthermore, 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.31 2 Table of ContentsOur 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 in the over-the-counter market and be quoted on a service such as those provided by OTC Markets Group, Inc. Such alternatives aregenerally considered to be less efficient markets, and our stock price, as well as the liquidity of our common stock, may beadversely impacted as a result. Delisting from The Nasdaq Global Select Market could also have other negative results,including the potential loss of confidence by customers, suppliers and employees, the loss of institutional investor interestand fewer business development opportunities, as well as the loss of liquidity for our stockholders.Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited. As of December 31, 2016, we had U.S. federal net operating loss carryforwards of approximately $178.4 million andstate net operating loss carryforwards of approximately $1.0 million, which begin expiring in varying amounts from 2022through 2017 if unused. Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, if a corporationundergoes an “ownership change,” the corporation’s ability to use its pre-change net operating loss carryforwards and otherpre-change tax attributes, such as research tax credits, to offset its post-change income and taxes may be limited. In general,an “ownership change” occurs if there is a cumulative change in our ownership by “5% shareholders” that exceeds 50percentage points over a rolling three-year period. Similar rules may apply under state tax laws. We may have undergoneprior ownership changes, and we may undergo ownership changes in the future, which may result in limitations on our netoperating loss carryforwards and other tax attributes. Any such limitations on our ability to use our net operating losscarryforwards and other tax attributes could adversely impact our business, financial condition and results of operations. 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 in 2011 to settle its claim of patent infringement, which resulted in AXT paying themroyalties.If we are unable to protect our intellectual property, including our non-patented proprietary process technology, we maylose valuable assets 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. We believe that ourinternal, non-patented proprietary process technology methods, systems and processes are a valuable and critical element ofour intellectual property. We must establish and maintain safeguards to avoid the theft of these processes. Our ability toestablish and maintain a position of technology leadership also depends on the skills of our development personnel. Despiteour efforts to protect our intellectual property, third parties can develop products or processes similar to ours. Our means ofprotecting our proprietary rights may not be adequate, and our competitors may independently develop similar technology,duplicate our products or design around our patents. We believe that at least two of our competitors32 Table of Contentsship GaAs substrates produced using a process similar to our VGF process. Our competitors may also develop and patentimprovements to the VGF technology upon which we rely, and thus may limit any exclusivity we enjoy by virtue of ourpatents or trade secrets.It 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, Other Legal and Administrative MattersIf 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, 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.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 instructed to obtain a permit to continue tomanufacture our gallium arsenide substrate wafers. The Beijing municipal authority accepted our permit application in May2015, but has not yet issued to us the requisite permit while we continue to make preparations in good faith to eventuallyrelocate our gallium arsenide production. If our application is denied in the future, then our gallium arsenide productioncould be disrupted, which could materially and adversely impact our results of operations and our financial condition. For example, 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 put in place engineering, administrative and personnel protective equipment programs toaddress these issues, our ability to expand or continue to operate our present locations could be restricted or we could berequired to acquire costly remediation equipment or incur other significant expenses if we were found liable for failure tocomply with environmental and safety regulations. Existing or future changes in laws or regulations in the United States andChina may require us to incur significant expenditures or liabilities, or may restrict our operations. In addition, ouremployees could be exposed to chemicals or other hazardous materials at our facilities and we may be subject to lawsuitsseeking damages for wrongful death or personal injuries allegedly caused by exposure to chemicals or hazardous materials atour facilities. 33 Table of ContentsLitigation 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. 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.We 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. Item 1B. Unresolved Staff CommentsNone. Item 2. PropertiesOur principal properties as of February 27, 2017 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 1,500 Administration Operating lease by Beijing JiYa SemiconductorMaterial, Co., Ltd., expires March 2017Nanjing, 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.* 34 Table of Contents*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. PART 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 2016 First Quarter$2.97$2.28Second Quarter $3.92 $2.49 Third Quarter $5.21 $3.12 Fourth Quarter $5.97 $4.35 2015 First Quarter $3.05 $2.36 Second Quarter $2.70 $2.22 Third Quarter $2.59 $1.91 Fourth Quarter $2.70 $1.90 As of February 27, 2017, there were 66 holders of record of our common stock. Because many shares of AXT’scommon stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the totalnumber of beneficial 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, and must be paid before any dividend is paid on our common stock. The 883,000shares of Series A preferred stock issued and outstanding as of December 31, 2016 are valued at $3,532,000 and are non-voting and non-convertible preferred stock with a 5.0% cumulative annual dividend rate payable when declared by ourboard of directors, and a $4.00 per share liquidation preference over common stock that must be paid before any distributionis made to the holders of our common stock. These shares of preferred stock were issued to shareholders of LyteOptronics, Inc. in connection with the completion of our acquisition of Lyte Optronics, Inc. on May 28, 1999.35 Table of ContentsIssuer 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. No shares were repurchased during 2016 under this program. As ofDecember 31, 2016, approximately $2.7 million remained available for future repurchases under this program. 36 Table of ContentsComparison 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, 2011 and endingDecember 31, 2016. 12/11 12/12 12/13 12/14 12/15 12/16 AXT, Inc. 100 67.39 62.59 67.15 59.47 115.11 NASDAQ Composite 100 116.41 165.5 189 200.32 216.54 NASDAQ Electronic Components 100 99.13 142.52 186.42 183.01 236.19 37 Table of Contents 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, 2016 2015 2014 2013 2012 (in thousands, except per share data) Statements of Operations Data: Revenue$81,349$77,502$83,499$85,335$88,374Cost of revenue 54,968 60,673 66,332 73,507 63,522 Gross profit 26,381 16,829 17,167 11,828 24,852 Operating expenses: Selling, general and administrative 13,880 16,064 14,970 16,066 15,419 Research and development 5,850 5,664 4,144 3,424 3,468 Restructuring charge 226 — 907 — — Total operating expenses 19,956 21,728 20,021 19,490 18,887 Income (loss) from operations 6,425 (4,899) (2,854) (7,662) 5,965 Interest income, net 409 412 483 408 518 Equity in earnings (loss) of unconsolidated joint ventures (1,995) 462 1,528 1,377 1,281 Other income (expense), net 860 2,023 361 (748) (761) Income (loss) before provision for income taxes 5,699 (2,002) (482) (6,625) 7,003 Provision for income taxes 733 531 215 188 853 Net income (loss) 4,966 (2,533) (697) (6,813) 6,150 Less: Net (income) loss attributable to noncontrollinginterests 670 305 (691) (1,145) (3,040) Net income (loss) attributable to AXT, Inc. $5,636 $(2,228) $(1,388) $(7,958) $3,110 Net income (loss) attributable to AXT, Inc. per commonshare: Basic $0.17 $(0.07) $(0.05) $(0.25) $0.09 Diluted $0.17 $(0.07) $(0.05) $(0.25) $0.09 Shares used in per share calculations: Basic 32,139 32,183 32,452 32,700 32,144 Diluted 32,894 32,183 32,452 32,700 32,865 December 31, 2016 2015 2014 2013 2012 (in thousands) Balance Sheet Data: Cash and cash equivalents $36,152 $24,875 $28,814 $24,961 $30,634 Investments 17,571 19,128 20,123 22,644 19,461 Working capital 94,236 84,047 88,422 84,114 93,376 Total assets 154,246 151,896 161,517 163,822 167,589 Current liabilities 13,050 12,841 14,771 15,426 13,096 Long-term debt, net of current portion — — — — — Stockholders’ equity 140,291 137,561 144,688 145,546 150,914 38 Table of Contents Item 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsIn addition to historical information, the following discussion contains forward‑looking statements that are 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.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 inChina. We reduced the workforce at Tongmei by approximately 93 positions that were no longer required to supportproduction and operations, or approximately 11 percent of our workforce. We recorded a restructuring charge ofapproximately $907,000 related to the reduction in force for severance-related expenses. In the second quarter of 2016, we restructured the operations of Beijing JiYa Semiconductor Material Co., Ltd., oneof our partially owned consolidated subsidiaries, which resulted in a reduction in force of 28 positions that were no longerrequired to support production and operations. Accordingly, we recorded a restructuring charge of approximately $226,000related to the reduction in force for severance-related expenses. As of June 30, 2016, we had completed this restructuring planand the reduction in force.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 customer acceptance requirementsthat would preclude revenue recognition. Our products are typically sold pursuant to a purchase order placed by ourcustomers, and our terms and conditions of sale do not require customer acceptance. We recognize revenue upon shipmentand 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 have received a valid purchase order,the price is fixed or determinable, title and risk of ownership have transferred, collection of resulting receivables is probable,and product returns are reasonably estimable. We do not provide training, installation or commissioning services.39 Table of ContentsWe 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, 2016 and 2015, our accounts receivable, net balance was $14.5 million and $18.5 million,respectively, which was net of an allowance for doubtful accounts of $653,000 and $561,000, respectively. During 2016, weincreased this allowance for doubtful accounts by $92,000 due to the poor financial condition of a few customers. During2015, we increased this allowance for doubtful accounts by $151,000 primarily because of the poor financial condition of afew customers partially offset by recoveries. 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 2016, we utilized $360,000and charged an additional $296,000 resulting in the ending balance of allowance for sales returns of $360,000 as ofDecember 31, 2016. During 2015, we utilized $423,000 and charged an additional $434,000 resulting in the ending balanceof allowance for sales returns of $424,000 as of December 31, 2015.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 31,2016 and 2015, accrued product warranties totaled $251,000 and $497,000, respectively. The decrease in accrued productwarranties is primarily attributable to decreased claims for quality issues experienced by customers. If actual warranty costs orpending new claims differ substantially from our estimates, revisions to the estimated warranty liability would be required,which could have a material impact on our financial condition and results of operations for future periods.Inventory ValuationInventories are stated at the lower of cost (approximated by standard cost) or market. Cost is determined using theweighted average cost method. Our inventory consists of raw materials as well as finished goods and work-in-process thatinclude material, labor and manufacturing overhead costs. We routinely evaluate the levels of our inventory in light ofcurrent market conditions in order to identify excess and obsolete inventory, and we provide a valuation allowance forcertain inventories based upon the age and quality of the product and the projections for sale of the completed products. Asof December 31, 2016 and 2015, we had an inventory reserve of $12.0 million and $12.0 million, respectively, for excess andobsolete inventory and $254,000 and $625,000, respectively, for lower of cost or market reserves. If actual demand for ourproducts were to be substantially lower than estimated, additional inventory adjustments for excess or obsolete inventorymight be required, which could have a material impact on our business, financial condition and results of operations.40 Table of ContentsImpairment 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 the subsidiary’s management, thelength of time and extent to which the fair value has been less than our cost basis, the financial condition and near-termprospects of the subsidiary, fundamental changes to the business prospects of the subsidiary, share prices of subsequentofferings, and our intent and ability to hold the investment for a period of time sufficient to allow for any anticipatedrecovery in our carrying value. We had no write‑downs in 2016, 2015 and 2014.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 similarinstruments in markets with insufficient volume or infrequent transactions (less active markets), issuer bank statements, 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 similar 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 the mostmanagement judgment and subjectivity.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 with41 Table of Contentsgenerally 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, 2016 and2015, the net change in fair value from the placement of the hedge to settlement at each month end during the quarter had ade 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, 2016 and 2015.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 one, three 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.Results 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 operating42 Table of Contentssegment and two product lines: specialty material substrates and raw materials used to make such substrates or other relatedproducts. We recorded our first substrate sales in 1990 and our substrate products currently include indium phosphide (InP),gallium arsenide (GaAs) and germanium (Ge) substrates used to produce semiconductor devices for use in applications suchas fiber optic and wireless telecommunications, light emitting diodes (LEDs), lasers and for solar cells for space and terrestrialphotovoltaic applications. We also sell raw materials, including gallium and germanium, through our participation inmajority‑ and minority‑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 with comparable facilities in the United States, Europe or Japan. Our supplychain includes partial ownership of 10 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 annual revenue declined for four consecutive years during the period from 2012 to 2015. Our annual revenueincreased in 2016 by 5 percent. The period of decline was primarily a result of silicon chips replacing GaAs chips in themobile phone switching function. Before 2012, silicon chips did not perform adequately in this function due to powerconsumption, heat and speed issues. The development of the silicon-on-insulator technique overcame these deficiencies andprovided a lower cost solution for mobile phone switches and our annual revenue declined from $104 million in 2011 to $88million in 2012. The decline in GaAs revenue was partially mitigated by revenue growth in our InP wafers. We believe ourproduct and customer diversity also mitigated the decline in revenue. In 2016 GaAs revenue increased, as did revenue of allof our substrate material revenue. However, this increase was partially offset by a decrease in revenue from our raw materialsproduct line.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 substrate manufacturing, which has the highest costs as compared toresearch and development or selling and administrative expenses. In 2015, we invested in wafer manufacturing equipmentto increase automation and decrease the number of manually operated processing steps in our production flow. We believethis can improve our manufacturing yields, product quality and product consistency. In addition to revenue growth in 2016,we also increased our gross margins as a result of increased yields and manufacturing efficiencies. We intend to continue tofocus on InP substrates as we believe InP can continue to be an engine for growth if, for example, the data center expansionand upgrade cycle begins. We are also investing in six-inch low defect density (“low EPD”) GaAs substrates that are requiredfor 3D-Sensing using vertical cavity surface emitting lasers (“VCSELs”). In the second quarter of 2016, we implemented acost reduction program and reduced our workforce by 28 positions.Revenue 2015 to 2016 2014 to 2015 Years Ended Dec. 31 Increase Increase 2016 2015 2014 (Decrease) % Change (Decrease) % Change Product Type: Substrates $65,633 $58,220 $60,178 $7,413 12.7% $(1,958) (3.3)%Raw Materials andOthers 15,716 19,282 23,321 (3,566) (18.5)% (4,039) (17.3)%Total revenue $81,349 $77,502 $83,499 $3,847 5.0% $(5,997) (7.2)% Revenue increased $3.8 million, or 5.0% in 2016 from $77.5 million in 2015. The $7.4 million increase in substratesales was partially offset by the decrease of our raw material sales from our consolidated subsidiaries. The average sellingprice of each type of wafer was unchanged or it declined. The revenue increase is the result of higher unit volume and a shifttowards wafers with higher selling prices. Raw material sales decreased by $3.6 million or 18.5%, partially offsetting theincrease in our substrate product line. The decline of raw material sales is the result of decreasing average selling prices ofboth raw gallium and purified gallium by 29% while quantity sold remains consistence, which were partially offset by theincrease of average selling price of pBN.43 Table of ContentsRevenue decreased $6.0 million, or 7.2%, to $77.5 million in 2015 from $83.5 million in 2014. In particular, oursales of GaAs substrate materials that are used to produce LEDs declined by $6.3 million. The LED market encounteredsevere pricing pressure and we withdrew from the lower performance segment of the LED market. We also experienced aslowdown in the satellite solar cell market, which resulted in an additional decline in the sale of Ge substrate materials of$2.5 million. In addition, in 2015 raw material sales decreased approximately $4.0 million due to a reduction of the averageselling price of gallium. These declines were partially offset by our sales of InP substrate materials used in the production ofpassive optical networks (PONs) for fiber-to-the-home and office networks in the amount of $7.3 million.Revenue by Geographic Region Year Ended Dec. 31, 2015 to 2016 2014 to 2015 Increase Increase 2016 2015 2014 (Decrease) % Change (Decrease) % Change ($ in thousands) Europe (primarily Germany) $18,637 $19,518 $21,535 $(881) (4.5)%$(2,017) (9.4)% % of total revenue 23% 25% 26% China 17,448 13,728 17,451 3,720 27.1% (3,723) (21.3)% % of total revenue 21% 18% 21% Japan 11,015 9,138 11,550 1,877 20.5% (2,412) (20.9)% % of total revenue 14% 11% 14% Asia Pacific (excluding China, Taiwanand Japan) 10,796 11,482 11,207 (686) (6.0)% 275 2.5% % of total revenue 13% 15% 13% Taiwan 15,369 13,799 11,464 1,570 11.4% 2,335 20.4% % of total revenue 19% 18% 14% North America (primarily the UnitedStates) 8,084 9,837 10,292 (1,753) (17.8)% (455) (4.4)% % of total revenue 10% 13% 12% Total revenue $81,349 $77,502 $83,499 $3,847 5.0%$(5,997) (7.2)% Sales to customers located outside of North America represented approximately 90%, 87% and 88% of our revenueduring 2016, 2015 and 2014, respectively.Revenue from customers in China increased by 27.1% in 2016, primarily due to increased sales of Ge substratesused in the satellite solar cell market as compared to 2015. In addition, InP substrate sales used in fiber-to-the-home andoffice networks grew in China, although the growth did slow in the second half of 2016. Increased revenues in China fromthese markets were offset by decreased sales of GaAs substrates used for LED applications. Further, our revenue from the saleof raw materials in China also declined. Revenue from customers in Japan increased in 2016 by 20.5% due to increasedsubstrate sales which was partially offset by the decrease of raw materials sales. Revenue from customers in Europe decreasedby 4.5% primarily due to decreased demand from the sales of raw materials. Revenue from customers in Taiwan increased by11.4% primarily due to increased demand from two customers that perform a foundry service for epitaxial growth, a processstep required on all of our wafers before they can be sold to chip and optical companies. Revenue from customers in AsiaPacific declined modestly by 6.0% due to a lower volume of substrate sales. Revenue from customers in North Americadecreased by 17.8% due to decreased sales from both substrates and raw materials.In 2015, revenue from customers in China decreased by 21.3% primarily due to decreased sales of GaAs substratesfor LED applications and lower sales of raw materials. Revenue from customers in Japan decreased by 20.9% primarily due todecreased sales to a customer that performs a foundry service for epitaxial growth that terminated its epi processing business.In addition, the Japanese yen further weakened against the dollar in 2015. Revenue from customers in Europe decreased by9.4% primarily due to decreased sales of substrates used in solar cells and optical sensors applications. Revenue fromcustomers in Taiwan increased by 20.4%, primarily due to increased demand from two customers that perform a foundryservice for epitaxial growth. In aggregate, our 2015 decrease in revenue was partially44 Table of Contentsoffset by the increased demand for our InP substrates in all regions as a result of expanding applications in the marketplace,such as fiber optic lasers and data connectivity. Gross Margin 2015 to 2016 2014 to 2015 Year Ended Dec. 31, Increase 2016 2015 2014 (Decrease) % Change (Decrease) % Change ($ in thousands) Gross profit$26,381 $16,829 $17,167 $9,552 56.8%$(338) (2.0)%Gross Margin % 32.4% 21.7% 20.6% Gross margin increased to 32.4% of total revenue in 2016 from 21.7% of total revenue in 2015. Gross marginincreased in 2016 as a result of an increase in gross margins from sales of both substrates and raw materials. Substrate grossmargin increased to 34.7% of substrate revenue in 2016 from 23.2% of revenue in 2015 and raw materials gross marginincreased to 23.0% of raw materials revenue in 2016 from 17.1% of raw materials revenue in 2015. Gross margin increasedprimarily due to improvements in yields, manufacturing efficiencies, higher production volumes and the sale of an increasednumber of InP substrates used in optical applications, such as passive optical networks. 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.Selling, General and Administrative Expenses 2015 to 2016 2014 to 2015 Years Ended Dec. 31 Increase Increase 2016 2015 2014 (Decrease) % Change (Decrease) % Change ($ in thousands) Selling, general and administrativeexpenses $13,880 $16,064 $14,970 $(2,184) (13.6)%$1,094 7.3%% of total revenue 17.1% 20.7% 17.9% Selling, general and administrative expenses decreased $2.2 million, or 13.6%, to $13.9 million for 2016 comparedto $16.1 million for 2015. The decrease in selling, general and administrative expenses in 2016 was primarily due to theabsence of professional service fees incurred in connection with an investigation of potential related-party transactions thatconcluded in 2015, lower personnel-related costs, lower outside professional consulting service costs, lower stock-basedcompensation and a decrease in allowance for doubtful accounts. The decrease was partially offset by an increase in salescommission paid in 2016 resulting from increased revenue.