AXT INC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

This quarterly report on Form 10-Q 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, 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 and adoption 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, ramping production at our new sites, potential severance costs
with respect to the relocation of our gallium arsenide production line, 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. Additionally, statements regarding completing steps in connection
with the proposed listing of shares of our wafer manufacturing company, Beijing
Tongmei Xtal Technology Co., Ltd. ("Tongmei"), on the Shanghai Stock Exchange's
Sci-Tech innovAtion boaRd (the "STAR Market"), being accepted to list shares of
Tongmei on the STAR Market and the timing and completion of such listing of
shares of Tongmei on the STAR Market 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. Additionally, statements concerning future
matters such as our strategy and plans, industry trends and the impact of
trends, tariffs and trade wars, the potential or expected impact of the COVID-19
pandemic on our business, results of operations and financial condition,
mandatory factory shutdowns in China, changes in policies and regulations in
China and economic cycles on our business are forward-looking statements.

Our forward-looking statements are based upon assumptions that are subject to
uncertainties and factors relating to the company's operations and business
environment, which could cause actual results to differ materially from those
expressed or implied in the forward-looking statements contained in this report.
These uncertainties and factors include but are not limited to: the withdrawal,
cancellations or requests for redemptions by private equity funds in China of
their investments in Tongmei, the administrative challenges in satisfying the
requirements of various government agencies in China in connection with the
investments in Tongmei and the listing of shares of Tongmei on the STAR Market,
continued open access to companies to list shares on the STAR Market, investor
enthusiasm for new listings of shares on the STAR Market and geopolitical
tensions between China and the United States. Additional uncertainties and
factors include, but are not limited to: the timing and receipt of significant
orders; the cancellation of orders and return of product; emerging applications
using chips or devices fabricated on our substrates; end-user acceptance of
products containing chips or devices fabricated on our substrates; our ability
to bring new products to market; product announcements by our competitors; the
ability to control costs and improve efficiency; the ability to utilize our
manufacturing capacity; product yields and their impact on gross margins; the
relocation of manufacturing lines and ramping of production; possible factory
shutdowns as a result of air pollution in China or COVID-19; COVID-19 or other
outbreaks of a contagious disease; the availability of COVID-19 vaccines;
tariffs and other trade war issues; the financial performance of our partially
owned supply chain companies; policies and regulations in China; and other
factors as set forth in this Quarterly Report on Form 10-Q, including those set
forth under the section entitled "Risk Factors" in Item 1A below. All
forward-looking statements are based upon management's views as of the date of
this quarterly report 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 quarterly report, 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. This discussion should be read in
conjunction with Management's Discussion and Analysis of Financial Condition and
Results of Operations included in our Annual Report on Form 10-K for the year
ended December 31, 2021 and the condensed consolidated financial statements
included elsewhere in this report.

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Overview

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. Two of 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, 5G infrastructure and data center connectivity. InP
substrates are also used in biometric wearables and other health monitoring
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. GaAs wafers could also be used for making vertical cavity surface
emitting lasers (VCSELs) and micro-LEDs targeting improved screen technology. Ge
substrates are used in applications such as solar cells for space and
terrestrial photovoltaic applications.

Our supply chain strategy includes two consolidated raw material companies. One
of these consolidated 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 antimonite 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.
Our substrate product group generated 75%, 79% and 81% of our consolidated
revenue and our raw materials product group generated 25%, 21% and 19% for 2021,
2020 and 2019, 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 and Wafer Diameter        Sample of Applications
Indium Phosphide                          • Data center connectivity using light/lasers
(InP)                                     • 5G communications
2", 3", 4"                                • Fiber optic lasers and detectors
                                          • Passive Optical Networks (PONs)
                                          • Silicon photonics
                                          • Photonic Integrated circuits (PICs)
                                          • High efficiency terrestrial solar cells (CPV)
                                          • RF amplifier and switching (military wireless & 5G)
                                          • Infrared light-emitting diode (LEDs) motion control
                                          • Lidar for robotics and autonomous vehicles
                                          • Infrared thermal imaging
Gallium Arsenide                          • Wi-Fi devices
(GaAs - semi-insulating)                  • IoT devices
1", 2", 3", 4", 5", 6"                    • High-performance transistors
                                          • Direct broadcast television
                                          • Power amplifiers for wireless devices
                                          • Satellite communications
                                          • High efficiency solar cells for drones and automobiles
                                          • Solar cells
Gallium Arsenide                          • High brightness LEDs
(GaAs - semi-conducting)                  • Screen displays using micro-LEDs
1", 2", 3", 4", 5", 6"                    • Printer head lasers and LEDs
                                          • 3-D sensing using VCSELs
                                          • Data center communication using VCSELs
                                          • Sensors for industrial

robotics/Near-infrared sensors

                                          • Laser machining, cutting and drilling
                                          • Optical couplers
                                          • High efficiency solar cells for drones and automobiles
                                          • Other lasers
                                          • Night vision goggles
                                          • Lidar for robotics and autonomous vehicles
                                          • Solar cells
Germanium                                 • Multi-junction solar cells for satellites
(Ge)                                      • Optical sensors and detectors
2", 4", 6"                                • Terrestrial concentrated photo voltaic (CPV) cells
                                          • Infrared detectors
                                          • Carrier wafer for LED
Raw Materials Group
6N+ and 7N+ purified gallium              • Key material in single crystal ingots such as:
                                          - Gallium Arsenide (GaAs)
                                          - Gallium Nitride (GaN)
                                          - Gallium Antimonite (GaSb)
                                          - Gallium Phosphide (GaP)
Boron trioxide (B2O3)                     • Encapsulant in the ingot growth of III-V compound semiconductors
Gallium-Magnesium alloy                   • Used for the synthesis of 

organo-gallium compounds in epitaxial growth on semiconductor wafers pyrolytic boron nitride (pBN) crucibles • Used when growing single-crystal compound semiconductor ingots

                                          • Used as effusion rings growing OLED tools
pBN insulating parts                      • Used in MOCVD reactors
                                          • Used when growing epitaxial 

layers in Molecular Beam Epitaxy (MBE) reactors

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All of our products are manufactured in the People's Republic of China (PRC or
China) by our PRC subsidiaries and PRC joint ventures. The PRC 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 raw material companies
produce materials, including raw gallium (4N Ga), high purity gallium (6N and 7N
Ga), starting material for InP, arsenic, germanium, germanium dioxide, pyrolytic
boron nitride (pBN) crucibles and boron oxide (B2O3). 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 noncontrolling 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 district where our
original manufacturing facility is currently located and is in the process of
moving thousands of government employees into this district. The government has
constructed showcase tower buildings and overseen the establishment of new
apartment complexes, retail stores and restaurants. A large park, named Green
Heart City Park, was built across the street from our facility and Universal
Studios has developed an amusement park 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 relocate our gallium arsenide
manufacturing lines. For reasons of manufacturing efficiency, we elected to also
move part of our germanium manufacturing line. Our indium phosphide
manufacturing line, as well as various administrative and sales functions, will
remain primarily at our original site.

