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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2019
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission file number: 000-24085
AXT, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
4281 Technology Drive, Fremont, California
(Address of principal executive offices)
94-3031310
(I.R.S. Employer
Identification No.)
94538
(Zip Code)
Registrant’s telephone number, including area code: (510) 438-4700
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
Common Stock, $0.001 par value
Trading Symbol
AXTI
Name of each exchange on which registered:
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act ☐ Yes ☒ No
Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes ☒ No
Indicate 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
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
such files). ☒ Yes ☐ No
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein,
and will 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 or any 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 an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth
company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Accelerated filer ☒
Non‑accelerated filer ☐
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 new or 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 ☒ No
The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing sale price of $3.96 for the common
stock on June 28, 2019 as reported on the Nasdaq Global Select Market, was approximately $109,287,545. Shares of common stock held by each officer,
director and by each 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 determination of affiliate status is not a conclusive determination for other purposes.
As of March 4, 2020, 40,826,656 shares, $0.001 par value, of the registrant’s common stock were outstanding.
Table of Contents
Business
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4. Mine Safety Disclosures
Properties
Legal Proceedings
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PART I
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Consolidated Financial Data
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Consolidated Financial Statements and Supplementary Data
Item 8.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9.
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions and Director Independence
Item 14. Principal Accountant Fees and Services
Item 15. Exhibits and Financial Statement Schedules
Item 16. Form 10-K Summary
PART IV
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PART I
This Annual Report on Form 10-K (including the following section regarding Management’s Discussion and
Analysis of Financial Condition and Results of Operations) contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Statements relating to our expectations regarding results of operations, market and customer demand for our
products, our competitors, customer qualifications of our products, our ability to expand our markets or increase sales,
emerging applications using chips or devices fabricated on our substrates, the development of new products, applications,
enhancements or technologies, the life cycles of our products and applications, product yields and gross margins, expense
levels, the impact of the adoption of certain accounting pronouncements, our investments in capital projects, our ability to
relocate our gallium arsenide and germanium production lines in a timely and orderly manner, our estimated construction
and relocation costs, including potential severance costs, with respect to the relocation of our gallium arsenide and
germanium production lines, our ability to have customers re-qualify substrates from our new manufacturing location in
Dingxing, China, our ability to utilize or increase our manufacturing capacity and our belief that we have adequate cash and
investments to meet our needs over the next 12 months are forward-looking statements. Words such as “expects,”
“anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “goals,” “should,” “continues,” “would,” “could” and
similar expressions or variations of such words are intended to identify forward‑looking statements, but are not the
exclusive means of identifying forward‑looking statements in this Annual Report on Form 10-K. Additionally, statements
concerning future matters such as our strategy and plans, industry trends and the impact of trends, tariffs and trade wars,
mandatory factory shutdowns in China, policies and regulations in China and economic cycles on our business are forward-
looking statements. All forward-looking statements are based upon management’s views as of the date of this Annual
Report on Form 10-K and are subject to risks and uncertainties that could cause actual results to differ materially from
historical results or those anticipated in such forward-looking statements. Such risks and uncertainties include those set
forth under the section entitled “Risk Factors” in Item 1A below, as well as those discussed elsewhere in this Annual
Report on Form 10-K, and identify important factors that could disrupt or injure our business or cause actual results to
differ materially from those predicted in any such forward-looking statements.
These forward-looking statements are not guarantees of future performance. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the date hereof. Readers are urged to carefully
review and consider the various disclosures made in this report, which attempt to advise interested parties of the risks and
factors that may affect our business, financial condition, results of operations and prospects. We undertake no obligation to
revise or update any forward‑looking statements in order to reflect any development, event or circumstance that may arise
after the date of this report.
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Item 1. Business
AXT, Inc. (“AXT”, “the Company”, “we,” “us,” and “our” refer to AXT, Inc. and its consolidated subsidiaries) is
a materials science company that develops and produces high-performance compound and single element semiconductor
substrates, also known as wafers. Our consolidated subsidiaries produce and sell certain raw materials some of which are
used in our substrate manufacturing process and some of which are sold to other companies.
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 other
electronic circuits are made from silicon. However, certain chips may become too hot or perform their function too slowly
if silicon is used as the base material. In addition, optoelectronic applications, such as LED lighting and chip-based lasers,
do not use silicon substrates because they require a wave form frequency that cannot be achieved using silicon. Alternative
or specialty materials are used to replace silicon as the preferred base in these situations. Our wafers provide such
alternative or specialty materials. We do not design or manufacture the chips. We add value by researching, developing and
producing the specialty material wafers. We have two product lines: specialty material substrates and raw materials integral
to these substrates. 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).
InP is a high-performance semiconductor substrate used in broadband and fiber optic applications and data center
connectivity. InP substrates can also be used in 5G applications. In recent years, InP demand has increased. Semi-insulating
GaAs substrates are used to create various high-speed microwave components, including power amplifier chips used in cell
phones, satellite communications and broadcast television applications. Semi-conducting GaAs substrates are used to
create opto-electronic products, including high brightness light emitting diodes (HBLEDs) that are often used to backlight
wireless handsets and liquid crystal display (LCD) TVs and also used for automotive panels, signage, display and lighting
applications. A new application for semi-conducting GaAs substrates is 3-D sensing chips using VCSELs (vertical cavity
surface emitting lasers) as an array of lasers on a single chip that can be used in cell phones and other devices. Ge
substrates are used in applications such as solar cells for space and terrestrial photovoltaic applications.
Our supply chain strategy includes partial ownership in raw material companies. Two of these companies are
consolidated. One of these companies produces 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, effusion rings when growing
OLED (Organic Light Emitting Diode) tools, epitaxial layer growth in MOCVD (Metal-Organic Chemical Vapor
Deposition) reactors and MBE (Molecular Beam Epitaxy) reactors. We use these pBN crucibles in our own ingot growth
processes and they are also sold in the open market to other companies. The second consolidated company converts raw
gallium to purified gallium. We use purified gallium in producing our GaAs substrates and it is also sold in the open
market to other companies for use in producing magnetic materials, high temperature thermometers, single crystal ingots,
including gallium arsenide, gallium nitride, gallium antimonide and gallium phosphide ingots, and other materials and
alloys. In addition to purified gallium, the second consolidated company also produces InP base material which we then
use to grow single crystal ingots. In prior years, we consolidated a third company was consolidated, but, in the first
quarter of 2019, we sold a portion of our ownership to our investment partner and, as of March 11, 2019, we ceased to
consolidate this company. Our substrate product group generated 81%, 79% and 80% of our consolidated revenue and our
raw materials product group generated 19%, 21% and 20% for 2019, 2018 and 2017, respectively.
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The following chart shows our substrate products and their materials, diameters and illustrative applications and
shows our raw materials group primary products and their illustrative uses and applications.
Products
Substrate Group
Indium Phosphide
(InP)
Wafer Diameter
2”, 3”, 4”
Gallium Arsenide
(GaAs - semi-insulating)
1”, 2”, 3”, 4”, 5”, 6”
Gallium Arsenide
(GaAs - semi-conducting)
1”, 2”, 3”, 4”, 5", 6”
Germanium
(Ge)
2”, 4”, 6”
Raw Materials Group
4N raw gallium
6N+ purified gallium
Boron trioxide (B2O3)
Gallium-Magnesium alloy
pyrolytic boron nitride (pBN)
crucibles
pBN insulating parts
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Sample of Applications
• Fiber optic lasers and detectors
• Passive Optical Networks (PONs)
• Data center connectivity using light/lasers
• Silicon photonics
• 5G
• Photonic Integrated circuits (PICs)
• High efficiency terrestrial solar cells (CPV)
• RF amplifier and switching
• Infrared light-emitting diode (LEDs) motion control
• Infrared thermal imaging
• Power amplifiers for wireless devices
• Direct broadcast television
• High-performance transistors
• Satellite communications
• High efficiency solar cells for drones and automobiles
• 3-D sensing using VCSELs
• 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
• Satellite solar cells
• Optical sensors and detectors
• Terrestrial concentrated photo voltaic (CPV) cells
• Multi-junction solar cells for satellites
• Infrared detectors
• Magnetic materials
• High temperature thermometers
• Low melting point alloys
• Optical glass
• Infrared detectors
• Key material in single crystal ingots such as:
- Gallium Arsenide (GaAs)
- Gallium Nitride (GaN)
- Gallium Antimonide (GaSb)
- Gallium Phosphide (GaP)
• Encapsulant in the ingot growth of III-V compound
semiconductors
• Used for the synthesis of organo-gallium compounds in
epitaxial growth on semiconductor wafers
• Used when growing single-crystal compound
semiconductor ingots
• Used as effusion rings growing OLED tools
• Used in MOCVD reactors
• Used when growing epitaxial layers in Molecular Beam
Epitaxy (MBE) reactors
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We manufacture all of our products in the People’s Republic of China (PRC or China), which generally has
favorable costs for facilities and labor compared with comparable facilities in the United States, Europe or Japan. Our
supply chain includes partial ownership of raw material companies in China (subsidiaries/joint ventures). We believe this
supply chain arrangement provides us with pricing advantages, reliable supply, market trend visibility and better sourcing
lead-times for key raw materials central to manufacturing our substrates. Our subsidiaries and joint venture companies
produce materials, including raw gallium (4N Ga), high purity gallium (6N Ga), arsenic, germanium, germanium dioxide,
pyrolytic boron nitride (pBN) crucibles and boron oxide (B2O3). Our ownership and the ownership held by one of the joint
venture companies range from 100% to 25%. We have board representation in all of these raw material companies. We
consolidate the companies in which we have either a controlling financial interest, or majority financial interest combined
with the ability to exercise substantive control over the operations, or financial decisions, of such companies. We use the
equity method to account for companies in which we have smaller financial interest and have the ability to exercise
significant influence, but not control, over such companies. We purchase portions of the materials produced by these
companies for our own use and they sell the remainder of their production to third parties.
The Beijing city government is moving its offices into the area where our original manufacturing facility is
currently located and is in the process of moving thousands of government employees into this area. The government has
constructed showcase tower buildings and overseen the establishment of new apartment complexes, retail stores and
restaurants. An amusement park is being constructed within a few miles of our facility. To create room and upgrade the
district, the city instructed virtually all existing manufacturing companies, including AXT, to relocate all or some of their
manufacturing lines. We were instructed to move our gallium arsenide manufacturing line out of the area. For reasons of
manufacturing efficiency we elected to also move our germanium manufacturing line. Our indium phosphide
manufacturing line, as well as various administrative and sales functions, will remain primarily at our original site for the
near future.
To mitigate our risks and maintain our production schedule, we moved our gallium arsenide equipment in
stages. By December 31, 2019, we have ceased all crystal growth for gallium arsenide in our original manufacturing
facility in Beijing and have transferred 100% of our ingot production to our new manufacturing facility in Kazuo, a city
approximately 250 miles from Beijing. We have transferred our wafer processing equipment for gallium arsenide to our
new manufacturing facility in Dingxing, a city approximately 75 miles from Beijing. Our key focus is now transferring
volume production of the wafer processing steps for gallium arsenide to Dingxing. Some of our larger, more sophisticated
customers want to perform a site qualification and subsequently develop a plan to ramp up production at Dingxing. The
new facilities are intended to give us the long-term capacity and a new level of technological sophistication in our
manufacturing capabilities to support the major trends that we believe are likely to drive demand for our products in the
years ahead.
Customer qualification of the Dingxing site requires us to continue to diligently address the many details that
arise at both of the new sites. A failure to properly accomplish this could result in disruption to our production and have a
material adverse impact on our revenue, our results of operations and our financial condition. If we fail to meet the product
qualification requirements of a customer, we may lose sales to that customer. Our reputation may also be damaged. Any
loss of sales could have a material adverse effect on our revenue, our results of operations and our financial condition.
In September 2018, the Trump Administration announced a list of thousands of categories of goods that became
subject to tariffs when imported into the United States. This pronouncement imposed tariffs on the wafer substrates we
imported into the United States. The initial tariff rate was 10% and subsequently was increased to 25%. Approximately
10% of our revenue derives from importing our wafers into the United States. In 2019, we paid approximately $735,000 in
tariffs. The future impact of tariffs and trade wars is uncertain.
We were incorporated in California in December 1986 and reincorporated in Delaware in May 1998. The
Company went public in 1998. We changed our name from American Xtal Technology, Inc. to AXT, Inc. in July 2000. Our
principal corporate office is located at 4281 Technology Drive, Fremont, California 94538, and our telephone number at
this address is (510) 438-4700. We have approximately 730 employees. In addition, our consolidated subsidiaries have, in
total, approximately 250 employees. In aggregate, we and our consolidated subsidiaries have
approximately 980 employees.
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Industry Background
Certain electronic and opto-electronic applications have performance requirements that exceed the capabilities of
conventional silicon substrates, also known as wafers, and often require high-performance compound wafers (mixture of
two materials) or single element wafer substrates. Examples of higher performance non-silicon based wafer substrates
include GaAs, InP, gallium nitride (GaN), silicon carbide (SiC) and Ge. One of the earliest broadly used alternative wafer
substrates was 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
chips used in cell phones, satellite communications and broadcast television applications. Semi-conducting GaAs
substrates are used to create opto-electronic products, including high brightness light-emitting diodes (HBLEDs) that are
often used to backlight wireless handsets and liquid crystal display (LCD) TVs and also used for automotive panels,
signage, display and lighting applications. A new application for semi-conducting GaAs is 3-D sensing chips using
VCSELs (vertical cavity surface emitting lasers) as an array of lasers on a single chip that could be used in cell phones and
other devices. InP is a high-performance semiconductor substrate used in broadband and fiber optic applications, data
center connectivity and 5G infrastructure. In recent years, InP demand has increased. Ge substrates are used in applications
such as solar cells for space and terrestrial photovoltaic applications.
The AXT Advantages
We believe that we benefit from the following advantages:
·
·
·
·
·
New facilities, equipment and added capacity. We believe we are the only company in our industry to have
recently added significant new facilities, equipment and capacity. Although current customers and
prospective customers previously viewed our relocation process as a risk, we believe our progress and success
in managing this process now position us as the “go to” supplier with a state of the art manufacturing line, a
proven ability to add capacity and a commitment to continuous improvement.
Key leadership in InP technology and revenue growth. We believe our InP wafers have the lowest defect
densities, stress and slip lines on the market, enabling our customers to achieve the highest wafer fab and
device yields. We have developed a strong base of proprietary InP technology that we continue to expand.
There are significant barriers to entry in the InP substrate market and currently, there are only three primary
suppliers, including AXT. We believe that this market will continue to expand and grow. We intend
to promote our track record of successfully adding capacity as the market expands.
Key provider of low defect density GaAs wafer substrates. In recent years customer demand for low etch pit
density (“EPD”) GaAs wafer substrates has increased, particularly for LED lighting, the deployment of 3-D
sensing for facial recognition in cell phones and world facing camera technology in cell phones. The
requirement of low EPD is a barrier to entry and we believe there are a limited number of potential substrate
providers that can meet this requirement, including AXT. As we qualify low EPD wafers from our new
location, we believe the quality of our low EPD wafers and our ability to expand manufacturing capacity
quickly will enable us to support new applications and generate additional revenue.
Proprietary process technology drives manufacturing. In our industry, the single crystal growth process and
the wafer manufacturing process incorporate proprietary process technology. We have a substantial body of
proprietary process technology and this creates a barrier to entry as evidenced by the small number of
suppliers of 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
labor in the United States, Japan or Europe. As of December 31, 2019, approximately 950 of our 980
employees (including employees at our Beijing and Dingxing facilities as well as our consolidated joint
venture companies) were located in China. Our primary competitors have their major manufacturing
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operations in Germany or Japan. Our presence in China also enables us to closely manage our raw materials
supply chain.
· We are the only compound semiconductor substrate supplier to have a position in raw materials. We have
partial ownership of raw material companies in China that form an integral part of our supply chain. We
believe our subsidiaries 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. We believe that this dedicated supply chain will enable us to meet increases in demand from our
customers by providing 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 diverse
range of products and are able to provide custom-defined products that meet our customers’
specifications. We have a strong technical sales support team that engages with our customers and
understands their product requirements. A significant percentage of the members of our team that engage
with customers have PhDs in physics or materials science. This combination of technical sales strength and
our willingness to accept our customers’ unique product specifications results in a broad range of customers
and applications.
Enhanced revenue diversity through the sale of raw materials. Our strategy allows our consolidated
subsidiaries to also sell raw materials in the open market to third parties. Revenue from non-substrate
products provides further diversity in our customer base and business model.
Business model unique among current competitors. We believe we are the only publicly traded company
producing InP, GaAs and Ge wafer substrates. Our direct competitors are either privately owned companies or
divisions within very large companies that are publicly listed in Japan. We believe the combination of access
to U.S. capital markets, U.S.-based product quality standards, but China-based manufacturing and a unique
strategy for the supply of many of the raw materials we need is a competitive advantage as well as an
attractive business model to our customers.
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Strategy
Our goal is to become the leading worldwide supplier of high-performance compound and single element
semiconductor substrates. Key elements of our strategy include:
Promote our strengths in InP. As cloud-based data centers continue to combine integrated circuits and InP-based
lasers to transfer data through light, we believe there will be increased demand for InP substrates. More recently InP is
being used in 5G infrastructure. Future applications could include driverless cars and 5G in cell phones.
Add InP capacity and continue InP R&D. We are continuing to add manufacturing capacity for InP to support
the growth for this product line. End market applications using our wafer substrate products often have long product life
cycles. We believe the end market applications using InP could have product life cycles that are similar to the long product
life cycles of end market applications using GaAs. In addition to adding manufacturing capacity, we are continuing 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.
Qualify the new facilities for GaAs based 3-D and Time of Flight sensing array applications in mobile
devices. Although 3-D sensing has not yet been widely adopted and embraced, we believe its use in world-facing cameras
will accelerate adoption and generate a significant impact for high-quality GaAs suppliers. We believe 3-D sensing
technology will also be used as sensors in driverless automobiles. The GaAs substrate requirements for 3-D sensing
applications include very low defect densities or etch pitch densities. We intend to capture opportunities in this emerging
market as we establish volume production in our new facilities.
Create customer awareness that the new facilities are designed to allow us to add equipment and capacity
rapidly. The construction of new facilities and infrastructure takes much longer to complete in comparison to the
installation of furnaces and other manufacturing equipment. We have proven our ability to do both and we believe this
ability makes us an attractive vendor for customers.
Offer diverse products, including custom products. We believe AXT has a reputation in the market for providing
a broad range of products, including custom products that are supported by a team of technical sales support professionals,
the majority of whom hold advanced graduate degrees in physics or materials science. We plan to further promote this
brand image 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
by increasing 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. We promote
the concept and practice of continuous improvement within our company culture.
Increase productivity and seek profitability in our subsidiaries/joint venture companies. The supply and
demand equation for specialty materials can be complex and volatile. Over the years, we have established or invested in
raw material companies in China that are an integral part of our supply chain. We will continue to provide strategic support
to these companies and they, in turn, will continue to be the backbone of our supply chain. We plan to work closely with
these companies to increase their productivity and improve their financial performance as they continue to support our
supply chain.
Materials of the future. The specialty materials substrate market is dynamic and subject to continued changes
and cycles. We plan to use our deep knowledge and experience in specialty materials and wafer substrates to seek new
applications for existing substrates in our portfolio and explore additional materials that may be synergistic with our
knowledge base, customer needs and manufacturing lines.
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Technology
Wafer substrates serve as a cornerstone in semiconductor device fabrication, on which integrated circuits and
optical devices are fabricated. Wafers are derived from ingots that are grown in a cylindrical form. The diameter and length
of an ingot will vary depending on the type of material and the growth process used. An ingot may be either single-
crystalline (also referred to as single element) or multi-crystalline (also referred to as compound elements). Single-
crystalline wafers typically have better material parameters. Depending on physical properties of the materials 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
into individual substrates or wafers. Before specialty material wafers can be used, a thin layer of structured chemicals is
grown on the surface of the substrate. This is called an epitaxial layer. We sell the majority of our substrates to companies
that specialize in applying the epitaxial layer. The wafers are then used to produce state-of-the-art electronic and opto-
electronic devices and circuit applications.
InP and GaAs compounds are formed by combining elements from Groups III and V in the periodic table of
elements, whereas Ge is a Group IV elemental material. Each of these materials has unique properties that determine the
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, have
played a key role in the manufacturing of special solar cells known as triple junction solar cells (TJSCs) for space and
terrestrial power generation.
With the recent evolution in several applications, InP lasers are projected to play a dominant role in the
optoelectronics arena, e.g. silicon photonics (where InP lasers are a key component) and autonomous cars (where special
wavelength InP-based lasers are used for object sensing and collision avoidance). Crystal growth process technology
frequently contains steps and procedures that are considered proprietary secrets held by the producer, often including
methods to control the temperature within the crucible. InP crystal growth relies on extreme pressure within the
crucible. As such it requires not only temperature control methodologies, but also pressure control and stabilization process
methodologies, many of which AXT considers proprietary trade secrets. It is this combination of variables and the required
methods 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 of proprietary knowledge.
After growing the crystalline ingot, the material is then sliced into individual substrates or wafers. We have
continued to invest in wafer processing technology covering each step in the process from sawing to edge smoothing to
final cleaning and we believe we have technology and trade secrets addressing the scope of wafer processing. One focus in
our recent development programs has been on automation, particularly in cleaning the wafers.
Ideally, all the atoms in a wafer or substrate are arrayed in a specific periodic order. However, sensitivities in the
ingot growth process will cause some atoms to be improperly aligned and these are referred to as dislocations. The
aggregate number of dislocations in a wafer is referred to as the dislocation density. Dislocation densities can be seen as a
group of tiny marks or pits under a microscope by etching the wafer with acid and each wafer has an etch pit density or
EPD. Certain micro devices, such as the array used for 3-D sensing, require wafers with very low EPD. AXT considers
the process technology we use to achieve low EPD as proprietary process technology and we believe we are one of only a
few substrate manufacturing companies that can produce low EPD wafers.
Products
We 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 the two
consolidated subsidiaries in our supply chain, we also sell certain raw materials. InP is a high-performance semiconductor
substrate used in fiber optic lasers and detectors, passive optical networks (PONs), telecommunication, now expanding to
include 5G, metro and data center connectivity, silicon photonics, photonic ICs (PICs), terrestrial solar
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cell (CPV), lasers, RF amplifiers (military wireless), infrared motion control and infrared thermal imaging. We make semi-
insulating GaAs substrates used in making semiconductor chips in applications such as power amplifiers for wireless
devices, high-performance transistors and high efficiency solar cells for drones. Our semi-conducting GaAs substrates are
used to create opto-electronic products, which include High Brightness LEDs that are often used to backlight wireless
handsets and LCD TVs and for automotive, signage, display and lighting applications, as well as high power industrial
lasers for material processing (welding, cutting, drilling, soldering, marking and surface modification). Our semi-
conducting GaAs substrates could be used to create opto-electronic products for 3-D sensing using VCSELs. Ge substrates
are used in emerging applications, 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‑element
substrates 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 semi-conducting 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 sulfur dopants or a special wafer thickness.
Raw Materials. Our two consolidated raw material subsidiaries produce and sell certain raw materials, some of
which are used in our substrate manufacturing process and some of which are sold to other companies. One of these
consolidated companies produces pBN crucibles and the other consolidated company converts raw gallium to purified
gallium and produces InP base material.
We promote our product diversity as a way to differentiate ourselves in the market. Some competitors provide
only gallium arsenide substrates. We provide gallium arsenide and also indium phosphide and germanium
substrates. Some competitors limit their wafer diameters to only a few sizes. Our wafers range from one inch to up to six
inches in diameter. We also produce substrates with customer defined specifications, which may range in thickness,
smoothness or flatness and may include adding special additional materials, such as iron or sulfur. In addition to our wafers
or substrates, we also generate revenue from our two consolidated subsidiaries that sell raw materials. Product diversity
can mitigate some of the down cycles in our market because we are not dependent on a single product or application for
revenue.
Customers
Before specialty material wafers can be processed in a typical wafer manufacturing facility that constructs the
electronic circuit, laser or optical device on a chip, a thin layer of structured chemicals is grown on the surface of the
substrate. This is called an epitaxial layer. We sell our substrates to companies that apply the epitaxial layer, who then in
turn sell the modified wafers to the wafer fabs, chip design companies, LED manufacturers and others. Some customers do
both the epitaxial layer and wafer fabrication.
Epitaxial layer companies that form our customer base are located in Asia, the United States and Europe. We also
sell our products to universities and other research organizations that use specialty materials for experimentation in various
aspects of semi-conducting 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 of
customers. One customer, Landmark, represented 15% of our revenue for the year ended December 31, 2019. One
customer, Landmark represented 13% of our revenue for the year ended December 31, 2018. Landmark and Osram,
represented 12% and 11%, respectively, of our revenue for the year ended December 31, 2017. Our top five customers,
although not the same five customers for each period, represented 40% of our revenue for the year 2019 and 35% of our
revenue for each of the years 2018 and 2017, respectively.
For the year ended December 31, 2019, three customers with our consolidated subsidiaries, in aggregate,
accounted for 48% of raw material sales. For each of the years ended December 31, 2018 and 2017, three customers with
our consolidated subsidiaries, in aggregate, accounted for over 30% of raw material sales. Our subsidiaries and joint
ventures are a key strategic benefit for us as they further diversify our sources of revenue.
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Manufacturing, Raw Materials and Supplies
We manufacture all of our products in China. We believe this location generally has favorable costs for facilities
and 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
growth of single element or compound element ingots in diameters currently ranging from one inch to six inches. The
growth process occurs in high temperature furnaces built using our proprietary designs. Growing the crystalline elements
into cylindrical ingots takes a number of days, depending on the diameter and length of the ingot produced. The crystal
growth stage utilizes AXT proprietary process technology. The second stage includes slicing or sawing the ingot into
wafers or substrates, then processing each substrate to strict specifications, including grinding to reduce the
thickness, beveling the edges, and then polishing and cleaning each substrate. Many of the wafer processing steps use
chemical baths and properly 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. Defects
may occur as a result of inherent factors in the materials used in the crystalline growth process. They may also result from
variances in the manufacturing process. We have many steps in our line that are partially or fully automated but other
manufacturing steps are performed manually. We intend to increase the level of automation, particularly in cleaning the
wafers. In 2015, we purchased wafer processing equipment from Hitachi Metals to help us increase automation in our
production line and, therefore, reduce variability and defects. In addition, we secured a manufacturing license from Hitachi
Metals. This license includes detailed work instructions for using the equipment purchased and allows us to apply the
licensed proprietary wafer processing technology at any step and on any form of equipment in our line. Due to potential
defects, yield is a key factor in our manufacturing cost. Other key elements are the initial cost of the raw material elements,
manufacturing equipment, factory loading, facilities and labor.
We have partially owned subsidiaries and joint venture companies in China that form the backbone of our supply
chain model. These companies generally provide us with reliable supply, market trend visibility, and shorter lead-times for
raw materials 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
joint ventures 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 orders and not pursuant to long-term supply contracts.
Sales and Marketing
We sell our substrate products directly to customers through our direct salesforce in the United States, China and
Europe. We use independent sales representatives and distributors in Japan, Taiwan, Korea and other areas. Our direct
salesforce is knowledgeable in the use of compound and single‑element substrates. Specialty material wafers are
scientifically complicated. Our application engineers must work closely with customers during all stages of our wafer
substrate manufacturing process, from developing the precise composition of the wafer substrate through manufacturing
and processing the wafer substrate to the customer’s specifications. We believe that maintaining a close relationship with
customers and providing them with engineering support improves customer satisfaction and provides us with a competitive
advantage in selling. A significant percentage of the members of our technical sales support team who frequently engage
with customers have PhDs in physics or materials science.
International Sales. International sales are a substantial part of our business. Sales to customers outside North
America (primarily the United States) accounted for approximately 90%, 90% and 91% of our revenue during 2019,
2018 and 2017, respectively. The primary markets for sales of our substrate products outside of North America are to
customers located in Asia and Western Europe. We occasionally receive small orders from customers located in Israel and
Russia.
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Our raw material 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 MBE and parts used in manufacturing OLED rings. These subsidiaries and joint ventures have their own
separate sales forces and sell directly to their own customers in addition to selling raw materials to us.
Research and Development
To maintain and improve our competitive position, we focus our research and development efforts on designing
new proprietary processes and products, improving the performance of existing products, achieving new lows in EPD,
increasing yields and reducing manufacturing costs. We also conduct research and development focusing on larger diameter
wafers and, in our history, we have consistently developed new products based on larger wafer diameters. Crystal growth
of specialty earth materials becomes 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 crystal growth 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. In anticipation of a growth in demand for low EPD six-inch wafers, we have focused our development efforts on
increasing our yield of such wafers.
Our current substrate research and development activities focus on continued development and enhancement of
GaAs, 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 from
Hitachi Metals. The Hitachi Metals purchase includes a license covering the use of the proprietary equipment and Hitachi
Metals’ proprietary wafer processing technology. A particular focus of the equipment and process technology is on
cleaning the wafers. It is important to remove any residual cleaning agents from each wafer to ensure that the epitaxial
growth process is not encumbered by residual chemicals on the wafer.
Our consolidated subsidiaries conduct research and development, focusing on gallium alloys, gallium refinement
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 research
and development objectives. Research and development expenses were $5.8 million in 2019, compared with $5.9 million in
2018 and $4.8 million in 2017. Development work focusing on yield, continuous improvement and other matters related to
our research and development efforts also occurs within regular manufacturing processes. These costs are included in our
cost of revenue because it is difficult to isolate them as research and development.
Competition
The semiconductor substrate industry is characterized by narrow technological boundaries, price erosion and
generally intense competition. Certain wafer substrates, such as low-quality wafer substrates for consumer products using
LED lighting, compete almost entirely on price. Other products, such as InP and low EPD GaAs wafers, have fewer
competitors and quality is a key competitive factor in addition to price. We face actual and potential competition from a
number of established companies who have the advantage of greater name recognition and more established relationships
in the industry. In some cases, our competitors have substantially greater financial, technical and marketing resources as
they are divisions of much larger companies. They may utilize these advantages to expand their product offerings more
quickly, adapt to new or emerging technologies and changes in customer requirements more quickly, and devote greater
resources to the marketing and sale of their products. We believe a critical factor in our business is technical support
extended to the customer or prospective customer and we attempt to counter possible advantages of name recognition or
size with superior technical support through the use of our team of technical sales support professionals, the majority of
whom hold PhDs in physics or materials science.
We believe that the primary competitive factors in the markets in which our substrate products compete are:
·
quality;
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·
·
·
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 processes;
protection of our products and processes 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
our wafers. Typically, our customer or prospective customer has at least two qualified substrate suppliers. 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 lead times become
the most important competitive factors. A supplier that cannot meet a customer’s current lead times or that a customer
perceives will not be able to meet future demand and provide consistent quality can lose market share. Our primary
competition 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 Technology Corp. (“CCTC”). We believe that at least two of our competitors are shipping high volumes of GaAs
substrates manufactured using a process similar to our VGF technology. In addition, we also face competition from
semiconductor device manufacturers that may use other specialty material substrates that are not GaAs, InP or Ge based
materials and that are actively exploring alternative materials. For example, silicon-on-insulator (“SOI”) technology, a
silicon wafer technology that produces satisfactory devices at lower cost, has been proven 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.
Because of our vertically integrated, sophisticated supply chain through our subsidiaries and joint venture
companies, we believe we are the only compound semiconductor substrate supplier to offer a broad suite of raw materials.
We believe this gives us a unique competitive advantage because we have greater control and stability over many of our
needed materials. Further, we believe we have some advantage in manufacturing costs. In the event of a significant
increase in demand we believe our raw materials supply chain strategy and our ability to rapidly increase capacity can
provide us some advantage.
Intellectual Property
Our success and the competitive position of our VGF technology depend on our ability to maintain our proprietary
process technology secrets and other intellectual property protections. We rely on a combination of patents, trademark and
trade secret laws, non-disclosure agreements and other intellectual property protection methods to protect our proprietary
technology. We believe that, due to the rapid pace of technological innovation in the markets for our
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products, our ability to establish and maintain a position of technology leadership depends as much on the skills of our
research and development personnel as upon the legal protections afforded our existing technologies. To protect our trade
secrets, we take certain measures 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 a proprietary product or process is not reverse engineered or independently developed.
In addition to proprietary process trade secrets, we also file patents. To date, we have been issued 55 patents
related to our VGF products and processes; 34 in China, nine in the United States, seven in Japan, two in Taiwan, one in the
European Union, one in Canada and one in South Korea. Patents have a protected life of 20 years from their filing dates.
Our patents have expiration dates ranging from one expiration in 2019 to 2039. In some cases we may consider filing
divisional, continuation or continuation-in-part of the existing patents for additional claims. We have 13 patent applications
pending, including six in China, two in the United States, three in the Patent Cooperation Treaty stage and two in Europe.
Furthermore, in aggregate, our consolidated joint venture companies have been issued 53 patents in China, including
31 patents issued to Beijing BoYu Semiconductor Vessel Craftwork Technology Co. Ltd. (“BoYu”), 22 patents issued to
Nanjing JinMei Gallium Co. Ltd. (“JinMei”).
We entered into a technology license and royalty agreement with Sumitomo, effective December 3, 2010, with a
term of eight years, terminating December 31, 2018. We, and our related companies, were granted a worldwide,
nonexclusive, royalty bearing, irrevocable license to certain patents for the term of the agreement. In January 2020, we
agreed to enter into a cross license and covenant agreement with Sumitomo that will expire December 31, 2029 and
includes annual payments by us to Sumitomo over a 10-year period.
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 not able to resolve or settle claims, obtain necessary licenses on commercially reasonable terms and/or
successfully prosecute or defend our position, our business, financial condition and results of operations could be
materially and adversely affected.
Environmental Regulations
We are subject to federal, state and local environmental and safety laws and regulations in all of our operating
locations, including laws and regulations of China, such as laws and regulations related to the development, manufacture
and use of our products, the use of hazardous materials, the operation of our facilities, and the use of the real property.
These laws and regulations govern the use, storage, discharge and disposal of hazardous materials during manufacturing,
research and development and sales demonstrations. We maintain a number of environmental, health and safety programs
that are primarily preventive in nature. As part of these programs, we regularly monitor ongoing compliance. If we fail to
comply with applicable regulations, we could be subject to substantial liability for clean-up efforts, personal injury, fines or
suspension or be forced to cease our operations, and/or suspend or terminate the development, manufacture or use of
certain of our products, the use of our facilities, or the use of our real property, each of which could have a material adverse
effect on our business, financial condition and results of operations. The regulatory landscape shifts and changes in China
as that country attempts to address its environmental pollution. Because we manufacture all of our products in China, we
are subject to an evolving set of regulations that could require changes in our equipment and processes and require us to
obtain new permits. In 2017, China increased its focus on environmental concerns which increased pressure on
manufacturing companies. During periods of severe air pollution in Beijing, manufacturing companies, including AXT,
may be ordered by the local government to stop production for several days. For example, in the first quarter of 2018, over
300 manufacturing companies, including AXT, were intermittently shut down by the local government for a total of ten
days from February 27 to March 31, due to severe air pollution.
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Employees
As of December 31, 2019, we had 731 employees, which consisted of 27 employees in our headquarters in
Fremont, California, one sales professional in France and 703 employees in our factories in China. In addition, our
consolidated subsidiaries had, in total, 257 employees. In aggregate, we and our consolidated subsidiaries had 988
employees, of whom 795 were principally engaged in manufacturing, 133 in sales and administration and 60 in research
and development. Of these 988 employees, 27 were located in the United States, one in France and 960 in China.
Most of our employees in China are represented by unions. As of December 31, 2019, 832 employees in China
including employees of our subsidiaries were represented by unions. We have never experienced a work stoppage and we
consider our relations with our employees to be good.
Geographical Information
Please see Note 14 of our Notes to Consolidated Financial Statements for information regarding our foreign
operations, and see “Risks related to international aspects of our business” under Item 1A. Risk Factors for further
information on risks attendant to our foreign operations and dependence.
Available Information
Our principal executive offices are located at 4281 Technology Drive, Fremont, CA 94538, and our main
telephone number at this address is (510) 438-4700. Our Internet website address is www.axt.com. Our website address is
given solely for informational purposes; we do not intend, by this reference, that our website should be deemed to be part
of this Annual Report on Form 10-K or to incorporate the information available at our Internet address into this Annual
Report on Form 10‑K.
We file electronically with the Securities and Exchange Commission, or SEC, our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended. We make these reports available free of
charge through 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 at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330.
Item 1A. Risk 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; and
V. Risks related to compliance, environmental regulations and other legal matters.
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I. Risks Related to Our General Business
Silicon substrates (wafers) are significantly lower in cost compared to substrates made from specialty materials, and
new silicon-based technologies could enable silicon-based substrates to replace specialty material based substrates for
certain applications.
Historically silicon wafers or substrates are less expensive than specialty material substrates, such as those that we
produce. Electronic circuit designers will generally consider silicon first and only turn to alternative materials if silicon
cannot provide the required functionality in terms of power consumption, speed, wave lengths or other
specifications. Beginning in 2011, certain applications that had previously used GaAs substrates, specifically the RF chip
in mobile phones, adopted a new silicon-based technology called silicon on insulator, or SOI. SOI technology uses a
silicon-insulator-silicon layered substrate in place 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. The adoption of SOI resulted in decreased GaAs wafer demand, and decreased
revenue. If SOI or new silicon-based technologies gain more widespread market acceptance, or are used in more
applications, our sales of specialty material based substrates could be reduced and our business and operating results could
be significantly and adversely affected.
The recent outbreak of a contagious disease may affect our business operations and financial performance.
