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0

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the quarterly period ended March 31, 2024

Or

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the transition period from                 to

Commission File Number 000-24085

AXT, INC.

(Exact name of registrant as specified in its charter)

DELAWARE

94-3031310

(State or other jurisdiction of
Incorporation or organization)

(I.R.S. Employer
Identification No.)

4281 Technology Drive, Fremont, California 94538

(Address of principal executive offices) (Zip code)

(510) 438-4700

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class:

    

Trading Symbol

    

Name of each exchange on which registered:

Common Stock, $0.001 par value

AXTI

The NASDAQ Stock Market LLC

Indicate by check-mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  No 

Indicate by check-mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes  No 

Indicate by check-mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer 

Non-accelerated filer

Smaller reporting company 

Emerging growth company 

If an emerging growth company, indicate by check-mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check-mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES  NO 

As of May 1, 2024, 44,398,843 shares, $0.001 par value, of the registrant’s common stock were outstanding.

AXT, INC.

FORM 10-Q

TABLE OF CONTENTS

Page

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

Condensed Consolidated Balance Sheets as of March 31, 2024 and December 31, 2023

3

Condensed Consolidated Statements of Operations for the three months ended March 31, 2024 and 2023

4

Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2024 and 2023

5

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2024 and 2023

6

Notes To Condensed Consolidated Financial Statements

7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

31

Item 3. Quantitative and Qualitative Disclosures About Market Risk

51

Item 4. Controls and Procedures

53

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

54

Item 1A. Risk Factors

54

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

80

Item 3. Defaults upon Senior Securities

80

Item 4. Mine Safety Disclosures

80

Item 5. Other Information

80

Item 6. Exhibits

81

Signatures

82

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

AXT, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except per share data)

    

March 31, 

    

December 31, 

 

2024

2023

ASSETS

Current assets:

Cash

$

25,793

$

37,752

Restricted cash

13,807

12,362

Short-term investments

 

1,667

 

2,140

Accounts receivable, net of allowances for credit losses of $579 and $579 as of March 31, 2024 and December 31, 2023

 

25,058

 

19,256

Inventories

 

85,943

 

86,503

Prepaid expenses and other current assets

 

11,474

 

12,643

Total current assets

 

163,742

 

170,656

Property, plant and equipment, net

 

163,122

 

166,348

Operating lease right-of-use assets

2,657

2,799

Other assets

 

19,443

 

18,898

Total assets

$

348,964

$

358,701

LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payable

$

10,262

$

9,617

Accrued liabilities

 

12,697

 

19,019

Short-term loans

49,048

52,921

Total current liabilities

 

72,007

 

81,557

Noncurrent operating lease liabilities

2,211

2,351

Other long-term liabilities

 

9,655

 

5,647

Total liabilities

 

83,873

 

89,555

Commitments and contingencies (Note 12)

Redeemable noncontrolling interests (Note 18)

40,581

41,663

Stockholders’ equity:

Preferred stock Series A, $0.001 par value; 2,000 shares authorized; 883 shares issued and outstanding as of March 31, 2024 and December 31, 2023 (Liquidation preference of $7,920 and $7,875 as of March 31, 2024 and December 31, 2023)

 

3,532

 

3,532

Common stock, $0.001 par value; 70,000 shares authorized; 44,399 and 44,239 shares issued and outstanding as of March 31, 2024 and December 31, 2023

 

44

 

44

Additional paid-in capital

 

239,257

 

238,452

Accumulated deficit

 

(34,123)

 

(32,040)

Accumulated other comprehensive loss

 

(7,626)

 

(5,999)

Total AXT, Inc. stockholders’ equity

 

201,084

 

203,989

Noncontrolling interests

 

23,426

 

23,494

Total stockholders’ equity

 

224,510

 

227,483

Total liabilities, redeemable noncontrolling interests and stockholders’ equity

$

348,964

$

358,701

See accompanying notes to condensed consolidated financial statements.