Begun in 2017, the relocation of our gallium arsenide production lines is now
completed. Our PRC subsidiary, Baoding Tongmei Xtal Technology Co., Ltd.
("Baoding Tongmei"), entered into volume production in 2020. To mitigate our
risks and maintain our production schedule, we moved our gallium arsenide
equipment in stages. By December 31, 2019, we had ceased all crystal growth for
gallium arsenide in our original manufacturing facility in Beijing and
transferred 100% of our ingot production to the new manufacturing facility of
our PRC subsidiary, ChaoYang Tongmei Xtal Technology Co., Ltd., in Kazuo, a city
approximately 250 miles from Beijing. We transferred our wafer processing
equipment for gallium arsenide to Baoding Tongmei's new manufacturing facility
in Dingxing, a city approximately 75 miles from Beijing. Some of our larger,
more sophisticated customers qualified gallium arsenide wafers from the new
sites in 2020. A few customers, as well as prospective customers, are still in
that process. These new facilities enabled us to expand capacity and upgrade
some of the equipment. The new buildings are large enough that our PRC
subsidiaries can install additional equipment if market demand increases or if
we gain market share. Our PRC subsidiaries also acquired sufficient land to
enable them to add facilities, if needed in the future. We believe our ability
to add capacity gives us a competitive advantage. In addition, a new level of
technological sophistication in our manufacturing capabilities will enable us to
support the major trends that we believe are likely to drive demand for our
products in the years ahead.

Customer qualifications and expanding capacity as needed require 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 and volume
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.

On November 16, 2020, we announced a strategic initiative to access China's
capital markets by beginning a process to list shares of Tongmei in an initial
public offering (the "IPO") on the STAR Market, an exchange intended to support
innovative companies in China. We formed and founded Tongmei in 1998 and believe
Tongmei has grown into a company that will be an attractive offering on the STAR
Market. To qualify for a STAR Market listing, the first major step in the
process was to engage private equity firms in China ("Investors") to invest
funds in Tongmei. By December 31, 2020, Investors, which consist of 10 private
equity funds, had entered into two sets of definitive transaction documents,

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each consisting of a capital increase agreement along with certain supplemental
agreements in substantially the same form (collectively, the "Capital Investment
Agreements"), with Tongmei for a total investment of approximately $48.1
million. (The currency used in the investment transactions was the Chinese
renminbi, which has been converted to approximate U.S. dollars for this report.)
The remaining investment of approximately $1.5 million of new capital was funded
in January 2021. Under China regulations, these investments must be formally
approved by the appropriate government agency and are not deemed to be dilutive
until such approval is granted. The government approved the approximately $49
million investment in its entirety on January 25, 2021. In exchange for an
investment of approximately $49 million, the Investors received a 7.28%
redeemable noncontrolling interest in Tongmei.

Pursuant to the Capital Investment Agreements with the Investors, each Investor
has the right to require AXT to redeem any or all Tongmei shares held by such
Investor at the original purchase price paid by such Investor, without interest,
in the event the IPO fails to pass the audit of the Shanghai Stock Exchange, is
not approved by the Chinese Securities Regulatory Commission ("CSRC") or Tongmei
cancels the IPO application. The aggregate redemption amount is approximately
$49 million.

Tongmei submitted its IPO application to the Shanghai Stock Exchange the
application in December 2021 and it was formally accepted for review on January
10, 2022. The Shanghai Stock Exchange approved the IPO application on July 12,
2022. The STAR Market IPO remains subject to review and approval by the CSRC and
other authorities. The process of going public on the STAR Market includes
several periods of review and, therefore, is a lengthy process. Subject to
review and approval by the CSRC and other authorities, Tongmei expects to
accomplish this goal in the second half of 2022, probably in the fourth quarter
of 2022. The listing of Tongmei on the STAR Market will not change the status of
AXT as a U.S. public company.

An additional step in the STAR Market IPO process involves certain entity
reorganizations and alignment of assets under Tongmei. In this regard our two
consolidated raw material companies, Nanjing JinMei Gallium Co., Ltd. ("JinMei")
and Beijing BoYu Semiconductor Vessel Craftwork Technology Co., Ltd. ("BoYu")
and its subsidiaries were assigned to Tongmei in December 2020. As of June 30,
2021, AXT-Tongmei, Inc., a wholly owned subsidiary of AXT, was assigned to
Tongmei. The assignment to Tongmei of JinMei, BoYu and its subsidiaries, and
AXT-Tongmei, Inc. will increase the number of customers and employees
attributable to Tongmei as well as increase Tongmei's consolidated revenue.

We are neither a PRC operating company nor do we conduct our operations in China through the use of variable interest entities ("VIEs"). The following organization chart depicts the consolidated structure as of June 30, 2022;

                           [[Image Removed: Graphic]]

The businesses of our PRC subsidiaries and PRC joint ventures are subject to
complex and rapidly evolving laws and regulations in the PRC, which can change
quickly with little advance notice. The PRC government is a single party form of
government with virtually unlimited authority and power to intervene in or

influence commercial

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operations in China. In the past, we have experienced such intervention or
influence by the PRC government and a change in the rules and regulations in
China when we were instructed by the Beijing municipal government to relocate
our manufacturing facility in Beijing and expect that such intervention or
influence or change in the rules and regulations in China could occur in the
future.

In the ordinary course of business, our PRC subsidiaries and PRC joint ventures
require permits and licenses to operate in the PRC. Such permits and licenses
include permits to use hazardous materials in manufacturing operations. From
time to time, the PRC government issues new regulations, which may require
additional actions on the part of our PRC subsidiaries and PRC joint ventures 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. In the ordinary course of business, our PRC
subsidiaries and PRC joint ventures apply for permits as required.

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. For the six months ended June 30, 2022 and 2021,
we paid approximately $1.6 million and $0.6 million, respectively.

Our independent registered public accounting firm is BPM LLP ("BPM"), which is
registered with the Public Company Accounting Oversight Board (the "PCAOB"). The
Holding Foreign Companies Accountable Act (the "HFCA Act") requires that the
PCAOB determine whether it is unable to inspect or investigate completely
registered public accounting firms located in a non-U.S. jurisdiction because of
a position taken by one or more authorities in that jurisdiction. On December
16, 2021, the PCAOB issued a report on its determinations that the PCAOB is
unable to inspect or investigate completely registered public accounting firms
headquartered in the PRC and Hong Kong because of positions taken by PRC
authorities in those jurisdictions. BPM is neither headquartered in the PRC or
Hong Kong nor is it subject to the determinations announced by the PCAOB.