Currently, a contagious disease originating in Wuhan, China called the coronavirus or COVID-19, has spread to
other cities in China and to many other countries including the United States. This outbreak has triggered references to the
SARS outbreak, which occurred in 2003 and affected our business operations. Any severe occurrence of an outbreak of a
contagious disease such as the coronavirus, SARS, Avian Flu or Ebola may cause us or the government to temporarily
close our manufacturing operations in China. In January 2020, virtually all companies in China were ordered to remain
closed after the traditional Lunar New Year holiday ended, including our subsidiaries in China. Similarly, if one or more of
our key suppliers is required to close for an extended period, we might not have enough raw material inventories to
continue manufacturing operations. In addition, while we possess management skills among our China-based staff that
enable us to maintain our manufacturing operations with minimal on-site supervision from our U.S.‑based staff, our
business could also be harmed if travel to or from China and the United States is restricted or inadvisable or our key China-
based employees are unable to work. If our manufacturing operations were closed for a significant period, we could lose
revenue and market share, which would depress our financial performance and could be difficult to recapture. Finally, if
one of our key customers is required to close for an extended period, we might not be able to ship product to them, our
revenue would decline and our financial performance would suffer.
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 increases or decreases in total revenue, unit
volume, shifts in product mix, shifts in the cost of raw materials, costs related to the relocation of our gallium arsenide and
germanium production lines, including costs related to the hiring additional manufacturing employees at our new locations,
tariffs imposed by the U.S. government, the introduction of new products, decreases in average selling prices for products,
utilization of our manufacturing capacity, fluctuations in manufacturing yields and our ability to reduce product costs.
These factors and other variables change from period to period and these fluctuations are expected to continue in the future.
A recent example is that in the second quarter of 2019 our gross margin was 34.3% but it dropped to 21.0% in the fourth
quarter of 2019 as a result of several of these factors.
Further, we do not control the prices at which our raw material companies sell their raw material products to third
parties and we do not control their production process. However, because we consolidate the results of two of these raw
material companies with our own, any reduction in their gross margins could have a significant, adverse impact on our
overall gross margins. One or more of our companies has in the past sold, and may in the future sell, raw materials at
significantly reduced prices in order to gain volume sales or sales to new customers. In addition, at some points in the last
three years, the market price of gallium dropped below our per unit inventory cost and we incurred an inventory write down
under the lower of cost or net realizable value accounting rules.
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Shutdowns or underutilizing our manufacturing facilities may result in declines in our gross margins.
An important factor in our success is the extent to which we are able to utilize the available capacity in our
manufacturing facilities. A number of factors and circumstances may reduce utilization rates, including periods of industry
overcapacity, low levels of customer orders, operating inefficiencies, mechanical failures and disruption of operations due
to expansion, power interruptions, fire, flood, other natural disasters or calamities or government-ordered mandatory
factory shutdowns. Severe air pollution in Beijing can trigger mandatory factory shutdowns. For example, in the first
quarter of 2018, over 300 manufacturing companies, including AXT, were intermittently shut down by the local
government for a total of ten days from February 27 to March 31, due to severe air pollution. Further, we are increasing
capacity by adding two new sites, which may reduce our utilization rate and increase our depreciation charges, at least until
we de-commission part of our Beijing site. Because many portions of our manufacturing costs are relatively fixed, high
utilization rates are critical to our gross margins and operating results. If we fail to achieve acceptable manufacturing
volumes or experience product shipment delays, our results of operations will be negatively affected. During periods of
decreased demand, we have underutilized our manufacturing lines. If we are unable to improve utilization levels at our
facilities during periods of decreased demand and correctly manage capacity, the fixed expense levels will have an adverse
effect on our business, financial condition and results of operations. For example, in the three months ended December 31,
2019, our revenue dropped to $18.4 million and our gross margin was only 21.0%.
If we are unable to utilize the available capacity in our manufacturing facilities, we may need to implement a
restructuring plan, which could have a material adverse effect on our revenue, our results of operations and our financial
condition. For example, in 2013, we concluded that incoming orders were insufficient and that we were significantly
underutilizing our factory capacity. As a result, in February 2014, we announced a restructuring plan with respect to our
wafer manufacturing company, Beijing Tongmei Xtal Technology Co., Ltd. (“Tongmei”), in order to better align
manufacturing capacity with demand. Under the restructuring plan, we recorded a charge of approximately $907,000 in the
first quarter of 2014.
If we receive fewer customer orders than forecasted or if our customers delay or cancel orders, we may not be able
to reduce our manufacturing costs in the short-term and our gross margins would be negatively affected. In addition, lead
times required by our customers are shrinking, which reduces our ability to forecast orders and properly balance our
capacity utilization.
If we have low product yields, the shipment of our products may be delayed and our product cost and operating results
may be adversely impacted.
A critical factor in our product cost is yield. Our products are manufactured using complex crystal growth and
wafer processing 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
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substrates, which can be used for manufacturing opto-electronic devices in cell phones, enabling 3-D sensing. This
application requires very low defect densities, also called etch pit densities, or EPD, and our yields will be lower than the
yields achieved for the same substrate when it will be used in other applications. If we are unable to achieve the targeted
quantity of low defect density substrates, 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
yields decrease, 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 have experienced product shipment delays and difficulties in achieving acceptable yields on both new and
older products, and such delays and poor yields have adversely affected our operating results. We may experience similar
problems in the future and we 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, our
products would be rejected, resulting in compensation costs paid to our customers, and possible disqualification. This could
lead to revenue loss and market share loss.
Risks exist in relocating our gallium arsenide and germanium manufacturing operations.
The Chinese government has imposed, and may impose in the future, manufacturing restrictions and regulations
that require us to move part of our manufacturing operations to a different location or temporarily cease or limit
manufacturing. Such relocation, or other restrictions on manufacturing, could materially and adversely impact our results of
operations and our financial condition.
The Beijing city government is moving its offices into the area where our original manufacturing facility is
currently located and is in the process of moving thousands of government employees into this area. The government has
constructed showcase tower buildings and overseen the establishment of new apartment complexes, retail stores and
restaurants. An amusement park is being constructed within a few miles of our facility. To create room and upgrade the
district, the city instructed virtually all existing manufacturing companies, including AXT, to relocate all or some of their
manufacturing lines. We were instructed to move our gallium arsenide manufacturing line out of the area. For reasons of
manufacturing efficiency we elected to also move our germanium manufacturing line. Our indium phosphide
manufacturing line, as well as various administrative and sales functions, will remain primarily at our original site for the
near future.
To mitigate our risks and maintain our production schedule, we moved our gallium arsenide equipment in
stages. By December 31, 2019, we have ceased all crystal growth for gallium arsenide in our original manufacturing
facility in Beijing and have transferred 100% of our ingot production to our new manufacturing facility in Kazuo, a city
approximately 250 miles from Beijing. We have transferred our wafer processing equipment for gallium arsenide to our
new manufacturing facility in Dingxing, a city approximately 75 miles from Beijing. Our key focus is now transferring
volume production of the wafer processing steps for gallium arsenide to Dingxing. Some of our larger, more sophisticated
customers want to perform a site qualification and subsequently, develop a plan to ramp up production at Dingxing. The
new facilities are intended to give us the long-term capacity and a new level of technological sophistication in our
manufacturing capabilities to support the major trends that we believe are likely to drive demand for our products in the
years ahead.
Customer qualification of the Dingxing site requires us to continue to diligently address the many details that arise
at both of the new sites. A failure to properly accomplish this could result in disruption to our production and have a
material adverse impact on our revenue, our results of operations and our financial condition. If we fail to meet the product
qualification requirements of a customer, we may lose sales to that customer. Our reputation may also be damaged. Any
loss of sales could have a material adverse effect on our revenue, our results of operations and our financial condition.
We expect many of the key employees who are employed at our current manufacturing facility to relocate to the
new sites or commute under a program we are developing. There can be no assurances that the key employees will
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relocate. A loss of key employees or our inability to hire qualified employees could disrupt our production, which could
materially and adversely impact our results of operations and our financial condition.
Although we expect many of our employees to relocate to our new facilities, certain employees may choose not to
relocate. If we are unable to continue to employ those employees in our original manufacturing facility, we may be required
to terminate those employees and could incur severance costs. If the government does not assist us in this matter it could
materially and adversely impact our results of operations and our financial condition.
The Chinese government has in the past imposed temporary restrictions on manufacturing facilities, such as the
restrictions imposed on polluting factories for the 2008 Olympics and the 2014 Asian Pacific Economic Cooperation
event. These restrictions included a shutdown of the transportation of materials and power plants to reduce air pollution.
To reduce air pollution in Beijing, the Chinese government has sometimes limited the construction of new, or expansion of
existing, facilities by manufacturing companies in the Beijing area or required mandatory factory shutdowns. For example,
in the first quarter of 2018, over 300 manufacturing companies, including AXT, were intermittently shut down by the local
government for a total of ten days from February 27 to March 31 due to severe air pollution. If the government applies
similar restrictions to us or requires mandatory factory shutdowns in the future, then such restrictions or shutdowns could
have an adverse impact on our results of operations and our financial condition. Our ability to supply current or new orders
could be significantly impacted. Customers could then be required to purchase products from our competitors, causing our
competitors to take market share from us.
In addition, from time to time, the Chinese government issues new regulations, which may require additional
actions on our part to comply. On February 27, 2015, the China State Administration of Work Safety updated its list of
hazardous substances. The previous list, which was published in 2002, did not restrict the materials that we use in our
wafers. The new list added gallium arsenide. As a result of the newly published list, we were instructed to obtain a permit
to continue to manufacture our gallium arsenide substrate wafers. The Beijing municipal authority accepted our permit
application in May 2015, but has not issued to us the requisite permit while we continue to execute our plan to relocate our
gallium arsenide production. If our application is denied in the future before we complete our relocation, then our gallium
arsenide production could be disrupted, which could materially and adversely impact our results of operations and our
financial condition.
Customers may require that they re-qualify our gallium arsenide wafer substrates or the new sites as a result of
relocating our gallium arsenide manufacturing line.
As required by the Beijing city government we are relocating gallium arsenide production so that it is not within
Beijing. To mitigate our risks and maintain our production schedule, we moved our gallium arsenide equipment in
stages. By December 31, 2019 all crystal growth for gallium arsenide was closed in Beijing and 100% of our ingot
production is now in Kazuo, a city approximately 250 miles from Beijing. Wafer processing equipment for gallium
arsenide has been moved to Dingxing, a city approximately 75 miles from Beijing. Our key focus is now transferring
volume production of the wafer processing steps for gallium arsenide to Dingxing. Some of our larger, more sophisticated
customers want to perform a site qualification and subsequently make a plan to ramp up at Dingxing.
Customer qualification of the Dingxing site requires us to continue to diligently address the many details that arise
at both of the new sites. A failure to properly accomplish this could result in disruption to our production and have a
material adverse impact on our revenue, our results of operations and our financial condition. If we fail to meet the product
qualification requirements of a customer, we may lose sales to that customer. Our reputation may also be damaged. Any
loss of sales could have a material adverse effect on our revenue, our results of operations and our financial condition.
Global economic and political conditions, including trade tariffs and restrictions, may have a negative impact on our
business and financial results.
In September 2018, the Trump Administration announced a list of thousands of categories of goods that became
subject to tariffs when imported into the United States. This pronouncement imposed tariffs on wafer substrates we
imported into the United States. The initial tariff rate was 10% and subsequently was increased to 25%. Approximately
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10% of our revenue derives from importing our wafers into the United States. In the year 2019 we paid approximately
$735,000 in tariffs. The future impact of tariffs and trade wars is uncertain.
The economic and political conditions between China and the United States, in our view, create an unstable
business environment. Trade restrictions against China have resulted in a greater determination within China to be self-
sufficient and produce more goods domestically. Government agencies in China may be encouraging and supporting the
founding of new companies, the addition of new products in existing companies and more vertical integration within
companies. These factors could eventually result in lower revenue from sales of our wafer substrates in China.
Our operations and financial results depend on worldwide economic and political conditions and their impact on
levels of business spending, which has deteriorated significantly in many countries and regions. Uncertainties in the
political, financial and credit markets may cause our customers to postpone deliveries. Delays in the placement of new
orders and extended uncertainties may reduce future sales of our products and services. The revenue growth and
profitability of our business depends on the overall demand for our substrates. Because the end users of our products are
primarily large companies whose businesses fluctuate with general economic and business conditions, a softening of
demand for products that use our substrates, caused by a weakening economy, may result in decreased revenue. Customers
may find themselves facing excess inventory from earlier purchases, and may defer or reconsider purchasing products due
to the downturn in their business and in the general economy. If market conditions deteriorate, we may experience
increased collection times and greater write-offs, either of which could have a material adverse effect on our profitability
and our cash flow.
Future tightening of credit markets and concerns regarding the availability of credit may make it more difficult for
our customers to raise capital, whether debt or equity, to finance their purchases of capital equipment or of the products we
sell. Delays in our customers’ ability to obtain such financing, or the unavailability of such financing, would adversely
affect our product sales and revenues and, therefore, harm our business and operating results. We cannot predict the timing,
duration of or effect on our business of any future economic downturn or the timing or strength of any subsequent recovery.
If any of our facilities are damaged by occurrences such as fire, explosion, power outage or natural disaster, we might
not be able to manufacture our products.
The ongoing operation of our manufacturing and production facilities in China is critical to our ability to meet
demand for our products. If we are not able to use all or a significant portion of our facilities for prolonged periods for any
reason, we would not be able to manufacture products for our customers. For example, a fire or explosion caused by our
use of combustible chemicals, high furnace temperatures or, in the case of InP, high pressure during our manufacturing
processes could render some of our facilities inoperable for an indefinite period of time. Actions outside of our control,
such as earthquakes or other natural disasters, could also damage our facilities, rendering them inoperable. If we are unable
to operate our 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 manufacturing
facility. The electrical power supply supporting 2-inch, 3-inch and 4-inch gallium arsenide and germanium crystal growth
was damaged and production in that area was stopped. In addition, a waste water pipe was damaged resulting in a halt to
wafer processing for four days until the pipe could be repaired. We were able to rotate key furnace hardware and use some
of the 6-inch capacity for smaller diameter crystal growth production to mitigate the impact of the fire and resume
production. If we are unable to recover from a fire or natural disaster, our business and operating results could be materially
and adversely affected.
Demand for our products may decrease if demand for the end-user applications decrease or if manufacturers
downstream in 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
for our products is subject to the demand for end-user applications which utilize our products, as well as factors affecting
the ability of the manufacturers downstream in our supply chain to introduce and market their products successfully,
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including:
·
·
·
·
·
·
worldwide economic and political conditions and their impact on levels of business spending;
the competition such manufacturers face in their particular industries;
end of life obsolescence of products containing devices built on our wafers;
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 our supply chain are unable to develop, market and sell their products, demand for our products will
decrease. For example, during 2019 widespread political and economic instability and trade war concerns resulted in a
general slowdown and our revenue decreased significantly. Additionally, in the second half of 2016, manufacturers
producing and selling passive optical network devices known as EPONs and GPONs experienced a slowdown in demand
resulting in surplus inventory on hand. The slowdown persisted until late in 2017. This resulted in a slowdown of sales of
our InP substrates used in the PON market. We expect similar cycles of strong demand followed by lower demand will
occur for various InP, GaAs or Ge substrates in the future.
Our revenue, gross margins and profitability can be hurt if the average sales price of the various raw materials in our
partially-owned companies decreases.
Although the companies in our vertically integrated supply chain have historically made a positive contribution to
our financial performance, when the average selling prices for the raw materials produced decline, this results in a negative
impact on our revenue, gross margin and profitability. For example, the average selling prices for 4N gallium and for
germanium were driven down by oversupply in recent years, and negatively impacted our financial results. In 2019, 2018
and 2017, the companies accounted for under the equity method of accounting contributed a loss of $1.9 million, $1.1
million and $1.7 million, respectively, to our consolidated financial statements. Further, in several quarters over the past
three years, one of our consolidated subsidiaries incurred a lower of cost or net realizable value inventory write down,
which negatively impacted our consolidated gross margin. In the first quarter of 2019, we incurred an impairment charge of
$1.1 million for a germanium materials company in China in which we have a 25% ownership interest, writing down our
investment to zero value. If the pricing environment remains stressed by oversupply and our joint venture companies
cannot reduce their production costs, then the reduced average selling prices of the raw materials produced by our joint
venture companies will have a continuing adverse impact on our revenue, gross margins and net profit.
Problems incurred in our raw material joint venture companies or investment partners could result in a material
adverse impact on our financial condition or results of operations.
We have invested in raw material 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
they sell the remainder of their production to third parties. Our ownership and the ownership held by one of the joint
venture companies range from 100% to 20%. We consolidate the companies in which we have a majority or controlling
financial interest and employ equity accounting for the companies in which we have a smaller ownership interest. Several
of these companies occupy space within larger facilities owned and/or operated by one of the other investment partners.
Several of these partners are engaged in other manufacturing activities at or near the same facility. In some facilities, we
share access to certain functions, including water, hazardous waste treatment or air quality treatment. If a partner in any of
these ventures experiences problems with its operations, or deliberately withholds or
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disrupts services, disruptions in the operations of our companies could occur, having a material adverse effect on the
financial condition and results of operation in these companies, and correspondingly on our financial condition or results of
operations. For example, since gallium is a by-product of aluminum, our raw gallium joint venture in China, which is
housed in and receives services from an affiliated aluminum plant, could generate lower production and shipments of
gallium as a result of reduced services provided by the aluminum plant. Accordingly, in order to meet customer supply
obligations, our supply chain may have to source materials from another independent third-party supplier, resulting in
higher costs and reduced gross margin.
The China central government has become increasingly concerned about environmental hazards. Air pollution is a
well-known problem in Beijing and other parts of China. In days of severe air pollution, the government has ordered
manufacturing companies to stop all production. The central government is also tightening control over hazardous
chemicals and other hazardous elements such as arsenic, which is produced by two of our unconsolidated joint venture
companies. Further, the central government encourages employees to report to the appropriate regulatory agencies possible
safety or environmental violations, but there may not be actual violations. Regular use in the normal course of business of
hazardous chemicals or hazardous elements or a company’s failure to meet the ever-tightening standards for control of
hazardous chemicals or hazardous elements could result in orders to shut down permanently, fines or other severe
measures. Any such orders directed at one of our joint venture companies could result in impairment charges if the
company is forced to close its business, cease operations or incurs fines or operating losses, which would have a material
adverse effect on our financial results. In the first quarter of 2019, we incurred an impairment charge of $1.1 million for a
germanium materials company in China in which we have a 25% ownership interest, writing down our investment to zero
value.
Further, if any of our joint venture companies or investment partners with which our joint ventures share facilities
is deemed to have violated applicable laws, rules or regulations governing the use, storage, discharge or disposal of
hazardous chemicals, the operations of that joint venture could be adversely affected and we could be subject to substantial
liability for clean-up efforts, personal injury, fines or suspension or termination of our joint venture’s operations.
Employees working for our joint ventures or any of the other investment partners could bring litigation against us as a
result of actions taken 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
inherently uncertain and it is possible that our business, financial condition, results of operations or cash flows could be
affected. Even if we are not deemed responsible for the actions of the joint ventures or investment partners, litigation could
be costly, time consuming to defend and divert management attention; in addition, if we are deemed to be the most
financially viable of the partners, plaintiffs may decide to pursue us for damages.
Intense competition in the markets for our products could prevent us from increasing revenue and achieving
profitability.
The markets for our products are intensely competitive. We face competition for our wafer substrate products from
other manufacturers of substrates, such as Sumitomo, JX, Freiberger, Umicore, and CCTC, and from companies, such as
Qorvo and Skyworks, that are actively considering alternative materials to GaAs and marketing semiconductor devices
using these alternative materials. We believe that at least two of our major competitors are shipping high volumes of GaAs
substrates manufactured using a process similar to our VGF process technology. Other competitors may develop and begin
using similar technology. Sumitomo and JX also compete with us in the InP market. If we are unable to compete
effectively, our revenue may decrease and we may not maintain profitability. We face many competitors that have a number
of significant advantages over us, including:
·
greater name recognition and market share in the business;
· more manufacturing experience;
·
·
extensive intellectual property; and
significantly greater financial, technical and marketing resources.
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Our competitors could develop new or enhanced products that are more effective than our products.
The level and intensity of competition has increased over the past years and we expect competition to continue to
increase in the future. Competitive pressures have resulted in reductions in the prices of our products, and continued or
increased competition could reduce our market share, require us to further reduce the prices of our products, affect our
ability to 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
a former employee in China that is supplying semi-conducting GaAs wafers to the LED market. Competition from sources
such as this could increase, particularly if these competitors are able to obtain large capital investments. Further, recent
trade tensions between China and the United States have resulted in a greater determination within China to be self-
sufficient and produce more goods domestically. This could result in the formation of new competitors that would compete
against our company and adversely affect our financial results.
Cyber-attacks, system security risks and data protection issues could disrupt our internal operations and cause a
reduction in revenue, increase in expenses, negatively impact our results of operation or result in other adverse
consequences.
Like most technology companies, we could be targeted in cyber-attacks. We face a risk that experienced computer
programmers and hackers may be able to penetrate our network security and misappropriate or compromise our
confidential and proprietary information, potentially without being detected. Computer programmers and hackers also may
be able to develop and deploy viruses, worms, and other malicious software programs that attack our information
technology infrastructure. The costs to us to eliminate or alleviate cyber or other security problems, bugs, viruses, worms,
malicious software programs and security vulnerabilities could be significant, and our efforts to address these problems
may not be successful and could result in interruptions and delays that may impede our sales, manufacturing, distribution,
accounting or other critical functions.
Breaches of our security measures could create system disruptions or cause shutdowns or result in the accidental
loss, inadvertent disclosure or unapproved dissemination of proprietary information or sensitive or confidential data about
us. Cyber-attacks could use fraud, trickery or other forms of deception. A cyber-attack could expose us to a risk of loss or
misuse of information, result in litigation and potential liability, damage our reputation or otherwise harm our business. In
addition, the cost and operational consequences of implementing further data protection measures could be significant.
Portions of our information technology infrastructure might also experience interruptions, delays or cessations of
service or produce errors in connection with systems integration or migration work that takes place from time to time,
which may have a material impact on our business. We may not be successful in implementing new systems and
transitioning data, which could cause business disruptions and be more expensive, time consuming, disruptive and
resource-intensive than originally anticipated. Such disruptions could adversely impact our ability to fulfill orders and
interrupt other processes. Delayed sales, lower margins or lost customers could adversely affect our financial results and
reputation.
The average selling prices of our substrates may decline over relatively short periods, which may reduce our revenue
and gross 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
incorporating our products, the average selling prices for our products may decline over relatively short time periods. We
have in the past experienced, and in the future may experience, substantial period-to-period fluctuations in operating results
due to declining average selling prices. In certain years, we have experienced an average selling price decline of our
substrate selling prices of approximately 5% to 10%, depending on the substrate product. It is possible that the pace of the
decline of average selling prices could accelerate beyond these levels for certain products in a commoditizing market. We
anticipate that average selling prices will decrease in the future in response to the unstable demand environment, price
reductions by competitors, or by other factors, including pricing pressures from significant
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customers. When our average selling prices decline, our revenue and gross profit decline, unless we are able to sell more
products or reduce the cost to manufacture our products. We generally attempt to combat an average selling price decline
by improving yields and manufacturing efficiencies and working to reduce the costs of our raw materials and of
manufacturing our products. We also need to sell our current products in increasing volumes to offset any decline in their
average selling prices, and introduce new products, which we may not be able to do, or do on a timely basis.
In order to remain competitive, we must continually work to reduce the cost of manufacturing our products and
improve our yields and manufacturing efficiencies. Our efforts may not allow us to keep pace with competitive pricing
pressures which could adversely affect our margins. There is no assurance that any changes effected by us will result in
sufficient cost reductions to allow us to reduce the price of our products to remain competitive or improve our gross
margins.
Defects in our products could diminish demand for our products.
Our wafer products are complex and may contain defects, including defects resulting from impurities inherent in
our raw materials or inconsistencies in our manufacturing processes. We have experienced quality control problems with
some of our products, which caused customers to return products to us, reduce orders for our products, or both. If we
experience quality control problems, or experience other manufacturing problems, customers may return product for credit,
cancel or reduce orders or purchase products from our competitors. We may be unable to maintain or increase sales to our
customers and sales of our products could decline. Defects in our products could cause us to incur higher manufacturing
costs and suffer product returns and additional service expenses, all of which could adversely impact our operating results.
If new products developed by us contain defects when released, our customers may be dissatisfied and we may suffer
negative publicity or customer 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
for new products sold to existing customers.
New customers typically place orders with us for our substrate products three months to a year or more after our
initial contact with them. The sale of our products is subject to our customers’ lengthy internal evaluation and approval
processes. During this time, we may incur substantial expenses and expend selling, marketing and management efforts
while the customers evaluate our products. These expenditures may not result in sales of our products. If we do not achieve
anticipated sales in a period as expected, we may experience an unplanned shortfall in our revenue. As a result, our
operating results would be adversely affected. In addition, if we fail to meet the product qualification requirements of the
customer, we may not have another opportunity to sell that product to that customer for many months or even years. In the
current competitive climate, the average qualification and sales cycle for our products has lengthened even further and is
expected to continue to make it difficult for us to forecast our future sales accurately. We anticipate that sales of any future
substrate products will also have lengthy qualification periods and will, therefore, be subject to risks substantially similar to
those inherent 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
if we were to lose a major customer the loss would negatively impact our revenue. Our customers are not obligated to
purchase a specified quantity of our products or to provide us with binding forecasts of product purchases. In addition, our
customers 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
continue to generate revenue for us in any future period. Any loss of customers or any delay in scheduled shipments of our
products could cause revenue to fall below our expectations and the expectations of market analysts or investors, causing
our stock price to decline.
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The cyclical nature of the semiconductor industry may limit our ability to maintain or increase net sales and operating
results during industry downturns.
The semiconductor industry is highly cyclical and periodically experiences significant economic downturns
characterized by diminished product demand, resulting in production overcapacity and excess inventory in the markets we
serve. A downturn can result in lower unit volumes and rapid erosion of average selling prices. The semiconductor industry
has experienced significant downturns, often in connection with, or in anticipation of, maturing product cycles of both
semiconductor companies’ and their customers’ products or a decline in general economic conditions. This may adversely
affect our results of operations and the value of our business.
Our continuing business depends in significant part upon manufacturers of electronic and opto-electronic
compound semiconductor devices, as well as the current and anticipated market demand for these devices and products
using these devices. As a supplier to the semiconductor industry, we are subject to the business cycles that characterize the
industry. The timing, length and volatility of these cycles are difficult to predict. The compound semiconductor industry has
historically been cyclical due to sudden changes in demand, the amount of manufacturing capacity and changes in the
technology employed in compound semiconductors. The rate of changes in demand, including end demand, is high, and the
effect of these changes upon us occurs quickly, exacerbating the volatility of these cycles. These changes have affected the
timing and amounts of customers’ purchases and investments in new technology. These industry cycles create pressure on
our revenue, gross margin and net income.
Our industry has in the past experienced periods of oversupply and that has resulted in significantly reduced prices
for compound semiconductor devices and components, including our products, both as a result of general economic
changes and overcapacity. Oversupply causes greater price competition and can cause our revenue, gross margins and net
income to decline. During periods of weak demand, customers typically reduce purchases, delay delivery of products
and/or cancel orders for our products. Order cancellations, reductions in order size or delays in orders could occur and
would materially adversely affect our business and results of operations. Actions to reduce our costs may be insufficient to
align our structure with prevailing business conditions. We may be required to undertake additional cost-cutting measures,
and may be unable to invest in marketing, research and development and engineering at the levels we believe are necessary
to maintain our competitive 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 a
particular quarter is lower than we expect, we likely will be unable to proportionately reduce our operating expenses or
fixed manufacturing 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 customer
requirements, 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 new
products, such as larger diameter substrates, low defect density substrates, thicker or thinner substrates, substrates with
extreme surface flatness specifications, substrates that are manufactured with a doped crystal growth process or substrates
that incorporate leading technology and other technological advances. New products must meet customer needs and
compete effectively 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 new technologies or performance characteristics, our existing products could become obsolete and
unmarketable. Over time, we have seen our competitors selling more substrates manufactured using a crystal growth
technology similar to ours, which has eroded our technological differentiation.
The development of new product features, improved performance characteristics and new products can be a highly
complex process, and we may experience delays in developing and introducing them. Any significant delay could cause us
to 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 product
enhancements or fail to achieve higher quality products, we may not generate sufficient revenue to offset our development
costs and other expenses or meet our customers’ requirements.
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We have made and may continue to make strategic investments in raw materials suppliers, which may not be successful
and may result in the loss of all or part of our investment.
We have made direct investments or investments through our subsidiaries in raw material suppliers in China,
which provide us with opportunities to gain supplies of key raw materials that are important to our substrate business.
These affiliates each have a market beyond that provided by us. We do not have significant influence over every one of
these companies and in some we have made only a strategic, minority investment. We may not be successful in achieving
the financial, technological or commercial advantage upon which any given investment is premised, and we could end up
losing all or part of our investment which would have a negative impact on our results of operations. In the first quarter of
2017, we incurred an impairment charge of $313,000 against one of our partially-owned suppliers, writing down our
investment to zero value. Most recently, in the first quarter of 2019, we incurred an impairment charge of $1.1 million for a
germanium materials company in China in which we have a 25% ownership interest, writing down our investment to zero
value. The significant decline in the selling prices of raw materials which began in 2015 has weakened some of these
companies and their losses have negatively impacted our financial results. Further, the increasing concern and restrictions
in China of hazardous chemicals and other hazardous elements could result in orders to shut down permanently, fines or
other severe measures. Any such orders directed at one of our joint venture companies could result in impairment charges
if the company is forced to close its business, cease operations or incurs fines, or operating losses, which would have a
material adverse effect on our financial results.
We purchase critical raw materials and parts for our equipment from single or limited sources, and could lose sales if
these sources fail to fill our needs.
We depend on a limited number of suppliers for certain raw materials, components and equipment used in
manufacturing our products, including key materials such as quartz tubing, and polishing solutions. We generally purchase
these materials through standard purchase orders and not pursuant to long-term supply contracts, and no supplier
guarantees supply of raw materials or equipment to us. If we lose any of our key suppliers, our manufacturing efforts could
be significantly hampered and we could be prevented from timely producing and delivering products to our customers.
Prior to investing in our subsidiaries and joint ventures, we sometimes experienced delays obtaining critical raw materials
and spare parts, including gallium, and we could experience such delays again in the future due to shortages of materials or
for other reasons. Delays in receiving equipment or materials could result in higher costs and cause us to delay or reduce
production of our products. If we have to delay or reduce production, we could fail to meet customer delivery schedules
and our revenue and operating results could suffer.
We may not be able to identify or form additional complementary joint ventures.
We might invest in additional joint venture 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 are identified, we may not be able to reach agreement on the terms of the business
venture with the other investment partners. Further, geopolitical tensions and trade wars could result in government
agencies blocking such new joint ventures. New joint ventures could require cash investments or cause us to incur
additional liabilities or other expenses, any of which could adversely affect our financial 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 market
conditions, we may grant our customers extended payment terms when selling products to them. Subsequent to our
fulfilling an order, some customers have been unable to make payments when due, reducing our cash balances and causing
us to incur charges to allow for a possibility that some accounts might not be paid. We have had some customers file for
bankruptcy. If our customers do not pay amounts owed to us then we will incur charges that would reduce our earnings.
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We depend on the continuing efforts of our senior management team and other key personnel. If we lose members of
our senior management team or other key personnel, or are unable to successfully recruit and train qualified personnel,
our ability 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 key
personnel. Our industry is characterized by high demand and intense competition for talent, and the turnover rate can be
high. We compete for qualified management and other personnel with other specialty material companies and
semiconductor companies. Our employees could leave our company with little or no prior notice and would be free to
work for a competitor. If one or more of our senior executives or other key personnel were unable or unwilling to continue
in their present positions, we may not be able to replace them easily or at all, and other senior management may be required
to divert attention from other aspects of the business. The loss of any of these individuals or our ability to attract or retain
qualified personnel could adversely affect our business.
Our results of operations may suffer if we do not effectively manage our inventory.
We must manage our inventory of raw materials, work in process and finished goods effectively to meet changing
customer requirements, while keeping inventory costs down and improving gross margins. Although we seek to maintain
sufficient inventory levels of certain materials to guard against interruptions in supply and to meet our near term needs, we
may experience shortages of certain key materials. Some of our products and supplies have in the past and may in the
future become obsolete while in inventory due to changing customer specifications, or become excess inventory due to
decreased demand for our products and an inability to sell the inventory within a foreseeable period. This would result in
charges that reduce our gross profit and gross margin. Furthermore, if market prices drop below the prices at which we
value inventory, we would need to take a charge for a reduction in inventory values in accordance with the lower of cost or
net realizable value valuation rule. We have in the past had to take inventory valuation and impairment charges. Any future
unexpected 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, global, political and economic environment could have
a significant 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, along
with volatility in the financial markets, increasing national debt and fiscal concerns in various regions, pose challenges to
our industry. Currently China’s economy is slowing and this could impact our financial performance. In addition, tariffs,
trade restrictions, trade wars and Brexit are creating an unstable environment and can disrupt or restrict commerce.
Although we remain well-capitalized, the cost and availability of funds may be adversely affected by illiquid credit
markets. Volatility in U.S. and international markets and economies may adversely affect our liquidity, financial condition
and profitability. Another severe or prolonged economic downturn could result in a variety of risks to our business,
including:
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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
in industries most affected by the economic downturn; and
impairment of our tangible or intangible assets.
In the past, most recently in the fourth quarter of 2018 and continuing in 2019, we experienced delays in
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customer purchasing decisions and disruptions in a normal volume of customer orders that we believe were in part due to
the uncertainties in the global economy, resulting in an adverse impact on consumer spending. During challenging and
uncertain economic times and in tight credit markets, many customers delay or reduce technology purchases. Should
similar events occur again, our business and operating results could be significantly and adversely affected.
The effect of terrorist threats and actions on the general economy could decrease our revenue.
Countries such as the United States and China continue to be on alert for terrorist activity. The potential near and
long-term impact terrorist activities may have in regards to our suppliers, customers and markets for our products and the
economy is uncertain. There may be embargos of ports or products, or destruction of shipments or our facilities, or attacks
that affect our personnel. There may be other potentially adverse effects on our operating results due to significant events
that we cannot foresee. Since we perform all of our manufacturing operations in China, terrorist activity or threats against
U.S.‑owned enterprises are a particular concern to us.
II. Risks Related to International Aspects of Our Business
The Chinese central government is increasingly aware of air pollution and other forms of environmental pollution and
their reform efforts can impact our manufacturing, including intermittent mandatory shutdowns.
The Chinese central government is demonstrating strong leadership to improve air quality and reduce
environmental pollution. These efforts have impacted manufacturing companies through mandatory shutdowns, increased
inspections and regulatory reforms. 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
quality improved. In the first quarter of 2018, from February 27 to March 31 over 300 manufacturing companies, including
AXT, were again intermittently shut down by the local government for a total of ten days, or 30 percent of the remaining
calendar days, due to severe air pollution. Our shipments were delayed and our revenue for the quarter was negatively
impacted. We expect that mandatory factory shutdowns will occur in the future. If the frequency of such shutdowns
increases, especially at the end of a quarter, or if the total number of days of shutdowns prevents us from producing enough
wafers to ship, then these shutdowns will have a material adverse effect on our manufacturing output, revenue and factory
utilization. Each of our raw material supply chain companies could also be impacted by environmental related orders from
the central government.
Enhanced trade tariffs, import restrictions, export restrictions, Chinese regulations or other trade barriers may
materially harm our business.
All of our wafer substrates are manufactured in China and in 2019, approximately 10% of our revenue was
generated by sales to customers in North America, primarily in the U.S. In September 2018, the Trump Administration
announced a list of thousands of categories of goods that became subject to tariffs when imported into the United
States. This pronouncement imposed tariffs on wafer substrates we imported into the United States. The initial tariff rate
was 10% and subsequently was increased to 25%. Approximately 10% of our revenue derives from importing our wafers
into the United States. In the year 2019 we paid approximately $735,000 in tariffs. The future impact of tariffs and trade
wars is uncertain. We may be required to raise prices, which may result in the loss of customers and our business, financial
condition and results of operations may be materially harmed. Additionally, the Trump Administration continues to signal
that it may alter trade agreements and terms between China and the United States, including limiting trade with China, and
may impose additional tariffs on imports from China. It is possible that our business could be adversely impacted by
retaliatory trade measures taken by China or other countries in response to existing or future tariffs, which could cause us to
raise prices or make changes to our operations, which could materially harm our business, financial condition and results of
operations.
The economic and political conditions between China and the United States, in our view, create an unstable
business environment. Trade restrictions against China have resulted in a greater determination within China to be self-
sufficient and produce more goods domestically. Government agencies in China may be encouraging and supporting the
founding of new companies, the addition of new products in existing companies and more vertical integration within
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companies. These factors could eventually result in lower revenue from sales of our wafer substrates in China. Further, the
continued threats of tariffs and other trade restrictions could have a generally disruptive impact on the global economy and,
therefore, negatively impact our sales.
In addition, we may incur increases in costs and other adverse business consequences, including loss of revenue or
decreased gross margins, due to changes in tariffs, import or export restrictions, further trade barriers, or unexpected
changes in regulatory requirements. For example, in July 2012, we received notice of retroactive value-added taxes (VATs)
levied by the tax authorities in China, which applied for the period from July 1, 2011 to June 30, 2012. We expensed the
retroactive VATs of approximately $1.3 million in the quarter ended June 30, 2012, which resulted in a decrease in our
gross margins. These VATs will continue to negatively impact our gross margins for the future quarters. Given the
relatively fluid regulatory environment in China and the United States, there could be additional tax or other regulatory
changes in the future. Any such changes could directly and materially adversely impact our financial results and general
business condition.