3

ub

AXT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except per share data)

    

Three Months Ended

March 31, 

2024

    

2023

Revenue

$

22,688

$

19,405

Cost of revenue

 

16,594

 

14,295

Gross profit

 

6,094

 

5,110

Operating expenses:

Selling, general and administrative

 

6,227

 

5,952

Research and development

 

3,214

 

3,595

Total operating expenses

 

9,441

 

9,547

Loss from operations

 

(3,347)

 

(4,437)

Interest expense, net

 

(349)

 

(397)

Equity in income of unconsolidated joint ventures

 

890

 

1,034

Other income, net

 

1,032

 

282

Loss before provision for income taxes

 

(1,774)

 

(3,518)

Provision for income taxes

 

274

 

148

Net loss

 

(2,048)

 

(3,666)

Less: Net (income) loss attributable to noncontrolling interests and redeemable noncontrolling interests

 

(35)

 

318

Net loss attributable to AXT, Inc.

$

(2,083)

$

(3,348)

Net loss attributable to AXT, Inc. per common share:

Basic

$

(0.05)

$

(0.08)

Diluted

$

(0.05)

$

(0.08)

Weighted-average number of common shares outstanding:

Basic

 

42,987

 

42,498

Diluted

 

42,987

 

42,498

See accompanying notes to condensed consolidated financial statements.

4

AXT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited, in thousands)

Three Months Ended

March 31, 

    

2024

    

2023

    

 

Net loss

$

(2,048)

$

(3,666)

Other comprehensive income (loss), net of tax:

Change in foreign currency translation gain (loss), net of tax

 

(2,010)

 

887

Change in unrealized gain on available-for-sale debt investments, net of tax

 

7

 

111

Total other comprehensive income (loss), net of tax

 

(2,003)

 

998

Comprehensive loss attributable to AXT, Inc.

 

(4,051)

 

(2,668)

Less: Comprehensive loss attributable to noncontrolling interests and redeemable noncontrolling interests

 

341

 

178

Comprehensive loss attributable to AXT, Inc.

$

(3,710)

$

(2,490)

See accompanying notes to condensed consolidated financial statements.

5

AXT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

Three Months Ended

March 31, 

    

2024

    

2023

Cash flows from operating activities:

Net Loss

$

(2,048)

$

(3,666)

Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation and amortization

 

2,192

 

2,118

Amortization of marketable securities premium

 

 

7

Stock-based compensation

 

809

 

915

(Gain) Loss on disposal of equipment

 

 

5

Equity in income of unconsolidated joint ventures

 

(890)

 

(1,034)

Deferred tax assets

40

(10)

Changes in operating assets and liabilities:

Accounts receivable

 

(6,076)

 

7,982

Inventories

 

(720)

 

(1,466)

Prepaid expenses and other current assets

 

(375)

 

1,965

Other assets

 

65

 

(1,055)

Accounts payable

 

815

 

(3,351)

Accrued liabilities

 

(558)

 

(1,568)

Other long-term liabilities

 

(2,060)

 

(2,376)

Net cash used in operating activities

 

(8,806)

 

(1,534)

Cash flows from investing activities:

Purchases of property, plant and equipment

 

(4,392)

 

(3,616)

Proceeds from sales and maturities of available-for-sale debt securities

 

480

 

2,903

Net cash used in investing activities

 

(3,912)

 

(713)

Cash flows from financing activities:

Proceeds from common stock options exercised

 

20

 

8

Proceeds from short-term bank loans

 

12,858

 

18,372

Payments on short-term bank loans

(16,541)

(12,810)

Proceeds from capital increase in subsidiary shares from noncontrolling interests

203

Proceeds from long-term loan

5,831

Payments on long-term loan

(168)

Net cash provided by financing activities

 

2,000

 

5,773

Effect of exchange rate changes on cash and restricted cash

 

204

 

19

Net increase (decrease) in cash and restricted cash

 

(10,514)

 

3,545

Cash and restricted cash at the beginning of the year

 

50,114

 

41,348

Cash and restricted cash at the end of the period

$

39,600

$

44,893

Supplemental disclosure of non-cash flow information:

Notes receivables paid to purchase fixed assets

$

1,377

$

Investment in subsidiary shares from noncontrolling interest

$

$

72

Consideration payable in connection with construction in progress, included in accrued liabilities

$

21

$

See accompanying notes to condensed consolidated financial statements.