Critical Accounting Policies, Estimates and Change in Accounting Estimates

We prepare our condensed 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 condensed 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 condensed
consolidated financial statements and require us to make difficult, subjective
or complex judgments that could have a material effect on our financial reports
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.

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,

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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.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivables are recorded at the invoiced amount and are not interest
bearing. We review at least quarterly, or when there are changes in credit
risks, the likelihood of collection on our accounts receivable balances and
provide an allowance for doubtful accounts receivable for any expected credit
losses 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 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 a credit loss is
expected through the establishment of an allowance, which would then be written
off when all efforts to collect have been exhausted and recoveries are
recognized when they are received. As of June 30, 2022 and December 31, 2021,
our accounts receivable, net balance was $38.8 million and $34.8 million,
respectively, which was net of an allowance for doubtful accounts of $307,000
and $130,000, respectively. 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.

Warranty Reserve

We maintain a product warranty 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 June 30, 2022 and
December 31, 2021, accrued product warranties totaled $839,000 and $743,000,
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 June
30, 2022 and December 31, 2021, we had an inventory reserve of $22.1 million and
$19.6 million, respectively, for excess and obsolete inventory and $135,000 and
$66,000, respectively, for lower of cost or net realizable value reserves. If
actual demand for our products were to be substantially lower than estimated,

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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 securities as available-for-sale debt
securities in accordance with Accounting Standards Codification ("ASC") Topic
320, Investments - Debt Securities. All available-for-sale debt 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 review our debt investment portfolio at least
quarterly, or when there are changes in credit risks or other potential
valuation concerns to identify and evaluate whether an allowance for expected
credit losses or impairment would be necessary.

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
company, 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. There were no impairment charges during the three and six
months ended June 30, 2022 and 2021.

Fair Value of Investments

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 identical 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.

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.


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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" in the condensed consolidated balance sheets and classified as
Level 3 assets and liabilities. As of June 30, 2022, 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 condensed consolidated results.

There have been no transfers between fair value measurement levels during the three months ended June 30, 2022 and 2021.

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 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. 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 in the
condensed consolidated balance sheets as of June 30, 2022 and December 31, 2021.

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.

The award of performance Restricted Stock covering Shares (the "Performance
Award") will be subject to vesting requirements relating to both the recipient
of the Performance Award (the "Participant") continuously remaining a Service
Provider through specified dates and achievement of specified performance-based
criteria ("Performance Goal"). Any capitalized term not defined herein will have
the meaning ascribed to such term in the 2015 Equity Incentive Plan. The
Performance Goal will be measured over the Company's fiscal year 2021 or 2022
(each a "Performance Period").

The financial Performance Goal is a metric based upon prior year-end actual results as compared to the Company's current year-end actual results. All performance shares, if earned, are still subject to annual vesting over a four-year period except that no shares are vested on the first anniversary because the performance measurement is based on year-end results for the entire year.

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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.

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.

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 14-"Income Taxes" in the notes to condensed consolidated financial statements for additional information.

Impact of the COVID-19 Pandemic

In March 2020, the World Health Organization declared the outbreak of COVID-19
to be a pandemic, which continues to be spread throughout the world. In March
2020, the President of the United States declared the COVID-19 outbreak a
national emergency. For much of the three months ended March 31, 2020, our
manufacturing facilities in China were operating at reduced staffing levels to
limit the risk of COVID-19 exposure for our employees. The Chinese government
mandates have evolved, allowing us to return to full staffing levels at all
three manufacturing locations in China. We are unable to accurately predict the
full impact of the COVID-19 pandemic due to numerous uncertainties, including
the severity of the disease, the duration of the outbreak, the potential
resurgence of the outbreak as a result of variants in countries that had
previously contained the outbreak, the availability of COVID-19 vaccines and the
number of people who are vaccinated, the effect of the outbreak on
transportation, such as reduced availability of air transport, port closures,
and increased border controls or closures, the impact of the outbreak on our
customers and additional actions that may be taken by government authorities to
contain the outbreak, such as lockdowns in China that may require the temporary
closure of one or more of our manufacturing facilities in China and travel
restrictions between China and the U.S. that have disrupted our normal movement
to and from China and impacted our efficiency. As a result of these factors, we
believe that the COVID-19 pandemic could have a material adverse impact on our
business, condensed consolidated results of operations and financial condition
until the COVID-19 pandemic subsides and related public health measures are
reduced or eliminated.

Results of Operations

Revenue

                  Three Months Ended                                       Six Months Ended
                       June 30,             Increase                          June 30,               Increase
                   2022         2021       (Decrease)     % Change        2022          2021        (Decrease)     % Change

Product Type:      ($ in thousands)                                       

($ in thousands)
Substrates      $   31,694    $  24,905   $      6,789        27.3 %   $    63,439    $  48,278    $     15,161        31.4 %
Raw materials
and other            7,793        8,830        (1,037)      (11.7) %        15,701       16,807         (1,106)       (6.6) %
Total revenue   $   39,487    $  33,735   $      5,752        17.1 %   $    79,140    $  65,085    $     14,055        21.6 %


Revenue increased $5.8 million, or 17.1%, to $39.5 million for the three months
ended June 30, 2022 from $33.7 million for the three months ended June 30, 2021.
The substrate revenue increase for the three months ended June 30, 2022 as
compared to the same period in 2021 was primarily the result of higher demand
for our InP wafer substrates

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followed by an increase in revenue for semi-conducting GaAs and Ge wafer
substrates. Demand for InP wafer substrates used in 5G and 5G related
technologies was a primary contributor to InP revenue growth. In addition, data
center connectivity applications contributed to InP revenue. Demand for GaAs
wafer substrates used in LED applications was the primary contributor to GaAs
revenue growth, primarily in automotive applications and high-end signage. In
addition, we had continued strength in high-power industrial laser applications.
Raw materials sales decreased $1.0 million, or 11.7%, to $7.8 million for the
three months ended June 30, 2022 as compared to the same period in 2021. The
decrease in raw materials revenue for the three months ended June 30, 2022 as
compared to the same period in 2021 was primarily the result of a decrease in
sales of refined gallium partially offset by increased sales of pBN crucibles
resulting from stronger market demand.

