AXT
Annual Report 2017

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, 2017OR☐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 check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or anemerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule12b-2 of the Exchange Act.reporting company)Large accelerated filer ☐Accelerated filer ☒Non‑accelerated filer ☐(Do not check if a smaller reporting company)Smaller reporting company ☐Emerging growth company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any newor revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐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 $6.35 for the common stock onJune 30, 2017 as reported on the Nasdaq Global Select Market, was approximately $236,453,006. Shares of common stock held by each officer, director and byeach person who owns 10% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determinationof affiliate status is not a conclusive determination for other purposes.As of March 5, 2018, 39,412,313 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 35Item 2. Properties 35Item 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 36Item 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 55Item 8. Consolidated Financial Statements and Supplementary Data 57Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 57Item 9A. Controls and Procedures 57Item 9B. Other Information 58 PART III Item 10. Directors, Executive Officers and Corporate Governance 60Item 11. Executive Compensation 60Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 60Item 13. Certain Relationships and Related Transactions, and Director Independence 60Item 14. Principal Accountant Fees and Services 60 PART IV Item 15. Exhibits and Financial Statement Schedules 61Item 16. Form 10-K Summary 99 1 Table of Contents PART IThis Annual Report on Form 10-K (including the following section regarding Management’s Discussion andAnalysis of Financial Condition and Results of Operations) contains forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, asamended. Statements relating to our expectations regarding results of operations, customer demand, customer qualificationsof our products, our ability to expand our markets or increase sales, the development of new products, applications,enhancements or technologies, the life cycles of our products and applications, gross margins, expense levels, the impact ofthe adoption of certain accounting pronouncements, our investments in capital projects, our ability to relocate our galliumarsenide production line in a timely and orderly manner, our ability to have customers re-qualify substrates from our newmanufacturing location in Dingxing, China, and our belief that we have adequate cash and investments to meet our needsover the next 12 months are forward-looking statements. Words such as “expects,” “anticipates,” “intends,” “plans,”“believes,” “seeks,” “estimates,” “goals,” “should,” “continues,” “would,” “could” and similar expressions or variations ofsuch words are intended to identify forward‑looking statements, but are not the exclusive means of identifyingforward‑looking statements in this Annual Report on Form 10-K. Additionally, statements concerning future matters such asour strategy, plans, industry trends and the impact of trends and economic cycles on our business are forward-lookingstatements. All forward-looking statements are based upon management’s views as of the date of this Annual Report on Form10-K and are subject to risks and uncertainties that could cause actual results to differ materially from historical results orthose anticipated in such forward-looking statements. Such risks and uncertainties include those set forth under the sectionentitled “Risk Factors” in Item 1A below, as well as those discussed elsewhere in this Annual Report on Form 10-K, andidentify important factors that could disrupt or injure our business or cause actual results to differ materially from thosepredicted 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”, “the company”, “we,” “us,” and “our” refer to AXT, Inc. and its consolidated subsidiaries) is aworldwide materials science company that develops and produces high-performance compound and single elementsemiconductor substrates, also known as wafers. Our consolidated subsidiaries produce and sell certain raw materials some ofwhich are used in our substrate manufacturing process and some of which are sold to other companies.Our substrate wafers are used when a typical silicon substrate wafer cannot meet the performance requirements of a semiconductor or optoelectronic device. The dominant substrates used in producing semiconductor chips and otherelectronic circuits are made from silicon. However, certain chips may become too hot or perform their function too slowly ifsilicon is used as the base material. In addition, optoelectronic applications, such as LED lighting and chip-based lasers, donot use silicon substrates because they require a wave form frequency that cannot be achieved using silicon. Alternative orspecialty materials are used to replace silicon as the preferred base in these situations. Our wafers provide such alternative orspecialty materials. We do not design or manufacture the chips. We add value by researching, developing and producing thespecialty material wafers. We have two product lines: specialty material substrates and raw materials integral to thesesubstrates. Our compound substrates combine indium with phosphorous (indium phosphide: InP) or gallium with arsenic(gallium arsenide: GaAs). Our single element 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 (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 80%, 81% and75% of our revenue and our raw materials product group generated 20%, 19% and 25% for 2017, 2016 and 2015,respectively. 3 Table of ContentsThe following chart shows our substrate products and their materials, diameters and illustrative applications andshows our raw materials group primary products and their illustrative uses and applications. Products Substrate Group Wafer 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 Integrated circuits (PICs) • High efficiency terrestrial solar cells (CPV) • RF amplifier and switching (military wireless and potential5G) • Infrared light-emitting diode (LEDs) 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 and automobiles Gallium Arsenide 1”, 2”, 3”, 4”, 5", 6” • 3-D sensing using VCSELs (GaAs - semi-conducting) • Data center communication using VCSELs • High brightness LEDs • Lasers • Near-infrared sensors • Printer head lasers and LEDs • Laser machining, cutting and drilling • Optical couplers • High efficiency solar cells for drones and automobiles • Night vision goggles Germanium 2”, 4”, 6” • Satellite solar cells (Ge) • Optical sensors and detectors • Terrestrial concentrated photo voltaic (CPV) cells • 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 pBN insulating parts • Metal-Organic Chemical Vapour Deposition (MOCVD)reactors and organic light-emitting diode (OLED) rings 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 companies 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 such companies. 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 such companies. We purchase portions of the materials produced by these companies for our own use andthey sell the remainder of their production to third parties. The Beijing city government is expanding its offices into the area where our manufacturing facility is currentlylocated and is in the process of moving thousands of government employees into this area. The Beijing city governmentdesires to upgrade this area and has applied pressure on manufacturing companies to relocate, including us. We arecooperating with the government and, in accordance with our relocation plan, are relocating our gallium arsenide productionline. On September 12, 2017, we announced that we completed the purchase of a new manufacturing site in the city ofDingxing, China. Dingxing, located in the province of Hebei and under the jurisdiction of the prefecture-level city ofBaoding, is approximately a 90 minute drive south of our current Beijing location. The Dingxing site is approximately18.75 acres and currently has three existing buildings, which comprise approximately 140,000 sq. feet of production spaceand 50,000 sq. feet designated for offices and dormitories. We are developing plans to construct a fourth building at this site.We have also acquired property in the city of Kazuo, China, located in the province of Liaoning near the Inner MongoliaAutonomous Region and under the jurisdiction of the prefecture-level city of Chaoyang. Initially, the Kazuo site will beused to perform the first step in producing gallium arsenide, which is the blending or synthesis of gallium and arsenic (“polysynthesis”). We also intend to use the Kazuo site for ingot growth. The Dingxing site will focus on wafer processing and theingots will be shipped from our Kazuo site to our Dingxing site. Although our current focus is on relocating our galliumarsenide production line, we are also relocating our germanium production line and will consider moving our indiumphosphide production line in the future. Additional environmental permits, regulatory approvals and zoning conformanceapplications are in process. To mitigate our risks and maintain our production schedule, we are moving our gallium arsenide equipment instages so that we will continue to produce our gallium arsenide products at our Beijing site and then subsequently transferincreasing volume to the new sites. This approach will also minimize any disruption to our customers. We intend tocomplete this relocation by the end of 2018 or the first half of 2019. The relocation of our gallium arsenide production linerequires us to accurately execute our relocation plan. We expect that our major customers will want to examine and qualifythe wafer substrates produced from the new manufacturing line before placing volume purchase orders for such products. Weintend to make available initial gallium arsenide qualification wafers by March 31, 2018. A failure to properly execute ourrelocation plan could result in disruption to our production and have a material adverse impact on our revenue and ourresults of operations and financial condition. If we fail to meet the product qualification requirements of a customer, we maylose sales to that customer. Our reputation may also be damaged. Any loss of sales could have a material adverse effect onour revenue and our results of operations and financial condition.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 694 employees. In addition, our three consolidated subsidiaries have, in total,approximately 320 employees. In aggregate, we and our subsidiaries have 1,014 employees. .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 wafers (mixture of twomaterials) or single element wafer substrates. Examples of higher performance non-silicon based wafer substrates includeGaAs, InP, gallium nitride (GaN), silicon carbide (SiC) and Ge. One of the earliest broadly used alternative wafer substrateswas GaAs and GaAs wafer substrates were the earliest wafer substrates we produced.Semi-insulating GaAs is used to create various high speed microwave components, including power amplifier chipsused in cell phones, satellite communications and broadcast television applications. Semi-conducting GaAs substrates areused to create opto-electronic products, including high brightness light emitting diodes (HBLEDs) that are often used tobacklight wireless handsets and liquid crystal display (LCD) TVs and also used for automotive panels, signage, display andlighting applications. A possible new application for semi-conducting GaAs is 3-D sensing chips using VCSELs (verticalcavity surface emitting lasers) as an array of lasers on a single chip that could be used in cell phones and other devices. InP isa high performance semiconductor substrate used in broadband and fiber optic applications and data center connectivity. Inrecent years, 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 fora number of years and have developed a strong base of proprietary technology that we continue to expand.There are significant barriers to entry in the InP substrate market and currently there are only three leadingproviders, including AXT. Further, we believe that this market will continue to expand and grow and we havebeen adding capacity to take advantage of this expansion.·Key provider of low defect density GaAs which can be used to make 3-D sensing chips. The deployment of 3-Dsensing facial recognition technology in cell phones and other devices requires GaAs substrates with low etchpit density (“EPD”) (i.e., low defect densities.) The requirement of low EPD is a barrier to entry and we believethere are a limited number of potential substrate providers that can meet this requirement, which includes AXT.We believe several companies in Asia are already using our wafers for development although we are not yetselling wafers into the one program that is in production. However, when we qualify wafers from our newlocation our low EPD quality and ability to expand capacity quickly can generate more revenue.·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, 2017, approximately 988 of our 1,014 employees(including employees at our Beijing and Dingxing facilities as well as our consolidated joint venturecompanies) were located in China. Our primary competitors have their major manufacturing operations inGermany or Japan. Our presence 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 are6 Table of Contentslocated. High volume emerging market applications may require rapid expansion and we believe we are well-positioned to respond to increased demand.·We are the only compound semiconductor substrate supplier to have a position in raw materials. We havepartial ownership of 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 a more reliable supply of and shorter lead-times for the raw materials central to our final manufactured products compared to third party providers. Webelieve that this dedicated supply chain will enable us to meet increases in demand from our customers byproviding an increased 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. We are able to provide custom defined products that meet our customers’ specifications andwe have the technical sales support team to engage with our customers and understand their product requirements. Seven of the members of our team that engages with customers have PhDs in material science orphysics. Our product diversity gives us a greater opportunity to expand our business into new applications andmarkets, generating more revenue.·Enhanced revenue diversity through the sale of raw materials. Because our strategy allows our consolidatedsubsidiaries to also sell raw materials in the open market to third parties, approximately one fifth of our totalsales are from non-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 wafer substrates. Our direct competitors are either privately owned companies ordivisions within very large companies that are publicly listed in Japan. We believe the combination of accessto U.S. capital markets, U.S.-based product quality standards, but China-based manufacturing and a uniquestrategy for the supply of many of the raw materials we need is a competitive advantage as well as an attractivebusiness model to our customers.·Strong cash position with $77 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:Promote our strengths in InP. As cloud-based data centers continue to combine integrated circuits and InP-basedlasers to transfer data through light, we believe there could be increased demand for InP substrates. We believe there are alsoother possible applications for InP substrates in the future, which could include driverless cars and 5G cell phones.Add InP capacity and continue InP R&D. We are continuing to add manufacturing capacity for InP to support ourgrowth for this product line. Our wafer substrate products often have long product life cycles and we believe the InP productlife cycle could be similar to the long product life cycle of GaAs. In addition to adding manufacturing capacity, we arecontinuing to invest in InP crystal growth technology and wafer processing technology. For example, we are developing 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 in mobile devices. We are continuing to develop semi-conducting GaAs six-inch diameter wafers with low EPD. The GaAs substrate requirements for 3-D sensing/facial recognitionapplications include very low defect densities. We intend to submit qualification wafers from our new manufacturing lineonce the equipment has been transferred and installed.Establish the ability to rapidly add GaAs capacity. The planned relocation of our GaAs manufacturing linespresents a strategic opportunity to ensure our ability to increase capacity at our new site in the future should market demandsjustify such capacity expansion and we intend to review our capacity expansion requirements as we proceed.Offer diverse products, including custom products. We believe AXT has a reputation in the market for providing abroad range of products, including custom products that are supported by a team of technical sales support professionals, themajority of whom hold advanced graduate degrees in physics or materials science. We plan to further promote this brandimage as a way to differentiate ourselves in the market. We believe this strategy will lead to a more diverse customer base.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 improve their financial performance as they continue to support AXT’s supply chain.Materials 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 derived 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 compound8 Table of Contentselements). Single-crystalline wafers typically have better material parameters. Depending on physical properties of thematerials in a wafer, the performance of devices and circuits can be remarkably different.AXT uses its proprietary vertical gradient freeze (VGF) technology for growing single crystal Indium Phosphide(InP), Gallium Arsenide (GaAs) and Germanium (Ge) ingots. After growing the crystalline ingot, the ingot is then sliced 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 by combining elements from Groups III and V in the periodictable of elements, whereas Ge is a Group IV elemental material. Each of these materials has unique properties that determinethe best device and/or circuit applications. As a result of their special high electron mobility combined with their direct 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, haveplayed 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. (Crystacomm), thus adding thecapability of growing polycrystalline and large diameter single crystal InP ingots using the Crystacomm proprietary LiquidEncapsulated Czochralski (LEC) technology. Crystacomm had a long history in the development and experimentation in InPand this acquisition transfers that proprietary technology to us. A number of Crystacomm’s proprietary methods can also beused in our VGF processes.After growing the crystalline ingot, the material is then sliced 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.Ideally, 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 or EPD. Certain microdevices, such as the array used for 3-D sensing, require wafers with very low EPD. AXT considers the process technology weuse to achieve low EPD as proprietary process technology and we believe we are one of only a few substrate manufacturingcompanies that can produce low EPD wafers.9 Table of ContentsProductsWe have two product lines: specialty material substrates and raw materials integral to these substrates. We design, develop,manufacture and distribute high-performance semiconductor substrates, also known as wafers. Through our subsidiaries inour supply chain, we also sell certain raw materials. InP is a high-performance semiconductor substrate used in fiber opticlasers and detectors, passive optical 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. Wemake semi-insulating GaAs substrates used in making semiconductor chips in applications such as power amplifiers forwireless devices, high-performance transistors and high efficiency solar cells for drones. Our semi-conducting GaAssubstrates are used to create opto-electronic products, which include High Brightness LEDs that are often used to backlightwireless handsets and LCD TVs and for automotive, signage, display and lighting applications. Our semi-conducting GaAssubstrates could be used to create opto-electronic products for 3-D sensing using VCSELs. Ge substrates are used in emergingapplications, such as triple junction 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 pBN crucibles used in the high temperature (typically in the range 500 C to 1,500 C) growth processof single crystal ingots and epitaxial layer growth in MBE reactors. We use these pBN crucibles in our own ingot growthprocesses 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. Some competitors provide onlygallium arsenide substrates. We provide gallium arsenide and also indium phosphide and germanium substrates. Somecompetitors limit their wafer diameters to only a few sizes. Our wafers range from one inch to up to six inches indiameter. We also produce substrates with customer defined specifications, which may range in thickness or smoothness andmay include adding special additional materials, such as iron or sulfur. In addition to our wafers or substrates, we alsogenerate revenue from our consolidated subsidiaries that sell raw materials. Product diversity can mitigate some of the downcycles in our market because we are not dependent on a single product or application for revenue. CustomersBefore 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 that 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. Two customers, Landmark and Osram, represented 12% and 11%, respectively, of our revenue for the year endedDecember 31, 2017. No customer represented more than 10% of our revenue for the year ended December 31,10 Table of Contents2016 while one customer, IQE Group, represented 12% of our revenue for the year ended December 31, 2015. Our top fivecustomers, although not the same five customers for each period, represented 35%, 35% and 40% of our revenue for the yearsended December 31, 2017, 2016 and 2015, respectively.For the year ended December 31, 2017, each of three third-party customers for the raw materials products from ourconsolidated subsidiaries accounted for over 10% of the revenue from raw materials sales. For the year ended December 31,2016, each of four third-party customers for the raw materials products from our consolidated subsidiaries accounted for over10% of the revenue from raw materials sales while there were three third-party customers for the year ended December 31,2015. Our subsidiaries and joint ventures are a key strategic benefit for us as they further diversify our sources of revenue.Manufacturing, Raw Materials and SuppliesWe manufacture all of our products in the PRC. We believe this location generally has favorable costs for facilitiesand labor compared to the United States or compared to the location of some of our competitors 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 also 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 to help us increase automation in our production line and, therefore, reducevariability and defects. In addition, we secured a manufacturing license from Hitachi Metals. This license includes detailedwork instructions for using the equipment purchased and allows us to apply the licensed proprietary wafer processingtechnology at any step and on any form of equipment in our line. Due to potential defects, yield is a key factor in ourmanufacturing cost. Other key elements are the initial cost of the raw material elements, manufacturing equipment, factoryloading, facilities and labor.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, China andEurope. We use independent sales representatives and distributors in Japan, Taiwan, Korea and other areas. Our directsalesforce is knowledgeable in the use of compound and single‑element substrates. Specialty material wafers arescientifically complicated. Our application engineers must work closely with customers during all stages of our wafer11 Table of Contentssubstrate manufacturing process, from developing the precise composition of the wafer substrate through manufacturing andprocessing the wafer substrate to the customer’s specifications. We believe that maintaining a close relationship withcustomers and providing them with engineering support improves customer satisfaction and provides us with a competitiveadvantage in selling. Seven of the members of our technical sales support team who frequently engage with customers havePhDs in physics or materials science.International Sales. International sales are a substantial part of our business. Sales to customers outside NorthAmerica (primarily the United States) accounted for approximately 91%, 90% and 87% of our revenue during 2017, 2016and 2015, respectively. The primary markets for sales of our substrate products outside of North America are to customerslocated in Asia and Western Europe. We occasionally receive immaterial orders from customers located in Israel and Russia.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, parts for MBEand parts used in manufacturing OLED rings. These subsidiaries and joint ventures have their own separate sales forces andsell directly to their own customers in addition to selling raw materials to us. Research and DevelopmentTo maintain and improve our competitive position, we focus our research and development efforts on designing newproprietary processes and products, improving the performance of existing products, increasing yields and reducingmanufacturing costs. We also conduct research and development focusing on larger diameter wafers and, in our history, wehave consistently developed new products based on larger wafer diameters. Crystal growth of specialty earth materialsbecomes significantly more difficult as the ingot diameter increases because a consistent temperature, and in the case of InP,consistent control of pressure, must be applied over a larger surface area. In 2015, we acquired certain proprietary InP crystalgrowth technology and equipment from Crystacomm.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 proprietary wafer processing equipment fromHitachi Metals. The Hitachi Metals purchase includes a license covering the use of the proprietary equipment and HitachiMetals’ proprietary wafer processing technology. A particular focus of the equipment and process technology is on cleaningthe wafers. It is important to remove any residual cleaning agents from each wafer to ensure that the epitaxial growth processis 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 $4.8 million in 2017, compared with $5.9 million in2016 and $5.7 million in 2015. Wafer substrate research and development increased in 2017 and this increase was offset by adecrease in one of our three consolidated subsidiaries. Development work focusing on yield improvement also occurs withinregular manufacturing processes.CompetitionThe semiconductor substrate industry is characterized by narrow technological boundaries, price erosion andgenerally intense competition. Certain wafer substrates, such as low quality wafer substrates for LED lighting, competealmost entirely on price. Other products, such as InP and low EPD GaAs wafers, have fewer competitors and quality is a keycompetitive factor in addition to price. We face actual and potential competition from a number of established12 Table of Contentscompanies who have the advantage of greater name recognition and more established relationships in the industry. In somecases, our competitors have substantially greater financial, technical and marketing resources as they are divisions of muchlarger companies. They may utilize these advantages to expand their product offerings more quickly, adapt to new oremerging technologies and changes in customer requirements more quickly, and devote greater resources to the marketingand sale of their products. We believe a critical factor in our business is technical support extended to the customer orprospective customer and we attempt to counter possible advantages of name recognition or size with superior technicalsupport through the use of our team of technical sales support professionals, the majority of whom hold PhDs in physics ormaterials 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.A majority of our customers specialize in epitaxial growth, a complex series of chemical layers grown on top of ourwafers. 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 Sumitomo Electric Industries(“Sumitomo”), Japan Energy (“JX”), Freiberger Compound Materials (“Freiberger”), Umicore, and China Crystal TechnologyCorp., (“CCTC”). We believe that at least two of our competitors are shipping high volumes of GaAs substrates manufacturedusing a process similar to our VGF technology. In addition, we also face competition from semiconductor devicemanufacturers that produce substrates for their own use, and for other companies, such as Skyworks and Qorvo, that areactively exploring alternative materials and marketing semiconductor devices using these alternative materials. For example,silicon-on-insulator (SOI) technology, a silicon wafer technology that produces satisfactory devices at lower cost, has beenproven in the market. From 2012 to 2015, SOI technology displaced GaAs chips in key sectors, primarily the radio frequency(RF) switching function in cell phones. 13 Table of ContentsBecause of our vertically integrated, sophisticated supply chain through our subsidiaries and joint venturecompanies, we believe we are the only compound semiconductor substrate supplier to offer a full suite of raw materials. Webelieve this gives us a unique competitive advantage because we have greater control and stability over the neededmaterials. Further, we believe we have some advantage in manufacturing costs. 