6

AXT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Basis of Presentation

The accompanying condensed consolidated financial statements of AXT, Inc. (“AXT,” the “Company,” “we,” “us,” and “our” refer to AXT, Inc. and all of its consolidated subsidiaries) are unaudited, and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, this interim quarterly financial report does not include all disclosures required by U.S. GAAP. In the opinion of our management, the unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, considered necessary to present fairly the financial position, results of operations and cash flows of AXT, Inc. for all periods presented.

Our management has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these condensed consolidated financial statements in conformity with U.S. GAAP. Due to the COVID-19 pandemic, there has been uncertainty and disruption in the global economy and financial markets. These estimates and assumptions may change as new events occur and additional information is obtained. Actual results could differ materially from those estimates.

The results of operations for the three months ended March 31, 2024 are not necessarily indicative of the results to be expected in the future or for the full fiscal year. It is recommended that these condensed consolidated financial statements be read in conjunction with our consolidated financial statements and the notes thereto included in our 2023 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 15, 2024.

The condensed consolidated financial statements include the accounts of AXT and our consolidated subsidiaries, Beijing Tongmei Xtal Technology Co., Ltd. (“Tongmei”), AXT-Tongmei, Inc. (“AXT-Tongmei”), Baoding Tongmei Xtal Technology Co., Ltd. (“Baoding Tongmei”), ChaoYang Tongmei Xtal Technology Co., Ltd. (“ChaoYang Tongmei”), ChaoYang LiMei Semiconductor Technology Co., Ltd. (“ChaoYang LiMei”), ChaoYang XinMei High Purity Semiconductor Materials Co., Ltd. (“ChaoYang XinMei”), Nanjing JinMei Gallium Co., Ltd. (“JinMei”), ChaoYang JinMei Gallium Ltd. (“ChaoYang JinMei”), ChaoYang ShuoMei High Purity Semiconductor Materials Co., Ltd. (“ChaoYang ShuoMei”), MaAnShan JinMei Gallium Ltd., (“MaAnShan JinMei”) and Beijing BoYu Semiconductor Vessel Craftwork Technology Co., Ltd. (“BoYu”). All significant inter-company accounts and transactions have been eliminated. Investments in business entities in which we do not have controlling interests, but have the ability to exercise significant influence over operating and financial policies (generally 20-50% ownership), are accounted for by the equity method. As of March 31, 2024 and December 31, 2023, we have three companies accounted for by the equity method. In May 2023, we reduced our ownership in Emeishan Jia Mei High Purity Metals Co., Ltd. (“Jia Mei”) from 25% to 10% by selling a portion of our Jia Mei shares to an unrelated third party for approximately $827,000. As a result of our decreased ownership and the fact that we do not have the ability to exercise significant influence over Jia Mei’s operations, as of May 2023, we no longer reported Jia Mei as an equity investment in our condensed consolidated balance sheets. Our Jia Mei investment was re-measured to fair value at the time of sale. Any future changes to the fair value are recognized through net income (“fair value method”). For the majority-owned subsidiaries that we consolidate, we reflect the portion we do not own as either noncontrolling interests in stockholder’s equity or as redeemable noncontrolling interests in temporary equity on our condensed consolidated balance sheets and in our condensed consolidated statements of operations.

When warranted by favorable market conditions, we intend to construct facilities at the ChaoYang LiMei location to provide us with additional production capacity. For the three months ended March 31, 2024, expenses associated with ChaoYang LiMei had a de minimis impact on our condensed consolidated financial statements.