Revenue increased $14.1 million, or 21.6%, to $79.1 million for the six months
ended June 30, 2022 from $65.1 million for the six months ended June 30, 2021.
The substrate revenue increase for the six months ended June 30, 2022 as
compared to the same period in 2021 was primarily the result of higher demand
for our InP wafer substrates followed by an increase in revenue for
semi-conducting GaAs and Ge wafer substrates. Demand for InP wafer substrates
used in 5G and 5G related technologies was a primary contributor to InP revenue
growth. In addition, data center connectivity applications contributed to InP
revenue. Demand for GaAs wafer substrates used in LED applications was the
primary contributor to GaAs revenue growth, primarily in automotive applications
and high-end signage. In addition, we had continued strength in high-power
industrial laser applications. Raw materials sales decreased $1.1 million, or
6.6%, to $15.7 million for the six months ended June 30, 2022 as compared to the
same period in 2021. The decrease in raw materials revenue for the six months
ended June 30, 2022 as compared to the same period in 2021 was primarily the
result of a decrease in sales of refined gallium partially offset by increased
sales of pBN crucibles resulting from stronger market demand.

Revenue by Geographic Region

                                         Three Months Ended                2021 to 2022
                                              June 30,                 Increase
                                        2022             2021         (Decrease)     % Change

                                          ($ in thousands)
China                               $      18,445    $     15,546    $      2,899        18.6 %
% of total revenue                             47 %            46 %
Taiwan                                      7,044           4,996           2,048        41.0 %
% of total revenue                             18 %            15 %
Japan                                       2,718           2,635              83         3.1 %
% of total revenue                              7 %             8 %
Asia Pacific (excluding China,
Taiwan and Japan)                             662           1,396           (734)      (52.6) %
% of total revenue                              2 %             4 %
Europe (primarily Germany)                  5,299           6,411         (1,112)      (17.3) %
% of total revenue                             13 %            19 %
North America (primarily the
United States)                              5,319           2,751           2,568        93.3 %
% of total revenue                             13 %             8 %
Total revenue                       $      39,487    $     33,735    $      5,752        17.1 %

Revenue in China increased $2.9 million for the three months ended June 30,
2022, primarily due to higher demand for our GaAs and Ge wafer substrates and
pBN crucibles sold by one of our consolidated subsidiaries, partially offset by
lower demand for our refined gallium sold by one of our consolidated
subsidiaries and InP wafer substrates. Revenue in Taiwan increased $2.0 million,
primarily due to higher demand for our InP and GaAs wafer substrates. Revenue in
Japan increased $0.1 million primarily due to higher demand for pBN crucibles
sold by one of our consolidated subsidiaries, partially offset by lower demand
for our InP and GaAs wafer substrates. Revenue in Asia Pacific decreased by $0.7
million, primarily due to decreased demand for our GaAs and InP wafer substrates
and pBN crucibles sold by one of our consolidated subsidiaries. Revenue in
Europe decreased by $1.1 million primarily due to decreased demand for our Ge
and GaAs wafer substrates and pBN crucibles sold by one of our consolidated
subsidiaries partially offset by increased demand for our InP wafer substrates.
Revenue in North America increased by $2.6 million

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due to higher demand for our InP wafer substrates and pBN crucibles sold by one
of our consolidated subsidiaries partially offset by lower demand for our GaAs
and Ge wafer substrates.

                                          Six Months Ended
                                             June 30,                 Increase
                                        2022            2021         (Decrease)     % Change

                                          ($ in thousands)
China                               $     35,925    $     31,092      $    4,833        15.5 %
% of total revenue                            45 %            48 %
Taiwan                                    13,903           8,011           5,892        73.5 %
% of total revenue                            18 %            12 %
Japan                                      5,525           5,158             367         7.1 %
% of total revenue                             7 %             8 %
Asia Pacific (excluding China,
Taiwan and Japan)                          2,418           3,213           (795)      (24.7) %
% of total revenue                             3 %             5 %
Europe (primarily Germany)                11,693          11,846           (153)       (1.3) %
% of total revenue                            15 %            18 %
North America (primarily the
United States)                             9,676           5,765           3,911        67.8 %
% of total revenue                            12 %             9 %
Total revenue                       $     79,140    $     65,085    $     14,055        21.6 %


Revenue in China increased $4.8 million for the six months ended June 30, 2022,
primarily due to higher demand for our GaAs and Ge wafer substrates and pBN
crucibles sold by one of our consolidated subsidiaries, partially offset by
lower demand for our refined gallium sold by one of our consolidated
subsidiaries and our InP wafer substrates. Revenue in Taiwan increased $5.9
million, primarily due to higher demand for our InP and GaAs wafer substrates.
Revenue in Japan increased $0.4 million primarily due to higher demand for pBN
crucibles sold by one of our consolidated subsidiaries, partially offset by
lower demand for our InP and GaAs wafer substrates. Revenue in Asia Pacific
decreased by $0.8 million, primarily due to decreased demand for our GaAs and
InP wafer substrates and pBN crucibles sold by one of our consolidated
subsidiaries. Revenue in Europe decreased by $0.2 million primarily due to
decreased demand for our GaAs and Ge wafer substrates and pBN crucibles sold by
one of our consolidated subsidiaries partially offset by increased demand for
our InP wafer substrates. Revenue in North America increased by $3.9 million due
to higher demand for our InP wafer substrates and pBN crucibles sold by one of
our consolidated subsidiaries partially offset by lower demand for our GaAs

and
Ge wafer substrates.

Gross Profit

                   Three Months Ended                                     

Six Months Ended

                       June 30,             Increase                         June 30,            Increase
                    2022         2021      (Decrease)     % Change        

2022 2021 (Decrease) % Change

                    ($ in thousands)                                      ($ in thousands)
Gross profit     $   15,435    $ 12,238    $     3,197        26.1 %    $ 28,743    $ 23,774    $     4,969        20.9 %
Gross Profit %         39.1 %      36.3 %                                  

36.3 % 36.5 %

Gross profit increased $3.2 million, or 26.1%, to $15.4 million for the three
months ended June 30, 2022 from $12.2 million for the three months ended June
30, 2021. The increase in gross profit is attributed to higher revenue and a
change in product mix. Gross margin as a percent of revenue increased due to
improved yields in crystal growth for our wafer substrates, the recycling of
remnants of indium phosphide processing material, higher gross margin for our
two raw material companies and a change in product mix that was more favorable
to gross margin.

Gross profit increased $5.0 million, or 20.9%, to $28.7 million for the six
months ended June 30, 2022 from $23.8 million for the six months ended June 30,
2021. The increase in gross profit is attributed to higher revenue and a change
in product mix. Gross margin as a percent of revenue remained relatively flat.

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Selling, General and Administrative Expenses

                        Three Months Ended                                     Six Months Ended
                            June 30,              Increase                        June 30,            Increase
                         2022         2021       (Decrease)     % Change       2022        2021      (Decrease)     % Change

                         ($ in thousands)                                      ($ in thousands)
Selling, general and
administrative
expenses              $    6,693     $ 5,795    $        898        15.5 % 

$ 13,143 $ 11,365 $ 1,778 15.6 % % of total revenue 16.9 % 17.2 %

16.6 % 17.5 %

Selling, general and administrative expenses increased $0.9 million, or 15.5%,
to $6.7 million for the three months ended June 30, 2022 from $5.8 million for
the three months ended June 30, 2021. The higher selling, general and
administrative expenses were primarily from higher personnel-related expenses,
increase in professional services and a provision for bad debt allowance.

