axti_Current_Folio_10Q

Table of Contents

 

 

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, 2016

 

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)

 


 

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 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 and posted on its Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  No 

 

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

 

 

 

 

Large accelerated filer

 

Accelerated filer 

 

 

 

Non-accelerated filer

 

Smaller reporting company 

(Do not check if a smaller reporting company)

 

 

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

 

 

 

Class

 

Outstanding at May 2, 2016

Common Stock, $0.001 par value

 

32,341,176

 

 

 


 

Table of Contents

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, 2016 and December 31, 2015 

Condensed Consolidated Statements of Operations for the three months ended March 31, 2016 and 2015 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2016 and 2015 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015 

Notes To Condensed Consolidated Financial Statements 

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

24 

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

36 

Item 4. Controls and Procedures 

38 

PART II. OTHER INFORMATION 

 

Item 1. Legal Proceedings 

39 

Item 1A. Risk Factors 

39 

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

56 

Item 3. Defaults Upon Senior Securities 

57 

Item 4. Mine Safety Disclosures 

57 

Item 5. Other Information 

57 

Item 6. Exhibits 

58 

Signatures 

59 

 

 

2


 

Table of Contents

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, 

 

 

 

2016

 

2015

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

25,067

 

$

24,875

 

Short-term investments

 

 

9,053

 

 

11,437

 

Accounts receivable, net of allowances of $885 and $985 as of March 31, 2016 and December 31, 2015

 

 

19,711

 

 

18,468

 

Inventories

 

 

38,822

 

 

38,012

 

Prepaid expenses and other current assets

 

 

4,386

 

 

4,096

 

Total current assets

 

 

97,039

 

 

96,888

 

Long-term investments

 

 

9,211

 

 

7,691

 

Property, plant and equipment, net

 

 

31,141

 

 

31,422

 

Related party notes receivable – long-term

 

 

1,792

 

 

1,781

 

Other assets

 

 

13,544

 

 

14,114

 

Total assets

 

$

152,727

 

$

151,896

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

8,034

 

$

6,460

 

Accrued liabilities

 

 

5,357

 

 

6,381

 

Total current liabilities

 

 

13,391

 

 

12,841

 

Long-term portion of royalty payments

 

 

1,006

 

 

1,150

 

Other long-term liabilities

 

 

308

 

 

344

 

Total liabilities

 

 

14,705

 

 

14,335

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Preferred stock Series A, $0.001 par value; 2,000 shares authorized; 883 shares issued and outstanding as of March 31, 2016 and December 31, 2015 (Liquidation preference of $6.5 million and $6.5 million as of March 31, 2016 and December 31, 2015.)

 

 

3,532

 

 

3,532

 

Common stock, $0.001 par value; 70,000 shares authorized; 32,341 and 32,548 shares issued and outstanding as of March 31, 2016 and December 31, 2015.

 

 

32

 

 

32

 

Additional paid-in-capital

 

 

194,899

 

 

194,646

 

Accumulated deficit

 

 

(70,579)

 

 

(70,621)

 

Accumulated other comprehensive income

 

 

4,665

 

 

4,382

 

Total AXT, Inc. stockholders’ equity

 

 

132,549

 

 

131,971

 

Noncontrolling interests

 

 

5,473

 

 

5,590

 

Total stockholders’ equity

 

 

138,022

 

 

137,561

 

Total liabilities and stockholders’ equity

 

$

152,727

 

$

151,896

 

 

See accompanying notes to condensed consolidated financial statements.

