AXT, INC. 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 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 theShanghai Stock Exchange's Sci-Tech innovAtion boaRd (the "STAR Market"), being accepted to list shares of Tongmei on the STAR Market, the timing and completion of such listing of shares of Tongmei on the STAR Market and the completion of entity reorganizations and the alignment of assets under Tongmei 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 inChina , changes in policies and regulations inChina 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 inChina of their investments in Tongmei, the administrative challenges in satisfying the requirements of various government agencies inChina 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 betweenChina andthe 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 inChina ; 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 inChina ; 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 endedDecember 31, 2020 and the condensed consolidated financial statements included elsewhere in this report. 30 Table of Contents OverviewAXT, Inc. ("AXT", "the company", "we," "us," and "our" refer toAXT, 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 is3-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 micro-LEDs. 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 79%, 81% and 79% of our consolidated revenue and our raw materials product group generated 21%, 19% and 21% for 2020, 2019 and 2018, respectively. 31 Table of Contents 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 imagingGallium 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 cellsGallium 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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We manufacture all of our products in the People's Republic of China (PRC or
China ), which generally has favorable costs for facilities and labor compared
with comparable facilities in the United States , Europe or Japan . Our supply
chain includes partial ownership of raw material companies in China
(subsidiaries/joint ventures). We believe this supply chain arrangement provides
us with pricing advantages, reliable supply, market trend visibility and better
sourcing lead-times for key raw materials central to manufacturing our
substrates. Our 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 smaller financial interest and have the ability to exercise significant
influence, but not control, over such companies. We purchase portions of the
materials produced by these companies for our own use and they sell the
remainder of their production to third parties.
The Beijing city government is moving its offices into the area where our
original manufacturing facility is currently located and is in the process of
moving thousands of government employees into this area. The government has
constructed showcase tower buildings and overseen the establishment of new
apartment complexes, retail stores and restaurants. An amusement park is being
constructed within a few miles of our facility. To create room and upgrade the
district, the city instructed virtually all existing manufacturing companies,
including AXT, to relocate all or some of their manufacturing lines. We were
instructed to 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
for the near future.
Begun in 2017, the relocation of our gallium arsenide production lines is now
largely completed. We 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 our new manufacturing facility in
Kazuo, a city approximately 250 miles from Beijing . We transferred our wafer
processing equipment for gallium arsenide to our new manufacturing facility in
Dingxing, a city approximately 75 miles from Beijing . Some of our larger, more
sophisticated customers qualified gallium arsenide wafers from the new sites in
2020. A few customers are still in that process. Our new facilities enabled us
to expand capacity and upgrade some of our equipment. The new buildings are
large enough that we can install additional equipment if market demand increases
or if we gain market share. We also acquired sufficient land to enable us 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 inthe 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. OnNovember 16, 2020 we announced a strategic initiative to accessChina'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 inChina . 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 inChina ("Investors") to invest funds in Tongmei. ByDecember 31, 2020 , 10 Investors had engaged 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 approximateU.S. dollars for this report.) The remaining investment of approximately$1.5 million of new capital was funded in early January, 2021. Under 33 Table of ContentsChina 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 onJanuary 25, 2021 . In exchange for an investment of approximately$49 million , the Investors received a 7.28% noncontrolling interest in Tongmei. Pursuant to the investment agreements ("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 of a material adverse change or if Tongmei does not achieve its IPO on or beforeDecember 31, 2022 . This right is suspended when Tongmei submits its formal application for IPO to theChina Securities Regulatory Commission ("CSRC"). Tongmei currently plans to submit its formal application to the CSRC in the third quarter of 2021 or in the fourth quarter of 2021. However, if onDecember 31, 2022 the IPO application has been submitted and accepted by the CSRC or the stock exchange and such submission remains under review, then the date when such Investor is entitled to exercise such redemption right shall be deferred to a date when such submission is rejected by the CSRC or stock exchange, or the date when Tongmei withdraws its IPO application. Tongmei would be required to sell a minimum of 10% of its equity in the IPO. The process of going public on the STAR Market includes several periods of review and is therefore a lengthy process. Tongmei does not expect to complete the IPO until mid-2022. The listing of Tongmei onChina's STAR Market will not change the status of AXT as aU.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") andBeijing BoYu Semiconductor Vessel Craftwork Technology Co., Ltd. ("BoYu") and its subsidiaries were assigned to Tongmei inDecember 2020 . As ofJune 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, andAXT-Tongmei, Inc. will increase the number of customers and employees attributable to Tongmei as well as increase Tongmei's consolidated revenue.