Selling, general and administrative expenses increased $1.8 million, or 15.6%,
to $13.1 million for the six months ended June 30, 2022 from $11.4 million for
the six months ended June 30, 2021. The higher selling, general and
administrative expenses were primarily from higher personnel-related expenses
and a provision for bad debt allowance.

Research and Development

                           Three Months Ended                                      Six Months Ended
                               June 30,              Increase                         June 30,            Increase
                            2022         2021       (Decrease)     % Change        2022        2021      (Decrease)     % Change

                            ($ in thousands)                               

($ in thousands) Research and development $ 3,453 $ 2,537 $ 916 36.1 % $ 6,612 $ 4,942 $ 1,670 33.8 % % of total revenue

              8.7 %       7.5 %                                      8.4 %      7.6 %


Research and development expenses increased $0.9 million, or 36.1%, to $3.5
million for the three months ended June 30, 2022 from $2.5 million for the three
months ended June 30, 2021. The increase in research and development expenses
for the three months ended June 30, 2022 was primarily due to personnel-related
expenses and development expenses for 8-inch GaAs and 6-inch InP wafer
substrates and development of new features for certain of our GaAs and InP wafer
substrates.

Research and development expenses increased $1.7 million, or 33.8%, to $6.6
million for the six months ended June 30, 2022 from $4.9 million for the six
months ended June 30, 2021. The increase in research and development expenses
for the six months ended June 30, 2022 was primarily due to personnel-related
expenses, travel and development expenses for 8-inch GaAs and 6-inch InP wafer
substrates and development of new features for certain of our GaAs and InP wafer
substrates.

Interest Income (Expense), Net

                       Three Months Ended                                      Six Months Ended
                            June 30,             Increase                         June 30,            Increase
                        2022          2021      (Decrease)     % Change        2022        2021      (Decrease)     % Change

                        ($ in thousands)                                       ($ in thousands)
Interest income
(expense), net       $     (188)     $    39    $     (227)     (582.1) %  

$ (371) $ (11) $ (360) 3,272.7 % % of total revenue (0.5) % 0.1 %

(0.5) % (0.0) %

Interest income (expense), net decreased $227,000 to an expense of $188,000 for
the three months ended June 30, 2022 from income of $39,000 for the three months
ended June 30, 2021. Interest income (expense), net decreased primarily due to a
decrease in the amount of cash, restricted cash and cash equivalents held by us
during the three months ended June 30, 2022 as compared to the three months
ended June 30, 2021 and due to increased debt during the three months ended June
30, 2022 as compared to the three months ended June 30, 2021.

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Interest income (expense), net decreased $360,000 to an expense of $371,000 for
the six months ended June 30, 2022 from an expense of $11,000 for the six months
ended June 30, 2021. Interest income (expense), net decreased primarily due to a
decrease in the amount of cash, restricted cash and cash equivalents held by us
during the six months ended June 30, 2022 as compared to the six months ended
June 30, 2021 and due to increased debt during the six months ended June 30,
2022 as compared to the six months ended June 30, 2021.

Equity in Income of Unconsolidated Joint Ventures

                   Three Months Ended                                  Six Months Ended
                       June 30,              Equity in Income             June 30,             Equity in Income
                    2022         2021       Change      % Change       2022        2021       Change      % Change

                    ($ in thousands)                                   ($ in thousands)
Equity in income
of
unconsolidated
joint ventures   $    2,177     $ 1,502    $     675        44.9 %   $   3,302    $ 2,613    $     689        26.4 %
% of total
revenue                 5.5 %       4.5 %                                  4.2 %      4.0 %


The equity in income of unconsolidated joint venture companies was income of
$2.2 million for the three months ended June 30, 2022 as compared to income of
$1.5 million for the three months ended June 30, 2021. The current quarter
income is primarily due to positive financial results of two raw gallium
companies that benefited from higher sales volume and higher prices.

The equity in income of unconsolidated joint venture companies was income of
$3.3 million for the six months ended June 30, 2022 as compared to income of
$2.6 million for the six months ended June 30, 2021. The current quarter income
is primarily due to positive financial results of two raw gallium companies that
benefited from higher sales volume and higher prices.

Other Income (Expense), Net

                      Three Months Ended                                    

Six Months Ended

                          June 30,                 Other Expense               June 30,               Other Income
                     2022           2021        Change      % Change       2022         2021       Change      % Change

                       ($ in thousands)                                     ($ in thousands)
Other income
(expense), net     $     294      $      61    $     233       382.0 %    $   285     $   (50)    $     335       670.0 %
% of total revenue       0.7 %          0.2 %                              

0.4 % (0.1) %

Other income (expense), net increased $233,000 to an income of $294,000 for the
three months ended June 30, 2022 from an income of $61,000 for the three months
ended June 30, 2021. Other income (expense), net increased primarily due to a
foreign exchange gain of $0.2 million in June 2022, compared to a foreign
exchange gain of $33,000 in June 2021.

Other income (expense), net increased $335,000 to an income of $285,000 for the
six months ended June 30, 2022 from an expense of $50,000 for the six months
ended June 30, 2021. Other income (expense), net increased primarily due to a
grant of $0.2 million received from a Chinese provincial government agency as an
award for relocating to its province in March 2022, compared to a grant of $0.1
million in March 2021 and a foreign exchange loss of $140,000 in June 2021
compared to a gain of $2,000 in June 2022.

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Provision for Income Taxes

                             Three Months Ended                                       Six Months Ended
                                  June 30,              Increase                         June 30,            Increase
                              2022          2021       (Decrease)     % Change        2022        2021      (Decrease)     % Change

                              ($ in thousands)                             

($ in thousands) Provision for income taxes $ 1,027 $ 893 $ 134 15.0 % $ 1,687 $ 1,639 $ 48 2.9 % % of total revenue

                 2.6 %       2.6 %                                      2.1 %      2.5 %


Provision for income taxes increased $134,000, or 15.0%, to $1.0 million for the
three months ended June 30, 2022 from $893,000 for the three months ended June
30, 2021. Provision for income taxes increased $48,000, or 2.9%, to $1.7 million
for the six months ended June 30, 2022 from $1.6 million for the six months
ended June 30, 2021. Income taxes and certain state taxes, have been provided
for our U.S. operations as most of the income in the U.S. had been fully offset
by utilization of federal and state net operating loss carryforwards except for
the newly created U.S. subsidiary, AXT-Tongmei. 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.