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Table of Contents

 

AXT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

 

 

 

March 31, 

 

 

 

2016

    

2015

 

 

 

 

 

 

 

 

 

Revenue

 

$

18,713

 

$

20,064

 

Cost of revenue

 

 

13,460

 

 

15,315

 

Gross profit

 

 

5,253

 

 

4,749

 

Operating expenses:

 

 

 

 

 

 

 

Selling, general, and administrative

 

 

3,374

 

 

5,251

 

Research and development

 

 

1,381

 

 

1,241

 

Total operating expenses

 

 

4,755

 

 

6,492

 

Income (loss) from operations

 

 

498

 

 

(1,743)

 

Interest income, net

 

 

98

 

 

97

 

Equity in (loss) earnings of unconsolidated joint ventures

 

 

(456)

 

 

200

 

Other income, net

 

 

190

 

 

633

 

Income (loss) before provision for income taxes

 

 

330

 

 

(813)

 

Provision for income taxes

 

 

397

 

 

86

 

Net loss

 

 

(67)

 

 

(899)

 

Less: Net (income) loss attributable to noncontrolling interests

 

 

109

 

 

(125)

 

Net income (loss) attributable to AXT, Inc.

 

$

42

 

$

(1,024)

 

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

 

 

 

 

 

 

 

Basic

 

$

(0.00)

*

$

(0.03)

 

Diluted

 

$

(0.00)

*

$

(0.03)

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

Basic

 

 

32,002

 

 

32,553

 

Diluted

 

 

32,002

 

 

32,553

 

 


* Net loss to AXT, Inc. per common share is a result of the accrual of the preferred dividend liquidation preference during the three months ended March 31, 2016.

 

See accompanying notes to condensed consolidated financial statements.

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AXT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited, in thousands)

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

 

 

2016

    

2015

 

 

 

 

 

 

 

 

Net loss

$

(67)

 

$

(899)

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

Change in foreign currency translation gain, net of tax

 

302

 

 

238

 

Change in unrealized gain (loss) on available-for-sale investments, net of tax

 

25

 

 

(259)

 

Total other comprehensive income (loss), net of tax

 

327

 

 

(21)

 

Comprehensive income (loss)

 

260

 

 

(920)

 

Less: Comprehensive (income) loss attributable to noncontrolling interests

 

65

 

 

(157)

 

Comprehensive income (loss) attributable to AXT, Inc.

$

325

 

$

(1,077)

 

 

See accompanying notes to condensed consolidated financial statements.

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AXT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2016

    

2015

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

 

$

(67)

 

$

(899)

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,178

 

 

1,403

 

Amortization of marketable securities premium

 

 

38

 

 

55

 

Stock-based compensation

 

 

253

 

 

274

 

Provision for doubtful accounts

 

 

 —

 

 

150

 

Realized gain on sale of investments

 

 

(181)

 

 

(367)

 

Loss on disposal of equipment

 

 

 —

 

 

9

 

Loss (gain) from equity method investments, net

 

 

456

 

 

(200)

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(1,223)

 

 

(1,052)

 

Inventories

 

 

(756)

 

 

(858)

 

Prepaid expenses and other current assets

 

 

(281)

 

 

1,124

 

Other assets

 

 

114

 

 

(75)

 

Accounts payable

 

 

1,557

 

 

1,979

 

Accrued liabilities

 

 

(1,051)

*  

 

(1,906)

*

Other long-term liabilities

 

 

(148)

 

 

(110)

 

Net cash used in operating activities

 

 

(111)

 

 

(473)

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of equipment

 

 

(795)

 

 

(676)

 

Proceeds from sale of equipment

 

 

 —

 

 

2

 

Purchases of available for sale securities

 

 

(4,138)

 

 

(4,304)

 

Proceeds from sales and maturities of available for sale securities

 

 

5,170

 

 

10,277

 

Investments in non-marketable equity investments

 

 

 —

 

 

(162)

 

Dividends received from equity method investments

 

 

 —

 

 

286

 

Net cash provided by investing activities

 

 

237

 

 

5,423

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from common stock options exercised

 

 

 —

 

 

76

 

Repurchase of the Company’s common stock, including commission

 

 

 —

 

 

(617)

 

Dividends paid by joint ventures to their minority shareholders

 

 

(39)

 

 

 —

 

Net cash used in financing activities

 

 

(39)

 

 

(541)

 