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 $0.7 millionrelated to an investigation of certain potential related-party transactions, which was completed in the second quarter of 2015,an increase in consulting services and higher stock-based compensation expenses. The increase was partially offset by lowerpersonnel related costs and lower facilities maintenance cost resulting from the implementation of cost-saving activities. 45 Table of ContentsResearch and Development Expenses 2015 to 2016 2014 to 2015 Years Ended Dec. 31 Increase Increase 2016 2015 2014 (Decrease) % Change (Decrease) % Change ($ in thousands) Research and development $5,850 $5,664 $4,144 $186 3.3%$1,520 36.7%% of total revenue 7.2% 7.3% 5.0% Research and development expenses increased $0.2 million, or 3.3%, to $5.9 million for 2016 from $5.7 million for2015. Research and development expenses increased in 2016 primarily due to higher personnel-related costs directedtowards low defect density GaAs wafers, and higher consulting expenses, which are partially offset by lower productdevelopment costs at one of our raw material subsidiaries in 2016 as compared to the same period in 2015.Research 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 costs a one of our rawmaterial subsidiaries, and testing costs and personnel related costs, partially offset by lower consulting expenses for producttesting.Restructuring ChargesIn the second quarter of 2016, we restructured the operations of Beijing JiYa Semiconductor Material Co., Ltd.,which resulted in a reduction in force of 28 positions that were no longer required to support production and operations.Accordingly, we recorded a restructuring charge of approximately $226,000 related to the reduction in force for severance-related expenses. As of June 30, 2016, we had completed this restructuring plan and the reduction in force.In the first quarter of 2014, we reduced the workforce at Tongmei by approximately 93 positions that were no longerrequired to support production and operations, or approximately 11 percent of the workforce. We recorded a restructuringcharge of approximately $907,000 related to the reduction in force for severance-related expenses. We had no restructuringcharges in 2015.Interest Income, Net 2015 to 2016 2014 to 2015 Years Ended Dec. 31 Increase Increase 2016 2015 2014 (Decrease) % Change (Decrease) % Change ($ in thousands) Interest income, net $409 $412 $483 $(3) (0.7)%$(71) (14.7)%% of total revenue 0.5% 0.5% 0.6% Interest income, net remained virtually unchanged for 2016 as compared to 2015. This small fluctuation in interestincome resulted from our mix of investment securities held.Interest income, net decreased $71,000 to $412,000 for 2015 from $483,000 for 2014. The decrease was primarilydue to lower returns from our mix of investment securities held due to lower market interest rates.46 Table of ContentsEquity in Earnings (loss) of Unconsolidated Joint Venture Companies 2015 to 2016 2014 to 2015 Years Ended Dec. 31 Increase Increase 2016 2015 2014 (Decrease) % Change (Decrease) % Change ($ in thousands) Equity in earnings (loss) of unconsolidatedjoint ventures $(1,995) $462 $1,528 $(2,457) (531.8)%$(1,066) (69.8)%% of total revenue (2.5)% 0.6% 1.8% Equity in earnings (loss) of unconsolidated joint ventures is primarily net income (loss) from our seven minority-owned joint venture companies that are not consolidated. Equity in earnings (loss) of unconsolidated joint venturesdecreased $2.5 million to a loss of $2.0 million for 2016 from income of $0.5 million for 2015. The decrease in 2016 was aresult of a sharp decline in the average selling prices of raw materials, which began in 2015.Equity in earnings (loss) of unconsolidated joint ventures decreased $1.1 million to $462,000 for 2015 from $1.5million for 2014 primarily due to lower net income from declining average selling prices and selling volume in the rawmaterials businesses.Other Income (Expense), Net 2015 to 2016 2014 to 2015 Years Ended Dec. 31 Increase Increase 2016 2015 2014 (Decrease) % Change (Decrease) % Change ($ in thousands) Other income, net $860 $2,023 $361 $(1,163) (57.5)%$1,662 460.4%% of total revenue 1.1% 2.6% 0.4% Other income, net decreased $1.2 million to $0.8 million for 2016 from $2.0 million for 2015 primarily due to dueto a lower realized gain of $0.4 million recognized from sales of available-for-sale investments, lower foreign exchange gainof $0.5 million and a lower government subsidy received from our China subsidiary.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 $1.3 million gain.Provision for Income Taxes 2015 to 2016 2014 to 2015 Years Ended Dec. 31 Increase Increase 2016 2015 2014 (Decrease) % Change (Decrease) % Change ($ in thousands) Provision for income taxes $733 $531 $215 $202 38.0%$316 147.0%% of total revenue 0.9% 0.7% 0.3% Provision for income taxes for 2016 and 2015 were $0.7 million and $0.5 million, respectively, which were mostlyrelated to our China subsidiary and our China joint venture operations. No income taxes or benefits have been provided forU.S. operations due to the loss in the U.S. and the uncertainty of generating future profit in the U.S. which47 Table of Contentshas resulted in our deferred tax assets being fully reserved. Our estimated tax rate can vary greatly from year to year becauseof the change or benefit in the mix of taxable income between our U.S. and China based operations.Due to our uncertainty regarding our future profitability in the U.S., we recorded a full valuation allowance againstour net deferred tax assets of $68 million in 2016, $66 million in 2015 and $62 million in 2014.Noncontrolling Interests 2015 to 2016 2014 to 2015 Years Ended Dec. 31 Increase Increase 2016 2015 2014 (Decrease) % Change (Decrease) % Change ($ in thousands) Noncontrolling interests $(670) $(305) $691 $(365) 119.7%$(996) (144.1)%% of total revenue (0.8)% (0.4)% 0.8% Net loss attributable to noncontrolling interests of the three consolidated joint venture companies for the yearsended December 31, 2016 and 2015 were $670,000 and $305,000, respectively, and net income attributable tononcontrolling interests for the year ended December 31, 2014 was $691,000. The downward trend in noncontrollinginterest’s share of earnings starting from 2014 and eventual switch to a share of losses in 2015 and 2016 was due to lowerprofitability from our China joint venture operations as profits from sales of raw materials have decreased due to decliningaverage selling prices, which also led to a write down in inventory at one of the consolidated joint ventures. Liquidity and Capital Resources Year Ended December 31, 2016 2015 2014 ($ in thousands) Net cash provided by (used in): Operating activities $12,504 $1,878 $3,497 Investing activities (1,113) (2,483) 469 Financing activities 1,298 (2,234) (32) Effect of exchange rate changes (1,412) (1,100) (81) Net change in cash and cash equivalents 11,277 (3,939) 3,853 Cash and cash equivalents—beginning year 24,875 28,814 24,961 Cash and cash equivalents—end of year 36,152 24,875 28,814 Short and long-term investments—end of year 17,571 19,128 20,123 Total cash, cash equivalents and short-term and long-term investments $53,723 $44,003 $48,937 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”). We began classifying IntelliEpi stock as anavailable-for-sale security upon its initial public offering in 2013 and sold our remaining IntelliEpi stock in the secondquarter of 2015. In 2015, we re-categorized our GHI investment from the cost method to short-term investments when wedetermined that there was sufficient trading volume in the exchange for the stock to be determined readily marketable.Total cash and cash equivalents, short term and long term investments increased by $9.7 million in 2016. Asof December 31, 2016, our principal source of liquidity was $53.8 million, which consisted of cash and cash equivalents of$36.2 million, short-term investments of $11.4 million and long-term investments of $6.2 million. In 2016, cash and cashequivalents increased by $11.3 million and short-term and long-term investments decreased by $1.6 million. The48 Table of Contentsincrease in cash and cash equivalents of $11.3 million in 2016 was primarily due to net cash provided by operating activitiesof $12.5 million and net cash provided by financing activities of $1.3 million, and was partially offset by net cash used ininvesting activities of $1.1 million and the effect of exchange rate changes of $1.4 million. As of December 31, 2016, we andour consolidated joint ventures held approximately $22.6 million in cash and investments in foreign bank accounts. Thisconsists of $14.5 million held by our wholly owned subsidiary in China and $8.1 million held by our three partially-ownedconsolidated subsidiaries in China. Of this $22.6 million, approximately $16.6 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.Net cash provided by operating activities of $12.5 million for 2016 was primarily comprised of our net income of$5.0 million, an adjustment of non-cash items of depreciation of $4.9 million, loss on equity method investments of $2.0million, stock-based compensation of $1.1 million, provision for doubtful accounts of $0.3 million, amortization ofmarketable securities premium of $94,000, loss on disposal property and equipment of $5,000 offset by realized gain on salesof investments of $0.4 million and a net change of $0.4 million in assets and liabilities. The $0.4 million net change inoperating assets and liabilities primarily resulted from a $3.0 million increase in inventories, a $1.2 million increase inprepaid expenses and other current assets, an $0.9 million decrease in other long-term liabilities, offset by a $3.5 milliondecrease in accounts receivable, a $0.5 million decrease in other assets, a $0.5 million increase in accounts payable and a$0.2 million increase in accrued liabilitiesNet 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 used in investing activities of $1.1 million for 2016 was primarily from the purchases of marketableinvestment securities of $11.9 million and the purchase of property, plant and equipment of $2.7 million, which werepartially offset by proceeds from maturities and sales of available-for-sales securities of $13.5 million.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 provided by financing activities was $1.3 million for 2016, which mainly consisted of proceeds fromcommon stock exercised.49 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.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. No shares were repurchased during 2016 under this program. As ofDecember 31, 2016, approximately $2.7 million remained available for future repurchases under this program. Dividends accrue on our outstanding Series A preferred stock, and are payable as and when declared by our board ofdirectors. We have never paid or declared any dividends on the Series A preferred stock. By the terms of the Series Apreferred stock, so long as any shares of Series A preferred stock are outstanding, neither the Company nor any subsidiary ofthe Company shall redeem, repurchase or otherwise acquire any shares of common stock, unless all accrued dividends on theSeries A preferred stock have been paid. During 2013 and 2015, we repurchased shares of our outstanding common stock. As of December 31, 2015, the Series A preferred stock had cumulative dividends of $2,930,592. If we are required to pay thecumulative dividends on the Series A preferred stock, our cash and cash equivalents would be reduced. We account for thecumulative dividends on the Series A preferred stock when calculating our earnings per share, but do not classify thesecumulative dividends as a liability on our consolidated balance sheet. See Item 5, Market for Registrant’s Common Equity,Related Stockholder Matters and Issuer Purchases of Equity Securities in Part II.The China central government is working with the Beijing city government to design a master development plan ofthe area where our manufacturing facility is located, which will result in the relocation of many of the manufacturingcompanies in our district. We have been asked to relocate our gallium arsenide production line. We are working with thegovernment and are forming a plan to identify a new manufacturing site, acquire land use rights for such site, construct afacility and move our gallium arsenide production line. We intend to complete this relocation by the end of 2018 or the firsthalf of 2019. To date, we have not completed a land use rights purchase of our new manufacturing site. We do not yet haveconstruction bids or third party estimates for the relocation costs or construction costs of our future manufacturing facility,but we currently believe the land use rights purchase amount, relocation costs and facility construction costs will be in therange of $25 million to $35 million, but could be substantially more expensive. We believe that we have adequate cash and investments to meet our operating needs over the next twelve months. Ifour sales decrease, however, our ability to generate cash from operations will be adversely affected which could adverselyaffect our future liquidity, require us to use cash at a more rapid rate than expected, and require us to seek additional capital.Further, while we believe we have sufficient funds for the relocation project we may still considering adding liquidity. 50 Table of ContentsOn October 24, 2016, we filed with the SEC a registration statement on Form S-3, pursuant to which we may offer upto $60,000,000 of common stock, preferred stock, depositary shares, warrants, debt securities and/or units in one or moreofferings and in any combination. A prospectus supplement, which we will provide each time we offer securities, willdescribe the specific amounts, prices and terms of the securities we determine to offer. We intend to use the net proceeds fromthe sale of securities under the shelf registration statement for general corporate purposes, which may include theconstruction of a facility for our China manufacturing operations, other capital expenditures, working capital, other corporateexpenses and acquisitions of complementary products, technologies or businesses.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 December 31, 2015 and 2014. This line of credit wasterminated in January 2015 when we closed our investment account with this institution and moved all of our funds from thisbank 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.Contractual 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 relate to our lease agreement for the facility inFremont, California with approximately 19,467 square feet. Total rent expenses under these operating leases wereapproximately $331,000, $313,000and $260,000 for the years ended December 31, 2016, 2015 and 2014, 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 on the agreement. We shall pay up to $7.0 million royalty payment overeight years that began in 2011 based on future royalty bearing sales. This agreement contains a clause that allows us to claima credit, starting in 2013, in the event that the royalty bearing sales for the year is lower than a pre-determined amount setforth in this agreement. Royalty expense under this agreement was $447,000, which was net of claim for credit of $128,000for the year ended December 31, 2016. Royalty expense for year ended December 31, 2015 was $583,000, which was net ofclaim for credit of $217,000. Royalty expense for year ended December 31, 2014 was $577,000, which was net of claim forcredit of $233,000. The following table summarizes our contractual obligations as of December 31, 2016 (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 $355 $174 $65 $50 $66 Royalty agreement 1,150 575 575 — — Total $1,505 $749 $640 $50 $66 51 Table of ContentsSelected Quarterly Results of Operations The following table sets forth unaudited quarterly results for the eight quarters ended December 31, 2016. 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, have beenincluded in the amounts stated below to present fairly such quarterly information. The operating results for any quarter arenot 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) 2016 2016 2016 2016 2015 2015 2015 2015 Revenue $20,269 $21,872 $20,495 $18,713 $18,057 $18,371 $21,010 $20,064 Cost of revenue 12,746 14,294 14,468 13,460 14,967 13,766 16,625 15,315 Gross profit 7,523 7,578 6,027 5,253 3,090 4,605 4,385 4,749 Operating expenses: Selling, general andadministrative 3,774 3,313 3,419 3,374 3,379 3,659 3,775 5,251 Research and development 1,431 1,566 1,472 1,381 1,377 1,657 1,389 1,241 Restructuring charge — — 226 — — — — — Total operating expenses 5,205 4,879 5,117 4,755 4,756 5,316 5,164 6,492 Income (loss) from operations 2,318 2,699 910 498 (1,666) (711) (779) (1,743) Interest income, net 106 105 100 98 105 102 108 97 Equity in earnings (loss) ofunconsolidated joint ventures (558) (581) (400) (456) (315) 167 410 200 Other income, net 178 164 328 190 268 496 626 633 Income (loss) before provision forincome taxes 2,044 2,387 938 330 (1,608) 54 365 (813) Provision for income taxes 20 176 140 397 197 7 241 86 Net income (loss) 2,024 2,211 798 (67) (1,805) 47 124 (899) Less: Net (income) lossattributable to noncontrollinginterest 190 18 353 109 562 (5) (127) (125) Net income (loss) attributable toAXT, Inc $2,214 $2,229 $1,151 $42 $(1,243) $42 $(3) $(1,024) Net income (loss) attributable toAXT, Inc. per common share: Basic $0.07 $0.07 $0.03 $(0.00)*$(0.04) $(0.00)*$(0.00) $(0.03) Diluted $0.06 $0.07 $0.03 $(0.00)*$(0.04) $(0.00)*$(0.00) $(0.03) Weighted average number ofcommon shares outstanding: Basic 32,431 32,110 32,020 32,002 31,951 31,988 32,242 32,553 Diluted 33,734 33,138 32,451 32,002 31,951 31,988 32,242 32,553 * 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 and March 31, 2016. Recent Accounting PronouncementsRecent accounting pronouncements are detailed in Note 1 to our Consolidated Financial Statements included inthis Annual Report on Form 10-K.52 Table of Contents 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. For example, during 2014, we recorded netforeign exchange losses of $1.0 million, included as part of other income (expense), net in our consolidated statements ofoperations. Although during 2016 and 2015, we recorded a foreign exchange gain of $232,000 and $717,000, respectively,we cannot guarantee to have the same gain in the future. We incur foreign currency transaction exchange gains and lossesdue to operations in general. In the future we may experience foreign exchange losses on our non-functional currencydenominated receivables and payables to the extent that we have not mitigated our exposure. Foreign exchange losses couldhave a materially adverse effect on our operating results and cash flows. Our product sales to Japanese customers are typically invoiced in Japanese yen. As such we have foreign 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 and year end any foreign currency hedges not settled arenetted on the condensed consolidated balance sheet and consolidated balance sheet, respectively, and classified as Level 3assets and liabilities. As of December 31, 2016 the net change in fair value from the placement of the hedge to settlement ateach month end during the quarter had a de minimis impact to the consolidated 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, as well as in translation of the assets and liabilities at each balance sheet date. Our financialresults could be adversely affected by factors such as changes in foreign currency exchange rates or weak economicconditions in foreign markets, including the revaluation by China of the Renminbi, and any future adjustments that Chinamay make to its currency such as any move it might make to a managed float system with opportunistic interventions. Wemay also experience foreign exchange losses on our non-functional currency denominated receivables 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 fluctuationrisks. Our primary objective in holding these instruments is to reduce the volatility of earnings and cash flows associatedwith changes in foreign currency. The program is not designated for trading or speculative purposes. The company maychoose not to hedge certain foreign exchange exposures for a variety of reasons, including but not limited to accountingconsiderations and the prohibitive economic cost of hedging particular exposures. However, even with our hedging program,we still experience losses on foreign exchange from time to time. 53 Table of ContentsInterest 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 2016 Rate Income Income Income Cash and cash equivalents $36,152 0.53% $192 $173 $211 Investments in marketable debt 17,412 1.20% 209 188 230 $401 $361 $441 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. The credit risk in our accounts receivableis mitigated by our credit evaluation process and the geographical dispersion of sales transactions. One customer accountedfor 13% of our trade accounts receivable as of December 31, 2016 and one customer accounted for 22% of our trade accountsreceivable as of December 31, 2015. Equity RiskAs part of our supply chain strategy, we maintain minority investments in privately-held companies located inChina either invested directly by us and our wholly-own subsidiary or indirectly through our three consolidated jointventure companies. These minority investments are reviewed for other than temporary declines in value on a quarterly basis.These investments are classified as other assets in the consolidated balance sheets and accounted for under either the equityor cost method, depending on whether we have the ability to exercise significant influence over their operations or financialdecisions. We monitor our investments for impairment and record reductions in carrying value when events or changes incircumstances indicate that the carrying value may not be recoverable. Reasons for other than temporary declines in valueinclude whether the related company would have insufficient cash flow to operate for the next twelve months, significantchanges in the operating performance and changes in market conditions. As of December 31, 2016 and 2015, we did notmaintain any direct investments under the cost method. Our direct minority investments under the equitymethod totaled $6.6 million and $7.9 million, respectively, and our indirect minority investments through our consolidatedjoint ventures totaled $4.7 million and $5.8 million, respectively. In aggregate, as of December 31, 2016 and 2015 the totalof our direct and indirect investments in the seven companies under the equity method totaled $11.3 million and $13.7million, respectively.54 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 83, 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 controls55 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, 2016based 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, 2016.Our independent registered public accounting firm, BPM LLP, has audited the consolidated financial statementsincluded in this Annual Report on Form 10-K and has issued its report on the effectiveness of our internal control overfinancial reporting as of December 31, 2016.