Under the 2017 Tax Cuts and Jobs Act (TCJA), research and experimental ("R&E"),
expenditures incurred or paid for tax years beginning after December 31, 2021,
will no longer be immediately deductible for tax purposes. Instead, businesses
are now required to capitalize and amortize R&E expenditures over a period of
five years for research conducted within the U.S. or 15 years for research
conducted in a foreign jurisdiction. We capitalize the R&E expense for our US
Corporation and amortize it over 5 years. We also capitalize the R&E expense in
our China subsidiaries and amortize it over 15 years.

On June 29, 2020, California Governor Gavin Newsom signed Assembly Bill 85 ("AB
85") into law as part of the California 2020 Budget Act, which temporarily
suspends the use of California net operating losses and imposes a cap on the
amount of business incentive tax credits that companies can utilize against
their net income for tax years 2020, 2021, and 2022. We analyzed the provisions
of AB 85 and determined there was no impact on our provision for income taxes
for the current period and will continue to evaluate the impact, if any, AB 85
may have on the Company's condensed consolidated financial statements and
disclosures.

Net Income Attributable to Noncontrolling Interests and Redeemable Noncontrolling Interests

                   Three Months Ended                Net income attributable to                 Six Months Ended                  Net income attributable to
                                                    noncontrolling interests and                                                 noncontrolling interests and
                       June 30,                 redeemable noncontrolling interests                June 30,                  redeemable noncontrolling interests
                  2022           2021             Change                 % Change               2022         2021            Change                      % Change

                    ($ in thousands)                                                            ($ in thousands)
Net income
attributable to
noncontrolling
interests and
redeemable
noncontrolling
interests       $     999      $     230     $             769                    334.3 %    $    1,806     $   570     $           1,236                        216.8 %
% of total
revenue               2.5 %          0.7 %                                                          2.3 %       0.9 %


Net income attributable to noncontrolling interests and redeemable
noncontrolling interests increased $769,000 or 334.3% to $999,000 for the three
months ended June 30, 2022, from $230,000 for the three months ended June 30,
2021, primarily due to the structural changes of the legal entities in China
(see Note 1) and partially offset by, losses generated by ChaoYang XinMei.

Net income attributable to noncontrolling interests and redeemable noncontrolling interests increased $1.2 million or 216.8% to $1.8 million for the six months ended June 30, 2022, from $570,000 for the six months ended June

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30, 2021, primarily due to the structural changes of the legal entities in China (see Note 1) and partially offset by, losses generated by ChaoYang XinMei.

Liquidity and Capital Resources

We consider cash and cash equivalents and short-term investments as liquid and
available for use within one year in our current operations. Short-term
investments are comprised of U.S. government securities, certificates of deposit
and investment-grade corporate notes and bonds.

As of June 30, 2022, our principal source of liquidity was $57.2 million, which
consisted of cash, restricted cash and cash equivalents of $44.9 million and
investments of $12.2 million. In the six months ended June 30, 2022, cash,
restricted cash and cash equivalents increased by $8.2 million and investments
decreased by $2.8 million. The increase in cash, restricted cash and cash
equivalents of $8.2 million in the six months ended June 30, 2022 was primarily
due to net cash provided by financing activities of $22.0 million and operating
activities of $5.5 million, partially offset by net cash used in investing
activities of $18.4 million and the effect of exchange rate changes of $1.0
million. As of June 30, 2022, we and our consolidated joint ventures in China
held approximately $31.5 million in cash and investments in foreign bank
accounts.

As of June 30, 2021, our principal source of liquidity was $58.5 million, which
consisted of cash and cash equivalents of $52.8 million and investments of $5.7
million. In the six months ended June 30, 2021, cash and cash equivalents
decreased by $19.8 million and investments decreased by $0.3 million. The
decrease in cash and cash equivalents of $19.8 million in the six months ended
June 30, 2021 was primarily due to net cash used in operating activities of
$10.6 million, and net cash used in investing activities of $12.8 million,
partially offset by net cash provided by financing activities of $3.2 million
and the effect of exchange rate changes of $0.3 million. As of June 30, 2021, we
and our consolidated subsidiaries in China held approximately $34.5 million in
cash and investments in foreign bank accounts.

Net cash provided by operating activities of $5.5 million for the six months
ended June 30, 2022 was primarily comprised of a net income before income
attributable to noncontrolling interest and redeemable noncontrolling interests
of $10.5 million, the adjustment for non-cash items of depreciation and
amortization of $4.0 million and stock-based compensation of $2.2 million,
partially offset by a net change of $8.1 million in operating assets and
liabilities and income from equity method investments of $3.3 million.

Net cash used in operating activities of $10.6 million for the six months ended
June 30, 2021 was primarily comprised of a net change of $22.2 million in
operating assets and liabilities and a gain on equity method investments of $2.6
million, partially offset by a net income before income attributable to
noncontrolling interest and redeemable noncontrolling interests of $8.4 million,
the adjustment for non-cash items of depreciation and amortization of $3.3
million stock-based compensation of $1.8 million and return of equity method
investments (dividends) of $0.8 million.

Net cash used in investing activities of $18.4 million for the six months ended
June 30, 2022 was primarily from the purchase of property, plant and equipment
of $20.9 million, partially offset by proceeds from sales and maturities of
available-for-sale debt securities of $2.5 million.

Net cash used in investing activities of $12.8 million for the six months ended
June 30, 2021 was primarily from the purchase of property, plant and equipment
of $13.0 million, partially offset by proceeds from sales and maturities of
available-for-sale debt securities of $0.2 million.

Net cash provided by financing activities was $22.0 million for the six months
ended June 30, 2022, which consisted of proceeds from short-term loan of $23.4
million, capital increase in subsidiary shares from noncontrolling interest of
$1.3 million and common stock option exercised of $0.1 million, partially offset
by repayment of short-term loan of $2.8 million.

Net cash provided by financing activities was $3.2 million for the six months ended June 30, 2021, which consisted of proceeds from issuance of Tongmei's common stock to redeemable noncontrolling interests of $0.3 million,

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common stock exercised of $1.1 million, formation of new subsidiary with noncontrolling interests of $1.3 million and proceeds from sale of subsidiary shares to noncontrolling interests of $0.5 million.

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 could be made from time to time in the open market and
could be 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. Since 2015, no
shares were repurchased under this program. During the six months ended June 30,
2022, we did not repurchase any shares under the approved stock repurchase
program. As of June 30, 2022, 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 declared or paid 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
include such cumulative dividends in "Accrued liabilities" in our condensed
consolidated balance sheets. At the time we pay this accrued liability, our cash
and cash equivalents will be reduced. We account for the cumulative year to date
dividends on the Series A preferred stock when calculating our earnings per
share.