In February 2021, Tongmei signed a joint venture agreement with certain investors to fund a new company, ChaoYang XinMei. The agreement called for a total investment of approximately $3.0 million, of which Tongmei would

7

fund approximately $1.8 million for a 58.5 percent ownership of ChaoYang XinMei. In February 2021, Tongmei and the investors completed the initial funding of approximately $1.5 million. Tongmei’s portion of the investment was approximately $0.9 million. In May 2021, Tongmei and the investors completed the funding of the remaining balance of approximately $1.5 million. Tongmei’s portion of the final investment was approximately $0.9 million, for a total investment of approximately $1.8 million for a 58.5 percent ownership of ChaoYang XinMei. In September 2021 and October 2021, ChaoYang XinMei received funding from a minority investor of $0.9 million and $1.0 million, respectively. In December 2021 and January 2022, ChaoYang XinMei 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 ChaoYang XinMei as an equity investment. In April 2022, Tongmei entered into a capital increase agreement (the “Capital Increase Agreement”) with minority investors to further invest approximately $4.5 million in ChaoYang XinMei. Tongmei’s portion of the investment was approximately $2.6 million, of which $1.1 million was invested in April 2022 and $0.8 million was invested in May 2022. The minority investors’ portion of the investment was approximately $1.9 million, of which $0.7 million was invested in April 2022 and $0.6 million was invested in May 2022. As a result, noncontrolling interests increased $1.4 million and redeemable noncontrolling interests increased $0.1 million. In July 2022, Tongmei and the minority investors further invested $0.8 million and $0.6 million in ChaoYang XinMei, respectively. This completed the investment obligations under the Capital Increase Agreement. As a result, noncontrolling interests increased $610,000 and redeemable noncontrolling interests increased $57,000. Tongmei’s ownership remained at 58.5% after these equity investments.

In April 2022, ChaoYang JinMei signed a joint venture agreement with certain investors to fund a new company, ChaoYang ShuoMei, our consolidated subsidiary (the “ChaoYang ShuoMei Joint Venture Agreement”). The ChaoYang ShuoMei Joint Venture Agreement called for a total investment of approximately $4.4 million, of which ChaoYang JinMei would fund approximately $3.3 million for a 75 percent ownership of ChaoYang ShuoMei. In July and August 2022, ChaoYang JinMei completed the initial funding of $1.0 million in ChaoYang ShuoMei. In August 2022, the investor invested $334,000 in ChaoYang ShuoMei. As a result, noncontrolling interests increased $406,000 and redeemable noncontrolling interests increased $73,000. In January 2023, ChaoYang ShuoMei received $0.5 million in funding from ChaoYang JinMei and $0.2 million in funding from one of the minority investors. As a result, noncontrolling interests increased $0.2 million and redeemable noncontrolling interests increased $36,000. In May 2023, ChaoYang ShuoMei received $1.0 million in funding from ChaoYang JinMei and $0.3 million in funding from one of the minority investors. As a result, noncontrolling interests increased $0.4 million and redeemable noncontrolling interests increased $75,000. In August 2023, ChaoYang ShuoMei received $0.6 million in funding from ChaoYang JinMei and $0.2 million in funding from one of the minority investors. As a result, noncontrolling interests increased $0.2 million and redeemable noncontrolling interests increased $44,000. ChaoYang JinMei has completed its investment obligations under the ChaoYang ShuoMei Joint Venture Agreement. ChaoYang JinMei’s ownership of ChaoYang ShuoMei remained at 75% after these equity investments.

In April 2022, Tongmei signed a joint venture agreement with certain investors to fund a new company, ChaoYang KaiMei Quartz Co., Ltd. (“ChaoYang KaiMei”) (the “ChaoYang KaiMei Joint Venture Agreement”), which called for a total investment of approximately $7.6 million, of which Tongmei would fund approximately $3.0 million for a 40 percent ownership of ChaoYang KaiMei. In July 2022, Tongmei and the investors completed the initial funding of approximately $2.2 million. Tongmei’s portion of the investment was approximately $0.9 million. In January 2023, Tongmei made an investment of $0.9 million to ChaoYang KaiMei. In each of July 2023 and August 2023, Tongmei made an investment of approximately $0.6 million in ChaoYang KaiMei. In September 2023, Tongmei entered into another joint venture agreement with the same group of investors. This new agreement called for additional investment of approximately $5.6 million, with Tongmei committing to fund approximately $2.3 million. In December 2023, Tongmei made its initial additional investment of approximately $0.6 million in ChaoYang KaiMei. These contributions culminated in the fulfillment of all of Tongmei’s financial obligations under the ChaoYang KaiMei Joint Venture Agreement. Tongmei’s ownership of ChaoYang KaiMei remained at 40% after these equity investments.