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 46 patents that relate to our VGF products and processes; 25 in China, 10 in theUnited States, six in Japan, two in Taiwan, one in the European Union, one in Canada and one in Korea. Patents have aprotected life of 20 years from their filing dates. Our patents have expiration dates ranging from one expiration in 2018 to2032. In some cases we may consider filing divisional, continuation or continuation-in-part of the existing patents foradditional claims. We have two U.S. patent applications pending and 15 foreign patent applications pending, including 12in China, two in Europe, one in Japan, and one in the Patent Cooperation Treaty stage. Furthermore, in aggregate, our threeconsolidated joint venture companies have been issued 47 patents in China, including five patents issued to JiYa, 20 patentsissued to JinMei and 22 patents issued to BoYu.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 reasonable terms and/or successfully prosecute ordefend our position, our business, financial condition and results of operations could be materially and adversely affected.Environmental RegulationsWe are subject to federal, state and local environmental 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 materials during manufacturing, research anddevelopment and sales demonstrations. We maintain a number of environmental, health and safety programs that areprimarily preventive in nature. As part of these programs, we regularly monitor ongoing compliance. If we fail to comply withapplicable regulations, we could be subject to substantial liability for clean-up efforts, personal injury, fines or suspension orbe forced to cease our operations, and/or suspend or terminate the development, manufacture or use of certain of ourproducts, the use of our facilities, or the use of our real property, each of which could have a material adverse effect on ourbusiness, financial condition and results of operations. The regulatory landscape shifts and changes in China as that countryattempts to address its environmental pollution. Because we14 Table of Contentsmanufacture all of our products in China, we are subject to an evolving set of regulations that could require changes in ourequipment and processes and require us to obtain new permits. In 2017, China increased its focus on environmental concernswhich increased pressure on manufacturing companies. During a spike in air pollutants in Beijing, many manufacturingcompanies, including AXT, were ordered by the local government to stop production for several days.EmployeesAs of December 31, 2017, we had approximately 694 employees, which consisted of approximately 25 employees inour headquarters in Fremont, California, one sales professional in France, approximately 646 employees in our factory inBeijing and approximately 22 employees in our factory in Dingxing. In addition, our three consolidated subsidiaries had, intotal, approximately 320 employees. In aggregate, we and our subsidiaries had 1,014 employees, of whom 843 wereprincipally engaged in manufacturing, 115 in sales and administration and 56 in research and development. Of these 1,014employees, 25 were located in the United States, one in France and 988 in China.Most workers in China are represented by unions. As of December 31, 2017, 878 employees in China includingemployees of our subsidiaries were represented by unions. We have never experienced a work stoppage and we consider ourrelations with our employees to be good.Geographical InformationPlease see Note 15 of our Notes to Consolidated Financial Statements for information regarding our foreignoperations, and see “Risks related to international aspects of our business” under Item 1A. Risk Factors for furtherinformation on risks attendant to our foreign operations and dependence.Available InformationOur principal executive offices are located at 4281 Technology Drive, Fremont, CA 94538, and our main telephonenumber at this address is (510) 438-4700. Our Internet website address is www.axt.com. Our website address is given solelyfor informational purposes; we do not intend, by this reference, that our website should be deemed to be part of this AnnualReport on Form 10-K or to incorporate the information available at our Internet address into this Annual Report onForm 10‑K.We file electronically with the Securities and Exchange Commission, or SEC, our annual reports on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant toSection 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended. We make these reports available free of chargethrough our Internet website as soon as reasonably practicable after we have electronically filed such material with the SEC.These reports can also be obtained from the SEC’s Internet website at www.sec.gov or at the SEC's Public Reference Room at100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public ReferenceRoom by calling the SEC at 1-800-SEC-0330. Item 1A. Risk Factors For ease of reference, we have divided these risks and uncertainties into the following general categories:I.Risks related to our general business;II.Risks related to international aspects of our business;III.Risks related to our financial results and capital structure;IV.Risks related to our intellectual property; andV.Risks related to compliance, environmental regulations and other legal matters.15 Table of ContentsI. 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 enable 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, wave lengths or otherspecifications. Beginning in 2011, certain applications that had previously used GaAs substrates adopted a new silicon-based technology called silicon on insulator, or SOI. SOI technology uses a silicon-insulator-silicon layered substrate inplace of conventional silicon substrates in semiconductor manufacturing. SOI substrates cost less than GaAs substrates and,although their performance is not as robust as GaAs substrates in terms of power consumption, heat generation and speed,they became acceptable in mobile phones and other applications that were previously dominated by GaAs substrates. Theadoption of SOI resulted in decreased GaAs wafer demand, and decreased revenue. If SOI or similar technologies gain morewidespread market acceptance, or are used in more applications, our sales of specialty material based substrates could bereduced and our business and operating results could be significantly and adversely affected.Our gross margin has fluctuated historically and may decline due to several factors.Our gross 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, fluctuations in manufacturing yields and our ability to reduce product costs. These factors and othervariables change from period to period and these fluctuations are expected to continue in the future.Further, we do not control the prices at which our subsidiaries and other joint venture companies sell their rawmaterial products to third parties and we do not control their production process. However, because we consolidate the resultsof three of these companies with our own, any reduction in their gross margins could have a significant, adverse impact onour overall gross margins. One or more of our companies has in the past sold, and may in the future sell, raw materials atsignificantly reduced prices in order to gain volume sales or sales to new customers. In addition, at some points in the lastthree years, the market price of gallium dropped below our per unit inventory cost and we incurred an inventory write downunder the lower of cost or net realizable value accounting rules. In such events, our gross margin is 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 demand and correctly manage capacity, the fixedexpense levels will have an adverse effect on our business, financial condition and results of operations. For example, in thethree months ended December 31, 2015, our revenue dropped to $18.1 million and our gross margin was only 17.1%.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 recorded a charge of approximately $907,000 in the first quarter of 2014. In thesecond quarter of 2016, we restructured the operations of Beijing JiYa Semiconductor Material Co., Ltd., one of our partiallyowned consolidated subsidiaries, which resulted in a reduction in force of 28 positions that were no longer16 Table of Contentsrequired to support production and operations.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 crystal growth and waferprocessing technologies, and the number of usable wafer 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, 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.Risks 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. Such relocation, or other restrictions on manufacturing, could materially and adversely impact our results ofoperations and our financial condition. 17 Table of ContentsThe Beijing city government is expanding its offices into the area where our manufacturing facility is currentlylocated and is in the process of moving thousands of government employees into this area. The Beijing city governmentdesires to upgrade this area and has applied pressure on manufacturing companies to relocate, including us. We arecooperating with the government and, in accordance with our relocation plan, are relocating our gallium arsenide productionline to the city of Dingxing, which is approximately a 90 minute drive south of our current Beijing facility. In addition, wehave acquired a smaller site in Kazuo, located in the province of Liaoning near the Inner Mongolia Autonomous Region andunder the jurisdiction of the prefecture-level city of Chaoyang, which will initially be used for the synthesis of raw galliumand raw arsenic as well as ingot growth. Additional environmental permits, regulatory approvals and zoning conformanceapplications are in process for both sites. Given the fluidity and ever-increasing review of environmental and regulatoryordinances in China, there can be no assurance that these matters will be completed smoothly or at all. The relocation of our gallium arsenide production line requires us to accurately execute our relocation plan. Weexpect that our major customers will want to examine and qualify the wafer substrates produced at the new site before placingvolume purchase orders for products produced at the new site. A failure to properly execute our relocation plan could resultin disruption to our production and have a material adverse impact on our revenue and our results of operations and financialcondition. If we fail to meet the product qualification requirements of a customer, we may lose sales to that customer. Ourreputation may also be damaged. Any loss of sales could have a material adverse effect on our revenue and our results ofoperations and financial condition. For example, product qualification of our low EPD wafer substrates for 3-D sensingapplications will be required and a failure to satisfy all of the qualification standards could result in no orders for thisopportunity. We expect many of the key employees who are employed at our current manufacturing facility to relocate to the newsites or commute under a program we will develop. There can be no assurances that the key employees will relocate or thatwe will be able to hire qualified employees for our new manufacturing facilities. A loss of key employees and our inability tohire qualified employees could disrupt our production, which could materially and adversely impact our results of operationsand our financial condition. We do not yet have comprehensive construction bids for further modifications to the existing buildings, newbuildings or third party estimates for the complete relocation costs, but we believe these costs will be in the range of $40million to $50 million, which includes the amount we have already paid for the purchase of our new manufacturing facilitiesand will extend into 2019. However, such costs could be more expensive, particularly as we are now contemplating a largerfacility that will enable us to rapidly add furnaces and other necessary production equipment to serve the anticipated demandfor 3-D sensing VCSELs and other high-end applications. 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 applies 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 our permit application in May2015, but has not issued to us the requisite permit while we continue to make preparations in good faith to relocate ourgallium arsenide production. If our application is denied in the future before we complete our relocation, then our galliumarsenide production could be disrupted, which could materially and adversely impact our results of operations and ourfinancial condition. 18 Table of Contents Customers may require that they re-qualify our gallium arsenide wafer substrates from the new manufacturing line. We are required by the China central government to move our gallium arsenide production so that it is not withinBeijing and are in the process of complying. Our larger customers will view this as a process engineering change and theirinternal quality control system will require them to re-qualify our product and ensure that the product characteristics stillconform to their specifications. Delays in this qualification process or failures to re-qualify could result in a reduction oforders and have a material adverse effect on our revenue. 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, high furnace temperatures or, in the case of InP, high pressure during our manufacturing processescould render some or all of our facilities inoperable for an indefinite period of time. Actions outside of our control, such asearthquakes or other natural disasters, could also damage our facilities, rendering them inoperable. If we are unable to operateour facilities and manufacture our products, we would lose customers and revenue and our business would be harmed.On the evening of March 15, 2017, an electrical short-circuit fire occurred at our Beijing manufacturingfacility. The electrical power supply supporting 2-inch, 3-inch and 4-inch gallium arsenide and germanium crystal growthwas damaged and production in that area was stopped. In addition, a waste water pipe was damaged resulting in a halt towafer processing for four days until the pipe could be repaired. We were able to rotate key furnace hardware and use some ofthe 6-inch capacity for smaller diameter crystal growth production to mitigate the impact of the fire and resume production. Ifwe are unable to recover from a fire or natural disaster, our business and operating results could be materially and adverselyaffected.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 to produce components for electronic and opto-electronic products. Accordingly, demand forour products is subject to the demand for end-user applications which utilize our products, as well as factors affecting theability of 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. 19 Table of ContentsOur revenue, gross margins and profitability can be hurt if the average sales price of the various raw materials in ourpartially owned companies decreases. Although the companies in our vertically integrated supply chain have historically made a positive contribution toour financial performance, when the average selling prices for the raw materials produced decline, this results in a negativeimpact on our revenue, gross margin and profitability. For example, the average selling prices for 4N gallium and forgermanium were driven down by oversupply in 2015, 2016 and 2017, and negatively impacted our financial results. In 2017and 2016, the seven companies accounted for under the equity method of accounting contributed a loss of $1.7 and $2.0million, respectively, to our consolidated financial statements. There can be no assurance that the oversupply will becorrected by the market. Further, in several quarters over the past three years, one of our consolidated subsidiaries incurred alower of cost or net realizable value inventory write down, which negatively impacted our consolidated gross margin. In thefirst quarter of 2017 we incurred an impairment charge of $313,000 against one of our partially owned suppliers, writingdown our investment to zero value. If the pricing environment remains stressed by oversupply and our joint venturecompanies cannot reduce their production cost, then the reduced average selling prices of the raw materials produced by ourjoint 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 companies range from 20% to 83%. We consolidate the companies in which we have a majority or controllingfinancial interest and employ equity accounting for the companies in which we have a smaller ownership interest. Several ofthese companies occupy space within larger facilities owned and/or operated by one of the other investment partners. Severalof these partners are engaged in other manufacturing activities at or near the same facility. In some facilities, we share accessto certain functions, including water, hazardous waste treatment or air quality treatment. If a partner in any of these venturesexperiences problems with its operations, disruptions of our joint venture operations could result, having a material adverseeffect on the financial condition and results of operation of our joint venture companies, and correspondingly on ourfinancial condition or results of operations. For example, since gallium is a by-product of aluminum, our raw gallium jointventure in China, which is housed in and receives services from an affiliated aluminum plant, could generate lowerproduction of gallium as a result of reduced services provided by the aluminum plant. Accordingly, in order to meet customersupply obligations, our supply chain may have to source materials from another independent third party supplier, resulting inreduced gross margin.In addition, if any of our joint venture companies or investment partners with which our joint ventures sharefacilities is deemed to have violated applicable laws, rules or regulations governing the use, storage, discharge or disposal ofhazardous chemicals, the operations of that joint venture could be adversely affected and we could be subject to substantialliability for clean-up efforts, personal injury, fines or suspension or termination of our joint venture’s operations. Employeesworking for our joint ventures or any of the other investment partners could bring litigation against us as a result of actionstaken at the joint venture or investment partner facilities, even though we are not directly controlling those operations. While we would expect to defend ourselves vigorously in any litigation that is brought against us, litigation is inherentlyuncertain and it is possible that our business, financial condition, results of operations or cash flows could be affected. Evenif we are not deemed responsible for the actions of the joint ventures or investment partners, litigation could be costly, timeconsuming to defend and divert management attention; in addition, if we are deemed to be the most financially viable of thepartners, plaintiffs may decide to pursue us for damages.The China central government has become increasingly concerned about environmental hazards. Air pollution is awell-known problem in Beijing and other parts of China. In days of severe air pollution the government has orderedmanufacturing companies to stop all production. The central government is tightening control over hazardous chemicalsand other hazardous elements such as arsenic, which is produced by two of our joint venture companies. Similarly, acompany’s failure to meet the ever tightening standards for control of hazardous chemicals or hazardous elements could20 Table of Contentsresult in fines or shut downs. Any such orders directed at one of our joint venture companies could have a material adverseeffect on our financial results.Intense competition in the markets for our products could prevent us from increasing revenue and sustaining profitability.The markets for our products are intensely competitive. We face competition for our substrate products from othermanufacturers of substrates, such as Sumitomo, Japan Energy, Freiberger, Umicore, and CCTC and from companies, such asQorvo and Skyworks, that are actively considering alternative materials to GaAs and marketing semiconductor devices usingthese alternative materials. We believe that at least two of our major competitors are shipping high volumes of GaAssubstrates manufactured using a process similar to our VGF process technology. Other competitors may develop and beginusing similar technology. Sumitomo and Japan Energy also compete with us in the InP market. If we are unable to competeeffectively, our revenue may not increase and we may not maintain profitability. We face many competitors that have anumber of significant advantages over us, including:·greater name recognition and market share in the business;·more manufacturing experience;·extensive intellectual property; and·significantly greater financial, technical and marketing resources.Our competitors could develop new or enhanced products that are more effective than our products.The level and intensity of competition has increased over the past years and we expect competition to continue toincrease in the future. Competitive pressures have resulted in reductions in the prices of our products, and continued orincreased competition could reduce our market share, require us to further reduce the prices of our products, affect our abilityto recover costs and result in reduced gross margins and profitability.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. In certain years, we have experienced an average selling price decline of our substrate selling prices ofapproximately 5% to 10%, depending on the substrate product. It is possible that the pace of the decline of average sellingprices could accelerate beyond these levels for certain products in a commoditizing market. We anticipate that averageselling prices will decrease in the future in response to the unstable demand environment, price reductions by competitors, orby other factors, including pricing pressures from significant customers. When our average selling prices decline, ourrevenue and gross profit decline, unless we are able to sell more products or reduce the cost to manufacture our products. Wegenerally attempt to combat an average selling price decline by improving yields and manufacturing efficiencies andworking to reduce the costs of our raw materials and of manufacturing our products. We have in the past, and may in thefuture, experience declining selling prices, which could negatively impact our revenues, gross profits and financial results.We, therefore, need to sell our current products in increasing volumes to offset any decline in their average selling prices, andintroduce 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 wafer products are complex and may contain defects, including defects resulting from impurities inherent in ourraw materials or inconsistencies in our manufacturing processes. We have experienced quality control problems with some ofour products, which caused customers to return products to us, reduce orders for our products, or both. If we experiencequality control problems, or experience other manufacturing problems, customers may return product for credit, cancel orreduce orders or purchase products from our competitors. We may be unable to maintain or increase sales to our customersand sales of our products could decline. Defects in our products could cause us to incur higher manufacturing costs and sufferproduct returns and additional service expenses, all of which could adversely impact our operating results. If new productsdeveloped by us contain defects when released, our customers may be dissatisfied and we may suffer negative publicity orcustomer claims against 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 revenue from new customers or fornew products sold to existing customers.New customers typically place orders with us for our substrate products three months to a year or more after ourinitial contact with them. The sale of our products is subject to our customers’ lengthy internal evaluation and approvalprocesses. During this time, we may incur substantial expenses and expend sales, marketing and management efforts whilethe customers evaluate our products. These expenditures may not result in sales of our products. If we do not achieveanticipated sales in a period as expected, we may experience an unplanned shortfall in our revenue. As a result, our operatingresults would be adversely affected. In addition, if we fail to meet the product qualification requirements of the customer, wemay not have another opportunity to sell that product to that customer for many months or even years. In the currentcompetitive climate, the average qualification and sales cycle for our products has lengthened even further and is expected tocontinue to make it difficult for us to forecast our future sales accurately. We anticipate that sales of any future substrateproducts will also have lengthy qualification periods and will, therefore, be subject to risks substantially similar to thoseinherent in the lengthy sales cycles of our current substrate products.The loss of one or more of our key substrate customers would significantly hurt our operating results.From time to time, sales to one or more of our customers individually represent more than 10% of our revenue and ifwe were to lose a major customer the loss would negatively impact our revenue. Most of our customers are not obligated topurchase a specified quantity of our products or to provide us with binding forecasts of product purchases. In addition, ourcustomers may reduce, delay or cancel orders. In the past, we have experienced a slowdown in bookings, significant push-outs and cancellation of orders from customers. If we lose a major customer or if a customer cancels, reduces or delays orders,our revenue would decline. In addition, customers that have accounted for significant revenue in the past may not continueto generate revenue for us in any future period. Any loss of customers or any delay in scheduled shipments of our productscould cause revenue to fall below our expectations and the expectations of market analysts or investors, causing our stockprice 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 cycles of bothsemiconductor companies’ and their customers’ products or a decline in general economic conditions. This may22 Table of Contentsadversely 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. Oversupply causes greater price competition and can cause our revenue, gross margins and net income todecline. During periods of weak demand, customers typically reduce purchases, delay delivery of products and/or cancelorders for our products. 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.A significant portion of our operating expense and manufacturing costs are relatively fixed. If revenue for aparticular quarter is lower than we expect, we likely will be unable to proportionately reduce our operating expenses or fixedmanufacturing costs for that quarter, which would harm our operating results. If we do not successfully develop new product features and improvements and new products that respond to customerrequirements, our ability to generate revenue, obtain new customers, and retain existing customers may suffer.Our success depends on our ability to offer new product features, improved performance characteristics and newproducts, such as larger diameter substrates, low defect density substrates, thicker or thinner substrates, substrates withextreme surface flatness specifications, substrates that are manufactured with a doped crystal growth process or substrates thatincorporate leading technology and other technological advances. New products must meet customer needs and competeeffectively on quality, price and performance. The markets for our products are characterized by rapid technological change,changing customer needs and evolving industry standards. If our competitors introduce products employing newtechnologies or performance characteristics, our existing products could become obsolete and unmarketable. During the pastfew years, we have seen our competitors selling more substrates manufactured using a crystal growth technology similar toours, which has eroded our technological differentiation.The development of new product features, improved performance characteristics and new products can be a highlycomplex process, and we may experience delays in developing and introducing them. Any significant delay could cause usto fail to timely introduce and gain market acceptance of new products. Further, the costs involved in researching,developing and engineering new products could be greater than anticipated. If we fail to offer new products or productenhancements or fail to achieve higher quality products, we may not generate sufficient revenue to offset our developmentcosts and other expenses or meet our customers’ requirements.We have made and may continue to make strategic investments in raw materials suppliers, which may not be successful andmay result in the loss of all or part of our investment.We have made direct investments or investments through our subsidiaries in 10 raw material suppliers in China,which provide 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 significant influence over every one of thesecompanies and in some we have made only a strategic, minority investment. We may not be successful in23 Table of Contentsachieving the financial, technological or commercial advantage upon which any given investment is premised, and we couldend up losing all or part of our investment which would have a negative impact on our results of operations. In the firstquarter of 2017, we incurred an impairment charge of $313,000 against one of our partially owned suppliers, writing downour investment to zero value.