Effect of exchange rate changes on cash and cash equivalents

 

 

105

 

 

62

 

Net increase in cash and cash equivalents

 

 

192

 

 

4,471

 

Cash and cash equivalents at the beginning of the period

 

 

24,875

 

 

28,814

 

Cash and cash equivalents at the end of the period

 

$

25,067

 

$

33,285

 

Supplemental disclosures:

 

 

 

 

 

 

 

Income taxes paid

 

 

 —

 

 

 —

 


* Dividend accrued but not paid by joint ventures of $552 and $646 was included in accrued liabilities as of March 31, 2016 and March 31, 2015, respectively.

 

See accompanying notes to condensed consolidated financial statements.

6


 

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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 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 accounting principles generally accepted in the United States of America. 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 and our consolidated subsidiaries 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 accounting principles generally accepted in the United States of America. Actual results could differ materially from those estimates.

 

The results of operations 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 2015 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 11, 2016.

 

The condensed consolidated financial statements include the accounts of AXT, our wholly-owned subsidiary, Beijing Tongmei Xtal Technology Co., Ltd., and our majority-owned, or significantly controlled subsidiaries, Beijing JiYa Semiconductor Material Co., Ltd., Nanjing Jin Mei Gallium Co., Ltd. and Beijing BoYu Semiconductor Vessel Craftwork Technology Co., Ltd. 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. For partially-owned subsidiaries that we consolidate, we reflect the noncontrolling interest of the portion we do not own on our condensed consolidated balance sheets in stockholders’ equity and in our condensed consolidated statements of operations.

 

7


 

Table of Contents

Note 2. Investments and Fair Value Measurements

 

Our cash and cash equivalents consist of cash and instruments with original maturities of less than 90 days. Our investments consist of instruments with original maturities of more than 90 days. As of March 31, 2016 and December 31, 2015, our cash, cash equivalents and investments are classified as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

 

December 31, 2015

 

 

    

 

 

    

Gross

    

Gross

    

 

 

    

 

 

    

Gross

    

Gross

    

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

    

Cost

    

Gain

    

(Loss)

    

Value

    

Cost

    

Gain

    

(Loss)

    

Value

 

Classified as:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

15,810

 

$

 —

 

$

 —

 

$

15,810

 

$

10,289

 

$

 —

 

$

 —

 

$

10,289

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit 1

 

 

9,257

 

 

 —

 

 

 —

 

 

9,257

 

 

14,586

 

 

 —

 

 

 —

 

 

14,586

 

Total cash and cash equivalents

 

 

25,067

 

 

 —

 

 

 —

 

 

25,067

 

 

24,875

 

 

 —

 

 

 —

 

 

24,875

 

Investments (available for sale):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit 2

 

 

9,084

 

 

5

 

 

(1)

 

 

9,088

 

 

9,795

 

 

1

 

 

(13)

 

 

9,783

 

Corporate bonds

 

 

8,663

 

 

2

 

 

(22)

 

 

8,643

 

 

8,776

 

 

 —

 

 

(63)

 

 

8,713

 

Corporate equity securities

 

 

135

 

 

398

 

 

 —

 

 

533

 

 

200

 

 

432

 

 

 —

 

 

632

 

Total investments

 

 

17,882

 

 

405

 

 

(23)

 

 

18,264

 

 

18,771

 

 

433

 

 

(76)

 

 

19,128

 

Total cash, cash equivalents and investments

 

$

42,949

 

$

405

 

$

(23)

 

$

43,331

 

$

43,646

 

$

433

 

$

(76)

 

$

44,003

 

Contractual maturities on investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Due within 1 year

 

$

8,654

 

 

 

 

 

 

 

$

9,053

 

$

11,022

 

 

 

 

 

 

 

$

11,437

 

Due after 1 through 5 years

 

 

9,228

 

 

 

 

 

 

 

 

9,211

 

 

7,749

 

 

 

 

 

 

 

 

7,691

 

 

 

$

17,882

 

 

 

 

 

 

 

$

18,264

 

$

18,771

 

 

 

 

 

 

 

$

19,128

 


1.