All activities for MaAnShan JinMei ceased during the first half of 2022 and the subsidiary was subsequently dissolved in May 2022. The dissolution of MaAnShan JinMei had a de minimis impact on the condensed consolidated results.

8

During the quarter ended December 31, 2020, Tongmei entered into two sets of definitive transaction documents, each consisting of a capital increase agreement along with certain supplemental agreements in substantially the same form (collectively, the “Capital Investment Agreements”), with several private equity investors in China.

In preparation for Tongmei’s application for a listing of shares in an initial public offering (the “IPO”) on the Shanghai Stock Exchange’s Sci-Tech innovAtion boaRd (the “STAR Market”), in late December 2020, we reorganized our entity structures in China. JinMei and BoYu and their subsidiaries were assigned to Tongmei and effectively merged with Tongmei although they retained their own respective legal entity status and are wholly owned subsidiaries of Tongmei. The 33% minority interest stakeholders of BoYu converted their ownership to a 7.59% minority interest in Tongmei. The 8.5% minority interest stakeholders, employees of JinMei, converted their ownership to a 0.38% minority interest in Tongmei. Further, a number of employees, key managers and contributors purchased a 0.4% minority interest in Tongmei. Additionally, Baoding Tongmei and ChaoYang Tongmei, were assigned to Tongmei as wholly owned subsidiaries. In 2020, the private equity funds (the “Investors”) had transferred approximately $48.1 million of new capital to Tongmei. An additional 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, at which time the Investors owned a redeemable noncontrolling interest in Tongmei of 7.28%. As of March 31, 2024, Tongmei’s noncontrolling interests and redeemable noncontrolling interests totaled approximately 14.5%. We remain the controlling stakeholder of Tongmei and hold a majority of the board of director positions of Tongmei. In June 2021, we sold AXT-Tongmei to Tongmei for $1. Since Tongmei is 85.5% owned by us, and the transaction was between common interest holders, the transaction was accounted for at net book value and resulted in an increase of $1.2 million to noncontrolling interests and $1.2 million to redeemable noncontrolling interests.

Note 2. Investments and Fair Value Measurements

Our investments consist of instruments with original maturities of more than three months. As of March 31, 2024 and December 31, 2023, our cash and debt investments are classified as follows (in thousands):

March 31, 2024

December 31, 2023

 

    

    

Gross

    

Gross

    

    

    

Gross

    

Gross

    

 

Amortized

Unrealized

Unrealized

Fair

Amortized

Unrealized

Unrealized

Fair

 

    

Cost

    

Gain

    

(Loss)

    

Value

    

Cost

    

Gain

    

(Loss)

    

Value

 

Classified as:

Cash and restricted cash

$

39,600

$

$

$

39,600

$

50,114

$

$

$

50,114

Investments (available-for-sale):

Certificates of deposit 1

 

1,680

 

(13)

 

1,667

 

2,160

 

(20)

 

2,140

Total cash, restricted cash and investments

$

41,280

$

$

(13)

$

41,267

$

52,274

$

$

(20)

$

52,254

Contractual maturities on investments:

Due within 1 year 2

$

1,680

$

1,667

$

2,160

$

2,140

$

1,680

$

1,667

$

2,160

$

2,140

1.Certificates of deposit with original maturities of more than three months.
2.Classified as “Short-term investments” in our condensed consolidated balance sheets.

We manage our debt investments as a single portfolio of highly marketable securities that is intended to be available to meet our current cash requirements. Certificates of deposit and corporate bonds are typically held until maturity.