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. We generally purchasethese materials 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. Delays in receiving equipment or materials could result in higher costs and cause us to delay or reduce production ofour products. If we have to delay or reduce production, we could fail to meet customer delivery schedules and our revenueand operating results could suffer.We may not be able to identify or form additional complementary joint ventures.Although we are not currently pursuing additional joint ventures, in the future, we might invest in additional jointventure companies in order to remain competitive in our marketplace and ensure a supply of critical raw materials. However,we may not be able to identify additional complementary joint venture opportunities or, even once opportunities areidentified, we may not be able to reach agreement on the terms of the business venture with the other investment partners.New joint ventures could cause us to incur additional liabilities or other expenses, any of which could adversely affect ourfinancial condition and operating results. The financial condition of our customers may affect their ability to pay amounts owed to us.Some of our customers may be undercapitalized and cope with cash flow issues. Because of competitive marketconditions, we may grant our customers extended payment terms when selling products to them. Subsequent to our fulfillingan order, some customers have been unable to make payments when due, reducing our cash balances and causing us to incurcharges to allow for a possibility that some accounts might not be paid. We have had some customers file for bankruptcy. Ifour customers do not pay their accounts we will 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 meet24 Table of Contentschanging customer requirements, while keeping inventory costs down and improving gross margins. Although we seek tomaintain sufficient inventory levels of certain materials to guard against interruptions in supply and to meet our near termneeds, we may experience shortages of certain key materials. Some of our products and supplies have in the past and may inthe future become obsolete while in inventory due to changing customer specifications, or become excess inventory due todecreased demand for our products and an inability to sell the inventory within a foreseeable period. This would result incharges that reduce our gross profit and gross margin. Furthermore, if market prices drop below the prices at which we valueinventory, we would need to take a charge for a reduction in inventory values in accordance with the lower of cost or netrealizable value valuation rule. We have in the past had to take inventory valuation and impairment charges. Any futureunexpected changes in demand or increases in costs of production that cause us to take additional charges for un-saleable,obsolete or excess inventory, or to reduce inventory values, would adversely affect our results of operations.Financial market volatility and adverse changes in the domestic and global economic environment could have asignificant adverse impact on our business, financial condition and operating results.We are subject to the risks arising from adverse changes and uncertainty in domestic and global economies.Uncertain global economic and political conditions or low or negative growth in China, Europe or the United States, alongwith volatility in the financial markets, increasing national debt and fiscal concerns in various regions, pose challenges toour industry. Currently China’s economy is slowing and this could impact our financial performance. Although we remainwell-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 and profitability. Anothersevere 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;·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 tangible or intangible 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 and political conditions and their impact onlevels of business spending, which had deteriorated significantly in many countries and regions in previous years.Uncertainties in the financial and credit markets may cause our customers to postpone deliveries. Delays in the placement ofnew orders and extended uncertainties may reduce future sales of our products and services. The revenue growth andprofitability of our business depends on the overall demand for our substrates, and we are particularly dependent on themarket conditions for the wireless, solid‑state illumination, fiber optics and telecommunications industries. Because the endusers of our products are primarily large companies whose businesses fluctuate with general economic and businessconditions, a softening of demand for products that use our substrates, caused by a weakening economy, may result indecreased revenue. Customers may find themselves facing excess inventory from earlier purchases, and may defer orreconsider purchasing products due to the downturn in their business and in the general25 Table of Contentseconomy. If market conditions deteriorate, we may experience increased collection times and greater write-offs, either ofwhich could have a material adverse effect on our profitability and our cash flow.Future tightening of credit markets and concerns regarding the availability of credit may make it more difficult 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.The effect of terrorist threats and actions on the general economy could decrease our revenue.Developed countries such as the United States and China continue to be on alert for terrorist activity. The potentialnear- and long-term impact terrorist activities may have in regards to our suppliers, customers and markets for our productsand the economy is uncertain. There may be embargos of ports or products, or destruction of shipments or our facilities, orattacks that affect our personnel. There may be other potentially adverse effects on our operating results due to significantevents that we cannot foresee. Since we perform all of our manufacturing operations in China, terrorist activity or threatsagainst U.S.‑owned enterprises are a particular concern to us.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.Typically over 85% of our revenue is from international sales. We expect that sales to customers outside the UnitedStates, particularly sales to customers in Japan, Taiwan and China, will continue to represent a significant portion of ourrevenue. Therefore, our revenue growth depends significantly on the expansion of our international sales and operations.All of our manufacturing facilities and most of our suppliers are also located outside the United States. Managingour overseas operations presents challenges, including periodic regional economic downturns, trade balance issues, varyingbusiness conditions and demands, political instability, variations in enforcement of intellectual property and contract rightsin different jurisdictions, differences in the ability to develop relationships with suppliers and other local businesses, changesin U.S. and international laws and regulations, including U.S. export restrictions, fluctuations in interest and currencyexchange rates, the ability to provide sufficient levels of technical support in different locations, cultural differences andperceptions of U.S. companies, shipping delays and terrorist acts or acts of war, among other risks. Many of these challengesare present in China, which represents a large potential market for semiconductor devices. Global uncertainties with respectto: (i) economic growth rates in various countries; (ii) sustainability of demand for electronics products; (iii) capital spendingby semiconductor manufacturers; (iv) price weakness for certain semiconductor devices; (v) changing and tighteningenvironmental regulations and (vi) political instability in regions where we have operations may also affect our business,financial condition and results of operations.Our dependence on international sales involves a number of risks, including:·unexpected changes in regulatory requirements;·longer periods to collect accounts receivable;·foreign exchange rate fluctuations;·changes in tariffs, import restrictions, export restrictions, or other trade barriers;·changes in export license requirements;26 Table of Contents·political and economic instability; and·unexpected changes in diplomatic and trade relationships.Most of our sales are denominated in U.S. dollars, except for sales to our Chinese customers which are denominatedin renminbi and our Japanese customers which are denominated in Japanese yen. We also have some small sales denominatedin Euro. Increases in the value of the U.S. dollar could increase the price of our products in non-U.S. markets and make ourproducts more expensive than competitors’ products in these markets.We are subject to foreign exchange gains and losses that materially impact our income statement. We are subject to foreign exchange gains and losses that materially impact our income statement. For example, in2017 we incurred a loss of $602,000. In 2016 we incurred a gain of $232,000. The functional currency of our wholly owned Chinese subsidiary and our partially owned joint venture companiesis the Chinese renminbi, the local currency. We incur foreign exchange gains or losses when we pay dollars to one of ourChina-based companies or a third party supplier in China. Similarly, if a company in China pays renminbi into one of ourbank accounts transacting in dollars the renminbi will be converted to dollars and we can incur a foreign exchange gain orloss. Hedging renminbi will be considered in the future but it is complicated by the number of companies involved, thediversity of transactions and restrictions imposed by the banking system in China. Sales to Japanese customers are denominated in Japanese yen. This subjects us to fluctuations in the exchange ratesbetween the U.S. dollar and the Japanese yen and can result in foreign exchange gains and losses. This has been problematicin the past and, therefore, we instituted a foreign currency hedging program dealing with yen which has mitigated theproblem. The Chinese central government is increasingly aware of air pollution and other forms of environmental pollution andtheir reform efforts can impact our manufacturing. The Chinese central government is demonstrating strong leadership to improve air quality and reduceenvironmental pollution. These efforts can impact manufacturing companies through increased inspections, regulatoryreforms and work stoppages. In the fourth quarter of 2017, many manufacturing companies in the greater Beijing area,including AXT, were instructed by the local government to cease most manufacturing for several days until the air qualityimproved. Although the work stoppage did not materially impact our quarterly output, shipments or revenue, such workstoppages could reoccur. If such work stoppages occur in the future, or if the work stoppage period is longer, it could have amaterial adverse effect on our manufacturing output. Each of our ten raw material supply chain companies could also beimpacted by environmental related orders from the central government. Joint venture companies in China bring certain risks. Since our wholly owned subsidiary and all of our partially owned companies reside in China, their activities couldsubject us to a number of risks associated with conducting operations internationally, including:·unexpected changes in regulatory requirements that may limit our ability to manufacture, export the productsof our joint venture companies, sell into particular jurisdictions or impose multiple conflicting tax laws andregulations;·difficulties in managing geographically disparate operations;·difficulties in enforcing agreements through non-U.S. legal systems;·political and economic instability, civil unrest or war;27 Table of Contents·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.Uncertainty regarding the United States’ foreign policy under the new administration could disrupt our business. We manufacture our substrates in China and, in 2017, approximately 91% 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’ current foreign policy could create uncertainty and caution in the international business community, resultingin possible disruptions in manufacturing, import/export, trade tariffs, sales, investments or other business activity. Suchdisruptions 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, other trade barriers, orunexpected 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.If China places restrictions on freight and transportation routes and on port of entry and departure this could result inshipping delays or increased costs for shipping. In August 2015, there was an explosion at the Port of Tianjin, China. As a result of this incident the governmentplaced 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 manufacturing delays orbottlenecks at shipping ports, affecting our ability to deliver products to our customers. During periods of such restrictions,we may increase our stock of critical materials (such as arsenic, gallium, and other chemicals) for use during the period thatthese restrictions are likely to last, which will increase our use of cash and increase our inventory level. Any of theserestrictions could materially and adversely impact our results of operations and our financial condition.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.28 Table of ContentsChanges 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 hazardous materials, including arsenic, environmental controls, air pollution, economic liberalization, laws andpolicies affecting technology companies, foreign investment, currency exchange rates, taxation structure and other matterscould change, resulting in greater restrictions on our ability to do business and operate our manufacturing facilities in China.We have observed a growing fluidity and tightening of regulations concerning hazardous materials and other environmentalcontrols. The Chinese government could revoke, terminate or suspend our operating licenses for reasons related toenvironmental control over the use of hazardous materials, air pollution, labor complaints, national security and similarreasons without compensation to us. In days of severe air pollution the government has ordered manufacturing companies tostop all production. For example, in Q4 of 2017 many manufacturing companies in the greater Beijing area, including AXT,were instructed to cease most manufacturing for several days until the air quality improved. If the Chinese government wereto take any of these actions, we would be prevented from conducting all or part of our business. Any failure on our part tocomply with governmental regulations could result in the loss of our ability to manufacture our products. Further, anyimposition of surcharges or any increase in Chinese tax rates or reduction or elimination of Chinese tax benefits could hurtour operating results.The Beijing city government is expanding its offices into the area where our manufacturing facility is currentlylocated and is in the process of moving thousands of government employees into this area. The Beijing city governmentdesires to upgrade this area and has applied pressure on manufacturing companies to relocate, including us. We arecooperating with the government and, in accordance with our relocation plan, are relocating our gallium arsenide waferproduction line to the city of Dingxing which is about 90 minutes south of our current facility. In addition, we have acquireda site in Kazuo, located in the province of Liaoning near the Inner Mongolia Autonomous Region and under the jurisdictionof the prefecture-level city of Chaoyang, which will initially be used for the synthesis of raw gallium and raw arsenic. Wealso intend to use the Kazuo site for ingot growth. Additional environmental permits, regulatory approvals and zoningconformance applications are in process for both sites. In light of the increased focus in China on the use of hazardousmaterials and environmental issues there can be no assurance that these matters will be completed smoothly or at all. The relocation of our gallium arsenide production line requires us to accurately execute our relocation plan. Weexpect that our major customers will want to examine and qualify the wafer substrates produced at the new site before placingvolume purchase orders for products produced at the new site. A failure to properly execute our relocation plan could resultin disruption to our production and have a material adverse impact on our revenue and our results of operations and financialcondition.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.29 Table of ContentsInstability 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 fromfinished goods inventory on hand. As a result, our revenue could be adversely impacted, and our relationships with ourcustomers could suffer, impacting our ability to generate future revenue. In addition, if power is shut off at any of ourfacilities at any time, either voluntarily or as a result of unplanned brownouts, during certain phases of our manufacturingprocess including our crystal growth phase, the work in process may be ruined and rendered unusable, causing us to incurcosts that will not be covered by revenue, and negatively impacting our cost of revenue and gross margins.An outbreak of a contagious disease such as Ebola, Severe Acute Respiratory Syndrome (SARS) or the Avian Flu mayadversely impact our manufacturing operations and some of our key suppliers and customers.Any reoccurrence of SARS or an outbreak of a contagious disease, such as Avian Flu or Ebola, may cause us totemporarily close our manufacturing operations. Similarly, if one or more of our key suppliers is required to close for anextended period, we might not have enough raw material inventories to continue manufacturing operations. In addition,while we possess management skills among our China staff that enable us to maintain our manufacturing operations withminimal on-site supervision from our U.S.‑based staff, our business could also be harmed if travel to or from China and theUnited States is restricted or inadvisable. If our manufacturing operations were closed for a significant period, we could loserevenue and market share, which would depress our financial performance and could be difficult to recapture. Finally, if oneof our key customers is required to close for an extended period, we might not be able to ship product to them, our revenuewould decline and our financial performance would suffer.III Risks Related to Our Financial Results and Capital 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, the relocation of our gallium arsenidemanufacturing operations, the extent to which we pursue on-going capital expenditures, the acquisition and build out of thesites at Dingxing and Kazuo, the level of our production, the level of profits or losses, and other factors related to theuncertainties of the industry and global economies. Our relocation expenditures and any negative cash flow effects of theseother factors will draw down our cash reserves, which could adversely affect our financial condition, reduce our value andpossibly impinge our ability to raise debt and equity funding in the future, at a time when we might need to raise additionalcash or elect to raise additional cash. Accordingly, there can be no assurance that events will not require us to seek additionalcapital or, if required, 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;·disruptions in manufacturing if air pollution or another environmental hazard causes the government to orderwork stoppages.·fluctuation of our manufacturing yields;30 Table of Contents·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; and·increases in our expenses, including expenses for research and development.Due to these factors, we believe that period-to-period comparisons of our operating results may not be meaningfulindicators of our future performance.A substantial percentage of our operating expenses are fixed, and we may be unable to adjust spending tocompensate for an unexpected shortfall in revenue. As a result, any delay in generating revenue could cause our operatingresults to fall below the expectations of market analysts or investors, which could also cause our stock price to decline.If our operating results and financial performance do not meet the guidance that we have provided to the public, our stockprice may decline.We provide public guidance on our expected operating and financial results. Although we believe that thisguidance provides our stockholders, investors and analysts with a better understanding of our expectations for the future,such guidance is comprised of forward-looking statements subject to the risks and uncertainties described in this report andin our other public filings and public statements. Our actual results may not meet the guidance we have provided. If ouroperating or financial results do not meet our guidance or the expectations of investment analysts, our stock price maydecline.We have adopted certain anti-takeover measures that may make it more difficult for a third party to acquire us.Our board of directors has the authority to issue up to 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;31 Table of Contents·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.Our common stock may be delisted from The Nasdaq Global Select Market, which could negatively impact the price of ourcommon stock and our ability to access the capital markets.Our common stock is listed on The Nasdaq Global Select Market. The bid price of our common stock has in the pastclosed below the $1.00 minimum per share bid price required for continued inclusion on The Nasdaq Global Select Marketunder Marketplace Rule 5450(a). If the bid price of our common stock remains below $1.00 per share for thirty consecutivebusiness days, we could be subject to delisting from the Nasdaq Global Select Market.Any delisting from The Nasdaq Global Select Market could have an adverse effect on our business and on thetrading of our common stock. If a delisting of our common stock were to occur, our common stock would trade 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, 2017, we had U.S. federal net operating loss carryforwards of approximately $63.6 million andstate net operating loss carryforwards of approximately $0.3 million, which begin expiring in varying amounts from 2022 ifunused. Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an“ownership change,” the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change taxattributes, such as research tax credits, to offset its post-change income and taxes may be limited. In general, an “ownershipchange” occurs if there is a cumulative change in our ownership by “5% shareholders” that exceeds 50 percentage pointsover a rolling three-year period. Similar rules may apply under state tax laws. We might have undergone prior ownershipchanges, and we may undergo ownership changes in the future, which may result in limitations on our net operating losscarryforwards and other tax attributes. Any such limitations on our ability to use our net operating loss carryforwards andother tax attributes could adversely impact our business, financial condition and results of operations. 32 2Table of ContentsIV. 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 competitors ship GaAs substratesproduced using a process similar to our VGF process. Our competitors may also develop and patent improvements to the VGFtechnology upon which we rely, and thus may limit any exclusivity we enjoy by virtue of our patents or trade secrets.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, Environmental Regulations and Other Legal MattersIf we fail to comply with environmental and safety regulations, we may be subject to significant fines or forced to cease ouroperations;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 materials 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.33 Table of ContentsThe Chinese central government is demonstrating strong leadership to improve air quality and reduceenvironmental pollution. These efforts can impact manufacturing companies through increased inspections, regulatoryreforms and work stoppages. In the fourth quarter of 2017, many manufacturing companies in the greater Beijing area,including AXT, were instructed by the local government to cease most manufacturing for several days until the air qualityimproved. Although the work stoppage did not materially impact our quarterly output, shipments or revenue, such workstoppages could reoccur. If such work stoppages occur in the future, or if the work stoppage period is longer, it could have amaterial adverse effect on our manufacturing output. Each of our 10 raw material supply chain companies could also beimpacted by environmental-related orders from the central government.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 show good faith and, more recently, significantprogress in relocating our gallium arsenide production. If our application is denied in the future before we complete ourrelocation, then our gallium arsenide production could be disrupted, which could materially and adversely impact our resultsof operations and our financial condition.We could be subject to suits for personal injuries caused by hazardous materials.In 2005, a complaint was filed against us alleging personal injury, general negligence, intentional tort, wage lossand other damages, including punitive damages, as a result of exposure of plaintiffs to high levels of gallium arsenide ingallium arsenide wafers, and methanol. Other current and/or former employees could bring litigation against us in the future.Although we have in place engineering, administrative and personnel protective equipment programs to address these issues,our ability to expand or continue to operate our present locations could be restricted or we could be required to acquirecostly remediation equipment or incur other significant expenses if we were found liable for failure to comply withenvironmental and safety regulations. Existing or future changes in laws or regulations in the United States and China mayrequire us to incur significant expenditures or liabilities, or may restrict our operations. In addition, our employees could beexposed to chemicals or other hazardous materials at our facilities and we may be subject to lawsuits seeking damages forwrongful death or personal injuries allegedly caused by exposure to chemicals or hazardous materials at our facilities. Litigation is inherently uncertain and while we would expect to defend ourselves vigorously, it is possible that ourbusiness, financial condition, results of operations or cash flows could be affected in any particular period by litigationpending and any additional litigation brought against us. In addition, future litigation could divert management’s attentionfrom our business and operations, causing our business and financial results to suffer. We could incur defense or settlementcosts in excess of the insurance covering these litigation matters, or that could result in significant judgments against us orcause us to incur costly settlements, in excess of our insurance limits. 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,34 Table of Contentsfinancial and accounting systems and controls, add experienced senior level managers, and maintain close coordinationamong our executive, engineering, accounting, marketing, sales and operations organizations. Item 1B. Unresolved Staff CommentsNone. Item 2. PropertiesOur principal properties as of March 9, 2018 are as follows: Square Location Feet Principal Use OwnershipFremont, CA 19,467 Administration Operating lease, expires November 2020Beijing, China 300,000 Production and Administration Owned by AXT / TongmeiDingXing,China 190,000 Production Owned by AXT / TongmeiKazuo, China 69,000 Production Owned by AXT / TongmeiXianxi, China 56,500 Production Owned by Beijing JiYa Semiconductor Material Co., Ltd.*Xianxi, China 7,500 Administration Owned by Beijing JiYa Semiconductor Material Co., Ltd.*Beijing, China 1,500 Administration Operating lease by Beijing JiYa Semiconductor Material Co., Ltd.,expires March 2018Nanjing, China 22,000 Production Owned by Nanjing JinMei Gallium Co., Ltd.*Nanjing, China 5,700 R&D and Administration Owned by Nanjing JinMei Gallium Co., Ltd.*Nanjing, China 3,900 Production Owned by Nanjing JinMei Gallium Co., Ltd.*Beijing, China 14,720 Production Owned by BoYu Semiconductor Vessel Craftwork Technology Co.,Ltd.*Beijing, China 7,600 Production and Administration Operating leases by BoYu Semiconductor Vessel Craftwork TechnologyCo., Ltd., expire in various terms until June 2018.* *Joint ventures in which we hold an interest and consolidate in our consolidated financial statements. We hold a 46%interest in Beijing JiYa Semiconductor Material Co., Ltd., a 83% interest in Nanjing JinMei Gallium Co., Ltd., and a63% interest in 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. 35 Table of Contents 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 2017 First Quarter$8.65$4.68Second Quarter $7.83 $5.50 Third Quarter $9.50 $5.95 Fourth Quarter $10.75 $7.65 2016 First Quarter $2.97 $2.28 Second Quarter $3.92 $2.49 Third Quarter $5.21 $3.12 Fourth Quarter $5.97 $4.35 As of March 9, 2018, there were 123 holders of record of our common stock. Because many shares of AXT’s commonstock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number ofbeneficial owners of our common stock.We have never paid or declared any cash dividends on our common stock and do not anticipate paying cashdividends in the foreseeable future. Dividends accrue on our outstanding Series A preferred stock at the rate of $0.20 perannum per share of Series A preferred stock. The 883,000 shares of Series A preferred stock issued and outstanding as ofDecember 31, 2017 are valued at $3,532,000 and are non-voting and non-convertible preferred stock with a 5.0% cumulativeannual dividend rate payable when declared by our board of directors, and a $4.00 per share liquidation preference overcommon stock that must be paid before any distribution is made to the holders of our common stock. These shares ofpreferred stock were issued to shareholders of Lyte Optronics, Inc. in connection with the completion of our acquisition ofLyte Optronics, Inc. on May 28, 1999. By the terms of the Series A preferred stock, so long as any shares of Series A preferredstock are outstanding, neither the Company nor any subsidiary of the Company shall redeem, repurchase or otherwise acquireany shares of common stock, unless all accrued dividends on the Series A preferred stock have been paid. During 2013 and2015, we repurchased shares of our outstanding common stock. As of December 31, 2015, the Series A preferred stock hadcumulative dividends of $2.9 million and we include such cumulative dividends in “Accrued liabilities” in our consolidatedbalance sheets. No shares were repurchased during 2017 and 2016 under this program. 