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, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financialreporting. Item 9B. Other InformationNone.56 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, 2016, 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, 2016, based on criteria established in Internal Control—Integrated Framework (2013 Framework) issuedby 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, 2016 and 2015 and therelated consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each ofthe three years in the period ended December 31, 2016 and our report dated February 27, 2017, expressed an unqualifiedopinion. /s/ BPM LLPSan Jose, CaliforniaFebruary 27, 201757 Table of Contents PART III Item 10. Directors, Executive Officers and Corporate GovernanceWe have a classified Board of Directors consisting of two Class I directors, one Class II director and one Class IIIdirector, who will serve until the annual meetings of stockholders to be held in 2017, 2018 and 2019, respectively, and untiltheir respective successors are duly elected and qualified. At each annual meeting of stockholders, directors are elected forterms of three years to succeed those directors whose terms expire at the annual meeting dates. The term of the Class I directors will expire on the date of the 2017 annual meeting. Accordingly, two nominees areto be elected to serve as the Class I directors of the Board of Directors at the annual meeting. Our Nominating and CorporateGovernance Committee of the Board of Directors has recommended to the Board of Directors, and the Board of Directors hasnominated, Dr. Morris S. Young and Dr. David C. Chang, the current Class I members of the Board of Directors, as thenominees for election by the stockholders to these positions. If elected, these nominees will serve as Class I directors untilour annual meeting of stockholders in 2020 and until their respective successors are elected and qualified. The following table sets forth, for our current directors, including the Class I nominees to be elected at Company’s2017 annual meeting of stockholders, and non-director Executive Officers, information with respect to their ages as ofFebruary 27, 2017 and their background: Name Principal Occupation Age DirectorSince Class I directors whose terms expire at the 2017 Annual Meeting of Stockholders: Morris S. Young Director, Chief Executive Officer 72 1989 David C. Chang Director 75 2000 Class II director whose term expires at the 2018 Annual Meeting of Stockholders: Jesse Chen Chairman of the Board 59 1998 Class III director whose term expires at the 2019 Annual Meeting of Stockholders: Leonard J. LeBlanc Director 76 2003 Non-director Executive Officers: Gary L. Fischer Chief Financial Officer and Corporate Secretary 66 Robert G. Ochrym Vice President, Business Development, Strategic Sales and Marketing 65 Members of the Board of Directors Morris S. Young, Ph.D. co-founded AXT in 1986 and has served as a director since 1989. Dr. Young served as ourchairman of the Board of Directors from February 1998 to May 2004 and as our president and chief executive officer from1989 to May 2004. From 2004 until his retirement in 2006, Dr. Young served as our chief technology officer. He wasreappointed as our chief executive officer on July 16, 2009. From 1985 to 1989, Dr. Young was a physicist at LawrenceLivermore National Laboratory. Dr. Young has a B.S. degree in metallurgical engineering from National Cheng KungUniversity, Taiwan, a M.S. degree in metallurgy from Syracuse University, and a Ph.D. in metallurgy from PolytechnicUniversity. 58 Table of ContentsThe Board has determined that Dr. Young’s long history with the Company, as well as his breadth of experience andon-going, active involvement in the semiconductor industry, make him a valuable asset to the Board. David C. Chang, Ph.D. has served as one of our directors since December 2000. Dr. Chang co-founded The GlobalMaximum Educational Opportunities, Inc., which provides study abroad programs in China for U.S. undergraduate students,in 2011 and became its Chairman and Chief Executive Officer in August 2013. Dr. Chang has served as president ofPolytechnic University in New York (now known as Tandon School of Engineering, New York University) from 1994 to2005 and President Emeritus and chancellor from 2005 to present. Previously, Dr. Chang was dean of the College ofEngineering and Applied Sciences at Arizona State University. Dr. Chang served as a director of the NSF/Industry CorporateResearch Center for Microwave and Millimeter-Wave Computer Aided Design from 1981 to 1989. Dr. Chang was a memberof the board of directors of Time Warner Cable Inc. from 2004 to 2016. Dr. Chang has a M.S. degree and a Ph.D. in appliedphysics from Harvard University and a B.S. degree in electrical engineering from National Cheng Kung University, Taiwan. The Board has determined that Dr. Chang’s extensive experience in the semiconductor industry allows him to makesignificant contributions to the strategic direction of the Company. Jesse Chen has served as one of our directors since February 1998 and was Chairman of the Board of Directors fromMay 2004 until October 2007, at which time he was appointed our lead independent director. Since March 2009, Mr. Chenhas served as our Chairman of the Board of Directors. Since May 1997, Mr. Chen has served as a managing director of MatonVentures, an investment company. From 1990 to 1996, Mr. Chen served as chief executive officer of BusLogic, Inc., a fablesssemiconductor and computer peripherals company. Mr. Chen serves on the board of directors of several private companies.Mr. Chen has a B.S. degree in aeronautical engineering from National Cheng Kung University, Taiwan and a M.S. degree inelectrical engineering from Loyola Marymount University. The Board has determined that Mr. Chen’s experience as a CEO and his investment background provides him withthe experience and knowledge in compensation and governance matters for technology companies to enhance hiscontributions to the Board and its committees. Leonard J. LeBlanc has served as one of our directors since April 2003. Mr. LeBlanc served as the acting chieffinancial officer and vice president of corporate development for Ebest, Inc., a privately held applications software company,from February 2001 to September 2003. Mr. LeBlanc was the executive vice president and chief financial officer of VantiveCorporation, a customer relationship management software and solution company, from August 1998 to January 2000. FromMarch 1996 to July 1997, Mr. LeBlanc was the executive vice president of finance and administration and chief financialofficer at Infoseek Corporation, an internet search and navigation company. From September 1993 to December 1994,Mr. LeBlanc served as senior vice president, finance and administration of GTECH Corporation, a manufacturer of lotteryequipment and systems. From May 1987 to December 1992, Mr. LeBlanc served as executive vice president, finance andadministration and chief financial officer of Cadence Design Systems, Inc., an electronic design automation softwarecompany. Mr. LeBlanc served on the board of directors and as chairman of the audit committee of OplinkCommunications, Inc., a provider of optical manufacturing solutions and optical networking components from 2000 to 2009and as chairman of the Board from 2006 to 2009. From November 2009 to November 2010, he was a consultant to OplinkCommunications, Inc. Mr. LeBlanc has B.S. and M.S. degrees from the College of Holy Cross, and an M.S. degree in financefrom George Washington University. The Board has determined that Mr. LeBlanc’s financial expertise, his background and experience in the financefunction in a number of companies make him a valuable contributor to the Board as well as to the Audit Committee. Executive Officers The following sets forth information regarding our current non-director executive officers. Information regarding Dr. Morris Young, our Chief Executive Officer, is set forth under Members of the Board ofDirectors. 59 Table of ContentsRobert G. Ochrym joined AXT as Vice President, Business Development in June 2005. On October 26, 2009, Mr.Ochrym was appointed as our Vice President, Business Development, Strategic Sales and Marketing. From 2003 to May2005, Mr. Ochrym was national sales manager at Aixtron, Inc., where he was responsible for North American sales andmarketing functions. From 1973 to 2003, Mr. Ochrym held various positions in sales and marketing, business developmentand product management at Uniroyal Optoelectronics, Northrop Grumman and Rhone‑Poulenc, and had extensiveinvolvement with rare earths and gallium businesses. Mr. Ochrym has a B.A. degree in Biology from Le Moyne College inSyracuse, New York. Gary L. Fischer was appointed as our Vice President, Chief Financial Officer and Corporate Secretary in August,2014. From June 2014 to August 2014, Mr. Fischer served as a financial consultant to the Company. Prior to serving as afinancial consultant to the Company, Mr. Fischer served as a consultant to eRide, Inc., a fabless semiconductor company thatdevelops both GPS devices and software for location-based services, since 2009. Prior to that position, Mr. Fischer served asVice President and Chief Financial Officer of eRide from 2005 until 2009, when eRide was acquired. From 1993 to 2005, Mr.Fischer held various positions at Integrated Silicon Solution, Inc.(“ISSI”), a leader in advanced memory solutions, mostrecently as President and Chief Operating Officer. Mr. Fischer has a B.A. degree from the University of California, SantaBarbara, and an M.B.A. from Santa Clara University. In August 2007, the SEC filed a complaint against ISSI and Mr. Fischer. The complaint alleged violations ofsecurities laws related to the backdating of stock option grants. In September 2007, Mr. Fischer, without admitting ordenying the allegations of the SEC’s complaint, agreed to settle the matter by consenting to (i) a permanent injunctionagainst violations of the securities laws and rules thereunder, including in particular knowingly circumventing or failing toimplement a system of internal accounting controls or knowingly falsifying any book, record or account, (ii) thedisgorgement of profits and interest thereon that the SEC alleged he gained from backdating options and civil penalties, and(iii) consenting to an order barring him from acting as an officer or director of a public company for five years, which expiredin September 2012. Section16 (a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our executive officers and directors andpersons who beneficially own more than 10% of our Common Stock to file initial reports of beneficial ownership and reportsof changes in beneficial ownership with the SEC. Such persons are required by SEC regulations to furnish us with copies ofall Section 16(a) forms filed by such person. Based solely on our review of such forms furnished to us and written representations from certain reporting persons,we believes that all filing requirements applicable to our executive officers, directors and greater-than-10% stockholderswere complied with in a timely manner in 2016. No Material Changes to the Procedures to Recommend Nominees to the Board of Directors There have been no material changes to the procedures by which security holders may recommend nominees to theCompany’s Board of Directors since the Company’s proxy statement for the 2016 annual meeting of stockholders filed withthe SEC on April 13, 2016.Audit Committee The members of the Audit Committee during 2016 were Dr. David C. Chang, Jesse Chen and Leonard J. LeBlanc.The Board has determined that all Audit Committee members are “independent” as defined under the applicable Nasdaqlisting standards and SEC rules and regulations and as such rules apply to audit committee members. The Board hasdetermined that each of Mr. Leonard LeBlanc and Mr. Jesse Chen is an “audit committee financial expert” as defined by therules and regulations of the SEC. Code of Business Conduct and Ethics The Board has adopted a Code of Business Conduct and Ethics applicable to all of our employees and directors,60 Table of Contentsincluding our Chief Executive Officer, Chief Financial Officer and Corporate Controller, which is available under the“Investors” section on our website at www.axt.com. In addition, we will provide a copy of the Code of Business Conduct andEthics upon request made in writing to us at AXT, Inc., 4281 Technology Drive, Fremont, CA 94538, attention: CorporateSecretary. We will disclose any amendment to the Code of Business Conduct and Ethics, or waiver of any of its provisions,applicable to an executive officer or director under the “Investors” section on our website at www.axt.com. Item 11. Executive CompensationCompensation Discussion and Analysis Overview of Compensation Programs and Philosophy Our philosophy is to provide a total compensation package that is competitive with the prevailing practices for ourindustry and markets. We believe that there should be a strong link between pay and performance, both at the Company leveland the individual level. Although we believe that exceptional individual performance should be rewarded, we believe thatsuch rewards should not be made unless there has been strong Company performance as well as strong individualperformance. Our compensation programs are intended to assure that our compensation and benefits policies attract, motivate andretain the key employees necessary to support our operations and our strategic growth. To meet these objectives, we haveadopted the following overriding policies: ·Pay total compensation that is competitive with the practices of other companies of similar size and in similarindustries; ·Use total cash compensation (salary plus annual cash bonus, payable quarterly) to recognize appropriately eachindividual officer’s scope of responsibility, role in the organization, experience and contributions; ·Reward performance by: ·providing short-term bonus compensation by establishing a bonus plan to reward achievement at specifiedlevels of financial and individual performance, with a significant portion of each executive’s goals relatedto key financial measures, including company‑specific measures comprising achievement of targetedrevenue, gross profit, operating expense and net income levels all being line items upon which executiveofficer performance can have a significant impact and that can show beneficial financial performanceimprovement and ,therefore, value to stockholders, and a portion of each executive’s goals related toindividual metrics for each individual executive officer that represent an improvement over such officer’sperformance in the prior fiscal year; and ·providing long-term incentives in the form of stock options and restricted stock awards, in order to retainthose individuals with the leadership abilities necessary for increasing long-term stockholder value whilealigning the interests of our officers with those of our stockholders. On May 26, 2016, we held a stockholder advisory vote on the compensation of our named executive officers,commonly referred to as a say-on-pay vote. Our stockholders approved the compensation of our named executive officers,with over 91.50% of the votes cast in favor of our say-on-pay resolution. As we evaluated our compensation practicesthroughout fiscal 2016, we were mindful of the strong support our stockholders expressed for our philosophy of linkingcompensation to performance. For fiscal 2016, our Compensation Committee (the “Committee”) decided to retain ourgeneral approach to executive compensation. Moreover, in determining how often to hold a stockholder advisory vote onexecutive compensation, our Board took into account our stockholders’ preference for an annual vote at our 2011 annualmeeting of stockholders. Based on stockholder input, the Board determined that we will continue to hold an annual advisorystockholder vote on our named executive officer compensation until the frequency is modified by a stockholder vote. 61 Table of ContentsComponents of Our Compensation Program There are five major elements that comprise our executive officer compensation programs: (i) base salary; (ii) annualcash bonus, payable quarterly; (iii) long-term incentives, such as stock options and restricted stock awards; (iv) retirementbenefits provided under a 401(k) plan; and (v) perquisites and benefit programs that are generally available to all of ouremployees. In addition, we provide certain benefits to U.S. employees who spend a significant amount of their time in ourBeijing facilities. We have selected these elements because each is considered useful and/or necessary to meet one or more ofthe principal objectives of our compensation policy. For instance, base salary and bonus target percentages are set with thegoal of attracting and retaining employees, adequately compensating them on a day-to-day basis for the time spent and theservices they perform, and rewarding them for achievement at specified levels of financial and individual performance. Ourstock option grants and restricted stock awards are intended to provide an incentive and reward for the achievement of long-term business objectives, including achievement of our financial goals, our growth, and retaining key employees. We believethat these elements of compensation, when combined, are effective, and will continue to be effective, in achieving theobjectives of our compensation programs. These policies were established by our Committee in setting executive officer compensation, including theassessment of the appropriate allocation between current cash compensation, short-term bonus compensation, and long-termcompensation. Other considerations include our business objectives, competitive practices and trends, and regulatoryrequirements Oversight of Executive Compensation and Role of Management Our executive compensation program is overseen and administered by the Committee, which is comprised entirelyof independent directors as determined in accordance with various Nasdaq and SEC rules and the Internal Revenue Code.The Committee operates under a written charter adopted by our Board. A copy of the charter is available under the“Investors” section on our website at www.axt.com. During fiscal 2016, the Committee met regularly with our Chief Executive Officer, Dr. Young, to obtainrecommendations with respect to Company compensation programs, practices and packages for executives, other employeesand directors. Dr. Young made recommendations to the Committee on the base salary, bonus targets and equitycompensation for the executive team and other employees for fiscal 2016 compensation. The Committee considers, but is notbound by and does not always accept, Dr. Young’s recommendations with respect to executive compensation. For fiscal2016, the Committee determined that Dr. Young was well placed to know what would motivate his team financially, both interms of long-term and short-term compensation. Dr. Young attended most of the Committee’s meetings, but the Committee also regularly held executive sessions notattended by any members of management or the non-independent directors. The Committee discussed Dr. Young’scompensation package with him, but made decisions with respect to Dr. Young’s compensation without him present. TheCommittee has not delegated any of its authority with respect to the compensation of executive officers. The Committee reviews the compensation programs applicable to executive officers on an annual basis, other thandeferred compensation and retirement benefits, which are reviewed from time to time to ensure that benefit levels remaincompetitive but are not included in the annual determination of an executive’s compensation package. In settingcompensation levels for a particular executive, the Committee takes into consideration the proposed compensation packageas a whole and each element individually, as well as the executive’s past and expected future contributions to our business Reliance on Compensation Consultants The Committee has the authority to engage its own independent advisors to assist in carrying out its responsibility.For 2015, the Committee retained Compensia, an independent compensation consulting firm, to review our executivecompensation practices. In 2015, Compensia advised the Committee on the principal aspects of executive compensation,including base salaries, bonuses and long-term equity incentives. Compensia also reported on its62 Table of Contentsevaluation of the competitiveness of our executive officer compensation program as compared to peer companies.Compensia provided market information about the competitive framework for executive pay and performancebenchmarking. For fiscal 2016, the Committee relied upon the information provided by Compensia in 2015 and did notfurther retain Compensia during 2016 for any specific compensation determinations. In 2015, representatives of Compensia communicated with the chair of the Committee outside of meetings with theCommittee. In 2015, Compensia reported to the Committee and did not perform services for the Company other than for theCommittee. Based on the consideration of the various factors as set forth in the rules of Nasdaq, the Committee does notbelieve that its relationship with Compensia and the work of Compensia on behalf of the Committee has raised any conflictof interest. Compensation Benchmarking For fiscal 2016, in order to determine each officer’s target total annual cash compensation (salary and bonuses) forupcoming periods, the Committee reviewed compensation information from a peer group of 15 companies identified byCompensia in 2015, with input from our management. The peer group included companies with market capitalizations andannual revenues similar to ours, and that are in the same high-technology industries in which we compete for executiveofficer talent. The peer group consisted of the following companies: Alliance Fiber Optic ProductsANADIGICSAudienceEMCOREGSI TechnologyGT Advanced TechnologiesIntermolecularIntevacMolycorpOclaroPericom SemiconductorPixelworksQuickLogicRubicon TechnologyZhone Technologies Data on the compensation practices of the above‑mentioned peer group was gathered by Compensia in 2015through searches of publicly available information, including publicly available databases. The Committee relied uponCompensia to benchmark target cash compensation levels against the above peer group. Peer group data was gathered byCompensia with respect to base salary, bonuses and long term equity incentives. It does not include deferred compensationbenefits or generally available benefits, such as 401(k) plans or health care coverage. Base Salary For fiscal 2016, the annual and actual base salaries for our current named executive officers were as follows: Fiscal 2016 Base Salary Morris S. Young, Chief Executive Officer $410,000 Gary L. Fischer, Chief Financial Officer and Corporate Secretary $275,000 Robert G. Ochrym, Vice President Business Development, Strategic Sales andMarketing $249,500 63 Table of ContentsKey Executive Non-Equity Incentive Plan/Bonus Plan We maintain an incentive bonus program for key executive officers to encourage and award achievement of ourbusiness goals and to assist us in attracting and retaining executives by offering an opportunity to earn a competitive level ofcompensation (the “Bonus Plan”). Based on these and the objectives described above, the form of the Bonus Plan wasinitially approved by the Committee for fiscal 2006. Thereafter, the Committee extended operation of the Bonus Plan forfiscal years 2007 to 2015, with revised metrics to reflect the revisions in the operating plans for each fiscal year. In February2016, the Committee recommended, and the Board approved, the Executive Incentive Plan (the “Executive Incentive Plan”),which revised and updated the Bonus Plan. The Executive Incentive Plan is intended to increase shareholder value and thesuccess of the Company by motivating employees to perform to the best of their abilities, and achieve the Company’sobjectives In recommending the Executive Incentive Plan, the Committee confirmed that its philosophy was to use total cashcompensation (salary plus cash bonus) to recognize appropriately each individual officer’s scope of responsibility, role in theorganization, experience and contributions. The Committee believes that the Executive Incentive Plan appropriately reflectsthe benchmarking information provided by Compensia. The Executive Incentive Plan is administered by the Committee. The Committee, in its sole discretion, will selectthe eligible employees who will be participants for any performance period. The eligible employees are any executive,officer, or key employee of the Company or of an affiliate, whether such individual is so employed at the time the ExecutiveIncentive Plan is adopted or becomes so employed subsequent to the adoption of the Executive Incentive Plan. Participationin the Executive Incentive Plan is in the sole discretion of the Committee, on a performance period by performance periodbasis. The Committee, in its sole discretion, will establish a target award for each participant, which may be a percentageof a participant’s annual base salary as of the beginning or end of the performance period, a fixed dollar amount, or suchother amount or based on such other formula as the Committee determines. Each performance period, the Committee, in itssole discretion, will establish a bonus pool, which pool may be established before, during or after the applicable performanceperiod. Actual awards will be paid from the bonus pool. Notwithstanding any contrary provision of the Executive IncentivePlan, the Committee will, in its sole discretion, determine the performance goals applicable to any target award, which mayinclude subjective or objective criteria. Each actual award will be paid solely from the general assets of the Company. Payment of each actual award shallbe made as soon as practicable after the end of the performance period to which the actual award relates and after the actualaward is approved by the Committee, but in no event later than (i) the 15th day of the third month of the fiscal yearimmediately following the fiscal year in which the participant’s actual award for any performance period is first no longer issubject to a substantial risk of forfeiture, and (ii) March 15 of the calendar year immediately following the calendar year inwhich the participant’s actual award for any performance period is first no longer is subject to a substantial risk offorfeiture. Each actual award will be paid in cash (or its equivalent) in a single lump sum. For fiscal year 2016, the Committee selected Dr. Morris Young, Gary Fischer and Robert Ochrym as the participantsof the Executive Incentive Plan and divided the fiscal year into four quarterly performance periods. The Committeedetermined that actual awards were based upon achievement of corporate financial targets (the “Corporate Targets”) andindividual targets established for each participant (the “Individual Targets”). Achievement of the Corporate Targetsrepresented 60% of the actual award, and achievement of the Individual Targets represented 40% of the actual award. The Corporate Targets were comprised of four financial targets: (1) total revenue (“Total Revenue Target”), (2) grossprofit (“Gross Profit Target”), (3) operating expense (“Operating Expense Target”) and (4) net income (“Net IncomeTarget”). The actual quarterly Corporate Targets were set forth in the operating plan for the year ending December 31, 2016,and approved by the Board. The Corporate Targets were weighted 10% for each of the Total Revenue Target, Gross ProfitTarget and Operating Expense Target and 30% for the Net Income Target for a total of 60% of the target award. 