We derive a significant portion of our revenue from international sales, and our ability to sustain and increase our
international sales involves significant risks.
Approximately 90% of our revenue is from international sales. We expect that sales to customers outside the
United States, particularly sales to customers in Japan, Taiwan and China, will continue to represent a significant portion of
our revenue. 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. Managing
our overseas operations presents challenges, including periodic regional economic downturns, trade balance issues, threats
of trade wars, varying business conditions and demands, political instability, variations in enforcement of intellectual
property and contract rights in different jurisdictions, differences in the ability to develop relationships with suppliers and
other local businesses, changes in U.S. and international laws and regulations, including U.S. export restrictions,
fluctuations in interest and currency exchange rates, the ability to provide sufficient levels of technical support in different
locations, cultural differences and perceptions of U.S. companies, shipping delays and terrorist acts or acts of war, among
other risks. Many of these challenges are present in China, which represents a large potential market for semiconductor
devices. Global uncertainties with respect to: (i) economic growth rates in various countries; (ii) sustainability of demand
for electronic products; (iii) capital spending by semiconductor manufacturers; (iv) price weakness for certain
semiconductor devices; (v) changing and tightening environmental regulations; (vi) political instability in regions where we
have operations and (vii) trade wars may also affect our business, financial condition and results of operations.
Our dependence on international sales involves a number of risks, including:
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changes in tariffs, import restrictions, export restrictions, or other trade barriers;
unexpected changes in regulatory requirements;
longer periods to collect accounts receivable;
foreign exchange rate fluctuations;
changes in export license requirements;
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
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denominated in renminbi and our Japanese customers which are denominated in Japanese yen. We also have some small
sales denominated in Euro. Increases in the value of the U.S. dollar could increase the price of our products in non-U.S.
markets and make our products 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 statement of operations. For
example, in 2017 we incurred a loss of $602,000.
The functional currency of our wholly-owned Chinese subsidiary and our partially-owned joint venture companies
is the Chinese renminbi, the local currency. We can incur foreign exchange gains or losses when we pay dollars to one of
our China-based companies or a third-party supplier in China. Similarly, if a company in China pays renminbi into one of
our bank accounts transacting in dollars the renminbi will be converted to dollars and we can incur a foreign exchange gain
or loss. Hedging renminbi will be considered in the future but it is complicated by the number of companies involved, the
diversity 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
rates between the U.S. dollar and the Japanese yen and can result in foreign exchange gains and losses. This has been
problematic in the past and, therefore, we instituted a foreign currency hedging program dealing with yen which has
mitigated the problem.
Joint venture companies in China bring certain risks.
Since our wholly-owned subsidiaries and all of our partially-owned companies reside in China, their activities
could subject us to a number of risks associated with conducting operations internationally, including:
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unexpected changes in regulatory requirements that may limit our ability to manufacture, export the products
of these companies or sell into particular jurisdictions or impose multiple conflicting tax laws and regulations;
the imposition of tariffs, trade barriers and duties;
difficulties in managing geographically disparate operations;
difficulties in enforcing agreements through non-U.S. legal systems;
political and economic instability, civil unrest or war;
terrorist activities that impact international commerce;
difficulties in protecting our intellectual property rights, particularly in countries where the laws and practices
do 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 or
exchange rates, taxation or employment; and
nationalization of foreign‑owned assets, including intellectual property.
Uncertainty regarding the United States’ foreign policy under the current administration could disrupt our business.
We manufacture our substrates in China and, in 2019, approximately 90% of our sales were to customers located
outside of the United States. Further, we have partial ownership of raw material companies in China as part of
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our supply chain. The United States’ current foreign policy has created uncertainty and caution in the international
business community, resulting in disruptions in manufacturing, import/export, trade tariffs, sales, investments and other
business activity. Such disruptions have had an adverse impact on our financial performance and could continue in the
future.
If China places restrictions on freight and transportation routes and on ports of entry and departure this could result in
shipping 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 government
placed restrictions on importing certain materials and on freight routes used to transport these materials. We experienced
some modest disruption from these restrictions. If the government were to place additional restrictions on the
transportation of materials, then our ability to transport our raw materials or products could be limited and result in
manufacturing delays or bottlenecks 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 items) for
use during the period that these restrictions are likely to last, which will increase our use of cash and increase our inventory
level. Any of these restrictions 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
in China 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 past
experienced quality problems with our China‑manufactured products. Our previous quality problems caused us to lose
market share to our competitors, as some of our customers reduced their orders until our wafer surface quality was as good
and as consistent as that offered by our competitors and instead allocated their requirements for compound semiconductor
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 facilities will become
underutilized, and we will be unable to achieve revenue growth.
Changes in China’s political, social, regulatory or economic environments may affect our financial performance.
Our financial performance may be affected by changes in China’s political, social, regulatory or economic
environments. The role of the Chinese central and local governments in the Chinese economy is significant. Chinese
policies toward hazardous materials, including arsenic, environmental controls, air pollution, economic liberalization, laws
and policies affecting technology companies, foreign investment, currency exchange rates, taxation structure and other
matters could 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, other
environmental controls and air pollution. The Chinese government could revoke, terminate or suspend our operating
licenses for reasons related to environmental control over the use of hazardous materials, air pollution, labor complaints,
national security and similar reasons without compensation to us. Further, the central government encourages employees to
report to the appropriate regulatory agencies possible safety or environmental violations, but there may not be actual
violations. In days of severe air pollution the government has ordered manufacturing companies to stop all production. For
example, 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 quality improved. In the first
quarter of 2018, from February 27 to March 31, over 300 manufacturing companies, including us, were again intermittently
shut down by the local government for a total of ten days due to severe air pollution. Our shipments were delayed and our
revenue for the quarter was negatively impacted. We expect that mandatory factory shutdowns will occur in the future.
Any failure on our part to comply with governmental regulations could result in the loss of our ability to manufacture our
products. Further, any imposition of surcharges or any increase in Chinese tax rates or reduction or elimination of Chinese
tax benefits could hurt our financial results.
An important example of some of these factors is seen in a change underway in Beijing. The Beijing city
government is moving its offices into the area where our original manufacturing facility is currently located and is in the
process of moving thousands of government employees into this area. The government has constructed showcase tower
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buildings and overseen the establishment of new apartment complexes, retail stores and restaurants. An amusement park is
being constructed within a few miles of our facility. To create room and upgrade the district, the city instructed virtually all
existing manufacturing companies, including AXT, to relocate all or some of their manufacturing lines. We were instructed
to move our gallium arsenide manufacturing. For reasons of manufacturing efficiency we elected to also move our
germanium manufacturing line.
Some of our larger, more sophisticated customers want to perform a site qualification and subsequently make a
plan to ramp up production at Dingxing. Customer qualification of the Dingxing site requires us to continue to diligently
address the many details that arise at both of the new sites. A failure to properly accomplish this could result in disruption
to our production and have a material adverse impact on our revenue, our results of operations and our financial condition.
If we fail to meet the product qualification requirements of a customer, we may lose sales to that customer. Our reputation
may also be damaged. Any loss of sales could have a material adverse effect on our revenue, our results of operations and
our financial condition.
Our international operations are exposed to potential adverse tax consequence in China.
Our international operations create a risk of potential adverse tax consequences. Taxes on income in our China-
based companies are dependent upon acceptance of our operational practices and intercompany transfer pricing by local tax
authorities as being on an arm's length basis. Due to inconsistencies among taxing authorities in application of the arm's
length standard, transfer pricing challenges by tax authorities could, if successful, materially increase our consolidated
income tax expense. We are subject to tax audits in China and an audit could result in the assessment of additional income
tax against us. This could have a material adverse effect on our operating results or cash flows in the period or periods for
which that determination is made and could result in increases to our overall tax expense in subsequent periods. Various
taxing agencies in China are increasingly focused on tax reform and other legislative action to increase tax revenue. In
addition 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 adversely
impact our ability to manufacture our products and meet customer orders, and would result in reduced revenue.
In the past, China has faced power shortages resulting in power demand outstripping supply in peak periods.
Instability in electrical supply has caused sporadic outages among residential and commercial consumers causing the
Chinese government to implement tough measures to ease the energy shortage. If further problems with power shortages
occur in the future, we may be required to make temporary closures of our operations or of our subsidiary and joint venture
operations. We may be unable to manufacture our products and would then be unable to meet customer orders except from
finished goods inventory on hand. As a result, our revenue could be adversely impacted, and our relationships with our
customers could suffer, impacting our ability to generate future revenue. In addition, if power is shut off at any of our
facilities at any time, either voluntarily or as a result of unplanned brownouts, during certain phases of our manufacturing
process including our crystal growth phase, the work in process may be ruined and rendered unusable, causing us to incur
costs that will not be covered by revenue, and negatively impacting our cost of revenue and gross margins.
The recent outbreak of a contagious disease may affect our business operations and financial performance.
Currently, a contagious disease originating in Wuhan, China called the coronavirus or COVID-19 has spread to
other cities in China and to many other countries including the United States. This has triggered references to the SARS
outbreak which occurred in 2003 and affected our business operations. Any severe occurrence of an outbreak of a
contagious disease such as the coronavirus, SARS, Avian Flu or Ebola may cause us or the government to temporarily
close our manufacturing operations in China. In January 2020, virtually all companies in China were ordered to remain
closed after the traditional Lunar New Year holiday ended, including our subsidiaries in China. Similarly, if one or more of
our key suppliers is required to close for an extended period, we might not have enough raw material inventories to
continue our manufacturing operations. In addition, while we possess management skills among our China-based staff that
enable us to maintain our manufacturing operations with minimal on-site supervision from our U.S.‑based staff, our
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business could also be harmed if travel to or from China and the United States is restricted or inadvisable or our key China-
based employees are unable to work. If our manufacturing operations were closed for a significant period, we could lose
revenue and market share, which would depress our financial performance and could be difficult to recapture. Finally, if
one of our key customers is required to close for an extended period, we might not be able to ship product to them, our
revenue would decline and our financial performance would suffer.
III. Risks Related to Our Financial Results and Capital Structure
We may utilize our cash balances for relocation, expansion, or to offset a business downturn resulting in the decline of
our existing cash, cash equivalents and investment balances, and if we need additional capital, those funds may not be
available on acceptable terms, or at all.
Our liquidity is affected by many factors including among others, the relocation of our gallium arsenide
manufacturing operations, the extent to which we pursue on-going capital expenditures, the build out of the sites at
Dingxing and Kazuo, the level of our production, the level of profits or losses, and other factors related to the uncertainties
of the industry and global economies. Our capital expenditures and any negative cash flow effects of these other factors
will draw down our cash reserves, which could adversely affect our financial condition, require us to incur debt, reduce our
value and possibly impinge our ability to raise debt and equity funding in the future, at a time when we might need to raise
additional cash or elect to raise additional cash. Accordingly, there can be no assurance that events will not require us to
seek additional capital 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
stock price to decline.
We have experienced, and may continue to experience, significant fluctuations in our revenue, gross margins and
earnings. Our quarterly and annual revenue and operating results have varied significantly in the past and may vary
significantly in the future due to a number of factors, including:
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our ability to develop, manufacture and deliver high quality products in a timely and cost-effective manner;
unforeseen disruptions at our new sites;
disruptions in manufacturing if air pollution, or other environmental hazards, or outbreaks of contagious
diseases causes the Chinese government to order work stoppages;
fluctuation of our manufacturing yields;
decreases in the prices of our or our competitors’ products;
fluctuations in demand for our products;
the volume and timing of orders from our customers, and cancellations, push-outs and delays of customer
orders once 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;
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costs incurred in connection with any future acquisitions of businesses or technologies; and
increases in our expenses, including expenses for research and development.
Due to these factors, we believe that period-to-period comparisons of our operating results may not be meaningful
indicators of our future performance.
A substantial percentage of our operating expenses are fixed, and we may be unable to adjust spending to
compensate for an unexpected shortfall in revenue. As a result, any delay in generating revenue could cause our operating
results 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
stock price may decline.
We provide public guidance on our expected operating and financial results. Although we believe that this
guidance 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 and
in our other public filings and public statements. Our actual results may not meet the guidance we have provided. If our
operating or financial results do not meet our guidance or the expectations of investment analysts, our stock price may
decline.
We have adopted certain anti-takeover measures that may make it more difficult for a third party to acquire us.
Our board of directors has the authority to issue up to 800,000 shares of preferred stock in addition to the
outstanding shares of Series A preferred stock and to determine the price, rights, preferences and privileges of those shares
without any further vote or action by the stockholders. The rights of the holders of common stock will be subject to, and
may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance
of shares of preferred stock could have the effect of making it more difficult for a third party to acquire a majority of our
outstanding 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 of
delaying or preventing a merger, acquisition or change of control, or changes in our management, which could adversely
affect the market price of our common stock. The following are some examples of these provisions:
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the division of our board of directors into three separate classes, each with three-year terms;
the right of our board to elect a director to fill a space created by a board vacancy or the expansion of the
board;
the ability of our board to alter our amended and restated bylaws; and
the requirement that only our board or the holders of at least 10% of our outstanding shares may call a special
meeting of our stockholders.
Furthermore, because we are incorporated in Delaware, we are subject to the provisions of Section 203 of the
Delaware General Corporation Law. These provisions prohibit us from engaging in any business combination with any
interested stockholder (a stockholder who owns 15% or more of our outstanding voting stock) for a period of three years
following the time that such stockholder became an interested stockholder, unless:
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66 /3% of the shares of voting stock not owned by the interested stockholder approve the merger or
combination, or
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the board of directors approves the merger or combination or the transaction which resulted in the stockholder
becoming an interested stockholder.
Our common stock may be delisted from The Nasdaq Global Select Market, which could negatively impact the price of
our common stock and our ability to access the capital markets.
Our common stock is listed on The Nasdaq Global Select Market. The bid price of our common stock has in the
past closed below the $1.00 minimum per share bid price required for continued inclusion on The Nasdaq Global Select
Market under Marketplace Rule 5450(a). If the bid price of our common stock remains below $1.00 per share for thirty
consecutive business 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 the
trading 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 are
generally considered to be less efficient markets, and our stock price, as well as the liquidity of our common stock, may be
adversely 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 interest
and 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, 2019, we had U.S. federal net operating loss carryforwards of approximately
$58.3 million. We have utilized all state net operating losses, primarily in the state of California, as of December 31, 2019.
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 tax attributes,
such as research tax credits, to offset its post-change income and taxes may be limited. In general, an “ownership change”
occurs if there is a cumulative change in our ownership by “5% shareholders” that exceeds 50 percentage points over a
rolling three-year period. Similar rules may apply under state tax laws. We might have undergone prior ownership
changes, and we may undergo ownership changes in the future, which may result in limitations on our net operating loss
carryforwards and other tax attributes. Any such limitations on our ability to use our net operating loss carryforwards and
other tax attributes could adversely impact our business, financial condition and results of operations.
IV. Risks Related to Our Intellectual Property
Intellectual property infringement claims may be costly to resolve and could divert management attention.
Other companies may hold or obtain patents on inventions or may otherwise claim proprietary rights to
technology necessary to our business. The markets in which we compete are comprised of competitors that in some cases
hold substantial patent portfolios covering aspects of products that could be similar to ours. We could become subject to
claims that we are infringing patent, trademark, copyright or other proprietary rights of others. We have in the past been
involved in lawsuits alleging patent infringement, and could in the future be involved in similar litigation. For example, we
entered into a royalty agreement with Sumitomo in 2011 to settle its claim of patent infringement, which resulted in AXT
paying royalties for a worldwide, nonexclusive, royalty bearing, irrevocable license to certain patents. The agreement
expired as of December 31, 2018. In January 2020, we agreed to enter into a cross license and covenant agreement with
Sumitomo that will expire December 31, 2029 and includes annual payments by us to Sumitomo over a 10-year period.
If we are unable to protect our intellectual property, including our non-patented proprietary process technology, we may
lose valuable assets or incur costly litigation.
We rely on a combination of patents, copyrights, trademarks, trade secrets and trade secret laws, non-disclosure
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agreements and other intellectual property protection methods to protect our proprietary technology. We believe that our
internal, non-patented proprietary process technology methods, systems and processes are a valuable and critical element of
our intellectual property. We must establish and maintain safeguards to avoid the theft of these processes. Our ability to
establish and maintain a position of technology leadership also depends on the skills of our development
personnel. Despite our efforts to protect our intellectual property, third parties can develop products or processes similar to
ours. Our means of protecting 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 substrates produced using a process similar to our VGF process. Our competitors may also develop and patent
improvements to the VGF technology 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 or
the validity of our patents. In addition, the laws of some foreign countries may not protect our proprietary rights to as great
an extent as do the laws of the United States and it may be more difficult to monitor the use of our intellectual property.
Our competitors may be able to legitimately ascertain non-patented proprietary technology embedded in our systems. If this
occurs, 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 or
know-how or to determine their scope, validity or enforceability. Enforcing or defending our proprietary technology is
expensive, could cause us to divert resources and may not prove successful. Our protective measures may prove inadequate
to 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 Matters
If we, or any of our partially-owned supply chain companies, fail to comply with environmental and safety regulations,
we may be subject to significant fines or forced to cease our operations.
We are subject to federal, state and local environmental and safety laws and regulations in all of our operating
locations, including laws and regulations of China, such as laws and regulations related to the development, manufacture
and use of our products, the use of hazardous materials, the operation of our facilities, and the use of our real property.
These laws and regulations govern the use, storage, discharge and disposal of hazardous materials during manufacturing,
research and development, and sales demonstrations. If we, or any of our partially-owned supply chain companies, fail to
comply with applicable regulations, we could be subject to substantial liability for clean-up efforts, personal injury, fines or
suspension or be forced to close or temporarily cease our operations, and/or suspend or terminate the development,
manufacture or use of certain of our products, the use of our facilities, or the use of our real property, each of which could
have a material adverse effect on our business, financial condition and results of operations.
The Chinese central government is demonstrating strong leadership to improve air quality and reduce
environmental pollution. The central government encourages employees to report to the appropriate regulatory agencies
possible safety or environmental violations but there may not be actual violations. These efforts have impacted
manufacturing companies through mandatory shutdowns, increased inspections and regulatory reforms. 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 quality improved. In the first quarter of 2018, from
February 27 to March 31 over 300 manufacturing companies were again intermittently shut down by the local government
for a total of ten days, or 30 percent of the remaining calendar days, due to severe air pollution. Our shipments were
delayed and our revenue for the quarter was negatively impacted. We expect that mandatory factory shutdowns will occur
in the future. If the frequency of such shutdowns increases, especially at the end of a quarter, or if the total number of days
of shutdowns prevents us from producing enough wafers to ship, then the shutdowns will have a material adverse effect on
our manufacturing output, revenue and factory utilization. We believe the relocation of our gallium arsenide and
germanium manufacturing lines mitigates our exposure to factory shutdowns. Each of our raw material supply chain
companies could also be impacted by environmental related orders from the central government.
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In addition, from time to time, the Chinese government issues new regulations, which may require additional
actions on our part to comply. For example on February 27, 2015, the China State Administration of Work Safety updated
its list of hazardous substances. The previous list, which was published in 2002, did not restrict the materials that we use in
our wafers. The new list added gallium arsenide. As a result of the newly published list, we were instructed to obtain a
permit to continue to manufacture our gallium arsenide substrate wafers. The Beijing municipal authority accepted our
permit application in May 2015, but has not yet issued to us the requisite permit while we continue to show good faith in
relocating our gallium arsenide production. If our application is denied in the future before we complete customer
qualifications and ramp wafer processing volume, then our gallium arsenide production could be disrupted, which could
materially and adversely impact our results of 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 loss
and other damages, including punitive damages, as a result of exposure of plaintiffs to high levels of gallium arsenide in
gallium 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
acquire costly remediation equipment or incur other significant expenses if we were found liable for failure to comply with
environmental and safety regulations. Existing or future changes in laws or regulations in the United States and China may
require us to incur significant expenditures or liabilities, or may restrict our operations. In addition, our employees could be
exposed to chemicals or other hazardous materials at our facilities and we may be subject to lawsuits seeking damages for
wrongful 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 our
business, financial condition, results of operations or cash flows could be affected in any particular period by litigation
pending and any additional litigation brought against us. In addition, future litigation could divert management’s attention
from our business and operations, causing our business and financial results to suffer. We could incur defense or settlement
costs in excess of the insurance covering these litigation matters, or that could result in significant judgments against us or
cause 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
a report of management on the effectiveness of our internal control over financial reporting. Ongoing compliance with this
requirement is complex, costly and time-consuming and it extends to our companies in China. If: (1) we fail to maintain
effective internal control over financial reporting; or (2) our management does not timely assess the adequacy of such
internal control, we could be subject to regulatory 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 venture
companies. If we fail to manage these procedures properly or fail to effectively manage a transition from manual processes
to automated processes, our systems and controls may be disrupted. To manage our business effectively, we may need to
implement additional management information systems, further develop our operating, administrative, financial and
accounting systems and controls, add experienced senior level managers, and maintain close coordination among our
executive, engineering, accounting, marketing, sales and operations organizations.
Item 1B. Unresolved Staff Comments
None.
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Item 2. Properties
Our principal properties as of March 12, 2020 are as follows:
Location
Fremont, CA
Beijing, China
Square
Feet
19,467
256,000
Principal Use
Administration
Production and
Administration
DingXing, China
Kazuo, China
190,000
69,000
Production
Production
Nanjing, China
1,250
Administration
Kazuo, China
71,000
Beijing, China
37,660
Production and
Administration
Production and
Administration
Operating lease, expires November 2020
Ownership
Owned by AXT / Tongmei
Owned by AXT / Tongmei
Owned by AXT / Tongmei
Operating lease by Nanjing JinMei Gallium Co. Ltd., expires
May 2020.*
Owned by Beijing BoYu Semiconductor Vessel Craftwork
Technology Co., Ltd.*
Operating leases by Beijing BoYu Semiconductor Vessel
Craftwork Technology Co., Ltd., expire on various dates until
November 2020.*
*
Joint ventures in which we hold an interest and consolidate in our consolidated financial statements. We hold a 100%
interest in Nanjing JinMei Gallium Co., Ltd., and a 63% 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 each
facility has sufficient plant capacity to meet its current and anticipated operating requirements.
Item 3. Legal Proceedings
From time to time we may be involved in judicial or administrative proceedings concerning matters arising in the
ordinary course of business. We do not expect that any of these matters, individually or in the aggregate, will have a
material adverse effect on our business, financial condition, cash flows or results of operation.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Our common stock has been trading publicly on the NASDAQ Global Market (NASDAQ) under the symbol
“AXTI” since May 20, 1998, the date we consummated our initial public offering, and beginning on January 3, 2011, our
common stock began trading on the NASDAQ Global Select Market under the same symbol. The following table sets
forth the range of high and low sales prices of the common stock for the periods indicated, as reported by NASDAQ.
2019
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2018
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
4.68
6.14
4.47
4.20
9.45
8.60
9.38
7.24
$
$
$
$
$
$
$
$
3.70
3.55
3.24
2.72
6.90
5.80
6.80
3.93
$
$
$
$
$
$
$
$
As of March 9, 2020, there were 139 holders of record of our common stock. Because many shares of AXT’s
common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total
number of beneficial owners of our common stock.
We have never paid or declared any cash dividends on our common stock and do not anticipate paying cash
dividends in the foreseeable future. Dividends accrue on our outstanding Series A preferred stock at the rate of $0.20 per
annum per share of Series A preferred stock. The 883,000 shares of Series A preferred stock issued and outstanding as of
December 31, 2019 are valued at $3,532,000 and are non-voting and non-convertible preferred stock with a 5.0%
cumulative annual dividend rate payable when declared by our board of directors, and a $4.00 per share liquidation
preference over common stock that must be paid before any distribution is made to the holders of our common stock. These
shares of preferred stock were issued to shareholders of Lyte Optronics, Inc. in connection with the completion of our
acquisition of Lyte Optronics, Inc. on May 28, 1999. By the terms of the Series A preferred stock, so long as any shares of
Series A preferred stock are outstanding, neither the 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 of our outstanding common stock. As of December 31, 2015, the
Series A preferred stock had cumulative dividends of $2.9 million and we include such cumulative dividends in “Accrued
liabilities” in our consolidated balance sheets. No shares were repurchased during 2019, 2018 and 2017 under this
program. If we are required to pay the cumulative dividends on the Series A preferred stock, our cash and cash equivalents
would be reduced. We account for the cumulative year to date dividends on the Series A preferred stock when calculating
our earnings per share.
Issuer Purchases of Equity Securities
On October 27, 2014, our Board of Directors approved a stock repurchase program pursuant to which we may
repurchase up to $5.0 million of our outstanding common stock. These repurchases can be made from time to time in the
open market and are funded from our existing cash balances and cash generated from operations. During 2015, we
repurchased 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 2019 or 2018 under
this program. As of December 31, 2019 and 2018, approximately $2.7 million remained available for future repurchases
under this program, respectively.
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Comparison of Stockholder Return
Set forth below is a line graph comparing the annual percentage change in the cumulative total return to the
stockholders 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, 2014 and ending
December 31, 2019.
AXT, Inc.
NASDAQ Composite
NASDAQ Electronic Components
12/14
12/15
12/16
12/17
12/18
12/19
100
100
100
88.57
171.43
310.71
155.36
155.36
106.96
116.45
150.96
146.67
200.49
98.12
127.26
181.19
160.26
239.78
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Item 6. Selected Consolidated Financial Data
The following selected consolidated financial data is derived from and should be read in conjunction with our
consolidated financial statements and related notes set forth in Item 8 below, and in our previously filed reports on
Form 10‑K. See also Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
for further information relating to items reflecting our results of operations and financial condition.
Statements of Operations Data:
Revenue
Cost of revenue
Gross profit
Operating expenses:
Selling, general and administrative
Research and development
Restructuring charge
Total operating expenses
Income (loss) from operations
Interest income, net
Equity in (loss) earnings of unconsolidated joint ventures
Other income (expense), net
Income (loss) before provision for income taxes
Provision for income taxes
Net income (loss)
Less: Net (income) loss attributable to noncontrolling interests
Net income (loss) attributable to AXT, Inc.
Net income (loss) attributable to AXT, Inc. per common share:
2019
Year Ended December 31,
2017
(in thousands, except per share data)
2016
2018
2015
$ 83,256 $ 102,397 $ 98,673 $ 81,349 $ 77,502
58,431 65,350 64,198 54,968 60,673
24,825 37,047 34,475 26,381 16,829
—
—
226
19,305 19,003 17,009 13,880 16,064
5,897 4,827 5,850 5,664
5,834
—
—
25,139 24,900 21,836 19,956 21,728
(314) 12,147 12,639 6,425 (4,899)
412
217
(1,876)
462
860 2,023
947
(1,026) 11,947 10,853 5,699 (2,002)
531
(1,588) 11,009 10,061 4,966 (2,533)
305
(1,012)
(1,355)
9,654 $ 10,148 $ 5,636 $ (2,228)
$ (2,600) $
409
(1,080) (1,694) (1,995)
(553)
461
352
938
562
528
792
670
733
87
Basic
Diluted
Shares used in per share calculations:
Basic
Diluted
Balance Sheet Data:
Cash and cash equivalents
Investments
Working capital
Total assets
Current liabilities
Stockholders’ equity
$ (0.07) $
$ (0.07) $
0.24 $
0.24 $
0.27 $
0.26 $
0.17 $ (0.07)
0.17 $ (0.07)
39,487 39,049 37,444 32,139 32,183
39,487 40,265 38,966 32,894 32,183
2019
2018
December 31,
2017
(in thousands)
2016
2015
$ 26,892 $ 16,526 $ 44,352 $ 36,152 $
9,427
85,679
223,349
27,526
192,762
22,846
99,831
223,524
28,709
194,532
32,608
117,927
211,200
22,594
188,317
17,571
91,335
154,246
15,951
137,390
41
24,875
19,128
81,146
151,896
15,742
134,660
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
In addition to historical information, the following discussion contains forward‑looking statements that are subject
to 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 Annual
Report 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.
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in accordance with accounting principles generally accepted in
the United States of America. Accordingly, we make estimates, assumptions and judgments that affect the amounts
reported on our consolidated financial statements. These estimates, assumptions and judgments about future events and
their effects on our results cannot be determined with certainty, and are made based upon our historical experience and on
other assumptions that are believed to be reasonable under the circumstances. These estimates may change as new events
occur or additional information is obtained, and we may periodically be faced with uncertainties, the outcomes of which are
not within our control and may not be known for a prolonged period of time.
We have identified the policies below as critical to our business operations and understanding of our financial
condition and results of operations. Critical accounting policies are material to the presentation of our consolidated
financial statements and require us to make difficult, subjective or complex judgments that could have a material effect on
our financial condition and results of operations. They may require us to make assumptions about matters that are highly
uncertain at the time of the estimate. Different estimates that we could have used, or changes in the estimate that are
reasonably likely to occur, may have a material impact on our financial condition or results of operations. We also refer you
to Note 1 to our consolidated financial statements included elsewhere in this Form 10-K.
Revenue Recognition and Sales Returns
We manufacture and sell high-performance compound semiconductor substrates including indium phosphide,
gallium arsenide and germanium wafers, and our consolidated subsidiaries sell certain raw materials, including 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 acceptance requirements that would preclude revenue recognition. Our products are
typically sold pursuant to purchase orders placed by our customers, and our terms and conditions of sale do not require
customer acceptance. We account for a contract with a customer when there is a legally enforceable contract, which could
be the customer’s purchase order, the rights of the parties are identified, the contract has commercial terms, and
collectibility of the contract consideration is probable. The majority of our contracts have a single performance obligation
to transfer products and are short term in nature, usually less than six months. Our revenue is measured based on the
consideration specified in the contract with each customer in exchange for transferring products that are generally based
upon a negotiated, formula, list or fixed price. Revenue is recognized when control of the promised goods is transferred to
our customer, which is either upon shipment from our dock, receipt at the customer’s dock, or removal from consignment
inventory at the customer’s location, in an amount that reflects the consideration we expect to be entitled to receive in
exchange for those goods.
We have elected to account for shipping and handling as activities to fulfill the promise to transfer the goods. As
such, shipping and handling fees billed to customers in a sales transaction are recorded in revenue. Shipping and handling
costs incurred are recorded in cost of revenue. Sales taxes and value added taxes in foreign jurisdictions that are collected
from customers and remitted to governmental authorities are accounted for on a net basis and, therefore, are excluded from
revenue.
We do not provide training, installation or commissioning services. We accrue for future returns based on
historical data, prior experience, current economic trends and changes in customer demand at the time revenue is
recognized. We do not recognize any asset associated with the incremental cost of obtaining revenue generating customer
contracts. As such, sales commissions and other related expenses are expensed as incurred, given that the expected period
of benefit is less than one year.
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On January 1, 2018, we adopted Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts
with Customers (“ASC 606”), and its related amendments, using the modified retrospective method applied to those
contracts which were not completed as of January 1, 2018. The adoption of ASC 606, using the modified retrospective
approach, had no significant impact to our accumulated deficit as of January 1, 2018 and no significant impact to the total
net cash from or used in operating, investing, or financing activities within the consolidated statements of cash flows. In
connection with this adoption on January 1, 2018, we reclassified our refund liabilities relating to sales with a right of
return in the amount of $169,000 to present it separately from “Accounts receivable” and included it in “Accrued
liabilities” on the consolidated balance sheets. As of December 31, 2019 and 2018, the balance was $26,000 and $47,000,
respectively. See Note 1 for the required disclosures related to the impact of adopting this standard.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivables are recorded at the invoiced amount and are not interest bearing. We periodically review the
likelihood of collection on our accounts receivable balances and provide an allowance for 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. with an emphasis on balances in
excess of 120 days and establish a reserve allowance on the receivable balances if needed. The reason for the difference in
the evaluation of receivables between foreign and U.S. customers is that U.S. customers have historically made payments
in a shorter period of time than foreign customers. Foreign business practices generally require us to allow customer
payment terms that are longer than those accepted in the United States. We assess the probability of collection based on a
number of factors, including the length of time a receivable balance has been outstanding, our past history with the
customer and the customer’s credit-worthiness.
We exercise judgment when determining the adequacy of our reserves as we evaluate historical bad debt trends,
general economic conditions in the United States and internationally, and changes in customer financial conditions.
Uncollectible receivables are recorded as bad debt expense when all efforts to collect have been exhausted and recoveries
are recognized when they are received. As of December 31, 2019 and 2018, our accounts receivable, net balance was $19.0
million and $19.6 million, respectively, which was net of an allowance for doubtful accounts of $34,000 and $358,000 as of
December 31, 2019 and 2018, respectively. During 2019, the allowance for doubtful accounts decreased by $324,000
primarily due to the deconsolidation of Beijing JiYa Semiconductor Material Co., Ltd. as of March 11, 2019. There were no
changes in the allowance for doubtful accounts in 2018. If actual uncollectible accounts differ substantially from our
estimates, revisions to the estimated allowance for doubtful accounts would be required, which could have a material
impact on our financial results.
Warranty Reserve
We maintain a warranty reserve based upon our claims experience during the prior twelve months and any
pending claims and returns of which we are aware. Warranty costs are accrued at the time revenue is recognized. As of
December 31, 2019 and 2018, accrued product warranties totaled $387,000 and $236,000, respectively. The increase in
accrued product warranties is primarily attributable to increased claims for quality issues experienced by customers. If
actual warranty costs or pending new claims differ substantially from our estimates, revisions to the estimated warranty
liability would be required, which could have a material impact on our financial condition and results of operations for
future periods.
Inventory Valuation
Inventories are stated at the lower of cost (approximated by standard cost) or net realizable value. Cost is
determined using 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 in light of current market conditions in order to identify excess and obsolete inventory, and we provide a
valuation allowance for certain inventories based upon the age and quality of the product and the projections for sale of the
completed products. As of December 31, 2019 and 2018, we had an inventory reserve of $16.4 million and $14.8
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million, respectively, for excess and obsolete inventory and $91,000 and $18,000, respectively, for lower of cost or net
realizable value reserves. If actual demand for our products were to be substantially lower than estimated, additional
inventory adjustments for excess or obsolete inventory might be required, which could have a material impact on our
business, financial condition and results of operations.
Impairment of Investments
We classify marketable investments in debt and equity securities as available-for-sale securities in accordance with
ASC Topic 320, Investments—Debt and Equity Securities. All available-for-sale securities with a quoted market value
below cost (or adjusted cost) are reviewed in order to determine whether the decline is other-than-temporary. Factors
considered in determining whether a loss is temporary include the magnitude of the decline in market value, the length of
time the market value has been below cost (or adjusted cost), credit quality, and our ability and intent to hold the securities
for a period of time sufficient to allow for any anticipated recovery in market value.
We also invest in equity instruments of privately-held raw material companies in China for business and strategic
purposes. Investments in our unconsolidated joint venture companies are classified as other assets and accounted for under
either the equity or cost method, depending on whether we have the ability to exercise significant influence over their
operations or financial decisions. We monitor our investments for impairment and record reductions in carrying value when
events or changes in circumstances indicate that the carrying value may not be recoverable. Determination of impairment is
highly subjective and is based on a number of factors, including an assessment of the strength of the subsidiary’s
management, the length of time and extent to which the fair value has been less than our cost basis, the financial condition
and near-term prospects of the subsidiary, fundamental changes to the business prospects of the subsidiary, share prices of
subsequent offerings, and our intent and ability to hold the investment for a period of time sufficient to allow for any
anticipated recovery in our carrying value.
For the year ended December 31, 2019, we recorded an impairment charge of $1.1 million for a germanium
materials company in China in which we have a 25% ownership interest. After receiving such company’s preliminary first
quarter 2019 financial results in early April 2019 and its projections for significant losses going forward, we determined
that this asset was fully impaired and wrote the asset balance down to zero. For the year ended December 31, 2018, we had
no impairment charges. For the year ended December 31, 2017, we recorded an impairment charge of $313,000 for one of
the gallium companies. During the first quarter of 2017, management determined it unlikely that this company will recover
from the difficult pricing environment and we wrote the investment down to zero.
Fair Value of Investments
ASC 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 1
instruments 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 similar
instruments in markets with insufficient volume or infrequent transactions (less active markets), issuer bank statements,
credit ratings, non-binding market consensus prices that can be corroborated with observable market data, model-derived
valuations in which all significant inputs are observable or can be derived principally from or corroborated with observable
market data for substantially the full term of the assets or liabilities, or quoted prices for similar assets or liabilities. These
Level 2 instruments require more management judgment and subjectivity compared to Level 1 instruments, including:
·
Determining which instruments are most comparable to the instrument being priced requires management to
identify 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
security being priced.
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·
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
marketable debt instruments using non-binding market consensus prices that are corroborated with observable
market data or pricing models, such as discounted cash flow models, with all significant inputs derived from or
corroborated with observable market data.
Level 3 instruments include unobservable inputs to the valuation methodology that are significant to the
measurement of fair value of assets or liabilities. The determination of fair value for Level 3 instruments requires the most
management judgment and subjectivity.
We place short-term foreign currency hedges that are intended to offset the potential cash exposure related to
fluctuations in the exchange rate between the United States dollar and Japanese yen. We measure the fair value of these
foreign currency hedges at each month end and quarter end using current exchange rates and in accordance with generally
accepted accounting principles. At quarter end any foreign currency hedges not settled are netted in “Accrued liabilities” on
the consolidated balance sheet and classified as Level 3 assets and liabilities. As of December 31, 2019 and 2018, the net
change in fair value from the placement of the hedge to settlement at each month end during the quarter had a de minimis
impact to the consolidated results.