Certificate of deposit with original maturities of less than 90 days.

2.

Certificate of deposit with original maturities of more than 90 days.

 

We manage our investments as a single portfolio of highly marketable securities that is intended to be available to meet our current cash requirements. We have no investments in auction rate securities. Certificates of deposit and corporate bonds are typically held until maturity. Corporate equity securities have no maturity and may be sold at any time. Our holding of corporate equity securities consists of common stock of GCS Holdings, Inc. (“GHI”) (previously Global Communication Semiconductors, Inc.), a Taiwan publicly-traded company. Previously, we also owned the common stock of Intelligent Epitaxy Technology, Inc. (“IntelliEpi”).We began classifying IntelliEpi stock as an available-for-sale security upon its initial public offering in 2013. We sold our remaining IntelliEpi stock in the second quarter of 2015. As of March 31, 2016, we no longer hold any IntelliEpi stock. During the three months ended March 31, 2015, we sold some of our IntelliEpi stock. From this, our cash proceeds from sales of available-for-sale investments was $387,000. Our cost was $20,000 and our gross realized gain from sales of available-for-sale investments was $367,000. 

 

We began classifying GHI as an available-for-sale security in the second quarter of 2015 when we determined that there was sufficient trading volume in the exchange for the stock to be deemed readily marketable. An unrealized gain of $398,000 net of tax was recorded as of March 31, 2016. This security is valued at fair market value at March 31, 2016 and will be marked to market with changes through other comprehensive income until sold. There is no assurance that we will realize this value when the stock is sold in the future. During the three months ended March 31, 2016, we sold some of our GHI stock. From this, our cash proceeds from sales of available-for-sale investments was $246,000. Our cost was $65,000 and our gross realized gain from sales of available-for-sale investments was $181,000.

 

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The gross unrealized losses related to our portfolio of available-for-sale securities were primarily due to changes in interest rates and market and credit conditions of the underlying securities. We have determined that the gross unrealized losses on some of our available-for-sale securities as of March 31, 2016 are temporary in nature. We periodically review our investment portfolio to identify and evaluate investments that have indications of possible impairment. Factors considered in determining whether a loss is temporary include the magnitude of the decline in market value, the length of time the market value has been below cost (or adjusted cost), credit quality, and our ability and intent to hold the securities for a period of time sufficient to allow for any anticipated recovery in market value.

 

A portion of our investments would generate a loss if we sold them on March 31, 2016. The following table summarizes the fair value and gross unrealized losses related to available-for-sale securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of March 31, 2016 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In Loss Position

 

In Loss Position

 

Total In

 

 

 

< 12 months

 

> 12 months

 

Loss Position

 

 

 

 

 

 

Gross

 

 

 

 

Gross

 

 

 

 

Gross

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

As of March 31, 2016

    

Value

    

(Losses)

    

Value

    

(Losses)

    

Value

    

(Losses)

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

$

1,919

 

$

 —

 

$

960

 

$

(1)

 

$

2,879

 

$

(1)

 

Corporate bonds

 

 

5,105

 

 

(21)

 

 

1,834

 

 

(1)

 

 

6,939

 

$

(22)

 

Total in loss position

 

$

7,024

 

$

(21)

 

$

2,794

 

$

(2)

 

$

9,818

 

$

(23)

 

 

The following table summarizes the fair value and gross unrealized losses related to available-for-sale securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2015 (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, 2015

 

Value

 

(Loss)

 

Value

 

(Loss)

 

Value

 

(Loss)

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

$

4,509

 

$

(11)

 

$

3,543

 

$

(2)

 

$

8,052

 

$

(13)

 

Corporate bonds

 

 

6,866

 

 

(56)

 

 

1,847

 

 

(7)

 

 

8,713

 

$

(63)

 

Total in loss position

 

$

11,375

 

$

(67)

 

$

5,390

 

$

(9)

 

$

16,765

 

$

(76)

 

 

Investments in Privately-held 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 all of these companies, including minority investments indirectly in privately-held companies made by our consolidated subsidiaries, are accounted for under the equity method and included in “other assets” in the condensed consolidated balance sheets and totaled $11.7 million and $12.1 million as of March 31, 2016 and December 31, 2015, respectively.