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 year to date dividends on the Series A preferred stock when calculating our earnings per share. Issuer Purchases of Equity SecuritiesOn February 21, 2013, our Board of Directors approved a stock repurchase program pursuant to which we couldrepurchase up to $6.0 million of our outstanding common stock through February 27, 2014. The purchases could be madefrom time to time in the open market and were to be funded from our existing cash balances and cash generated fromoperations. During 2013, we repurchased approximately 285,000 shares at an average price of $2.52 per share for a totalpurchase price of $716,000 under the stock repurchase program. As of December 31, 2013, approximately $5.3 millionremained available for future repurchases under this program. No shares were repurchased in 2014 under this program and theplan expired on February 27, 2014.36 Table of ContentsOn 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 2017 or 2016 under this program. As ofDecember 31, 2017 and 2016, approximately $2.7 million remained available for future repurchases under this program,respectively.Comparison of Stockholder ReturnSet forth below is a line graph comparing the annual percentage change in the cumulative total return to thestockholders of the Company on our common stock with the CRSP Total Return Index for the Nasdaq Stock Market (U.S.Companies) and the Nasdaq Electronic Components Index for the period commencing December 31, 2012 and endingDecember 31, 2017. 12/12 12/13 12/14 12/15 12/16 12/17 AXT, Inc. 100 92.88 99.64 88.26 170.82 309.61 NASDAQ Composite 100 141.63 162.1 173 187.19 242.29 NASDAQ Electronic Components 100 142.79 190.07 186.91 241.21 341.27 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, 2017 2016 2015 2014 2013 (in thousands, except per share data) Statements of Operations Data: Revenue$98,673$81,349$77,502$83,499$85,335Cost of revenue 64,198 54,968 60,673 66,332 73,507 Gross profit 34,475 26,381 16,829 17,167 11,828 Operating expenses: Selling, general and administrative 17,009 13,880 16,064 14,970 16,066 Research and development 4,827 5,850 5,664 4,144 3,424 Restructuring charge — 226 — 907 — Total operating expenses 21,836 19,956 21,728 20,021 19,490 Income (loss) from operations 12,639 6,425 (4,899) (2,854) (7,662) Interest income, net 461 409 412 483 408 Equity in (loss) earnings of unconsolidated joint ventures (1,694) (1,995) 462 1,528 1,377 Other (expense) income, net (553) 860 2,023 361 (748) Income (loss) before provision for income taxes 10,853 5,699 (2,002) (482) (6,625) Provision for income taxes 792 733 531 215 188 Net income (loss) 10,061 4,966 (2,533) (697) (6,813) Less: Net (income) loss attributable to noncontrollinginterests 87 670 305 (691) (1,145) Net income (loss) attributable to AXT, Inc. $10,148 $5,636 $(2,228) $(1,388) $(7,958) Net income (loss) attributable to AXT, Inc. per commonshare: Basic $0.27 $0.17 $(0.07) $(0.05) $(0.25) Diluted $0.26 $0.17 $(0.07) $(0.05) $(0.25) Shares used in per share calculations: Basic 37,444 32,139 32,183 32,452 32,700 Diluted 38,966 32,894 32,183 32,452 32,700 December 31, 2017 2016 2015 2014 2013 (in thousands) Balance Sheet Data: Cash and cash equivalents $44,352 $36,152 $24,875 $28,814 $24,961 Investments 32,608 17,571 19,128 20,123 22,644 Working capital 117,927 91,335 81,146 85,668 84,114 Total assets 211,200 154,246 151,896 161,517 163,822 Current liabilities 22,594 15,951 15,742 17,525 15,426 Stockholders’ equity 188,317 137,390 134,660 141,934 145,546 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 on Form 10-K. This discussion should be read in conjunction with Item 6. “Selected Consolidated Financial Data”and our consolidated financial statements and related notes included elsewhere in this Form 10-K.Restructuring ChargesIn 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. We did not have any restructuring charges in 2017.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.In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)2014-09, which applies to any entity that either enters into contracts with customers to transfer goods or services or entersinto contracts for the transfer of non-financial assets, unless those contracts are within the scope of other standards,superseding the existing revenue recognition requirements in Accounting Standards Codification (“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 entity39 Table of Contentsexpects to be entitled in exchange, as applied through a multi-step process to achieve that core principle. Subsequently, theFASB approved a deferral included in ASU 2015-14 that permits public entities to apply the amendments in ASU 2014-09for annual 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. The Company adopted ASU 2014-09 and its related amendments as of January 1, 2018 using the modifiedretrospective method. See Note 1 "The Company and Summary of Significant Accounting Policies" for the requireddisclosures related to the impact of adopting this standard and a discussion of the Company's updated policies related torevenue recognition. We provide for future returns based on historical experience, current economic trends and changes in customerdemand at the time revenue is recognized.Accounts Receivable, Allowance for Doubtful Accounts and Allowance for sales returnsWe periodically review the likelihood of collection on our accounts receivable balances and provide an allowancefor doubtful accounts receivable primarily based upon the age of these accounts. We evaluate receivables from U.S.customers with an emphasis on balances in excess of 90 days and for receivables from customers located outside the U.S. withan emphasis on balances in excess of 120 days and establish a reserve on the receivable balances if needed. The reason forthe difference in the evaluation of receivables between foreign and U.S. customers is that U.S. customers have historicallymade payments in a shorter period of time than foreign customers. Foreign business practices generally require us to allowcustomer payment terms that are longer than those accepted in the United States. We assess the probability of collectionbased on a number of factors, including the length of time a receivable balance has been outstanding, our past history withthe customer and their creditworthiness.As of December 31, 2017 and 2016, our accounts receivable, net balance was $22.8 million and $14.5 million,respectively, which was net of an allowance for doubtful accounts of $358,000 and $653,000, respectively. During 2017, wedecreased the allowance for doubtful accounts by $295,000 due to $138,000 from bad debt recovery and $157,000 from baddebts written off in 2017. During 2016, we increased the allowance for doubtful accounts by $92,000 due to the poorfinancial condition of a few customers. No amounts were written off in 2016. 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. In addition, the allowance for sales returns is also deductedfrom gross accounts receivable. As of December 31, 2017 and 2016, the balance of allowance for sales returns was $169,000and $360,000, respectively. During 2017, we utilized $119,000 and reduced an additional $72,000 and during 2016, weutilized $360,000 and charged an additional $296,000. 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 31,2017 and 2016, accrued product warranties totaled $133,000 and $251,000, respectively. The decrease in40 Table of Contentsaccrued product warranties is primarily attributable to decreased claims for quality issues experienced by customers. If actualwarranty costs or pending new claims differ substantially from our estimates, revisions to the estimated warranty liabilitywould be required, which could have a material impact on our financial condition and results of operations for future periods.Inventory ValuationInventories are stated at the lower of cost (approximated by standard cost) or net realizable value. Cost is determinedusing the weighted average cost method. Our inventory consists of raw materials as well as finished goods and work-in-process that include material, labor and manufacturing overhead costs. We routinely evaluate the levels of our inventory inlight of current market conditions in order to identify excess and obsolete inventory, and we provide a valuation allowancefor certain inventories based upon the age and quality of the product and the projections for sale of the completed products.As of December 31, 2017 and 2016, we had an inventory reserve of $13.3 million and $12.0 million, respectively, for excessand obsolete inventory and $291,000 and $254,000, respectively, for lower of cost or net realizable value reserves. If actualdemand for our products were to be substantially lower than estimated, additional inventory adjustments for excess orobsolete inventory might be required, which could have a material impact on our business, financial condition and results ofoperations.Impairment of InvestmentsWe classify marketable investments in debt and equity securities as available-for-sale securities in accordance withASC Topic 320, Investments—Debt and Equity Securities. All available-for-sale securities with a quoted market value belowcost (or adjusted cost) are reviewed in order to determine whether the decline is other-than-temporary. Factors considered indetermining whether a loss is temporary include the magnitude of the decline in market value, the length of time the marketvalue has been below cost (or adjusted cost), credit quality, and our ability and intent to hold the securities for a period oftime 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 unconsolidated 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.For the year ended December 31, 2017, we have included an impairment charge of $313,000 for one of the galliumcompanies. During the first quarter of 2017, management determined it unlikely that this company will recover from thedifficult pricing environment and we wrote the investment down to zero. We had no impairment charges during 2016 and2015.Fair Value of InvestmentsASC Topic 820, Fair Value Measurement establishes three levels of inputs that may be used to measure fair value.Level 1 instruments represent quoted prices in active markets. Therefore, determining fair value for Level 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-derived41 Table of Contentsvaluations 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 toidentify a sample of similar securities based on the coupon rates, maturity, issuer, credit rating, and instrument type,and subjectively select an individual security or multiple securities that are deemed most similar to the securitybeing priced.·Determining which model-derived valuations to use in determining fair value requires management judgment.When observable market prices for similar securities or similar 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, 2017 and 2016, the netchange in fair value from the placement of the hedge to settlement at each month end during the quarter had a de minimisimpact to the consolidated results. Impairment of Long-Lived AssetsWe evaluate the recoverability of property, equipment and intangible assets in accordance with ASC Topic 360,Property, Plant and Equipment. When events and circumstances indicate that long-lived assets may be impaired, we comparethe carrying value of the long-lived assets to the projection of future undiscounted cash flows attributable to such assets. Inthe event that the carrying value exceeds the future undiscounted cash flows, we record an impairment charge against incomeequal to the excess of the carrying value over the asset’s fair value. Fair values are determined based on quoted marketvalues, discounted cash flows or internal and external appraisals, as applicable. Assets held for sale are carried at the lower ofcarrying value or estimated net realizable value. We had no “Assets held for sale” on the consolidated balance sheets as ofDecember 31, 2017 and 2016.Stock-Based CompensationWe account for stock-based compensation in accordance with ASC Topic 718, Stock-based Compensation. Share-based awards granted include stock options and restricted stock awards. We utilize the Black‑Scholes option pricing modelto estimate the grant date fair value of stock options, which requires the input of highly subjective assumptions, includingestimating stock price volatility and expected term. Historical volatility of our stock price was used while the expected termfor our options was estimated based on historical option exercise behavior and post-vesting forfeitures of options, and thecontractual term, the vesting period and the expected term of the outstanding options. Further, we apply an expectedforfeiture rate in determining the amount of share-based compensation. We use historical forfeitures to estimate the rate offuture forfeitures. Changes in these inputs and assumptions can materially affect the measure of estimated fair value of ourstock compensation. The cost of restricted stock awards is determined using the fair value of our common stock on the date ofgrant.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 is42 Table of Contentsrecognized 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).In March 2016, the Financial Accounting Standards Board issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. This ASU affects entities that issue share-based payment awards to their employees. The ASU isdesigned to simplify several aspects of accounting for share-based payment award transactions which include the income taxconsequences, classification of awards as either equity or liabilities, classification on the statement of cash flows andforfeiture rate calculations. ASU 2016-09 is effective for public companies for annual periods and interim periods withinthose annual periods beginning after December 15, 2016. We adopted this ASU as of January 1, 2017. The adoption of ASU2016-09 did not have a material effect on our consolidated financial statements.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. Our deferred tax assets havebeen reduced to zero by valuation allowance.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 operating segment and twoproduct lines: specialty material substrates and raw materials used to make such substrates or other related products. Werecorded our first substrate sales in 1990 and our substrate products currently include indium phosphide (InP), galliumarsenide (GaAs) and germanium (Ge) substrates used to produce semiconductor devices for use in applications such as fiberoptic 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 has grown for the last two consecutive years. Our revenue increased in 2017 by 21 percent to$98.7 million and in 2016 our revenue increased by 5 percent to $81.3 million. Gross margins also improved to 34.9% oftotal revenue in 2017 from 32.4% of total revenue in 2016. During the four years from 2012 to 2015 our revenue declined,primarily as the result of an alternative technology, silicon on insulator (“SOI”), which entered the market in 2011. SOIenabled the RF switching chip in cell phones to function satisfactorily at a reduced cost. Before 2011, silicon did notperform adequately in this function due to power consumption, heat and speed issues. 43 Table of ContentsIn 2014, our revenue from InP began to grow and, in 2014 and 2015, the InP annual growth rate exceeded 50% yearon year. This mitigated the reduction in revenue in gallium arsenide and enabled us to return to annual growth in2016. During this period, we believe our GaAs wafer business stabilized, our manufacturing yields improved and ouroutlook for GaAs today is positive, as it is for InP and for our Ge substrates. Each of these substrates has end marketapplications that we believe are growing. We are continuing to improve our six-inch low defect density or low EPD GaAssubstrates that are required for 3D-sensing using VCSELs. Currently, for the largest active deployment of VCSELs, we areworking to deliver wafers for qualification that are manufactured from our new facility. In this regard, in the second half of2017, we secured land usage rights to a site in Dingxing, China and began the required relocation of our GaAs productionline to our new manufacturing facility. The relocation will proceed on a staged basis throughout 2018. Revenue 2016 to 2017 2015 to 2016 Years Ended Dec. 31 Increase Increase 2017 2016 2015 (Decrease) % Change (Decrease) % Change Product Type: Substrates$78,619 $65,633 $58,220 $12,986 19.8% $7,413 12.7%Raw Materials and Others 20,054 15,716 19,282 4,338 27.6% (3,566) (18.5)%Total revenue$98,673 $81,349 $77,502 $17,324 21.3% $3,847 5.0% Revenue increased $17.3 million, or 21.3% in 2017 from $81.3 million in 2016. The $13.0 million increase insubstrate sales came from a 17% or more increase from each of our wafer substrate products while the $4.3 million increase inraw materials from our consolidated subsidiaries came from a 40% increase in pBN sales and a 29% increase in refinedgallium sales as compared to 2016. Except for Ge wafers, the average selling price of each type of wafer, which included rawgallium, purified gallium and pBN, increased in 2017. The revenue increase was the result of higher unit volume and higherselling prices.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 declined. The revenue increase was the result of higher unit volume and a shifttowards wafers with higher selling prices. Raw material sales decreased by $3.6 million or 18.5%, partially offsetting theincrease in our substrate product line. The decline of raw material sales was the result of decreasing average selling prices ofboth raw gallium and purified gallium by 29% while quantity sold remains consistent, which were partially offset by theincrease of average selling price of pBN.44 Table of ContentsRevenue by Geographic Region Year Ended Dec. 31, 2016 to 2017 2015 to 2016 Increase Increase 2017 2016 2015 (Decrease) % Change (Decrease) % Change ($ in thousands) China$24,962 $17,448 $13,728 $7,514 43.1%$3,720 27.1% % of total revenue 25% 21% 18% Europe (primarily Germany) 23,956 18,637 19,518 5,319 28.5% (881) (4.5)% % of total revenue 24% 23% 25% Taiwan 18,279 15,369 13,799 2,910 18.9% 1,570 11.4% % of total revenue 19% 19% 18% Japan 13,258 11,015 9,138 2,243 20.4% 1,877 20.5% % of total revenue 13% 14% 11% Asia Pacific (excluding China, Taiwan andJapan) 9,866 10,796 11,482 (930) (8.6)% (686) (6.0)% % of total revenue 10% 13% 15% North America (primarily the United States) 8,352 8,084 9,837 268 3.3% (1,753) (17.8)% % of total revenue 9% 10% 13% Total revenue$98,673 $81,349 $77,502 $17,324 21.3%$3,847 5.0% Sales to customers located outside of North America represented approximately 91%, 90% and 87% of our revenueduring 2017, 2016 and 2015, respectively.Revenue from customers in China increased by 43.1% in 2017, primarily due to an increase of $5.0 million, or 93%,from raw materials sales and an increase of $2.5 million, or 21%, from wafer substrate sales. Sales of all three of our wafersubstrates products in China grew in 2017. The growth of Ge substrates that we experienced in 2016 continued into 2017 asthe satellite solar cell market remained strong in 2017. GaAs substrates sales in 2017 also increased, primarily due to anincrease from our semi-conducting GaAs substrates, which was partially offset by decreased sales of semi-insulating GaAssubstrates. Revenue from customers in Europe increased by 28.5%, primarily due to an increase of $5.3 million, or 35%, fromwafer substrate sales, while raw materials sales from our consolidated joint ventures sales remained the same in 2017.Revenue from customers in Taiwan increased by 18.9%, primarily due to strong demand for InP substrates used in siliconphotonics, specifically in data center expansions and upgrades. Revenue from customers in Japan increased in 2017 by20.4% due to increases in both substrate and raw material sales.Revenue from customers in China increased by 27.1% in 2016, primarily due to increased sales of Ge substratesused in the satellite solar cell market as compared to 2015. In addition, InP substrate sales used in fiber-to-the-home andoffice networks grew in China, although the growth did slow in the second half of 2016. Increased revenues in China fromthese markets were offset by decreased sales of GaAs substrates used for LED applications. Further, our revenue from the saleof raw materials in China also declined. Revenue from customers in Japan increased in 2016 by 20.5% due to increasedsubstrate sales, which were partially offset by the decrease of raw materials sales. Revenue from customers in Europedecreased by 4.5% primarily due to decreased demand from the sales of raw materials. Revenue from customers in Taiwanincreased by 11.4% primarily due to increased demand from two customers that perform a foundry service for epitaxialgrowth, a process step required on all of our wafers before they can be sold to chip and optical companies. Revenue fromcustomers in Asia Pacific declined modestly by 6.0% due to a lower volume of substrate sales. Revenue from customers inNorth America decreased by 17.8% due to decreased sales from both substrates and raw materials.45 Table of ContentsGross Margin 2016 to 2017 2015 to 2016 Year Ended Dec. 31, Increase 2017 2016 2015 (Decrease) % Change (Decrease) % Change ($ in thousands) Gross profit$34,475 $26,381 $16,829 $8,094 30.7%$9,552 56.8%Gross Margin % 34.9% 32.4% 21.7% Gross margin increased to 34.9% of total revenue in 2017 from 32.4% of total revenue in 2016. Gross marginincreased in 2017 as a result of an increase in gross margins from sales of raw materials, GaAs and Ge substrates. Substrategross margin increased to 37.4% of substrate revenue in 2017 from 34.7% of revenue in 2016 and raw materials gross marginincreased to 25.5% of raw materials revenue in 2017 from 23.0% of raw materials revenue in 2016. Gross profit increasedprimarily due to favorable product mix, higher production volume, overall improvements in yield and manufacturingefficiencies and lower raw material costs used in our wafer substrates in 2017 as compared to 2016. However, the effect ofthese favorable factors was partially offset by higher excess and obsolescence charges in 2017 as compared to 2016.Gross margin increased to 32.4% of total revenue in 2016 from 21.7% of total revenue in 2015. Gross marginincreased in 2016 as a result of an increase in gross margins from sales of both substrates and raw materials. Substrate grossmargin increased to 34.7% of substrate revenue in 2016 from 23.2% of revenue in 2015 and raw materials gross marginincreased to 23.0% of raw materials revenue in 2016 from 17.1% of raw materials revenue in 2015. Gross margin increasedprimarily due to improvements in yields, manufacturing efficiencies, higher production volumes and the sale of an increasednumber of InP substrates used in optical applications, such as passive optical networks. Selling, General and Administrative Expenses 2016 to 2017 2015 to 2016 Years Ended Dec. 31 Increase Increase 2017 2016 2015 (Decrease) % Change (Decrease) % Change ($ in thousands) Selling, general and administrativeexpenses$17,009 $13,880 $16,064 $3,129 22.5%$(2,184) (13.6)%% of total revenue 17.2% 17.1% 20.7% Selling, general and administrative expenses increased $3.1 million, or 22.5%, to $17.0 million for 2017 comparedto $13.9 million for 2016. The higher selling, general and administrative expenses were primarily from higher legal fees,marketing consultants, severance pay and personnel related costs as well as from expenses incurred as a result of businessinterruption caused by the electrical fire in our Beijing facility on the evening of March 15, 2017.Selling, general and administrative expenses decreased $2.2 million, or 13.6%, to $13.9 million for 2016 comparedto $16.1 million for 2015. The decrease in selling, general and administrative expenses in 2016 was primarily due to theabsence of professional service fees incurred in connection with an investigation of potential related-party transactions thatconcluded in 2015, lower personnel-related costs, lower outside professional consulting service costs, lower stock-basedcompensation and a decrease in allowance for doubtful accounts. The decrease was partially offset by an increase in salescommission paid in 2016 resulting from increased revenue.46 Table of ContentsResearch and Development Expenses 2016 to 2017 2015 to 2016 Years Ended Dec. 31 Increase Increase 2017 2016 2015 (Decrease) % Change (Decrease) % Change ($ in thousands) Research and development$4,827 $5,850 $5,664 $(1,023) (17.5)% $186 3.3%% of total revenue 4.9% 7.2% 7.3% Research and development expenses decreased $1.0 million, or 17.5%, to $4.8 million for 2017 from $5.9 millionfor 2016. The decrease in research and development expenses in 2017 was primarily due to the reduced use of raw materialsfor product development and lower personnel-related costs at our consolidated subsidiaries. Research and development forAXT substrates increased in 2017 by approximately 8%. 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.Restructuring ChargesWe had no restructuring charges in 2017. In the second quarter of 2016, we restructured the operations of BeijingJiYa Semiconductor Material Co., Ltd., which resulted in a reduction in force of 28 positions that were no longer required tosupport production and operations. Accordingly, we recorded a restructuring charge of approximately $226,000 related tothe reduction in force for severance-related expenses. As of June 30, 2016, we had completed this restructuring plan andthe reduction in force.Interest Income, Net 2016 to 2017 2015 to 2016 Years Ended Dec. 31 Increase Increase 2017 2016 2015 (Decrease) % Change (Decrease) % Change ($ in thousands) Interest income, net$461 $409 $412 $52 12.7%$(3) (0.7)%% of total revenue 0.5% 0.5% 0.5% Interest income, net increased in 2017 as compared to 2016 primarily due to increased cash balances as a result ofthe secondary public offering in March 2017. 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.Equity in (Loss) Earnings of Unconsolidated Joint Venture Companies 2016 to 2017 2015 to 2016 Years Ended Dec. 31 Increase Increase 2017 2016 2015 (Decrease) % Change (Decrease) % Change ($ in thousands) Equity in (loss) earnings ofunconsolidated joint ventures$(1,694) $(1,995) $462 $(301) (15.1)% $2,457 531.8%% of total revenue (1.7)% (2.5)% 0.6% Equity in (loss) earnings of unconsolidated joint ventures is the aggregate net (loss) earnings from our sevenminority-owned supply chain joint venture companies that are not consolidated. Equity in loss of unconsolidated jointventures decreased $0.3 million to a loss of $1.7 million for 2017 from a loss of $2.0 million for 2016 as our unconsolidatedjoint ventures had reported better performance in 2017 as compared to 2016. The loss in 2017 is the47 Table of Contentsresult of continuing low prices for raw materials. The $1.7 million net loss from our unconsolidated joint ventures includedan impairment charge of $313,000 for one of the gallium companies. During the first quarter of 2017, managementdetermined it was unlikely that this company would recover from the difficult pricing environment and we wrote theinvestment down to zero.Equity in (loss) earnings of unconsolidated joint ventures increased $2.5 million to a loss of $2.0 million for 2016from income of $0.5 million for 2015. The net loss in equity earnings of unconsolidated joint ventures in 2016 was a resultof a sharp decline in the average selling prices of raw materials, which began in 2015. There were no impairment charges in2016. Other (Expense) Income, Net 2016 to 2017 2015 to 2016 Years Ended Dec. 31 Increase Increase 2017 2016 2015 (Decrease) % Change (Decrease) % Change ($ in thousands) Other (expense) income, net$(553) $860 $2,023 $(1,413) (164.3)%$(1,163) (57.5)%% of total revenue (0.6)% 1.1% 2.6% Other (expense) income, net decreased $1.4 million to a loss of $0.6 million for 2017 from income of $0.9 millionfor 2016 primarily due to a lower realized gain recognized from sales of GHI stock in 2017 as compared to 2016. As ofDecember 31, 2017, we no longer held any GHI stock.Other (expense) income, net decreased $1.2 million to $0.8 million for 2016 from $2.0 million for 2015 primarilydue to a lower realized gain of $0.4 million recognized from sales of available-for-sale investments, lower foreign exchangegain of $0.5 million and a lower government subsidy received from our China subsidiary.Provision for Income Taxes 2016 to 2017 2015 to 2016 Years Ended Dec. 31 Increase Increase 2017 2016 2015 (Decrease) % Change (Decrease) % Change ($ in thousands) Provision for income taxes$792 $733 $531 $59 8.0%$202 38.0%% of total revenue 0.8% 0.9% 0.7% Provision for income taxes for 2017 and 2016 were $0.8 million and $0.7 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 as the income in the U.S. had been fully offset by utilization of federal and state net operating losscarryforwards. We also incurred $0.5 million of alternative minimum tax, which was fully offset by foreign tax credits.Additionally, there is uncertainty of generating future profit in the U.S. which has resulted in our deferred tax assets beingfully reserved. Our estimated tax rate can vary greatly from year to year because of the change or benefit in the mix of taxableincome 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 $22 million in 2017, $68 million in 2016 and $66 million in 2015. 48 Table of ContentsNet Loss Attributable to Noncontrolling Interests 2016 to 2017 2015 to 2016 Years Ended Dec. 31 Increase Increase 2017 2016 2015 (Decrease) % Change (Decrease) % Change ($ in thousands) Net loss attributable to noncontrollinginterests$(87) $(670) $(305) $(583) (87.0)%$365 119.7%% of total revenue (0.1)% (0.8)% (0.4)% The decrease in noncontrolling interests’ share of losses for 2017 as compared to the 2016 was due to higherprofitability from two of our three consolidated subsidiaries in China which was partially offset with lower profitability fromour other consolidated subsidiary in China.