Historically, the gross unrealized losses related to our portfolio of available-for-sale debt securities were immaterial, and primarily due to normal market fluctuations and not due to increased credit risk or other valuation concerns. There was an insignificant amount of gross unrealized losses on our available-for-sale debt securities as of March 31, 2024, and historically, such gross unrealized losses have been temporary in nature and we believe that it is

9

probable the principal and interest will be collected in accordance with the contractual terms. We 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 credit losses or impairment would be necessary. 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.

The following table summarizes the fair value and gross unrealized losses related to available-for-sale debt securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of March 31, 2024 (in thousands):

In Loss Position

In Loss Position

Total In

 

< 12 months

> 12 months

Loss Position

 

Gross

Gross

Gross

 

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

 

As of March 31, 2024

    

Value

    

(Losses)

    

Value

    

(Losses)

    

Value

    

(Losses)

 

Investments:

Certificates of deposit

$

$

$

1,667

$

(13)

$

1,667

$

(13)

Total in loss position

$

$

$

1,667

$

(13)

$

1,667

$

(13)

The following table summarizes the fair value and gross unrealized losses related to available-for-sale debt securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2023 (in thousands):

In Loss Position

In Loss Position

Total In

 

< 12 months

> 12 months

Loss Position

 

    

    

    

Gross

    

    

    

Gross

    

    

    

Gross

 

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

 

As of December 31, 2023

Value

(Loss)

Value

(Loss)

Value

(Loss)

 

Investments:

Certificates of deposit

$

$

$

2,140

$

(20)

$

2,140

$

(20)

Total in loss position

$

$

$

2,140

$

(20)

$

2,140

$

(20)

Restricted Cash

We maintain restricted cash in connection with cash balances temporarily restricted for regular business operations. These balances have been excluded from the Company’s cash balance. As of March 31, 2024, $13.8 million was included in restricted cash in our condensed consolidated balance sheets.

Investments in Privately-held Raw Material Companies

We have made strategic investments in private companies located in China in order to gain access at a competitive cost to raw materials that are critical to our substrate business (see Note 7). The investment balances for the non-consolidated companies are accounted for under the equity method, included in “Other assets” in the condensed consolidated balance sheets, totaled $13.2 million and $12.5 million as of March 31, 2024 and December 31, 2023, respectively. As of March 31, 2024, there were three companies accounted for under the equity method. One of our equity investments, Beijing JiYa Semiconductor Material Co., Ltd. (“JiYa”), determined one of their equity investments was fully impaired and wrote the asset balance down to zero. This resulted in a $754,000 impairment charge in our second quarter 2023 financial results. Except as mentioned above, there were no impairment charges for the remainder of these investments during the three months ended March 31, 2024 and 2023.

In May 2023, we reduced our ownership in Jia Mei from 25% to 10% by selling a portion of our Jia Mei shares to an unrelated third party for approximately $827,000. As a result of our decreased ownership and the fact that we do not have the ability to exercise significant influence over Jia Mei’s operations, we adopted the fair value method of accounting to report on the investment in Jia Mei. Our investments under the fair value method are reviewed for other-than-temporary declines in value on a quarterly basis. We monitor our investments for impairment and record reductions

10

in carrying value when events or changes in circumstances indicate that the carrying value may not be recoverable. As of March 31, 2024, our investments in this unconsolidated company had a carrying value of $551,000 and were included in “Other assets” in the condensed consolidated balance sheets. As a result of the share sale, we recognized a gain of $575,000. Additionally, in accordance with Accounting Standards Codification (“ASC”) 321-10-35-2, we adjusted the investment in Jia Mei to its fair value at the time of the sale, which resulted in a gain of $383,000. The gain resulting from the sale and the subsequent remeasurement was incorporated as a component of “Equity in income of unconsolidated joint ventures” in the condensed consolidated statements of operations in the second quarter of 2023.