Impairment of Long-Lived Assets
We 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
compare the carrying value of the long-lived assets to the projection of future undiscounted cash flows attributable to such
assets. In the event that the carrying value exceeds the future undiscounted cash flows, we record an impairment charge
against income equal to the excess of the carrying value over the asset’s fair value. Fair values are determined based on
quoted market values, discounted cash flows or internal and external appraisals, as applicable. Assets held for sale are
carried at the lower of carrying value or estimated net realizable value. We had no “Assets held for sale” or any impairment
of long-lived assets on the consolidated balance sheets as of December 31, 2019 and 2018.
Stock-Based Compensation
We 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 model
to estimate the grant date fair value of stock options, which requires the input of highly subjective assumptions, including
estimating stock price volatility and expected term. Historical volatility of our stock price was used while the expected term
for our options was estimated based on historical option exercise behavior and post-vesting forfeitures of options, and the
contractual term, the vesting period and the expected term of the outstanding options. Further, we apply an expected
forfeiture rate in determining the amount of share-based compensation. We use historical forfeitures to estimate the rate of
future forfeitures. Changes in these inputs and assumptions can materially affect the measure of estimated fair value of our
stock compensation. The cost of restricted stock awards is determined using the fair value of our common stock on the date
of grant.
We recognize the compensation costs net of an estimated forfeiture rate over the requisite service period of the
options award, which is generally the vesting term of four years. Compensation expense for restricted stock awards is
recognized over the vesting period, which is generally one, three or four years. Stock-based compensation expense is
recorded in cost of revenue, research and development, and selling, general and administrative expenses. (see Note 1—
Summary of Significant Accounting Policies—Stock‑Based Compensation).
Income Taxes
We account for income taxes in accordance with ASC topic 740, Income Taxes (“ASC 740”), which requires that
deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the
book and tax bases of recorded assets and liabilities. ASC 740 also requires that deferred tax assets be reduced by a
valuation allowance if it is more likely than not that a portion of the deferred tax asset will not be realized.
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Our deferred tax assets have been reduced to zero by valuation allowance.
We provide for income taxes based upon the geographic composition of worldwide earnings and tax regulations
governing each region, particularly China. The calculation of tax liabilities involves significant judgment in estimating the
impact of uncertainties in the application of complex tax laws, particularly in foreign countries such as China.
See Note 12—”Income Taxes” in the consolidated financial statements for additional information.
Results of Operations
Overview
We were founded in 1986 to commercialize and enhance our proprietary vertical gradient freeze (VGF)
technology for producing high-performance compound semiconductor substrates or wafers. We have one operating
segment and two product lines: specialty material substrates and raw materials used to make such substrates or other related
products. We recorded our first substrate sales in 1990 and our substrate products currently include indium phosphide (InP),
gallium arsenide (GaAs) and germanium (Ge) substrates used to produce semiconductor devices for use in applications
such as fiber optic and wireless telecommunications, light emitting diodes (LEDs), lasers and for solar cells for space and
terrestrial photovoltaic applications. We also sell raw materials, including gallium and germanium, through our
participation in majority‑ and minority‑owned subsidiaries and joint ventures.
Operating Results
We manufacture all of our products in the People’s Republic of China (PRC or China), which generally has
favorable costs for facilities and labor compared with comparable facilities in the United States, Europe or Japan. Our
supply chain includes partial ownership of raw material companies in China (joint ventures). We believe this supply chain
arrangement provides us with pricing advantages, reliable supply and enhanced sourcing lead-times for key raw materials
which are central to our final manufactured products.
Our annual revenue decreased in 2019 from $102.4 million in 2018 to $83.3 million in 2019. This was a decrease
of 18.7%. For the years ended in 2018, 2017 and 2016 our revenue grew each year. Our revenue increased in 2018 by 4%
to $102.4 million, in 2017 by 21% to $98.7 million and in 2016 by 5% to $81.3 million. Our gross margin declined in 2019
to 29.8%. For the years ended in 2018, 2017 and 2016 our gross margin grew each year. Gross margins improved to
36.2% of total revenue in 2018 from 34.9% of total revenue in 2017 and from 32.4% of total revenue in 2016. During the
four years from 2012 to 2015 our revenue declined, primarily as a result of the adoption of an alternative technology, SOI,
which entered the market in 2011. SOI enabled the RF switching chip in cell phones to function satisfactorily at a reduced
cost. Before 2011, silicon did not perform adequately in this function due to power consumption, heat and speed issues.
In 2014, our revenue from InP began to grow and, in 2014 and 2015, the InP annual growth rate exceeded 50%
year on year. This mitigated the reduction in revenue from gallium arsenide and enabled us to return to annual growth in
2016. During this period, we believe our GaAs wafer business stabilized and our manufacturing yields improved. Our
outlook for GaAs wafer substrates today is positive, as it is for InP and Ge substrates. The underlying end markets needing
our wafer substrates are growing. For example, InP wafer substrates are used for silicon photonics/data centers, passive
optical networks and, more recently, 5G. GaAs wafer substrates are used in LED lighting, industrial lasers and cell
phones. We are continuing to improve our six-inch low defect density or low EPD GaAs substrates that are required for
3D-sensing using VCSELs. We believe the relocation of our GaAs manufacturing line will enable us to add capacity
quickly for GaAs and InP in the future if market demands so require.
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Revenue
Product Type:
Substrates
Raw materials and
other
Total revenue
Years Ended Dec. 31
2019
2018
2017
2018 to 2019
2017 to 2018
Increase
(Decrease) % Change
Increase
(Decrease) % Change
$ 67,849 $
81,008 $
78,619 $ (13,159)
(16.2)% $
2,389
15,407
$ 83,256 $
21,389
102,397 $
(5,982)
20,054
98,673 $ (19,141)
(28.0)%
(18.7)% $
1,335
3,724
3.0 %
6.7 %
3.8 %
Revenue decreased $19.1 million, or 18.7% in 2019 from $102.4 million in 2018. The $13.2 million decrease in
wafer substrate sales was the result of weaker GaAs demand in LED sensors used in the automobile industry and the
industrial sensor market. In addition, GaAs sales into wireless applications decreased. Revenue from Ge wafer substrates
also decreased, primarily as a result of lower demand from our customers in China. These decreases were partially offset
by an increase in InP revenue. The $6.0 million raw materials revenue decrease as compared to the same period in 2018
was primarily the result of the absence of revenue from raw gallium sales due to the deconsolidation of JiYa as of March
11, 2019. In addition there was a reduction in shipments of purified gallium due to lower market demand.
Revenue increased $3.7 million, or 3.8% in 2018 from $98.7 million in 2017. The $2.4 million increase in wafer
substrate sales primarily came from growth of our InP and Ge wafer substrate sales in 2018, which is partially offset by a
modest decrease of our GaAs wafer substrate sales as compared to the same period of 2017. The $1.3 million increase in
raw materials sales from our consolidated subsidiaries came from a 31% increase in raw gallium sales and a 28% increase
in pBN sales as compared to 2017, which was partially offset by the decrease in purified gallium sales from one of our
consolidated subsidiaries. During 2018, the average selling prices of our wafer substrates decreased slightly. The revenue
increase was the result of higher unit volume in 2018 as compared to the same period in 2017.
Revenue by Geographic Region
Year Ended Dec. 31,
2019
2018
2017
($ in thousands)
2018 to 2019
2017 to 2018
Increase
(Decrease) % Change
Increase
(Decrease) % Change
China
$ 26,796
$ 31,492
$ 24,962
$ (4,696)
(14.9)% $ 6,530
26.2 %
% of total revenue
Europe (primarily Germany)
% of total revenue
32 %
31 %
25 %
18,178
22,013
23,956
(3,835)
(17.4)% (1,943)
(8.1)%
22 %
21 %
24 %
Taiwan
16,204
20,078
18,279
(3,874)
(19.3)% 1,799
9.8 %
% of total revenue
19 %
20 %
19 %
North America (primarily the
United States)
% of total revenue
Asia Pacific (excluding China,
Taiwan and Japan)
8,228
10,021
8,352
(1,793)
(17.9)% 1,669
20.0 %
10 %
10 %
9 %
7,592
8,488
9,866
(896)
(10.6)% (1,378)
(14.0)%
% of total revenue
9 %
8 %
10 %
Japan
6,258
10,305
13,258
(4,047)
(39.3)% (2,953)
(22.3)%
% of total revenue
8 %
10 %
13 %
Total revenue
$ 83,256
$ 102,397
$ 98,673
$ (19,141)
(18.7) % $ 3,724
3.8 %
Sales to customers located outside of North America represented approximately 90%, 90% and 91% of our
revenue during 2019, 2018 and 2017, respectively.
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Revenue from customers in China decreased in 2019 by 14.9%, primarily due to lower demand for our Ge wafer
substrates. Revenue from customers in Europe decreased by 17.4%, primarily due to weaker demand for GaAs wafer
substrates used in LED sensors for the automobile industry. In addition, GaAs sales into wireless applications decreased.
Revenue from customers in Taiwan decreased in 2019 by 19.3%, primarily due to a softening of demand from InP
customers and a slow-down in both LED and wireless applications using GaAs substrate wafers. Revenue from customers
in North America decreased by 17.9% as a result of lower demand for GaAs. In addition revenue from one customer in
Canada decreased as a result of weak demand from its primary optical device customer. Revenue from customers in Asia
Pacific decreased by 10.6% as a result of lower demand for GaAs wafers used to produce industrial sensors. Revenue from
customers in Japan decreased in 2019 by 39.3% as a result of lower demand for raw materials. In addition, there was lower
demand for GaAs used in wireless applications and there was an aggressive inventory reduction program at one of our
customers.
Revenue from customers in China increased in 2018 by 26.2%, primarily due to an increase of $1.2 million, or
12%, from raw materials sales and an increase of $5.3 million, or 36%, from wafer substrate sales. Sales of all three of our
wafer substrate products in China increased in 2018. Revenue from customers in Europe decreased by 8.1%, primarily due
to a decrease of $1.6 million, or 75.5%, in gallium sales from our consolidated joint ventures and from a decrease of $0.7
million, or 3%, from wafer substrate sales. Revenue from customers in Japan decreased in 2018 by 22.3% due to a decrease
of $3.9 million in GaAs wafer substrate sales. However, sales from InP and Ge wafer substrates and raw materials in Japan
all increased in 2018 as compared to 2017. Revenue from customers in Taiwan increased by 9.8%, primarily due to strong
demand for InP substrates used in silicon photonics, specifically in data center expansions and upgrades.
Gross Margin
Gross profit
Gross Margin %
2019
Year Ended Dec. 31,
2018
2017
Increase
(Decrease) % Change
Increase
(Decrease) % Change
2018 to 2019
2017 to 2018
($ in thousands)
$ 24,825
$ 37,047
$ 34,475
$ (12,222)
(33.0)% $
2,572
7.5 %
29.8 %
36.2 %
34.9 %
Gross profit decreased $12.2 million in 2019 as compared to 2018. Gross margin in 2019 was 29.8% as compared
to 36.2% in 2018. The decrease in gross profit is attributed to the lower sales volume in 2019 as compared to 2018. In
addition our manufacturing costs did not drop commensurately, particularly in GaAs.
Gross margin increased to 36.2% of total revenue in 2018 from 34.9% of total revenue in 2017. Gross margin
increased in 2018 as a result of an increase in gross margins from raw materials sales, particularly pBN crucibles, and InP
wafer substrates offset by a slight decrease in gross margins from sales of GaAs wafer substrates. Substrate gross margin
slightly decreased to 36.2% of substrate revenue in 2018 from 37.4% of revenue in 2017 and raw materials gross margin
increased to 36.2% of raw materials revenue in 2018 from 25.5% of raw materials revenue in 2017. Gross profit increased
primarily due to favorable substrate product mix, increased revenue and improvement in raw materials gross margin.
Selling, General and Administrative Expenses
2019
Years Ended Dec. 31
2018
2017
Increase
(Decrease) % Change
Increase
(Decrease) % Change
2018 to 2019
2017 to 2018
Selling, general and
administrative expenses
% of total revenue
($ in thousands)
$ 19,305
$ 19,003
23.2 %
18.6 %
$ 17,009
$
17.2 %
302
1.6 % $
1,994
11.7 %
Selling, general and administrative expenses increased $0.3 million, or 1.6%, to $19.3 million for 2019 compared
to $19.0 million for 2018. The higher selling, general and administrative expenses were primarily from higher
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stock compensation expenses, VAT tax, legal expenses and consulting expenses related to our building construction in
China which were partially offset by lower office supplies, facility and freight related expenses. Selling, general and
administrative expenses increased $2.0 million, or 11.7%, to $19.0 million for 2018 compared to $17.0 million for 2017.
The higher selling, general and administrative expenses were primarily from higher personnel-related costs from hiring
additional staff in China in connection with the relocation of our gallium arsenide and germanium production lines and a
new direct sales professional in Europe, higher travel expenses related to traveling for customer visits and to our new
manufacturing sites and higher stock compensation expenses, which were partially offset by lower professional service fees
and lower sales commission expense that resulted from the termination of our European sales representative.
Research and Development Expenses
2019
Years Ended Dec. 31
2018
2017
Increase
(Decrease) % Change
Increase
(Decrease) % Change
2018 to 2019
2017 to 2018
Research and development
$
% of total revenue
($ in thousands)
5,834
$
7.0 %
5,897
$
5.8 %
4,827
$
4.9 %
(63) (1.1)
% $
1,070
22.2 %
Research and development expenses decreased $0.1 million, or 1.1%, to $5.8 million in 2019 from $5.9 million in
2018. The decrease in research and development expenses in 2019 was primarily due to lower personnel costs in one of
our consolidated subsidiaries which was partially offset by higher personnel-related costs in North America.
Research and development expenses increased $1.1 million, or 22.2%, to $5.9 million in 2018 from $4.8 million
in 2017. The increase in research and development expenses in 2018 was primarily due to the increased use of raw
materials for product development programs, particularly for low EPD-related programs and for improving Ge performance
specifications, higher personnel-related costs and higher depreciation expenses.
Interest Income, Net
2019
Years Ended Dec. 31
2018
2017
Increase
(Decrease) % Change
Increase
(Decrease) % Change
2018 to 2019
2017 to 2018
Interest income, net
$
% of total revenue
($ in thousands)
217
$
0.3 %
528
$
0.5 %
461
$
0.5 %
(311)
(58.9)% $
67
14.5 %
Interest income, net decreased in 2019 as compared to the same period in 2018, primarily due to lower investment
balances in 2019. Interest income, net increased in 2018 as compared to the same period in 2017, primarily due to higher
market interest rates.
Equity in Loss of Unconsolidated Joint Venture Companies
2019
Years Ended Dec. 31
2018
2017
Increase
(Decrease) % Change
Increase
(Decrease) % Change
2018 to 2019
2017 to 2018
Equity in loss of
unconsolidated joint
ventures
% of total revenue
($ in thousands)
$ (1,876)
$ (1,080)
(2.3)%
(1.1)%
$ (1,694)
$
(1.7)%
796
73.7 % $
(614)
(36.2)%
Equity in loss of unconsolidated joint ventures is the aggregate net loss from our minority-owned supply chain
joint venture companies that are not consolidated. Equity in loss of unconsolidated joint ventures increased $0.8 million to
a loss of $1.9 million in 2019 from a loss of $1.1 million in 2018 as our unconsolidated joint ventures reported worse
performance in 2019 as compared to 2018. The loss in 2019 includes an impairment charge of $1.1 million from the
germanium mining company in our raw material supply chain. The decrease of $0.6 million in 2018 from 2017 resulted
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from price increases of raw materials in 2018. Further, there were no impairment charges in 2018 as compared to a charge
of $313,000 in 2017.
Equity in loss of unconsolidated joint ventures decreased $0.6 million to a loss of $1.1 million in 2018 from a loss
of $1.7 million in 2017 as our unconsolidated joint ventures reported better performance in 2018 as compared to 2017. The
loss in 2018 primarily came from a single minority-owned supply chain joint venture company that was required to
temporarily shut down during the fourth quarter of 2018 to install manufacturing improvements mandated by a regional
environmental agency. This resulted in a $1.1 million charge in the fourth quarter and a cumulative loss of $1.4 million for
this entity in 2018. The decrease of $0.6 million in 2018 from 2017 resulted from price increases of raw materials in
2018. Further, there were no impairment charges in 2018 as compared to a charge of $313,000 in 2017.
Other Income (expense), Net
2019
Years Ended Dec. 31
2018
2017
Increase
(Decrease) % Change
Increase
(Decrease) % Change
2018 to 2019
2017 to 2018
Other income (expense), net $
% of total revenue
($ in thousands)
947
$
1.1 %
352
$
0.3 %
(553)
$
(0.6)%
595
169.0 % $
905
163.7 %
Other income (expense), net increased $0.6 million to an income of $0.9 million for 2019 as compared to
an income of $0.4 million in 2018, primarily due to compensation received from the China government by one of our
consolidated subsidiaries for relocating their facility outside of Nanjing. In addition, our Beijing facility received an
economic stimulus grant.
Other income, net increased $0.9 million to an income of $0.4 million for 2018 as compared to a loss of $0.6
million in 2017, primarily due to a higher foreign exchange gain in 2018 as compared to 2017.
Provision for Income Taxes
2019
Years Ended Dec. 31
2018
2017
Increase
(Decrease) % Change
Increase
(Decrease) % Change
2018 to 2019
2017 to 2018
Provision for income taxes $
% of total revenue
($ in thousands)
938
$
0.9 %
562
$
0.7 %
792
$
0.8 %
(376)
(40.1)% $
146
18.4 %
Provision for income taxes for 2019 and 2018 were $0.6 million and $0.9 million, respectively, which were mostly
related to our wholly owned subsidiary in China and our partially owned consolidated raw material companies. No income
taxes or benefits have been provided for U.S. operations as the income in the U.S. had been fully offset by utilization of
federal and state net operating loss carryforwards. Additionally, there is uncertainty of generating future profit in the U.S.,
which has resulted in our deferred tax assets being fully reserved. Our estimated tax rate can vary greatly from year to year
because of the change or benefit in the mix of taxable income between our U.S. and China-based operations.
Due to our uncertainty regarding our future profitability in the U.S., we recorded a full valuation allowance
against our net deferred tax assets of $20 million in 2019, $20 million in 2018 and $22 million in 2017.
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Net (Income) Loss Attributable to Noncontrolling Interests
2019
Years Ended Dec. 31
2018
2017
Increase
(Decrease) % Change
Increase
(Decrease) % Change
2018 to 2019
2017 to 2018
($ in thousands)
Net (income) loss
attributable to
noncontrolling interests
% of total revenue
$ (1,012)
$ (1,355)
$
(1.3)%
(1.2)%
$
87
0.1 %
(343)
(25.3)% $
1,442
1,657.5 %
The decrease in noncontrolling interests’ share of income for 2019 as compared to 2018 was due to lower
profitability from one of our consolidated subsidiaries in China.
The increase in noncontrolling interests’ share of income for 2018 as compared to the 2017 was due to higher
profitability from all of our consolidated subsidiaries in China.
Liquidity and Capital Resources
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Effect of exchange rate changes
Net change in cash and cash equivalents
Cash and cash equivalents—beginning year
Cash and cash equivalents—end of year
Short and long-term investments—end of year
Total cash, cash equivalents and short-term and long-term investments
2019
Year Ended December 31,
2018
($ in thousands)
2017
3,218 $
$ 12,658 $
(8,328)
6,186
(150)
10,366
16,526
26,892
9,427
8,615
(36,458)
(30,827)
35,638
213
405
(430)
8,200
(27,826)
36,152
44,352
44,352
16,526
32,608
22,846
$ 36,319 $ 39,372 $ 76,960
We consider cash and cash equivalents, short-term investments and long-term investments as liquid and available
for use within two years in our current operations. Short-term investments and long-term investments are comprised of
money market accounts, certificates of deposit, corporate bonds and notes, and government securities. As of December 31,
2019, we and our consolidated joint ventures held approximately $16.5 million in cash and investments in foreign bank
accounts. This consists of $15.1 million held by our wholly owned subsidiaries in China and $1.4 million held by our
consolidated subsidiary in China.
Total cash and cash equivalents, short-term and long-term investments decreased by $3.1 million in 2019. As
of December 31, 2019, our principal source of liquidity was $36.3 million, which consisted of cash and cash equivalents of
$26.9 million and short-term investments of $9.4 million. In 2019, cash and cash equivalents increased by $10.4 million
and short-term and long-term investments decreased by $13.4 million. The increase in cash and cash equivalents of $10.4
million in 2019 was primarily due to net cash provided by operating activities of $12.7 million and financing activities of
$6.2 million and partially offset by net cash used in investing activities of $8.3 million and the effect of exchange rate
changes of $0.2 million.
Total cash and cash equivalents, short-term and long-term investments decreased by $37.6 million in 2018. As
of December 31, 2018, our principal source of liquidity was $39.4 million, which consisted of cash and cash equivalents of
$16.5 million, short-term investments of $22.1 million and long-term investments of $0.7 million. In 2018, cash and cash
equivalents decreased by $27.8 million and short-term and long-term investments decreased by $9.8 million. The decrease
in cash and cash equivalents of $27.8 million in 2018 was primarily due to net cash used in investing activities of $30.8
million, primarily due to property, plant and equipment activities for the new manufacturing sites in China, and the effect of
exchange rate changes of $0.4 million, and was partially offset by net cash provided by operating activities of $3.2 million
and net cash provided by financing activities of $0.2 million.
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Net cash provided by operating activities of $12.7 million for 2019 was primarily comprised of an adjustment of
non-cash items of depreciation and amortization of $5.5 million, stock-based compensation of $2.3 million, impairment
charge on equity investee of $1.1 million, loss on equity method investments of $1.0 million, return on equity method
investments of $0.4 million, loss on disposal of equipment of $0.1 million, net change in operating assets and liabilities of
$4.0 million offset in part by our net loss of $1.6 million and gain from deconsolidation of a subsidiary of $0.2 million. The
$4.0 million net change in operating assets and liabilities primarily resulted from a $8.9 million decrease in inventories, a
$2.9 million decrease in prepaid expenses and other current assets, a $0.4 million decrease in accounts receivable, a $0.1
million increase in other long-term liabilities, including royalties offset in part by a $4.0 million decrease in accrued
liabilities, a $3.1 million decrease in accounts payable and a $1.2 million increase in other assets.
Net cash provided by operating activities of $3.2 million for 2018 was primarily comprised of our net income of
$11.0 million, adjusted for non-cash items of depreciation and amortization of $4.9 million, stock-based compensation of
$1.9 million, loss on equity method investments of $1.1 million, amortization of marketable securities premium of $0.2
million offset in part by gain on disposal of property, plant and equipment of $0.1 million, which were partially offset by a
net change of $15.7 million in operating assets and liabilities. The $15.7 million net change in operating assets and
liabilities primarily resulted from a $14.6 million increase in inventories, a $4.6 million increase in prepaid expenses and
other current assets, a $1.9 million increase in other assets, a $0.3 million decrease in other long-term liabilities offset in
part by a $0.5 million increase in accrued liabilities, a $2.8 million decrease in accounts receivable, and a $2.3 million
increase in accounts payable.
Net cash provided by operating activities of $8.6 million for 2017 was primarily comprised of our net income of
$10.1 million, 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, amortization of marketable securities premium of $0.2 million, which were partially offset by a net change of $9.1
million in operating assets and liabilities. The $9.1 million net change in operating assets and liabilities primarily resulted
from a $8.0 million increase in accounts receivable, a $4.7 million increase in inventories, a $2.3 million increase in
prepaid expenses and other current assets, offset in part by a $4.4 million increase in accounts payable and a $1.6 million
increase in accrued liabilities.
Net cash used in investing activities of $8.3 million for 2019 was primarily due to property, plant and equipment
of $21.8 million in preparation for our new manufacturing sites, additional equipment for our Beijing site and equipment
and facility costs incurred by our consolidated subsidiaries and the purchases of marketable investment securities of $8.7
million, which were partially offset by proceeds from maturities and sales of available-for-sale securities of $22.2 million.
Net cash used in investing activities of $30.8 million for 2018 was primarily due to property, plant and equipment
of $40.6 million in preparation for our new manufacturing sites, additional equipment for our Beijing site and equipment
and facility costs incurred by our consolidated subsidiaries and the purchases of marketable investment securities of $9.9
million, which were partially offset by proceeds from maturities and sales of available-for-sale securities of $19.6 million
and proceeds from sale of property, plant and equipment of $0.1 million.
Net cash used in investing activities of $36.5 million for 2017 was primarily from the purchases of marketable
investment securities of $30.0 million and investments in property, plant and equipment of $21.4 million in preparation for
our new manufacturing sites, additional equipment for our Beijing site and equipment and facility costs incurred by our
consolidated subsidiaries, which were partially offset by proceeds from maturities and sales of available-for-sale securities
of $14.8 million.
Net cash provided by financing activities was $6.2 million for 2019, which mainly consisted of the proceeds of
$5.8 million from short-term loan in China, $0.3 million from the exercise of common stock options, $0.4 from sale of
previously consolidated subsidiary shares partially offset by the considerations paid in cash to repurchase subsidiary shares
from noncontrolling interests of $0.3 million.
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Net cash provided by financing activities was $0.2 million for 2018, which mainly consisted of the proceeds of
$0.6 million from the exercise of common stock options, partially offset by the considerations paid in cash to repurchase
subsidiary shares from noncontrolling interests of $0.4 million.
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
$2.5 million 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 of proceeds from common stock options exercised.
On October 27, 2014, our Board of Directors approved a stock repurchase program pursuant to which we may
repurchase up to $5.0 million of our outstanding common stock. These repurchases can be made from time to time in the
open market and are funded from our existing cash balances and cash generated from operations. During 2015, we
repurchased 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 2019, 2018 and
2017 under this program. As of December 31, 2019, 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
of directors. We have never paid or declared any dividends on the Series A preferred stock. By the terms of the Series A
preferred stock, so long as any shares of Series A preferred stock are outstanding, neither the 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 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 amount in “Accrued liabilities” in our consolidated balance sheets. At the time we pay this accrued liability, our cash
and cash equivalents would be reduced. We account for the cumulative year to date dividends on the Series A preferred
stock when calculating our earnings per share. See Item 5, Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities in Part II.
The Beijing city government is moving its offices into the area where our original manufacturing facility is
currently located and is in the process of moving thousands of government employees into this area. The government has
constructed showcase tower buildings and overseen the establishment of new apartment complexes, retail stores and
restaurants. An amusement park is being constructed within a few miles of our facility. To create room and upgrade the
district, the city instructed virtually all existing manufacturing companies, including AXT, to relocate all or some of their
manufacturing lines. To mitigate our risks and maintain our production schedule, we moved our gallium arsenide
equipment in stages. By December 31, 2019, we have ceased all crystal growth for gallium arsenide in our original
manufacturing facility in Beijing and have transferred 100% of our ingot production to our new manufacturing facility in
Kazuo, a city approximately 250 miles from Beijing. We transferred our wafer processing equipment for gallium arsenide
to our new manufacturing facility in Dingxing, a city approximately 75 miles from Beijing. Our key focus is now
transferring volume production of the wafer processing steps for gallium arsenide to Dingxing. We expect to spend
approximately $5 million in capital expenditures for our gallium arsenide manufacturing line in 2020 and are considering
additional investments in our indium phosphide manufacturing line.
One of our consolidated raw material joint ventures, JinMei, is in the process of relocating its manufacturing
operations to the city of Kazuo, located in the province in Liaoning near the Inner Mongolia Autonomous Region, very
near our own location. Currently, JinMei expects to invest approximately $3.0 million to 3.5 million related to the new
facilities in 2020. In July 2017, our wholly-owned subsidiary, Tongmei, provided an inter-company loan to JinMei in the
amount of $768,000 in preparation for the acquisition of the land use rights and the construction of a new building. The
inter-company loan carries an interest rate of 4.9% per annum and is due on June 30, 2023. As of December 31, 2019,
JinMei repaid principal and interest totaling $490,000 to Tongmei. As of December 31, 2019, the remaining balance of
principal and interest totaled $285,000. BoYu, our consolidated pBN crucible joint venture will invest approximately $4.0
million to $4.5 million.
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We believe that we have adequate cash and investments to meet our operating needs over the next twelve months.
If our sales decrease, however, our ability to generate cash from operations will be adversely affected which could
adversely affect our future liquidity, require us to use cash at a more rapid rate than expected, and require us to seek
additional capital.
On October 24, 2016, we filed with the SEC a registration statement on Form S-3, pursuant to which we may offer
up to $60 million of common stock, preferred stock, depositary shares, warrants, debt securities and/or units in one or more
offerings and in any combination. On November 4, 2016, the SEC declared the registration statement effective. On
November 4, 2019, the registration statement expired.
On March 2, 2017, we filed with the SEC a final prospectus supplement, pursuant to which we offered and sold
5,307,692 shares of our common stock. The net proceeds are being used for the relocation of our gallium arsenide
production line, for equipment capital expenditures, working capital for accounts receivable and inventory, possible
acquisitions 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 set
forth below under Item 1A. “Risk Factors” above.
Bank Loans and Line of Credit
In September 2018, Tongmei entered into a credit facility with Industrial and Commercial Bank of China
(“ICBC”) in China with a $2.9 million line of credit at an annual interest rate of approximately 0.4% over the current Loan
Prime Rate published by ICBC. Accrued interest is calculated and paid monthly. The annual interest rate was
approximately 4.4%. This credit line was collateralized by Tongmei’s land-use right and all of its buildings located at its
facility in Beijing. The primary intended use of the credit facility was for general purposes, which may include working
capital, capital expenditures and other corporate expenses. In September 2018, we borrowed $291,000 against this credit
line. The repayment of the full amount was due in September 2019. However, on December 26, 2018, we repaid the
principal of $291,000 and interest of $3,000 and terminated this credit line. We decided to terminate this loan because we
were able to secure a larger bank loan in the U.S. and our management believed that to secure bank loans in the future
based on the two new manufacturing sites may have more strategic advantages as compared to have a loan based on the
Beijing site.
On November 6, 2018, the Company entered into a Credit Agreement (the “Credit Agreement”), by and between
the Company and Wells Fargo Bank, National Association (“Wells Fargo Bank”), which established a $10 million secured
revolving line of credit with a $1.0 million letter of credit sublimit facility. The revolving credit facility is collateralized by
substantially all of the assets of the Company located within the United States, subject to certain exceptions. The
commitments under the Credit Agreement expire on November 30, 2020 and any loans thereunder will bear interest at a
rate based on the daily one-month London Inter-bank Offered Rate (“LIBOR”) for the applicable interest period plus a
margin of 2.00%. As of December 31, 2019, no loans or letters of credit were outstanding under the Credit Agreement. On
February 5, 2020, the Company entered into the First Amendment to Credit Agreement (the “First Amendment”), by and
between the Company and Wells Fargo Bank, which reduced the $10 million secured revolving line of credit under the
Credit Agreement to $7 million. The commitments under the Credit Agreement, as amended by the First Amendment,
expire on November 30, 2020 and any loans thereunder will bear interest at a rate based on the daily one-month LIBOR for
the applicable interest period plus a margin of 2.5%. As of the date of this Annual Report on Form 10-K, no loans or letters
of credit were outstanding under the Credit Agreement, as amended by the First Amendment.
On August 9, 2019, Tongmei entered into a credit facility (the “Credit Facility”) with the Bank of China with a
$5.8 million line of credit at an annual interest rate of approximately 0.4% over the average interest rate quoted by the
National Interbank Funding Center. Accrued interest is calculated monthly and paid quarterly. The annual interest rate was
approximately 4.7% as of December 31, 2019. The Credit Facility is collateralized by Baoding Tongmei Xtal Technology
Co., Ltd.’s land use rights and all of its buildings located at its facility in Dingxing. The primary intended use of the Credit
Facility is for general purposes, which may include working capital and other corporate expenses.
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On August 9, 2019, we borrowed $2.8 million against the Credit Facility. The repayment of the full amount is due
on August 9, 2020. On September 12, 2019 we borrowed an additional $2.8 million against the Credit Facility. The
repayment of the full amount is due on September 12, 2020, unless the parties agree to a renewal. As of December 31,
2019, $5.7 million was included in “Bank loan” in our consolidated balance sheets.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet financing arrangements and have never established any special purpose
entities as defined under SEC Regulation S-K Item 303(a)(4)(ii). We have not entered into any options on non-financial
assets.
Contractual Obligations
We lease certain office space, warehouse facilities and equipment under long-term operating leases expiring at
various dates through July 2029. The majority of our lease obligations relate to our lease agreement for a nitrogen system to
be used during the manufacturing process for our facility in Dingxing, China. The equipment lease became effective in
August 2019 and will expire in July 2029. There are no variable lease payments, residual value guarantees or any
restrictions or covenants imposed by the equipment lease. The remainder relate to our lease agreement for our facility in
Fremont, California with approximately 19,467 square feet, which expires in 2020. Under the terms of the facility lease
agreement, in May, 2020, we will have the option to extend the term of the lease for an additional three years. We are
reasonably certain to exercise the option in the future. There are no variable lease payments, residual value guarantees or
any restrictions or covenants imposed by the facility lease. All other operating leases have a term of 12 months or less.
Total rent expenses under these operating leases were approximately $306,000, $319,000 and $302,000 for the years ended
December 31, 2019, 2018 and 2017, respectively.
The following table summarizes our contractual obligations as of December 31, 2019 (in thousands):
Contractual Obligations
Operating leases
Total
$
3,664
Less than 1 year
489
$
Payments due by period
1-3
years
4-5
years
More than
5 years
$
1,685
$
534
$
956
We entered into a royalty agreement with Sumitomo effective December 3, 2010 with a term of eight years,
terminating December 31, 2018. We and our related companies were granted a worldwide, nonexclusive, royalty bearing,
irrevocable license to certain patents for the term on the agreement. Under this agreement we could have paid up to $7.0
million in royalty payments over eight years beginning in 2011 based on future royalty bearing sales. This agreement
contained a clause that allowed us to claim a credit, starting in 2013, in the event that the royalty bearing sales for the year
is lower than a pre-determined amount set forth in this agreement. For the year ended December 31, 2018, royalty expense
under this agreement was $565,000, which was net of claim for credit of $10,000. Royalty expense for the year ended
December 31, 2017 was $526,000, which was net of claim for credit of $49,000. In January 2020, we agreed to enter into a
cross license and covenant agreement with Sumitomo that will expire December 31, 2029 and includes annual payments by
us to Sumitomo over a 10-year period in the aggregate amount of $2 million.
Land Purchase and Investment Agreement
We have established a wafer processing production line in Dingxing, China. In addition to a land rights and
building purchase agreement that we entered into with a private real estate development company to acquire our new
manufacturing facility, we also entered into a cooperation agreement with the Dingxing local government. In addition to
pledging its full support and cooperation, the Dingxing local government will issue certain tax credits to us as we achieve
certain milestones. We, in turn, agreed to hire local workers over time, pay taxes when due and eventually demonstrate a
total investment of approximately $90 million in value, assets and capital. The investment will include cash paid 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 deemed value for our
customer list or the end user of our substrates (for example, the end users of the 3-D sensing VCSELs), a deemed value
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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, rather it is
a good faith covenant entered into between AXT and the Dingxing local government. Further, there is no specific penalty
contemplated if either party breaches the agreement, however the agreement does state that each party has a right to seek
from the other party compensation for losses. Under certain conditions, the Dingxing local government may purchase the
land and building at the appraised value. We believe that such cooperation agreements are normal, customary and usual in
China and that the future valuation is flexible. We have a similar agreement with the city of Kazuo, China, although on a
smaller scale. The total investment targeted by AXT in Kazuo is approximately $15 million in value, assets and capital.
Purchase Obligations with Penalties for Cancellation
In the normal course of business, we issue purchase orders to various suppliers. In certain cases, we may incur a
penalty if we cancel the purchase order. As of December 31, 2019, we do not have any outstanding purchase orders that
will incur 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, 2019. The
information for each of these quarters is unaudited but has been prepared on the same basis as the audited consolidated
financial statements. We believe that all necessary adjustments, consisting only of normal recurring adjustments, have been
included in the amounts stated below to present fairly such quarterly information. The operating results for any quarter are
not necessarily indicative of results for any subsequent period.
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Table of Contents
(in thousands, except
for per share amounts)
Revenue
Cost of revenue
Gross profit
Operating expenses:
Dec. 31,
Sept. 30,
June 30,
Mar. 31,
Dec. 31,
Sept. 30,
June 30,
Mar. 31,
2019
2019
2019
2019
2018
2018
2018
2018
Quarters Ended
$ 18,410 $ 19,841 $ 24,797 $ 20,208 $ 22,232 $ 28,626 $ 27,120 $ 24,419
14,846
9,573
14,545
3,865
16,382
5,850
16,110
11,010
16,291
8,506
13,513
6,695
14,082
5,759
18,012
10,614
Selling, general and
administrative
Research and development
Total operating expenses
Income (loss) from operations
Interest income, net
Equity in earnings (loss) of
unconsolidated joint ventures
Other (expense) income, net
Income (loss) before provision
for (benefit from) income
taxes
Provision for (benefit from)
income taxes
Net income (loss)
5,058
1,607
6,665
(2,800)
2
4,755
1,482
6,237
(478)
41
4,769
1,399
6,168
2,338
79
4,723
1,346
6,069
626
95
5,179
1,309
6,488
(638)
114
4,615
1,668
6,283
4,331
133
4,987
1,500
6,487
4,523
139
4,222
1,420
5,642
3,931
142
(226)
1,002
(204)
169
8
(90)
(1,454)
(134)
(1,059)
531
6
87
307
(51)
(334)
(215)
(2,022)
(472)
2,335
(867)
(1,052)
4,557
4,918
3,524
(214)
(1,808)
23
(495)
597
1,738
156
(1,023)
(173)
(879)
410
4,147
367
4,551
334
3,190
Less: Net income
attributable to
noncontrolling interests
Net income (loss) attributable
to AXT, Inc
Net income (loss) attributable
to AXT, Inc. per common
share:
(241)
(403)
(287)
(81)
(182)
(208)
(650)
(315)
$ (2,049) $
(898) $ 1,451 $ (1,104) $ (1,061) $ 3,939 $ 3,901 $ 2,875
Basic
Diluted
$ (0.05) $ (0.02) $
$ (0.05) $ (0.02) $
0.04 $ (0.03) $ (0.03) $
0.04 $ (0.03) $ (0.03) $
0.10 $
0.10 $
0.10 $
0.10 $
0.07
0.07
Weighted average number of
common shares outstanding:
Basic
Diluted
39,636
39,636
39,514
39,514
39,447
40,123
39,352
39,352
39,197
39,197
39,008
40,331
39,001
40,216
38,941
40,364
Recent Accounting Pronouncements
Recent accounting pronouncements are detailed in Note 1 to our Consolidated Financial Statements included in
this Annual Report on Form 10-K.