 

As noted above, in the second quarter of 2015, we re-classified our minority investment in GHI, which was accounted for under the cost method, as an available-for- sale security and valued the security at fair market value. As of March 31, 2016 and December 31, 2015, we did not maintain any investments under the cost method.

 

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Fair Value Measurements

 

We invest primarily in money market accounts, certificates of deposits, corporate bonds and notes, and government securities. ASC topic 820, Fair value measurement (“ASC 820”) establishes three levels of inputs that may be used to measure fair value. Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets of the asset or identical assets. Level 2 instrument valuations are obtained from readily-available, observable pricing sources for comparable instruments. Level 3 instrument valuations are obtained from unobservable inputs in which there is little or no market data, which require us to develop our own assumptions. On a recurring basis, we measure certain financial assets and liabilities at fair value, primarily consisting of our short-term and long-term investments.

 

The type of instrument valued based on quoted market prices in active markets include our money market funds, which are generally classified within Level 1 of the fair value hierarchy. Other than corporate equity securities which are based on quoted market prices and classified as Level 1, we classify our available-for-sale securities including certificates of deposit and corporate bonds as having Level 2 inputs. The valuation techniques used to measure the fair value of these financial instruments having Level 2 inputs were derived from bank statements, quoted market prices, 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 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 of March 31, 2016 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 were no changes in valuation techniques or related inputs in the three months ended March 31, 2016. There have been no transfers between fair value measurements levels during the three months ended March 31, 2016.

 

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, 2016 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Quoted Prices in

    

 

 

 

Significant

 

 

 

 

 

 

Active Markets of

 

Significant Other

 

Unobservable

 

 

 

Balance as of

 

Identical Assets

 

Observable Inputs

 

Inputs

 

 

    

March 31, 2016

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents and investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

$

9,088

 

$

 —

 

$

9,088

 

$

 —

 

Corporate bonds

 

 

8,643

 

 

 —

 

 

8,643

 

 

 —

 

Corporate equity securities

 

 

533

 

 

533

 

 

 —

 

 

 —

 

Total

 

$

18,264

 

$

533

 

$

17,731

 

$

 —

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency hedge obligations

 

$

8

 

$

 

$

 

$

8

 

 

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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, 2015 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Quoted Prices in

    

 

 

 

Significant

 

 

 

 

 

 

Active Markets of

 

Significant Other

 

Unobservable

 

 

 

Balance as of

 

Identical Assets

 

Observable Inputs

 

Inputs

 

 

    

December 31, 2015

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents and investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

 

9,783

 

 

 —

 

 

9,783

 

 

 —

 

Corporate bonds

 

 

8,713

 

 

 

 

8,713

 

 

 —

 

Corporate equity securities

 

 

632

 

 

632

 

 

 —

 

 

 —

 

Total

 

$

19,128

 

$

632

 

$

18,496

 

$

 —

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency hedge obligations

 

$

36

 

$

 

$

 

$

36

 

 

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 cost method (See Note 7). We did not record other-than-temporary impairment charges for either of these investments during the three months ended March 31, 2016 and 2015.