64 Table of ContentsAchievement of the Individual Targets, representing 40% of a participant’s target award, were determined eachquarter by the Committee, pursuant to objectives established by the Committee for each such participant. Each participant’starget award was based on a percentage of such participant’s annual base salary at the beginning of each quarterlyperformance period. In February 2016, the Committee determined the fiscal year 2016 terms and conditions under the ExecutiveIncentive Plan. The fiscal 2016 target awards were as follows: Percentage of BaseSalary of Named Executive Officer Amount Fiscal 2016 Award Morris S. Young $307,500 75.0%Gary L. Fischer $137,500 50.0%Robert G. Ochrym $112,500 45.0% In fiscal 2016, executive officers achieved approximately 71.4% of the target bonus amounts, based on Companyand individual performance. The bonuses were paid quarterly. Actual bonuses paid to our named executive officers for fiscal 2016 were: Percentage of BaseSalary Named Executive Officer Amount Earned in Fiscal 2016 Morris S. Young $236,665 57.7%Gary L. Fischer $99,029 36.0%Robert G. Ochrym $62,143 24.9% Determination of Target Bonus Amounts for Fiscal 2017 In February 2017, the Committee recommended, and the Board approved, the fiscal year 2017 terms and conditionsunder the Executive Incentive Plan. For fiscal year 2017, the Committee selected Dr. Morris Young, Gary Fischer and RobertOchrym as the participants of the Executive Incentive Plan and divided the fiscal year into four quarterly performanceperiods. Achievement of the Corporate Targets represents 60% of the actual award, and achievement of the IndividualTargets represents 40% of the actual award. The Corporate Targets are weighted 10% for each of the Total Revenue Target,Gross Profit Target and Operating Expense Target and 30% for the Net Income Target for a total of 60% of the targetaward. Achievement of the Individual Targets, representing 40% of a participant’s target award, will be determined eachquarter by the Committee, pursuant to objectives established by the Committee for each such participant. Each participant’starget award will be based on a percentage of such participant’s annual base salary at the beginning of each quarterlyperformance period. The Committee made no changes for the target bonus amounts, which are as follows: Percentage ofBase Salary of Fiscal 2017 Target Named Executive Officer Bonus Morris S. Young 75%Gary L. Fischer 50%Robert G. Ochrym 45% 65 Table of ContentsOther Bonuses At its discretion, the Committee may award management bonuses to certain of our named executive officers outsideof the Executive Incentive Plan. Further, the Board and/or the Committee may amend or terminate the Executive IncentivePlan, or any part thereof, at any time and for any reason. Long-Term Incentive Compensation Historically we have provided long-term incentive compensation through grants of stock options and restrictedstock awards that generally vest over multiple years. Our equity compensation program is intended to align the interests ofour officers with those of our stockholders by creating an incentive for our officers to maximize stockholder value. Theequity compensation program also is designed to encourage our officers to remain employed with us despite a verycompetitive labor market. The Committee believes that appropriate equity incentives are critical to attracting and retainingthe best employees in the industry, and that stock awards can be an effective tool for meeting our compensation goal ofincreasing long-term stockholder value by tying the value of the stock awards to our performance in the future. The number of stock awards the Committee grants to each executive officer and the vesting schedule for each grantis determined based on a variety of factors, including the Committee’s goal to increase the proportion of compensationawarded to executive officers as long-term incentive compensation. In 2015 we determined that the value of our equityawards was below the 25 percentile of the peer group mentioned above, based on the benchmarking information provided atthat time by Compensia. The Committee typically grants equity awards to executive officers at its regularly scheduled quarterlymeetings. All grants of stock options and restricted stock awards or other equity awards to newly‑hired employees are alsomade by the Committee at scheduled meetings, unless the Board or the Committee determines that unusual circumstances,such as in the case of retention of an executive officer, directors or other employees, call for consideration of the grant ofawards other than at a regular quarterly meeting, in which case consideration of and action with respect to such awards shalltake place at a special meeting and not by unanimous written consent. The Committee has not granted, nor does it intend inthe future to grant, equity compensation awards to executives in anticipation of the release of material nonpublic informationthat is likely to result in changes to the price of our common stock, such as a significant positive or negative earningsannouncement. Similarly, the Committee has not timed, nor does it intend in the future to time, the release of materialnonpublic information based on equity award grant dates. Further, because equity compensation awards to executive officerstypically vest over a three‑ or four-year period, the value to recipients of any immediate increase in the price of our stockfollowing a grant will be attenuated. All equity awards approved during scheduled meetings become effective and are priced as of the second trading dayafter the earnings release for the quarter in which the grants were approved (the “Grant Date”), provided that if publicannouncement of material information is anticipated, the Grant Date may be deferred at the discretion of the Board orCommittee until the second trading day after release of such information. With respect to grants of incentive stock options,the exercise price of all options granted at regular quarterly meetings shall be the closing price of our common stock on theGrant Date, as reported by the Nasdaq Global Select Market. Retirement Benefits under the 401(k) Plan, Executive Perquisites and Generally Available Benefit Programs We do not maintain a deferred compensation plan, other than our AXT, Inc. Employee Savings and Retirement Plan(the “401(k) Plan”). The 401(k) Plan is available to all full-time U.S. based employees, including named executive officers.Under the 401(k) Plan, participating employees are eligible to receive matching contributions from us that are subject tovesting over time. We also make an annual “reconciling match” designed to more evenly determine the amount of matchingcontributions that each eligible employee receives. This reconciling match works by recalculating the regular matchingcontribution as if it were paid on an annualized, instead of payroll-by-payroll, basis. If the annualized matching contributionwould have been higher, we contribute a matching contribution equal to the difference between the two. We do not providedefined benefit pension plans or defined contribution retirement plans to our executives or other employees other than the401(k) Plan. 66 th Table of ContentsWe also offer a number of other benefits to our US based employees, including the named executive officers,pursuant to benefit programs that provide for broad‑based employee participation. These benefits programs include medical,dental and vision insurance, long-term and short-term disability insurance, life and accidental death and dismembermentinsurance, health and dependent care flexible spending accounts, wellness programs, relocation/expatriate programs andservices, educational assistance and certain other benefits. The 401(k) Plan and other generally available benefit programs allow us to remain competitive for key employees,and we believe that the availability of the benefit programs generally enhances employee productivity and loyalty. The mainobjectives of our benefits programs are to give our employees access to quality healthcare, assistance in achieving retirementfinancial goals and enhanced health and productivity. These generally available benefits typically do not specifically factorinto decisions regarding an individual executive’s total compensation or equity award package. Stock Ownership Guidelines The Board has not adopted stock ownership guidelines applicable to our executive officers or directors. Accounting and Tax Considerations In designing our compensation programs, we take into consideration the accounting and tax effect that each elementwill or may have on us and the executive officers and other employees as a group. We have not provided any executiveofficer or director with a gross-up or other reimbursement for tax amounts the executive might pay pursuant to Section 280Gor Section 409A of the Internal Revenue Code. Section 280G and related Internal Revenue Code sections provide thatexecutive officers, directors who hold significant stockholder interests and certain other service providers could be subject tosignificant additional taxes if they receive payments or benefits in connection with a change of control that exceeds certainlimits, and that we or our successor could lose a deduction on the amounts subject to the additional tax. Section 409A alsoimposes additional significant taxes in the event that an executive officer, director or service provider receives “deferredcompensation” that does not meet the requirements of Section 409A. We structure our equity awards in a manner intended tocomply with the applicable Section 409A requirements. In determining which elements of compensation are to be paid, and how they are weighted, we also take intoaccount whether a particular form of compensation will be considered “performance‑based” compensation for purposes ofSection 162(m) of the Internal Revenue Code. Under Section 162(m), we generally receive a federal income tax deduction forcompensation paid to any of our named executive officers only if the compensation is less than $1 million during any fiscalyear or is “performance‑based” under Section 162(m). Our Committee currently intends to continue seeking a tax deductionfor all of our executive compensation, to the extent we determine it is in our best interests. All of the stock options granted toour executive officers qualify under Section 162(m) as performance‑based compensation.67 Table of ContentsSummary Compensation Table The following table sets forth information concerning the compensation earned during the fiscal years endedDecember 31, 2016, 2015 and 2014, by our current Chief Executive Officer, our Chief Financial Officer, and each of ourother executive officers (together, the “named executive officers”): Non-Equity Incentive Stock Option Plan All Other Salary Bonus Awards Awards Compensation Compensation Total Name and Principal Position Year ($) ($) ($)(1) ($)(1) ($)(2) ($) ($) Morris S. Young 2016 $410,000 $ — $303,738 $341,414 $236,665 $34,009$1,325,826 Chief Executive Officer 2015 $435,712$ — $261,600 $322,668 $152,772 $30,971$1,203,723 2014 $329,567 $ — $79,040 $116,698 $200,082 $29,593$754,980 Gary L. Fischer 2016 $275,000 $ — $114,073 $128,224 $99,029 $18,384$634,710 Chief Financial Officer 2015 $260,345 $ — $71,940 $88,734 $67,511 $15,207$503,737 and Corporate Secretary 2014 $91,346$ — $9,880 $231,331 $49,631 $5,980$388,168 Robert G. Ochrym 2016 $249,500 $ — $36,470 $40,994 $62,143 $15,964$405,071 Vice President, 2015 $275,005$ — $15,260 $18,822 $45,238 $13,205$367,530 Business Development, 2014 $212,241 $ — $19,760 $29,174 $70,100 $11,912$343,187 Strategic Sales andMarketing (1)Valuation based on the dollar amount recognized for financial statement reporting purposes pursuant to ASC topic718, Stock Compensation (“ASC 718”). Amounts shown do not reflect compensation actually received by thenamed executive officer. Instead, the amounts shown are the value of option awards and stock awards calculatedbased on the grant date fair value as determined pursuant to ASC 718. (2)Amounts consist of bonuses earned for services rendered in fiscal years 2014 to 2016. Performance‑based bonusesare generally paid under our Bonus Plan and reported as Non-Equity Incentive Plan Compensation. Includesamounts earned for the fourth quarter of fiscal 2016, but not paid until March 2017. (3)Includes payment of $55,904, amount equal to Dr. Young’s salary reduction between March 2014 and March 2015,which was approved by the Committee in March 2015. (4)Includes our matching contribution of $16,400 under the tax-qualified 401(k) Plan, travel allowance of $5,142, andour payment on behalf of Dr. Young of $12,467 in term life insurance premiums. (5)Includes our matching contribution of $15,538 under the tax-qualified 401(k) Plan, travel allowance of $2,966, andour payment on behalf of Dr. Young of $12,467 in term life insurance premiums. (6)Includes our matching contribution of $13,183 under the tax-qualified 401(k) Plan, travel allowance of $7,262, andour payment on behalf of Dr. Young of $9,149 in term life insurance premiums. (7)Includes our matching contribution of $11,000 under the tax-qualified 401(k) Plan, and our payment on behalf ofMr. Fischer of $7,382 in term life insurance premiums. (8)Includes our matching contribution of $10,385 under the tax-qualified 401(k) Plan, and our payment on behalf ofMr. Fischer of $4,822 in term life insurance premiums. (9)Mr. Fischer was hired in August 2014 and his annual salary was $250,000. 68 (4) (3) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) Table of Contents(10)Includes our matching contribution of $3,077 under the tax-qualified 401(k) Plan, and our payment on behalf ofMr. Fischer of $2,903 in term life insurance premiums. (11)Includes our matching contribution of $9,980 under the tax-qualified 401(k) Plan and our payment on behalf ofMr. Ochrym of $5,984 in term life insurance premiums. (12)Includes payment of $36,402, amount equal to Mr. Ochrym’s salary reduction between March 2014 and March2015, which was approved by the Committee in March 2015. (13)Includes our matching contribution of $9,783 under the tax-qualified 401(k) Plan and our payment on behalf ofMr. Ochrym of $3,422 in term life insurance premiums. (14)Includes our matching contribution of $8,490 under the tax-qualified 401(k) Plan, and our payment on behalf ofMr. Ochrym of $3,422 in term life insurance premiums.Grants of Plan-Based Awards The following table sets forth certain information with respect to option awards and other plan-based awards grantedto our named executive officers during the fiscal year ended December 31, 2016: 2016 GRANTS OF PLAN-BASED AWARDS FROM THE 2015 PLAN All Other All Other Stock Restricted Option: StockAwards: Grant Date Estimated Future Payouts Under Number of Number of Exercise or Fair Value of Non-Equity Incentive BonusPlan Awards (1) Securities Shares of Base Price Stock and Grant Threshold Maximum Underlying Stock or of Option Option Name Date ($) Target ($) ($) Options (#) Units (#) Awards ($/Sh) Awards ($)(2) Morris S. Young 10/28/16 174,896 58,299 $5.21 $645,152 02/20/17 $ 0 $307,500 $369,000 Gary L. Fischer 10/28/16 65,685 21,895 $5.21 $242,297 02/20/17 $ 0 $137,500 $165,000 Robert G.Ochrym 10/28/16 21,000 7,000 $5.21 $77,464 02/20/17 $ 0 $112,500 $135,000 (1)We award bonuses pursuant to the Bonus Plan, which provides for the award of annual cash bonuses based uponthreshold, target and maximum payout amounts set by the Board at the beginning of each fiscal year. See“Compensation Discussion and Analysis—Plan-Based Awards.” The actual amount paid to each named executiveofficer for the fiscal year ended December 31, 2016 is set forth in the Summary Compensation Table under theheading, “Non-Equity Incentive Bonus Plan Compensation.” (2)The value of an option or stock award is based on the fair value as of the grant date of such award determinedpursuant to ASC topic 718, Stock Compensation (“ASC 718”), excluding the impact of estimated forfeitures relatedto service-based vesting conditions. The exercise price for all options granted to the named executive officers is100% of the fair market value of the shares on the grant date. The option exercise price has not been deducted fromthe amounts indicated above. Regardless of the value placed on a stock option on the grant date, the actual value ofthe option will depend on the market value of our common stock at such date in the future69 Table of Contentswhen the option is exercised. The proceeds to be paid to the individual following this exercise do not include theoption exercise price. Outstanding Equity Awards at Fiscal Year-End The following table sets forth certain information with respect to the value of all unexercised options previouslyawarded to our named executive officers as of December 31, 2016.OUTSTANDING EQUITY AWARDS AS OF DECEMBER 31, 2016 Options Awards Stock Awards Market Number of Number of Number of Value of Securities Securities Shares or Shares or Underlying Underlying Units of Units of Unexercised Unexercised Option Option Stock That Stock That Options (#) Options (#) Exercise Expiration Have Not Have Not Name Grant Date(1) Exercisable Unexercisable Price ($) Date Vested(#) Vested($)(2) Morris S. Young 07/16/2009 92,896 — $1.59 07/16/19 — — 08/02/2010 110,000 — $5.83 08/02/20 — — 10/28/2011 90,000 — $4.79 10/28/21 — — 11/05/2012 108,000 — $2.91 11/05/22 — — 11/04/2013 69,375 20,625 $2.36 11/04/23 — — 11/03/2014 50,000 46,000 $2.47 11/03/24 — — 11/02/2015 97,500 262,500 $2.18 11/02/25 — — 10/28/2016 — 174,896 $5.21 10/28/26 — — 11/04/2013 — — — — 7,500 $36,000 11/03/2014 — — — — 16,000 $76,800 11/02/2015 — — — — 90,000 $432,000 10/28/2016 — — — — 58,299 $279,835 Gary L. Fischer 06/02/2014 125,000 75,000 $2.29 06/02/24 — — 11/03/2014 6,250 5,750 $2.47 11/03/24 — — 11/02/2015 26,813 72,187 $2.18 11/02/25 — — 10/28/2016 — 65,685 $5.21 10/28/26 11/03/2014 — — — — 2,000 $9,600 11/02/2015 — — — — 24,750 $118,800 10/28/2016 — — — — 21,895 $105,096 Robert G. Ochrym 10/22/2007 431 — $6.31 10/22/17 — — 08/02/2010 33,000 — $5.83 08/02/20 — — 11/04/2013 500 5,500 $2.36 11/04/23 — — 11/03/2014 500 11,500 $2.47 11/03/24 — — 11/02/2015 438 15,312 $2.18 11/02/25 — — 10/28/2016 — 21,000 $5.21 10/28/26 — — 11/04/2013 — — — — 2,000 $9,600 11/03/2014 — — — — 4,000 $19,200 11/02/2015 — — — — 5,250 $25,200 10/28/2016 — — — — 7,000 $33,600 (1)Except as otherwise noted, all options awards granted to named executive officers vest at the rate of /4 of theunderlying shares on the first anniversary of the date of grant and /48 of the shares each month thereafter. After fouryears, the shares become fully vested and exercisable. Restricted stock awards granted to named executive officersvest over a four-year period, at a rate of 25% on the each anniversary of the vesting commencement70 11 Table of Contentsdate.