Fair Value Measurements

We invest primarily in certificates of deposits, corporate bonds and notes, government securities and money market accounts. We review our debt investment portfolio for credit loss at least quarterly or when there are changes in credit risk or other potential valuation concerns. As of March 31, 2024 and December 31, 2023, the total unrealized loss, net of tax, included in accumulated other comprehensive income was immaterial. We believe it is probable the principal and interest will be collected in accordance with the contractual terms, and the unrealized loss on these securities was due to normal market fluctuations, and not due to increased credit risk or other valuation concerns. ASC 820, Fair Value Measurements and Disclosures, establishes three levels of inputs that may be used to measure fair value. Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets of the asset or identical assets. Level 2 instrument valuations are obtained from readily- available, observable pricing sources for comparable instruments. Level 3 instrument valuations are obtained from unobservable inputs in which there is little or no market data, which require us to develop our own assumptions. On a recurring basis, we measure certain financial assets and liabilities at fair value, primarily consisting of our short-term and long-term debt investments.

The type of instrument valued based on quoted market prices in active markets includes our money market funds, which are generally classified within Level 1 of the fair value hierarchy. We classify our available-for-sale debt securities, including certificates of deposit and corporate bonds, as having Level 2 inputs. The valuation techniques used to measure the fair value of these financial instruments having Level 2 inputs were derived from bank statements, quoted market prices, broker or dealer statements or quotations, or alternative pricing sources with reasonable levels of price transparency.

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 U.S. GAAP. At quarter end, any foreign currency hedges not settled are netted in “Accrued liabilities” on the condensed consolidated balance sheets and classified as Level 3 assets and liabilities. As of March 31, 2024, 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 on the condensed consolidated results.

There were no changes in valuation techniques or related inputs in the three months ended March 31, 2024. There have been no transfers between fair value measurements levels during the three months ended March 31, 2024.

The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis in accordance with ASC 820 as of March 31, 2024 (in thousands):

    

    

Quoted Prices in

    

Significant

 

Active Markets of

Significant Other

Unobservable

 

Balance as of

Identical Assets

Observable Inputs

Inputs

 

    

March 31, 2024

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

Assets:

Investments:

Certificates of deposit

$

1,667

$

$

1,667

$

Total

$

1,667

$

$

1,667

$

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The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis in accordance with ASC 820 as of December 31, 2023 (in thousands):

    

    

Quoted Prices in

    

Significant

 

Active Markets of

Significant Other

Unobservable

 

Balance as of

Identical Assets

Observable Inputs

Inputs

 

    

December 31, 2023

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

Assets:

Investments:

Certificates of deposit

$

2,140

$

$

2,140

$

Total

$

2,140

$

$

2,140

$

Items Measured at Fair Value on a Nonrecurring Basis

Certain assets that are subject to nonrecurring fair value measurements are not included in the table above. These assets include investments in privately-held companies accounted for by the equity or fair value method (see Note 7). We did not record any other-than-temporary impairment charges for these investments during the three months ended March 31, 2024 and 2023, respectively.

Note 3. Inventories

The components of inventories are summarized below (in thousands):

March 31, 

December 31, 

    

2024

    

2023

 

Inventories:

Raw materials

$

28,501

$

32,910

Work in process

 

54,281

 

50,008

Finished goods

 

3,161

 

3,585

$

85,943

$

86,503

As of March 31, 2024 and December 31, 2023, carrying values of inventories were net of inventory reserves of $22.2 million and $21.9 million, respectively, for excess and obsolete inventory and $213,000 and $78,000, respectively, for lower of cost or net realizable value reserves.

Note 4. Property, Plant and Equipment, Net

The components of our property, plant and equipment are summarized below (in thousands):

March 31, 

December 31, 

2024

2023

Property, plant and equipment:

Machinery and equipment, at cost

$

66,472

$

65,918

Less: accumulated depreciation and amortization

(42,065)

(42,112)

Building, at cost

124,200

125,786

Less: accumulated depreciation and amortization

(23,791)

(23,339)

Leasehold improvements, at cost

 

7,470

 

7,596

Less: accumulated depreciation and amortization

(6,014)

(5,984)

Construction in progress

 

36,850

 

38,483

$

163,122

$

166,348

As of March 31, 2024, the balance of construction in progress was $36.9 million, of which $29.4 million was related to our buildings in our new Dingxing and Kazuo locations, $2.9 million was for manufacturing equipment purchases not yet placed in service and $4.6 million was for construction in progress for our other consolidated subsidiaries. As of December 31, 2023, the balance of construction in progress was $38.5 million, of which $31.2

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million was for our buildings in our new Dingxing and Kazuo locations, $3.1 million was for manufacturing equipment purchases not yet placed in service and $4.2 million was for our construction in progress for our other consolidated subsidiaries. 