 

Note 3. Inventories

 

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

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

    

2016

    

2015

 

Inventories:

 

 

 

 

 

 

 

Raw materials

 

$

19,546

 

$

19,532

 

Work in process

 

 

16,611

 

 

16,007

 

Finished goods

 

 

2,665

 

 

2,473

 

 

 

$

38,822

 

$

38,012

 

 

As of March 31, 2016 and December 31, 2015, carrying values of inventories were net of inventory reserve of $12.7 million and $12.0 million, respectively, for excess and obsolete inventory and lower of cost or market 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, 

 

 

 

2016

 

2015

 

Property, plant and equipment:

 

 

 

 

 

 

 

Machinery and equipment

 

$

41,059

 

$

40,899

 

Less: accumulated depreciation and amortization

 

 

(36,903)

 

 

(36,044)

 

Building

 

 

30,585

 

 

30,388

 

Less: accumulated depreciation and amortization

 

 

(9,518)

 

 

(9,170)

 

Leasehold improvements

 

 

5,087

 

 

5,059

 

Less: accumulated depreciation and amortization

 

 

(3,448)

 

 

(3,306)

 

Construction in progress

 

 

4,279

 

 

3,596

 

 

 

$

31,141

 

$

31,422

 

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Note 5. Accrued Liabilities

 

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

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

    

2016

    

2015

 

Accrued compensation and related charges

 

$

1,533

 

$

2,129

 

Current portion of royalty payments

 

 

575

 

 

575

 

Dividends payable by consolidated joint ventures

 

 

552

 

 

534

 

Accrued product warranty

 

 

431

 

 

497

 

Accrued income taxes

 

 

371

 

 

225

 

Accrued professional services

 

 

295

 

 

709

 

Other accrued liabilities

 

 

1,600

 

 

1,712

 

 

 

$

5,357

 

$

6,381

 

 

 

Note 6. Related Party Transactions

 

In August 2011, our consolidated joint venture, Beijing JiYa Semiconductor Material Co., Ltd. (“JiYa”), entered into a non-interest bearing note agreement in the amount of $1.6 million for a loan to one of its equity investment entities. The original term of the loan was for two years and ten months with three periodic principal payments required.  After various amendments to the terms of the note, in December 2013 the parties agreed to delay all principal repayment until December 2017. As of March 31, 2016, and December 31, 2015, we included $1.6 million and $1.6 million, respectively, in “Related party notes receivable – long term” in our condensed consolidated balance sheets.

 

JiYa also purchases raw materials from one of its equity investment entities for production in the ordinary course of business. As of March 31, 2016 and December 31, 2015, amounts payable of $2.7 million and $2.4 million, respectively, were included in “accounts payable” in our condensed consolidated balance sheets.

 

JiYa also sells raw materials to one of its equity investment entities for production in the ordinary course of business. As of March 31, 2016 and December 31, 2015, amounts receivable of $476,000 and $473,000, respectively, were included in “accounts receivable” in our condensed consolidated balance sheets.

 

Beginning in 2012, our consolidated joint venture, Nanjing Jin Mei Gallium Co., Ltd. (“Jin Mei”), is contractually obligated under an agency sales agreement to sell raw material on behalf of its equity investment entity. Jin Mei bills the customers and remits the receipts, net of its portions of sales commission, to this equity investment entity. For the three months ended March 31, 2016 and 2015, Jin Mei has recorded $0 and $1,000 income from agency sales, respectively, which were included in “other income (expense), net” in the condensed consolidated statements of operations.

 

In March 2012, our wholly-owned subsidiary, Beijing Tongmei Xtal Technology Co., Ltd. (“Tongmei”), entered into an operating lease for the land it owns with our consolidated joint venture Beijing BoYu Semiconductor Vessel Craftwork Technology Co., Ltd. (“Boyu”). The lease agreement for the land of approximately 22,081 square feet commenced on January 1, 2012 for a term of 10 years with annual lease payments of $24,000 subject to a 5% increase at each third year anniversary. The annual lease payment is due by January 31 of each year.

 

Tongmei has paid $115,000 on behalf of Donghai County Dongfang High Purity Electronic Materials Co., Ltd.(“Dongfang”), its equity investment entity, to purchase materials. The original agreement was signed between Tongmei and Dongfang in 2014 and the date of repayment was set on December 31, 2015. In 2015, both parties agreed to delay the date of repayment to December 31, 2017. As of March 31, 2016, this balance was included in “Related party notes receivable – long term” in our condensed consolidated balance sheets.