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Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Foreign Currency Risk
A significant portion of our business is conducted in currencies other than the U.S. dollar. Foreign exchange losses
have had a material adverse effect on our operating results and cash flows in the past and could have a material adverse
effect on our operating results and cash flows in the future. If we do not effectively manage the risks associated with this
currency risk, our revenue, cash flows and financial condition could be adversely affected. Although during 2019 and 2018,
we recorded a foreign exchange gain of $321,000 and $165,000, respectively, during 2017 we recorded net foreign
exchange loss of $602,000, included as part of other (expense) income, net in our consolidated statements of operation. We
incur foreign currency transaction exchange gains and losses due to operations in general. In the future we may experience
foreign exchange losses on our non-functional currency denominated receivables and payables to the extent that we have
not mitigated our exposure. Foreign exchange losses could have a materially adverse effect on our operating results and
cash flows.
Our product sales to Japanese customers are typically invoiced in Japanese yen. As such we have foreign
exchange exposure on our accounts receivable and on any Japanese yen denominated cash deposits. 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 the potential cash exposure
related to fluctuations in the exchange rate between the United States dollar and Japanese yen. We measure the fair value of
these hedges at each month end and quarter end using current exchange rates and in accordance with generally accepted
accounting principles. At quarter end and year end any foreign currency hedges not settled are netted on the consolidated
balance sheet and consolidated balance sheet, respectively, and classified as Level 3 assets and liabilities. As of December
31, 2019 the net change in fair value from the placement of the hedge to settlement at each month end during the quarter
had a de minimis impact to the consolidated results.
The functional currency for our foreign operations is the renminbi, the local currency of China, and in the future
we may establish short term hedges covering renminbi. Most of our operations are conducted in China and most of our
costs are incurred in Chinese renminbi, which subjects us to fluctuations in the exchange rates between the U.S. dollar and
the Chinese renminbi. We incur transaction gains or losses resulting from consolidation of expenses incurred in local
currencies for our Chinese subsidiaries, as well as in translation of the assets and liabilities at each balance sheet date. Our
financial results could be adversely affected by factors such as changes in foreign currency exchange rates or weak
economic conditions in foreign markets, including the revaluation by China of the renminbi, and any future adjustments
that China may make to its currency such as any move it might make to a managed float system with opportunistic
interventions. We may also experience foreign exchange losses on our non-functional currency denominated receivables
and payables.
We currently are using a hedging program to minimize the effects of currency fluctuations relating to the
Japanese yen. While we may apply this program to other currencies, such as the Chinese renminbi, our hedging position is
partial and may not exist at all in the future. It may not succeed in minimizing our foreign currency fluctuation
risks. Our primary objective in holding these instruments is to reduce the volatility of earnings and cash flows associated
with changes in foreign currency. The program is not designated for trading or speculative purposes. The company may
choose not to hedge certain foreign exchange exposures for a variety of reasons, including but not limited to accounting
considerations 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.
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Interest Rate Risk
Cash and cash equivalents earning interest and certain variable rate debt instruments are subject to interest rate
fluctuations. The following table sets forth the probable impact of a 10% change in interest rates (in thousands):
Instrument
Cash and cash equivalents
Investments in marketable debt
Balance as of
December 31,
2019
26,892
9,427
$
Current
Interest
Rate
Projected Annual
Interest
Income
Proforma 10% Proforma 10%
Interest Rate
Increase
Income
Interest Rate
Decline
Income
0.18 % $
2.30 %
$
48 $
217
265 $
43 $
195
238 $
53
239
292
The primary objective of our investment activities is to preserve principal while maximizing income without
significantly increasing risk. Financial instruments that potentially subject us to concentration of credit risk consist
primarily of cash and cash equivalents, short-term investments, and trade accounts receivable. We invest primarily in
money market accounts, certificates of deposit, corporate bonds and notes, and government securities. We are exposed to
credit risks in the event of default by the issuers to the extent of the amount recorded on the consolidated balance sheets.
These securities are generally classified as available-for-sale and consequently are recorded on the balance sheet at fair
value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income, net of
estimated tax. Our cash, cash equivalents and short-term investments and long-term investments are in high-quality
securities placed with major banks and financial institutions and commercial paper. We have no investments in auction rate
securities.
Credit Risk
We perform ongoing credit evaluations of our customers’ financial condition, and limit the amount of credit
extended when deemed necessary, but generally do not require collateral. The credit risk in our accounts receivable is
mitigated by our credit evaluation process and the geographical dispersion of sales transactions. Three customers accounted
for 14%, 13% and 12% of our trade accounts receivable as of December 31, 2019 and three customers accounted for 17%,
12% and 10% of our trade accounts receivable as of December 31, 2018.
Equity Risk
As part of our supply chain strategy, we maintain minority investments in privately-held raw material companies
located in China either invested directly by us and our wholly-own subsidiary or indirectly through our consolidated joint
venture 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
equity or cost method, depending on whether we have the ability to exercise significant influence over their operations or
financial decisions. We monitor our investments for impairment and record reductions in carrying value when events or
changes in circumstances indicate that the carrying value may not be recoverable. We own 25% of a germanium mining
company. In 2019, we wrote down our investment in this company to zero resulting in an impairment charge of $1.1
million. Reasons for other than temporary declines in value include whether the related company would have insufficient
cash flow to operate for the next twelve months, significant changes in the operating performance and changes in market
conditions. As of December 31, 2019 and 2018, we did not maintain any direct investments under the cost method. Our
minority investments under the equity method as of December 31, 2019 and 2018 totaled $6.0 million and $8.4 million,
respectively.
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Item 8. Consolidated Financial Statements and Supplementary Data
The consolidated financial statements, related notes thereto and financial statement schedules required by this item
are listed and set forth beginning on page 64, and are incorporated by reference here. Supplementary financial information
regarding quarterly financial information required by this item is set forth under the caption “Selected Quarterly Results of
Operations” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and is
incorporated by reference here.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated
the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered
by this Annual Report on Form 10-K. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer
have concluded that our disclosure controls and procedures as defined under Exchange Act Rules 13a-15(e) and 15d-15(e)
were effective at the reasonable assurance level to ensure that information required to be disclosed in our Securities
Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the Securities
and Exchange Commission and is accumulated and communicated to management, including our Chief Executive Officer
and our Chief Financial 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 of
reasonable assurance because a control system, no matter how well designed and operated, can provide only reasonable
assurance that the control system’s objectives will be met.
Management’s Report on Internal Control over Financial Reporting
Our 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 a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and
implemented by our Board of Directors, management and other personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
accounting principles generally accepted in the United States of America (“U.S. GAAP”). Internal control over financial
reporting includes those policies and procedures that:
·
·
·
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions
and dispositions of our assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with U.S. GAAP, and that receipts and expenditures are being made only in
accordance with authorizations of our management and directors; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition 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 controls
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may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
Our management, under the supervision and with the participation of our Chief Executive Officer and Chief
Financial Officer, has assessed the effectiveness of our internal control over financial reporting as of December 31,
2019 based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Management has concluded that our internal control over
financial reporting was effective as of December 31, 2019.
Our independent registered public accounting firm, BPM LLP, has audited the consolidated financial statements
included in this Annual Report on Form 10-K and has issued its report on the effectiveness of our internal control over
financial reporting as of December 31, 2019.
Changes in Internal Control over Financial Reporting
Beginning January 1, 2019, we implemented ASC 842, Leases. We implemented changes to our processes related
to lease recognition and the control activities within them. These included the development of new policies, ongoing lease
review requirements, and gathering of information provided for disclosures.
There was no change in our internal control over financial reporting during our fourth quarter of fiscal 2019 that
has materially affected, or is reasonably likely to materially affect, AXT’s internal control over financial reporting.
Item 9B. Other Information
None.
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Report of Independent Registered Public Accounting Firm
To 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”) as of
December 31, 2019, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2019, based on the COSO 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, 2019 and 2018 and the related consolidated statements of
operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended
December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”) of the Company, and
our report dated March 12, 2020, expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting, and for
its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s
Report on Internal Controls over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal
control over financial reporting based on our audit. We are a public accounting firm 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained
in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as
we considered necessary in the circumstances. We believe that our audit provides a reasonable 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 assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of
the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, 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 detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ BPM LLP
San Jose, California
March 12, 2020
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PART III
The United States Securities and Exchange Commission (“SEC”) allows us to include information required in
this report by referring to other documents or reports we have already or will soon be filing. This is called “Incorporation
by Reference.” We intend to file our definitive proxy statement for our annual meeting of stockholders to be held on May
21, 2020 (the “Proxy Statement”) pursuant to Regulation 14A not later than 120 days after the end of the fiscal year
covered by this report, and certain information therein is incorporated in this report by reference.
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item with respect to identification of directors is incorporated by reference to the
information contained in the section captioned “Information About our Board of Directors” in the Proxy Statement. The
information with respect to our executive officers, is incorporated by reference to the information contained in the section
captioned “Executive Officers” in the Proxy Statement. Information with respect to Items 405 of Regulation S-K is
incorporated 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
to Items 407(d)(4) and 407(d)(5) is incorporated by reference to the information contained in the sections of the Proxy
Statement captioned “Corporate Governance—Committees of the Board of Directors.”
The Board of Directors of AXT, Inc. has adopted a Code of Conduct and Ethics (the “Code”) that applies to our
principal executive officers, principal financial officer, and corporate controller, as well as all other employees. A copy of
this Code has been posted on our Internet website at www.axt.com. Any amendments to, or waivers from, a provision of
our Code that applies to our principal executive officer, principal financial officer, controller, or persons performing similar
functions and that relates to any element of the Code enumerated in paragraph (b) of Item 406 of Regulation S-K shall be
disclosed by posting such information on our website.
Item 11. Executive Compensation
The information required by this Item is incorporated herein by reference to information set forth in our Proxy
Statement under the section entitled “Executive Compensation and Other Matters.”
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item is incorporated herein by reference to information set forth in our Proxy
Statement under the section entitled “Security Ownership of Certain Beneficial Owners and Management” and “Equity
Compensation Plan Information.”
Item 13. Certain Relationships and Related Transactions and Director Independence
Information required by this item will be set forth in our Proxy Statement under the headings “Compensation
Committee Interlocks and Insider Participation” and “Certain Relationships and Related Transactions,” which information
is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The information required by this Item is incorporated herein by reference to information set forth in our Proxy
Statement under the section entitled “Ratification of Appointment of Independent Registered Public Accountants.”
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PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)
(1)
The following documents are filed as part of this report:
Financial Statements:
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(2)
Financial Statement Schedules
65
66
67
68
69
70
71
All schedules have been omitted because the required information is not applicable or because the information
required is included in the consolidated financial statements or notes thereto.
(b)
Exhibits
See Index to Exhibits attached elsewhere to this Form 10-K. The exhibits listed in the accompanying Index to
Exhibits are filed as part of, or incorporated by reference into, this report on Form 10-K.
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Report of Independent Registered Public Accounting Firm
To 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 its
subsidiaries (the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of operations,
comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended
December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our
opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company
as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the
period ended December 31, 2019, 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, 2019, based on
criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated March 12, 2020, expressed an unqualified
opinion.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting
for leases in 2019 due to the adoption of the new lease standard.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility
is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public
accounting firm 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
and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of
material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of
material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial
statements. We believe 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, California
March 12, 2020
65
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AXT, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
ASSETS
Current assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, net of allowances of $34 and $358 as of December 31, 2019 and
December 31, 2018
Inventories
Prepaid expenses and other current assets
Total current assets
Long-term investments
Property, plant and equipment, net
Operating lease right-of-use assets
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued liabilities
Bank loan
Total current liabilities
Noncurrent operating lease liabilities
Other long-term liabilities
Total liabilities
Commitments and contingencies (Note 16)
Stockholders’ equity:
Preferred stock Series A, $0.001 par value; 2,000 shares authorized; 883 shares issued
and outstanding as of December 31, 2019 and December 31, 2018 (Liquidation
preference of $7,169 and $6,992 as of December 31, 2019 and December 31, 2018)
Common stock, $0.001 par value; 70,000 shares authorized; 40,632 and 39,985 shares
issued and outstanding as of December 31, 2019 and December 31, 2018
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss
Total AXT, Inc. stockholders’ equity
Noncontrolling interests
Total stockholders’ equity
Total liabilities and stockholders’ equity
December 31,
2019
2018
$
26,892 $
9,427
16,526
22,129
19,031
49,152
8,703
113,205
—
97,403
2,938
9,803
223,349 $
10,098 $
11,681
5,747
27,526
2,695
366
30,587
19,586
58,571
11,728
128,540
717
82,280
—
11,987
223,524
13,338
15,371
—
28,709
—
283
28,992
3,532
3,532
41
236,957
(47,783)
(4,862)
187,885
4,877
192,762
223,349 $
40
234,418
(45,183)
(1,972)
190,835
3,697
194,532
223,524
$
$
$
See accompanying notes to consolidated financial statements.
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AXT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Revenue
Cost of revenue
Gross profit
Operating expenses:
Selling, general and administrative
Research and development
Total operating expenses
Income (loss) from operations
Interest income, net
Equity in loss of unconsolidated joint ventures
Other income (expense), net
Income (loss) before provision for income taxes
Provision for income taxes
Net income (loss)
Less: Net (income) loss attributable to noncontrolling interests
Net income (loss) attributable to AXT, Inc.
Net income (loss) attributable to AXT, Inc. per common share:
Basic
Diluted
Weighted-average number of common shares outstanding:
$
$
$
Basic
Diluted
See accompanying notes to consolidated financial statements.
67
Year Ended December 31,
2019
2018
2017
$
83,256
58,431
24,825
$ 102,397
65,350
37,047
$ 98,673
64,198
34,475
19,305
5,834
25,139
(314)
217
(1,876)
947
(1,026)
562
(1,588)
(1,012)
(2,600)
(0.07)
(0.07)
39,487
39,487
$
$
$
19,003
5,897
24,900
12,147
528
(1,080)
352
11,947
938
11,009
(1,355)
9,654
17,009
4,827
21,836
12,639
461
(1,694)
(553)
10,853
792
10,061
87
$ 10,148
0.24
0.24
$
$
0.27
0.26
39,049
40,265
37,444
38,966
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AXT, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
Net income (loss)
Other comprehensive income (loss), net of tax:
Change in foreign currency translation gain (loss), net of tax
Change in unrealized gain (loss) on available-for-sale investments, net of
tax
Reclassification adjustment for gains included in net loss upon
deconsolidation of a subsidiary
Total other comprehensive income (loss), net of tax
Comprehensive income (loss)
Less: Comprehensive income attributable to noncontrolling interests
Comprehensive income (loss) attributable to AXT, Inc.
Year Ended December 31,
2019
2018
2017
$
(1,588)
$ 11,009
$ 10,061
(1,847)
(5,749)
3,726
81
9
(138)
(617)
(2,383)
(3,971)
(1,519)
(5,490)
—
(5,740)
5,269
(994)
4,275
—
3,588
13,649
(347)
$ 13,302
$
$
See accompanying notes to consolidated financial statements.
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January 1, 2017
Common stock
options exercised
Sale of subsidiary
shares to
noncontrolling
interests
Stock-based
compensation
Issuance of common
stock in the form of
restricted stock
Issuance of common
stock, net of stock
issuance costs of
$2,639
Net income
Net dividend declared
by joint ventures
Other comprehensive
income
Balance as of
December 31, 2017
Common stock
options exercised
Purchase of
subsidiary shares
from noncontrolling
interests
Restricted stock
awards canceled
Stock-based
compensation
Issuance of common
stock in the form of
restricted stock
Net income
Other comprehensive
loss
Balance as of
December 31, 2018
Common stock
options exercised
Reclassification out of
accumulated other
comprehensive
income and
noncontrolling
interests upon the
deconsolidation of a
subsidiary
Purchase of
subsidiary shares
from noncontrolling
interests
Restricted stock
awards canceled
Stock-based
compensation
Issuance of common
stock in the form of
restricted stock
Net loss
Other comprehensive
loss
Balance as of
December 31, 2019
AXT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
Common Stock
Preferred
Stock
Additional
Paid-In Accumulated Comprehensive Stockholders’ Noncontrolling Stockholders’
AXT, Inc.
Total
Accumulated
Other
Shares
$
Shares $ Capital
Deficit
Income (Loss)
Equity
Interests
Equity
883
3,532 33,032
33
194,177
(64,985)
253
133,010
4,380
137,390
762
1
2,476
1,765
1,405
312
5,307
5
31,856
10,148
2,477
1,765
1,405
—
31,861
10,148
—
3,154
3,154
2,477
2,000
1,405
—
31,861
10,061
(465)
3,588
235
(87)
(465)
434
883
3,532 39,413
39
231,679
(54,837)
3,407
183,820
4,497
188,317
238
1
627
187
1,925
(10)
344
9,654
628
187
—
1,925
—
9,654
628
(1,794)
(1,607)
—
1,925
—
11,009
1,355
883
3,532 39,985
40
234,417
(45,183)
(1,972)
190,835
3,697
194,532
113
1
267
268
268
(5,379)
(5,379)
(361)
(5,740)
(1,150)
(1,150)
533
(617)
(74)
2,346
(20)
554
(74)
(339)
2,346
(2,600)
(1,740)
1,012
(26)
(413)
—
2,346
—
(1,588)
(1,766)
(2,600)
(1,740)
883 $3,532 40,632 $41 $ 236,956 $
(47,783) $
(4,862) $
187,885 $
4,877 $
192,762
See accompanying notes to consolidated financial statements.
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AXT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Year Ended December 31,
2019
2018
2017
$
(1,588)
$
11,009
$
10,061
Depreciation and amortization
Amortization of marketable securities premium
Impairment charge on equity investee
Stock-based compensation
Realized gain on sale of available-for-sale securities
Loss (gain) on disposal of equipment
Gain from deconsolidation of a subsidiary
Loss from equity method investments, net
Return on equity method investments
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Prepaid expenses and other current assets
Other assets
Accounts payable
Accrued liabilities *
Other long-term liabilities, including royalties
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of property, plant and equipment
Proceeds from sale of equipment
Purchases of available-for-sale securities
Proceeds from sales and maturities of available-for-sale securities
Repayment of related party notes receivable
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from common stock options exercised
Proceeds from sale of previously consolidated subsidiary shares
Consideration paid to repurchase subsidiary shares from noncontrolling interests
Proceeds from short-term loan
Dividends paid by joint ventures to their minority shareholders
Net cash provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Cash and cash equivalents at the end of the year
Supplemental disclosures:
Income taxes paid, net of refunds
Supplemental disclosure of non-cash flow information:
$
$
Consideration payable to repurchase subsidiary shares from noncontrolling interests, included in
accrued liabilities
Reduction of noncontrolling interests in excess (deficit) of total consideration paid and payable
in connection with the repurchase of subsidiary shares from noncontrolling interests
Consideration payable in connection with construction, included in accrued liabilities
$
$
$
5,531
37
1,068
2,346
—
72
(175)
983
362
441
8,862
2,936
(1,188)
(3,137)
(4,010)
118
12,658
(21,792)
—
(8,725)
22,189
—
(8,328)
268
366
(262)
5,814
—
6,186
(150)
10,366
16,526
26,892
749
151
(74)
1,447
4,871
158
—
1,925
—
(99)
—
1,080
—
2,819
(14,629)
(4,600)
(1,888)
2,314
518
(260)
3,218
(40,539)
99
(9,937)
19,550
—
(30,827)
628
—
(415)
—
—
213
(430)
(27,826)
44,352
16,526
1,134
1,192
187
2,912
$
$
$
$
$
4,422
173
313
1,405
(77)
57
—
1,381
—
(7,977)
(4,740)
(2,309)
(52)
4,401
1,642
(85)
8,615
(21,356)
—
(30,021)
14,750
169
(36,458)
34,338
1,765
—
—
(465)
35,638
405
8,200
36,152
44,352
714
—
—
—
$
$
$
$
$
* Dividend accrued but not paid by joint ventures of $0, $504 and $533 was included in accrued liabilities as of December 31, 2019, 2018 and 2017,
respectively.
See accompanying notes to consolidated financial statements.
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AXT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. The Company and Summary of Significant Accounting Policies
The Company
AXT, Inc. (“AXT”, “the Company”, “we,” “us,” and “our” refer to AXT, Inc. and its consolidated subsidiaries) is
a worldwide materials science company that develops and produces high-performance compound and single element
semiconductor substrates, also known as wafers. Our consolidated subsidiaries produce and sell certain raw materials some
of which are used in our substrate manufacturing process and some of which are sold to other companies.
Our substrate wafers are used when a typical silicon substrate wafer cannot meet the conductive requirements of a
semiconductor or optoelectronic device. The dominant substrates used in producing semiconductor chips and other
electronic circuits are made from silicon. However, certain chips may become too hot or perform their function too slowly
if silicon is used as the base material. In addition, optoelectronic applications, such as LED lighting and chip-based lasers,
do not use silicon substrates because they require a wave form frequency that cannot be achieved using silicon. Alternative
or specialty materials are used to replace silicon as the preferred base in these situations. Our wafers provide such
alternative or specialty materials. We do not design or manufacture the chips. We add value by researching, developing and
producing the specialty material wafers. We have two product lines: specialty material substrates and raw materials integral
to these substrates. In 2019, our substrate product group generated 81% of our revenue and raw materials product group
generated 19%. 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 GaAs
substrates and also sell purified gallium in the open market to other companies for use in magnetic materials, 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 and epitaxial
layer growth in MBE reactors. We use these pBN crucibles in our own ingot growth processes and also sell them in the
open market to other companies.
Principles of Consolidation
The consolidated financial statements include the accounts of AXT, our wholly-owned subsidiaries, Beijing
Tongmei Xtal Technology Co., Ltd. (“Tongmei”), Baoding Tongmei Xtal Technology Co., Ltd. (“Tongmei Baoding”),
ChaoYang Tongmei Xtal Technology Co., Ltd. (“Tongmei ChaoYang”), Nanjing JinMei Gallium Co., Ltd. (“JinMei”),
ChaoYang JinMei Gallium Ltd. and MaAnShan JinMei Gallium Ltd., and, except as discussed below and in Note 6, our
majority-owned subsidiary, Beijing BoYu Semiconductor Vessel Craftwork Technology Co., Ltd. (“BoYu”). Tongmei
Boading is located in the city of Dingxing, China. Tongmei ChaoYang is located in the city of Kazuo, China. All significant
inter‑company accounts and transactions have been eliminated. Investments in business entities in which we do not have
controlling interests, but have the ability to exercise significant influence over operating and financial policies
(generally 20-50% ownership), are accounted for by the equity method. As of December 31, 2019, we have five companies
accounted for by the equity method. As of December 31, 2018, we had seven companies accounted for by the equity
method. For the majority-owned subsidiary that we consolidate, we reflect the portion we do not own as noncontrolling
interests on our consolidated balance sheets in stockholders' equity and in our consolidated statements of operations.
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As discussed in Note 6, “Investments in Privately-Held Raw Material Companies”, effective as of March 11,
2019, we reduced our ownership in Beijing JiYa Semiconductor Material Co., Ltd. (“JiYa”) from 46% to 39% by selling a
portion of our JiYa shares to our investor partner, which is also JiYa’s landlord. As a result of this transaction, our investor
partner became the largest shareholder of JiYa and assumed the right to appoint the general manager of JiYa and thereby
exercised greater control over JiYa’s long-term strategic direction. Further, although our Chief Executive Officer remains
on the board, as of March 11, 2019 he was no longer the chairman of JiYa’s board of directors and our Chief Financial
Officer was no longer a member of JiYa’s board of financial supervisors. Therefore, we deconsolidated JiYa from our
consolidated financial statements as of March 11, 2019 in accordance with Accounting Standards Codification (“ASC”)
Topic 810, Consolidation (“ASC 810”). As of March 12, 2019, we accounted for our retained investment in JiYa under the
equity method of accounting, as we continue to exercise significant influence.
Our consolidated balance sheet as of December 31, 2018, as reported, included JiYa’s assets and liabilities, after
all significant inter-company accounts and transactions were eliminated. Our consolidated balance sheet as of December
31, 2019, as reported, does not include the assets and liabilities of JiYa, since we deconsolidated JiYa as of March 11, 2019.
Our consolidated statement of operations for the year 2019 includes JiYa’s results for the period through March 11, 2019.
As discussed in Note 6, in May 2019, we purchased the remaining 3% ownership interest of JinMei from retiring
members of the JinMei management team for approximately $413,000. As a result, our ownership of JinMei increased
from 97% to 100%. As of June 1, 2019, we referred to JinMei as a wholly-owned subsidiary instead of a significantly
controlled subsidiary and reduced the carrying value of the corresponding noncontrolling interests to zero.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United
States of America (“U.S. GAAP”) requires management to make estimates, judgments and assumptions. We believe that
the estimates, judgments, and assumptions upon which management relies are reasonable based on information available at
the time that these estimates, judgments, and assumptions are made. These estimates, judgments, and assumptions can
affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements as well as the
reported amounts of revenues and expenses during the periods presented. To the extent there are material differences
between these estimates and actual results, our consolidated financial statements would be affected.
Fair Value of Financial Instruments
The carrying amounts of certain of our financial instruments including cash and cash equivalents, short-term
investments and long-term investments, accounts receivable, accounts payable and accrued liabilities approximate fair
value due to their short maturities. Certain cash equivalents and investments are required to be adjusted to fair value on a
recurring basis. See Note 2.
Fair Value of Investments
ASC Topic 820, Fair value measurement (“ASC 820”) establishes three levels of inputs that may be used to
measure fair value.
Level 1 instruments represent quoted prices in active markets. Therefore, determining fair value for Level 1
instruments 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 similar
instruments in markets with insufficient volume or infrequent transactions (less active markets), issuer bank statements,
credit ratings, non-binding market consensus prices that can be corroborated with observable market data, model-derived
valuations in which all significant inputs are observable or can be derived principally from or corroborated with observable
market data for substantially the full term of the assets or liabilities, or quoted prices for similar assets or
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liabilities. These Level 2 instruments require more management judgment and subjectivity compared to Level 1
instruments, including:
·
·
Determining which instruments are most comparable to the instrument being priced requires management to
identify 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
security being 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 our
marketable debt instruments using non-binding market consensus prices that are corroborated with observable
market data or pricing models, such as discounted cash flow models, with all significant inputs derived from or
corroborated with observable market data.
Level 3 instruments include unobservable inputs to the valuation methodology that are significant to the
measurement of fair value of assets or liabilities. The determination of fair value for Level 3 instruments requires the most
management judgment and subjectivity.
We place short-term foreign currency hedges that are intended to offset the potential cash exposure related to
fluctuations in the exchange rate between the United States dollar and Japanese yen. We measure the fair value of these
foreign currency hedges at each month end and quarter end using current exchange rates and in accordance with generally
accepted accounting principles. At quarter end any foreign currency hedges not settled are netted in “Accrued liabilities” on
the consolidated balance sheets and classified as Level 3 assets and liabilities. As of December 31, 2019 and 2018, the net
change in fair value from the placement of the hedge to settlement had a de minimis impact to the consolidated results.
Foreign Currency Translation
The functional currency of our Chinese subsidiaries is the renminbi, the local currency of China. Transaction gains
and losses resulting from transactions denominated in currencies other than the U.S. dollar or in the functional currencies of
our subsidiaries are included in “Other (expense) income, net” for the years presented. The transaction gain totaled
$321,000 and $165,000 for the years ended December 31, 2019 and 2018, respectively. The transaction loss for the year
ended December 31, 2017 totaled $602,000. 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 foreign currency translation are included in “Other comprehensive income (loss)” in the
consolidated statements of comprehensive income (loss), net of tax.
Revenue Recognition
We manufacture and sell high-performance compound semiconductor substrates including indium phosphide,
gallium arsenide and germanium wafers, and our consolidated subsidiaries sell certain raw materials, including 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 acceptance requirements that would preclude revenue recognition. Our products are
typically sold pursuant to purchase orders placed by our customers, and our terms and conditions of sale do not require
customer acceptance. We account for a contract with a customer when there is a legally enforceable contract, which could
be the customer’s purchase order, the rights of the parties are identified, the contract has commercial terms, and
collectibility of the contract consideration is probable. The majority of our contracts have a single performance obligation
to transfer products and are short term in nature, usually less than six months. Our revenue is measured based on the
consideration specified in the contract with each customer in exchange for transferring products that are generally based
upon a negotiated, formula, list or fixed price. Revenue is recognized when control of the promised goods is transferred to
our customer, which is either upon shipment from our dock, receipt at the customer’s dock, or removal from consignment
inventory at the customer’s location, in an amount that reflects the consideration we expect to be entitled to receive in
exchange for those goods.
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We have elected to account for shipping and handling as activities to fulfill the promise to transfer the goods.
Shipping and handling fees billed to customers in a sales transaction are recorded as an offset to shipping and handling
expenses. Sales taxes and value added taxes in foreign jurisdictions that are collected from customers and remitted to
governmental authorities are accounted for on a net basis and, therefore, are excluded from revenue.
We do not provide training, installation or commissioning services. We provide for future returns based on
historical data, prior experience, current economic trends and changes in customer demand at the time revenue is
recognized. We do not recognize any asset associated with the incremental cost of obtaining revenue generating customer
contracts. As such, sales commissions are expensed as incurred, given that the expected period of benefit is less than one
year.
On January 1, 2018, we adopted ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”), and its
related amendments, using the modified retrospective method applied to those contracts which were not completed as of
January 1, 2018. The adoption of ASC 606, using the modified retrospective approach, had no significant impact to our
accumulated deficit as of January 1, 2018 and no significant impact to the total net cash from or used in operating,
investing, or financing activities within the consolidated statements of cash flows. In connection with this adoption on
January 1, 2018, we reclassified our refund liabilities relating to sales with a right of return in the amount of $169,000 to
present it separately from “Accounts receivable” and included it in “Accrued liabilities” on the consolidated balance sheets.
Contract Balances
We receive payments from customers based on a billing schedule as established in our contracts. Contract assets
are recorded when we have a conditional right to consideration for our completed performance under the contracts.
Accounts receivables are recorded when the right to this consideration becomes unconditional. We do not have any material
contract assets as of December 31, 2019.
Contract liabilities
During the three and twelve months ended December 31, 2019, the Company
recognized $0 and $0.4 million, respectively, of revenue that was included in
the contract balances as of December 31, 2018.
Disaggregated Revenue
December 31,
2019
December 31,
2018
$
(396)
$
(476)
In general, revenue disaggregated by product types and geography (See Note 14) is aligned according to the nature
and economic characteristics of our business and provides meaningful disaggregation of our results of operations. Since we
operate in one segment, all financial segment and product line information can be found in the consolidated financial
statements.
Practical Expedients and Exemptions
As part of our adoption of ASC 606, we elected to use the following practical expedients: (i) not to adjust the
promised amount of consideration for the effects of a significant financing component when we expect, at contract
inception, that the period between our transfer of a promised product or service to a customer and when the customer pays
for that product or service will be one year or less; (ii) to expense costs as incurred for costs to obtain a contract when the
amortization period would have been one year or less; (iii) not to assess whether promised goods or services are
performance obligations if they are immaterial in the context of the contract with the customer.
In addition, we do not disclose the value of unsatisfied performance obligations for contracts with an original
expected length of one year or less.
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Accounting for Sales Taxes
We record sales taxes collected on sales of our products and for amounts not yet remitted to tax authorities as
accrued liabilities on our consolidated balance sheets.
Risks and Concentration of Credit Risk
Our business is very dependent on the semiconductor, lasers and optical industries which can be highly cyclical
and experience downturns as a result of economic changes, overcapacity, and technological advancements. Significant
technological changes in the industry or customer requirements, or the emergence of competitive products with new
capabilities or technologies, could adversely affect our operating results. In addition, a significant portion of our revenues
and net income is derived from international sales. Fluctuations of the United States dollar against foreign currencies and
changes in local regulatory or economic conditions, particularly in an emerging market such as China, could adversely
affect operating results.
We depend on a limited number of suppliers for certain raw materials, components and equipment used in
manufacturing our products, including quartz tubing and polishing solutions. We generally purchase these materials
through standard 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 cash
equivalents, investments, and trade accounts receivable. We invest primarily in money market accounts, certificates of
deposit and corporate bonds. The composition and maturities are regularly monitored by management. Such deposits are in
excess of the amount of the insurance provided by the federal government on such deposits. We are exposed to credit risks
in the event of default by the issuers to the extent of the amount recorded on the consolidated balance sheets.
We perform ongoing credit evaluations of our customers’ financial condition, and limit the amount of credit
extended when deemed necessary, but generally do not require collateral. The credit risk in our accounts receivable is
mitigated by our credit evaluation process and the geographical dispersion of sales transactions. Three customers accounted
for 14%, 13% and 12% of our trade accounts receivable as of December 31, 2019 and three customers accounted for 17%,
12% and 10% of our trade accounts receivable as of December 31, 2018.
One customer represented 15% of our revenue for the year ended December 31, 2019. One customer represented
13% of our revenue for the year ended December 31, 2018. Two customers represented 12% and 11%, respectively, of our
revenue for the year ended December 31, 2017. Our top five customers, although not the same five customers for each
period, represented 40% of our revenue for the year 2019 and 35% of our revenue for each of the years 2018 and 2017,
respectively.
For the years ended December 31, 2019, 2018 and 2017 each of three third-party customers for the raw materials
products from our consolidated subsidiaries accounted for over 10% of the revenue from raw materials sales. Our
subsidiaries and joint ventures are a key strategic benefit for us as they further diversify our sources of revenue.
Cash and Cash Equivalents
We consider investments in highly liquid instruments purchased with an original maturity of three months or less
to be 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 Investments
We classify our investments in marketable securities as available-for-sale securities. Short-term and long-term
investments are comprised of available-for-sale marketable securities, which consist primarily of certificates of deposit and
corporate bonds. These investments are reported at fair value as of the respective balance sheet dates with unrealized gains
and losses included in accumulated other comprehensive income (loss) within stockholders’ equity on the consolidated
balance sheets. The amortized cost of securities is adjusted for amortization of premiums and accretion of
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discounts to maturity. Such amortization is included in “Other (expense) income, net” in the consolidated statements of
operations. Realized gains and losses and declines in value judged to be other than temporary on available-for-sale
securities are also included in “Other (expense) income, net” in the consolidated statements of operations. The cost of
securities sold is based upon the specific identification method.
Accounts Receivable and Allowance for Doubtful Accounts and Sales Returns
Accounts receivable are recorded at the invoiced amount and are not interest bearing. We periodically review the
likelihood of collection on our accounts receivable balances and provide an allowance for 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. with an emphasis on balances in
excess of 120 days and establish a reserve allowance on the receivable balances if needed. The reason for the difference in
the evaluation of receivables between foreign and U.S. customers is that U.S. customers have historically made payments
in a shorter period of time than foreign customers. Foreign business practices generally require us to allow customer
payment terms that are longer than those accepted in the United States. We assess the probability of collection based on a
number of factors, including the length of time a receivable balance has been outstanding, our past history with the
customer and their credit worthiness.
We exercise judgment when determining the adequacy of 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
are recognized when they are received. As of December 31, 2019 and 2018, our accounts receivable, net balance was $19.0
million and $19.6 million, respectively, which was net of an allowance for doubtful accounts of $34,000 and $358,000 in
December 31, 2019 and 2018, respectively. During 2019, the allowance for doubtful accounts decreased by $324,000
primarily due to the deconsolidation of JiYa. There were no changes in the allowance for doubtful accounts in 2018. If
actual uncollectible accounts differ substantially from our estimates, revisions to the estimated allowance for doubtful
accounts would be required, which could have a material impact on our financial results for the future periods.
Historically, our allowance for sales returns reserve was deducted from gross accounts receivable. In connection
with the adoption of ASC Topic 606, on January 1, 2018, we reclassified our refund liabilities relating to sales with a right
of return in the amount of $169,000 to present it separately from “Accounts receivable” and included it in “Accrued
liabilities” on the consolidated balance sheets. As of December 31, 2019 and 2018, the balance was $26,000 and $47,000,
respectively. During 2019, we utilized $26,000 and reserved an additional $5,000 and during 2018, we utilized $47,000 and
reduced an additional $75,000.
Warranty Reserve
We maintain a warranty reserve based upon our claims experience during the prior twelve months and any
pending claims and returns of which we are aware. Warranty costs are accrued at the time revenue is recognized. As of
December 31, 2019 and 2018, accrued product warranties totaled $387,000 and $236,000, respectively. The increase in
accrued product warranties is primarily attributable to increased claims for quality issues experienced by customers. If
actual warranty costs or pending new claims differ substantially from our estimates, revisions to the estimated warranty
liability would be required, which could have a material impact on our financial condition and results of operations for
future periods.