The following organization chart depicts the consolidated structure as of
[[Image Removed: Graphic]]
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, 2021 , we paid
approximately $554,000 in tariffs. In 2020, we paid approximately $1.3 million
in tariffs. The future impact of tariffs and trade wars is uncertain.
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
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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, 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 receivable 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 fromU.S. customers with an emphasis on balances in excess of 90 days and for receivables from customers located outside theU.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 andU.S. customers is thatU.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 inthe 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 inthe 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 ofJune 30, 2021 andDecember 31, 2020 , our accounts receivable, net balance was$33.5 million and$24.6 million , respectively, which was net of an allowance for doubtful accounts of$217,000 and$217,000 , 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. 35 Table of Contents 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 ofJune 30, 2021 andDecember 31, 2020 , accrued product warranties totaled$792,000 and$609,000 , 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 ofJune 30, 2021 andDecember 31, 2020 , we had an inventory reserve of$19.3 million and$17.7 million , respectively, for excess and obsolete inventory and$394,000 and$162,000 , respectively, for lower of cost or net realizable value reserves. If actual demand for our products were to be substantially lower than estimated, additional inventory adjustments for excess or obsolete inventory might be required, which could have a material impact on our business, financial condition and results of operations. Impairment of Investments
We classify marketable investments in debt securities as available-for-sale debt securities in accordance with 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 inChina 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 six months endedJune 30, 2021 and 2020. 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.
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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. 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 betweenthe United States dollar and Japanese yen. We measure the fair value of these foreign currency hedges at each month end and quarter end using current exchange rates and in accordance with generally accepted accounting principles. At quarter end any foreign currency hedges not settled are netted in "Accrued liabilities" on the condensed consolidated balance sheet and classified as Level 3 assets and liabilities. As ofJune 30, 2021 , the net change in fair value from the placement of the hedge to settlement at each month end during the quarter had a de minimis impact to the consolidated results.
There have been no transfers between fair value measurement levels during the
three months ended
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 on the condensed consolidated balance sheets as ofJune 30, 2021 andDecember 31 ,
2020.
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
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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 (the
"Performance Period").
The financial Performance Goal is a metric based upon year-end 2020 actual
results as compared to the Company's year-end actual results in 2021. 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 year 2021.
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. Our
deferred tax assets have been reduced to zero by valuation allowance.
We provide for income taxes based upon the geographic composition of worldwide
earnings and tax regulations governing each region, particularly China . The
calculation of tax liabilities involves significant judgment in estimating the
impact of uncertainties in the application of complex tax laws, particularly in
foreign countries such as China .
See Note 14-"Income Taxes" in the notes to condensed consolidated financial statements for additional information.