Occasionally, one of our PRC subsidiaries or PRC raw material joint ventures
declares and pays a dividend. These dividends generally occur when the PRC joint
venture declares a dividend for all of its shareholders. Dividends paid to the
Company are subject to a 10% PRC withholding tax. The Company is required to
obtain approval from the State Administration of Foreign Exchange ("SAFE") to
transfer funds in or out of the PRC. SAFE requires a valid agreement to approve
the transfers, which are processed through a bank. Other than PRC foreign
exchange restrictions, the Company is not subject to any PRC restrictions and
limitations on its ability to distribute earnings from its businesses, including
its PRC subsidiaries and PRC joint ventures, to the Company and its investors as
well as the ability to settle amounts owed by the Company to its PRC
subsidiaries and PRC joint ventures. If SAFE approval is denied the dividend
payable to the Company would be owed but would not be paid.

For the six months ended June 30, 2022 and 2021, the aggregate dividends paid to
us, directly or to an intermediate entity within our corporate structure, by our
PRC subsidiaries and PRC raw material joint ventures were approximately $1.3
million and $774,000, respectively. For the six months ended June 30, 2022 and
2021, the aggregate dividends paid to minority shareholders by our PRC
subsidiaries and PRC raw material joint ventures were approximately $0 and $0,
respectively. For the six months ended June 30, 2022, no transfers, dividends,
or distributions have been made to date between the Company and its PRC
subsidiaries, or to investors, except for the settlement of amounts owed under
our transfer pricing arrangements in the ordinary course of business.

We have no current intentions to distribute to our investors earnings under our corporate structure. We settle amounts owed under our transfer pricing arrangements in the ordinary course of business.

The cash generated from one PRC subsidiary is not used to fund another PRC subsidiary's operations. None of our PRC subsidiaries has ever faced difficulties or limitations on its ability to transfer cash between our subsidiaries. AXT has cash management policies that dictate the amount of such funding.

As one of the first steps in the process of listing Tongmei on the STAR Market
and going public, we sold approximately 7.28% of Tongmei to private equity
investors for approximately $49 million in the aggregate. Pursuant to the
Capital Investment Agreements with the Investors, each Investor has the right to
require AXT to redeem any or all Tongmei shares held by such Investor at the
original purchase price paid by such Investor, without interest, in the event
the IPO fails to pass the audit of the Shanghai Stock Exchange, is not approved
by the CSRC or Tongmei cancels the IPO application. The aggregate redemption
amount is approximately $49 million.

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Tongmei submitted its IPO application to the Shanghai Stock Exchange, and it was
formally accepted for review on January 10, 2022. The Shanghai Stock Exchange
approved the IPO application on July 12, 2022. The STAR Market IPO remains
subject to review and approval by the CSRC and other authorities. The process of
going public on the STAR Market includes several periods of review and,
therefore, is a lengthy process. Subject to review and approval by the CSRC and
other authorities, Tongmei expects to accomplish this goal in the second half of
2022, probably in the fourth quarter of 2022. The listing of Tongmei on the STAR
Market will not change the status of AXT as a U.S. public company.

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.

On August 9, 2019, Tongmei borrowed $2.8 million against the Credit Facility
(the "August 2019 borrowing"). The repayment of the full amount was due on
August 9, 2020. On September 12, 2019 Tongmei borrowed an additional $2.8
million against the Credit Facility (the September 2019 borrowing"). The
repayment of the full amount was due on September 12, 2020. In August 2020,
Tongmei repaid the full amount of the Credit Facility, including all outstanding
accrued interest, of approximately $5.9 million and simultaneously applied to
renew the Credit Facility. The process of repaying a loan and then renewing the
loan is customary in China.

In September 2020, the August 2019 borrowing was renewed and funded against the
Credit Facility with an interest rate of 3.85%. The interest owed during the
term of the loan was deducted prior to funding. The repayment of the loan was
due on March 22, 2021, however the Credit Facility contains an option to renew
for an additional six months, which was exercised in March 2021 for
approximately $3.1 million. In September 2021, Tongmei repaid $3.1 million of
the Credit Facility, including all outstanding accrued interest, and
simultaneously applied to renew the Credit Facility. In September 2021, the
Credit Facility was renewed for approximately $2.7 million with an annual
interest rate of 3.85%. In March 2022, Tongmei repaid $2.7 million of the Credit
Facility, including all outstanding accrued interest. As of June 30, 2022, $0
was included in "Bank loan" in our condensed consolidated balance sheets.

In October 2020, the September 2019 borrowing was renewed and funded against the
Credit Facility and an additional $2.7 million was approved and funded against
the Credit Facility with the annual interest rate of 4.7%. Accrued interest is
calculated monthly and paid quarterly. The combined loan totaled $5.6 million.
In April 2021, Tongmei repaid the full amount of the Credit Facility, including
all outstanding accrued interest, of approximately $5.6 million and
simultaneously applied to renew the Credit Facility. In June 2021, the combined
loans were renewed for approximately $5.8 million and funded against the Credit
Facility with an annual interest rate of 4.7%. In November 2021, Tongmei repaid
the full amount of the Credit Facility, including all outstanding accrued
interest. As of June 30, 2022, $0 was included in "Bank loan" in our condensed
consolidated balance sheets.

In February 2020, our consolidated subsidiary, BoYu, entered into a credit
facility with the Industrial and Commercial Bank of China ("ICBC") with a $1.4
million line of credit at an annual interest rate of approximately 0.15% over
the loan prime rate. Accrued interest is calculated monthly and paid quarterly.
The annual interest rate was approximately 4.3% as of December 31, 2020. The
credit facility is collateralized by BoYu's land use rights and its building
located at its facility in Tianjin, China and BoYu's accounts receivable. The
primary intended use of the credit facility is for general purposes, which may
include working capital and other corporate expenses.

In March 2020, BoYu borrowed $0.4 million against the credit facility. In
December 2020, BoYu repaid the outstanding loan amount of $0.4 million and
renewed the credit facility with a $1.5 million line of credit at an annual
interest rate of approximately 0.07% over the loan prime rate. Accrued interest
is calculated monthly and paid monthly. In December 2021, BoYu repaid the
outstanding loan amount of approximately $1.6 million and renewed the credit
facility with a $1.6 million line of credit. Accrued interest is calculated
monthly and paid monthly. The annual interest

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rate was approximately 3.92% as of December 31, 2021. As of June 30, 2022, $1.5 million was included in "Bank loan" in our condensed consolidated balance sheets.

In September 2021, Tongmei entered into a credit facility with the Bank of
Communications with a $3.1 million line of credit at an annual interest rate of
4.0% as of September 30, 2021. Accrued interest is calculated monthly and paid
quarterly. The credit facility is collateralized by ChaoYang Tongmei's land use
rights and all of its buildings located at its facility in Kazuo, China. The
primary intended use of the credit facility is for general purposes, which may
include working capital and other corporate expenses. In November 2021, the Bank
of China increased the line of credit, under the same terms as the September
2021 line of credit, by $1.6 million for a total line of credit of $4.7 million.
As of June 30, 2022, $4.5 million was included in "Bank loan" in our condensed
consolidated balance sheets.