Inventories
Inventories are stated at the lower of cost (approximated by standard cost) or net realizable value. Cost is
determined using 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 in light of current market conditions in order to identify excess and obsolete inventory, and we provide a
valuation allowance for certain inventories to their estimated net realizable value based upon the age and quality of the
product and the projections for sale of the completed products.
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Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation computed using the straight-line
method over the estimated economic lives of the assets, which vary from 1 to 27.5 years. Leasehold improvements are
amortized using the straight-line method over the shorter of the estimated useful life or the term of the lease. We generally
depreciate 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 the lease term if shorter, and buildings
over 27.5 years. Repairs and maintenance costs are expensed as incurred.
Impairment of Long-Lived Assets
We evaluate property, plant and equipment and intangible assets for impairment. When events and circumstances
indicate that long-lived assets may be impaired, we compare the carrying value of the long-lived assets to the projection of
future undiscounted cash flows attributable to these assets. In the event that the carrying value exceeds the future
undiscounted cash flows, we record an impairment charge against income equal to the excess of the carrying value over the
assets’ fair value. Fair values are determined based on quoted market values, discounted cash flows or internal and external
appraisals, as applicable. We did not recognize any impairment charges of long-lived assets in 2019, 2018 and 2017.
Impairment of Investments
All available-for-sale securities are periodically reviewed for impairment. An investment is considered to be
impaired when its fair value is less than its amortized cost basis and it is more likely than not that we will be required to sell
the impaired security before recovery of its amortized cost basis. Factors considered in determining whether a loss is
temporary include the magnitude of the decline in market value, the length of time the market value has been below cost
(or adjusted cost), credit quality, and our ability and intent to hold the securities for a period of time sufficient to allow for
any anticipated recovery in market value.
We also invest in equity instruments of privately-held companies in China for business and strategic purposes.
Investments in our unconsolidated joint venture companies are classified as other assets and accounted for under either the
equity or cost method, depending on whether we have the ability to exercise significant influence over their operations or
financial decisions. We monitor our investments for impairment and record reductions in carrying value when events or
changes in circumstances indicate that the carrying value may not be recoverable. Determination of impairment is highly
subjective and is based on a number of factors, including an assessment of the strength of each company’s management, the
length of time and extent to which the fair value has been less than our cost basis, the financial condition and near-term
prospects of the subsidiary, fundamental changes to the business prospects of the company, share prices of subsequent
offerings, and our intent and ability to hold the investment for a period of time sufficient to allow for any anticipated
recovery in our carrying value. We estimate fair value of our cost method investments considering available information
such as pricing in recent rounds of financing, current cash positions, earnings and cash flow forecasts, recent operational
performance and any other readily available market data.
We have 25% ownership interest in a germanium materials company in China and we incurred an impairment
charge for the period ended March 31, 2019. After receiving such company’s preliminary first quarter 2019 financial
results in early April 2019 and its projections for significant losses going forward, we determined that this asset was fully
impaired and wrote the asset balance down to zero. This resulted in a $1.1 million impairment charge in our first quarter
2019 financial results. Except as mentioned above, there were no impairment charges for the remainder of these
investments during the years ended December 31, 2019 and 2018.
Segment Reporting
We operate in one segment for the design, development, manufacture and distribution of high-performance
compound and single element semiconductor substrates and sale of raw materials integral to these substrates. Our chief
operating decision-maker has been identified as our Chief Executive Officer, who reviews operating results to make
decisions about allocating resources and assessing our performance for the Company. We discuss revenue and capacity
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for both AXT and our joint ventures collectively, when determining capacity constraints and need for raw materials in our
business, and consider their capacity when determining our strategic and product marketing and advertising strategies.
While we consolidate our majority-owned or significantly controlled joint ventures, we do not allocate any portion of
overhead, interest and other income, interest expense or taxes to them. We therefore have determined that our joint venture
operations do not constitute an operating segment. Since we operate in one segment, all financial segment and product line
information can be found in the consolidated financial statements.
Stock‑Based Compensation
We have employee stock option plans, which are described more fully in Note 10—Employee Benefit Plans and
Stock-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
grant date fair value of stock options, which requires the input of highly subjective assumptions, including estimating stock
price volatility and expected term. Stock‑based compensation cost is measured at each grant date, based on the fair value
of the award, and is recognized as expense and as an increase in additional paid-in capital over the requisite service period
of the award.
Research and Development
Research and development costs consist primarily of salaries, including stock-based compensation expense and
related personnel costs, depreciation, materials and product testing which are expensed as incurred. Tangible assets
acquired for research and development purposes are capitalized if they have alternative future use.
Advertising Costs
Advertising costs, included in selling, general and administrative expenses, are expensed as incurred. Advertising
costs for the years ended December 31, 2019, 2018 and 2017 were insignificant.
Income Taxes
We account for income taxes in accordance with ASC Topic 740, Income Taxes (“ASC 740”), which requires that
deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the
book and tax bases of recorded assets and liabilities. ASC 740 also requires that deferred tax assets be reduced by a
valuation allowance if it is more likely than not that a portion of the deferred tax asset will not be realized. The impact of
ASC 740 is more fully described in Note 12.
Comprehensive Income (Loss)
The components of other comprehensive income (loss) include unrealized gains and losses on marketable
securities and foreign currency translation adjustments. Comprehensive income (loss) is presented in the consolidated
statements of comprehensive income, net of tax. The balance of accumulated other comprehensive income (loss) is as
follows (in thousands):
Accumulated other comprehensive loss:
Unrealized loss on investments, net
Cumulative translation adjustment
Less: Cumulative translation adjustment attributable to noncontrolling
interests
Accumulated other comprehensive loss attributable to AXT, Inc.
As of December 31,
2019
2018
$
$
(3)
(4,842)
(4,845)
17
(4,862)
$
$
(84)
(1,845)
(1,929)
43
(1,972)
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Net Income (Loss) Per Share
Basic net income (loss) per share is computed using the weighted average number of common shares outstanding
during the periods less shares of common stock subject to repurchase and non-vested stock awards. Diluted net income
(loss) per share is computed using the weighted average number of common shares outstanding and potentially dilutive
common shares outstanding during the periods. The dilutive effect of outstanding stock options and restricted stock awards
is reflected in diluted earnings per share by application of the treasury stock method. Potentially dilutive common shares
consist of common shares issuable upon the exercise of stock options and vesting of restricted stock awards. Potentially
dilutive common shares are excluded from the computation of weighted average number of common shares outstanding in
net loss years, as their effect would be anti-dilutive to the computation.
Recent Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board issued Accounting Standard Update 2016-02, Leases
(Topic 842) (“ASC 842”), which replaces the existing guidance for leases. The new standard establishes a right-of-use
(“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with
terms longer than twelve months. Leases will be classified as either finance or operating, with classification affecting the
pattern of expense recognition in the income statement. The guidance is effective for fiscal years beginning after December
15, 2018, including interim periods within those fiscal years and requires retrospective application.
We adopted this guidance effective January 1, 2019, using the modified retrospective approach. The modified
retrospective approach provides a method for recording existing leases at the beginning of the period of adoption. In
addition, we elected the package of practical expedients permitted under the transition guidance within the new standard,
which among other things, allowed us to carry forward the historical lease classification and we elected the hindsight
practical expedient to determine the lease term for existing leases. We determined that the exercise of our renewal option
associated with our lease of facility in Fremont, California, would be reasonably certain in determining the expected lease
term. The comparative information has not been restated and continues to be reported under the accounting standards in
effect for those periods.
Adoption of ASC 842 standard resulted in the recording of net ROU assets of $1.1 million and lease liabilities of
$1.1 million, as of January 1, 2019. ASC 842 did not have an impact on our consolidated results of operations or cash flow.
The impact of the adoption of ASC 842 on the balance sheet as of January 1, 2019 was (in thousands):
Operating lease right-of-use assets
Total assets
Accrued liabilities
Total current liabilities
Long-term liability - operating leases
Total liabilities
Total liabilities and equity
* Short-term portion of lease liability included in accrued
liabilities
As Reported
December 31, 2018
$
— $
Adoption of ASC 842
Increase (Decrease)
Balance
January 1, 2019
1,086
224,610
15,499
28,837
958
30,078
224,610
1,086 $
1,086
128 *
128
958
1,086
1,086
223,524
15,371
28,709
—
28,992
223,524
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Note 2. Cash, Cash Equivalents and Investments
Our cash and cash equivalents consist of cash and instruments with original maturities of less than three months.
Our investments consist of instruments with original maturities of more than three months. As of December 31, 2019 and
2018, our cash, cash equivalents and investments are classified as follows (in thousands):
December 31, 2019
Gross
Gross
December 31, 2018
Gross
Gross
Amortized Unrealized Unrealized
Cost
Gain
(Loss)
Fair
Value
Amortized Unrealized Unrealized
Cost
Gain
(Loss)
Fair
Value
Classified as:
Cash
Cash equivalents:
Certificates of deposit
1
Total cash and cash
equivalents
Investments (available-for-
sale):
Certificates of deposit
Corporate bonds
2
Total investments
Total cash, cash equivalents
and investments
Contractual maturities on
investments:
Due within 1 year
Due after 1 through 5 years
3
4
$ 26,892 $
— $
— $ 26,892 $ 16,526 $
— $
— $ 16,526
—
26,892
2,400
7,030
9,430
—
—
2
4
6
—
—
—
—
26,892
16,526
—
(9)
(9)
2,402
7,025
9,427
4,508
18,422
22,930
—
—
—
—
—
—
—
—
16,526
(27)
(57)
(84)
4,481
18,365
22,846
$ 36,322 $
6 $
(9) $ 36,319 $ 39,456 $
— $
(84) $ 39,372
$ 9,430
—
$ 9,430
$ 9,427 $ 22,210
720
$ 9,427 $ 22,930
—
$ 22,129
717
$ 22,846
1.
2.
3.
4.
Certificate of deposit with original maturities of less than three months.
Certificate of deposit with original maturities of more than three months.
Classified as “Short-term investments” in our consolidated balance sheets.
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 to
meet our current cash requirements. Certificates of deposit and corporate bonds are typically held until maturity. Corporate
equity securities have no maturity and may be sold at any time.
The gross unrealized losses related to our portfolio of available-for-sale securities were primarily due to changes
in interest rates and market and credit conditions of the underlying securities. We have determined that the gross unrealized
losses on some of our available-for-sale securities as of December 31, 2019 are temporary in nature. We periodically
review our investment portfolio to identify and evaluate investments that have indications of possible impairment. Factors
considered in determining whether a loss is temporary include the magnitude of the decline in market value, the length of
time the market value has been below cost (or adjusted cost), credit quality, and our ability and intent to hold the securities
for a period of time sufficient to allow for any anticipated recovery in market value.
A portion of our investments would generate a loss if we sold them on December 31, 2019. The following table
summarizes the fair value and gross unrealized losses related to available-for-sale securities, aggregated by investment
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category and length of time that individual securities have been in a continuous unrealized loss position as of December 31,
2019 (in thousands):
As of December 31, 2019
Investments:
Corporate bonds
Total in loss position
In Loss Position
< 12 months
In Loss Position
> 12 months
Total In
Loss Position
Fair
Value
Gross
Unrealized Fair
Fair
(Losses) Value (Losses) Value
Gross
Unrealized
Gross
Unrealized
(Losses)
4,515
$ 4,515 $
—
(9)
(9) $ — $
4,515
—
— $ 4,515 $
(9)
(9)
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 loss
position as of December 31, 2018 (in thousands):
As of December 31, 2018
Investments:
Certificates of deposit
Corporate bonds
Total in loss position
In Loss Position
< 12 months
In Loss Position
> 12 months
Total In
Loss Position
Fair
Value
Gross
Unrealized
(Loss)
Fair
Value
Gross
Unrealized
(Loss)
Fair
Value
Gross
Unrealized
(Loss)
$
717 $
9,175
$ 9,892 $
(3) $
3,746 $
9,189
(29)
(32) $ 12,935 $
4,463 $
(24) $
(28)
(52) $ 22,827 $
18,364
(27)
(57)
(84)
Investments in Privately-held Raw Material Companies
We have made strategic investments in private companies located in China in order to gain access at a competitive
cost to raw materials that are critical to our substrate business (see Note 6). The investment balances for the non-
consolidated companies, are accounted for under the equity method and included in “Other assets” in the consolidated
balance sheets and totaled $6.0 million and $8.4 million as of December 31, 2019 and 2018, respectively. As of December
31, 2019, there were five companies accounted for under the equity method. The year ended December 31, 2019 includes
an impairment charge of $1.1 million for one of our minority investments in the three months ended March 31, 2019 (see
Note 6). We had no impairment charges during 2018. For the year ended December 31, 2017, we recognized an
impairment charge of $313,000 for one of the gallium companies. During the first quarter of 2017, management determined
it unlikely that this company will recover from the difficult pricing environment and we wrote the investment down to zero.
Fair Value Measurements
We invest primarily in money market accounts, certificates of deposit, corporate bonds and notes, and government
securities. ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), establishes three levels of inputs that
may be used to measure fair value. Level 1 instrument valuations are obtained from real-time quotes for transactions in
active exchange markets of the asset or identical assets. Level 2 instrument valuations are obtained from readily-
available, observable pricing sources for comparable instruments. Level 3 instrument valuations are obtained from
unobservable inputs in which there is little or no market data, which require us to develop our own assumptions. On a
recurring basis, we measure certain financial assets and liabilities at fair value, primarily consisting of our short-term and
long-term investments.
The type of instrument valued based on quoted market prices in active markets include our money market funds,
which are generally classified within Level 1 of the fair value hierarchy. Other than corporate equity securities which are
based on quoted market prices and classified as Level 1, we classify our available-for-sale securities including certificates
of deposit and corporate bonds as having Level 2 inputs. The valuation techniques used to measure the fair value of these
financial instruments having Level 2 inputs were derived from bank statements, quoted market prices,
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broker or dealer statements or quotations, or alternative pricing sources with reasonable levels of price transparency. There
were no changes in valuation techniques or related inputs in the year ended December 31, 2019. There have been
no transfers between fair value measurement levels during the years ended December 31, 2019 and 2018.
We place short-term foreign currency hedges that are intended to offset the potential cash exposure related to
fluctuations in the exchange rate between the United States dollar and Japanese yen. We measure the fair value of these
foreign currency hedges at each month end and quarter end using current exchange rates and in accordance with generally
accepted accounting principles. At quarter end any foreign currency hedges not settled are netted in “Accrued liabilities” on
the consolidated balance sheets and classified as Level 3 assets and liabilities. As of December 31, 2019, the net change in
fair value from the placement of the hedge to settlement at each month end during the quarter had a de minimis impact to
the consolidated results.
The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis in
accordance with ASC 820 as of December 31, 2019 (in thousands):
Assets:
Cash equivalents and investments:
Certificates of deposit
Corporate bonds
Total
Quoted Prices in
Active Markets of Significant Other Unobservable
Significant
Balance as of
December 31, 2019
Identical Assets
(Level 1)
Observable Inputs
(Level 2)
Inputs
(Level 3)
$
$
2,402 $
7,025
9,427 $
— $
—
— $
2,402 $
7,025
9,427 $
—
—
—
The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis in
accordance with ASC 820 as of December 31, 2018 (in thousands):
Assets:
Cash equivalents and investments:
Certificates of deposit
Corporate bonds
Total
Quoted Prices in
Active Markets of Significant Other Unobservable
Significant
Balance as of
December 31, 2018
Identical Assets
(Level 1)
Observable Inputs
(Level 2)
Inputs
(Level 3)
$
$
4,481 $
18,365
22,846 $
— $
—
— $
4,481 $
18,365
22,846 $
—
—
—
Items Measured at Fair Value on a Nonrecurring Basis
Certain assets that are subject to nonrecurring fair value measurements are not included in the table above. These
assets include investments in privately-held companies accounted for by equity and cost method (See Note 6). For the year
ended December 31, 2019, we recognized an impairment charge of $1.1 million for one of our minority investments. We
received its preliminary first quarter 2019 financial results in early April 2019 as well as its projections for significant
losses going forward. Such projected losses would fully deplete our asset investment balance for this company in
2019. This company in which we have a minority investment is experiencing significant disruptions due to upgrades and
repairs required to comply with stronger environmental regulations in China. As a result, we determined that this asset was
fully impaired and wrote the asset balance down to zero. We had no impairment charges 2018. For the year ended
December 31, 2017, we recognized an impairment charge of $313,000 for one of the gallium companies. During the first
quarter of 2017, management determined it was unlikely that this company would recover from the difficult pricing
environment and we wrote the investment down to zero.
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Note 3. Inventories
The components of inventory are summarized below (in thousands):
Inventories:
Raw materials
Work in process
Finished goods
December 31,
2019
December 31,
2018
$
$
20,677 $
24,946
3,529
49,152 $
26,966
28,217
3,388
58,571
As of December 31, 2019 and 2018, carrying values of inventories were net of inventory reserves of $16.4 million
and $14.8 million, respectively, for excess and obsolete inventory and $91,000 and $18,000, respectively, for lower of cost
or net realizable value reserves.
Note 4. Related Party Transactions
Effective as of March 11, 2019, we reduced our ownership in JiYa from 46% to 39% by selling a portion of our
JiYa shares to our investor partner, which is also JiYa’s landlord. Based on an independent third-party valuation analysis,
we sold these shares for $366,000. Previously we were the largest shareholder of JiYa and as such, we had the right to
appoint the general manager of JiYa and the ability to exercise control in substance over JiYa’s long-term strategic
direction. Further, our Chief Executive Officer was the chairman of JiYa’s board of directors and our Chief Financial
Officer was a member of JiYa’s board of financial supervisors. As a result of this transaction, our investor partner, Shanxi
Aluminum Industrial Co., Ltd. became the largest shareholder of JiYa and assumed the right to appoint the general manager
of JiYa and thereby exercised greater control over JiYa’s long-term strategic direction. Further, although our Chief
Executive Officer remains on the board, as of March 11, 2019, he was no longer chairman of JiYa’s board of directors and
our Chief Financial Officer was no longer on JiYa’s board of financial supervisors.
Previously, we accounted for JiYa’s financial performance under the consolidation method of accounting. As a
result of the changes, we began to account for JiYa’s financial performance under the equity method of
accounting. Therefore, we deconsolidated JiYa from our consolidated financial statements as of March 11, 2019 in
accordance with ASC 810. As of March 12, 2019, we accounted for our investment in JiYa under the equity method of
accounting as we continue to have board representation and substantial ownership. Pro-forma financials have not been
presented because we believe the effects were not material to our consolidated financial position and results of operations
for all periods presented. JiYa continues to be a related party to us after deconsolidation, from whom we may purchase raw
materials for production in the ordinary course of business from time to time.
Beginning in 2012, our consolidated joint venture, JinMei, became contractually obligated under an agency sales
agreement to sell raw material on behalf of its equity investment entity. JinMei bills the customers and remits the receipts,
net of its portions of sales commission, to this equity investment entity. For the years ended December 31, 2019 and 2018,
JinMei recorded $0 and $24,000 of income from agency sales, respectively, which were included in “Other (expense)
income, net” in the consolidated statements of operations.
In March 2012, Tongmei, entered into an operating lease for the land it owns with our consolidated joint venture,
BoYu. The lease agreement for the land of approximately 22,081 square feet commenced on January 1, 2012 for a term of
10 years with annual lease payments of $24,000 subject to a 5% increase at each third year anniversary. The annual lease
payment is due by January 31 of each year.
st
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
Tongmei and Dongfang in 2014 and the date of repayment was set as December 31, 2015. In 2015, both parties agreed to
delay the date 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.
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In April 2014, Tongmei loaned an additional of $46,000 to Dongfang. The loan bears interest at 6.15% per annum
and 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.
Tongmei also purchases raw materials from Dongfang for production in the ordinary course of business. As of
December 31, 2019 and 2018, amount payable of $0 and $59,000, respectively, were included in “Accounts payable” in our
consolidated balance sheets.
Tongmei ChaoYang 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, 2019 and 2018,
amount payable of $0 and $0, respectively, were included in “Accounts payable” in our consolidated balance sheets.
Tongmei and Tongmei ChaoYang also purchases raw materials from one of our equity investment entities,
Xilingol Tongli Germanium Refine Co. Ltd. (“Tongli”), for production in the ordinary course of business. As of December
31, 2019 and 2018, amount payable of $0 and $0, 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 the
acquisition of the land use rights and the construction of a new building. The inter-company loan carries an interest rate
of 4.9% per annum. The principle is due in three installments between December 2021 and December 2023 while the
interest is due in December of each year. As of December 31, 2019, JinMei repaid principal and interest totaling
$490,000 to Tongmei. As of December 31, 2019 and 2018, the remaining balance of principal and interest totaled $285,000
and $316,000, respectively. JinMei, is in the process of relocating its manufacturing operations to the city of Kazuo, located
in the province of Liaoning near the Inner Mongolia Autonomous Region, near our own location.
In April 2016, our consolidated joint venture, BoYu, provided a personal loan of $177,000 to one of its executive
employees. This loan is collateralized by the officer’s shares in BoYu. The loan bears interest at 2.75% per annum. During
the three months ended June 30, 2017, the repayment of the principal and interest totaling $180,000 was received by our
consolidated joint venture. In November 2017, BoYu provided another personal loan of $291,000 to the same executive
employee. This loan bears interest at 2.75% per annum. Principal and accrued interest are due on November 30, 2020. In
May 2019, BoYu provided another personal loan of $146,000 to the same executive employee. This loan bears interest at
2.75% per annum. Principal and accrued interest are due at such time BoYu pays a dividend to its shareholders. As of
December, 2019 and 2018, the balances, including both principal and accrued interest, were $449,000, and $299,000,
respectively, and included in “Other assets” and “Prepaid expenses and other current assets”, respectively, in our
consolidated balance sheets.
On November 2, 2017, our consolidated joint venture, BoYu, raised additional capital in the amount of $2 million
in cash from a third-party investor through the issuance of shares equivalent to 10% ownership of BoYu. This third-party
investor is an immediate family member to the owner of one of BoYu's customers. For the years ended December 31, 2019
and 2018, BoYu has recorded $0.2 million and $1.5 million in revenue from this customer, respectively. As of December
31, 2019 and 2018, amounts receivable of $12,000 and $0, respectively, were included in “Accounts receivable” in our
consolidated balance sheets.
Our Related Party Transactions Policy seeks to prohibit all conflicts of interest in transactions between related
parties and us, unless they have been approved by our Board of Directors. This policy applies to all of our
employees, directors, and our consolidated subsidiaries. Our executive officers retain board seats on the Board of Directors
of the companies in which we have invested in our China joint ventures. See Note 6 for further details.
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Note 5. Property, Plant and Equipment, Net
The components of our property, plant and equipment are summarized below (in thousands):
Property, plant and equipment:
Machinery and equipment, at cost
Less: accumulated depreciation and amortization
Building, at cost
Less: accumulated depreciation and amortization
Leasehold improvements, at cost
Less: accumulated depreciation and amortization
Construction in progress
December 31,
December 31,
2019
2018
$
$
45,742 $
(37,115)
38,837
(12,736)
4,877
(4,035)
61,833
97,403 $
51,496
(41,431)
39,775
(12,147)
5,464
(4,497)
43,620
82,280
As of December 31, 2019, the balance of construction in progress was $61.8 million, of which $48.8 million was
related to our buildings in our new Dingxing and Kazuo locations, $3.4 million was for manufacturing equipment
purchases not yet placed in service and $9.6 million was from our construction in progress for our other consolidated
subsidiaries. As of December 31, 2018, the balance of construction in progress was $43.6 million, of which $31.7 million
was related to our buildings in our new Dingxing and Kazuo locations, $2.2 million was for manufacturing equipment
purchases not yet placed in service and $9.7 million was from our construction in progress for our other consolidated
subsidiaries.
Depreciation and amortization expense was $5.5 million, $4.9 million and $4.4 million for the years ended
December 31, 2019, 2018 and 2017, respectively.
Note 6. Investments in Privately-held Raw Material Companies
We have made strategic investments in private companies located in China in order to gain access at a competitive
cost to raw materials that are critical to our substrate business. These companies form part of our overall supply chain.
The investments are summarized below (in thousands):
Investment Balance as of
Company
Nanjing JinMei Gallium Co., Ltd.
Beijing JiYa Semiconductor Material Co., Ltd.
Beijing BoYu Semiconductor Vessel Craftwork Technology Co.,
Ltd.
Donghai County Dongfang High Purity Electronic Materials Co.,
Ltd.
Beijing JiYa Semiconductor Material Co., Ltd.
Xilingol Tongli Germanium Co., Ltd.
Xiaoyi XingAn Gallium Co., Ltd.
Emeishan Jia Mei High Purity Metals Co., Ltd.
$
$
$
$
December 31, December 31, Accounting
2018
2019
Method
592 Consolidated
3,331 Consolidated
Ownership
Percentage
**100 %
*46 %
592 $
N/A
1,346
1,938 $
1,346 Consolidated
5,269
63 %
1,326 $
1,621
—
2,367
647
5,961 $
1,416
N/A
1,700
N/A
842
3,958
Equity
Equity
Equity
Equity
Equity
46 %
*39 %
25 %
25 %
25 %
* Ownership percentage decreased from 46% to 39% as of March 11, 2019 in connection with our sale of shares of this entity.
** In May 2019, we purchased the remaining 3% ownership interest from retiring members of the JinMei management team for
approximately $413,000. As a result, our ownership of JinMei increased from 97% to 100%.
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Effective as of March 11, 2019, we reduced our ownership in JiYa from 46% to 39% by selling a portion of our
JiYa shares to our investor partner, which is also JiYa’s landlord. Based on an independent third-party valuation analysis,
we sold these shares for $366,000. Previously, we were the largest shareholder and, as such, we had the right to appoint the
general manager of JiYa and the ability to exercise control in substance over JiYa’s long-term strategic direction. Further,
our Chief Executive Officer was the chairman of JiYa’s board of directors and our Chief Financial Officer was a member of
JiYa’s board of financial supervisors. As a result of this transaction, our investor partner, Shanxi Aluminum Industrial Co.,
Ltd., became the largest shareholder and assumed the right to appoint the general manager and thereby exercised greater
control over JiYa’s long-term strategic direction. Further, although our Chief Executive Officer remains on the board, as of
March 11, 2019 he was no longer the chairman of JiYa’s board of directors and our Chief Financial Officer was no longer a
member of JiYa’s board of financial supervisors.
Previously we accounted for JiYa’s financial performance under the consolidation method of accounting. As a
result of the changes we began to account for JiYa’s financial performance under the equity method of
accounting. Therefore, we deconsolidated JiYa from our consolidated financial statements as of March 11, 2019 in
accordance with ASC 810. As of March 12, 2019, we accounted for our investment in JiYa under the equity method of
accounting as we continue to have board representation and substantial ownership. Pro-forma financials have not been
presented because we believe the effects were not material to our consolidated financial position and results of operation
for all periods presented. JiYa continues to be a related party to us after deconsolidation, whom we may purchase raw
materials from for production in the ordinary course of business from time to time.
We recorded a gain on the deconsolidation of JiYa of $175,000 as a component of “Equity in loss of
unconsolidated joint ventures” during 2019 in the consolidated statements of operations and comprehensive income (loss).
On the date of deconsolidation, the fair value of the Company’s investment in JiYa exceeded the Company’s share of the
net assets of JiYa, which generated the gain. As of March 12, 2019, we recorded our investment in JiYa at a fair value of
$2,040,000, which was based on an independent third-party valuation analysis. The valuation is based on the asset-based
approach. The market-based approach is not deemed appropriate due to lack of availability of market data for comparable
companies on the open market and the discounted cash flow approach is not deemed reliable because of the difficulty in
predicting the future profitability of JiYa due to the volatility of the gallium market, the concentration of customers and the
significant accumulated losses of JiYa. The asset-based approach examines the value of a company’s assets net of its
liabilities to derive a value for the equity holders. The gain on deconsolidation includes the following:
Fair value of the consideration received
Fair value of the retained investment in Beijing JiYa Semiconductor Material Co., Ltd.
Carrying value of noncontrolling interest, net of accumulated other comprehensive income attributable
to subsidiary
Derecognition of Beijing JiYa Semiconductor Material Co., Ltd.'s net asset
Gain recognized on deconsolidation of Beijing JiYa Semiconductor Material Co., Ltd.
Fair value of the retained investment in Beijing JiYa Semiconductor Material Co., Ltd.
Carrying value of retained noncontrolling investment
Gain on retained noncontrolling investment due to remeasurement
Amount
(in thousands)
366
2,040
617
(2,848)
175
Amount
(in thousands)
2,040
(1,559)
481
$
$
$
$
Our ownership of JinMei is 100%. Before June 15, 2018, our ownership of JinMei was 83%. On June 15, 2018,
we purchased a 12% ownership interest from one of the minority owners of JinMei for $1.4 million. The $1.4 million
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was scheduled to be paid in two installments. On June 15, 2018, we paid the first installment of $163,000. In May 2019, we
paid the second installment of $1.2 million as the relocation of JinMei’s headquarters and manufacturing operations was
nearly complete, which had been previously included in “Accrued liabilities” in our consolidated balance sheets. As a
result, our ownership of JinMei increased from 83% to 95%. In September 2018, we purchased a 2% ownership interest
from one of the three remaining minority owners of JinMei for $252,000. As a result, our ownership of JinMei increased
from 95% to 97%. In May 2019, we purchased the remaining 3% ownership interest from retiring members of the JinMei
management team for approximately $413,000. We paid approximately $262,000 in May 2019 and plan to pay the
remainder of approximately $151,000 in January 2020. As a result, our ownership of JinMei increased from 97% to 100%.
Prior to June 1, 2019, we reported JinMei as a consolidated joint venture as we had a controlling financial interest and have
majority control of the board. As of June 1, 2019, we now refer to it as a wholly-owned subsidiary and reduced the carrying
value of the corresponding noncontrolling interests to zero. Our Chief Executive Officer is chairman of the JinMei board
and we have appointed two other representatives to serve on the JinMei board.
Our ownership of BoYu is 63%. On November 2, 2017, BoYu raised additional capital in 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%. We continue to consolidate BoYu as we have a controlling financial
interest and have majority control of the board and accordingly no gain was recognized as a result of this equity
transaction. Our Chief Executive Officer is chairman of the BoYu board and we have appointed two other representatives to
serve on the board.
Although we have representation on the boards of directors of each of these companies, the daily operations of
each of these companies are managed by local management and not by us. Decisions concerning their respective short-
term strategy and operations, ordinary course of business capital expenditures, and decisions concerning sales of finished
product, are made by local management with regular guidance and input from us.
During 2019, 2018 and 2017, the consolidated joint ventures generated $4.3 million, $5.5 million and
$2.1 million of income, respectively, of which an income of $1.0 million, an income of $1.4 million and a loss of $0.1
million, respectively were allocated to noncontrolling interests, resulting in $3.3 million, $4.1 million and $2.2 million of
income, respectively, to our net income (loss).
For AXT’s minority investment entities that are not consolidated, the investment balances are included in “Other
assets” in our consolidated balance sheets and totaled $6.0 million and $8.4 million as of December 31, 2019 and 2018,
respectively. Our respective ownership interests in each of these companies are 46%, 39%, 25%, 25% and 25%. These
minority investment entities are not considered variable interest entities because:
·
·
·
·
all minority investment entities have sustainable businesses of their own;
our voting power is proportionate to our ownership interests;
we only recognize our respective share of the losses and/or residual returns generated by the companies if they
occur; and
we do not have controlling financial interest in, do not maintain operational or management control of, do not
control the board of directors of, and are not required to provide additional investment or financial support to any
of these companies.
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One of the minority investment entities in which we have a 25% ownership interest is a germanium materials
company in China. This company provides results to us only on a quarterly basis. We received its preliminary first quarter
2019 financial results in early April 2019 as well as its projections for significant losses going forward. Such projected
losses would fully deplete our asset investment balance for this company in 2019. The Company is experiencing
significant disruptions due to upgrades and repairs required to comply with stronger environmental regulations in
China. As a result, we determined that this asset was fully impaired and wrote the asset balance down to zero. This
resulted in a $1.1 million impairment charge in our first quarter 2019 financial results.
AXT’s minority investment entities are not consolidated and are accounted for under the equity method.
Excluding one fully impaired entity, the equity entities had the following summarized income information (in thousands)
for the years ended December 31, 2019, 2018 and 2017, respectively:
Net revenue
Gross profit
Operating loss
Net loss
2019
18,991
2,013
(2,266)
(3,000)
$
$
Year Ended
December 31,
2018
33,212
6,457
(3,152)
(4,750)
$
$
2017
24,053
1,739
(3,676)
(4,798)
$
$
2019
5,458
558
(700)
(1,876)
$
$
Our share for the
Year Ended
December 31,
2018
$
$
8,549
1,675
(778)
(1,080)
$
$
2017
6,152
482
(938)
(1,694)
Excluding one fully impaired entity, these minority investment entities that are not consolidated, but rather are
accounted for under the equity method, had the following summarized balance sheet information (in thousands) as of
December 31, 2019 and 2018, respectively:
Current assets
Noncurrent assets
Current liabilities
Noncurrent liabilities
$
As of December 31,
2019
2018
$
22,144
11,990
13,726
—
31,525
26,889
24,670
112
Our portion of the income and losses, including impairment charges, from these minority investment entities that
are not consolidated and are accounted for under the equity method was a loss of $1.9 million, $1.1 million, and $1.7
million for the years ended December 31, 2019, 2018 and 2017, respectively. Dividends received from these minority
investment entities were $362,000 for the year ended December 31, 2019 and $0 for each of the years ended December 31,
2018 and 2017. Excluding one fully impaired entity, undistributed retained earnings relating to our investments in these
minority investment entities amounted to $1.2 million and $2.5 million as of December 31, 2019 and 2018, respectively.
Note 7. Balance Sheets Details
Other Assets
The components of other assets are summarized below (in thousands):
Equity method investments
Value added tax receivable, long term
Other intangible assets
Other assets
As of December 31,
2019
2018
5,961
2,708
1,124
10
9,803
$
$
8,422
1,845
1,048
672
11,987
$
$
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Accrued Liabilities
The components of accrued liabilities are summarized below (in thousands):
Accrued compensation and related charges
Preferred stock dividends payable
Payable in connection with construction
Payable in connection with land restoration of Nanjing JinMei factory
Accrued professional services
Advance from customers
Accrued product warranty
Current portion of operating lease liability
Other personnel-related costs
Accrued income taxes
Payable in connection with repurchase of subsidiaries shares
Other tax payable
Accrual for sales returns
Deferred government grant income in connection with purchase of land
Dividends payable by consolidated joint ventures
Other accrued liabilities
$
As of December 31,
2019
2018
$
3,307
2,901
1,447
703
630
396
387
319
180
171
151
50
26
—
—
1,013
3,440
2,901
2,912
—
706
476
236
—
202
99
1,147
261
47
1,000
504
1,440
$
11,681
$
15,371
Note 8. Bank Loans and Line of Credit
In September 2018, Tongmei entered into a credit facility with Industrial and Commercial Bank of China
(“ICBC”) in China with a $2.9 million line of credit at an annual interest rate of approximately 0.04% over the current
Loan Prime Rate published by ICBC. Accrued interest is calculated and paid monthly. The annual interest rate was
approximately 4.4%. This credit line is collateralized by Tongmei’s land-use right and all of its buildings located at its
facility in Beijing. The primary intended use of the credit facility is for general purposes, which may include working
capital, capital expenditures and other corporate expenses. In September 2018, we borrowed $291,000 against this credit
line. The repayment of the full amount was due in September 2019. On December 26, 2018, we repaid the principal of
$291,000 and interest of $3,000 of this loan to the bank. This credit line was terminated in December 2018, after we repaid
both principal and interest to ICBC. We have decided to terminate this loan because we were able to secure a larger bank
loan in the U.S. and our management believed that to secure bank loans from the two new manufacturing sites have more
strategic advantages as compared to have one single loan from Beijing.
On November 6, 2018, the Company entered into the Credit Agreement, which established a $10 million secured
revolving line of credit with a $1.0 million letter of credit sublimit facility. The revolving credit facility is collateralized by
substantially all of the assets of the Company located within the United States, subject to certain exceptions. The
commitments under the Credit Agreement expire on November 30, 2020 and any loans thereunder will bear interest at a
rate based on the daily one-month LIBOR for the applicable interest period plus a margin of 2%. As of December 31,
2019, no loans or letters of credit were outstanding under the Credit Agreement. Effective February 5, 2020, the Company
amended the Credit Agreement. The line of credit was reduced from $10 million to $7 million. The commitments under the
First Amendment To Credit Agreement expire on November 30, 2020 and any loans thereunder will bear interest at a rate
based on the daily one-month LIBOR for the applicable interest period plus a margin of 2.5%.
On August 9, 2019, Tongmei entered into a Credit Facility with the Bank of China with a $5.8 million line of
credit at an annual interest rate of approximately 0.4% over the average interest rate quoted by the National Interbank
Funding Center. Accrued interest is calculated monthly and paid quarterly. The annual interest rate was approximately
4.7% as of December 31, 2019. The Credit Facility is collateralized by Baoding Tongmei’s land use rights and all of its
buildings located at its facility in Dingxing. The primary intended use of the credit facility is for general purposes, which
may include working capital and other corporate expenses.
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On August 9, 2019, we borrowed $2.8 million against the Credit Facility. The repayment of the full amount is due
on August 9, 2020. On September 12, 2019 we borrowed an additional $2.8 million against the Credit Facility. The
repayment of the full amount is due on September 12, 2020, unless the parties agree to a renewal. As of December 31,
2019, $5.7 million was included in “Bank loan” in our consolidated balance sheets.