Impact of the COVID-19 Pandemic
InMarch 2020 , theWorld Health Organization declared the outbreak of COVID-19 to be a pandemic, which continues to be spread throughout the world. InMarch 2020 , the President ofthe United States declared the COVID-19 outbreak a national emergency. For much of the three months endedMarch 31, 2020 , our manufacturing facilities inChina 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 inChina . 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 peoplewho 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 travel restrictions betweenChina and theU.S. that have disrupted our normal movement to and fromChina 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, 38
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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
2021 2020 (Decrease) % Change 2021 2020 (Decrease) % Change
Product Type: ($ in thousands) ($ in thousands) Substrates$ 24,905 $ 16,874 $ 8,031 47.6 %$ 48,278 $ 33,755 $ 14,523 43.0 % Raw materials and other 8,830 5,260 3,570 67.9 % 16,807 9,102 7,705 84.7 % Total revenue$ 33,735 $ 22,134 $ 11,601 52.4 %$ 65,085 $ 42,857 $ 22,228 51.9 % Revenue increased$11.6 million , or 52.4%, to$33.7 million for the three months endedJune 30, 2021 from$22.1 million for the three months endedJune 30, 2020 . The substrate revenue increase for the three months endedJune 30, 2021 as compared to the same period in 2020 was primarily the result of higher demand for our InP wafer substrates followed by an increase in revenue for semi-conducting GaAs wafer substrates. Demand for InP wafer substrates used in 5G and related 5G 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. Raw materials sales increased$3.6 million , or 67.9%, to$8.8 million for the three months endedJune 30, 2021 as compared to the same period in 2020. The raw materials revenue increase for the three months endedJune 30, 2021 as compared to the same period in 2020 was primarily the result of an increase in sales of refined gallium and pBN crucibles resulting from stronger market demand. In addition, pricing for purified gallium increased. Revenue increased$22.2 million , or 51.9%, to$65.1 million for the six months endedJune 30, 2021 from$42.9 million for the six months endedJune 30, 2020 . The substrate revenue increase for the six months endedJune 30, 2021 as compared to the same period in 2020 was primarily the result of higher demand for our InP wafer substrates followed by an increase in revenue for semi-conducting GaAs wafer substrates. Demand for InP wafer substrates used in 5G and related 5G 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. Raw materials sales increased$7.7 million , or 84.7%, to$16.8 million for the six months endedJune 30, 2021 as compared to the same period in 2020. The raw materials revenue increase for the six months endedJune 30, 2021 as compared to the same period in 2020, was primarily the result of an increase in sales of refined gallium and pBN crucibles resulting from stronger market demand. 39 Table of Contents Revenue byGeographic Region Three Months Ended 2020 to 2021 June 30, Increase 2021 2020 (Decrease) % Change ($ in thousands) China$ 15,546 $ 7,753 $ 7,793 100.5 % % of total revenue 46 % 35 % Taiwan 4,996 4,398 598 13.6 % % of total revenue 15 % 20 % Japan 2,635 1,698 937 55.2 % % of total revenue 8 % 8 %Asia Pacific (excludingChina , Taiwan and Japan) 1,396 1,701 (305) (17.9) % % of total revenue 4 % 8 % Europe (primarily Germany) 6,411 4,114 2,297 55.8 % % of total revenue 19 % 18 %North America (primarily the United States) 2,751 2,470 281 11.4 % % of total revenue 8 % 11 % Total revenue$ 33,735 $ 22,134 $ 11,601 52.4 %
Revenue inChina increased$7.8 million for the three months endedJune 30, 2021 , primarily due to higher demand for our InP, GaAs and Ge wafer substrates and refined gallium and pBN crucibles sold by two of our consolidated subsidiaries. Revenue inTaiwan increased$0.6 million , primarily due to higher demand for our InP wafer substrates partially offset by decreased demand for our GaAs wafer substrates. Revenue inJapan increased$0.9 million primarily due to higher demand for our InP wafer substrates partially offset by lower demand for our GaAs wafer substrates and decreased demand for pBN crucibles sold by one of our consolidated subsidiaries. Revenue inAsia Pacific decreased by$0.3 million , primarily due to decreased demand for pBN crucibles sold by one of our consolidated subsidiaries partially offset by increased demand for our GaAs wafer substrates. Revenue inEurope increased by$2.3 million primarily due to increased demand for our GaAs, InP and Ge wafer substrates. Revenue