In September 2021 and October 2021, our consolidated subsidiary, ChaoYang XinMei
received funding from a minority investor of $0.9 million and $1.0 million,
respectively. In December 2021 and January 2022, the same subsidiary received
funding from Tongmei of $1.4 million and $1.4 million, respectively. In January
2022, the China local government certified this additional funding in our
consolidated subsidiary, ChaoYang XinMei, as an equity investment. As a result,
noncontrolling interests increased $2.2 million and redeemable noncontrolling
interests increased $0.2 million. Tongmei's ownership remained at 58.5% after
these equity investments. As of June 30, 2022, $0 was included in "Long-term
debt, related party" in our condensed consolidated balance sheets.

In December 2021, Tongmei entered into a credit facility with China Merchants
Bank for $1.6 million with an annual interest rate of 3.55%. Accrued interest is
calculated monthly and paid quarterly. The repayment of the loan and any accrued
interest is due on December 6, 2022. The loan is guaranteed by Beijing Capital
Financing Guarantee Co., Ltd. In exchange for the guarantee, Tongmei paid
Beijing Capital Financing Guarantee Co., Ltd. a fee of 1.5% of the loan amount
or approximately $24,000. As of June 30, 2022, $1.5 million was included in
"Bank loan" in our condensed consolidated balance sheets.

In December 2021, Tongmei entered into a credit facility with China Merchants
Bank for $1.6 million with an annual interest rate of 4.22%. Accrued interest is
calculated monthly and paid quarterly. The repayment of the loan and any accrued
interest is due on December 7, 2022. The credit facility is not collateralized.
As of June 30, 2022, $1.5 million was included in "Bank loan" in our condensed
consolidated balance sheets.

In January 2022, ChaoYang Tongmei entered into a credit facility with the Bank
of Communications for $1.6 million with an annual interest rate of 3.3%. The
interest owed during the term of the loan was deducted prior to funding. The
repayment of the loan is due in January 2023. As of June 30, 2022, $1.5 million
was included in "Bank loan" in our condensed consolidated balance sheets.

In January 2022, ChaoYang JinMei entered into a credit facility with the Bank of
Communications for $1.6 million with an annual interest rate of 3.3%. The
interest owed during the term of the loan was deducted prior to funding. The
repayment of the loan is due in January 2023. As of June 30, 2022, $1.5 million
was included in "Bank loan" in our condensed consolidated balance sheets.

In January 2022, Tongmei entered into a credit facility with the Bank of China
for $4.4 million with an annual interest rate of 4.55%. Accrued interest is
calculated monthly and paid quarterly. The repayment of the loan and any accrued
interest is due in January 2023. 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, China. As of June 30, 2022, $4.2
million was included in "Bank loan" in our condensed consolidated balance
sheets.

In March 2022, Tongmei entered into a credit facility with the Bank of China for
$3.1 million with an annual interest rate of 3.7%. The interest owed during the
term of the loan was deducted prior to funding. The repayment of the loan is due
in September 2022. As of June 30, 2022, $3.0 million was included in "Bank loan"
in our condensed consolidated balance sheets.

In April 2022, Tongmei entered into a credit facility with the Bank of China for $1.5 million with an annual interest rate of 4.2%. Accrued interest is calculated monthly and paid quarterly. The repayment of the loan and any

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accrued interest is due in April 2023. As of June 30, 2022, $1.5 million was included in "Bank loan" in our condensed consolidated balance sheets.

In May 2022, Tongmei entered into a credit facility with the Bank of Beijing for
$3.4 million with an annual interest rate of 4.2%. Accrued interest is
calculated monthly and paid quarterly. The repayment of the loan and any accrued
interest is due in May 2023. The credit facility is collateralized by a $3.9
million time deposit held in the Bank of Beijing. The time deposit cannot be
withdrawn until such time the credit facility and all accrued interest has been
repaid. As of June 30, 2022, $3.4 million was included in "Bank loan" in our
condensed consolidated balance sheets.

In June 2022, Tongmei entered into a credit facility with Industrial Bank for
$6.0 million with an annual interest rate of 4.35%. Accrued interest is
calculated monthly and paid quarterly. The repayment of the loan and any accrued
interest is due in June 2023. The credit facility is not collateralized. As of
June 30, 2022, $6.0 million was included in "Bank loan" in our condensed
consolidated balance sheets.

In June 2022, Tongmei entered into a credit facility with NingBo Bank for $1.5
million with an annual interest rate of 4.8%. The repayment of the loan and any
accrued interest is due in June 2023. The credit facility is not collateralized.
As of June 30, 2022, $1.5 million was included in "Bank loan" in our condensed
consolidated balance sheets.

In June 2022, BoYu entered into a credit facility with NingBo Bank for $1.5
million with an annual interest rate of 4.8%. The repayment of the loan and any
accrued interest is due in June 2023. The credit facility is not collateralized.
As of June 30, 2022, $1.5 million was included in "Bank loan" in our condensed
consolidated balance sheets.

On July 27, 2021, 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, debt securities, depositary shares, warrants, subscription rights,
purchase contracts and/or units in one or more offerings and in any combination.
A prospectus supplement, which we will provide each time we offer securities,
will describe the specific amounts, prices and terms of the securities we
determine to offer. We currently expect to use the net proceeds from the sale of
securities under the shelf registration statement for working capital, capital
expenditures and other general corporate purposes. We may also use a portion of
the net proceeds to acquire, license or invest in complementary products,
technologies or businesses. On May 17, 2022, the SEC declared the registration
statement effective.

We believe that we have adequate cash and investments to meet our operating needs and capital expenditures 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.

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".

Contract to Purchase Goods and Services

Purchase orders or contracts for the purchase of certain goods and services are
not considered to be part of our contractual obligations. We cannot determine
the aggregate amount of such purchase orders that represent contractual
obligations because purchase orders may represent authorizations to purchase
rather than binding agreements. For the purposes of this disclosure, contractual
obligations for purchase of goods or services are defined as agreements that are
enforceable and legally binding and that specify all significant terms,
including fixed or minimum quantities to be purchased; fixed, minimum, or
variable price provisions; and the approximate timing of the transaction. Our
purchase orders are based on our current needs and are fulfilled by our vendors
within short time horizons. We also enter into contracts for outsourced
services; however, the obligations under these contracts were not significant
and the contracts generally contain clauses allowing for cancellation without
significant penalty. Contractual obligations that are contingent upon the
achievement of certain milestones would also not be included.

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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 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.

Off-Balance Sheet Arrangements

As of June 30, 2022, 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).

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