 

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In April 2014, Tongmei loaned an additional of $47,000 to Dongfang. The loan bears interest at 6.15% per annum and the principal and interest totaling $52,000 as of March 31, 2016 is due on December 31, 2016. As of March 31, 2016, this balance, including both principal and interest, was included in “Related party notes receivable – long term” in our condensed consolidated balance sheets.

 

Tongmei also purchases raw materials from one of our equity investment entities for production in the ordinary course of business. As of March 31, 2016 and December 31 2015, amounts payable of $70,000 and $70,000, respectively, were included in “accounts payable” in our condensed consolidated balance sheets.

 

In April 2016, our consolidated joint venture, BoYu, provided a personal loan of $186,000 to an executive officer. This loan is secured by the officer’s shares in BoYu. The loan bears interest at 2.75% per annum. Principal and accrued interest are due on March 31, 2019.

 

Beijing Kaide Quartz Co. Ltd. (“Kaide”) has been a supplier of customized quartz tubes to the Company since 2004. Beijing XiangHeMing Trade Co. Ltd., (“XiangHeMing”) is a significant shareholder of Kaide. XiangHeMing was previously owned by, among others, certain immediate family members of Davis Zhang, our former President, China Operations, until at least sometime in 2004, at which time the official Chinese government records indicate that Mr. Zhang’s immediate family members transferred their ownership of XiangHeMing to a third party. However, we are currently unable to conclusively determine whether Mr. Zhang’s immediate family members retained any economic interest in XiangHeMing after the transfer. As of March 31, 2016 and December 31 2015, amounts payable to Kaide of $381,000 and $379,000, respectively, were included in “accounts payable” 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.

 

Note 7. Investments in Privately-Held 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. Our consolidated subsidiaries have also made investments in private companies. These companies form part of our overall supply chain.

 

The investments are summarized below (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment Balance as of

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

Accounting

 

Ownership

 

Company

    

2016

    

2015

    

Method

    

Percentage

 

Beijing JiYa Semiconductor Material Co., Ltd.

 

$

3,331

 

$

3,331

 

Consolidated

 

46

%

Nanjing Jin Mei Gallium Co., Ltd.

 

 

592

 

 

592

 

Consolidated

 

83

%

Beijing BoYu Semiconductor Vessel Craftwork Technology Co., Ltd.

 

 

1,346

 

 

1,346

 

Consolidated

 

70

%

 

 

$

5,269

 

$

5,269

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Donghai County Dongfang High Purity Electronic Materials Co., Ltd.

 

$

1,524

 

$

1,524

 

Equity

 

46

%

Xilingol Tongli Germanium Co. Ltd.

 

 

5,154

 

 

5,343

 

Equity

 

25

%

Emeishan Jia Mei High Purity Metals Co., Ltd.

 

 

1,048

 

 

1,081

 

Equity

 

25

%

 

 

$

7,726

 

$

7,948

 

 

 

 

 

 

Our ownership of Beijing JiYa Semiconductor Material Co., Ltd. (“JiYa”) is 46%. We continue to consolidate JiYa as we are the founding and largest shareholder, we appoint the general manager and controller and have the ability to exercise control in substance over the long-term strategic decisions made. Our Chief Executive Officer is chairman of the JiYa board and we have appointed one other representative, Davis Zhang, to serve on the board.  Mr. Zhang was an

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executive officer of AXT for 27 years. Further, our Chief Financial Officer, Gary Fischer, is on the board of supervisors of JiYa.

 

Our ownership of Nanjing Jin Mei Gallium Co., Ltd. (“Jin Mei”) is 83%. We continue to consolidate Jin Mei as we have a controlling financial interest and have majority control of the board. Our Chief Executive Officer is chairman of the Jin Mei board and we have appointed two other representatives to serve on the board.