inNorth America increased by$0.3 million due to higher demand for our InP and Ge wafer substrates partially offset by lower demand for our GaAs wafer substrates and decreased demand for pBN crucibles sold by one of our consolidated subsidiaries. Six Months Ended June 30, Increase 2021 2020 (Decrease) % Change ($ in thousands) China$ 31,092 $ 12,477 $ 18,615 149.2 % % of total revenue 48 % 29 % Taiwan 8,011 9,575 (1,564) (16.3) % % of total revenue 12 % 23 % Japan 5,158 3,032 2,126 70.1 % % of total revenue 8 % 7 %Asia Pacific (excludingChina , Taiwan and Japan) 3,213 3,057 156 5.1 % % of total revenue 5 % 7 % Europe (primarily Germany) 11,846 10,328 1,518 14.7 % % of total revenue 18 % 24 %North America (primarily the United States) 5,765 4,388 1,377 31.4 % % of total revenue 9 % 10 % Total revenue$ 65,085 $ 42,857 $ 22,228 51.9 %
Revenue in
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gallium sold by two of our consolidated subsidiaries. Revenue inTaiwan decreased by$1.6 million primarily due to decreased demand for our InP and GaAs wafer substrates. Revenue inJapan increased$2.1 million primarily due to higher demand for our InP wafer substrates partially offset by lower demand for our GaAs wafer substrates. Revenue inEurope increased$1.5 million , primarily due to increased demand for GaAs wafer substrates partially offset by lower demand for Ge wafer substrates. Revenue inNorth America increased$1.4 million , primarily due to increased demand for our InP wafer substrates partially offset by decreased demand for our GaAs wafer substrates. Gross Margin Three Months Ended Six Months Ended June 30, Increase June 30, Increase 2021 2020 (Decrease) % Change 2021 2020 (Decrease) % Change ($ in thousands) ($ in thousands) Gross profit$ 12,238 $ 6,768 $ 5,470 80.8 % $
23,774$ 12,290 $ 11,484 93.4 % Gross Margin % 36.3 % 30.6 % 36.5 % 28.7 % Gross profit increased$5.5 million , or 80.8%, to$12.2 million for the three months endedJune 30, 2021 from$6.8 million for the three months endedJune 30, 2020 . The increase in gross profit is attributed to higher revenue and a change in product mix. Gross profit increased$11.5 million , or 93.4%, to$23.8 million for the six months endedJune 30, 2021 from$12.3 million for the six months endedJune 30, 2020 . The increase in gross profit is attributed to higher revenue and a change in product mix.
Selling, General and Administrative Expenses
Three Months Ended Six Months Ended
June 30, Increase June 30, Increase
2021 2020 (Decrease) % Change 2021 2020 (Decrease) % Change
($ in thousands) ($ in thousands)
Selling, general and
administrative
expenses $ 5,795 $ 4,747 $ 1,048 22.1 % $ 11,365 $ 9,496 $ 1,869 19.7 %
% of total revenue 17.2 % 21.4 % 17.5 % 22.2 %
Selling, general and administrative expenses increased $1.0 million , or 22.1%,
to $5.8 million for the three months ended June 30, 2021 from $4.7 million for
the three months ended June 30, 2020 . The higher selling, general and
administrative expenses were primarily from higher personnel-related expenses,
directors and officers insurance and professional service-related expenses
partially offset by lower travel-related expenses driven by the COVID-19
pandemic.
Selling, general and administrative expenses increased $1.9 million , or 19.7%,
to $11.4 million for the six months ended June 30, 2021 from $9.5 million for
the six months ended June 30, 2020 . The higher selling, general and
administrative expenses were primarily from higher personnel-related expenses,
license and fees and outside commissions partially offset by lower legal and
travel-related expenses driven by the COVID-19 pandemic.
Research and Development
Three Months Ended Six Months Ended
June 30, Increase June 30, Increase
2021 2020 (Decrease) % Change 2021 2020 (Decrease) % Change
($ in thousands)
($ in thousands)
Research and development
7.5 % 7.0 % 7.6 % 6.9 %
Research and development expenses increased
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development expenses for the three months endedJune 30, 2021 was primarily due to 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, higher product testing and personnel-related expenses. Research and development expenses increased$2.0 million , or 67.5%, to$4.9 million for the six months endedJune 30, 2021 from$3.0 million for the six months endedJune 30, 2020 . The increase in research and development expenses for the six months endedJune 30, 2021 was primarily due to development expenses for 8-inch GaAs and 6-inch InP wafer substrates and development of new features for certain of our GaAs and InP wafer substrates, higher expense in our new product testing and personnel-related expenses.