Note 9. Stockholders’ Equity and Stock Repurchase Program
Stockholders’ Equity
The 883,000 shares of $0.001 par value Series A preferred stock issued and outstanding as of December 31, 2019
and 2018, valued at $3,532,000 are non-voting and non-convertible preferred stock with a 5.0% cumulative annual
dividend rate payable when declared by the Board of Directors and $4 per share liquidation preference over common stock,
and must be paid before any distribution is made to common stockholders. These preferred shares were issued to Lyte
Optronics, Inc. stockholders in connection with the completion of our acquisition of Lyte Optronics, Inc. on May 28, 1999.
Changes 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 the
Company’s equity are as follows:
Net income (loss) attributable to AXT, Inc.
Increase (decrease) in paid-in capital for:
Purchase of subsidiary shares from noncontrollling interest
Net transfers to noncontrolling interests
Net income (loss) attributable to AXT, Inc., net of transfers to noncontrolling interests
As of December 31,
2019
2018
(2,600) $
9,654
(74)
(74)
(2,674)
$
187
187
9,841
$
$
Stock Repurchase Program
On October 27, 2014, our Board of Directors approved a stock repurchase program pursuant to which we may
repurchase up to $5.0 million of our outstanding common stock. These repurchases can be made from time to time in the
open market and are funded from our existing cash balances and cash generated from operations. During 2015, we
repurchased 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 2019, 2018 and
2017 under this program. As of December 31, 2019, 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,
neither the 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 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 amount in “Accrued liabilities” in our consolidated balance
sheets. In 2017, 2018 and 2019, we did not repurchase any of our outstanding common stock. If we are required to pay the
cumulative dividends on the Series A preferred stock, our cash and cash equivalents would be reduced. We account for the
cumulative year to date dividends on the Series A preferred stock when calculating our earnings per share.
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Note 10. Employee Benefit Plans and Stock-based Compensation
Stock Option Plans and Equity Incentive Plans
In May 2007, our stockholders approved our 2007 Equity Incentive Plan (the “2007 Plan”), which provides for the
grant of incentive and non-qualified stock options to our employees, consultants and directors. The 2007 Plan is a
restatement of the 1997 Stock Option Plan which expired in 2007. The 1,928,994 share reserve of the 1997 Stock Option
Plan became the reserve of the 2007 Plan, together with 1,300,000 additional shares approved for issuance under the 2007
Plan. In May 2013, the stockholders approved an additional 2,000,000 shares to be issued under the 2007 plan. Awards may
be made under the 2007 Plan are stock options, stock appreciation rights, restricted stock, restricted stock units,
performance shares, performance units, deferred compensation awards and other stock‑based awards. Stock options and
stock appreciation rights awarded under the 2007 Plan may not be repriced without stockholder approval. Stock options
and stock appreciation rights may not be granted below fair market value. Stock options or stock appreciation rights
generally shall not be fully vested over a period of less than three years from the date of grant and cannot be exercised more
than 10 years from the date of grant. Restricted stock, restricted stock units, and performance awards generally shall not
vest faster than over a three-year period (or a twelve‑month period if vesting is based on a performance measure). In
December 2008, the 2007 Plan was amended to comply with the applicable requirements under Section 409A of the
Internal Revenue Code.
In May 2015, our stockholders approved our 2015 Equity Incentive Plan (the “2015 Plan”). The 2015 Plan is a
replacement of the 2007 Plan. The 399,562 share reserve of the 2007 Plan became the reserve of the 2015 Plan, together
with 3,000,000 additional shares approved for issuance under the 2015 Plan. In May 2019, our stockholders approved
1,600,000 of additional shares for issuance under the 2015 Plan. Awards that may be made under the 2015 Plan are stock
options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, deferred
compensation awards and other stock‑based awards. Stock options and stock appreciation rights awarded under the 2015
Plan may not be repriced without stockholder approval. Stock options and stock appreciation rights may not be granted
below fair market value. Stock options or stock appreciation rights generally shall not be fully vested over a period of less
than 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‑month period if vesting is based on a performance measure). However, options granted to consultants and restricted
stock awards granted to independent board members typically vest in one year and the 2015 Plan does allow for similar
vesting to employees. As of December 31, 2019, approximately 1.0 million shares were available for grant under the 2015
Plan.
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Stock Options
The following table summarizes the stock option transactions for each of the years ended December 31, 2017,
2018 and 2019 (in thousands, except per share data):
Stock Options
Balance as of January 1, 2017
Granted
Exercised
Canceled and expired
Balance as of December 31, 2017
Granted
Exercised
Canceled and expired
Balance as of December 31, 2018
Granted
Exercised
Canceled and expired
Balance as of December 31, 2019
Options vested as of December 31, 2019 and unvested options expected
to vest, net of forfeitures
Options exercisable as of December 31, 2019
Number of
Options
Outstanding
Weighted-
average
Exercise
Weighted
average
Remaining
Contractual Aggregate
Intrinsic
Life
Price
(in years) Value
3,294 $
184
(762)
(50)
2,666 $
246
(238)
(20)
2,654 $
430
(113)
(18)
2,953 $
3.38
8.99
3.25
3.47
3.81
5.77
2.64
4.40
4.09
3.06
2.37
4.47
4.00
7.23 $ 5,301
6.87 $ 13,149
6.28 $ 2,720
5.95 $ 3,040
2,914 $
2,169 $
4.00
3.81
5.90 $ 3,001
4.83 $ 2,484
The options outstanding and exercisable as of December 31, 2019 were in the following exercise price ranges (in
thousands, except per share data):
Range of
Exercise Price
$ 2.14 - $
$ 2.18 - $
$ 2.29 - $
$ 2.47 - $
$ 3.06 - $
$ 4.79 - $
$ 5.21 - $
$ 5.61 - $
$ 5.83 - $
$ 9.50 - $
2.14
2.18
2.36
2.91
3.06
4.79
5.21
5.77
7.95
9.50
Shares
11
540
358
342
430
129
471
325
223
124
2,953
$
$
$
$
$
$
$
$
$
$
$
Options Outstanding as of
December 31, 2019
Weighted‑average
Exercise Price
Weighted‑average
Remaining
Contractual Life
2.14
2.18
2.32
2.71
3.06
4.79
5.21
5.73
6.41
9.50
4.00
4.33
5.84
4.15
3.97
9.85
1.82
6.82
7.21
2.34
7.82
5.95
Options Vested and
Exercisable as of
December 31, 2019
Shares
11
540
358
341
—
129
370
146
207
67
2,169
$
$
$
$
$
$
$
$
$
$
$
Weighted‑Average
Exercise Price
2.14
2.18
2.32
2.71
—
4.79
5.21
5.68
6.29
9.50
3.81
There were 113,000, 238,000 and 762,000 options exercised in the years ended December 31, 2019, 2018 and
2017, respectively. The total intrinsic value of options exercised for the years ended December 31, 2019, 2018 and 2017,
was $266,000, $666,000 and $4,030,000, respectively.
As of December 31, 2019, the unamortized compensation costs related to unvested stock options granted to
employees under our 2015 plan was approximately $1.4 million, net of estimated forfeitures of $110,000. These costs will
be amortized on a straight-line basis over a weighted-average period of approximately 2.9 years and will be adjusted
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for subsequent changes in estimated forfeitures. We did not capitalize any stock‑based compensation to inventory as of
December 31, 2019 and 2018, due to the immateriality of the amount.
Restricted Stock Awards
A summary of activity related to restricted stock awards for the years ended December 31, 2017, 2018 and 2019 is
presented below (in thousands, except per share data):
Stock Awards
Non-vested as of January 1, 2017
Granted
Vested
Forfeited
Non-vested as of December 31, 2017
Granted
Vested
Forfeited
Non-vested as of December 31, 2018
Granted
Vested
Forfeited
Non-vested as of December 31, 2019
Shares
Weighted-Average
Grant Date
Fair Value
325
312
(157)
—
480
344
(181)
(10)
633
554
(228)
(20)
939
$
$
$
$
$
$
$
$
$
$
$
$
$
3.27
9.15
3.13
—
7.13
6.02
6.04
6.65
6.85
3.60
6.46
7.16
5.02
Total fair value of stock awards vested during the years ended December 31, 2019, 2018 and 2017 was
$1.5 million, $1.1 million and $490,000, respectively. As of December 31, 2019, we had $4.2 million of unrecognized
compensation expense related to restricted stock awards, which will be recognized over the weighted average period of 1.6
years.
Common Stock
The following number of shares of common stock were reserved and available for future issuance as of December
31, 2019 (in thousands, except per share data):
Options outstanding
Restricted stock awards outstanding
Stock available for future grant: 2015 Equity Incentive Plan
Total
2,953
939
1,048
4,940
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Stock-based Compensation
We recorded $2.3 million, $1.9 million and $1.4 million of stock‑based compensation in our consolidated
statements of operations for the years ended December 31, 2019, 2018 and 2017, respectively. The following table
summarizes compensation costs related to our stock‑based compensation awards (in thousands, except per share data):
Cost of revenue
Selling, general and administrative
Research and development
Total stock-based compensation
Tax effect on stock-based compensation
Net effect on net income (loss)
Shares used in computing basic net income (loss) per share
Shares used in computing diluted net income (loss) per share
Effect on basic net income (loss) per share
Effect on diluted net income (loss) per share
2019
125
1,778
443
2,346
—
2,346
39,487
39,487
(0.06)
(0.06)
$
$
$
$
Year Ended
December 31,
2018
$
$
$
$
92
1,520
313
1,925
—
1,925
39,049
40,265
(0.05)
(0.05)
$
$
$
$
2017
39
1,146
220
1,405
—
1,405
37,444
38,966
(0.04)
(0.04)
We estimate the fair value of stock options using a Black‑Scholes valuation model. There were 430,000, 246,000
and 184,000 stock options granted with a weighted-average grant date fair value of $1.48, $2.74 and $3.67 per share during
2019, 2018 and 2017, respectively. The fair value of options granted was estimated at the date of grant using the following
weighted‑average assumptions:
Expected term (in years)
Volatility
Expected dividend
Risk-free interest rate
2019
6.1
49.5 %
— %
1.67 %
Year Ended
December 31,
2018
5.8
46.6 %
— %
3.09 %
2017
5.8
46.5 %
— %
2.10 %
The expected term for stock options is based on the observed historical option exercise behavior and post-vesting
forfeitures of options by our employees, and the contractual term, the vesting period and the expected term of the
outstanding options. Expected volatility is based on the historical volatility of our common stock. The dividend yield of
zero is based on the fact that we have never paid cash dividends and have no present intention to pay cash dividends. The
risk-free interest rates are taken from the Daily Federal Yield Curve Rates as of the grant dates as published by the Federal
Reserve and represent the yields on actively traded Treasury securities for terms equal to the expected term of the options.
Retirement Savings Plan
We have a 401(k) Savings Plan (“Savings Plan”) which qualifies as a thrift plan under Section 401(k) of the
Internal Revenue 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 the amount of such reduction contributed to the 401(k) Plan. We provide matching to employee contributions up to
4% of the employees’ base pay if employees contribute at least 6% of their base pay. If the contribution rate is less than 6%
of the base pay, the matching percentage is prorated. Our contributions to the Savings Plan were $176,000, $180,000 and
$149,000 for the years ended December 31, 2019, 2018 and 2017, respectively.
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Note 11. Guarantees
Indemnification Agreements
We have entered into indemnification agreements with our directors and officers that require us to indemnify our
directors and officers against liabilities that may arise by reason of their status or service as directors or officers, other than
liabilities arising from willful misconduct of a culpable nature; to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified; and to obtain directors’ and officers’ insurance if available
on reasonable terms, which we currently have in place.
Product Warranty
We provide warranties for our products for a specific period of time, generally twelve months, against material
defects. We provide for the estimated future costs of warranty obligations in cost of sales when the related revenue is
recognized. The accrued warranty costs represent the best estimate at the time of sale of the total costs that we expect to
incur to repair or replace product parts that fail while still under warranty. The amount of accrued estimated warranty costs
are primarily based on historical experience as to product failures as well as current information on repair costs. On a
quarterly basis, we review the accrued balances and update the historical warranty cost trends. The following table reflects
the change in our warranty accrual which is included in “Accrued liabilities” on the consolidated balance sheets, during
2019 and 2018 (in thousands):
Beginning accrued product warranty
Accruals for warranties issued
Adjustments related to pre-existing warranties including expirations and changes in
estimates
Cost of warranty repair
Ending accrued product warranty
Note 12. Income Taxes
Year Ended
December 31,
2019
2018
236 $
522
227
(598)
387 $
133
289
87
(273)
236
$
$
Consolidated income before provision for income taxes includes non-U.S. income of approximately $2.8 million,
$6.5 million and $6.4 million for the years ended December 31, 2019, 2018 and 2017, respectively. We recorded a current
tax provision of $562,000, $938,000 and $792,000 for the years ended December 31, 2019, 2018 and 2017, respectively.
The components of the provision for income taxes are summarized below (in thousands):
Year Ended December 31,
2019 2018 2017
Current:
Federal
State
Foreign
Total current
Deferred:
Federal
State
Total deferred
Total provision for income taxes
95
$ — $ — $ —
2
790
792
27
535
562
5
933
938
—
—
—
—
—
—
$ 562 $ 938 $ 792
—
—
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A reconciliation of the effective income tax rates and the U.S. statutory federal income tax rate is summarized
below:
Statutory federal income tax rate
State income taxes, net of federal tax benefits
Valuation allowance
Rate change
Stock-based compensation
Foreign tax rate differential
Foreign tax incentives
Foreign income inclusion
Section 78 gross up
Foreign tax credit
Tax effect in equity method loss or gain from unconsolidated affiliates
Foreign-derived intangible income
Other
Effective tax rate
Year Ended December 31,
2018
2017
2019
21.0 %
(2.1)
(173.0)
—
(21.8)
137.7
32.2
—
—
—
(47.8)
—
(1.0)
(54.8)%
21.0 %
—
(2.6)
—
0.3
(11.4)
(2.9)
2.6
—
—
3.2
(2.4)
0.1
7.9 %
35.0 %
—
(139.5)
100.8
(10.4)
(10.3)
(7.0)
55.6
11.7
(30.6)
2.9
—
(0.9)
7.3 %
Deferred tax assets and liabilities are summarized below (in thousands):
Deferred tax assets:
Net operating loss carryforwards
Accruals, reserves and other
Credit carryforwards
Operating lease liability
Gross deferred tax assets
Valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Operating lease right-of-use assets
Total net deferred tax assets
As of December 31,
2018
2019
$ 14,979 $ 15,735
2,100
1,685
—
19,520
(19,520)
—
3,011
1,685
209
19,884
(19,691)
193
(193)
$
— $
—
—
As of December 31, 2019, we have federal net operating loss (“NOL”) carryforwards of approximately
$58.3 million, which will expire beginning in 2022. In addition, we have federal tax credit carryforwards of approximately
$1.7 million, which will expire beginning in 2027. We have utilized all state net operating losses, primarily in the state of
California, as of December 31, 2019.
The deferred tax assets valuation allowance as of December 31, 2019 is attributed to U.S. federal, and state
deferred tax 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 the realizability of the deferred tax assets such that a full valuation allowance has been recorded. These factors
include our history of losses related to domestic operations, and the lack of carryback capacity to realize deferred tax assets.
The valuation allowance increased by $0.2 million for the year ended December 31, 2019, whereas the valuation allowance
decreased by $2.6 million and $46.3 million for the years ended December 31, 2018 and 2017, respectively.
The China Enterprise Income Tax Law (“EIT”) imposes a single uniform income tax rate of 25% on all Chinese
enterprises. Our subsidiaries in China have qualified for a preferential 15% tax rate that is available for High and New
Technology 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 research
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expenditures. We realized benefits from this 10% reduction in tax rate of $211,000, $764,000 and $599,000 for 2019, 2018
and 2017, respectively. As of December 31, 2019, the favorable tax rate is still valid for the Company and it will stay the
same for next year if there is no change of the business nature. The preferential tax rate that we enjoy could be modified or
discontinued altogether at any time, which could materially and adversely affect our financial condition and results of
operations.
Our subsidiaries in China also qualify for reduction in their taxable income in China for research and
development (“R&D”) expenditures. Government pre-approval is required to claim R&D tax benefits. Any
R&D claim is then submitted with the annual corporate income tax for the taxing authorities’ approval.
Historically, we didn’t record such benefit until we received the tax refund from the Chinese government.
Beginning in 2019, we record the tax benefit in the year it incurs the cost rather than in the year the tax benefit
is received. This will better align the costs with the tax benefit. Our consolidated subsidiaries in China have
enjoyed various tax holidays since 2000. 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 to
ownership changes that might have occurred previously or that could occur in the future, as provided by Section 382 of the
Internal Revenue Code of 1986 (“Section 382”), as well as similar state provisions. Ownership changes may limit the
amount of NOL and tax credit carryforwards that can be utilized to offset future taxable income and tax, respectively. In
general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain
shareholders or public groups in the stock of a corporation by more than 50 percentage points over a three-year period. If
there is a change of control, utilization of our NOL or tax credit carryforwards would be subject to an annual limitation
under Section 382. Any limitation may result in expiration of a portion of the NOL or research and development credit
carryforwards before utilization. Subsequent ownership changes could further impact the limitation in future years. Until a
Section 382 study is completed and any limitation known, no amounts are being presented as an uncertain tax position. A
full valuation allowance has been provided against our NOL carryforwards and R&D credit carryforwards and, if an
adjustment is required, this adjustment would be offset by an adjustment to the valuation allowance. Thus, there would be
no net impact to the consolidated balance sheets or statements of operations if an adjustment were required.
During fiscal year 2019, 2018 and 2017, the amount of gross unrecognized tax benefits remains unchanged. The
total amount of unrecognized tax benefits was $14.6 million as of December 31, 2019 and 2018. The Company recognizes
interest and penalties related to uncertain tax positions as part of the provision for income taxes. To date, such interest and
penalties have not been material.
We comply with the laws, regulations, and filing requirements of all jurisdictions in which we conduct business.
We regularly engage in discussions and negotiations with tax authorities regarding tax matters in various jurisdictions.
We file income tax returns in the U.S. federal, various states and foreign jurisdictions. Currently, there is no tax
audit in any of the jurisdictions and we do not expect there will be any significant change to this.
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A reconciliation of the beginning and ending amount of the gross unrecognized tax benefits is as follows (in
thousands):
Gross unrecognized tax benefits balance at beginning of
the year
Add:
Additions based on tax positions related to the current
year
Additions for tax positions of prior years
Less:
Decrease related to lapse of statute of limitations
Gross unrecognized tax benefits balance at end of the
year
Year Ended December 31,
2019
2018
2017
$ 14,557
$ 14,557
$ 14,557
—
—
—
—
—
—
—
—
—
$ 14,557
$ 14,557
$ 14,557
Excluding the effects of recorded valuation allowances for deferred tax assets, $14.6 million of the unrecognized
tax benefit would favorably impact the effective tax rate in future periods if recognized.
Note 13. Net Income (Loss) per Share
Basic net income (loss) per share is computed using the weighted average number of common shares outstanding
during the periods less shares of common stock subject to repurchase and non-vested stock awards. Diluted net income
(loss) per share is computed using the weighted average number of common shares outstanding and potentially dilutive
common shares outstanding during the periods. The dilutive effect of outstanding stock options and restricted stock awards
is reflected in diluted earnings per share by application of the treasury stock method. Potentially dilutive common shares
consist of common shares issuable upon the exercise of stock options. Potentially dilutive common shares are excluded in
net loss periods, as their effect would be anti-dilutive.
A reconciliation of the numerators and denominators of the basic and diluted net income (loss) per share
calculations is as follows (in thousands, except per share data):
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Numerator:
Net income (loss) attributable to AXT, Inc.
Less: Preferred stock dividends
Net income (loss) available to common stockholders
Denominator:
Denominator for basic net income (loss) per share - weighted-average
common shares
Effect of dilutive securities:
Common stock options
Restricted stock awards
Denominator for dilutive net income (loss) per common shares
Basic net income (loss) per share:
Net income (loss) attributable to AXT, Inc.
Net income (loss) to common stockholders
Diluted net income (loss) per share:
Net income (loss) attributable to AXT, Inc.
Net income (loss) to common stockholders
Options excluded from diluted net income (loss) per share as the impact is anti-
dilutive
Restricted stock excluded from diluted net income (loss) per share as the impact is
anti-dilutive
Note 14. Segment Information and Foreign Operations
Segment Information
Year ended
December 31,
2018
2017
2019
$ (2,600) $ 9,654 $ 10,148
(177)
$ (2,777) $ 9,477 $ 9,971
(177)
(177)
39,487
39,049
37,444
—
—
39,487
1,106
110
40,265
1,339
183
38,966
$ (0.07) $
$ (0.07) $
0.24 $
0.24 $
0.27
0.27
$ (0.07) $
$ (0.07) $
0.24 $
0.24 $
0.26
0.26
2,953
939
266
227
86
63
We operate in one segment for the design, development, manufacture and distribution of high-performance
compound and single element semiconductor substrates and sale of raw materials integral to these substrates. In accordance
with ASC Topic 280, Segment Reporting, our chief operating decision‑maker has been identified as the Chief Executive
Officer, who reviews operating results to make decisions about allocating resources and assessing performance for the
Company. Since we operate in one segment, all financial segment and product line information can be found in the
consolidated financial statements.
Product Information
The following table represents revenue amounts (in thousands) by product type:
Product Type:
Substrates
Raw materials and others
Total
$
$
2019
67,849
15,407
83,256
$
$
Year Ended
December 31,
2018
2017
81,008
21,389
102,397
$
$
78,619
20,054
98,673
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Geographical Information
The following table represents revenue amounts (in thousands) reported for products shipped to customers in the
corresponding geographic region:
Geographical region:
China
Europe (primarily Germany)
Taiwan
North America (primarily the United States)
Asia Pacific (excluding China, Taiwan and Japan)
Japan
Total
2019
Year Ended
December 31,
2018
$
$
26,796
18,178
16,204
8,228
7,592
6,258
83,256
$
$
31,492
22,013
20,078
10,021
8,488
10,305
102,397
$
$
2017
24,962
23,956
18,279
8,352
9,866
13,258
98,673
Long-lived assets consist primarily of property, plant and equipment, and operating lease right-of-use assets are
attributed to the geographic location in which they are located. Long-lived assets, net of depreciation, by geographic region
were as follows (in thousands):
Long-lived assets by geographic region, net of depreciation:
North America
China
As of December 31,
2019
2018
$
$
1,069
99,272
100,341
$
$
445
81,835
82,280
Note 15. Other (expense) income
The components of other (expense) income are summarized below (in thousands):
$
$
2019
321
—
808
(182)
947
$
$
Year Ended
December 31,
2018
165
—
—
187
352
$
$
2017
(602)
77
—
(28)
(553)
Foreign exchange gain (loss)
Gain on available-for-sales securities
Gain from local China government subsidy
Other income (expense)
Note 16. Commitments and Contingencies
Legal Proceedings
From time to time we may be involved in judicial or administrative proceedings concerning matters arising in the
ordinary course of business. We do not expect that any of these matters, individually or in the aggregate, will have a
material adverse effect on our business, financial condition, cash flows or results of operations.
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Leases
We lease certain equipment, office space, warehouse and facilities under long-term operating leases expiring at
various dates through July 2029. The majority of our lease obligations relate to our lease agreement for a nitrogen system to
be used during the manufacturing process for our facility in Dingxing, China. The equipment lease became effective in
August 2019 and will expire in July 2029. There are no variable lease payments, residual value guarantees or any
restrictions or covenants imposed by the equipment lease. The remainder relate to our lease agreement for our facility in
Fremont, California with approximately 19,467 square feet, which expires in 2020. Under the terms of the facility lease
agreement, in May, 2020, we will have the option to extend the term of the lease for an additional three years. We are
reasonably certain to exercise the option in the future. There are no variable lease payments, residual value guarantees or
any restrictions or covenants imposed by the facility lease. All other operating leases have a term of 12 months or less.
On January 1, 2019, we adopted ASC 842, which requires the recognition of the right-of-use assets and related
operating and finance lease liabilities on the balance sheet. As permitted by ASC 842, we elected the adoption date of
January 1, 2019, which is the date of initial application. As a result, the consolidated balance sheet prior to January 1, 2019
was not restated, continues to be reported under ASC Topic 840, Leases, (“ASC 840”), which did not require the
recognition of operating lease liabilities on the balance sheet, and is not comparative. Under ASC 842, all leases are
required to be recorded on the balance sheet and are classified as either operating leases or finance leases. The lease
classification affects the expense recognition in the statement of operations. Operating lease charges are recorded entirely
in operating expenses. Finance lease charges are split, where amortization of the right-of-use asset is recorded in operating
expenses and an implied interest component is recorded in interest expense. The expense recognition for operating leases
and finance leases under ASC 842 is substantially consistent with ASC 840. As a result, there is no significant difference in
our results of operations presented in our consolidated statement of operations and consolidated statement of
comprehensive income (loss) for each year presented.
We adopted ASC 842 using a modified retrospective approach for all leases existing at January 1, 2019. The
adoption of ASC 842 had a material impact on our consolidated balance sheet. The most significant impact was the
recognition of the operating lease right-of-use assets and the liability for operating leases. Accordingly, upon adoption,
leases that were classified as operating leases under ASC 840 were classified as operating leases under ASC 842, and we
recorded an adjustment of $1.1 million to operating lease right-of-use assets and the related lease liability. The lease
liability is based on the present value of the remaining minimum lease payments, determined under ASC 840, discounted
using our secured incremental borrowing rate at the effective date of January 1, 2019, using the original lease term as the
tenor. As permitted under ASC 842, we elected several practical expedients that permit us to not reassess (1) whether a
contract is or contains a lease, (2) the classification of existing leases, and (3) whether previously capitalized costs continue
to qualify as initial indirect costs. The application of the practical expedients did not have a material impact on the
measurement of the operating lease liability.
Leases are classified as either finance leases or operating leases. A lease is classified as a finance lease if any one
of the following criteria are met: the lease transfers ownership of the asset by the end of the lease term, the lease contains
an option to purchase the asset that is reasonably certain to be exercised, the lease term is for a major part of the remaining
useful life of the asset or the present value of the lease payments equals or exceeds substantially all of the fair value of the
asset. A lease is classified as an operating lease if it does not meet any one of these criteria. All of our leases are classified
as operating leases and substantially all of our operating leases are comprised of equipment and office space leases. None
of our leases are classified as, finance leases.
For all leases at the lease commencement date, a right-of-use asset and a lease liability are recognized. The right-
of-use asset represents the right to use the leased asset for the lease term. The lease liability represents the present value of
the lease payments under the lease.
The right-of-use asset is initially measured at cost, which primarily comprises the initial amount of the lease
liability, plus any initial direct costs incurred, consisting mainly of brokerage commissions, less any lease incentives
received. All right-of-use assets are reviewed for impairment. The lease liability is initially measured at the present value of
the lease payments, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined,
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our secured incremental borrowing rate for the same term as the underlying lease.
Lease payments included in the measurement of the lease liability comprise the following: the fixed noncancelable
lease payments, payments for optional renewal periods where it is reasonably certain the renewal period will be exercised,
and payments for early termination options unless it is reasonably certain the lease will not be terminated early.
Lease expense for operating leases consists of the lease payments plus any initial direct costs, primarily brokerage
commissions, and is recognized on a straight-line basis over the lease term.
We have elected not to recognize right-of-use assets and lease liabilities for short-term leases that have a term of
12 months or less. The effect of short-term leases on our right-of-use asset and lease liability was not material.
As of December 31, 2019, the maturities of our operating lease liabilities (excluding short-term leases) are as
follows (in thousands):
Maturity of Lease Liabilities
2020
2021
2022
2023
2024
Thereafter
Total minimum lease payments
Less: Interest
Present value of lease obligations
Less: Current portion
Long-term portion of lease obligations
$
$
452
549
565
556
267
1,223
3,612
(598)
3,014
(319)
2,695
The weighted average remaining lease term and the weighted-average discount rate for our operating leases are as
follows:
Weighted-average remaining lease term (years)
Weighted-average discount rate
December 31,
2019
7.94
4.61 %
Supplemental cash flow information related to leases where we are the lessee is as follows (in thousands):
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
Supplemental noncash information on lease liabilities arising from obtaining right-of-use
assets:
Right-of-use assets obtained in exchange for new operating lease liabilities
$
$
Year Ended
December 31, 2019
267
2,072
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The components of lease expense are as follows (in thousands) within our consolidated statements of operations:
Operating lease
Short-term lease expense
Total
Royalty Agreement
Year Ended
December 31, 2019
358
60
418
$
$
We had entered into a royalty agreement with Sumitomo effective December 3, 2010 with a term of eight years,
terminating December 31, 2018. We and our related companies were granted a worldwide, nonexclusive, royalty bearing,
irrevocable license to certain patents for the term on the agreement. We were to pay up to $7.0 million in royalty payment
over eight years that began in 2011 based on future royalty bearing sales. This agreement contained a clause that allowed us
to claim a credit, starting in 2013, in the event that the royalty bearing sales for the year was lower than a pre-determined
amount set forth in this agreement.
For the year ended December 31, 2018, royalty expense under this agreement was $565,000, which was net of
claim for credit of $10,000. Royalty expense for year ended December 31, 2017 was $526,000, which was net of claim for
credit of $49,000. These expenses were included in cost of revenue.
In January 2020, we agreed to enter into a cross license and covenant agreement with Sumitomo that will expire
December 31, 2029 and includes annual payments by us to Sumitomo over a 10-year period. Please see Note 18 of our
Notes to Consolidated Financial Statements.
Land Purchase and Investment Agreement
We have established a wafer process production line in Dingxing, China. In addition to a land rights and building
purchase agreement that we entered into with a private real estate development company to acquire our new manufacturing
facility, we also entered into a cooperation agreement with the Dingxing local government. In addition to pledging its full
support and cooperation, the Dingxing local government will issue certain credits or rebates to us as we achieve certain
milestones. We, in turn, agreed to hire local workers over time, pay taxes when due and eventually demonstrate a total
investment of approximately $90 million in value, assets and capital. The investment will include cash paid 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 deemed value for our
customer list or the end user of our substrates, for example, the end users of 3-D sensing VCSELs (vertical cavity surface
emitting lasers), a deemed value 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, rather it is a good faith covenant entered into between AXT and the Dingxing local
government. Further, there is no specific penalty contemplated if either party breaches the agreement. However, the
agreement does state that each party has a right to seek from the other party compensation for losses. Under certain
conditions, the Dingxing local government may purchase the land and building at the appraised value. We believe that such
cooperation agreements are normal, customary and usual in China and that the future valuation is flexible. We have a
similar agreement with the city of Kazuo, China, although on a smaller scale. The total investment targeted by AXT in
Kazuo is approximately $15 million in value, assets and capital. In addition, BoYu has a similar agreement with the city of
Kazuo. The total investment targeted by BoYu in Kazuo is approximately $8 million in value, assets and capital.
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Note 17. Unaudited Quarterly Consolidated Financial Data
2019:
Revenue
Gross profit
Net income (loss) attributable to AXT, Inc.
Net income (loss) attributable to AXT, Inc. per share, basic
Net income (loss) attributable to AXT, Inc. per share, diluted
2018:
Revenue
Gross profit
Net income (loss) attributable to AXT, Inc.
Net income (loss) attributable to AXT, Inc. per share, basic
Net income (loss) attributable to AXT, Inc. per share, diluted
Note 18. Subsequent Events
Quarter
First
Second Third
Fourth
(in thousands, except per share data)
$ 20,208 $ 24,797 $ 19,841 $ 18,410
3,865
5,759
(2,049)
(898)
0.04 $ (0.02) $ (0.05)
0.04 $ (0.02) $ (0.05)
6,695
(1,104)
$ (0.03) $
$ (0.03) $
8,506
1,451
9,573
2,875
$ 24,419 $ 27,120 $ 28,626 $ 22,232
5,850
(1,061)
0.10 $ (0.03)
0.10 $ (0.03)
10,614
3,939
11,010
3,901
0.10 $
0.10 $
0.07 $
0.07 $
$
$
On January 28, 2020, AXT and Sumitomo entered into a basic agreement, pursuant to which AXT and Sumitomo
agreed to execute a formal cross license and covenant agreement that will expire on December 31, 2029. The formal
agreement is a fixed-cost cross license and not a variable-cost cross license that is based on revenue or units. Under the
formal agreement, the aggregate fixed cost is $2 million, which is payable in annual installments over a 10-year period.
In November 2018, AXT entered into a credit agreement with Wells Fargo Bank (“Credit Agreement”). The line of
credit has never been drawn on. On February 5, 2020, the Company entered into the First Amendment, which reduced the
$10 million secured revolving line of credit under the Credit Agreement to $7 million. The commitments under the Credit
Agreement, as amended by the First Amendment, expire on November 30, 2020 and any loans thereunder will bear interest
at a rate based on the daily one-month LIBOR for the applicable interest period plus a margin of 2.5%. As of the date of
this Annual Report on Form 10-K, no loans or letters of credit were outstanding under the Credit Agreement, as amended
by the First Amendment.
Item 16. Form 10-K Summary
Not applicable.
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AXT, Inc.
EXHIBITS
TO
FORM 10-K ANNUAL REPORT
For the Year Ended December 31, 2019
Exhibit
Number
3.1(1)
3.2(2)
3.3(3)
3.4(4)
3.5(5)
3.6(6)
3.7(7)
4.1
10.1(8)*
10.3(9)**
10.4(10)**
10.5(11)*
10.6(12)*
10.7(13)*
Description
Restated Certificate of Incorporation
Certificate of Amendment of Certificate of Incorporation
Certificate of Amendment to the Restated Certificate of Incorporation
Certificate of Designation, Preferences and Rights of Series A Preferred Stock (which is incorporated
herein by reference to Exhibit 2.1 to the registrant’s form 8-K dated May 28, 1999).
Second Amended and Restated By Laws
Amended and Restated Section 5.1 of Article V of the Second Amended and Restated Bylaws of AXT,
Inc.
Certificate of Amendment to By Laws
Description of Securities
Form of Indemnification Agreement for directors and officers
6-inch Supply Agreement dated December 31, 2008 between AXT, Inc. and IQE plc
4-inch Supply Agreement dated December 31, 2008 between AXT, Inc. and IQE plc
2007 Equity Incentive Plan (amended December 8, 2008)
Forms of agreements under the 2007 Equity Incentive Plan
Amended and Restated Employment Offer Letter between the Company and Dr. Morris S. Young dated
December 4, 2012
10.8(14)*
10.9(15)*
10.10(16)*
10.11(17)*
Employment Letter Agreement between the Company and Mr. Gary L. Fischer
2015 Equity Incentive Plan
Executive Incentive Plan
Credit Agreement, dated as of November 2, 2018, by and between AXT, Inc. and Wells Fargo Bank,
10.12
12.1
21.1
23.1
24.1
31.1
31.2
32.1
32.2
National Association
First Amendment to Credit Agreement, dated as of February 5, 2020, by and between AXT, Inc. and Wells
Fargo Bank, National Association
Computation of Ratio of Earnings to Fixed Charges
List of Subsidiaries
Consent of Independent Registered Public Accounting Firm, BPM LLP
Power of Attorney (see signature page)
Certification by principal executive officer pursuant to Section 302 of the Sarbanes‑Oxley Act of 2002
Certification by principal financial officer pursuant to Section 302 of the Sarbanes‑Oxley Act of 2002
Certification by Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to
Section 906 of the Sarbanes‑Oxley Act of 2002
Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
Section 906 of the Sarbanes‑Oxley Act of 2002
XBRL Instance.
XBRL Taxonomy Extension Schema.
XBRL Taxonomy Extension Calculation Linkbase.
XBRL Taxonomy Extension Definition Linkbase.
XBRL Taxonomy Extension Label Linkbase.
XBRL Taxonomy Extension Presentation Linkbase.
105
Table of Contents
Incorporated by reference to exhibit 3.1 to registrant’s Form 10-K filed with the SEC on March 31, 1999.
(1)
Incorporated by reference to exhibit 3.1 to registrant’s Form 10-Q filed with the SEC on August 14, 2000.
(2)
Incorporated by reference to exhibit 3.4 to registrant’s Form 10-Q filed with SEC on August 5, 2004.
(3)
Incorporated by reference to exhibit 3.1 to registrant’s Form 8-K filed with the SEC on June 14, 1999.
(4)
Incorporated by reference to exhibit 3.4 to registrant’s Form 8-K filed with the SEC on May 30, 2001.
(5)
Incorporated by reference to exhibit 99.2 to registrant’s Form 8-K filed with the SEC on August 1, 2007.
(6)
Incorporated by reference to exhibit 3.1 to registrant’s Form 8-K filed with the SEC on October 26, 2010.
(7)
Incorporated by reference to exhibit 10.1 to registrant’s Form 8-K filed with the SEC on October 31, 2014.
(8)
(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 10.1 to registrant’s Form 8-K filed with the SEC on December 4, 2012.
(14) Incorporated by reference to exhibit 10.1 to registrant’s Form 8-K filed with the SEC on August 12, 2014.
(15) Incorporated by reference to appendix A to the registrant’s Definitive Proxy Statement on Schedule 14A filed with the SEC on April 8, 2015.
(16) Incorporated by reference to exhibit 10.1 to registrant’s Form 8-K filed with the SEC on February 26, 2016.
(17) Incorporated by reference to exhibit 10.1 registrant’s Form 8-K filed with the SEC on November 9, 2018.
* Management contract or compensatory plan.
** Confidential treatment has been requested of the SEC for portions of the exhibit.
106
Table of Contents
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereto duly authorized.