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 $305,000, respectively. The downward trend in noncontrollinginterests’ share of earnings starting from 2014 and eventual switch to a share of losses in 2015 and 2016 was due to lowerprofitability from our China joint venture operations as profits from sales of raw materials have decreased due to decliningaverage selling prices, which also led to a write down in inventory at one of the consolidated joint ventures. Liquidity and Capital Resources Year Ended December 31, 2017 2016 2015 ($ in thousands) Net cash provided by (used in): Operating activities $8,615 $12,504 $1,878 Investing activities (36,458) (1,113) (2,483) Financing activities 35,638 1,298 (2,234) Effect of exchange rate changes 405 (1,412) (1,100) Net change in cash and cash equivalents 8,200 11,277 (3,939) Cash and cash equivalents—beginning year 36,152 24,875 28,814 Cash and cash equivalents—end of year 44,352 36,152 24,875 Short and long-term investments—end of year 32,608 17,571 19,128 Total cash, cash equivalents and short-term and long-term investments $76,960 $53,723 $44,003 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 readilymarketable. During the three months ended March 31, 2017, we sold the remainder of our GHI stock.Total cash and cash equivalents, short-term and long-term investments increased by $23.2 million in 2017. Asof December 31, 2017, our principal source of liquidity was $77.0 million, which consisted of cash and cash equivalents of$44.4 million, short-term investments of $20.0 million and long-term investments of $12.6 million. In 2017, cash and cashequivalents increased by $8.2 million and short-term and long-term investments increased by $15.0 million. The increase incash and cash equivalents of $8.2 million in 2017 was primarily due to net cash provided by operating activities of $8.6million and net cash provided by financing activities of $35.6 million, primarily due to the net proceeds of $31.9 millionreceived from the public offering of 5,307,692 shares of our common stock in March 2017, proceeds of $2.5 million from theexercise of common stock options and proceeds from sales of subsidiary shares to noncontrolling49 Table of Contentsinterest of $1.8 million partially offset by the net dividends paid by our joint ventures of $0.5 million, and was partiallyoffset by net cash used in investing activities of $36.5 million. As of December 31, 2017, we and our consolidated jointventures held approximately $21.4 million in cash and investments in foreign bank accounts. This consists of $11.5 millionheld by our wholly owned subsidiary in China and $9.9 million held by our three partially-owned consolidated subsidiariesin China.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. The increase incash and cash equivalents of $11.3 million in 2016 was primarily due to net cash provided by operating activities of $12.5million and net cash provided by financing activities of $1.3 million, and was partially offset by net cash used in investingactivities of $1.1 million and the effect of exchange rate changes of $1.4 million. 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.Net cash provided by operating activities of $8.6 million for 2017 was primarily comprised of a net income of $10.1million, adjusted for non-cash items of depreciation and amortization of $4.4 million, loss on equity method investments of$1.4 million, stock-based compensation of $1.4 million, impairment charge on equity investee of $0.3 million, amortizationof marketable securities premium of $0.2 million which were partially offset by a net change of $9.1 million in operatingassets and liabilities. The $9.1 million net change in operating assets and liabilities primarily resulted from a $8.0 millionincrease in accounts receivable, a $4.7 million increase in inventories, a $2.3 million increase in prepaid expenses and othercurrent assets, offset in part by a $4.4 million increase in accounts payable and a $1.6 million increase in accrued liabilities.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 in part by realized gainon sales of investments of $0.4 million and a net change of $0.4 million in assets and liabilities. The $0.4 million net changein operating 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 in part by a $3.5million decrease in accounts receivable, a $0.5 million decrease in other assets, a $0.5 million increase in accounts payableand a $0.2 million increase in accrued liabilities. Net cash provided by operating activities of $1.9 million for 2015 was primarily comprised of an adjustment of non-cash items of depreciation of $5.5 million, amortization of marketable securities premium of $218,000, stock-basedcompensation of $1.3 million, provision for doubtful accounts of $211,000, loss on disposal property and equipment of$17,000 partially offset by our net loss of $2.5 million, realized gain on sales of investments of $859,000, gain on equityinvestments of $462,000 and a net change of $1.6 million in assets and liabilities. The $1.6 million net change in operatingassets and liabilities primarily resulted from a $1.1 million increase in accounts receivable, a $1.1 million decrease in accruedliabilities, an $813,000 decrease in other long-term liabilities, and a $485,000 decrease in accounts payable partially offsetby a $1.4 million decrease in prepaid expenses and other current assets, and a $542,000 decrease in other assets. Net cash used in investing activities of $36.5 million for 2017 was primarily from the purchases of marketableinvestment securities of $30.0 million and the purchase of property, plant and equipment of $21.4 million in preparation forour new manufacturing sites at Dingxing and Kazuo, which were partially offset by proceeds from maturities and sales ofavailable-for-sale securities of $14.8 million.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-sale securities of $13.5 million.50 Table of ContentsNet 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 financing activities was $35.6 million for 2017, which mainly consisted of the net proceeds of$31.9 million received from the public offering of 5,307,692 shares of our common stock in March 2017, proceeds of $2.5million from the exercise of common stock options and proceeds from sales of subsidiary shares to noncontrolling interest of$1.8 million partially offset by the net dividends paid by our joint ventures of $0.5 million, which mainly consisted ofproceeds from common stock exercised.Net cash provided by financing activities was $1.3 million for 2016, which mainly consisted of proceeds fromcommon stock exercised.Net 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.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 2017 and 2016 under this program. Asof December 31, 2017, approximately $2.7 million remained available for future repurchases under this program. Currently,we do not plan to repurchase additional shares. 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 $2.9 million and we included this amountin “Accrued liabilities” in our consolidated balance sheets. At the time we pay this accrued liability, our cash and cashequivalents would be reduced. We account for the cumulative year to date dividends on the Series A preferred stock whencalculating our earnings per share. See Item 5, Market for Registrant’s Common Equity, Related Stockholder Matters andIssuer 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 are required to relocate our gallium arsenide production line. We are cooperating with thegovernment and, in accordance with our relocation plan, are relocating our gallium arsenide production line as well as ourgermanium production line. We will consider relocating our indium phosphide production subsequently. On September 12,2017, we announced that we completed the purchase of a new manufacturing site in the city of Dingxing, China. TheDingxing site is approximately 18.75 acres and currently has three existing buildings, which comprise approximately140,000 sq. feet of production space and 50,000 sq. feet designated for offices and51 Table of Contentsdormitories. We believe that 3D-sensing VCELs will require additional gallium arsenide capacity and we are developingplans to construct a fourth building at this site. In addition, we have acquired a second new site in city of Kazuo, located inthe province in Liaoning near the Inner Mongolia Autonomous Region, which will initially be used for poly synthesis andingot growth for gallium arsenide and germanium as well as possible expansion of indium phosphide ingot growth. We donot yet have comprehensive construction bids for further modifications to the existing buildings, the new buildings or thirdparty estimates for the complete relocation costs, but we believe these costs will be in the range of $40 million to $50million, which includes the amount we have already paid for the purchase of our new manufacturing facilities and willextend into 2019. However, such costs could be more expensive. One of our consolidated joint ventures, JinMei, is in the process of relocating its headquarters and manufacturingoperations to an alternative location. Currently, JinMei has identified a site as a possible candidate and the estimated costsfor the land use rights acquisition and facility construction is expected to be approximately $6 million. In July 2017, ourwholly-owned subsidiary, Tongmei, provided an inter-company loan to JinMei in the amount of $768,000 in preparation forthe acquisition of the land use rights and the construction of a new building. The inter-company loan carries an interest rateof 4.9% per annum and is due on June 30, 2023. 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. On October 24, 2016, we filed with the SEC a registration statement on Form S-3, pursuant to which we may offer upto $60 million of common stock, preferred stock, depositary shares, warrants, debt securities and/or units in one or moreofferings and in any combination. On November 4, 2016, the SEC declared the registration statement effective. A prospectussupplement, which we will provide each time we offer securities, will describe the specific amounts, prices and terms of thesecurities we determine to offer. On March 2, 2017, we filed with the SEC a final prospectus supplement, pursuant to which we offered and sold5,307,692 shares of our common stock. The net proceeds are being used for the relocation of our gallium arsenideproduction line, for equipment capital expenditures, working capital for accounts receivable and inventory, possibleacquisitions of complementary products, technologies or businesses and other general purposes. 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.52 Table of ContentsContractual ObligationsWe lease certain office space, warehouse facilities and equipment under long-term operating leases expiring atvarious dates through April 2023. The majority of our lease obligations relate to our lease agreement for the facility inFremont, California with approximately 19,467 square feet. The term of the original lease for this facility would have expiredin 2017. According to the lease agreement, we had an option to extend the term of the lease for an additional three years. InMay 2017, we exercised this option and the lease was extended for an additional three year term. All terms of this leaseremain the same and the term of this lease will expire in 2020. Total rent expenses under these operating leases wereapproximately $302,000, $331,000 and $313,000 for the years ended December 31, 2017, 2016 and 2015, 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. For the year ended December 31, 2017, royalty expense under this agreement was $526,000, whichwas net of claim for credit of $49,000. Royalty expense under this agreement was $447,000, which was net of claim for creditof $128,000 for the year ended December 31, 2016. Royalty expense for year ended December 31, 2015 was $583,000,which was net of claim for credit of $217,000. The following table summarizes our contractual obligations as of December 31, 2017 (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 $549 $185 $340 $24 $ — Royalty agreement 575 575 — — — Total $1,124 $760 $340 $24 $ — Land Purchase and Investment Agreement We are in the process of relocating our gallium arsenide production line to Dingxing, China. In addition to a landrights and building purchase agreement that we entered into with a private real estate development company to acquire ournew manufacturing facility, we also entered into a cooperation agreement with the Dingxing local government. In additionto pledging its full support and cooperation, the Dingxing local government will issue certain credits or rebates to us as weachieve certain milestones. We, in turn, agreed to hire local workers over time, pay taxes when due and eventuallydemonstrate a total investment of approximately $90 million in value, assets and capital. The investment will include cashpaid for the land and buildings, cash on deposit in our name at local banks, the gross value of new and used equipment(including future equipment that might be used for indium phosphide and germanium substrates production), the deemedvalue for our customer list or the end user of our substrates (for example, the end users of the 3-D sensing VCSELs), a deemedvalue for employment of local citizens, a deemed value for our proprietary process technology, other intellectual property,other intangibles and additional items of value. There is no timeline or deadline by which this must be accomplished, ratherit is a good faith covenant entered into between AXT and the Dingxing local government. Further, there is no specificpenalty contemplated if either party breaches the agreement, however the agreement does state that each party has a right toseek from the other party compensation for losses. Under certain conditions, the Dingxing local government may purchasethe land and building at the appraised value. We believe that such cooperation agreements are normal, customary and usualin China and that the future valuation is flexible. We have a similar agreement with the city of Kazuo, China, although on asmaller scale. The total investment targeted by AXT in Kazuo is approximately $15 million in value, assets and capital. 53 Table of ContentsPurchase Obligations with Penalties for Cancellation In the normal course of business, we issue purchase orders to various suppliers. In certain cases, we may incur apenalty if we cancel the purchase order. As of December 31, 2017, we do not have any outstanding purchase orders that willincur a penalty if cancelled by the Company. Selected Quarterly Results of Operations The following table sets forth unaudited quarterly results for the eight quarters ended December 31, 2017. 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) 2017 2017 2017 2017 2016 2016 2016 2016 Revenue $26,332 $28,168 $23,557 $20,616 $20,269 $21,872 $20,495 $18,713 Cost of revenue 16,534 17,035 16,301 14,328 12,746 14,294 14,468 13,460 Gross profit 9,798 11,133 7,256 6,288 7,523 7,578 6,027 5,253 Operating expenses: Selling, general andadministrative 4,790 4,484 3,942 3,793 3,774 3,313 3,419 3,374 Research and development 1,274 1,410 1,019 1,124 1,431 1,566 1,472 1,381 Restructuring charge — — — — — — 226 — Total operating expenses 6,064 5,894 4,961 4,917 5,205 4,879 5,117 4,755 Income from operations 3,734 5,239 2,295 1,371 2,318 2,699 910 498 Interest income, net 127 122 114 98 106 105 100 98 Equity in loss of unconsolidatedjoint ventures (307) (266) (188) (933) (558) (581) (400) (456) Other (expense) income, net (150) (349) (102) 48 178 164 328 190 Income before provision forincome taxes 3,404 4,746 2,119 584 2,044 2,387 938 330 Provision for income taxes 131 181 321 159 20 176 140 397 Net income (loss) 3,273 4,565 1,798 425 2,024 2,211 798 (67) Less: Net (income) lossattributable to noncontrollinginterests (139) (146) 132 240 190 18 353 109 Net income attributable to AXT,Inc $3,134 $4,419 $1,930 $665 $2,214 $2,229 $1,151 $42 Net income (loss) attributable toAXT, Inc. per common share: Basic $0.08 $0.11 $0.05 $0.02 $0.07 $0.07 $0.03 $(0.00)*Diluted $0.08 $0.11 $0.05 $0.02 $0.06 $0.07 $0.03 $(0.00)*Weighted average number ofcommon shares outstanding: Basic 38,766 38,499 38,306 34,210 32,431 32,110 32,020 32,002 Diluted 40,448 40,095 39,706 35,624 33,734 33,138 32,451 32,002 * Net loss to AXT, Inc. per common share resulted due to the accrual of preferred dividend liquidation preference during the three months endedMarch 31, 2016. 54 Table of ContentsRecent Accounting PronouncementsRecent accounting pronouncements are detailed in Note 1 to our Consolidated Financial Statements included inthis Annual Report on Form 10-K. Item 7A. Quantitative and Qualitative Disclosures about Market RiskForeign Currency RiskA significant portion of our business is conducted in currencies other than the U.S. dollar. Foreign exchange losseshave had a material adverse effect on our operating results and cash flows in the past and could have a material adverse effecton our operating results and cash flows in the future. If we do not effectively manage the risks associated with this currencyrisk, our revenue, cash flows and financial condition could be adversely affected. Although during 2016 and 2015,we recorded a foreign exchange gain of $232,000 and $717,000, respectively, during 2017 we recorded net foreign exchangeloss of $602,000, included as part of other (expense) income, net in our consolidated statements of operation. We incurforeign currency transaction exchange gains and losses due to operations in general. In the future we may experience foreignexchange losses on our non-functional currency denominated receivables and payables to the extent that we have notmitigated our exposure. Foreign exchange losses could have a materially adverse effect on our operating results and cashflows. 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, 2017 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 the Chineserenminbi. We incur transaction gains or losses resulting from consolidation of expenses incurred in local currencies for ourChinese subsidiaries, as well as in translation of the assets and liabilities at each balance sheet date. Our financial resultscould be adversely affected by factors such as changes in foreign currency exchange rates or weak economic conditions inforeign markets, including the revaluation by China of the renminbi, and any future adjustments that China may make to itscurrency such as any move it might make to a managed float system with opportunistic interventions. We may alsoexperience 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.55 Table of Contents Interest Rate RiskCash and cash equivalents earning interest and certain variable rate debt instruments are subject to interest ratefluctuations. The following table sets forth the probable impact of a 10% change in interest rates (in thousands): Proforma 10% Proforma 10% Balance as of Current Projected Annual Interest Rate Interest Rate December 31, Interest Interest Decline Increase Instrument 2017 Rate Income Income Income Cash and cash equivalents $44,352 0.15% $67 $60 $74 Investments in marketable debt 32,608 1.94% 633 570 696 $700 $630 $770 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 12% of our trade accounts receivable as of December 31, 2017 and one customer accounted for 13% of our trade accountsreceivable as of December 31, 2016.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, 2017 and 2016, we did notmaintain any direct investments under the cost method. Our direct minority investments under the equitymethod totaled $5.6 million and $6.6 million, respectively, and our indirect minority investments through our consolidatedjoint ventures totaled $4.3 million and $4.7 million, respectively. In aggregate, as of December 31, 2017 and 2016 the totalof our direct and indirect investments in the seven companies under the equity method totaled $9.8 million and $11.3million, respectively.56 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 63, 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 of America (“U.S. GAAP”). Internal control over financial reporting includes thosepolicies 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 U.S. GAAP, and that receipts and expenditures are being made only inaccordance with 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 controls57 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, 2017based 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, 2017.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, 2017.Changes in Internal Control over Financial ReportingThere were no changes in our internal control over financial reporting that occurred during the year endedDecember 31, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financialreporting. Item 9B. Other InformationNone.58 Table of ContentsReport of Independent Registered Public Accounting FirmTo the Board of Directors and Stockholders of AXT, Inc. Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of AXT, Inc. and its subsidiaries (the “Company”) asof December 31, 2017, based on criteria established in Internal Control—Integrated Framework (2013) issued by theCommittee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Companymaintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on theCOSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board(United States) (“PCAOB”), the consolidated balance sheets as of December 31, 2017 and 2016 and the related consolidatedstatements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in theperiod ended December 31, 2017, and the related notes (collectively referred to as the “consolidated financial statements”) ofthe Company, and our report dated March 9, 2018, expressed an unqualified opinion on those consolidated financialstatements.Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting, andfor its assessment of the effectiveness of internal control over financial reporting, included in the accompanyingManagement’s Report on Assessment of Internal Controls over Financial Reporting. Our responsibility is to express anopinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firmregistered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan andperform the audit to obtain reasonable assurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit of internal control over financial reporting included obtaining anunderstanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing andevaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also includedperforming such other procedures as we considered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting 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. /s/ BPM LLPSan Jose, CaliforniaMarch 9, 2018 59 Table of Contents PART IIIThe United States Securities and Exchange Commission (“SEC”) allows us to include information required in thisreport by referring to other documents or reports we have already or will soon be filing. This is called “Incorporation byReference.” We intend to file our definitive proxy statement for our annual meeting of stockholders to be held on May 24,2018 (the “Proxy Statement”) pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered bythis report, and certain information therein is incorporated in this report by reference. Item 10. Directors, Executive Officers and Corporate GovernanceThe information required by this item with respect to identification of directors is incorporated by reference to theinformation contained in the section captioned “Information About our Board of Directors” in the Proxy Statement. Theinformation with respect to our executive officers, is incorporated by reference to the information contained in the sectioncaptioned “Executive Officers” in the Proxy Statement. Information with respect to Items 405 of Regulation S-K isincorporated by reference to the information contained in the sections of the Proxy Statement captioned “Section 16(a)Beneficial Ownership Reporting Compliance.” There will be no disclosure under Item 407(c)(3). Information with respect toItems 407(d)(4) and 407(d)(5) is incorporated by reference to the information contained in the sections of the ProxyStatement captioned “Corporate Governance—Committees of the Board of Directors.”The Board of Directors of AXT, Inc. has adopted a Code of Conduct and Ethics (the “Code”) that applies to ourprincipal executive officers, principal financial officer, and corporate controller, as well as other employees. A copy of thisCode has been posted on our Internet website at www.axt.com. Any amendments to, or waivers from, a provision of our Codethat applies to our principal executive officer, principal financial officer, controller, or persons performing similar functionsand that relates to any element of the Code enumerated in paragraph (b) of Item 406 of Regulation S-K shall be disclosed byposting such information on our website. Item 11. Executive CompensationThe information required by this Item is incorporated herein by reference to information set forth in our ProxyStatement under the section entitled “Executive Compensation and Other Matters.”· · Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersThe information required by this Item is incorporated herein by reference to information set forth in our ProxyStatement under the section entitled “Security Ownership of Certain Beneficial Owners and Management” and “EquityCompensation Plan Information.” Item 13. Certain Relationships and Related Transactions and Director IndependenceInformation required by this item will be set forth in our Proxy Statement under the headings “CompensationCommittee Interlocks and Insider Participation” and “Certain Relationships and Related Transactions,” which information isincorporated herein by reference. Item 14. Principal Accountant Fees and ServicesThe information required by this Item is incorporated herein by reference to information set forth in our ProxyStatement under the section entitled “Ratification of Appointment of Independent Registered Public Accountants.”60 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 62Consolidated Balance Sheets 63Consolidated Statements of Operations 64Consolidated Statements of Comprehensive Income (Loss) 65Consolidated Statements of Stockholders’ Equity 66Consolidated Statements of Cash Flows 67Notes to Consolidated Financial Statements 68 (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.61 Table of ContentsReport of Independent Registered Public Accounting FirmTo the Board of Directors and Stockholders of AXT, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of AXT, Inc. (a Delaware corporation) and itssubsidiaries (the “Company”) as of December 31, 2017 and 2016, 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 December31, 2017, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, theconsolidated financial statements present fairly, in all material respects, the financial position of the Company as ofDecember 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the periodended December 31, 2017, in conformity with accounting principles generally 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) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2017, based oncriteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizationsof the Treadway Commission (COSO), and our report dated March 9, 2018, expressed an unqualified opinion. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility isto express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accountingfirm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of materialmisstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of materialmisstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respondto those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in theconsolidated financial statements. Our audits also included evaluating the accounting principles used and significantestimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Webelieve that our audits provide a reasonable basis for our opinion. /s/ BPM LLP We have served as the Company’s auditor since 2004.San Jose, CaliforniaMarch 9, 2018 62 Table of ContentsAXT, INC.CONSOLIDATED BALANCE SHEETS(In thousands, except per share data) December 31, 2017 2016 ASSETS Current assets: Cash and cash equivalents $44,352 $36,152 Short-term investments 20,032 11,415 Accounts receivable, net of allowances of $527 and $1,013 as of December 31, 2017 andDecember 31, 2016 22,778 14,453 Inventories 45,840 40,152 Prepaid expenses and other current assets 7,519 5,114 Total current assets 140,521 107,286 Long-term investments 12,576 6,156 Property, plant and equipment, net 46,530 27,805 Related party notes receivable – long-term — 157 Other assets 11,573 12,842 Total assets $211,200 $154,246 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $11,445 $6,691 Accrued liabilities 11,149 9,260 Total current liabilities 22,594 15,951 Long-term portion of royalty payments — 575 Other long-term liabilities 289 330 Total liabilities 22,883 16,856 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, 2017 and December 31, 2016 (Liquidation preference of$6.8 million and $6.6 million as of December 31, 2017 and 2016) 3,532 3,532 Common stock, $0.001 par value; 70,000 shares authorized; 39,413 and 33,032 shares issuedand outstanding as of December 31, 2017 and 2016 39 33 Additional paid-in capital 231,679 194,177 Accumulated deficit (54,837) (64,985) Accumulated other comprehensive income 3,407 253 Total AXT, Inc. stockholders’ equity 183,820 133,010 Noncontrolling interests 4,497 4,380 Total stockholders’ equity 188,317 137,390 Total liabilities and stockholders’ equity $211,200 $154,246 See accompanying notes to consolidated financial statements.63 Table of ContentsAXT, INC.CONSOLIDATED STATEMENTS OF OPERATIONS(In thousands, except per share data) Year Ended December 31, 2017 2016 2015 Revenue $98,673 $81,349 $77,502 Cost of revenue 64,198 54,968 60,673 Gross profit 34,475 26,381 16,829 Operating expenses: Selling, general and administrative 17,009 13,880 16,064 Research and development 4,827 5,850 5,664 Restructuring charge — 226 — Total operating expenses 21,836 19,956 21,728 Income (loss) from operations 12,639 6,425 (4,899) Interest income, net 461 409 412 Equity in (loss) earnings of unconsolidated joint ventures (1,694) (1,995) 462 Other (expense) income, net (553) 860 2,023 Income (loss) before provision for income taxes 10,853 5,699 (2,002) Provision for income taxes 792 733 531 Net income (loss) 10,061 4,966 (2,533) Less: Net loss attributable to noncontrolling interests 87 670 305 Net income (loss) attributable to AXT, Inc. $10,148 $5,636 $(2,228) Net income (loss) attributable to AXT, Inc. per common share: Basic $0.27 $0.17 $(0.07) Diluted $0.26 $0.17 $(0.07) Weighted average number of common shares outstanding: Basic 37,444 32,139 32,183 Diluted 38,966 32,894 32,183 See accompanying notes to consolidated financial statements.64 Table of ContentsAXT, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)(In thousands) Year Ended December 31, 2017 2016 2015 Net income (loss) $10,061 $4,966 $(2,533) Other comprehensive income (loss), net of tax: Change in foreign currency translation gain (loss), net of tax 3,726 (4,305) (3,425) Change in unrealized loss on available-for-sale investments, net of tax (138) (312) (313) Total other comprehensive income (loss), net of tax 3,588 (4,617) (3,738) Comprehensive income (loss) 13,649 349 (6,271) Less: Comprehensive (income) loss attributable to noncontrolling interests (347) 1,158 752 Comprehensive income (loss) attributable to AXT, Inc. $13,302 $1,507 $(5,519) See accompanying notes to consolidated financial statements. 