Interest Income (Expense), Net
Three Months Ended Six Months Ended
June 30, Increase June 30, Increase
2021 2020 (Decrease) % Change 2021 2020 (Decrease) % Change
($ in thousands) ($ in thousands)
Interest income
(expense), net $ 39 $ (39) $ 78 200.0 %
(0.0) % (0.2) %
Interest income (expense), net increased $78,000 or 200.0% for the three months
ended June 30, 2021 as compared to the same period in 2020. Interest income
(expense), net increased primarily due to an increase in the amount of cash and
cash equivalents held by us in June 2021 as compared to June 2020 .
Interest income (expense), net increased $57,000 or 83.8% for the six months
ended June 30, 2021 as compared to the same period in 2020. Interest income
(expense), net increased primarily due to an increase in the amount of cash and
cash equivalents held by us in June 2021 as compared to June 2020 .
Equity in Income (Loss) of
Three Months Ended Six Months Ended
June 30, Equity in Income (Loss) June 30, Equity in Loss
2021 2020 Change % Change 2021 2020 Change % Change
($ in thousands) ($ in thousands)
Equity in income
(loss) of
unconsolidated
joint ventures $ 1,502 $ (168) $ 1,670 994.0 %
4.0 % (0.7) %
The equity in income (loss) of unconsolidated joint venture companies was income
of $1.5 million for the three months ended June 30, 2021 as compared to a loss
of $168,000 for the three months ended June 30, 2020 . The current quarter income
is primarily due to positive financial results of two raw gallium companies that
benefited from higher sales volume.
The equity in income (loss) of unconsolidated joint venture companies was income
of $2.6 million for the six months ended June 30, 2021 as compared to a loss of
$0.3 million for the six months ended June 30, 2020 . The current year six month
income is primarily due to positive financial results of two raw gallium
companies that benefited from higher sales volume and an increase in the selling
price of gallium.
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Other Income (Expense), Net
Three Months Ended Six Months Ended
June 30, Other Income (Expense) June 30, Other Income (Expense)
2021 2020 Change % Change 2021 2020 Change % Change
($ in thousands) ($ in thousands)
Other income
(expense), net $ 61 $ 1,608 $ (1,547) (96.2) % $ (50) $ 2,974 $ (3,024) (101.7) %
% of total revenue 0.2 % 7.3 % (0.1) % 6.9 %
Other income (expense), net decreased $1.5 million to an income of $0.1 million
for the three months ended June 30, 2021 from an income of $1.6 million for the
three months ended June 30, 2020 . Other income (expense), net decreased
primarily due to a grant of $1.6 million received from a Chinese provincial
government agency as an award for relocating to its province in June 2020 , which
was not repeated in June 2021 .
Other income (expense), net decreased $3.0 million to an expense of $50,000 for
the six months ended June 30, 2021 from an income of $3.0 million for the six
months ended June 30, 2020 . Other income (expense), net decreased primarily due
to grants totaling $3.0 million received from a Chinese provincial government
agency as an award for relocating to its province in June 2020 , which was not
repeated in June 2021 .
Provision for Income Taxes
Three Months Ended Six Months Ended
June 30, Increase June 30, Increase
2021 2020 (Decrease) % Change 2021 2020 (Decrease) % Change
($ in thousands)
($ in thousands)
Provision for income taxes
2.6 % 4.2 % 2.5 % 3.0 %
Provision for income taxes for the three and six months endedJune 30, 2021 was$893,000 and$1.6 million , respectively, which was primarily related to higher profits inChina and a tax on a rebate we received from a purchase of land use rights when we began the relocation. No income taxes, except certain state tax, or benefits have been provided for ourU.S. operations as the income in theU.S. had been fully offset by utilization of federal and state net operating loss carryforwards. Additionally, there is uncertainty of generating future profit in theU.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 ourU.S. andChina -based operations.