SIGNATURES
AXT, Inc.
By:
/s/ GARY L. FISCHER
Chief Financial Officer and Corporate Secretary
(Principal Financial Officer)
Date: March 12, 2020
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby
constitutes and appoints Morris S. Young and Gary L. Fischer, and each of them, his true and lawful attorney-in-fact and
agent, with full power of substitution, each with power to act alone, to sign and execute on behalf of the undersigned any
and all amendments to this Report on Form 10-K, and to perform any acts necessary in order to file the same, with all
exhibits thereto and 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 in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent, or their or his or her substitutes, shall do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ MORRIS S. YOUNG
Morris S. Young
Chief Executive Officer and Director
(Principal Executive Officer)
/s/ GARY L. FISCHER
Gary L. Fischer
Chief Financial Officer and Corporate Secretary
(Principal Financial Officer and
Principal Accounting Officer)
March 12, 2020
March 12, 2020
/s/ JESSE CHEN
Jesse Chen
/s/ DAVID C. CHANG
David C. Chang
/s/ LEONARD LEBLANC
Leonard LeBlanc
/s/ Christine Russell
Christine Russell
Chairman of the Board of Directors
March 12, 2020
March 12, 2020
March 12, 2020
March 12, 2020
Director
Director
Director
107
DESCRIPTION OF THE REGISTRANT’S SECURITIES
REGISTERED PURSUANT TO SECTION 12 OF THE
SECURITIES EXCHANGE ACT OF 1934
DESCRIPTION OF CAPITAL STOCK
Exhibit 4.1
The following information describes our common stock and preferred stock, as well as certain provisions of our
restated certificate of incorporation, as amended (the “certificate of incorporation”), and second amended and restated
bylaws, as amended (the “bylaws”). This summary does not purport to be complete and is qualified in its entirety by the
provisions of our certificate of incorporation and bylaws, copies of which have been filed as exhibits to this Annual Report
on Form 10-K, as well as to the applicable provisions of the Delaware General Corporation Law.
General
Our authorized capital stock consists of 70,000,000 shares of common stock with a $0.001 par value per share (the
“common stock”) and 2,000,000 shares of preferred stock with a $0.001 par value per share (the “preferred stock”),
1,000,000 shares of which are designated as “Series A Preferred Stock” and 200,000 of which are designated as “Series B
Preferred Stock.” Our board of directors may establish the rights and preferences of the preferred stock from time to time.
Common Stock
Each holder of our common stock is entitled to one vote for each share on all matters to be voted upon by the
stockholders. Subject to any preferential rights of any outstanding preferred stock, holders of our common stock are entitled
to receive ratably the dividends, if any, as may be declared from time to time by the board of directors out of funds legally
available therefor. We have never declared or paid any cash dividend on our capital stock and do not anticipate paying any
cash dividends in the foreseeable future. If there is a liquidation, dissolution or winding up of our company, holders of our
common stock would be entitled to share ratably in our assets remaining after the payment of liabilities and any preferential
rights of any outstanding preferred stock.
Holders of our common stock have no preemptive or conversion rights or other subscription rights, and there are
no redemption or sinking fund provisions applicable to the common stock. The outstanding shares of common stock are
fully paid and non-assessable. The rights, preferences and privileges of the holders of our common stock are subject to, and
may be adversely affected by, the rights of the holders of shares of any series of preferred stock that we may designate and
issue in the future.
Our common stock is listed on the NASDAQ Global Select Market under the symbol “AXTI.” The transfer agent
and registrar for the common stock is Broadridge Corporate Issuer Solutions, Inc.
Preferred Stock
Our certificate of incorporation provides that we may issue up to 2,000,000 shares of preferred stock. As of March
12, 2020, 883,000 shares of our Series A Preferred Stock were issued and outstanding and are non-voting and non-
convertible preferred stock with a 5.0% cumulative annual dividend rate payable when declared by the board of directors
and $4 per share liquidation preference over common stock, and must be paid before any distribution is made to common
stockholders. Other than the Series A Preferred Stock, no shares of preferred stock are currently outstanding.
Under the terms of our certificate of incorporation, our board of directors is authorized to issue shares of preferred
stock in one or more series without stockholder approval. Our board of directors has the discretion to determine the rights,
preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges
and liquidation preferences, of each series of preferred stock. There are no restrictions presently on the repurchase or
redemption of any shares of our preferred stock.
The issuance of shares of preferred stock will affect, and may adversely affect, the rights of holders of common
stock. It is not possible to state the actual effect of the issuance of any shares of preferred stock on the rights of holders
of common stock until our board of directors determines the specific rights attached to that preferred stock. The effects of
issuing additional preferred stock could include one or more of the following:
·
·
·
·
restricting dividends on the common stock;
diluting the voting power of the common stock;
impairing the liquidation rights of the common stock; or
delaying or preventing changes in control or management of our company.
Preferred stock will be fully paid and nonassessable upon issuance.
Effect of Certain Provisions of our Certificate of Incorporation and Bylaws and the Delaware Anti-Takeover Statute
Some provisions of Delaware law and our certificate of incorporation and bylaws contain provisions that could
make the following transactions more difficult:
·
·
·
acquisition of us by means of a tender offer;
acquisition of us by means of a proxy contest or otherwise; or
removal of our incumbent officers and directors.
Those provisions, summarized below, are expected to discourage coercive takeover practices and inadequate
takeover bids and to promote stability in our management. These provisions are also designed to encourage persons seeking
to acquire control of us to first negotiate with our board of directors.
Certificate of Incorporation and Bylaws
Our certificate of incorporation and our bylaws provide for, among other things, the following:
·
·
·
·
·
Undesignated Preferred Stock. The ability to authorize undesignated preferred stock makes it possible for our
board of directors to issue one or more series of preferred stock with voting or other rights or preferences that
could impede the success of any attempt to change control of our company. These and other provisions may
have the effect of deferring hostile takeovers or delaying changes in control or management of our company.
Stockholder Meetings. Our bylaws provide that in general a special meeting of stockholders may be called
only by our board of directors, its chairman or our president.
Requirements for Advance Notification of Stockholder Nominations and Proposals. Our bylaws establish
advance notice procedures with respect to stockholder proposals and the nomination of candidates for election
as directors, other than nominations made by or at the direction of our board of directors or a committee of
the board of directors.
Board Classification. Our board of directors is divided into three classes. The directors in each class are
elected to serve for a three-year term, one class being elected each year by our stockholders. This system of
electing and removing directors may tend to discourage a third party from making a tender offer or otherwise
attempting to obtain control of us, because it generally makes it more difficult and time consuming for
stockholders to replace a majority of the directors.
Limits on Ability of Stockholders to Act by Written Consent. We have provided in our bylaws that our
stockholders may not act by written consent. This limit on the ability of our stockholders to act by written
consent may lengthen the amount of time required to take stockholder actions. As a result, a holder
controlling a majority of our capital stock would not be able to amend our bylaws or remove directors without
holding a meeting of our stockholders called in accordance with our bylaws.
·
·
·
Amendment of Certificate of Incorporation and Bylaws. The amendment of the above provisions of our
certificate of incorporation and bylaws requires approval by holders of at least two-thirds of our outstanding
capital stock entitled to vote generally in the election of directors.
Election and Removal of Directors. Our certificate of incorporation and bylaws contain provisions that
establish specific procedures for appointing and removing members of our board of directors. Under our
certificate of incorporation and bylaws, vacancies and newly created directorships on our board of directors
may be filled only by a majority of the directors then serving on the board of directors. Under our certificate
of incorporation and bylaws, directors may be removed, with or without cause, by the affirmative vote of the
holders of a majority of the shares then entitled to vote at an election of directors.
No Cumulative Voting. The Delaware General Corporation Law provides that stockholders are not entitled to
the right to cumulate votes in the election of directors unless our certificate of incorporation provides
otherwise. Our certificate of incorporation and bylaws do not expressly provide for cumulative voting.
Without cumulative voting, a minority stockholder may not be able to gain as many seats on our board of
directors as the stockholder would be able to gain if cumulative voting were permitted. The absence of
cumulative voting makes it more difficult for a minority stockholder to gain a seat on our board of directors to
influence our board of directors’ decision regarding a takeover.
Delaware Anti-Takeover Statute
We are subject to the provisions of Section 203 of the Delaware General Corporation Law regulating corporate
takeovers. In general, Section 203 prohibits a publicly-held Delaware corporation from engaging, under certain
circumstances, in a business combination with an interested stockholder for a period of three years following the date the
person became an interested stockholder unless:
·
·
·
prior to the date of the transaction, the board of directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming an interested stockholder;
upon completion of the transaction that resulted in the stockholder becoming an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the voting stock outstanding, but not for
determining the outstanding voting stock owned by the interested stockholder, (i) shares owned by persons
who are directors and also officers, and (ii) shares owned by employee stock plans in which employee
participants do not have the right to determine confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer; or
at or subsequent to the date of the transaction, the business combination is approved by the board of directors
of the corporation and authorized at an annual or special meeting of stockholders, and not by written consent,
by the affirmative vote of at least 66-2/3% of the outstanding voting stock which is not owned by the
interested stockholder.
Generally, a business combination includes a merger, asset or stock sale, or other transaction resulting in a
financial benefit to the interested stockholder. An interested stockholder is a person who, together with affiliates and
associates, owns or, within three years prior to the determination of interested stockholder status, did own 15% or more of a
corporation’s outstanding voting stock.
FIRST AMENDMENT TO CREDIT AGREEMENT AND WAIVER
Exhibit 10.12
This FIRST AMENDMENT TO CREDIT AGREEMENT AND WAIVER (this "Amendment"), dated as of
February 5, 2020, is entered into by and between AXT, INC., a Delaware corporation ("Borrower"), and WELLS
FARGO BANK, NATIONAL ASSOCIATION ("Bank").
RECITALS
WHEREAS Borrower is currently indebted to Bank pursuant to the terms and conditions of that certain Credit
Agreement between Borrower and Bank, dated as of November 2, 2018 (as amended from time to time, the "Credit
Agreement"). Each capitalized term used but not otherwise defined herein has the meaning ascribed thereto in the
Credit Agreement.
WHEREAS Borrower has informed Bank that it has failed to maintain its financial condition as of September
30, 2019, pursuant to the terms of Section 4.9.(a) of the Credit Agreement, and that such failure has resulted in an
Event of Default under to Section 6.1.(c) of the Credit Agreement (the “Profitability Default” and, together with all
other Events of Default under the Credit Agreement resulting therefrom, the “Specified Defaults”).
WHEREAS, on and subject to the terms and conditions of this Agreement: (a) Borrower has requested that
Bank waive the Specified Defaults and agree to certain changes in the terms and conditions set forth in the Credit
Agreement; and (b) Bank has agreed to Borrower's requests.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree that the Credit Agreement and the other Loan Documents, as applicable, shall
be amended and the parties hereto agree as follows, provided that nothing contained herein shall terminate any security
interests, guaranties, subordination or other documents in favor of Bank, all of which shall remain in full force and
effect unless otherwise expressly provided herein:
1.
Borrower acknowledges that each of the Specified Defaults constitutes an Event of Default under
the Credit Agreement. Pursuant to the request of Borrower and subject to the terms and conditions of this
Amendment, Bank hereby waives the Specified Defaults. The limited waiver set forth in this Section 1 shall be limited
precisely as written and shall not be deemed to constitute: (a) an amendment, consent or waiver of any other terms or
conditions of the Credit Agreement or any other document related to the Credit Agreement; or (b) a consent to any
future amendment, consent or waiver, whether of any subsequent breach of the same provisions or otherwise. Except
as expressly set forth in this Amendment, the Credit Agreement and each other document executed and delivered in
connection with the Credit Agreement shall continue in full force and effect.
2.
Section 1.1.(a) of the Credit Agreement is hereby deleted in its entirety and replaced with the
following:
(a)
Line of Credit. Subject to the terms and conditions of this
Agreement, Bank hereby agrees to make advances to Borrower from time to time
up to and including November 30, 2020, not to exceed at any time the aggregate
principal amount of Seven Million Dollars ($7,000,000.00) (“Line of Credit”), the
proceeds of which shall be used for Borrower’s working capital requirements and
other general corporate purposes. Borrower’s obligation to repay advances under
the Line of Credit shall be evidenced by a promissory note dated as of November
2, 2018 (as the same may be amended, supplemented and/or otherwise modified
from time to time, the “Line of Credit Note”), all terms of which are incorporated
herein by this reference.
3.
Section 1.2.(c) of the Credit Agreement is hereby deleted in its entirety and replaced with the
following:
(c)
Unused Commitment Fee. Borrower shall pay to Bank a fee
equal to three-eighths of one percent (0.375%) per annum (computed on the basis
of a 360-day year, actual days elapsed) on the daily unused amount of the Line of
Credit, which fee shall be calculated on a quarterly basis by Bank and shall be due
and payable by Borrower in arrears on the fifteenth (15 ) day of each fiscal quarter
th
during the term hereof and on the maturity date hereof.
4.
Section 2.1. of the Credit Agreement is hereby deleted in its entirety and replaced with the
following:
SECTION 2.1.LEGAL STATUS. (a) Borrower is a corporation, duly
organized and existing and in good standing under the laws of Delaware, and is
qualified or licensed to do business (and is in good standing as a foreign
corporation, if applicable) in all jurisdictions in which such qualification or
licensing is required or in which the failure to so qualify or to be so licensed could
have a material adverse effect on Borrower; and (b) no member of the Borrowing
Group (as defined below) is a Sanctioned Target (as defined below) of economic or
financial sanctions, sectoral sanctions, secondary sanctions, trade embargoes or
restrictions and anti-terrorism laws imposed, administered or enforced from time
to time by the United States of America, the United Nations Security Council, the
European Union, the United Kingdom, any other governmental authority with
jurisdiction over Borrower or any member of the Borrowing Group (collectively,
“Sanctions”). As used herein, “Borrowing Group” means: (i) Borrower, (ii) any
direct or indirect parent of Borrower, (iii) any affiliate or subsidiary of Borrower,
(iv) any Third Party Obligor (as defined below), and (v) any officer, director or
agent acting on behalf of any of the parties referred to in items (i) through and
including (iv) with respect to the obligations hereunder, this Agreement or any of
the other Loan Documents. “Sanctioned Target” means any target of Sanctions,
including (i) persons on any list of targets identified or designated pursuant to any
Sanctions, (ii) persons, countries, or territories that are the target of any territorial
or country-based Sanctions program, (iii) persons that are a target of Sanctions due
to their ownership or control by any Sanctioned Target(s), or (iv) persons
otherwise a target of Sanctions, including vessels and aircraft, that are designated
under any Sanctions program.
5.
Section 2.5. of the Credit Agreement is hereby deleted in its entirety and replaced with the
following:
SECTION 2.5.CORRECTNESS OF FINANCIAL STATEMENT AND
OTHER INFORMATION. The annual financial statement of Borrower dated
December 31, 2017, and all interim financial statements delivered to Bank since
said date, true copies of which have been delivered by Borrower to Bank prior to
the date hereof, (a) are complete and correct and present fairly the financial
condition of Borrower, (b) disclose all liabilities of Borrower that are
required to be reflected or reserved against under generally accepted accounting
principles, whether liquidated or unliquidated, fixed or contingent, and (c) have
been prepared in accordance with generally accepted accounting principles
consistently applied. Since the dates of such financial statements there has been no
material adverse change in the financial condition of Borrower, nor has Borrower
mortgaged, pledged, granted a security interest in or otherwise encumbered any of
its assets or properties except in favor of Bank or as otherwise permitted by Bank
in writing. All information provided from time to time by Borrower or any Third
Party Obligor to Bank for the purpose of enabling Bank to fulfill its regulatory and
compliance requirements, standards and processes was complete and correct at the
time such information was provided and, except as specifically identified to Bank
in a subsequent writing, remains complete and correct today.
6.
The following Section 2.12. is hereby added to the Credit Agreement immediately following Section
2.11.:
SECTION 2.12SANCTIONS, ANTI-MONEY LAUNDERING AND
ANTI-CORRUPTION LAWS. (a) each member of the Borrowing Group has
instituted, maintains and complies with policies, procedures and controls
reasonably designed to assure compliance with Anti-Money Laundering Laws and
Anti-Corruption Laws (each as defined below), and Sanctions; and (b) to the best
of Borrower’s knowledge, after due care and inquiry, no member of the Borrowing
Group is under investigation for an alleged violation of any Sanctions, Anti-Money
Laundering Laws or Anti-Corruption Laws by a governmental authority that
enforces such laws. As used herein: “Anti-Corruption Laws” means: (i) the U.S.
Foreign Corrupt Practices Act of 1977, as amended; (ii) the U.K. Bribery Act
2010, as amended; and (iii) any other anti-bribery or anti-corruption laws,
regulations or ordinances in any jurisdiction in which the Borrower or any member
of the Borrowing Group is located or doing business. “Anti-Money Laundering
Laws” means applicable laws or regulations in any jurisdiction in which the
Borrower or any member of the Borrowing Group is located or doing business that
relates to money laundering, any predicate crime to money laundering, or any
financial record keeping and reporting requirements related thereto.
7.
Section 4.4.(b) of the Credit Agreement is hereby deleted in its entirety and replaced with the
following:
(b)
comply with, and cause Borrower’s Subsidiaries to comply
with, the requirements of all laws, rules, regulations and orders, including all
Sanctions, Anti-Money Laundering Laws, and Anti-Corruption Laws, other than
those referenced in Section 4.4(a), of any jurisdiction in which such entity is
located or doing business, or otherwise is applicable to such entity, except to the
extent that failure to so comply could not result in a Material Adverse Effect;
8.
Section 4.9. of the Credit Agreement is hereby deleted in its entirety and replaced with the
following:
SECTION 4.9.FINANCIAL CONDITION. Maintain the consolidated
financial condition of Borrower and its Subsidiaries as follows using generally
accepted accounting principles consistently applied and used consistently with
prior practices (except to the extent modified by the definitions herein):
(a)
As presented in the Borrower’s Form 10-Ks
and 10-Qs filed with the SEC): (i) a net loss after taxes not greater than
$2,200,000.00 for the fiscal quarter ending December 31, 2019, (ii) a net loss after
taxes not greater than $2,300,000.00 for the fiscal quarter ending March 31, 2020,
(iii) a net profit after taxes not less than $200,000.00 for the fiscal quarter ending
June 30, 2020, and (iv) a net profit after taxes not less than $300,000.00 for the
fiscal quarter ending September 30, 2020.
(b)
Quick Ratio not less than 1.10 to 1.0 at each fiscal quarter
end, with “Quick Ratio” defined as the aggregate of (i) cash and cash equivalents,
short-term investments and long-term investments of cash (as detailed in
Borrower’s Form 10-Ks and 10-Qs filed with the SEC), of which at least Seven
Million Dollars ($7,000,000.00) is unrestricted cash held in Borrower’s U.S.
operating and investment accounts, plus accounts receivable billed or invoiced
from the United States to account debtors worldwide; divided by the sum of (ii)
total current liabilities plus, without duplication, the outstanding balance remaining
under the Line of Credit, plus, without duplication, the outstanding balance
remaining under that certain promissory note from Borrower’s subsidiary Beijing
Tongmei Xtal Technology Co., Ltd. to Industrial and Commercial Bank of China
in the original principal amount of Fifty Million Renminbi (¥50,000,000.00) (“the
ICBC Debt”), plus, without duplication, the outstanding balance remaining under
the Specified ChaoYang Debt (as hereinafter defined).
9.
Section 4.10. of the Credit Agreement is hereby deleted in its entirety and replaced with the
following:
SECTION 4.10.NOTICE TO BANK. Promptly (but in no event more
than five (5) days after the occurrence of each such event or matter and in no event
more than one (1) business day after the occurrence of each such event or matter
described below with respect to Sanctions, Anti-Money Laundering Laws, and
Anti-Corruption Laws) give written notice to Bank in reasonable detail of: (a) the
occurrence of any Event of Default, or any condition, event or act which with the
giving of notice or the passage of time or both would constitute an Event of
Default; (b) any change in the name or the organizational structure of Borrower,
including, by illustration, merger, conversion or division; (c) the occurrence and
nature of any Reportable Event or Prohibited Transaction, each as defined in
ERISA, or any funding deficiency with respect to any Plan; (d) any termination or
cancellation of any insurance policy which Borrower is required to maintain, or
any uninsured or partially uninsured loss through liability or property damage, or
through fire, theft or any other cause affecting Borrower's property; or (e) any
breach of any covenant contained herein related to Sanctions, Anti-Money
Laundering Laws, and Anti-Corruption Laws the Borrower’s inability to make the
representations and warranties contained herein related to Sanctions, Anti-Money
Laundering Laws, and Anti-Corruption Laws on any date, or the failure of any
representations and warranties contained herein related to Sanctions, Anti-Money
Laundering Laws, and Anti-Corruption Laws to be true and correct in all respects
on or as of any date.
10.
Section 5.1. of the Credit Agreement is hereby deleted in its entirety and replaced with the
following:
SECTION 5.1.USE OF FUNDS. SOURCES OF REPAYMENT AND
COLLATERAL.
(a)
Use, or permit any member of the Borrowing Group to use, any
of the proceeds of any credit extended hereunder except for the purposes stated in
Article I hereof, or directly or indirectly use any such proceeds to fund, finance or
facilitate any activities, business or transactions: (i) that are prohibited by
Sanctions; (ii) that would be prohibited by Sanctions if conducted by Bank or any
of Bank’s affiliates; or (iii) that would be prohibited by any Anti-Money
Laundering Laws or Anti-Corruption Laws.
(b)
Fund any repayment of the obligations hereunder or under any
other Loan Document with proceeds, or provide any property as collateral for any
such obligations, or permit any third party to provide any property as collateral for
any such obligations, that is directly or indirectly derived from any transaction or
activity that is prohibited by any Sanctions, Anti-Money Laundering Laws or Anti-
Corruption Laws, or that could otherwise cause Bank or any of Bank’s affiliates to
be in violation of any Sanctions, Anti-Money Laundering Laws or Anti-Corruption
Laws.
11.
Section 5.2. of the Credit Agreement is hereby deleted in its entirety and replaced with the
following:
SECTION 5.2.CAPITAL EXPENDITURES. Make any additional
investment in fixed assets: (a) in the fiscal quarter ending December 31, 2018, in
excess of an aggregate of Thirty-Two Million Dollars ($32,000,000.00); (b) in the
fiscal year 2019,
in excess of an aggregate of Ten Million Dollars
($10,000,000.00); provided that any unused amounts in the fiscal quarter ending
December 31, 2018 under this provision may be carried over and utilized in fiscal
year 2019; or (c) in fiscal year 2020, in excess of an aggregate of Twenty-Five
Million Dollars ($25,000,000.00).
12.
Section 5.4. of the Credit Agreement is hereby deleted in its entirety and replaced with the
following:
SECTION 5.4.OTHER INDEBTEDNESS. Create, incur, assume or
permit to exist any indebtedness for borrowed money or liabilities resulting from
borrowings, loans or advances, whether secured or unsecured, matured or
unmatured, liquidated or unliquidated, joint or several, except (a) the liabilities of
Borrower to Bank; (b) purchase money indebtedness incurred in connection with
the purchase of equipment in an aggregate amount incurred after the date of this
Agreement not in excess of One Million Dollars ($1,000,000.00); (c) indebtedness
consisting of loans or advances permitted pursuant to Sections 5.7(b), (c), (d), and
(f) hereto; (d) the ICBC Debt existing as of the date hereof in an amount not to
exceed Eight Million Dollars ($8,000,000.00); and (e) indebtedness, in an
aggregate original principal amount not to exceed Twelve Million Dollars
($12,000,000.00), incurred by Borrower’s subsidiary ChaoYang Tongmei Xtal
Technology in 2020 but only to the extent such indebtedness is incurred and
evidenced by documentation in form and substance satisfactory to Bank (the
“Specified ChaoYang Debt”).
13.
Section 6.1.(c) of the Credit Agreement is hereby deleted in its entirety and replaced with the
following:
(c)
Any default in the performance of or compliance with: (1) any
collateral value requirement set forth herein or in any other Loan Document; (2)
any negative covenant set forth in Article V hereof; (3) any affirmative covenant
set forth in Article IV hereof requiring the delivery of financial statements and
other information to Bank; (4) any obligation, agreement or other provision
contained herein or in any other Loan Document related to Sanctions, Anti-Money
Laundering Laws, or Anti-Corruption Laws; or (5) any obligation, agreement or
other provision contained herein or in any other Loan Document (other than those
defaults specifically described as constituting an “Event of Default” under any
other subsection of this Section 6.1.), and with respect to such default(s) that by
their nature can be cured (excluding any defaults specifically described as
constituting an “Event of Default” under any other subsection of this Section 6.1.,
none of which shall be subject to a cure period), such default shall continue for a
period of twenty (20) days from its occurrence.
The effective date of this Amendment shall be the date that all of the following
14.
conditions set forth in this Section have been satisfied, as determined by Bank and evidenced by
Bank’s system of record. Notwithstanding the occurrence of the effective date of this Amendment,
Bank shall not be obligated to extend credit under this Amendment or any other Loan Document
until all conditions to each extension of credit set forth in the Credit Agreement have been fulfilled
to Bank's satisfaction.
(a)
of this Amendment shall be satisfactory to Bank's counsel.
Approval of Bank Counsel. All legal matters incidental to the effectiveness
(b)
satisfactory to Bank, each of the following, duly executed by all parties:
Documentation. Bank shall have received, in form and substance
(i)
(ii)
(iii)
This Amendment.
First Modification to Revolving Line of Credit Note.
Such other documents as Bank may require under any other Section of this
Amendment.
(c)
Regulatory and Compliance Requirements.
All regulatory and compliance
requirements, standards and processes shall be completed to the satisfaction of Bank.
15.
16.
17.
18.
19.
(a)
The promissory notes or other instruments or documents executed in connection with the credit(s)
subject to the Credit Agreement may calculate interest at a rate equal to the sum of an index rate of
interest plus a margin rate of interest. In the event any index rate of interest would be less than zero
percent (0.0%), then the index rate of interest shall be deemed to be zero percent (0.0%) and the
applicable promissory note or other instrument or document shall bear interest at a rate equal to the
margin rate of interest.
Except as specifically provided herein, all terms and conditions of the Credit Agreement remain in
full force and effect, without waiver or modification. All terms defined in the Credit Agreement
shall have the same meaning when used in this Amendment. This Amendment and the Credit
Agreement shall be read together, as one document. This Amendment is a Loan Document.
Borrower hereby remakes all representations and warranties contained in the Credit Agreement and
reaffirms all covenants set forth therein. Borrower further certifies that as of the date of this
Amendment there exists no Event of Default, other than the Specified Defaults, nor any condition,
act or event which with the giving of notice or the passage of time or both would constitute any such
Event of Default.
Borrower hereby covenants that Borrower shall provide to Bank from time to time such other
information as Bank may request for the purpose of enabling Bank to fulfill its regulatory and
compliance requirements, standards and processes. Borrower hereby represents and warrants to
Bank that all information provided from time to time by Borrower or any Third Party Obligor to
Bank for the purpose of enabling Bank to fulfill its regulatory and compliance requirements,
standards and processes was complete and correct at the time such information was provided and,
except as specifically identified to Bank in a subsequent writing, remains complete and correct today,
and shall be complete and correct at each time Borrower is required to reaffirm the representations
and warranties set forth in the Credit Agreement.
In consideration of the benefits provided to Borrower under the terms and provisions hereof,
Borrower hereby agrees as follows ("General Release"):
Borrower, for itself and on behalf of its successors and assigns, does hereby release, acquit and
forever discharge Bank, all of Bank's predecessors in interest, and all of Bank's past and present
officers, directors, attorneys, affiliates, employees and agents, of and from any and all claims,
demands, obligations, liabilities, indebtedness, breaches of contract, breaches of duty or of any
relationship, acts, omissions, misfeasance, malfeasance, causes of action, defenses, offsets, debts,
sums of money, accounts, compensation, contracts, controversies, promises, damages, costs, losses
and expenses, of every type, kind, nature, description or character, whether known or unknown,
suspected or unsuspected, liquidated or unliquidated, each as though fully set forth herein at length
(each, a "Released Claim" and collectively, the "Released Claims"), that Borrower now has or may
acquire as of the later of: (i) the date this Amendment becomes effective through the satisfaction (or
waiver by Bank) of all conditions hereto; or (ii) the date that Borrower has executed and delivered
this Amendment to Bank (hereafter, the "Release Date"), including without limitation, those
Released Claims in any way arising out of, connected with or related to any and all prior credit
accommodations, if any, provided by Bank, or any of Bank's predecessors in interest, to Borrower,
and any agreements, notes or documents of any kind related thereto or the transactions contemplated
thereby or hereby, or any other agreement or document referred to herein or therein.
(b)
Borrower hereby acknowledges, represents and warrants to Bank as follows:
(i)
Borrower understands the meaning and effect of Section 1542 of the
California Civil Code which provides:
Section 1542.
CERTAIN CLAIMS NOT AFFECTED BY GENERAL
RELEASE. A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS THAT
THE CREDITOR OR RELEASING PARTY DOES NOT KNOW OR SUSPECT
TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE
RELEASE AND THAT, IF KNOWN BY HIM OR HER, WOULD HAVE
MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR
OR RELEASED PARTY.
(ii) With regard to Section 1542 of the California Civil Code, Borrower agrees to
assume the risk of any and all unknown, unanticipated or misunderstood
defenses and Released Claims which are released by the provisions of this
General Release in favor of Bank, and Borrower hereby waives and
releases all rights and benefits which it might otherwise have under Section
1542 of the California Civil Code with regard to the release of such
unknown, unanticipated or misunderstood defenses and Released Claims.
(c)
Each person signing below on behalf of Borrower acknowledges that he or she has read each of the
provisions of this General Release. Each such person fully understands that this General Release has
important legal consequences and each such person realizes that they are releasing any and all
Released Claims that Borrower may have as of the Release Date. Borrower hereby acknowledges
that it has had an opportunity to obtain a lawyer's advice concerning the legal consequences of each
of the provisions of this General Release.
(d)
20.
Borrower hereby specifically acknowledges and agrees that: (i) none of the provisions of this
General Release shall be construed as or constitute an admission of any liability on the part of Bank;
(ii) the provisions of this General Release shall constitute an absolute bar to any Released Claim of
any kind, whether any such Released Claim is based on contract, tort, warranty, mistake or any other
theory, whether legal, statutory or equitable; and (iii) any attempt to assert a Released Claim barred
by the provisions of this General Release shall subject Borrower to the provisions of applicable law
setting forth the remedies for the bringing of groundless, frivolous or baseless claims or causes of
action.
This Amendment shall be governed by and interpreted in accordance with the laws of the State
California, except if preempted by Federal law. In any action brought or arising out of this
Agreement, Borrower hereby consents to the jurisdiction of any Federal or State Court having proper
venue within the City and County of San Francisco, California and also consents to the service of
process by any means authorized by California or Federal law. The headings used in this
Amendment are for convenience only and shall be disregarded in interpreting the substantive
provisions of this Amendment. Time is of the essence of each term of the Loan Documents,
including this Amendment. If any provision of this Amendment or any of the Loan Documents shall
be determined by a court of competent jurisdiction to be invalid, illegal or unenforceable, that
portion shall be deemed severed therefrom, and the remaining parts shall remain in full force as
though the invalid, illegal or unenforceable portion had never been a part thereof.
[Signature Page(s) Continue on Next Page.]
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound hereby, have caused this Amendment
to be effective as of the effective date set forth herein.
AXT, INC.
By:/s/ Morris S. Young
Name:Morris S. Young
WELLS FARGO BANK,
NATIONAL ASSOCIATION
By:/s/ Victor Choi
Name:Victor Choi
Title:Chief Executive Officer
Title:Vice President
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
2019
Year Ended December 31,
2017
2018
2016
(in thousands)
Exhibit 12.1
2015
Earnings:
Income (loss) before income taxes
Less: Equity in loss (earnings) of investees
Less: Pre-tax net (income) loss attributable to noncontrolling interest
Add: Distributions paid by equity investees
Fixed charges and preferred stock dividends, as calculated below
Total earnings
Computation of fixed charges and preferred stock dividends:
Interest expense
Preferred stock dividends
(1)
Interest component of rent expense
(2)
Total combined fixed charges and preferred stock dividends
$ (1,026)$ 11,947 $ 10,853 $ 5,699 $ (2,002)
(462)
1,876
1,694
1,080
(1,012)
(1,355)
87
305
-
-
358
281
278
196 $ 11,955 $ 12,912 $ 8,651 $ (1,573)
-
283
305
1,995
670
-
287
94 $
- $
- $
177
87
177
106
177
101
- $
177
110
358 $
283 $
278 $
287 $
-
177
104
281
$
$
$
Ratio of earnings to combined fixed charges and preferred stock dividends
Deficiency of earnings to combined fixed charges and preferred stock dividends
(3)
0.55
N/A
42.24
N/A
46.45 30.14
N/A
N/A N/A (1,854)
(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.
We have not paid any dividends on preferred stock. 883,000 shares of our preferred stock were issued and outstanding for all of the
periods presented.
(2) Effective January 1, 2019, interest is calculated consistent with guidance under ASC 842, where an estimate for the Company's
incremental borrowing rate of 4.6% is used to calculate the interest component of rent expense. The borrowing rate is calculated
using a weighted average for the interest rate on the Company's revolving line of credit of 4.4% and credit facility with the Bank of
China of 4.7%. For the years prior to 2019, represents one-third of total rent expense which we believe is a reasonable estimate of
the interest component of rent expense. Interest component of rental expense is estimated based on a tenant improvement loan at 4%,
which is considered a reasonable approximation of the interest factor. In 2010, the full amount of the tenant improvement loan was
paid off.
(3) For periods in which there is a deficiency of earnings available to cover combined fixed charges and preferred stock dividends, the
ratio information is not applicable.
Subsidiaries of the Registrant
Exhibit 21.1
Name
Beijing Tongmei Xtal Technology
Nanjing Jin Mei Gallium Co., Ltd*
Beijing BoYu Manufacturing Co., Ltd**
Ownership
Percentage
100
100
63
* AXT’s ownership of this subsidiary was 83%. On June 15, 2018, we purchased a 12% ownership interest from one
of the minority owners for $1.4 million. The $1.4 million is scheduled to be paid in two installments. On June 15,
2018, we paid the first installment of $163,000. The second installment of $1.2 million is scheduled to be paid
after the completion of the relocation of JinMei’s headquarters and manufacturing operations and was included in
“Accrued liabilities” in our condensed consolidated balance sheets. As a result, our ownership of JinMei increased
from 83% to 95%. In September 2018, we purchased a 2% ownership interest from one of the three remaining
minority owners for $252,000. As a result, our ownership of JinMei increased from 95% to 97%. In May 2019,
we purchased the remaining 3% ownership interest of JinMei from retiring members of the JinMei management
team for approximately $413,000. As a result, our ownership of JinMei increased from 97% to 100%. AXT
continues to consolidate JinMei as we have a controlling financial interest and have majority control of the board.
Our Chief Executive Officer is chairman of the JinMei board and we have appointed two other representatives to
serve on the board.
** AXT’s ownership of this subsidiary was 70% at inception. On November 2, 2017, BoYu, raised additional
capital in 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 to
consolidate BoYu as we have a controlling financial interest and have majority control of the board and,
accordingly, no gain was recognized as a result of this equity transaction. Our Chief Executive Officer is chairman
of the BoYu board and we have appointed two other representatives to serve on the board.
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-
38858, 333-67297, 333-143366, 333-188788, 333-204478 and 333-231744) of AXT, Inc. of our reports dated
March 12, 2020 relating to the consolidated financial statements and the effectiveness of internal control over
financial reporting as of December 31, 2019, which appear in this Form 10-K.
Exhibit 23.1
/s/ BPM LLP
San Jose, California
March 12, 2020
Exhibit 31.1
CERTIFICATION 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 2002
I, Morris S. Young, certify that:
1.
2.
3.
4.
(a)
(b)
(c)
(d)
5.
(a)
(b)
I have reviewed this annual report on Form 10-K of AXT, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present 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;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant’s internal control over financial reporting.
March 12, 2020
/s/ MORRIS S. YOUNG
Morris S. Young
Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
CERTIFICATION 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 2002
I, Gary L. Fischer, certify that:
1.
2.
3.
4.
(a)
(b)
(c)
(d)
5.
(a)
(b)
I have reviewed this annual report on Form 10-K of AXT, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present 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;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
March 12, 2020
/s/ GARY L. FISCHER
Gary L. Fischer
Chief Financial Officer and Corporate Secretary
(Principal Financial Officer and
Principal Accounting Officer)
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES‑OXLEY ACT OF 2002
In connection with the Annual Report of AXT, Inc. (the “Company”) on Form 10-K for the year ended
December 31, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the
undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes‑Oxley Act of 2002, that, to the best of my knowledge:
(1)
(2)
The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934
(15 U.S.C. 78m); and
The information contained in the Report fairly presents, in all material respects, the financial condition
and results of operations of the Company.
Date: March 12, 2020
By:
/s/ Morris S. Young
Morris S. Young
Chief Executive Officer
(Principal Executive Officer)
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES‑OXLEY ACT OF 2002
In connection with the Annual Report of AXT, Inc. (the “Company”) on Form 10-K for the year ended
December 31, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the
undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes‑Oxley Act of 2002, that, to the best of my knowledge:
(1)
(2)
The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934
(15 U.S.C. 78m); and
The information contained in the Report fairly presents, in all material respects, the financial condition
and results of operations of the Company.
Date: March 12, 2020
By:
/s/ Gary L. Fischer
Gary L. Fischer
Chief Financial Officer and
Corporate Secretary
(Principal Financial Officer and
Principal Accounting Officer)