65 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, 2015 883 $3,532 32,837 $32 $192,665 $(68,393) $7,673 $135,509 $6,425 $141,934 Common stockoptions exercised 119 165 165 165 Common stockrepurchased (908) (2,287) (2,287) (2,287) Series A preferredstock dividendaccrued as a resultof common stockrepurchase (147) (147) (147) 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 32 191,745 (70,621) 4,382 129,070 5,590 134,660 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 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 33 194,177 (64,985) 253 133,010 4,380 137,390 Common stockoptions exercised 762 1 2,476 2,477 2,477 Sale of subsidiaryshares tononcontrollinginterests 1,765 1,765 235 2,000 Stock-basedcompensation 1,405 1,405 1,405 Issuance ofcommonstock in the form ofrestricted stock 312 — — Issuance ofcommon stock, netof stock issuancecosts of $2,639 5,307 5 31,856 31,861 31,861 Net income 10,148 10,148 (87) 10,061 Net dividenddeclared by jointventures — (465) (465) Othercomprehensiveincome 3,154 3,154 434 3,588 Balance as ofDecember 31, 2017 883 $3,532 39,413 $39 $231,679 $(54,837) $3,407 $183,820 $4,497 $188,317 See accompanying notes to consolidated financial statements. 66 Table of ContentsAXT, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands) Year Ended December 31, 2017 2016 2015 Cash flows from operating activities: Net income (loss) $10,061 $4,966 $(2,533) Adjustments to reconcile net income (loss) to net cash provided by operatingactivities: Depreciation and amortization 4,422 4,865 5,494 Amortization of marketable securities premium 173 94 218 Impairment charge on equity investee 313 — — Stock-based compensation 1,405 1,096 1,349 Provision for doubtful accounts — 313 211 Realized gain on sale of available-for-sale securities (77) (429) (859) Loss on disposal of equipment 57 5 17 Loss (gain) from equity method investments, net 1,381 1,995 (462) Changes in operating assets and liabilities: Accounts receivable (7,977) 3,465 (1,076) Inventories (4,740) (2,959) (45) Prepaid expenses and other current assets (2,309) (1,223) 1,405 Other assets (52) 458 542 Accounts payable 4,401 524 (485) Accrued liabilities* 1,642 205 (1,085) Other long-term liabilities, including royalties (85) (871) (813) Net cash provided by operating activities 8,615 12,504 1,878 Cash flows from investing activities: Purchases of property, plant and equipment (21,356) (2,728) (4,150) Proceeds from sale of equipment — 35 2 Purchases of available-for-sale securities (30,021) (11,936) (12,787) Proceeds from sales and maturities of available-for-sale securities 14,750 13,516 14,309 Investments in non-marketable equity investments — — (162) Dividends received from equity method investments — — 305 Repayment of related party notes receivable 169 — — Net cash used in investing activities (36,458) (1,113) (2,483) Cash flows from financing activities: Proceeds from issuance of common stock and options exercised, net of issuancecosts 34,338 1,337 165 Proceeds from sale of subsidiary shares to noncontrolling interests, net ofportion allocated to noncontrolling interests 1,765 — — Repurchase of the Company’s common stock, including commission — — (2,287) Dividends paid by joint ventures to their minority shareholders (465) (39) (112) Net cash provided by (used in) financing activities 35,638 1,298 (2,234) Effect of exchange rate changes on cash and cash equivalents 405 (1,412) (1,100) Net increase (decrease) in cash and cash equivalents 8,200 11,277 (3,939) Cash and cash equivalents at the beginning of the year 36,152 24,875 28,814 Cash and cash equivalents at the end of the year $44,352 $36,152 $24,875 Supplemental disclosures: Income taxes paid, net of refunds $714 $788 $284 * Dividend accrued but not paid by joint ventures of $533, $499 and $534 was included in accrued liabilities as of December 31, 2017, 2016and 2015, respectively67 Table of Contents See accompanying notes to consolidated financial statements. AXT, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNote 1. The Company and Summary of Significant Accounting PoliciesThe CompanyAXT, Inc. (“AXT”, “the Company”, “we,” “us,” and “our” refer to AXT, Inc. and its consolidated subsidiaries) is aworldwide materials science company that develops and produces high-performance compound and single elementsemiconductor substrates, also known as wafers. Our consolidated subsidiaries produce and sell certain raw materials some ofwhich are used in our substrate manufacturing 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 asemiconductor or optoelectronic device. The dominant substrates used in producing semiconductor chips and otherelectronic circuits are made from silicon. However, certain chips may become too hot or perform their function too slowly ifsilicon is used as the base material. In addition, optoelectronic applications, such as LED lighting and chip-based lasers, donot use silicon substrates because they require a wave form frequency that cannot be achieved using silicon. Alternative orspecialty materials are used to replace silicon as the preferred base in these situations. Our wafers provide such alternative orspecialty materials. We do not design or manufacture the chips. We add value by researching, developing and producing thespecialty material wafers. We have two product lines: specialty material substrates and raw materials integral to thesesubstrates. In 2017, our substrate product group generated 80% of our revenue and raw materials product group generated20%. Our compound substrates combine indium with phosphorous (indium phosphide: InP) or gallium with arsenic (galliumarsenide: GaAs). Our single element 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 Tongmei XtalTechnology Co., Ltd., and our majority-owned, or significantly controlled subsidiaries, Beijing JiYa Semiconductor MaterialCo., Ltd., Nanjing JinMei Gallium Co., Ltd. and Beijing BoYu Semiconductor Vessel Craftwork Technology Co., Ltd. Allsignificant inter‑company accounts and transactions have been eliminated. Investments in business entities in which we donot have controlling interest, but have the ability to exercise significant influence over operating and financial policies(generally 20-50% ownership), are accounted for by the equity method. We have seven companies accounted for by theequity method. For subsidiaries that we consolidate, we reflect the portion we do not own on our consolidated balance sheetsin stockholders' equity and in our consolidated statements of operations. ReclassificationsCertain reclassifications have been made to prior periods’ consolidated financial statements to conform to thecurrent period presentation. These reclassifications did not result in any change in previously reported net income (loss) ortotal assets.68 Table of ContentsUse of EstimatesThe preparation of financial statements in conformity with accounting principles generally accepted in the UnitedStates of America (“U.S. GAAP”) requires management to make estimates, judgments and assumptions. We believe that theestimates, judgments, and assumptions upon which management relies are reasonable based on information available at thetime that these estimates, judgments, and assumptions are made. These estimates, judgments, and assumptions can affect thereported amounts of assets and liabilities as of the date of the consolidated financial statements as well as the reportedamounts of revenues and expenses during the periods presented. To the extent there are material differences between theseestimates and actual 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, short-terminvestments and long-term investments, accounts receivable, accounts payable and accrued liabilities approximate fair valuedue to their short maturities. Certain cash equivalents and investments are required to be adjusted to fair value on a recurringbasis. See Note 2.Fair Value of InvestmentsAccounting Standards Codification ("ASC") topic 820, Fair value measurement (“ASC 820”) establishes threelevels of inputs that may be used to measure fair value.Level 1 instruments represent quoted prices in active markets. Therefore, determining fair value for Level 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 toidentify a sample of similar securities based on the coupon rates, maturity, issuer, credit rating, and instrument type,and subjectively select an individual security or multiple securities that are deemed most similar to the securitybeing priced.·Determining which model-derived valuations to use in determining fair value requires management judgment.When observable market prices for similar securities or comparable securities are not available, we price ourmarketable debt instruments using non-binding market consensus prices that are corroborated with observablemarket data or pricing models, such as discounted cash flow models, with all significant inputs derived from orcorroborated with observable 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 sheets and classified as Level 3 assets and liabilities. As of December 31, 201769 Table of Contentsand 2016, 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 (expense) income, net” for the years presented. The transaction loss for the year endedDecember 31, 2017 totaled $602,000. The transaction gain totaled $232,000 and $717,000 for the years ended December 31,2016 and 2015, 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), net of tax.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.In May 2014, the Financial Accounting Standards Board ("FASB") issued new guidance related to revenuerecognition, which outlines a comprehensive revenue recognition model and supersedes most current revenue recognitionguidance. The new guidance requires a company to recognize revenue as control of goods or services transfers to a customerat an amount that reflects the expected consideration to be received in exchange for those goods or services. In August 2015,the FASB issued an amendment to defer the effective date of the guidance. The effective date of the guidance will be the firstquarter of our fiscal year 2018. The new standard creates a single source of revenue guidance under U.S. GAAP, eliminatingindustry-specific guidance.The underlying principle of the standard is to recognize revenue when a customer obtains control of promisedgoods or services at an amount that reflects the consideration that is expected to be received in exchange for those goods orservices. An entity should apply a five-step approach for recognizing revenue as follows (1) identify the contract with acustomer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate thetransaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies aperformance obligation. The standard also requires increased disclosures including the nature, amount, timing, anduncertainty of revenues and cash flows related to contracts with customers. The standard allows two methods of adoption: (1)retrospectively to each prior period presented (“full retrospective method”), or (2) retrospectively with the cumulative effectrecognized in retained earnings as of the date of adoption ("modified retrospective method"). 70 Table of ContentsWe have evaluated and disclosed whether or not we expect the recent accounting pronouncements will have amaterial impact on our consolidated financial statements. With regard to Accounting Standards Update 2014-09 Revenuefrom Contracts with Customers, we have established a crossfunctional team to assess the potential impact of the new standardand is reviewing current accounting policies and practices to identify potential differences that would result from applyingthe requirements of the new standard to revenue contracts and identifying appropriate changes to the business processes,systems and controls to support revenue recognition and disclosure requirements under the new standard. We havecompleted our evaluation of the potential impact on business processes, systems, controls and consolidated financialstatements of the new revenue standard and have concluded there will be no significant changes to our statement ofoperations. We have adopted this standard on January 1, 2018 using the modified retrospective method. 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.Financial instruments that potentially subject us to concentration of credit risk consist primarily of cash and cashequivalents, short-term investments, and trade accounts receivable. We invest primarily in money market accounts,certificates of deposits, corporate bonds and equity securities. The composition and maturities are regularly monitored bymanagement. Such deposits are in excess of the amount of the insurance provided by the federal government on suchdeposits. We are exposed to credit risks in the event of default by the issuers to the extent of the amount recorded on theconsolidated 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 12% of our trade accounts receivable as of December 31, 2017 and one customer accounted for 13% of our trade accountsreceivable as of December 31, 2016. Two customers represented 12% and 11%, respectively, of our revenue for the year ended December 31, 2017. Nocustomer represented more than 10% of our revenue for the year ended December 31, 2016 while one customer represented12% of our revenue for the year ended December 31, 2015. Our top five customers, although not the same five customers foreach period, represented 35%, 35% and 40% of our revenue for the years ended December 31, 2017, 2016 and 2015,respectively.For the year ended December 31, 2017, each of three third-party customers for the raw materials products from ourconsolidated subsidiaries accounted for over 10% of the revenue from raw materials sales. For the year ended December 31,2016, each of four third-party customers for the raw materials products from our consolidated subsidiaries accounted for over10% of the revenue from raw materials sales while there were three third-party customers for the year ended December 31,2015. Our subsidiaries and joint ventures are a key strategic benefit for us as they further diversify our sources of revenue.71 Table of ContentsCash and Cash EquivalentsWe consider investments in highly liquid instruments purchased with an original maturity of three months or less tobe cash equivalents. Cash equivalents consist primarily of certificate of deposits. Cash and cash equivalents are stated at cost,which approximates fair value.Short-Term and Long-Term InvestmentsWe classify our investments in marketable debt and equity securities as available-for-sale securities in accordancewith ASC Topic 320, Investments — Debt and Equity Securities (“ASC 320”). Short-term and long-term investments arecomprised of available-for-sale marketable debt and equity securities, which consist primarily of certificates of deposit,corporate bonds and equity 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 (expense) income, 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 (expense) income, net” in the consolidated statements of operations. The cost of securities sold isbased upon the specific identification method.Accounts Receivable and Allowance for Doubtful Accounts and Sales ReturnsAccounts receivable are recorded at the invoiced amount and are not interest bearing. We periodically review thelikelihood of collection on our accounts receivable balances and provide an allowance for doubtful accounts receivableprimarily based upon the age of these accounts. We evaluate receivables from U.S. customers with an emphasis onbalances in excess of 90 days and for receivables from customers located outside the U.S. with an emphasis on balances inexcess of 120 days and establish a reserve allowance on the receivable balances if needed. The reason for the difference in theevaluation of receivables between foreign and U.S. customers is that U.S. customers have historically made payments in ashorter period of time than foreign customers. Foreign business practices generally require us to allow customer paymentterms that are longer than those accepted in the United States. We assess the probability of collection based on a number offactors, including the length of time a receivable balance has been outstanding, our past history with the customer and theircredit worthiness.We exercise judgment when determining the adequacy of these reserves as we evaluate historical bad debt trends,general economic conditions in the United States and internationally, and changes in customer financial conditions.Uncollectible receivables are recorded as bad debt expense when all efforts to collect have been exhausted and recoveries arerecognized when they are received. As of December 31, 2017 and 2016, our accounts receivable, net balance was $22.8million and $14.5 million, respectively, which was net of an allowance for doubtful accounts of $358,000 and $653,000,respectively. During 2017, we decreased this allowance for doubtful accounts by $295,000 due to $138,000 from bad debtrecovery and $157,000 from bad debt written off in 2017. During 2016, we increased this allowance for doubtful accounts by$92,000 due to the poor financial condition of a few customers partially offset by recoveries. If actual uncollectible accountsdiffer substantially from our estimates, revisions to the estimated allowance for doubtful accounts would be required, whichcould have a material impact on our financial results for future periods.The allowance for sales returns is also deducted from gross accounts receivable. During 2017, we utilized $119,000and reduced the provision by an additional $72,000 resulting in the ending balance of allowance for sales returns of$169,000 as of December 31, 2017. During 2016, we utilized $360,000 and charged an additional $296,000 resulting in theending balance of allowance for sales returns of $360,000 as of December 31, 2016.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 31,2017 and 2016, accrued product warranties totaled $133,000 and $251,000, respectively. The decrease in accrued productwarranties is primarily attributable to decreased claims for quality issues experienced by some72 Table of Contentscustomers. If actual warranty costs or pending new claims differ substantially from our estimates, revisions to the estimatedwarranty liability would be required, which could have a material impact on our financial condition and results of operationsfor future periods.InventoriesInventories are stated at the lower of cost (approximated by standard cost) or net realizable value. Cost is determinedusing the weighted average cost method. Our inventory consists of raw materials as well as finished goods and work-in-process that include material, labor and manufacturing overhead costs. We routinely evaluate the levels of our inventory inlight of current market conditions in order to identify excess and obsolete inventory, and we provide a valuation allowancefor certain inventories to their estimated net realizable value based upon the age and quality of the product and theprojections for 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 Topic360, 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 these 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 assets’ 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 2017, 2016 and 2015.Impairment of InvestmentsAll available-for-sale securities are periodically reviewed for impairment. An investment is considered to beimpaired when its fair value is less than its amortized cost basis and it is more likely than not that we will be required to sellthe impaired security before recovery of its amortized cost basis. Factors considered in determining whether a loss istemporary include the magnitude of the decline in market value, the length of time the market value has been below cost (oradjusted cost), credit quality, and our ability and intent to hold the securities for a period of time sufficient to allow for anyanticipated recovery in market value.We also invest in equity instruments of privately-held companies in China for business and strategic purposes.Investments in our unconsolidated 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 each company’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 company, 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.73 Table of Contents Segment ReportingWe operate in one segment for the design, development, manufacture and distribution of high-performancecompound and single element semiconductor substrates and sale of raw materials integral to these substrates. In accordancewith ASC topic 280, Segment Reporting, our chief operating decision-maker has been identified as our Chief ExecutiveOfficer, who reviews operating results to make decisions about allocating resources and assessing our performance for theCompany. We discuss revenue and capacity for both AXT and our joint ventures collectively, when determining capacityconstraints and need for raw materials in our business, and consider their capacity when determining our strategic andproduct marketing and advertising strategies. While we consolidate our majority-owned or significantly controlled jointventures, we do not allocate any portion of overhead, interest and other income, interest expense or taxes to them. Wetherefore have determined that our joint venture operations do not constitute an operating segment. Since we operate in onesegment, all financial segment and product line information 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 which are expensed as incurred.Advertising CostsAdvertising costs, included in selling, general and administrative expenses, are expensed as incurred. Advertisingcosts for the years ended December 31, 2017, 2016 and 2015 were immaterial.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.On December 22, 2017, the U.S. government enacted comprehensive tax legislation, commonly known as the TaxCuts and Jobs Act of 2017 (“the Act”), which significantly reforms the Internal Revenue Code of 1986, as amended. The Actcontains broad and complex changes to corporate taxation, including in part reduction of the U.S. federal corporate tax ratefrom 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that werepreviously considered permanently reinvested, and creates new taxes on certain foreign sourced earnings.74 Table of ContentsAs of December 31, 2017, we have not completed our accounting for the tax effects of the Act. We have calculated adecrease in net deferred tax assets of $10.9 million and a corresponding decrease of $10.9 million in the valuation allowancedue to the reduction federal tax rate. Thus, the net impact to the Company's tax expense is zero. In accordance with StaffAccounting Bulletin No. 118, we were able to determine a reasonable estimate, namely the one-time transition tax and theremeasurement of deferred tax at the new tax rate. We did not recognize any provisional tax expense due to our historicalsignificant operating losses, except some alternative minimum tax, which is offset by foreign tax credits. We expect tocomplete our analysis in connection with filing our 2017 U.S. corporate tax return.The one-time transition tax is based on our post-1986 foreign earnings and profits which we have previouslyexcluded from U.S. income taxes due to our position that we would permanently reinvest future earnings. The one-timetransition tax is applied at a 15.5% tax rate on cash assets and an 8% tax rate for other specified assets. Since our foreignoperations has accumulated positive earnings, we recognized approximately $20.9 million of foreign earnings as a deemeddividend, due to the significant amount of operating loss available, we incurred approximately $0.5 million of alternativeminimum tax, which was fully offset by foreign tax credits.Comprehensive Income (Loss)We report comprehensive income (loss) in accordance with the provisions of ASC topic 220 Comprehensive Incomewhich establishes standards for reporting comprehensive income or loss and its components in the financial statements. Thecomponents of other comprehensive income (loss) include unrealized gains and losses on marketable securities and foreigncurrency translation adjustments. Comprehensive income (loss) is presented in the consolidated statements of comprehensiveincome (loss), net of tax. The balance of accumulated other comprehensive income is as follows (in thousands): As of December 31, 2017 2016Accumulated other comprehensive income: Unrealized (loss) gain on investments, net $(93) $45Cumulative translation adjustment 3,904 178 3,811 223Less: Cumulative translation adjustment attributable to noncontrollinginterests 404 (30)Accumulated other comprehensive income attributable to AXT, Inc. $3,407 $253 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 May 2014, the FASB issued new guidance related to revenue recognition, which outlines a comprehensive revenuerecognition model and supersedes most current revenue recognition guidance. The new guidance requires a company torecognize revenue as control of goods or services transfers to a customer at an amount that reflects the expected considerationto be received in exchange for those goods or services. In August 2015, the FASB issued an amendment to defer the effectivedate of the guidance. The effective date of the guidance will be the first quarter of our fiscal year 2018. The new standardcreates a single source of revenue guidance under U.S. GAAP, eliminating industry-75 Table of Contentsspecific guidance.The underlying principle of the standard is to recognize revenue when a customer obtains control of promised goods orservices at an amount that reflects the consideration that is expected to be received in exchange for those goods or services.An entity should apply a five-step approach for recognizing revenue as follows (1) identify the contract with a customer; (2)identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price tothe performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performanceobligation. The standard also requires increased disclosures including the nature, amount, timing, and uncertainty ofrevenues and cash flows related to contracts with customers. The standard allows two methods of adoption: (1)retrospectively to each prior period presented (“full retrospective method”), or (2) retrospectively with the cumulative effectrecognized in retained earnings as of the date of adoption ("modified retrospective method"). We have evaluated and disclosed whether or not we expect the recent accounting pronouncements will have a materialimpact on our consolidated financial statements. With regard to Accounting Standards Update 2014-09 Revenue fromContracts with Customers, we have established a crossfunctional team to assess the potential impact of the new standard andis reviewing current accounting policies and practices to identify potential differences that would result from applying therequirements of the new standard to revenue contracts and identifying appropriate changes to the business processes, systemsand controls to support revenue recognition and disclosure requirements under the new standard. We have completed ourevaluation of the potential impact on business processes, systems, controls and consolidated financial statements of the newrevenue standard and have concluded there will be no significant changes to our statement of operations. We have adoptedthis standard on January 1, 2018 using the modified retrospective method. In July 2015, the FASB issued Accounting Standards Update (“ASU”) 2015-11, Simplifying the Measurement ofInventory, amending ASC 330. Upon adoption, this topic supersedes the existing guidance under ASC 330 and aims tosimplify the subsequent measurement of inventory. Currently, inventory can be measured at the lower of cost or market,which could result in several potential outcomes, as market could be replacement cost, net realizable value or net realizablevalue less an approximately normal profit margin. The major amendments would be as follows: 1. Inventory should bemeasured at the lower of cost or net realizable value. 2. Net realizable value is the estimated selling price in the ordinarycourse of business less reasonably predictable costs of completion, disposal and transportation. 3. The amendment does notapply to inventory measured under LIFO or the retail inventory method. 4. The amendment does apply to all other inventory,which includes inventory measured via FIFO or average cost. We adopted this guidance effective January 1, 2017 and it didnot have a significant impact on our consolidated financial statements. In 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 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 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 this standard in fiscal 2019 and are currently evaluating the impact of the guidance on our consolidated financialstatements.