Due to our uncertainty regarding our future profitability in the
OnMarch 27, 2020 , the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") was passed into law. The CARES Act includes several significant business tax provisions, including modification to the taxable income limitation for utilization of net operating losses ("NOLs") incurred in 2018, 2019 and 2020 and the ability to carry back NOLs from those years for a period of up to five years, an increase to the limitation on deductibility of certain business interest expense, bonus depreciation for purchases of qualified improvement property, and special deductions on certain corporate charitable contributions. We analyzed the provisions of the CARES Act and determined there was no effect on our provision for income taxes for the current period and will continue to evaluate the impact, if any, the CARES Act may have on the Company's condensed consolidated financial statements and disclosures. OnJune 29, 2020 ,California GovernorGavin Newsom signed Assembly Bill 85 ("AB 85") into law as part of theCalifornia 2020 Budget Act, which temporarily suspends the use ofCalifornia 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. 43 Table of Contents
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
2021 2020 Change % Change 2021 2020 Change % Change
($ in thousands) ($ in thousands)
Net income
attributable to
noncontrolling
interests and
redeemable
noncontrolling
interests $ 230 $ 598 $ (368) (61.5) % $ 570 $ 993 $ (423) (42.6) %
% of total
revenue 0.7 % 2.7 % 0.9 % 2.3 %
Net income attributable to noncontrolling interests and redeemable
noncontrolling interests decreased $368,000 or 61.5% to $230,000 for the three
months ended June 30, 2021 , from $598,000 for the three months ended June 30,
2020 , primarily due to the structural changes of the legal entities in China
(see Note 1) and to a lesser degree, losses generated by ChaoYang XinMei.
Net income attributable to noncontrolling interests and redeemable
noncontrolling interests decreased $423,000 or 42.6% to $570,000 for the six
months ended June 30, 2021 , from $993,000 for the six months ended June 30,
2020 , primarily due to the structural changes of the legal entities in China
(see Note 1) and to a lesser degree, 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 ofU.S. government securities, certificates of deposit and investment-grade corporate notes and bonds. As ofJune 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 endedJune 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 endedJune 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 ofJune 30, 2021 , we and our consolidated subsidiaries inChina held approximately$34.5 million in cash and investments in foreign bank accounts. As ofJune 30, 2020 , our principal source of liquidity was$32.5 million , which consisted of cash and cash equivalents of$26.5 million and investments of$6.0 million . In the six months endedJune 30, 2020 , cash and cash equivalents decreased by$0.4 million and investments decreased by$3.5 million . The decrease in cash and cash equivalents of$0.4 million in the six months endedJune 30, 2020 was primarily due to net cash used in investing activities of$3.0 million and the effect of exchange rate changes of$0.2 million , partially offset by net cash provided by operating activities of$2.0 million and financing activities of$0.8 million . As ofJune 30, 2020 , we and our consolidated subsidiaries held approximately$13.4 million in cash and investments in foreign bank accounts. This consisted of$11.3 million held by our wholly-owned subsidiaries inChina and$2.1 million held by our partially-owned consolidated subsidiary inChina .
Net cash used in operating activities of
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$2.6 million , partially offset by a net income before income attributable to non-controlling 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 provided by operating activities of$2.0 million for the six months endedJune 30, 2020 was primarily comprised of a net income before income attributable to non-controlling interest of$1.2 million , the adjustment for non-cash items of depreciation and amortization of$2.0 million , stock-based compensation of$1.3 million and loss on equity method investments of$0.3 million , partially offset by a net change of$2.8 million in operating assets and liabilities. Net cash used in investing activities of$12.8 million for the six months endedJune 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 used in investing activities of$3.0 million for the six months endedJune 30, 2020 was primarily from the purchase of property, plant and equipment of$6.5 million , partially offset by proceeds from sales and maturities of available-for-sale debt securities of$3.5 million . Net cash provided by financing activities was$3.2 million for the six months endedJune 30, 2021 , which consisted of proceeds from issuance of Tongmei's common stock to redeemable noncontrolling interests of$0.3 million , common stock exercised of$1.1 million , formation of new subsidiary with noncontrolling interest of$1.3 million and proceeds from sale of subsidiary shares to noncontrolling interests of$0.5 million . Net cash provided by financing activities was$0.8 million for the six months endedJune 30, 2020 , which consisted of proceeds from short-term borrowings of$0.4 million and proceeds from common stock exercised of$0.5 million , partially offset by dividends paid by joint ventures to their minority shareholders of$0.1 million . OnOctober 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 endedJune 30, 2021 , we did not repurchase any shares under the approved stock repurchase program. As ofJune 30, 2021 , 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 ofDecember 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. 