 

Our ownership of Beijing BoYu Semiconductor Vessel Craftwork Technology Co., Ltd (“BoYu”) is 70%. We continue to consolidate BoYu as we have a controlling financial interest and have majority control of the board. Our Chief Executive Officer is chairman of the BoYu board and we have appointed two other representatives to serve on the board.

Although we have representation on the board of directors of each of these companies, the daily operations of each of these companies are managed by local management and not by us. Decisions concerning their respective short-term strategy and operations, any capacity expansion and annual capital expenditures, and decisions concerning sales of finished product, are made by local management with regular guidance and input from us.

 

During the three months ended March 31, 2016 and 2015, the three consolidated joint ventures generated a loss of $175,000 and an income of $552,000, respectively, of which a loss of $109,000 and a gain of $125,000 respectively, were allocated to non-controlling interests, resulting in a loss of $66,000 and an income of  $427,000, respectively, to our net income (loss).  

 

For AXT’s three minority investment entities that are not consolidated, the investment balances are included in “other assets” in our condensed consolidated balance sheets and totaled $7.7 million and $7.9 million as of March 31, 2016 and December 31, 2015. We own 46% of the ownership interests in one of these companies and 25% in each of the other two companies. These three companies are not considered variable interest entities because:

 

·

all three companies have sustainable businesses of their own;

 

·

our voting power is proportionate to our ownership interests;

 

·

we only recognize our respective share of the losses and/or residual returns generated by the companies if they occur; and

 

·

we do not have controlling financial interest in, do not maintain operational or management control of, do not control the board of directors of, and are not required to provide additional investment or financial support to any of these companies.

 

We also maintain four minority investments indirectly in privately-held companies through our consolidated joint ventures. Our subsidiary, Jiya, has three investments. Our subsidiary, Jinmei, has one investment. These minority investments are accounted for under the equity method in the books of our consolidated joint ventures. As of March 31, 2016 and December 31, 2015, our consolidated joint ventures included these minority investments in “other assets” in our condensed consolidated balance sheets with a carrying value of $3.9 million and $4.1 million, respectively.

 

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AXT’s three direct minority investment entities and the three minority investments of Jiya and the one minority investment of Jinmei are not consolidated and are accounted for under the equity method and had the following summarized income information (in thousands) for the three months ended March 31, 2016 and 2015.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

 

 

2016

    

2015

 

Net revenue

$

3,516

 

$

9,325

 

Gross profit

$

50

 

$

2,295

 

Operating (loss) income

$

(1,184)

 

$

1,051

 

Net (loss) income

$

(1,774)

 

$

957

 

 

Our portion of the entity earnings from these seven minority investment entities that are not consolidated and are accounted for under the equity method were a loss of $456,000 and a gain of $200,000 for the three months ended March 31, 2016 and 2015, respectively.

 

 

Note 8. Stockholders’ Equity

 

Consolidated Statement of Changes in Equity

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

AXT, Inc

 

 

 

Total

 

 

 

Preferred

 

Common

 

Additional

 

Accumulated

 

Comprehensive

 

Stockholders’

 

Noncontrolling

 

Stockholders’

 

 

    

Stock

    

Stock

    

 

Paid In Capital

    

Deficit

    

Income

    

Equity

    

Interests

    

Equity

 

Balance as of December 31, 2015

 

$

3,532

 

$

32

 

$

194,646

 

$

(70,621)

 

$

4,382

 

$

131,971

 

$

5,590

 

$

137,561

 

Common stock options exercised

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 —

 

 

 

 

 

 —

 

Common stock repurchased

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 —

 

 

 

 

 

 —

 

Stock-based compensation

 

 

 

 

 

 

 

 

253

 

 

 

 

 

 

 

 

253

 

 

 

 

 

253

 

Net (loss) income

 

 

 

 

 

 

 

 

 

 

 

42

 

 

 

 

 

42

 

 

(109)

 

 

(67)

 

Dividends declared by joint ventures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 —

 

 

(52)