(2)The market value of the restricted stock awards that have not vested is calculated by multiplying the number ofunits that have not vested by the closing price of our common stock at December 31, 2016, which was $4.80. Option Exercises and Stock Vested During Last Fiscal Year The following table shows all stock options exercised and value realized upon exercise, and the number of sharesacquired on vesting and the value realized on vesting by the named executive officers during the fiscal year ended December31, 2016: OPTION EXERCISES AND STOCK VESTED FOR FISCAL 2016 Stock Options Restricted Stock Number of Number of Shares Value Realized Shares Value Realized Acquired on on Exercise Acquired on on Vesting Name Exercise (#) ($)(1) Vesting (#) ($)(2) Morris S. Young 120,000 $395,200 54,500 $273,825 Gary L. Fischer — $ — 9,250 $46,050 Robert G. Ochrym 126,375 $240,019 8,500 $42,950 (1)Based on the difference between the market price of our common stock on the date of exercise and the exerciseprice. (2)Reflects the market price of our common stock on the vesting date. Potential Payments upon Termination or Change in Control Acceleration of Stock Options Stock option grants were made to employees under our 1997 Stock Option Plan (the “1997 Plan”) pursuant to astandard form of stock option agreement. The standard form of stock option agreement provided that in the event of a“change in control,” as defined therein, and termination of employment or resignation for “good reason” as defined therein,within twelve months after the change in control, the vesting and exercisability of the option will accelerate such that theoption will become immediately exercisable and vested in full as of the date of termination or resignation. Options granted toall of our employees from 2002 until the adoption of our 2007 Equity Incentive Plan (the “2007 Plan”), including optionsgranted to our named executive officers and directors, include these provisions which provide for acceleration in full upon achange of control event in which the employee is terminated or constructively dismissed within 12 months after the changein control. Options granted to our directors accelerate in full upon the change in control event, whether or not there is atermination of their service to the Company. All options so accelerated remain exercisable for the earlier of the term of theoption or six months after the effective date of the termination. The following are the applicable definitions under the 1997 Plan: A “Change in Control” shall mean an event or a series of related events (collectively, the “Transaction”) whereinthe stockholders of the Company immediately before the Transaction do not retain immediately after the Transaction, insubstantially the same proportions as their ownership of shares of our voting stock immediately before the Transaction, director indirect beneficial ownership of more than fifty percent (50%) of the total combined voting power of the outstandingvoting stock of the Company or the corporation or corporations to which the assets of the Company were transferred (the“Transferee Corporation(s)”), as the case may be. For purposes of the preceding sentence, indirect beneficial ownership shallinclude, without limitation, an interest resulting from ownership of the voting stock of one or more corporations which, as aresult of the Transaction, own the Company or the Transferee Corporation(s), as the case may be, either directly or throughone or more subsidiary corporations. The Board shall have the right to determine whether multiple sales or exchanges of thevoting stock of the Company or multiple Ownership Change Events are related, and its determination shall be final, bindingand conclusive.71 Table of Contents An “Ownership Change Event” shall be deemed to have occurred if any of the following occurs with respect to theCompany: ·the direct or indirect sale or exchange in a single or series of related transactions by the stockholders of theCompany of more than fifty percent (50%) of the voting stock of the Company; ·a merger or consolidation in which the Company is a party; ·the sale, exchange, or transfer of all or substantially all of the assets of the Company; or ·a liquidation or dissolution of the Company. “Termination After Change in Control” shall mean any of the following events occurring within twelve(12) months after a Change in Control: ·termination by the Participating Company Group of the Optionee’s Service with the Participating CompanyGroup for any reason other than for Cause (as defined below); or ·the Optionee’s resignation for Good Reason (as defined below) from all capacities in which the Optionee is thenrendering Service to the Participating Company Group within a reasonable period of time following the eventconstituting Good Reason. ·Notwithstanding any provision herein to the contrary, Termination After Change in Control shall not includeany termination of the Optionee’s Service with the Participating Company Group which (1) is for Cause (asdefined below); (2) is a result of the Optionee’s death or disability; (3) is a result of the Optionee’s voluntarytermination of Service other than for Good Reason; or (4) occurs prior to the effectiveness of a Change inControl. “Cause” shall mean any of the following: (i) the Optionee’s theft, dishonesty, or falsification of any ParticipatingCompany documents or records; (ii) the Optionee’s improper use or disclosure of a Participating Company’s confidential orproprietary information; (iii) any action by the Optionee which has a detrimental effect on a Participating Company’sreputation or business; (iv) the Optionee’s failure or inability to perform any reasonable assigned duties after written noticefrom a Participating Company of, and a reasonable opportunity to cure, such failure or inability; (v) any material breach bythe Optionee of any employment agreement between the Optionee and a Participating Company, which breach is not curedpursuant to the terms of such agreement; or (vi) the Optionee’s conviction (including any plea of guilty or nolo contendere)of any criminal act which impairs the Optionee’s ability to perform his or her duties with a Participating Company. “Good Reason” shall mean any one or more of the following: ·without the Optionee’s express written consent, the assignment to the Optionee of any duties, or any limitationof the Optionee’s responsibilities, substantially inconsistent with the Optionee’s positions, duties,responsibilities and status with the Participating Company Group immediately prior to the date of the Changein Control; ·without the Optionee’s express written consent, the relocation of the principal place of the Optionee’s Service toa location that is more than thirty (30) miles from the Optionee’s principal place of Service immediately prior tothe date of the Change in Control, or the imposition of travel requirements substantially more demanding of theOptionee than such travel requirements existing immediately prior to the date of the Change in Control; or ·any failure by the Participating Company Group to pay, or any material reduction by the ParticipatingCompany Group of, (1) the Optionee’s base salary in effect immediately prior to the date of the Change inControl by more than 15% (unless reductions comparable in amount and duration are concurrently made72 Table of Contentsfor all other employees of the Participating Company Group with responsibilities, organizational level and titlecomparable to the Optionee’s), or (2) the Optionee’s bonus compensation, if any, in effect immediately prior tothe date of the Change in Control (subject to applicable performance requirements with respect to the actualamount of bonus compensation earned by the Optionee). Stock option grants and restricted stock awards made to our named executive officers and directors under our 2007Plan provide that in the event of a “Change in Control,” as defined therein, the vesting and exercisability of the option willaccelerate such that the option will become immediately exercisable and vested in full as of the date of termination orresignation. Under the 2007 Plan, a “Change in Control” is defined as any of the following: ·any person becomes the direct or indirect beneficial owner of more than 50% of the voting power of our stock;·any one or related series of the following in which the stockholders immediately before the transaction do notretain immediately after the transaction direct or indirect beneficial ownership of more than 50% of our votingsecurities, our successor or the entity to which our assets were transferred;·the sale or exchange by the stockholders of more than 50% of our voting stock or a merger to which we are aparty; or·the sale of all or substantially all of our assets.Under our 2015 Equity Incentive Plan (the “2015 Plan”), in the event of a merger or our “change in control” (asdefined in the 2015 Plan), the administrator of the 2015 Plan (the “Administrator”) will have authority to determine thetreatment of outstanding awards, including, without limitation, that awards be assumed or substituted by the successorcorporation or a parent or subsidiary of the successor corporation. The Administrator will not be required to treat alloutstanding awards similarly.If the successor corporation does not assume or substitute outstanding awards, then options and stock appreciationrights will become fully vested and exercisable, all restrictions on restricted stock and restricted stock units will lapse, and,with respect to awards with performance-based vesting, unless determined otherwise by the Administrator, all performancegoals or other vesting criteria will be deemed achieved at 100% of target levels and all other terms and conditions met. Inaddition, if an option or stock appreciation right is not assumed or substituted for in the event of a change in control, theAdministrator will notify the participant that the option or stock appreciation right will be fully vested and exercisable for aperiod of time determined by the Administrator in its sole discretion, and the option or stock appreciation right will terminateupon the expiration of such period.If the successor corporation assumes or substitutes outstanding awards held by a non-employee director and the non-employee director’s status as a director of the Company or a director of the successor company terminates other than uponvoluntary resignation by the non-employee director (unless such resignation is at the request of the acquirer), then his or heroptions and stock appreciation rights will fully vest and become immediately exercisable, all restrictions on restricted stockand restricted stock units held by such non-employee director will lapse, and all performance goals or other vestingrequirements will be deemed achieved at 100% and all other terms and conditions met. If we had been the subject of a change in control that resulted in the termination of employment or resignation forgood reason of any of our executive officers or a merger or change in control in which the successor corporation did notassume or substitute outstanding awards as of December 31, 2016, the last business day of our fiscal 2016, the number ofoptions to purchase our common stock and restricted shares held by each executive officer as indicated below would haveaccelerated and become immediately exercisable and vested in full as of such date. In addition, based on the differencebetween the weighted average exercise price of the options and $4.80, the closing price of our common stock on December31, 2016, the net value of these options and of unvested restricted shares would be as set forth below: 73 Table of Contents Number of Options/Shares Value of Accelerated Name Accelerated Options/Shares(1) Morris S. Young 675,820 $1,669,890 Gary L. Fischer 267,267 $624,273 Robert G. Ochrym 71,562 $167,932 (1)Based on a common stock price of $4.80 per share, the closing price of our common stock on the Nasdaq GlobalSelect Market on December 31, 2016, less the applicable exercise price for each in-the-money option for whichvesting is accelerated. In this calculation, restricted stock awards are valued at $4.80. Young Employment Contract On December 4, 2012, we entered into an amended and restated employment offer letter with Dr. Morris Young,Chief Executive Officer. In the event that Dr. Young is terminated without cause, we shall pay Dr. Young an amount equal totwelve (12) months of his then current salary and reimbursement of twenty-four (24) months of health benefits. Alternatively, if, after a Change of Control (as defined below), Dr. Young’s employment is terminated by us withoutcause or by Dr. Young as a result of a defined constructive termination, and provided that Dr. Young executes a generalrelease of claims in a form acceptable to AXT or the acquiring company, Dr. Young will receive the following severancebenefits: (a) continuing payment of his last base salary for eighteen (18) months after the date his employment terminates;(b) provided he timely elects to continue his health insurance benefits under the applicable COBRA laws, the Company willreimburse him for the premiums necessary to maintain his health insurance coverage for a period of twenty-four (24) monthsfollowing termination of his employment; and (c) full vesting acceleration and exercisability of his outstanding equityawards. Further, notwithstanding any provision to the contrary contained in any plan or agreement evidencing the optionsheld by Dr. Young, in the event of a Change of Control in which the surviving, continuing, successor, or purchasingcorporation or other business entity or parent thereof, as the case may be (the “Acquiror” ), does not assume the Company’srights and obligations under the then-outstanding portion of options held by Dr. Young or substitute for such portion of suchoptions substantially equivalent options for the Acquiror’s stock, then the vesting and exercisability of such options shall beaccelerated in full effective as of the date ten (10) days prior to but conditioned upon the consummation of the Change ofControl, provided that Dr. Young remains an employee or other service provider with the Company immediately prior to theChange of Control. Except as set forth above, the treatment of stock-based compensation upon the consummation of aChange of Control shall be determined in accordance with the terms of the plans or agreements providing for such awards oroptions. For purposes of Dr. Young’s employment agreement, a “Change of Control” means a merger, consolidation, sale ofsubstantially all assets of the Company or transfer of beneficial ownership (as determined pursuant to Rule 13d-3 under theExchange Act) of outstanding shares of the capital stock of the Company by 1 (one) or more shareholders of the Company, inwhich the shareholders of the Company immediately prior to such merger, consolidation, sale or transfer do not own at least50% (fifty percent) of the combined voting power of the capital stock of the Company or surviving or successor corporationor entity immediately after such transaction. In addition, in the event of a change in control, if Dr. Young’s employment is terminated or he resigns for “goodreason” within twelve months after the change in control or a merger or change in control in which the successor corporationdid not assume or substitute outstanding awards, then Dr. Young’s stock options will become immediately exercisable andvested as of the date of termination or resignation. See “Acceleration of Stock Options” above. If we had terminated Dr. Young’s employment without cause and not as a result of a Change of Control on December31, 2016, the last business day of our fiscal 2016, Dr. Young would have received severance benefits under his employmentagreement equal to (a) a payment of $410,000, equal to twelve (12) months of his current base salary, and (b) reimbursementof twenty-four (24) months of health benefits of $26,617. 74 Table of Contents Ochrym Employment Contract On October 26, 2009, we entered into an employment agreement with Mr. Robert Ochrym, our Vice PresidentBusiness Development, Strategic Sales and Marketing. In the event that Mr. Ochrym is terminated without cause, we shallpay Mr. Ochrym an amount limited to the payment of his salary and other earned compensation through the effective date oftermination in addition to any severance to which he may be entitled under our severance pay plan or policy or may begranted by the Compensation Committee. If a change in control of AXT takes place, and within twelve (12) months thereafter, Mr. Ochrym incurs aninvoluntary separation from service (within the meaning of Treas. Reg. § 1.409A-1(n)), our total liability to Mr. Ochrym willbe limited to the payment of his salary and other earned compensation through the effective date of the involuntaryseparation from service plus severance in a gross amount equal to one (1) year of his then current annual salary, pluscontinuation of coverage in our group health plan for twelve months and acceleration of stock options and any other equityawards. Fischer Employment Contract On August 11, 2014, we entered into an employment agreement with Mr. Gary L. Fischer, our Vice President andChief Financial Officer. In the event that Mr. Fischer is terminated without cause, we shall pay Mr. Fischer an amount limitedto the payment of his salary and other earned compensation through the effective date of termination in addition to anyseverance to which he may be entitled under our severance pay plan or policy or may be granted by the CompensationCommittee. If a change in control of AXT takes place, and within twelve (12) months thereafter, Mr. Fischer incurs aninvoluntary separation from service (within the meaning of Treas. Reg. § 1.409A-1(n)), our total liability to Mr. Fischer willbe limited to the payment of his salary and other earned compensation through the effective date of the involuntaryseparation from service plus severance in a gross amount equal to one (1) year of his then current annual salary, pluscontinuation of coverage in the our group health plan for twelve months and acceleration of stock options and any otherequity awards. Release of Claims As a condition to each executive’s entitlement to receive the base salary amounts and equity award accelerationreferenced in the tables on page 63 and page 74, respectively, the executive is required to execute a release of claims againstus, which may include a non-competition agreement, which prohibits the executive from working in the our industry for aperiod equal to the greater of one year from the executive’s termination of employment, or, in the case of a change in control,two years from the date of the change in control. Compensation of Directors Directors who are also our employees do not receive any additional compensation for their services as directors.Non-employee directors are paid a cash retainer and retainers for service on committees of the Board of Directors. Inaddition, each non-employee director is reimbursed for reasonable expenses incurred. We additionally granted restrictedstock awards to non-employee directors in 2016 equal to such number of shares determined by dividing the sum of $60,000by the closing prices of our common stock on The Nasdaq Global Select Market on the dates of grant, which resulted in theawards of 16,260 shares of restricted stock to each of our non-employee directors. These awards vest on the anniversary of thedates of grant, conditioned upon the recipient’s continued service as a member of the Board or employee or other consultanton each relevant vesting date. During 2016, each of our non-employee directors received the following fees for board andcommittee meeting attendance.75 Table of Contents HIDDEN_ROW· · Board cash retainer: •$35,000 per annum ($8,750 per quarter)Annual Equity Grant •Restricted stock awards valued at $60,000, based upon the closing stock price onthe date of the grant vesting on the anniversary of the date of grant. Annual cash retainers for committeeservice:•Audit: $10,000•Compensation: $5,000•Nominating and Corporate Governance: $2,000 Annual cash retainers for committeechairs:•Audit: $20,000•Compensation: $10,000•Nominating and Corporate Governance: $4,000 Non-executive Chairman of theBoard: •Annual cash retainer of $25,000 The following table sets forth information concerning the compensation earned during the last fiscal year by eachindividual who served as a director at any time during the fiscal year ended December 31, 2016: Fees Earned Restricted Non-Equity or Paid Stock Incentive Plan All Other Name in Cash ($) Awards ($) Compensation ($) Compensation ($) Total ($) Jesse Chen $79,000 $60,000 — 4,896 $143,896 David C. Chang $57,000 $60,000 — $12,029 $129,029 Leonard LeBlanc $62,000 $60,000 — 543 $122,543 Compensation Committee Interlocks and Insider Participation None of the members of the Committee is or has been an officer or employee of AXT. During fiscal year 2016, nomember of the Committee had any relationship with us requiring disclosure under Item 404 of Regulation S-K. During fiscalyear 2016, none of our executive officers served on the compensation committee (or its equivalent) or on a board of directorsof another entity any of whose executive officers served on the Committee or our Board.Compensation Committee Report We, the Compensation Committee of the Board of Directors of AXT, Inc., have reviewed and discussed theCompensation Discussion and Analysis included in this Annual Report on Form 10-K with management. Based on suchreview and discussion, we have recommended to the Board of Directors that the Compensation Discussion and Analysis beincluded in this Annual Report on Form 10-K for the fiscal year ended December 31, 2016. THE COMPENSATION COMMITTEE David C. Chang, Chair Leonard J. LeBlanc Jesse Chen 76 Table of Contents Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Principal Stockholders and Stock Ownership by Management The following table sets forth, as of February 27, 2017, certain information with respect to the beneficial ownershipof our common stock by: ·each stockholder known by us to be the beneficial owner of more than 5% of our common stock; ·each of our directors and director nominees; ·each of our named executive officers; and ·all executive officers and directors as a group. Except as otherwise indicated, the address of each beneficial owner is c/o AXT, Inc., 4281 Technology Drive,Fremont, California 94538. Except as indicated in the footnotes to the table, we believe that the persons named in the table have sole votingand dispositive power with respect to all shares of common stock shown as beneficially owned by them, subject tocommunity property laws, where applicable. For each named person, this percentage includes common stock, includingrestricted common stock, and stock options or other right to acquire beneficial ownership of common stock either currentlyor within 60 days of February 27, 2017. However, such common stock shall not be deemed outstanding for the purpose ofcompleting the percentage owned by any other person. Percentages of beneficial ownership are based upon33,031,479 shares of common stock outstanding on February 27, 2017. Number of Shares Beneficially Beneficial Owner Owned Percent 5% Stockholders: Perritt Capital Management, Inc. 300 South Wacker, Suite 2880 Chicago, Illinois 60606 1,810,181 5.48%Dimensional Fund Advisors LP Building One, 6300 Bee Cave Road, Austin, Texas 78746 2,251,705 6.82% Directors and Named Executive Officers: Morris S. Young 1,783,575 5.29%Robert G. Ochrym 76,619 * Gary L. Fischer 242,875 * Jesse Chen 209,259 * David C. Chang 164,984 * Leonard LeBlanc 159,134 * Directors and executive officers as a group (6 persons) 2,636,446 7.77%* Less than 1%.(1)Except as otherwise indicated, the persons named in this table have sole voting and investment power with respectto all shares of Common Stock shown as beneficially owned by them, subject to community property laws whereapplicable and to the information contained in the footnotes to this table. (2)Under the rules of the Securities and Exchange Commission, a person is deemed to be the beneficial owner of sharesthat can be acquired by such person within 60 days upon the exercise of options or other rights. 77 (1)(2)(3)(4)(5)(6)(7)(8)(9)(10)(11)(12) Table of Contents(3)Calculated on the basis of 33,031,479 shares of Common Stock outstanding as of February 27, 2017, provided thatany additional shares of Common Stock that a stockholder has the right to acquire within 60 days after February 27,2017 are deemed to be outstanding for the purpose of calculating that stockholder’s percentage beneficialownership. (4)Based on the most recently available Schedule 13G/A filed with the SEC on February 14, 2017 by Perritt CapitalManagement, Inc. (“Perritt Capital Management”) and Perritt Funds, Inc. (“Perritt Funds”). According to itsSchedule 13G/A, Perritt Capital Management reported as having sole voting power over 78,450 shares, sharedvoting power over 1,731,731 shares, sole dispositive power over 78,450 shares, shared dispositive power over1,731,731 shares and beneficial ownership of 1,810,181 shares. Perritt Capital Management reported that it hasshared voting power and dispositive power over 1,731,731 shares that are beneficially owned by Perritt Funds. TheSchedule 13G/A contained information as of December 31, 2016 and may not reflect current holdings of AXT’sstock. (5)Based on a Schedule 13G/A filed with the SEC on February 9, 2017 by Dimensional Fund Advisors LP(“Dimensional Fund Advisors”). According to its Schedule 13G/A, Dimensional Fund Advisors reported as havingsole voting power over 2,155,801 shares, shared voting power over no shares, sole dispositive power over 2,251,705shares, shared voting power over no shares and beneficial ownership of 2,251,705 shares. Dimensional FundAdvisors reported that it furnishes investment advice to four investment companies registered under the InvestmentCompany Act of 1940, as amended, and serves as investment manager or sub-adviser to certain other commingledfunds, group trusts and separate accounts (such investment companies, trusts and accounts, collectively referred toas the “Funds”). The securities reported on the Schedule 13G/A are beneficially owned by the Funds. DimensionalFund Advisors disclaims beneficial ownership of such securities. The Schedule 13G/A contained information as ofDecember 31, 2016 and may not reflect current holdings of AXT’s stock. (6)Includes 1,120,304 shares held by the Young Family Trust, the Morris S. Young 2016 Annuity Trust, the VickieYoung 2016 Annuity Trust and the Morris Young Family Ltd. Partnership, of which Morris Young serve as trustee.Also includes 663,271 shares subject to options that may be exercised within 60 days after February 27, 2017. (7)Includes 40,619 shares subject to options that may be exercised within 60 days after February 27, 2017. (8)Includes 183,980 shares subject to options that may be exercised within 60 days after February 27, 2017. (9)Includes 209,259, whether vested or unvested, shares of restricted stock awards. (10)Includes 164,984, whether vested or unvested, shares of restricted stock awards. (11)Includes 159,134, whether vested or unvested, shares of restricted stock awards. (12)See notes (6) through (12). Includes 1,748,576 shares of restricted stock awards, whether vested or unvested, and887,870 shares subject to options that may be exercised and released within 60 days after February 27, 2017beneficially owned by executive officers and directors. Equity Compensation Plan Information We currently maintain one equity compensation plan that provides for the issuance of common stock to officers andother employees, directors, and consultants. This plan is the 2015 Plan, which was approved by stockholders in May 2015.Our 1997 Plan was amended and restated as the 2007 Plan and all outstanding options originally issued under the 1997 Planare reflected in the 2007 Plan. We continue to have outstanding options issued under the 2007 Plan as well as options issuedand outstanding from the 2015 Plan. The following table sets forth information regarding outstanding78 Table of Contentsoptions issued under the 2007 Plan and 2015 Plan and shares reserved for future issuance under the 2015 Plan as ofDecember 31, 2016: Number of shares remaining available for future issuance Number of shares to under 2015 be issued upon Weighted-average Equity Incentive exercise of exercise price of Plan (excluding outstanding options, outstanding options, shares reflected in warrants and rights warrants and rights column (a)) Plan Category (a) (b) (c) Equity compensation plans approved by stockholders 2007 and 2015Equity Incentive Plan 3,779,040 $3.38 1,941,464 Equity compensation plans not approved by stockholders - None N/A N/A N/A Total 3,779,040 $3.38 1,941,464 Item 13. Certain Relationships and Related Transactions and Director IndependenceCertain Relationships and Related Transactions Since January 1, 2016, there has not been, nor is there currently proposed, any transaction or series of similartransactions to which we were or are to be a party in which the amount involved exceeds $120,000, and in which anydirector, executive officer or holder of more than 5% of any class of our voting securities or members of that person’simmediate family had or will have a direct or indirect material interest other than the transactions described below. 