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 of a material adverse change or if Tongmei does not achieve its IPO on or beforeDecember 31, 2022 . This right is suspended when Tongmei submits its formal application to the CSRC. Tongmei currently plans to submit its formal application to the CSRC in the third quarter of 2021 or in the fourth quarter of 2021. However, if onDecember 31, 2022 the IPO application has been submitted and accepted by the CSRC or the stock exchange and such submission remains under review, then the date when such investor is entitled to exercise such redemption right shall be deferred to a date 45
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when such submission is rejected by the CSRC or stock exchange, or the date when Tongmei withdraws its IPO application. The process of going public on the STAR Market includes several periods of review and is therefore a lengthy process. Tongmei does not expect to complete the IPO until mid-2022. There can be no assurances that Tongmei will complete its IPO byDecember 31, 2022 or at all. In the event that investors exercise their redemption rights, we may be required to seek additional capital in order to redeem their Tongmei shares and there would be no assurances that such capital would be available on terms acceptable to us, if at all. Any redemptions could have a material adverse effect on our business, financial condition and results of operations. OnNovember 6, 2018 , the Company entered into a Credit Agreement (the "Credit Agreement"), by and between the Company andWells Fargo Bank, National Association ("Wells Fargo Bank "), which established a$10 million secured revolving line of credit with a$1.0 million letter of credit sublimit facility. The revolving credit facility, which was never drawn down, was collateralized by substantially all of the assets of the Company located withinthe United States , subject to certain exceptions. As ofDecember 31, 2019 , no loans or letters of credit were outstanding under the Credit Agreement. OnFebruary 5, 2020 , the Company entered into the First Amendment to Credit Agreement (the "First Amendment"), by and between the Company andWells Fargo Bank , which reduced the$10 million secured revolving line of credit under the Credit Agreement to$7 million . The commitments under the Credit Agreement, as amended by the First Amendment, expired onNovember 30, 2020 and there were no loans thereunder. As of the date of this Quarterly Report on Form 10-Q, the Credit agreement has expired and no loans or letters of credit were outstanding. OnAugust 9, 2019 , Tongmei entered into a credit facility with the Bank of China with a$5.8 million line of credit at an annual interest rate of approximately 0.4% over the average interest rate quoted by the National Interbank Funding Center. Accrued interest is calculated monthly and paid quarterly. The annual interest rate was approximately 4.7%. The credit facility is collateralized by Baoding Tongmei's land use rights and all of its buildings located at its facility in Dingxing. The primary intended use of the credit facility is for general purposes, which may include working capital and other corporate expenses. OnAugust 9, 2019 , we borrowed$2.8 million against the credit facility. The repayment of the full amount was due onAugust 9, 2020 . OnSeptember 12, 2019 , we borrowed an additional$2.8 million against the credit facility. The repayment of the full amount was due onSeptember 12, 2020 . InAugust 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 inChina .
InSeptember 2020 , theAugust 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 onMarch 22, 2021 , however the credit facility contained an option to renew for an additional six months, which was exercised inMarch 2021 . InOctober 2020 , theSeptember 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 totals$5.6 million . InApril 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. InJune 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%. As ofJune 30, 2021 ,$9.0 million was included in "Bank loan" in our condensed consolidated balance sheets. InFebruary 2020 , our majority-owned 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 credit facility is collateralized by BoYu's land use rights and its building located at its facility inTianjin, 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. InDecember 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. The annual interest rate was approximately 3.92% as ofJune 30, 2021 . InDecember 2020 , BoYu borrowed$1.5 million against the credit facility. The repayment of the full amount is due in 46
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December 2021.As of
OnJuly 27, 2021 , we filed with theSEC a registration statement on Form S-3, pursuant to which we may offer up to$60,000,000 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.
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.
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 the3-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 inChina 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. 47 Table of Contents
Off-Balance Sheet Arrangements
As of
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