Note 5. Accrued Liabilities

The components of accrued liabilities are summarized below (in thousands):

March 31, 

December 31, 

    

2024

    

2023

 

Accrued compensation and related charges

$

2,941

$

3,707

Preferred stock dividends payable

2,901

2,901

Payable in connection with construction in progress

1,613

7,249

Other tax payable

652

493

Advances from customers

535

305

Accrued product warranty

495

703

Accrued professional services

471

868

Current portion of operating lease liabilities

463

458

Other personnel-related costs

276

286

Accrued income taxes

272

Accrual for sales returns

34

39

Other accrued liabilities

2,044

2,010

$

12,697

$

19,019

Note 6. Related Party Transactions

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. As of December 31, 2021, $1.9 million was included in short-term loan from noncontrolling interest in our condensed consolidated balance sheets. 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 ChaoYang XinMei as an equity investment. As a result, noncontrolling interests increased $2.2 million and redeemable noncontrolling interests increased $0.2 million. Short-term loan from noncontrolling interest decreased to $0. In April 2022, Tongmei entered into the Capital Increase Agreement with minority investors to further invest $4.5 million in ChaoYang XinMei. In April 2022 and May 2022, ChaoYang XinMei received funding from Tongmei of $1.1 million and $0.8 million, respectively, as equity investments. In April 2022 and May 2022, the minority investors invested $0.7 million and $0.6 million, respectively. As a result, noncontrolling interests increased $1.4 million and redeemable noncontrolling interests increased $0.1 million. In July 2022, Tongmei and the minority investors further invested $0.8 million and $0.6 million in ChaoYang XinMei, respectively. This completed the investment obligations under the Capital Increase Agreement. As a result, noncontrolling interests increased $610,000 and redeemable noncontrolling interests increased $57,000. Tongmei’s ownership remained at 58.5% after these equity investments.

In September 2022, our consolidated subsidiary, ChaoYang LiMei completed the sale of land and its attached buildings to our equity investment entity, ChaoYang KaiMei, for a total consideration of $1.5 million. In January 2023, ChaoYang KaiMei paid to ChaoYang LiMei $1.5 million. As of March 31, 2024, $0 million was included in “Prepaid expenses and other current assets” in our condensed consolidated balance sheets.

Our Related Party Transactions Policy seeks to prohibit all conflicts of interest in transactions between related parties and us, unless they have been approved by our Board of Directors. This policy applies to all of our employees, directors, and our consolidated subsidiaries. Our executive officers retain board seats on the board of directors of the companies in which we have invested in our China joint ventures. See Note 7 for further details.

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Note 7. Investments in Privately-Held Raw Material Companies

We have made strategic investments in private companies located in China in order to gain access at a competitive cost to raw materials that are critical to our substrate business. These companies form part of our overall supply chain strategy.

As of March 31, 2024, the investments are summarized below (in thousands):

Investment Balance as of

March 31, 

December 31, 

Accounting

Ownership

*

Company

    

2024

    

2023

    

Method

    

Percentage

Nanjing JinMei Gallium Co., Ltd.

$

592

$

592

 

Consolidated

 

** 85.5

%

ChaoYang JinMei Gallium Co., Ltd.

1,820

1,820

Consolidated

** 85.5

%

Beijing BoYu Semiconductor Vessel Craftwork Technology Co., Ltd.

 

1,346

 

1,346

 

Consolidated

 

** 85.5

%

ChaoYang ShuoMei High Purity Semiconductor Materials Co., Ltd.

3,122

3,122

Consolidated

**** 75.0

%

ChaoYang XinMei High Purity Semiconductor Materials Co., Ltd.