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. Procedures for Approval of Related Person Transactions The Board is committed to upholding the highest legal and ethical conduct in fulfilling its responsibilities andrecognizes that related party transactions can present a heightened risk of potential or actual conflicts of interest.Accordingly, as a general matter, it is our preference to avoid related party transactions. The Board adopted a formal relatedparty transactions policy in February 2010. Our Related Party Transactions Policy seeks to prohibit all conflicts of interest intransactions between the Company and related parties, unless they have been approved by the Board of Directors of theCompany. This policy applies to all employees and directors of the Company, our subsidiaries and our joint ventures. The Audit Committee Charter requires that members of the Audit Committee, all of whom are independent directors,review and approve all related party transactions for which such approval is required under applicable law, including SECand NASDAQ rules. Pursuant to our Code of Business Conduct and Ethics, our employees, executive officers, and directors, includingtheir immediate family members and affiliates, are prohibited from entering into a related party transaction with us withoutthe prior consent of our Audit Committee (or other independent committee of our Board of Directors in cases where it isinappropriate for our Audit Committee to review such transaction due to a conflict of interest). Any79 Table of Contentsrequest for us to enter into a transaction with an executive officer, director, principal stockholder, or any of such persons’immediate family members or affiliates, in which the amount involved exceeds $120,000 must first be presented to our AuditCommittee for review, consideration and approval. Director Independence The Board has determined that each of Dr. David C. Chang, Jesse Chen and Leonard J. LeBlanc is an independentdirector for purposes of the Nasdaq Stock Market listing standards. Item 14. Principal Accountant Fees and ServicesThe following table sets forth the aggregate fees billed to us for the fiscal years ended December 31, 2016 and 2015by BPM LLP, our independent registered public accounting firm: Fiscal 2016 Fiscal 2015 Audit Fees (1) $676,400 $657,787 Audit-Related Fees $ — $ — Tax Fees $— $— All Other Fees (2) $19,425 $13,717 (1)Audit fees represent fees for professional services provided in connection with the audit of our annual consolidatedfinancial statements, review of our quarterly condensed consolidated financial statements and services that are normallyprovided by BPM LLP in connection with statutory and regulatory filings or engagements. (2)All other fees represent fees for professional services provided in connection with a transfer price study for 2016 and thereview of a registration statement on Form S-3 filed on October 24, 2016. 80 Table of Contents PART 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, BPM LLP 82Consolidated Balance Sheets 83Consolidated Statements of Operations 84Consolidated Statements of Comprehensive Income (Loss) 85Consolidated Statements of Stockholders’ Equity 86Consolidated Statements of Cash Flows 87Notes to Consolidated Financial Statements 88 (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.81 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, 2016 and 2015, and the related consolidated statements of operations, comprehensive income (loss),stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2016. The Company’smanagement is responsible for these consolidated financial statements. Our responsibility is to express an opinion on theseconsolidated financial 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, 2016 and 2015, and the results of their operations andtheir cash flows for each of the three years in the period ended December 31, 2016, 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, 2016, 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 February 27, 2017, expressed an unqualifiedopinion thereon./s/ BPM LLPSan Jose, CaliforniaFebruary 27, 201782 Table of ContentsAXT, INC.CONSOLIDATED BALANCE SHEETS(In thousands, except per share data) December 31, 2016 2015 ASSETS Current assets: Cash and cash equivalents $36,152 $24,875 Short-term investments 11,415 11,437 Accounts receivable, net of allowances of $1,013 and $985 as of December 31, 2016 andDecember 31, 2015, respectively 14,453 18,468 Inventories 40,152 38,012 Prepaid expenses and other current assets 5,114 4,096 Total current assets 107,286 96,888 Long-term investments 6,156 7,691 Property, plant and equipment, net 27,805 31,422 Related party notes receivable – long-term 157 166 Other assets 12,842 15,729 Total assets $154,246 $151,896 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $6,691 $6,460 Accrued liabilities 6,359 6,381 Total current liabilities 13,050 12,841 Long-term portion of royalty payments 575 1,150 Other long-term liabilities 330 344 Total liabilities 13,955 14,335 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, 2016 and December 31, 2015 (Liquidation preference of$6.6 million and $6.5 million as of December 31, 2016 and December 31, 2015.) 3,532 3,532 Common stock, $0.001 par value; 70,000 shares authorized; 33,032 and 32,548 shares issuedand outstanding as of December 31, 2016 and December 31, 2015. 33 32 Additional paid-in-capital 197,078 194,646 Accumulated deficit (64,985) (70,621) Accumulated other comprehensive income 253 4,382 Total AXT, Inc. stockholders’ equity 135,911 131,971 Noncontrolling interests 4,380 5,590 Total stockholders’ equity 140,291 137,561 Total liabilities and stockholders’ equity $154,246 $151,896 See accompanying notes to consolidated financial statements.83 Table of ContentsAXT, INC.CONSOLIDATED STATEMENTS OF OPERATIONS(In thousands, except per share data) Year Ended December 31, 2016 2015 2014 Revenue $81,349 $77,502 $83,499 Cost of revenue 54,968 60,673 66,332 Gross profit 26,381 16,829 17,167 Operating expenses: Selling, general and administrative 13,880 16,064 14,970 Research and development 5,850 5,664 4,144 Restructuring charge 226 — 907 Total operating expenses 19,956 21,728 20,021 Income (loss) from operations 6,425 (4,899) (2,854) Interest income, net 409 412 483 Equity in earnings (loss) of unconsolidated joint ventures (1,995) 462 1,528 Other income, net 860 2,023 361 Income (loss) before provision for income taxes 5,699 (2,002) (482) Provision for income taxes 733 531 215 Net income (loss) 4,966 (2,533) (697) Less: Net (income) loss attributable to noncontrolling interests 670 305 (691) Net income (loss) attributable to AXT, Inc. $5,636 $(2,228) $(1,388) Net income (loss) attributable to AXT, Inc. per common share: Basic $0.17 $(0.07) $(0.05) Diluted $0.17 $(0.07) $(0.05) Weighted average number of common shares outstanding: Basic 32,139 32,183 32,452 Diluted 32,894 32,183 32,452 See accompanying notes to consolidated financial statements.84 Table of ContentsAXT, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)(In thousands) Year Ended December 31, 2016 2015 2014 Net income (loss) $4,966 $(2,533) $(697) Other comprehensive loss, net of tax: Change in foreign currency translation loss, net of tax (4,305) (3,425) (377) Change in unrealized loss on available-for-sale investments, net of tax (312) (313) (964) Total other comprehensive loss, net of tax (4,617) (3,738) (1,341) Comprehensive income (loss) 349 (6,271) (2,038) Less: Comprehensive (income) loss attributable to noncontrolling interests 1,158 752 (630) Comprehensive income (loss) attributable to AXT, Inc. $1,507 $(5,519) $(2,668) See accompanying notes to consolidated financial statements. 85 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, 2014 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 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) Othercomprehensiveincome (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 Common stockoptions exercised 555 1 1,336 1,337 1,337 Restricted stockawards canceled (207) — — Stock-basedcompensation 1,096 1,096 1,096 Issuance ofcommonstock in the form ofrestricted stock 136 — — Net income (loss) 5,636 5,636 (670) 4,966 Net dividenddeclared by jointventures — (52) (52) Othercomprehensive loss (4,129) (4,129) (488) (4,617) Balance as ofDecember 31, 2016 883 $3,532 33,032 $33 $197,078 $(64,985) $253 $135,911 $4,380 $140,291 See accompanying notes to consolidated financial statements. 86 Table of ContentsAXT, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands) Year Ended December 31, 2016 2015 2014 Cash flows from operating activities: Net income (loss) $4,966 $(2,533) $(697) Adjustments to reconcile net income (loss) to net cash provided by operatingactivities: Depreciation and amortization 4,865 5,494 5,639 Amortization of marketable securities premium 94 218 432 Stock-based compensation 1,096 1,349 1,129 Provision for doubtful accounts 313 211 9 Realized gain on sale of available for sale securities (429) (859) (1,263) Loss (gain) on disposal of equipment 5 17 (13) Loss (gain) from equity method investments, net 1,995 (462) (1,528) Changes in operating assets and liabilities: Accounts receivable 3,465 (1,076) (2,959) Inventories (2,959) (45) 479 Prepaid expenses and other current assets (1,223) 1,405 2,393 Other assets 458 542 946 Accounts payable 524 (485) (979) Accrued liabilities* 205 (1,085) 742 Other long-term liabilities, including royalties (871) (813) (833) Net cash provided by operating activities 12,504 1,878 3,497 Cash flows from investing activities: Purchases of equipment (2,728) (4,150) (1,971) Proceeds from sale of equipment 35 2 13 Purchases of available for sale securities (11,936) (12,787) (11,828) Proceeds from sales and maturities of available for sale securities 13,516 14,309 13,928 Investments in non-marketable equity investments — (162) — Dividends received from equity method investments — 305 327 Net cash provided by (used in) investing activities (1,113) (2,483) 469 Cash flows from financing activities: Proceeds from common stock options exercised 1,337 165 134 Repurchase of the Company’s common stock, including commission — (2,287) — Dividends paid by joint ventures to their minority shareholders (39) (112) (166) Net cash provided by (used in) financing activities 1,298 (2,234) (32) Effect of exchange rate changes on cash and cash equivalents (1,412) (1,100) (81) Net increase (decrease) in cash and cash equivalents 11,277 (3,939) 3,853 Cash and cash equivalents at the beginning of the period 24,875 28,814 24,961 Cash and cash equivalents at the end of the period $36,152 $24,875 $28,814 Supplemental disclosures: Income taxes paid, net of refunds $788 $284 $293 * Dividend accrued but not paid by joint ventures of $499, $534 and $563 was included in accrued liabilities as of December 31, 2016, 2015 and2014, respectively See accompanying notes to consolidated financial statements.87 Table of ContentsAXT, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNote 1. The Company and Summary of Significant Accounting PoliciesThe CompanyAXT, Inc. (“AXT”, “we,” “us,” and “our” refer to AXT, Inc. and its consolidated subsidiaries) is a worldwidedeveloper and producer of high-performance compound and single element semiconductor substrates, also known aswafers. Our consolidated subsidiaries produce and sell certain raw materials some of which are used in our substratemanufacturing process and some of which are sold to other companies. Our substrate wafers are used when a typical silicon substrate wafer cannot meet the conductive requirements of achip. 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. Inaddition, optoelectronic applications, such as LED lighting and chip-based lasers, do not use silicon substrates because theyrequire a wave form frequency that cannot be achieved using silicon. Alternative or specialty materials are used to replacesilicon as the preferred base in these situations. Our wafers provide such alternative or specialty materials. We operate ourbusiness as one segment with two product lines: specialty material substrates and raw materials. In 2016, our substrateproduct group generated 81% of our revenue and raw materials product group generated 19%. Our compound substratescombine indium with phosphorous (indium phosphide: InP) or gallium with arsenic (gallium arsenide: GaAs). Our singleelement substrates are made from germanium (Ge).Our raw materials include both raw gallium and purified gallium. We use purified gallium in producing our GaAssubstrates and sell both raw gallium and purified gallium in the open market to other companies for use in magneticmaterials, high temperature thermometers and growing single crystal ingots including gallium arsenide, gallium nitride,gallium antimonide, gallium phosphide and other materials and alloys. We also produce pyrolytic boron nitride (pBN)crucibles used in the high temperature (typically in the range 500 C to 1,500 C) growth process of single crystal ingots andepitaxial layer growth in MBE reactors. We use these pBN crucibles in our own ingot growth processes and also sell them inthe open market to other companies.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. We have seven companies accounted for bythe equity method. For subsidiaries that we consolidate, we reflect the noncontrolling interest of the portion we do not ownon our consolidated balance sheets in stockholders’ equity and in our consolidated statements of operations.ReclassificationsCertain reclassifications have been made to prior periods’ financial statements to conform to the current periodpresentation. These reclassifications did not result in any change in previously reported net income (loss) or stockholders’equity.88 Table of ContentsUse 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 fairvalue 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 similarinstruments in markets with insufficient volume or infrequent transactions (less active markets), issuer bank statements, 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 similar 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 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, 201689 Table of Contentsand 2015, the net change in fair value from the placement of the hedge to settlement had a de minimis impact to theconsolidated 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, 2016 totaled $232,000. The transaction gain totaled $717,000 and a transaction loss totaled $1.0million for the years ended December 31, 2015 and 2014, 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).Revenue RecognitionWe manufacture and sell high-performance compound semiconductor substrates including indium phosphide andsemi-conducting and semi-insulating gallium arsenide and germanium wafers, and our three consolidated subsidiaries sellcertain raw materials including 99.99% pure gallium (4N Ga), high purity gallium (7N Ga), pyrolytic boron nitride (pBN)crucibles and boron oxide (B2O3). After we ship our products, there are no remaining obligations or customer acceptancerequirements that would preclude revenue recognition. Our products are typically sold pursuant to a purchase order placedby our customers, and our terms and conditions of sale do not require customer acceptance. We recognize revenue uponshipment and transfer of title of products to our customers, which is either upon shipment from our dock, receipt at thecustomer’s dock, or removal from consignment inventory at the customer’s location, provided that we have received a validpurchase order, the price is fixed or determinable, title and risk of ownership have transferred, collection of resultingreceivables is probable, and product returns are reasonably estimable. Revenue is net of any taxes assessed by anygovernmental authority. We do not provide training, installation or commissioning services. We assess the probability of collection based ona number of factors including past history with the customer and credit worthiness. We provide for future returns based onhistorical 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 optical industries which can be highly cyclical andexperience 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 limited number of suppliers for certain raw materials, components and equipment used inmanufacturing our products, including quartz tubing and polishing solutions. We generally purchase these materials throughstandard purchase orders and not pursuant to long-term supply contracts.90 Table of ContentsFinancial instruments that potentially subject us to concentration of credit risk consist primarily of cash and cashequivalents, short-term investments, and trade accounts receivable. We invest primarily in money market accounts,certificates of deposits, corporate bonds and notes, and government securities. The composition and maturities are regularlymonitored by management. Such deposits are in excess of the amount of the insurance provided by the federal governmenton such deposits. We are exposed to credit risks in the event of default by the issuers to the extent of the amount recorded onthe 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 13% of our trade accounts receivable as of December 31, 2016 and one customer accounted for 22% of our trade accountsreceivable as of December 31, 2015. No customer represented more than 10% of our revenue for the year ended December 31, 2016. One customer, IQEGroup, represented 12% of our revenue for the year ended December 31, 2015 while no customer represented more than 10%of our revenue for the year ended December 31, 2014. Our top five customers, although not the same five customers for eachperiod, represented 35%, 40% and 34% of revenue for the years ended December 31, 2016, 2015 and 2014, respectively.Cash 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 exhausted91 Table of Contentsand recoveries are recognized when they are received. As of December 31, 2016 and 2015, our accounts receivable, netbalance was $14.5 million and $18.5 million, respectively, which was net of an allowance for doubtful accounts of $653,000and $561,000, respectively. During 2016, we increased this allowance for doubtful accounts by $92,000 due to the poorfinancial condition of a few customers partially offset by recoveries. During 2015, we increased this allowance for doubtfulaccounts by $151,000 primarily because of the poor financial condition of a few customers. No amounts have been writtenoff. If actual uncollectible accounts differ substantially from our estimates, revisions to the estimated allowance for doubtfulaccounts would be required, which could have a material impact on our financial results for future periods.The allowance for sales returns is also deducted from gross accounts receivable. During 2016, we utilized $360,000and charged an additional $296,000 resulting in the ending balance of allowance for sales returns of $360,000 as ofDecember 31, 2016. During 2015, we utilized $423,000 and charged an additional $434,000 resulting in the ending balanceof allowance for sales returns of $424,000 as of December 31, 2015.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 31,2016 and 2015, accrued product warranties totaled $251,000 and $497,000, 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.InventoriesInventories are stated at the lower of cost (approximated by standard cost) or market. Cost is determined using theweighted average cost method. Our inventory consists of raw materials as well as finished goods and work-in-process thatinclude material, labor and manufacturing overhead costs. We routinely evaluate the levels of our inventory in light ofcurrent market conditions in order to identify excess and obsolete inventory, and we provide a valuation allowance forcertain inventories to their estimated net realizable value based upon the age and quality of the product and the projectionsfor sale of the completed products.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 2016, 2015 and 2014.92 Table of ContentsImpairment 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 the subsidiary’s management, thelength of time and extent to which the fair value has been less than our cost basis, the financial condition and near-termprospects of the subsidiary, fundamental changes to the business prospects of the subsidiary, share prices of subsequentofferings, and our intent and ability to hold the investment for a period of time sufficient to allow for any anticipatedrecovery in our carrying value. We estimate fair value of our cost method investments considering available information suchas 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 and single element semiconductor substrates and sale of materials. In accordance with ASC topic 280, SegmentReporting, our chief operating decision-maker has been identified as our Chief Executive Officer, who reviews operatingresults to make decisions about allocating resources and assessing our performance for the Company. We discuss revenue andcapacity for both AXT and our joint ventures collectively, when determining capacity constraints and need for raw materialsin our business, and consider their capacity when determining our strategic and product marketing and advertising strategies.While we consolidate our majority-owned or significantly controlled joint ventures, we do not allocate any portion ofoverhead, interest and other income, interest expense or taxes to them. We therefore have determined that our joint ventureoperations do not constitute an operating segment. Since we operate in one segment, all financial segment and product lineinformation can 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 estimate the grantdate fair value of stock options, which requires the input of highly subjective assumptions, including estimating stock pricevolatility and expected term. Stock‑based compensation cost is measured at each grant date, based on the fair value of theaward, and is recognized as expense and as an increase in additional paid-in-capital over the requisite service period of theaward.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.93 Table of ContentsAdvertising CostsAdvertising costs, included in selling, general and administrative expenses, are expensed as incurred. Advertisingcosts for the years ended December 31, 2016, 2015 and 2014 were $10,000, $10,000 and $10,000, respectively.Shipping and Handling costsWe include fees billed to customers and costs incurred for shipping and handling as a component of cost ofrevenues.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 marketable securitiesand foreign currency translation adjustments. Comprehensive income (loss) is presented in the consolidated statements ofcomprehensive income (loss), net of tax.