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 for76 Table of Contentsthe equity method. The guidance is effective for fiscal years beginning after December 15, 2016, including interim periodswithin those fiscal years with early application permitted. We adopted this guidance effective January 1, 2017. The adoptionof this standard did not have a significant impact on our consolidated financial statements. In March 2016, the FASB issued ASU No. 2016-09, which simplifies several aspects of the accounting for share-based 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 adopted this guidance effective January 1, 2017. The adoption of thisstandard did not have a significant impact on its consolidated financial statements. No excess income tax benefit or taxdeficiencies have been recorded as a result of the adoption and there will be no change to accumulated deficit with respect topreviously unrecognized excess tax benefits. The Company is electing to continue to account for forfeitures on an estimatedbasis. We have elected to present the consolidated statements of cash flows on a prospective transition method and no priorperiods have been adjusted. 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. In 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. In May 2017, the FASB issued ASU No. 2017-09 which provides clarity and reduces diversity in practice and costand complexity when accounting for a change to the terms or conditions of a share-based payment award. Theguidance is effective for fiscal years beginning after December 15, 2017. We are currently evaluating the impact the adoptionof this ASU will have on our consolidated financial statements. 77 Table of ContentsNote 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, 2017 and 2016,our cash, cash equivalents and investments are classified as follows (in thousands): December 31, 2017 December 31, 2016 Gross Gross Gross Gross Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair Cost Gain (Loss) Value Cost Gain (Loss) Value Classified as: Cash $43,610 $ — $ — $43,610 $23,948 $ — $ — $23,948 Cash equivalents: Certificates of deposit 742 — — 742 12,204 — — 12,204 Total cash and cashequivalents 44,352 — — 44,352 36,152 — — 36,152 Investments (available-for-sale): Certificates of deposit 7,099 — (24) 7,075 8,999 1 (20) 8,980 Corporate bonds 25,602 — (69) 25,533 8,479 — (47) 8,432 Corporate equitysecurities — — — — 48 111 — 159 Total investments 32,701 — (93) 32,608 17,526 112 (67) 17,571 Total cash, cash equivalentsand investments $77,053 $ — $(93) $76,960 $53,678 $112 $(67) $53,723 Contractual maturities oninvestments: Due within 1 year $20,056 $20,032 $11,325 $11,415 Due after 1 through 5 years 12,645 12,576 6,201 6,156 $32,701 $32,608 $17,526 $17,571 1.Certificate of deposit with original maturities of less than three months.2.Certificate of deposit with original maturities of more than three months.3.Classified as “Short-term investments” in our consolidated balance sheets.4.Classified as “Long-term investments” in our consolidated balance sheets. We manage our investments as a single portfolio of highly marketable securities that is intended to be available tomeet our current cash requirements. Certificates of deposit and corporate bonds are typically held until maturity. Corporateequity securities have no maturity and may be sold at any time. Our holding of corporate equity securities consisted ofcommon stock of GCS Holdings, Inc. (“GHI”) (previously Global Communication Semiconductors, Inc), a Taiwan publicly-traded company. Previously, we also owned the common stock of Intelligent Epitaxy Technology, Inc. (“IntelliEpi”). Webegan classifying IntelliEpi stock as an available-for-sale security upon its initial public offering in 2013 and sold ourremaining IntelliEpi stock in the second quarter of 2015 and we no longer hold any IntelliEpi stock as of December 31, 2017.In 2015, our cash proceeds from sales of IntelliEpi stock, an available-for-sale investment, were $902,000, our costwas $43,000 and our gross realized gain was $859,000. We began classifying GHI as an available-for-sale security in the second quarter of 2015 when we determined thatthere was sufficient trading volume in the exchange for the stock to be deemed readily marketable. During 2017, our cashproceeds from sales of GHI stock were $125,000. Our cost was $48,000 and our gross realized gain from sales of GHI stockwas $77,000. As of December 31, 2017, we no longer hold any GHI stock. An unrealized gain of $111,000 and $432,000, netof tax, was recorded as of December 31, 2016 and 2015, respectively. In 2016, we sold some of our GHI stock and our cashproceeds from sales of this available-for-sale investment was $581,000. Our cost78 1234Table of Contentswas $152,000 and our gross realized gain from sales of this available-for-sale investment was $429,000. There were no salesof GHI stock for 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, 2017 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, 2017. 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 31,2017 (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, 2017 Value (Losses) Value (Losses) Value (Losses) Investments: Certificates of deposit $3,994 $(16) $2,342 $(8) $6,336 $(24) Corporate bonds 25,533 (69) — — 25,533 (69) Total in loss position $29,527 $(85) $2,342 $(8) $31,869 $(93) 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, 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 (Loss) Value (Loss) Value (Loss) 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) 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 subsidiaries,are accounted for under the equity method and included in “Other assets” in the consolidated balance sheets and totaled $9.8million and $11.3 million as of December 31, 2017 and December 31, 2016, respectively. As of December 31, 2017, therewere seven companies accounted for under the equity method. For the year ended December 31, 2017, we have recognized animpairment charge of $313,000 for one of the gallium companies. During the first quarter of 2017, management determined itunlikely that this company will recover from the difficult pricing environment and we wrote the investment down tozero. We had no impairment charges during 2016 and 2015.As 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, 2017 and 2016, we no longer maintain any investments under the cost method.79 Table of ContentsFair Value MeasurementsWe invest primarily in money market accounts, certificates of deposits, corporate bonds and notes, and governmentsecurities. ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), establishes three levels of inputs that maybe used to measure fair value. Level 1 instrument valuations are obtained from real-time quotes for transactions in activeexchange markets of the asset or identical assets. Level 2 instrument valuations are obtained from readily-available, observable pricing sources for comparable instruments. Level 3 instrument valuations are obtained fromunobservable inputs in which there is little or no market data, which require us to develop our own assumptions. On arecurring basis, we measure certain financial assets and liabilities at fair value, primarily consisting of our short-term andlong-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, 2017. There have been no transfers between fairvalue measurement levels during the year ended December 31, 2017.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 sheets and classified as Level 3 assets and liabilities. As of December 31, 2017, the net change infair value 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, 2017 (in thousands): Quoted Prices in Significant Active Markets of Significant Other Unobservable Balance as of Identical Assets Observable Inputs Inputs December 31, 2017 (Level 1) (Level 2) (Level 3) Assets: Cash equivalents and investments: Certificates of deposit $7,817 $ — $7,817 $ — Corporate bonds 25,533 — 25,533 — Total $33,350 $ — $33,350 $ — 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 $ — 80 Table of ContentsItems 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). For the yearended in December 31, 2017, we recognized an impairment charge of $313,000 for one of the gallium companies. During thefirst quarter of 2017, management determined it was unlikely that this company would recover from the difficult pricingenvironment and we wrote the investment down to zero. We had no impairment charges 2016 and 2015.Note 3. InventoriesThe components of inventory are summarized below (in thousands): December 31, December 31, 2017 2016 Inventories: Raw materials $23,554 $17,485 Work in process 20,135 20,410 Finished goods 2,151 2,257 $45,840 $40,152 As of December 31, 2017 and 2016, carrying values of inventories were net of inventory reserves of $13.3 millionand $12.0 million, respectively, for excess and obsolete inventory and $291,000 and $254,000, respectively, for lower ofcost or net realizable value 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, 2017 and 2016, we included $1.2 million and $1.4 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. The general manager of JiYa has a family member who has a 10% ownership position in this equity investmententity. As of December 31, 2017 and 2016, amounts payable of $2.1 million and $1.8 million, respectively, were included in“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, 2017 and 2016, amounts receivable of $334,000 and $313,000, respectively, were included in“Accounts receivable” in our consolidated balance sheets. During the three months ended December 31, 2016, we deemedthe collection of the outstanding amount to be improbable and established an allowance in full. There have since been noadditional sales made on credit to the customer and as of December 31, 2017 the existing outstanding amount continues tobe fully reserved.Beginning in 2012, our consolidated joint venture, Nanjing JinMei Gallium Co., Ltd. (“JinMei”), is contractuallyobligated under an agency sales agreement to sell raw material on behalf of its equity investment entity. JinMei bills thecustomers and remits the receipts, net of its portions of sales commission, to this equity investment entity. For the year endedDecember 31, 2017 and 2016, JinMei has recorded $3,000 and $1,000 income from agency sales, respectively, which wereincluded in “Other (expense) income, net” in the consolidated statements of operations.81 Table of ContentsIn 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. During 2017, the repayment of the full amount of principal and interest totaling$114,000 was received by our wholly owned subsidiary. As of December 31, 2017 and 2016, the balance of $0 and$107,000, respectively, were included in “Related party notes receivable – long term” in our consolidated balance sheets.In April 2014, Tongmei loaned an additional of $46,000 to Dongfang. The loan bears interest at 6.15% per annumand comes due on December 31, 2017. During 2017, the repayment of the full amount of principal and interest totaling$55,000 was received by our wholly owned subsidiary. As of December 31, 2017 and 2016, the balance, including bothprincipal and interest, of $0 and $50,000, respectively, were included in “Related party notes receivable – long term” in ourconsolidated balance sheets.Tongmei also purchases raw materials from Dongfang for production in the ordinary course of business. As ofDecember 31, 2017 and 2016, amounts payable of $0 and $210,000, respectively, were included in “Accounts payable” inour consolidated balance sheets.Tongmei also 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, 2017 and 2016, amounts payable of$370,000 and $377,000, 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, 2017 and 2016, amountspayable of $219,000 and $246,000, respectively, were included in “Accounts payable” in our consolidated balance sheets. In July 2017, Tongmei, provided an inter-company loan to JinMei in the amount of $768,000 in preparation for theacquisition of the land use rights and the construction of a new building. The inter-company loan carries an interest rateof 4.9% per annum. The principle is due in three installments between December 2021 and December 2023 while the interestis due in December of each year. JinMei is in the process of relocating its headquarters and manufacturing operations to analternative location. Currently, JinMei has identified a site as a possible candidate and the estimated costs for the land userights acquisition and facility construction is expected to be approximately $6 million. In April 2016, our consolidated joint venture, BoYu, provided a personal loan of $177,000 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. During the three months ended June 30, 2017, the repayment of theprincipal and interest totaling $180,000 was received by our consolidated joint venture. In November 2017, BoYu providedanother personal loan of $307,000 to the same executive employee. The loan bears interest at 2.75% per annum. Principaland accrued interest are due on November 30, 2020. As of December, 2017 and 2016, the balances, including both principaland accrued interest, were $307,000 and $179,000, respectively, and included in “Other assets” and “Prepaid expenses andother current assets”, respectively, 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, 2017 and 2016, amounts payable of $0 and $146,000, respectively, were included in“Accounts payable” in our consolidated balance sheets. 82 stTable of ContentsBeijing Kaide Quartz Co. Ltd. (“Kaide”) has been a supplier of customized quartz tubes to AXT since 2004. BeijingXiangHeMing Trade Co. Ltd., (“XiangHeMing”) is a significant shareholder of Kaide. XiangHeMing was previously ownedby, among others, certain immediate family members of Davis Zhang, our former President, China Operations, until at leastsometime 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, 2017 and 2016, amounts payable to Kaide of $708,000 and $323,000, respectively, wereincluded in “Accounts payable” in our consolidated balance sheets. On November 2, 2017, our consolidated joint venture, BoYu, raised additional capital in the amount of $2 millionin cash from a third-party investor through the issuance of shares equivalent to 10% ownership of BoYu. This third-partyinvestor is an immediate family member to the owner of one of BoYu's customers. For the years ended December 31, 2017and 2016, BoYu has recorded $1.2 million and $653,000 in revenue from this customer, respectively. As of December 31,2017 and 2016, amounts receivable of $635,000 and $156,000, respectively, were included in “Accounts receivable” in ourconsolidated balance sheets. Our 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): December 31, December 31, 2017 2016 Property, plant and equipment: Machinery and equipment, at cost $44,549 $41,254 Less: accumulated depreciation and amortization (40,845) (37,311) Building, at cost 32,461 29,600 Less: accumulated depreciation and amortization (11,501) (9,654) Leasehold improvements, at cost 5,539 4,942 Less: accumulated depreciation and amortization (4,288) (3,608) Construction in progress 20,615 2,582 $46,530 $27,805 As of December 31, 2017, the balance of construction in process was $20.6 million, of which, $14.8 million was forour buildings in our new Dingxing location, $3.6 million was for manufacturing equipment purchases not yet placed inservice, and $2.2 million was for our construction in process at our other consolidated subsidiaries. Depreciation andamortization expense was $4.4 million, $4.9 million and $5.5 million for the years ended 2017, 2016, and 2015 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.83 Table of ContentsOur direct investments are summarized below (in thousands): Investment Balance as of December 31, December 31, Accounting Ownership Company 2017 2016 Method Percentage Beijing JiYa Semiconductor Material Co., Ltd. $3,331 $3,331 Consolidated 46%Nanjing JinMei Gallium Co., Ltd. 592 592 Consolidated 83%Beijing BoYu Semiconductor Vessel Craftwork Technology Co.,Ltd. 1,346 1,346 Consolidated 63% $5,269 $5,269 Donghai County Dongfang High Purity Electronic MaterialsCo., Ltd. $1,473 $1,498 Equity 46%Xilingol Tongli Germanium Co. Ltd. 3,190 4,000 Equity 25%Emeishan Jia Mei High Purity Metals Co., Ltd. 915 1,101 Equity 25% $5,578 $6,599 Our ownership of JiYa is 46%. We continue to consolidate JiYa as we are the founding and largest shareholder, weappoint the general manager and controller and have the ability to exercise control in substance over the long-term strategicdecisions made. Our Chief Executive Officer is chairman of the JiYa board and we have appointed one other representative,Davis Zhang, to serve on the board. Mr. Zhang was an executive officer of AXT for 27 years. Further, our Chief FinancialOfficer, Gary Fischer, is on the board of supervisors of JiYa.Our ownership of JinMei is 83%. We continue to consolidate JinMei as we have a controlling financial interest andhave majority control of the board. Our Chief Executive Officer is chairman of the JinMei board and we have appointed twoother representatives to serve on the board.Our ownership of BoYu is 63%. On November 2, 2017, BoYu raised additional capital in the amount of $2 millionin cash from a third-party investor through the issuance of shares equivalent to 10% ownership of BoYu. As a result, ourownership of BoYu was diluted from 70% to 63%. We continue to consolidate BoYu as we have a controlling financialinterest and have majority control of the board and accordingly no gain was recognized as a result of this equitytransaction. Our Chief Executive Officer is chairman of the BoYu board and we have appointed two other representatives toserve 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 2017, 2016, and 2015, the three consolidated joint ventures generated $2.1 million, $0.1 million and$0.8 million of income, respectively, of which a loss of $0.1 million, $0.7 million and $0.3 million, respectively wereallocated to noncontrolling interests, resulting in $2.2 million, $0.8 million and $1.2 million of income, respectively, to ournet income.For AXT’s three direct minority investment entities that are not consolidated, the investment balances are includedin “Other assets” in our consolidated balance sheets and totaled $5.6 million and $6.6 million as of December 31, 2017 and2016, 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;84 Table of Contents·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 $0.9 million, $1.2 million and $43,000for the year ended December 31, 2017, 2016 and 2015, respectively, which was recorded as “Equity in (loss) earnings ofunconsolidated joint ventures” in the consolidated statements of operations.Net income recorded from all of the consolidated joint ventures and these three equity investment entities was $1.3million for the year ended December 31, 2017. Net loss recorded from all of the consolidated joint ventures and these threeequity investment entities was $0.4 million for the year ended December 31, 2016. Net income recorded from all of theconsolidated joint ventures and these three equity investment entities was $1.1 million for the years ended December 31,2015.We also maintain four minority investments indirectly in privately-held companies through our consolidated jointventures. JiYa holds three investments and JinMei holds one investment. These minority investments are accounted for underthe equity method in the books of our consolidated joint ventures. As of December 31, 2017 and 2016, our consolidatedjoint ventures included these minority investments in “Other assets” in the consolidated balance sheets with a carrying valueof $4.3 million and $4.7 million, respectively.AXT’s three direct minority investment entities and the three minority investments of JiYa and the one minorityinvestment of JinMei are not consolidated and are accounted for under the equity method. Excluding one fully impairedentity, the equity entities had the following summarized income information (in thousands) for the years ended December 31,2017, 2016, and 2015, respectively: Our share for the Year Ended Year Ended December 31, December 31, 2017 2016 2015 2017 2016 2015 Net revenue $24,053 $23,266 $35,732 $6,152 $6,124 $9,007 Gross profit (loss) 1,739 (2,191) 8,429 482 (511) 1,975 Operating (loss) income (3,676) (6,869) 2,965 (938) (1,724) 588 Net (loss) income (4,798) (7,428) 2,850 (1,381) (1,891) 558 Excluding one fully impaired entity, these minority investment entities that are not consolidated, but rather areaccounted for under the equity method, had the following summarized balance sheet information (in thousands) for the yearsended December 31, 2017 and 2016, respectively: As of December 31, 2017 2016 Current assets $33,415 $31,672 Noncurrent assets 28,964 29,701 Current liabilities 27,274 23,412 Noncurrent liabilities 180 406 Our portion of the entity loss, excluding impairment charges, from all seven minority investment entities that are notconsolidated and are accounted for under the equity method were a loss of $1.4 million, a loss of $2.0 million, and an incomeof $462,000 for the years ended December 31, 2017, 2016, and 2015, respectively. Dividends received from these minorityinvestment entities were $0, $0 and $305,000 for the years ended December 31, 2017, 2016, and 2015, respectively.Excluding one fully impaired entity, undistributed retained earnings relating to our investments in these minority investmententities amounted to $3.6 million and $4.9 million as of December 31, 2017 and 2016, respectively. 85 Table of ContentsNote 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, 2017 2016 Accrued compensation and related charges $3,205 $2,610 Preferred stock dividends payable 2,901 2,901 Advance from customers 924 238 Current portion of royalty payments 575 575 Accrued professional services 570 583 Dividends payable by consolidated joint ventures 533 499 Other tax payable 395 147 Accrued income taxes 270 203 Other personnel related costs 230 200 Accrued product warranty 133 251 Other accrued liabilities 1,413 1,053 $11,149 $9,260 Note 9. DebtPrior to 2015, we had an unused credit facility with a bank that provided for a line of credit of $10.0 million. Theline of credit was secured by marketable securities we had with the bank at that time. This line of credit was never used andthere were no outstanding borrowings under this line of credit as of December 31, 2015. This line of credit was terminated inJanuary 2015 when we closed our investment account with this institution and moved all of our funds from this bank to adifferent 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, 2017and 2016, 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 mustbe paid before any distribution is made to common stockholders. These preferred shares were issued to Lyte Optronics, Inc.stockholders in connection with the completion of our acquisition of Lyte Optronics, Inc. on May 28, 1999. 86 Table of ContentsChanges in AXT, Inc.’s ownership interest in consolidated subsidiaries.The effects of changes in the Company’s ownership interests in its less than 100% owned subsidiaries on theCompany’s equity are as follows: As of December 31, 2017 2016Net income attributable to AXT, Inc. $10,148 $5,636Changes in paid-in capital for: Sale of subsidiary shares to noncontrollling interest 1,765 —Net transfers to noncontrolling interests 1,765 —Net income attributable to AXT, Inc., net of transfers to noncontrolling interests $11,913 $5,636 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 2017 and 2016 under this program. Asof December 31, 2017, approximately $2.7 million remained available for future repurchases under this program. By the terms of the Series A preferred stock, so long as any shares of Series A preferred stock are outstanding, neitherthe Company nor any subsidiary of the Company shall redeem, repurchase or otherwise acquire any shares of common stock,unless all accrued dividends on the Series A preferred stock have been paid. During 2013 and 2015, we repurchased shares ofour outstanding common stock. As of December 31, 2015, the Series A preferred stock had cumulative dividends of $2.9million and we included this amount in “Accrued liabilities” in our consolidated balance sheets. In 2017, we did notrepurchase any of our outstanding common stock. If we are required to pay the cumulative dividends on the Series Apreferred stock, our cash and cash equivalents would be reduced. We account for the cumulative year to date dividends onthe Series A preferred stock when calculating our earnings per share.Note 11. Employee Benefit Plans and Stock-based CompensationStock Option Plans and Equity Incentive PlansIn May 2007, our stockholders approved our 2007 Equity Incentive Plan (the “2007 Plan”), which provides for thegrant of incentive and non-qualified stock options to our employees, consultants and directors. The 2007 Plan is arestatement of the 1997 Stock Option Plan which expired in 2007. The 1,928,994 share reserve of the 1997 Stock OptionPlan became the reserve of the 2007 Plan, together with 1,300,000 additional shares approved for issuance under the 2007Plan. In May 2013, the stockholders approved an additional 2,000,000 shares to be issued under the 2007 plan. Awards maybe made under the 2007 Plan are stock options, stock appreciation rights, restricted stock, restricted stock units, performanceshares, performance units, deferred compensation awards and other stock‑based awards. Stock options and stock appreciationrights awarded under the 2007 Plan may not be repriced without stockholder approval. Stock options and stock appreciationrights may not be granted below fair market value. Stock options or stock87 Table of Contentsappreciation rights generally shall not be fully vested over a period of less than three years from the date of grant and cannotbe exercised more than 10 years from the date of grant. Restricted stock, restricted stock units, and performance awardsgenerally shall not vest faster than over a three-year period (or a twelve‑month period if vesting is based on a performancemeasure). In December 2008, the 2007 Plan was amended to comply with the applicable requirements under Section 409A ofthe Internal Revenue Code.In May 2015, our stockholders approved our 2015 Equity Incentive Plan (the “2015 Plan”). The 2015 Plan is areplacement of the 2007 Plan. The 399,562 share reserve of the 2007 Plan became the reserve of the 2015 Plan, together with3,000,000 additional shares approved for issuance under the 2015 Plan. Awards that may be made under the 2015 Plan arestock 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 2015 Plan does allow for similar vesting toemployees. As of December 31, 2017, approximately 1,389,329 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, 2015, 2016and 2017 (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, 2015 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 Granted 184 8.99 Exercised (762) 3.25 Canceled and expired (50) 3.47 Balance as of December 31, 2017 2,666 $3.81 6.87 $13,149 Options vested as of December 31, 2017 and unvested options expectedto vest, net of forfeitures 2,629 $3.78 6.84 $13,031 Options exercisable as of December 31, 2017 1,580 $3.37 5.83 $8,419 88 Table of ContentsThe options outstanding and exercisable as of December 31, 2017 were in the following exercise price ranges (inthousands, except per share data): Options Vested and Options Outstanding as of Exercisable as of December 31, 2017 December 31, 2017 Weighted‑‑average Range of Weighted‑‑average Remaining Weighted‑‑Average Exercise Price Shares Exercise Price Contractual Life Shares Exercise Price $2.04-$2.14 36 $2.10 4.47 31 $2.09 $2.18-$2.18 634 $2.18 7.79 262 $2.18 $2.29-$2.36 401 $2.33 6.05 376 $2.33 $2.47-$2.51 284 $2.47 6.78 201 $2.47 $2.56-$4.79 366 $3.55 4.94 332 $3.65 $5.21-$5.21 518 $5.21 8.75 135 $5.21 $5.61-$5.83 242 $5.76 3.11 242 $5.76 $7.82-$7.82 1 $7.82 2.84 1 $7.82 $7.95-$7.95 60 $7.95 9.08 — $ — $9.50-$9.50 124 $9.50 9.82 — $ — 2,666 $3.81 6.87 1,580 $$3.37 There were 762,000, 555,000 and 119,000 options exercised in the years ended December 31, 2017, 2016, and2015, respectively. The total intrinsic value of options exercised for the years ended December 31, 2017, 2016, and 2015, was $4,030,000, $1,302,000 and $118,000, respectively.As of December 31, 2017, the unamortized compensation costs related to unvested stock options granted toemployees under our 2015 plan was approximately $1.7 million, net of estimated forfeitures of $190,000. These costs will beamortized on a straight-line basis over a weighted-average period of approximately 2.3 years and will be adjusted forsubsequent changes in estimated forfeitures. We did not capitalize any stock‑based compensation to inventory as ofDecember 31, 2017 and 2016, due to the immateriality of the amount.Restricted Stock AwardsA summary of activity related to restricted stock awards for the years ended December 31, 2015, 2016 and 2017 ispresented below (in thousands, except per share data): Weighted-Average Grant Date Stock Awards Shares Fair Value Non-vested as of January 1, 2015 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 Granted 312 $9.15 Vested (157) $3.13 Forfeited — $ — Non-vested as of December 31, 2017 480 $7.13 Total fair value of stock awards vested during the years ended December 31, 2017, 2016, and 2015 was$490,000 $351,000 and $605,000, respectively. As of December 31, 2017, we had $3.1 million of unrecognized89 Table of Contentscompensation expense related to restricted stock awards, which will be recognized over the weighted average period of 2.0years.Common StockThe following number of shares of common stock were reserved and available for future issuance as of December 31,2017 (in thousands, except per share data):Options outstanding 2,666 Restricted stock awards outstanding 480 Stock available for future grant: 2015 Equity Incentive Plan 1,389 Total 4,535 Stock-based CompensationWe recorded $1.4 million, $1.1 million and $1.3 million of stock‑based compensation in our consolidatedstatements of operations for the years ended December 31, 2017, 2016, and 2015, respectively. The following tablesummarizes compensation costs related to our stock‑based compensation awards (in thousands, except per share data): Year Ended December 31, 2017 2016 2015 Stock‑based compensation in the form of employee stock options andrestricted stock, included in: Cost of revenue $39 $23 $20 Selling, general and administrative 1,146 908 1,148 Research and development 220 165 181 Total stock-based compensation 1,405 1,096 1,349 Tax effect on stock-based compensation — — — Net effect on net income $1,405 $1,096 $1,349 Shares used in computing basic net income per share 37,444 32,139 32,183 Shares used in computing diluted net income per share 38,966 32,894 32,183 Effect on basic net income per share $(0.04) $(0.03) $(0.04) Effect on diluted net income per share $(0.04) $(0.03) $(0.04) We estimate the fair value of stock options using a Black‑Scholes valuation model, consistent with the provisions ofASC 718. There were 184,000, 624,000 and 866,000 stock options granted with a weighted-average grant date fair value of$3.67, $1.85 and $0.88 per share during 2017, 2016, and 2015, respectively. The fair value of options granted was estimatedat the date of grant using the following weighted‑average assumptions: Year Ended December 31, 2017 2016 2015 Expected term (in years) 5.8 4.0 3.9 Volatility 46.5% 46.5% 51.1% Expected dividend —% —% —% Risk-free interest rate 2.10% 1.47% 1.75% 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 common stock. The dividend yield ofzero is based on the fact that we have never paid cash dividends and have no present intention to pay cash dividends. Therisk-free interest rates are taken from the Daily Federal Yield Curve Rates as of the grant dates as published by the90 Table of ContentsFederal Reserve and represent the yields on actively traded Treasury securities for terms equal to the expected term of theoptions.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 Savings Plan were $149,000, $133,000 and $125,000 forthe years ended December 31, 2017, 2016, and 2015, 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 2017 and 2016(in thousands): Year Ended December 31, 2017 2016 Beginning accrued warranty and related costs $251 $497 Accruals for warranties issued 125 92 Adjustments related to pre-existing warranties including expirations and changes in estimates (150) (223) Cost of warranty repair (93) (115) Ending accrued warranty and related costs $133 $251 91 Table of ContentsNote 13. Income TaxesConsolidated income before provision for income taxes includes non-U.S. income of approximately $6.4 million,$15.0 million and $15.2 million for the years ended December 31, 2017, 2016, and 2015, respectively. We recorded a currenttax provision of $792,000, $733,000 and $531,000 for the years ended December 31, 2017, 2016, and 2015, respectively.The components of the provision for income taxes are summarized below (in thousands): Year Ended December 31, 2017 2016 2015 Current: Federal $— $— $— State 2 4 2 Foreign 790 729 529 Total current 792 733 531 Deferred: Federal — — — State — — — Total deferred — — — Total net provision for income taxes $792 $733 $531 A reconciliation of the effective income tax rates and the U.S. statutory federal income tax rate is summarized below: Year Ended December 31, 2017 2016 2015 Statutory federal income tax rate 35.0% 35.0% 35.0%State income taxes, net of federal tax benefits — — — Valuation allowance (139.5) (7.1) (48.2) Rate change 100.8 — — Stock-based compensation (10.4) 1.2 (9.8) Foreign tax rate differential (10.3) (12.2) 30.6 Foreign tax incentives (7.0) (13.6) 25.2 Dividend from unconsolidated affiliates — 1.5 (60.4) 965(a) inclusion 55.6 — — Section 78 gross up 11.7 — — Foreign tax credit (30.6) — — Tax effect in equity method loss or gain from unconsolidated affiliates 2.9 8.3 1.2 Other (0.9) (0.2) (0.1) Effective tax rate 7.3% 12.9% (26.5)% 92 Table of ContentsDeferred tax assets and liabilities are summarized below (in thousands): As of December 31, 2017 2016 Deferred tax assets: Net operating loss $14,203 $62,459 Accruals and reserves not yet deductible 3,133 4,520 Credits 4,809 1,488 22,145 68,467 Deferred tax liabilities: Valuation of investment portfolio — — — — Net deferred tax assets 22,145 68,467 Valuation allowance (22,145) (68,467) Net deferred tax assets $— $— As of December 31, 2017, we have federal and state net operating loss (“NOL”) carryforwards of approximately$63.6 million and $0.3 million, respectively, which will expire beginning in 2022 and 2033, respectively. In addition, wehave federal tax credit carryforwards of approximately $1.5 million, which will expire beginning in 2029.The deferred tax assets valuation allowance as of December 31, 2017 is attributed to U.S. federal, and state deferredtax assets, which result primarily from future deductible accruals, reserves, NOL carryforwards, and tax credit carryforwards.We believe that, based on a number of factors, the available objective evidence creates sufficient uncertainty regarding therealizability of the deferred tax assets such that a full valuation allowance has been recorded. These factors include ourhistory of losses related to domestic operations, and the lack of carryback capacity to realize deferred tax assets. Thevaluation allowance decreased by $46.3 million and increased by $2.7 million for the years ended December 31, 2017 and2016, 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,satisfy certain product requirements, meet certain headcount requirements and maintain certain levels of researchexpenditures. We realized benefits from this 10% reduction in tax rate of $599,000, $489,000 and $354,000 for 2017, 2016and 2015, respectively. The favorable tax rate is renewed every three years and our subsidiaries are in the process ofapplying for renewal. The preferential tax rate that we enjoy could be modified or discontinued altogether at any time, whichcould 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 research and development(“R&D”) expenditures. Government pre-approval is required to claim R&D tax benefits. Any R&D claim is then submittedwith the annual corporate income tax for the taxing authorities’ approval. We do not record such benefit until we receive therefund from the Chinese government. Our consolidated subsidiaries in China have enjoyed various tax holidays since2000. Benefits under the tax holidays vary by jurisdiction.Utilization of the NOL and R&D credit carryforwards may be subject to a substantial annual limitation due toownership changes that might have occurred previously or that could occur in the future, as provided by Section 382 of theInternal Revenue Code of 1986 (“Section 382”), as well as similar state provisions. Ownership changes may limit the amountof NOL 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 there is a change ofcontrol, utilization of our NOL or tax credit carryforwards would be subject to an annual limitation under Section 382. Anylimitation may result in expiration of a portion of the NOL or research and development credit carryforwards beforeutilization. Subsequent ownership changes could further impact the limitation in future years. Until a Section 382 study iscompleted and any limitation known, no amounts are being presented as an uncertain tax position.93 Table of ContentsA full valuation allowance has been provided against our NOL carryforwards and R&D credit carryforwards and, if anadjustment is required, this adjustment would be offset by an adjustment to the valuation allowance. Thus, there would be nonet impact to the consolidated balance sheets or statements of operations if an adjustment were required.On December 22, 2017, the U.S. government enacted comprehensive tax legislation, commonly known as the TaxCuts and Jobs Act of 2017 (“the Act”), which significantly reforms the Internal Revenue Code of 1986, as amended. The Actcontains broad and complex changes to corporate taxation, including in part reduction of the U.S. federal corporate tax ratefrom 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that werepreviously considered permanently reinvested, and creates new taxes on certain foreign sourced earnings.As of December 31, 2017, we have not completed our accounting for the tax effects of the Act. We have calculated adecrease in net deferred tax assets of $10.9 million and a corresponding decrease of $10.9 million in the valuation allowancedue to the reduction federal tax rate. Thus, the net impact to the Company's tax expense is zero. In accordance with StaffAccounting Bulletin No. 118, we were able to determine a reasonable estimate, namely the one-time transition tax and theremeasurement of deferred tax at the new tax rate. We did not recognize any provisional tax expense due to our historicalsignificant operating losses, except some alternative minimum tax, which is offset by foreign tax credits. We expect tocomplete our analysis in connection with filing our 2017 U.S. corporate tax returnThe one-time transition tax is based on our post-1986 foreign earnings and profits which we have previouslyexcluded from U.S. income taxes due to our position that we would permanently reinvest future earnings. The one-timetransition tax is applied at a 15.5% tax rate on cash assets and an 8% tax rate for other specified assets. Since our foreignoperations have accumulated positive earnings, we recognized approximately $20.9 million of foreign earnings as a deemeddividend, due to the significant amount of operating losses available, we incurred approximately $0.5 million of alternativeminimum tax, which was fully offset by foreign tax credits. During fiscal year 2017 and 2016, the amount of gross unrecognized tax benefits remains unchanged. During fiscalyear 2015, the amount of gross unrecognized tax benefits decreased by $1.8 million. The total amount of unrecognized taxbenefits was $14.6 million as of December 31, 2017 and December 31, 2016. The Company recognizes interest and penaltiesrelated to uncertain tax positions as part of the income tax provision. To date, such interest and penalties have not beenmaterial. We recognize interest and penalties related to uncertain tax positions in income tax expense. Income tax expense forthe year ended December 31, 2017 includes no interest and penalties. As of December 31, 2017, 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 2002 and 2013, respectively. 94 Table of ContentsA reconciliation of the beginning and ending amount of the gross unrecognized tax benefits is as follows (inthousands): Year Ended December 31, 2017 2016 2015 Gross unrecognized tax benefits balance atbeginning of the year $ 14,557 $ 14,557 $ 16,403 Add: Additions based on tax positions related to thecurrent year — — — 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 ofthe year $ 14,557 $ 14,557 $ 14,557 Excluding the effects of recorded valuation allowances for deferred tax assets, $14.6 million of the unrecognized taxbenefit would favorably impact the effective tax rate in future periods if recognized. 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.95 Table of ContentsA 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, 2017 2016 2015 Numerator: Net income (loss) attributable to AXT, Inc. $10,148 $5,636 $(2,228) Less: Preferred stock dividends (177) (177) (177) Net income (loss) available to common stockholders $9,971 $5,459 $(2,405) Denominator: Denominator for basic net income per share - weighted average commonshares 37,444 32,139 32,183 Effect of dilutive securities: Common stock options 1,339 596 — Restricted stock awards 183 159 — Denominator for dilutive net income per common shares 38,966 32,894 32,183 Basic net income (loss) per share: Net income (loss) attributable to AXT, Inc. $0.27 $0.17 $(0.07) Net income (loss) to common stockholders $0.27 $0.17 $(0.07) Diluted net income (loss) per share: Net income (loss) attributable to AXT, Inc. $0.26 $0.17 $(0.07) Net income (loss) to common stockholders $0.26 $0.17 $(0.07) Options excluded from diluted net income (loss) per share as the impact is anti-dilutive 86 779 3,779 Restricted stock excluded from diluted net income (loss) per share as the impact isanti-dilutive 63 15 546 Note 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 integral to these substrates. In accordancewith ASC topic 280, Segment Reporting, our chief operating decision‑maker has been identified as the Chief ExecutiveOfficer, who reviews operating results to make decisions about allocating resources and assessing performance for theCompany. Since we operate in one segment, all financial segment and product line information can be found in theconsolidated financial statements.Product InformationThe following table represents revenue amounts (in thousands) by product type: Year Ended December 31, 2017 2016 2015 Product Type: Substrates$78,619 $65,633 $58,220 Raw Materials and Others 20,054 15,716 19,282 Total$98,673 $81,349 $77,502 96 Table of ContentsGeographical InformationThe following table represents revenue amounts (in thousands) reported for products shipped to customers in thecorresponding geographic region: Year Ended December 31, 2017 2016 2015 Product revenue: China$24,962 $17,448 $13,728 Europe (primarily Germany) 23,956 18,637 19,518 Taiwan 18,279 15,369 13,799 Japan 13,258 11,015 9,138 Asia Pacific (excluding China, Taiwan and Japan) 9,866 10,796 11,482 North America (primarily the United States) 8,352 8,084 9,837 Total$98,673 $81,349 $77,502 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, 2017 2016 Long-lived assets by geographic region, net of depreciation: North America $1,410 $318 China 45,120 27,487 $46,530 $27,805 Note 16. Other (expense) incomeThe components of other (expense) income are summarized below (in thousands): Year Ended December 31, 2017 2016 2015Foreign exchange gain (loss) $(602) $232 $717Gain on available-for-sales securities 77 429 859Other income (expense) (28) 199 447 $(553) $860 $2,023 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.97 Table of ContentsLeasesWe 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 expense under these operatingleases were $302,000, $331,000 and $313,000 for the years ended December 31, 2017, 2016 and 2015, respectively. Totalminimum lease payments under these leases as of December 31, 2017 are summarized below (in thousands): Lease Payments 2018 $185 2019 176 2020 164 2021 12 2022 12 $549 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 arelower than a pre-determined amount set forth in this agreement. Royalty expense under this agreement was$526,000, which was net of claim for credit of $49,000 for the year ended December 31, 2017. Royalty expenseunder this agreement was $447,000, which was net of claim for credit of $128,000 for the year ended December 31,2016. Royalty expense for year ended December 31, 2015 was $583,000, which was net of claim for credit of$217,000. These expenses were included in cost of revenue. Total maximum, remaining royalty payments underthis agreement as of December 31, 2017 amounted to $575,000 for the year ending December 31, 2018.Land Purchase and Investment Agreement We are in the process of relocating our gallium arsenide production line to Dingxing, China. In addition to a landrights and building purchase agreement that we entered into with a private real estate development company to acquire ournew manufacturing facility, we also entered into a cooperation agreement with the Dingxing local government. In additionto pledging its full support and cooperation, the Dingxing local government will issue certain credits or rebates to us as weachieve certain milestones. We, in turn, agreed to hire local workers over time, pay taxes when due and eventuallydemonstrate a total investment of approximately $90 million in value, assets and capital. The investment will include cashpaid for the land and buildings, cash on deposit in our name at local banks, the gross value of new and used equipment(including future equipment that might be used for indium phosphide and germanium substrates production), the deemedvalue for our customer list or the end user of our substrates (for example, the end users of the 3-D sensing VCSELs), a deemedvalue for employment of local citizens, a deemed value for our proprietary process technology, other intellectual property,other intangibles and additional items of value. There is no timeline or deadline by which this must be accomplished, ratherit is a good faith covenant entered into between AXT and the Dingxing local government. Further, there is no specificpenalty contemplated if either party breaches the agreement, however the agreement does state that each party has a right toseek from the other party compensation for losses. Under certain conditions, the Dingxing local government may purchasethe land and building at the appraised value. We believe that such cooperation agreements are normal, customary and usualin China and that the future valuation is flexible. We have a similar agreement with the city of Kazuo, China, although on asmaller scale. The total investment targeted by AXT in Kazuo is approximately $15 million in value, assets and capital. 98 Table of ContentsNote 18. Unaudited Quarterly Consolidated Financial Data Quarter First Second Third Fourth (in thousands, except per share data) 2017: Revenue $20,616 $23,557 $28,168 $26,332 Gross profit 6,288 7,256 11,133 9,798 Net income attributable to AXT, Inc 665 1,930 4,419 3,134 Net (loss) attributable to AXT, Inc per share, basic $0.02 $0.05 $0.11 $0.08 Net (loss) attributable to AXT, Inc per share, diluted $0.02 $0.05 $0.11 $0.08 2016: Revenue $18,713 $20,495 $21,872 $20,269 Gross profit 5,253 6,027 7,578 7,523 Net (loss) 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 * Net loss to AXT, Inc. per common share resulted due to the accrual of preferred dividend liquidation preference during the three months endedMarch 31, 2016.Note 19. Restructuring ChargesIn the second quarter of 2016, we restructured the operations of JiYa which resulted in a reduction in force of 28positions that were no longer required to support production and operations. Accordingly, we recorded a restructuring chargeof approximately $226,000 related to the reduction in force for severance-related expenses. As of June 30, 2016, we hadcompleted this restructuring plan and the reduction in force. We did not have any restructuring charges in 2017.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 consolidated financial statements resulting from these transactions. However, the investigation identifiedcertain historical related party transactions that were not previously disclosed in our filings with the Securities and ExchangeCommission (“SEC”). We filed a Current Report on Form 8-K with the SEC on February 23, 2015 to disclose such historicalrelated party transactions.On February 20, 2015, the Board of Directors waived any potential inconsistencies with our Code of Conduct andEthics arising from the transactions identified in the investigation. Also, the Audit Committee approved the related partynature of such transactions to the extent it had not previously approved such transactions. The Board of Directors and AuditCommittee specified that such waiver and approval would have retroactive effect to the date of commencement of thetransactions covered by such waiver and approval. We have incurred approximately $1.8 million of professional service feesduring the course of this investigation. Item 16. Form 10-K SummaryNot applicable.99 Table of ContentsAXT, Inc.EXHIBITSTOFORM 10-K ANNUAL REPORTFor the Year Ended December 31, 2017ExhibitNumber 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 officers10.3(9)** 6-inch Supply Agreement dated December 31, 2008 between AXT, Inc. and IQE plc10.4(10)** 4-inch Supply Agreement dated December 31, 2008 between AXT, Inc. and IQE plc10.5(11)* 2007 Equity Incentive Plan (amended December 8, 2008)10.6(12)* Forms of agreements under the 2007 Equity Incentive Plan10.7(13)* Employment Letter Agreement between the Company and Mr. Robert G. Ochrym10.8(14)* Amended and Restated Employment Offer Letter between the Company and Dr. Morris S. Young datedDecember 4, 201210.9(15)* Employment Letter Agreement between the Company and Mr. Gary L. Fischer10.10(16)* 2015 Equity Incentive Plan10.11(17)* 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.(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, 1999.100 Table of Contents(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 10.29 to registrant’s Form 8-K filed with the SEC on January 5, 2009.(10)Incorporated by reference to exhibit 10.30 to registrant’s Form 8-K filed with the SEC on January 5, 2009.(11)Incorporated by reference to exhibit 10.31 to registrant’s Form 10-K filed with the SEC on March 31, 2009.(12)Incorporated by reference to exhibit 10.20 to registrant’s Form 10-K filed with the SEC on March 22, 2010.(13)Incorporated by reference to exhibit 10.24 to registrant’s Form 10-K filed with the SEC on March 22, 2010.(14)Incorporated by reference to exhibit 10.1 to registrant’s Form 8-K filed with the SEC on December 4, 2012.(15)Incorporated by reference to exhibit 10.1 to registrant’s Form 8-K filed with the SEC on August 12, 2014.(16)Incorporated by reference to appendix A to the registrant’s Definitive Proxy Statement on Schedule 14A filed with the SEC on April 8,2015.(17)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.101 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: March 9, 2018POWER OF ATTORNEYKNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutesand appoints Morris S. Young and Gary L. Fischer, and each of them, his true and lawful attorney-in-fact and agent, with fullpower of substitution, each with power to act alone, to sign and execute on behalf of the undersigned any and allamendments to this Report on Form 10-K, and to perform any acts necessary in order to file the same, with all exhibits theretoand other documents in connection therewith with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requested and necessary to be done inconnection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirmingall that said attorney-in-fact and agent, or their or his or her substitutes, shall do or cause to be done by virtue hereof.Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the registrant and in the capacities and on the dates indicated.Signature Title Date /s/ MORRIS S. YOUNG Chief Executive Officer and Director March 9, 2018Morris S. Young (Principal Executive Officer) /s/ GARY L. FISCHER Chief Financial Officer and Corporate Secretary March 9, 2018Gary L. Fischer (Principal Financial Officer andPrincipal Accounting Officer) /s/ JESSE CHEN Chairman of the Board of Directors March 9, 2018Jesse Chen /s/ DAVID C. CHANG Director March 9, 2018David C. Chang /s/ LEONARD LEBLANC Director March 9, 2018Leonard LeBlanc 102Exhibit 12.1 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Year Ended December 31, 2017 2016 2015 2014 2013 2012 (in thousands) Earnings: Income (loss) before income taxes$10,853$5,699$(2,002)$(482)$(6,625)$7,003 Less: Equity in (earnings) loss of investees 1,694 1,995 (462) (1,528) (1,377) (1,281) Less: Pre-tax net (income) loss attributable to noncontrolling interest 87 670 305 (691) (1,145) (3,040) Add: Distributions paid by equity investees - - 305 327 308 436 Fixed charges and preferred stock dividends, as calculated below 278 287 281 264 391 327 Total earnings$12,912$8,651$(1,573) $(2,110) $(8,448) $3,445 Computation of fixed charges and preferred stock dividends: Interest expense$ -$ -$ -$ -$1$1 Preferred stock dividends 177 177 177 177 177 177 Interest component of rent expense 101 110 104 87 213 149 Total combined fixed charges and preferred stock dividends$278$287$281$264$391$327 Ratio of earnings to combined fixed charges and preferred stock dividends46.4530.14 N/A N/A N/A 10.54 Deficiency of earnings to combined fixed charges and preferred stock dividends N/A N/A (1,854) (2,374) (8,839) N/A (1)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.(2)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.(3)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)(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** 63 * AXT’s ownership of this subsidiary was 51% at inception, reduced to 46% at December 31, 2005 as 5% ownershipwas given to JiYa’s management upon fulfillment of certain conditions. AXT continues to consolidate JiYa as weare 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 chairmanof the JiYa board and we have appointed one other representative, Davis Zhang, to serve on the board. Mr. Zhangwas an executive officer of AXT for 27 years. Further, our Chief Financial Officer, Gary Fischer, is on the board ofsupervisors of JiYa. ** AXT’s ownership of this subsidiary was 70% at inception. On November 2, 2017, BoYu, raised additional capitalin the amount of $2 million in cash from a third-party investor through the issuance of shares equivalent to 10%ownership of BoYu. As a result, our ownership of BoYu was diluted from 70% to 63%. AXT continues toconsolidate BoYu as we have a controlling financial interest and have majority control of the board and,accordingly, no gain was recognized as a result of this equity transaction. Our Chief Executive Officer is chairmanof the BoYu board and we have appointed two other representatives to serve on the board. Exhibit 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-214211)and Form S-8 (Nos. 333-38858, 333-67297, 333-143366, 333-188788 and 333-204478) of AXT, Inc. of our reportsdated March 9, 2018 relating to the consolidated financial statements and the effectiveness of internal control overfinancial reporting as of December 31, 2017, which appear in this Form 10-K. /s/ BPM LLPSan Jose, CaliforniaMarch 9, 2018 Exhibit 31.1CERTIFICATION PURSUANT TO 18 U.S.C. RULE 13a-14(a)/15d-14(a)AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES‑OXLEY ACT OF 2002I, Morris S. Young, certify that:1.I have reviewed this annual report on Form 10-K of AXT, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairlypresent in all material respects, the financial condition, results of operations and cash flows of the registrant as of,and for, the periods presented in this report;4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controlsand procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financialreporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designedunder our supervision, to ensure that material information relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularly during the period in which this reportis being prepared;(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting tobe designed under our supervision, to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accountingprinciples;(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report ourconclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered bythis report based on such evaluation; and(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred duringthe registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that hasmaterially affected, or is reasonably likely to materially affect, the registrant’s internal control over financialreporting; and5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internalcontrol over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board ofdirectors (or persons performing the equivalent functions):(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financialreporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize andreport financial information; and(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in theregistrant’s internal control over financial reporting.March 9, 2018/s/ MORRIS S. YOUNG Morris S. Young Chief Executive Officer (Principal Executive Officer) Exhibit 31.2CERTIFICATION PURSUANT TO 18 U.S.C. RULE 13a-14(a)/15d-14(a)AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES‑OXLEY ACT OF 2002I, Gary L. Fischer, certify that:1.I have reviewed this annual report on Form 10-K of AXT, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material factnecessary to make the statements made, in light of the circumstances under which such statements were made, not misleadingwith respect to the period covered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in allmaterial respects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periodspresented in this report;4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as definedin Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period in which this report is being prepared;(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designedunder our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generally accepted accounting principles;(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusionsabout the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based onsuch evaluation; and(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during theregistrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materiallyaffected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control overfinancial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or personsperforming the equivalent functions):(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reportingwhich are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financialinformation; and(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’sinternal control over financial reporting.March 9, 2018/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 31,2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned herebycertifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002, that, tothe best of my knowledge:(1)The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934(15 U.S.C. 78m); and(2)The information contained in the Report fairly presents, in all material respects, the financial conditionand results of operations of the Company.Date: March 9, 2018By:/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 31,2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned herebycertifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002, that, tothe best of my knowledge:(1)The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934(15 U.S.C. 78m); and(2)The information contained in the Report fairly presents, in all material respects, the financial conditionand results of operations of the Company.Date: March 9, 2018By:/s/ Gary L. Fischer Gary L. Fischer Chief Financial Officer and Corporate Secretary (Principal Financial Officer and Principal Accounting Officer) 

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