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. Potentiallydilutive common shares are excluded from the computation of weighted average number of common shares outstanding innet loss years, as their effect would be anti-dilutive to the computation.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 be94 Table of Contentsentitled in exchange, as applied through a multi-step process to achieve that core principle. Subsequently, the FASBapproved a deferral included in ASU 2015-14 that permits public entities to apply the amendments in ASU 2014-09 forannual reporting periods beginning after December 15, 2017, including interim reporting periods therein, and that wouldalso permit public entities to elect to adopt the amendments as of the original effective date as applicable to reportingperiods beginning after December 15, 2016.The FASB has since issued additional updates of its new standard on revenue recognition issued in May 2014. InMarch 2016, an amendment was issued to clarify the implementation guidance on principal versus agent consideration. Theguidance requires entities to determine whether the nature of its promise to provide goods or services to a customer isperformed in a principal or agent capacity and to recognize revenue in a gross or net manner based on its principal/agentdesignation. In April 2016, amendments were issued to clarify the identification of performance obligations and the licensingimplementation guidance in the initial standard. Amendments were issued in May 2016 related to its guidance on assessingcollectability, presentation of sales tax, noncash consideration, and completed contracts and contract modification attransition, which reduce the potential for diversity in practice, and the cost and complexity of application at transition andon an ongoing basis. The new guidance allows for the amendment to be applied either retrospectively to each prior reportingperiod presented or retrospectively as a cumulative-effect adjustment as of the date of adoption. We are currently evaluatingthe impact that the adoption of ASU 2014-09 and ASU 2015-14 may have on our consolidated financial statements and havenot elected a transition method as of the period ended December 31, 2016.In February 2016, the FASB issued ASU 2016-02, which replaces the existing guidance for leases. The new standardestablishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheetfor all leases with terms longer than twelve months. Leases will be classified as either finance or operating, with classificationaffecting the pattern of expense recognition in the income statement. The guidance is effective for fiscal years beginningafter December 15, 2018, including interim periods within those fiscal years and requires retrospective application. We willadopt in fiscal 2020 and is currently evaluating the impact of the guidance on its consolidated financial statements.In March 2016, the FASB issued ASU No. 2016-07, which eliminates the requirement to retrospectively apply theequity method in previous periods when an investor initially obtains significant influence over an investee. Under theamended guidance, the investor should apply the equity method prospectively from the date the investment qualifies for theequity method. The guidance is effective for fiscal years beginning after December 15, 2016, including interim periodswithin those fiscal years with early application permitted. We are currently evaluating the impact of the future adoption ofthis standard on our consolidated financial statements.In March 2016, the FASB issued ASU No. 2016-09, which simplifies several aspects of the accounting for sharebased payment award transactions, including the accounting for income taxes, forfeitures and statutory tax withholdingrequirements, as well as classification in the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning afterDecember 15, 2016, including interim periods. We are currently evaluating the impact of the future adoption of this standardon our consolidated financial statements.In August 2016, the FASB issued ASU No. 2016-15, which reduces diversity in practice where the FASB was eitherunclear or did not provide specific guidance for classifying cash payments and receipts in the statement of cash flows foreight specific transactions. The guidance is effective for fiscal years beginning after December 15, 2017, including interimperiods within those fiscal years and requires retrospective application with early application permitted. We are currentlyevaluating the impact of the future adoption of this standard on our consolidated financial statements.In October 2016, the FASB issued ASU No. 2016-16, which clarifies the accounting for the current and deferredincome taxes for an intra-entity transfer of an asset other than inventory. The guidance is effective for fiscal years beginningafter December 15, 2017, including periods within those fiscal years and requires retrospective application with earlyapplication permitted. We are currently evaluating the impact of the future adoption of this standard on our consolidatedfinancial statements.95 Table of ContentsIn January 2017, the FASB issued ASU No. 2017-01, which clarifies the definition of a business with the objectiveof adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (ordisposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions,disposals, goodwill, and consolidation. The guidance is effective for fiscal years beginning after December 15, 2017,including periods within those fiscal years and requires retrospective application with early application permitted. We arecurrently evaluating the impact of the future adoption of this standard on our consolidated financial statements.Note 2. Cash, Cash Equivalents and InvestmentsOur cash and cash equivalents consist of cash and instruments with original maturities of less than three months. Ourinvestments consist of instruments with original maturities of more than three months. As of December 31, 2016 and 2015,our cash, cash equivalents and investments are classified as follows (in thousands): December 31, 2016 December 31, 2015 Gross Gross Gross Gross Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair Cost Gain (Loss) Value Cost Gain (Loss) Value Classified as: Cash $23,948 $ — $ — $23,948 $10,289 $ — $ — $10,289 Cash equivalents: Certificates of deposit 12,204 — — 12,204 14,586 — — 14,586 Total cash and cashequivalents 36,152 — — 36,152 24,875 — — 24,875 Investments (available forsale): Certificates of deposit 8,999 1 (20) 8,980 9,795 1 (13) 9,783 Corporate bonds 8,479 — (47) 8,432 8,776 — (63) 8,713 Corporate equitysecurities 48 111 — 159 200 432 — 632 Total investments 17,526 112 (67) 17,571 18,771 433 (76) 19,128 Total cash, cash equivalentsand investments $53,678 $112 $(67) $53,723 $43,646 $433 $(76) $44,003 Contractual maturities oninvestments: Due within 1 year $11,325 $11,415 $11,022 $11,437 Due after 1 through 5 years 6,201 6,156 7,749 7,691 $17,526 $17,571 $18,771 $19,128 1.Certificate of deposit with original maturities of less than three months.2.Certificate of deposit with original maturities of more than three months. 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 and sold our remaining IntelliEpi stock in the second quarter of 2015 andwe no longer hold any IntelliEpi stock as of December 31, 2016. In 2015, our cash proceeds from sales of IntelliEpi stock, anavailable-for-sale investment, were $902,000, our cost was $43,000 and our gross realized gain was $859,000. In 2014, ourcash proceeds from sales of this available-for-sale investment were $1.3 million, our cost was $82,000 and our gross realizedgain was $1.3 million. 96 12 Table of ContentsWe 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 $111,000 and $432,000, net of tax, was recorded as of December 31, 2016 and 2015, respectively. This security is valuedat fair market value at December 31, 2016 and will be marked to market with changes through other comprehensive incomeuntil sold. There is no assurance that we will realize this value when the stock is sold in the future. In 2016, we sold some ofour GHI stock and our cash proceeds from sales of this available-for-sale investment was $581,000. Our cost was $152,000and our gross realized gain from sales of this available-for-sale investment was $429,000. There were no sales of GHI stockfor the year ended December 31, 2015.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, 2016 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, 2016. 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 31,2016 (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, 2016 Value (Losses) Value (Losses) Value (Losses) Investments: Certificates of deposit $5,211 $(20) $1,200 $ — $6,411 $(20) Corporate bonds 5,037 (35) 3,395 (12) 8,432 (47) Total in loss position $10,248 $(55) $4,595 $(12) $14,843 $(67) 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, 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 (Loss) Value (Loss) Value (Loss) 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) 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 $11.3million and $13.7 million as of December 31, 2016 and December 31, 2015, respectively. As of December 31, 2016, therewere seven companies accounted for under the equity method.97 Table of ContentsAs noted above, in the second quarter of 2015, we re-classified our minority investment in GHI, whichwas accounted for under the cost method, as an available-for- sale security and valued the security at fair market value. As ofDecember 31, 2016 and 2015, we no longer maintain any investments under the cost method. As of December 31, 2014, ourinvestments in this unconsolidated company had a carrying value of $200,000 and were also included in “other assets” in theconsolidated balance sheets.Fair 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 to measurefair value. Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets ofthe asset or identical assets. Level 2 instrument valuations are obtained from readily-available, observable pricing sources forcomparable instruments. Level 3 instrument valuations are obtained from unobservable inputs in which there is little or nomarket data, which require us to develop our own assumptions. On a recurring basis, we measure certain financial assets andliabilities 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, 2016. There have been no transfers between fairvalue measurement levels during the year ended December 31, 2016.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, 2016, 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, 2016 (in thousands): Quoted Prices in Significant Active Markets of Significant Other Unobservable Balance as of Identical Assets Observable Inputs Inputs December 31, 2016 (Level 1) (Level 2) (Level 3) Assets: Cash equivalents and investments: Certificates of deposit $21,184 $ — $21,184 $ — Corporate bonds 8,432 — 8,432 — Corporate equity securities 159 159 — — Total $29,775 $159 $29,616 $ — 98 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, 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 $24,369 $ — $24,369 $ — Corporate bonds 8,713 — 8,713 — Corporate equity securities 632 632 — — Total $33,714 $632 $33,082 $ — 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 2016.Note 3. InventoriesThe components of inventory are summarized below (in thousands): December 31, December 31, 2016 2015 Inventories: Raw materials $17,485 $19,532 Work in process 20,410 16,007 Finished goods 2,257 2,473 $40,152 $38,012 As of December 31, 2016 and 2015, carrying values of inventories were net of inventory reserve of $12.0 millionand $12.0 million, respectively, for excess and obsolete inventory and $254,000 and $625,000, respectively, for lower ofcost or market reserves.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. In December 2016, we determined that this receivable was in substance an investment and began re-classifying thislong term loan from “Related party notes receivable – long-term” to “Other assets” in our consolidated balance sheets. As ofDecember 31, 2016 and 2015, we included $1.4 million and $1.6 million, respectively, in “Other assets” in our consolidatedbalance sheets.JiYa also purchases raw materials from one of its equity investment entities for production in the ordinary course ofbusiness. As of December 31, 2016 and 2015, amounts payable of $1.8 million and $2.4 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, 2016 and 2015, amounts receivable of $313,000 and $473,000, respectively, were included in“accounts receivable” in our consolidated balance sheets. During the three months ended December 31, 2016, we deemed thecollection of the outstanding amount to be improbable and established an allowance in full.99 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, 2016 and 2015, Jin Mei has recorded $1,000 and $1,000 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. (“BoYu”). The lease agreement for the land of approximately 22,081 square feet commencedon January 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 certain amounts 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 Tongmeiand Dongfang in 2014 and the date of repayment was set as December 31, 2015. In 2015, both parties agreed to delay thedate of repayment to December 31, 2017. As of December 31, 2016 and 2015, the balance of $107,000 and $114,000,respectively, were included in “Related party notes receivable – long term” in our consolidated balance sheets.In April 2014, Tongmei loaned an additional of $43,000 to Dongfang. The loan bears interest at 6.15% per annumand the principal and interest totaling $50,000 as of December 31, 2016 is due on December 31, 2017. As of December 31,2016, this balance, including both principal and interest, was included in “Related party notes receivable – long term” in ourconsolidated balance sheets.Tongmei purchases raw materials from one of our equity investment entities, Emei Shan Jiamei Materials Co. Ltd.(“Jiamei”), for production in the ordinary course of business. As of December 31, 2016 and 2015, amounts payable of$377,000 and $70,000, respectively, were included in “accounts payable” in our consolidated balance sheets.Tongmei also purchases raw materials from one of our equity investment entities, Xilingol Tongli GermaniumRefine Co. Ltd. (“Tongli”), for production in the ordinary course of business. As of December 31, 2016 and 2015, amountspayable of $246,000 and $0, respectively, were included in “accounts payable” in our consolidated balance sheets. In April 2016, our consolidated joint venture, BoYu, provided a personal loan of $173,000 to one of its executiveemployees. This loan is secured by the officer’s shares in BoYu. The loan bears interest at 2.75% per annum. Principal andaccrued interest are due on March 31, 2019. As of December 31, 2016, including both principal and accrued interest, wasincluded in “prepaid expenses and other current assets” in our consolidated balance sheets. Tongmei also purchases raw materials from one of Jiya’s equity investment entities for production in the ordinarycourse of business. As of December 31, 2016 and 2015, amounts payable of $146,000 and $13,000, 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, 2016 and 2015, amounts payable to Kaide of $323,000 and $379,000, respectively, wereincluded in “accounts payable” in our consolidated balance sheets. 100 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, 2016 2015 Property, plant and equipment: Machinery and equipment, at cost $41,254 $40,899 Less: accumulated depreciation and amortization (37,311) (36,044) Building, at cost 29,600 30,388 Less: accumulated depreciation and amortization (9,654) (9,170) Leasehold improvements, at cost 4,942 5,059 Less: accumulated depreciation and amortization (3,608) (3,306) Construction in progress 2,582 3,596 $27,805 $31,422 Depreciation and amortization expense was $4.9 million, $5.5 million and $5.6 million for the years ended 2016,2015, and 2014 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. We have six direct investments. Our consolidated subsidiarieshave also made investments in private companies. We have four indirect investments. These companies form part of ouroverall supply chain.Our direct investments are summarized below (in thousands): Investment Balance as of December 31, December 31, Accounting Ownership Company 2016 2015 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 MaterialsCo., Ltd. $1,498 $1,524 Equity 46%Xilingol Tongli Germanium Co. Ltd. 4,000 5,343 Equity 25%Emeishan Jia Mei High Purity Metals Co., Ltd. 1,101 1,081 Equity 25% $6,599 $7,948 Our ownership of Beijing JiYa Semiconductor Material Co., Ltd. (“JiYa”) is 46%. We continue to consolidate JiYaas we are the founding and 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.101 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%. Wecontinue to consolidate BoYu as we have a controlling financial interest and have majority control of the board. Our ChiefExecutive Officer 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, ordinary course of business capital expenditures, and decisions concerning sales of finished product,are made by local management with regular guidance and input from us.During 2016, 2015, and 2014, the three consolidated joint ventures generated $0.1 million, $0.8 million and$3.0 million of income, respectively, of which a loss of $0.7 million, a loss of $0.3 million and a gain of $0.7 million,respectively were allocated to noncontrolling interests, resulting in $0.8 million, $1.2 million and $2.3 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 $6.6 million and $7.9 million as of December 31, 2016 and2015, 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 $1.2 million and $43,000 for the yearended December 31, 2016 and 2015, respectively, and an equity earnings of $569,000 for the years ended December 31,2014, which was recorded as “equity in earnings (loss) of unconsolidated joint ventures” in the consolidated statements ofoperations.Net loss recorded from all of the consolidated joint ventures and these three equity investment entities was $0.4million for the year ended December 31, 2016. Net income recorded from all of the consolidated joint ventures and thesethree equity investment entities was $1.1 million and $2.9 million for the years ended December 31, 2015, and 2014,respectively.We also maintain four minority investments indirectly in privately-held companies through our consolidated jointventures. JiYa holds three investments and Jin Mei holds one investment. These minority investments are accounted forunder the equity method in the books of our consolidated joint ventures. As of December 31, 2016 and 2015, ourconsolidated joint ventures included these minority investments in “other assets” in the consolidated balance sheets with acarrying value of $4.7 million and $5.8 million, respectively.102 Table of ContentsAXT’s three direct minority investment entities and the three minority investments of JiYa and the one minorityinvestment of Jin Mei 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, 2016, 2015, and 2014, respectively: Our share for the Year Ended Year Ended December 31, December 31, 2016 2015 2014 2016 2015 2014 Net revenue $24,851 $36,259 $47,824 $6,441 $9,112 $11,887 Gross (loss) profit (2,344) 8,327 21,436 (542) 1,954 5,340 Operating (loss) income (7,388) 2,494 9,046 (1,828) 494 2,059 Net (loss) income (7,947) 2,371 6,765 (1,995) 462 1,528 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, 2016and 2015, respectively: As of December 31, 2016 2015 Current assets $32,210 $32,097 Noncurrent assets 31,770 35,917 Current liabilities 24,449 18,185 Noncurrent liabilities 406 571 Our portion of the entity earnings from these seven minority investment entities that are not consolidated and areaccounted for under the equity method were a loss of $2.0 million, a gain of $462,000 and a gain of $1.5 million for the yearsended December 31, 2016, 2015, and 2014, respectively. Dividends received from these minority investment entities were$0, $305,000 and $327,000 for the years ended December 31, 2016, 2015, and 2014, respectively. Undistributed retainedearnings relating to our investments in all these minority investment entities were $4.7 million and $6.6 million as ofDecember 31, 2016 and 2015, 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 listing the company,GHI, for the stock to be deemed readily marketable. Since 2015 we no longer maintain any investments under the costmethod. Note 8. Accrued LiabilitiesThe components of accrued liabilities are summarized below (in thousands): As of December 31, 2016 2015 Accrued compensation and related charges $2,610 $2,129 Accrued professional services 583 709 Current portion of royalty payments 575 575 Dividends payable by consolidated joint ventures 499 534 Accrued product warranty 251 497 Accrued income taxes 203 225 Other accrued liabilities 1,638 1,712 $6,359 $6,381 103 Table of ContentsNote 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, 2016, 2015 and 2014. This line of creditwas terminated in January 2015 when we closed our investment account with this institution and moved all of our funds fromthis bank to a different bank. We did not apply for a new line of credit.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, 2016and 2015, 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. No shares were repurchased during 2016 under this program. As ofDecember 31, 2016, approximately $2.7 million remained available for future repurchases under this program. See Item 5,Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities in Part II.Note 11. Employee Benefit Plans and Stock-based CompensationStock Option Plans and Equity Incentive PlansIn July 1997, our board of directors approved the 1997 Stock Option Plan (“1997 Plan”), which provides for 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,104 Table of Contentsperformance units, deferred compensation awards and other stock‑based awards. Stock options and stock appreciation rightsawarded under the 2007 Plan may not be repriced without stockholder approval. Stock options and stock appreciation rightsmay not be granted below fair market value. Stock options or stock appreciation rights generally shall not be fully vestedover a period 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). In December 2008, the 2007 Plan was amended tocomply with the applicable requirements under Section 409A of the Internal Revenue Code.In May 2015, our shareholders approved our 2015 Equity Incentive Plan (the “2015 Plan”). The 2015 Plan is areplacement of the 2007 Plan. The 1,804,869 share reserve of the 2007 Plan became the reserve of the 2015 Plan, togetherwith 2,000,000 additional shares approved for issuance under the 2015 Plan. Awards that may be made under the 2015 Planare stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units,deferred compensation awards and other stock‑based awards. Stock options and stock appreciation rights awarded under the2015 Plan may not be repriced without stockholder approval. Stock options and stock appreciation rights may not be grantedbelow fair market value. Stock options or stock appreciation rights generally shall not be fully vested over a period of lessthan four 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‑monthperiod if vesting is based on a performance measure). However, options granted to consultants and restricted stock awardsgranted to independent board members typically vest in one year and the Plan does allow for similar vesting toemployees. As of December 31, 2016, approximately 2,785,000 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, 2014, 2015and 2016 (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, 2014 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 Granted 624 4.92 Exercised (555) 2.41 Canceled and expired (554) 3.26 Balance as of December 31, 2016 3,294 $3.38 7.23 $5,301 Options vested as of December 31, 2016 and unvested options expectedto vest, net of forfeitures 3,228 $3.37 7.18 $5,226 Options exercisable as of December 31, 2016 1,718 $3.45 5.70 $2,732 105 $Table of ContentsThe options outstanding and exercisable as of December 31, 2016 were in the following exercise price ranges (inthousands, except per share data): Options Vested and Options Outstanding as of Exercisable as of December 31, 2016 December 31, 2016 Weighted‑‑average Range of Weighted‑‑average Remaining Weighted‑‑Average Exercise Price Shares Exercise Price Contractual Life Shares Exercise Price $1.59-$2.14 192 $1.80 3.52 174 $1.76 $2.18-$2.18 785 $2.18 8.84 190 $2.18 $2.29-$2.36 484 $2.33 7.09 329 $2.33 $2.47-$2.51 346 $2.47 7.87 162 $2.47 $2.56-$2.91 340 $2.84 6.48 272 $2.91 $4.79-$4.92 220 $4.80 4.61 220 $4.80 $5.21-$5.21 556 $5.21 9.83 — $ — $5.61-$5.83 321 $5.78 3.98 321 $5.78 $6.31-$6.31 39 $6.31 0.81 39 $6.31 $7.82-$7.82 11 $7.82 3.84 11 $7.82 3,294 $3.38 7.23 1,718 $3.45 There were 555,000, 119,000 and 111,000 options exercised in the years ended December 31, 2016, 2015, and2014, respectively. The total intrinsic value of options exercised for the years ended December 31, 2016, 2015, and 2014, was $1,302,000, $118,000 and $105,000, respectively.As of December 31, 2016, the unamortized compensation costs related to unvested stock options granted toemployees under our stock option plan was approximately $1.9 million, net of estimated forfeitures of $120,000. These costswill be amortized on a straight-line basis over a weighted-average period of approximately 2.9 years and will be adjusted forsubsequent changes in estimated forfeitures. We did not capitalize any stock‑based compensation to inventory as ofDecember 31, 2016 and 2015, due to the immateriality of the amount.Restricted Stock AwardsA summary of activity related to restricted stock awards for the years ended December 31, 2014, 2015 and 2016 ispresented below (in thousands, except per share data): Weighted-Average Grant Date Stock Awards Shares Fair Value Non-vested as of January 1, 2014 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 Granted 136 $4.66 Vested (150) $2.34 Forfeited (207) $2.55 Non-vested as of December 31, 2016 325 $3.27 Total grant date fair value of stock awards vested during the years ended December 31, 2016, 2015, and 2014 was$351,000, $605,000 and $405,000, respectively. As of December 31, 2016, we had $876,000 of unrecognized106 Table of Contentscompensation expense related to restricted stock awards, which will be recognized over the weighted average period of 1.6years.Common StockThe following number of shares of common stock were reserved and available for future issuance at December 31,2016 (in thousands, except per share data):Options outstanding 3,294 Restricted stock awards outstanding 325 Stock available for future grant: 2015 Equity Incentive Plan 2,785 Total 6,404 Stock-based CompensationWe recorded $1.1 million, $1.3 million and $1.1 million of stock‑based compensation in our consolidatedstatements of operations for the years ended December 31, 2016, 2015, and 2014, respectively. The following tablesummarizes compensation costs related to our stock‑based compensation awards (in thousands, except per share data): Year Ended December 31, 2016 2015 2014 Stock‑based compensation in the form of employee stock options and restricted stock,included in: Cost of revenue $23 $20 $18 Selling, general and administrative 908 1,148 938 Research and development 165 181 173 Total stock-based compensation 1,096 1,349 1,129 Tax effect on stock-based compensation — — — Net effect on net income (loss) $1,096 $1,349 $1,129 Shares used in computing basic net income per share 32,139 32,183 32,452 Shares used in computing diluted net income per share 32,894 32,183 32,452 Effect on basic net income per share $(0.03) $(0.04) $(0.03) Effect on diluted net income per share $(0.03) $(0.04) $(0.03) We estimate the fair value of stock options using a Black‑Scholes valuation model, consistent with the provisions ofASC 718. There were 624,000, 866,000 and 712,000 stock options granted with weighted‑average grant date fair value of$1.85, $0.88 and $1.17 per share during 2016, 2015, and 2014, respectively. The fair value of options granted was estimatedat the date of grant using the following weighted‑average assumptions: Year Ended December 31, 2016 2015 2014 Expected term (in years) 4.0 3.9 4.1 Volatility 46.5% 51.1% 63.2%Expected dividend —% —% —%Risk-free interest rate 1.47% 1.75% 1.85% 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 as107 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 $133,000, $125,000and $115,000 for the years ended December 31, 2016, 2015, and 2014, 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 2016 and 2015(in thousands): Year Ended December 31, 2016 2015 Beginning accrued warranty and related costs $497 $802 Accruals for warranties issued 92 662 Adjustments related to pre-existing warranties including expirations and changes in estimates (223) (238) Cost of warranty repair (115) (729) Ending accrued warranty and related costs $251 $497 108 Table of Contents Note 13. Income TaxesConsolidated income before provision for income taxes includes non-U.S. income of approximately $15.0 million,$15.2 million and $12.8 million for the years ended December 31, 2016, 2015, and 2014, respectively. We recorded a currenttax provision of $733,000, $531,000 and $215,000 for the years ended December 31, 2016, 2015, and 2014, respectively.The components of the provision for income taxes are summarized below (in thousands): Year Ended December 31, 2016 2015 2014 Current: Federal $— $— $— State 4 2 2 Foreign 729 529 213 Total current 733 531 215 Deferred: Federal — — — State — — — Total deferred — — — Total net provision for income taxes $733 $531 $215 A reconciliation of the effective income tax rates and the U.S. statutory federal income tax rate is summarized below: Year Ended December 31, 2016 2015 2014 Statutory federal income tax rate 35.0% 35.0% 35.0%State income taxes, net of federal tax benefits — — (0.2) Valuation allowance (7.0) (46.1) (106.3) Stock-based compensation 1.2 (9.4) (26.1) Foreign tax rate differential (12.1) 29.3 104.2 Foreign tax incentives (13.5) 24.1 64.7 Dividend from unconsolidated affiliates 1.5 (57.8) (169.8) Tax effect in equity method loss or gain from unconsolidated affiliates 8.2 1.1 45.6 Other (0.2) (0.1) 14.4 Effective tax rate 13.1% (23.9)% (38.5)% Deferred tax assets and liabilities are summarized below (in thousands): As of December 31, 2016 2015 Deferred tax assets: Net operating loss $62,459 $60,538 Accruals and reserves not yet deductible 4,520 3,723 Credits 1,488 1,488 68,467 65,749 Deferred tax liabilities: Valuation of investment portfolio — — — — Net deferred tax assets 68,467 65,749 Valuation allowance (68,467) (65,749) Net deferred tax assets $— $— 109 Table of ContentsAs of December 31, 2016, we have federal and state net operating loss carryforwards of approximately$178.4 million and $1.0 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, 2016 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 creates sufficient uncertaintyregarding the realizability of the deferred tax assets such that a full valuation allowance has been recorded. These factorsinclude our history of losses related to domestic operations, and the lack of carryback capacity to realize deferred tax assets.The valuation allowance increased by $2.7 million and increased by $4.1 million for the years ended December 31, 2016 and2015, respectively.The China Enterprise Income Tax Law “EIT” imposes a single uniform income tax rate of 25% on all Chineseenterprises. Our subsidiaries in China have qualified for a preferential 15% tax rate that is available for High and NewTechnology Enterprises “HTE”. In order to retain the preferential tax rate, we must meet certain operating conditions, satisfycertain product requirements, meet certain headcount requirements and maintain certain levels of research expenditures. Werealized benefits from this 10% reduction in tax rate of $489 thousand, $354 thousand and $143 thousand for 2016, 2015and 2014, respectively. The favorable tax rate is renewed every three years and our subsidiaries are due for renewal betweenlate 2016 and into the end of 2017. The preferential tax rate that we enjoy could be modified or discontinued altogether atany time, which could materially and adversely affect our financial condition and results of operations.Our subsidiaries in China also qualify for reduction in their taxable income in China for R&Dexpenditures. Government pre-approval is required to claim R&D tax benefits. Any R&D claim is then submitted with theannual corporate income tax for the taxing authorities approval. We realized a reduction in tax in China of $0.2 million for2016, 2015, and 2014. Our consolidated subsidiaries in China have enjoyed various tax holidays since 2000. Benefits underthe tax holidays vary by jurisdiction.Utilization of the NOL and research and development credit carryforwards may be subject to a substantial annuallimitation due to ownership changes that have occurred previously or that could occur in the future, as provided by Section382 of the Internal Revenue Code of 1986, as well as similar state provisions. Ownership changes may limit the amount ofNOL and tax credit carryforwards that can be utilized to offset future taxable income and tax, respectively. In general, anownership change, as defined by Section 382, results from transactions increasing the ownership of certain shareholders orpublic groups in the stock of a corporation by more than 50 percentage points over a three-year period. If the Company hasexperienced a change of control, utilization of its NOL or tax credits carryforwards would be subject to an annual limitationunder Section 382. Any limitation may result in expiration of a portion of the NOL or research and development creditcarryforwards before utilization. Subsequent ownership changes could further impact the limitation in future years. Until aSection 382 study is completed and any limitation known, no amounts are being presented as an uncertain tax position. Afull valuation allowance has been provided against the Company’s NOL carryforwards and research and development creditcarryforwards and, if an adjustment is required, this adjustment would be offset by an adjustment to the valuation allowance.Thus, there would be no net impact to the balance sheet or statement of operations if an adjustment were required. During fiscal year 2016, the amount of gross unrecognized tax benefits remain unchanged. During fiscal year 2015,the amount of gross unrecognized tax benefits decreased by $1.8 million. The total amount of unrecognized tax benefits was$14.6 million as of December 31, 2016 and December 31, 2015. The Company recognizes interest and penalties related touncertain tax positions as part of the income tax provision. To date, such interest and penalties have not been material.We recognize interest and penalties related to uncertain tax positions in income tax expense. Income tax expense forthe year ended December 31, 2016 includes no interest and penalties. As of December 31, 2016, 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 2003 and 2002, respectively.110 $$$$$$Table of ContentsDeferred tax liabilities have not been recognized for $95.3 million of undistributed earnings of our foreignsubsidiaries at December 31, 2016. 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, 2016, we and ourconsolidated joint ventures held approximately $22.6 million in cash and investments in foreign bank accounts. Thisconsists of $14.5 million held by our wholly owned subsidiary in China and $8.1 million held by our three partially-ownedconsolidated subsidiaries in China. Of this $22.6 million, approximately $16.6 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.A reconciliation of the beginning and ending amount of the gross unrecognized tax benefits is as follows (inthousands): Year Ended December 31, 2016 2015 2014 Gross unrecognized tax benefits balance at beginning ofthe year 14,557 16,403 16,403 Add: Additions based on tax positions related to the currentyear — — — Additions for tax positions of prior years — — — Less: Decrease related to lapse of statute of limitations — (1,846) — Gross unrecognized tax benefits balance at end of the year 14,557 14,557 16,403 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.111 Table of Contents Note 14. 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. Potentially dilutive common shares are excluded innet loss periods, as their effect would be anti-dilutive.A reconciliation of the numerators and denominators of the basic and diluted net income (loss) per sharecalculations is as follows (in thousands, except per share data): Year ended December 31, 2016 2015 2014 Numerator: Net income (loss) attributable to AXT, Inc $5,636 $(2,228) $(1,388) Less: Preferred stock dividends (177) (177) (177) Net income (loss) available to common stockholders $5,459 $(2,405) $(1,565) Denominator: Denominator for basic net income (loss) per share - weighted average commonshares 32,139 32,183 32,452 Effect of dilutive securities: Common stock options 596 — — Restricted stock awards 159 — — Denominator for dilutive net income (loss) per common shares 32,894 32,183 32,452 Basic net income (loss) per share: Net income (loss) attributable to AXT, Inc $0.17 $(0.07) $(0.05) Net income (loss) to common stockholders $0.17 $(0.07) $(0.05) Diluted net income (loss) per share: Net income (loss) attributable to AXT, Inc $0.17 $(0.07) $(0.05) Net income (loss) to common stockholders $0.17 $(0.07) $(0.05) Options excluded from diluted net income (loss) per share as the impact is anti-dilutive 779 3,779 2,772 Restricted stock excluded from diluted net income (loss) per share as the impact is anti-dilutive 15 546 252 112 Table of ContentsNote 15. Segment Information and Foreign OperationsSegment InformationWe operate in one segment for the design, development, manufacture and distribution of high-performancecompound and single element semiconductor substrates and sale of raw materials. In accordance with ASC topic 280,Segment Reporting, our chief operating decision‑maker has been identified as the Chief Executive Officer, who reviewsoperating results to make decisions about allocating resources and assessing performance for the Company. Since we operatein one segment, all financial segment and product line information can be found in the consolidated financial statements.Product InformationThe following table represents revenue amounts (in thousands) by product type: Year Ended December 31, 2016 2015 2014 Product Type: Substrates$65,633 $58,220 $60,178 Raw Materials and Others 15,716 19,282 23,321 Total$81,349 $77,502 $83,499 Geographical InformationThe following table represents revenue amounts (in thousands) reported for products shipped to customers in thecorresponding geographic region: Year Ended December 31, 2016 2015 2014 Europe (primarily Germany)$18,637 $19,518 $21,535 China 17,448 13,728 17,451 Taiwan 15,369 13,799 11,464 Japan 11,015 9,138 11,550 Asia Pacific (excluding China, Taiwan and Japan) 10,796 11,482 11,207 North America (primarily the United States) 8,084 9,837 10,292 Total$81,349 $77,502 $83,499 Long-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, 2016 2015 Long-lived assets by geographic region, net of depreciation: North America $318 $542 China 27,487 30,880 $27,805 $31,422 113 Table of ContentsNote 16. Other Income (expense)The components of other income (expense) are summarized below (in thousands): Year Ended December 31, 2016 2015 2014Foreign exchange gain (loss) $232 $717 $(999)Gain on available-for-sales securities 429 859 1,263Other income (expense) 199 447 97 $860 $2,023 $361 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, 2016 totaled $232,000. The transaction gain totaled $717,000 and atransaction loss totaled $1.0 million for the years ended December 31, 2015 and 2014, respectively.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 year 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, 2016 the net change in fairvalue from the placement of the hedge to settlement at year end had a de minimis impact to the consolidated results. As ofDecember 31, 2016 and December 31, 2015, we had no outstanding commitments with respect to foreign exchange contracts.Gain on Sales of InvestmentsGain on sales investments were derived from the realized gain from the sales of our IntelliEpi and GSI commonstock, both of these investments are categorized as available-for-sales investment, in the Taiwan stock exchange market inyear ended December 31, 2016 and 2015. As of December 31, 2016, we no longer hold any IntelliEpi stock.Note 17. Commitments and ContingenciesLegal 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 operations.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 which expires in 2017. Total rent expenses under these operatingleases were $331,000, $313,000 and $260,000 for the years ended December 31, 2016, 2015 and 2014, 114 Table of Contentsrespectively. Total minimum lease payments under these leases as of December 31, 2016 are summarized below (inthousands): Lease Payments 2017 $174 2018 37 2019 28 2020 25 2021 25 Thereafter 66 $355 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$447,000 which was net of claim for credit of $128,000 for the year ended December 31, 2016. Royalty expense foryears ended December 31, 2015 and 2014 were $583,000, which was net of claim for credit of $217,000 and$577,000 which was net of claim for credit of $233,000, respectively. These expenses were included in cost ofrevenue. Total maximum, remaining royalty payments under this agreement as of December 31, 2016 aresummarized below (in thousands): Royalty Payments 2017 $575 2018 575 $1,150 Note 18. Unaudited Quarterly Consolidated Financial Data Quarter First Second Third Fourth (in thousands, except per share data) 2016: Revenue $18,713 $20,495 $21,872 $20,269 Gross profit 5,253 6,027 7,578 7,523 Net income attributable to AXT, Inc 42 1,151 2,229 2,214 Net (loss) attributable to AXT, Inc per share, basic $(0.00)*$0.03 $0.07 $0.07 Net (loss) attributable to AXT, Inc per share, diluted $(0.00)*$0.03 $0.07 $0.06 2015: Revenue $20,064 $21,010 $18,371 $18,057 Gross profit 4,749 4,385 4,605 3,090 Net (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) * 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 and March 31, 2016. 115 Table of ContentsNote 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 had completed this restructuring plan and the reduction in force. We had no restructuring chargesin 2015.In the second quarter of 2016, we restructured the operations of Beijing JiYa Semiconductor Material Co., Ltd.,which resulted in a reduction in force of 28 positions that were no longer required to support production and operations.Accordingly, we recorded a restructuring charge of approximately $226,000 related to the reduction in force for severance-related expenses. As of June 30, 2016, we had completed this restructuring plan and the reduction in force. During the threemonth period ended September 30, 2016 and December 31, 2016, we incurred no additional restructuring charges. 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. Item 16. Form 10-K SummaryNot applicable. 116 Table of Contents SIGNATURESPursuant 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: February 27, 2017POWER 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 February 27, 2017Morris S. Young (Principal Executive Officer) /s/ GARY L. FISCHER Chief Financial Officer and Corporate Secretary February 27, 2017Gary L. Fischer (Principal Financial Officer andPrincipal Accounting Officer) /s/ JESSE CHEN Chairman of the Board of Directors February 27, 2017Jesse Chen /s/ DAVID C. CHANG Director February 27, 2017David C. Chang /s/ LEONARD LEBLANC Director February 27, 2017Leonard LeBlanc 117 Table of ContentsAXT, Inc.EXHIBITSTOFORM 10-K ANNUAL REPORTFor the Year Ended December 31, 2016ExhibitNumber 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 Laws10.1(8)* Form of Indemnification Agreement for directors and officers10.2(9)* 1997 Stock Option Plan and forms of agreements thereunder10.3(10)** 6-inch Supply Agreement dated December 31, 2008 between AXT, Inc. and IQE plc10.4(11)** 4-inch Supply Agreement dated December 31, 2008 between AXT, Inc. and IQE plc10.5(12)* 2007 Equity Incentive Plan (amended December 8, 2008)10.6(13)* Forms of agreements under the 2007 Equity Incentive Plan10.7(14)* Employment Letter Agreement between the Company and Mr. Robert G. Ochrym10.8(15)* Amended and Restated Employment Offer Letter between the Company and Dr. Morris S. Young datedDecember 4, 201210.9(16)* Employment Letter Agreement between the Company and Mr. Gary L. Fischer10.10(17)* 2015 Equity Incentive Plan10.11(18)* Executive Incentive Plan12.1 Computation of Ratio of Earnings to Fixed Charges21.1 List of Subsidiaries23.1 Consent of Independent Registered Public Accounting Firm, BPM LLP24.1 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, 2000.118 Table of Contents(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 10.1 to registrant’s Form 8-K filed with the SEC on October 31, 2014.(9)Incorporated by reference to exhibit 10.3 to registrant’s Registration Statement on Form S-1 filed with the SEC on March 17, 1998.(10)Incorporated by reference to exhibit 10.29 to registrant’s Form 8-K filed with the SEC on January 5, 2009.(11)Incorporated by reference to exhibit 10.30 to registrant’s Form 8-K filed with the SEC on January 5, 2009.(12)Incorporated by reference to exhibit 10.31 to registrant’s Form 10-K filed with the SEC on March 31, 2009.(13)Incorporated by reference to exhibit 10.20 to registrant’s Form 10-K filed with the SEC on March 22, 2010.(14)Incorporated by reference to exhibit 10.24 to registrant’s Form 10-K filed with the SEC on March 22, 2010.(15)Incorporated by reference to exhibit 10.1 to registrant’s Form 8-K filed with the SEC on December 4, 2012.(16)Incorporated by reference to exhibit 10.1 to registrant’s Form 8-K filed with the SEC on August 12, 2014.(17)Incorporated by reference to appendix A to the registrant’s Definitive Proxy Statement on Schedule 14A filed with the SEC on April 8,2015.(18)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. 119 Exhibit 12.1 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Year Ended December 31, 2016 2015 2014 2013 2012 2011 (in thousands) Earnings: Income (loss) before income taxes$5,699$(2,002)$(482)$(6,625)$7,003$28,618 Less: Equity in (earnings) loss of investees 1,995 (462) (1,528) (1,377) (1,281) (741) Less: Pre-tax net (income) loss attributable to noncontrolling interest 670 305 (691) (1,145) (3,040) (5,503) Add: Distributions paid by equity investees - 305 327 308 436 215 Fixed charges and preferred stock dividends, as calculated below 287 281 264 391 327 330 Total earnings$8,651$(1,573)$(2,110)$(8,448)$3,445$22,919 Computation of fixed charges and preferred stock dividends: Interest expense$ -$ -$ -$1$1$ - Preferred stock dividends 177 177 177 177 177 177 Interest component of rent expense 110 104 87 213 149 153 Total combined fixed charges and preferred stock dividends$287$281$264$391$327$330 Ratio of earnings to combined fixed charges and preferred stockdividends30.11 N/A N/A N/A 10.54 69.45 Deficiency of earnings to combined fixed charges and preferred stockdividends N/A (1,854) (2,374) (8,839) N/A N/A (1)Represents one-third of total rent expense which we believe is a reasonable estimate of the interest component of rent expense. Interestcomponent 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.(2)For periods in which there is a deficiency of earnings available to cover combined fixed charges and preferred stock dividends, theratio information is not applicable.(3)Dividends accrue on our outstanding Series A preferred stock at the rate of $0.20 per annum per share of Series A preferred stock. Wehave not paid any dividends on preferred stock. 883,000 shares of our preferred stock were issued and outstanding for all of theperiods presented. NM = ratio not meaningful (3)(1)(2) 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) and Form S-3 (No. 333-214211) of AXT, Inc. of our reportsdated February 27, 2017 relating to the consolidated financial statements and the effectiveness of internal controlover financial reporting as of December 31, 2016, which appear in this Form 10-K. /s/ BPM LLPSan Jose, CaliforniaFebruary 27, 2017 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.February 27, 2017/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.February 27, 2017/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 31,2016 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: February 27, 2017By:/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 31,2016 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: February 27, 2017By:/s/ Gary L. Fischer Gary L. Fischer Chief Financial Officer and Corporate Secretary (Principal Financial Officer and Principal Accounting Officer)

Continue reading text version or see original annual report in PDF format above