axti_Current_Folio_10Q

Table of Contents

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 June 30, 2018

 

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 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 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, 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 ☐

(Do not check if a 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 ☒

 

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 August 1, 2018

Common Stock, $0.001 par value

 

39,510,924

 

 

 


 

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 June 30, 2018 and December 31, 2017 

3

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2018 and 2017 

4

Condensed Consolidated Statements of Comprehensive (Loss) Income for the three and six months ended June 30, 2018 and 2017 

5

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017 

6

Notes To Condensed Consolidated Financial Statements 

7

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

27

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

44

Item 4. Controls and Procedures 

46

PART II. OTHER INFORMATION 

 

Item 1. Legal Proceedings 

47

Item 1A. Risk Factors 

47

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

67

Item 3. Defaults upon Senior Securities 

67

Item 4. Mine Safety Disclosures 

67

Item 5. Other Information 

68

Item 6. Exhibits 

69

Signatures 

71

 

 

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)

 

 

 

 

 

 

 

 

 

 

    

June 30, 

    

December 31, 

 

 

 

2018

 

2017

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

29,698

 

$

44,352

 

Short-term investments

 

 

18,802

 

 

20,032

 

Accounts receivable, net of allowances of $358 and $527 as of June 30, 2018 and December 31, 2017

 

 

22,516

 

 

22,778

 

Inventories

 

 

57,038

 

 

45,840

 

Prepaid expenses and other current assets

 

 

9,416

 

 

7,519

 

Total current assets

 

 

137,470

 

 

140,521

 

Long-term investments

 

 

5,714

 

 

12,576

 

Property, plant and equipment, net

 

 

65,174

 

 

46,530

 

Other assets

 

 

11,323

 

 

11,573

 

Total assets

 

$

219,681

 

$

211,200

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

14,059

 

$

11,445

 

Accrued liabilities

 

 

11,793

 

 

11,149

 

Total current liabilities

 

 

25,852

 

 

22,594

 

Other long-term liabilities

 

 

296

 

 

289

 

Total liabilities

 

 

26,148

 

 

22,883

 

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 June 30, 2018 and December 31, 2017 (Liquidation preference of $6,904 and $6,819 as of June 30, 2018 and December 31, 2017)

 

 

3,532

 

 

3,532

 

Common stock, $0.001 par value; 70,000 shares authorized; 39,511 and 39,413 shares issued and outstanding as of June 30, 2018 and December 31, 2017

 

 

39

 

 

39

 

Additional paid-in capital

 

 

232,984

 

 

231,679

 

Accumulated deficit

 

 

(48,061)

 

 

(54,837)

 

Accumulated other comprehensive income

 

 

1,172

 

 

3,407

 

Total AXT, Inc. stockholders’ equity

 

 

189,666

 

 

183,820

 

Noncontrolling interests

 

 

3,867

 

 

4,497

 

Total stockholders’ equity

 

 

193,533

 

 

188,317

 

Total liabilities and stockholders’ equity

 

$

219,681

 

$

211,200

 

 

See accompanying notes to condensed consolidated financial statements.

3


 

Table of Contents

 

AXT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

    

Six Months Ended

 

 

June 30, 

 

June 30, 

 

 

2018

    

2017

 

2018

    

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

27,120

 

$

23,557

 

$

51,539

 

$

44,173

Cost of revenue

 

 

16,110

 

 

16,301

 

 

30,956

 

 

30,629

Gross profit

 

 

11,010

 

 

7,256

 

 

20,583

 

 

13,544

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

4,987

 

 

3,942

 

 

9,209

 

 

7,735

Research and development

 

 

1,500

 

 

1,019

 

 

2,920

 

 

2,143

Total operating expenses

 

 

6,487

 

 

4,961

 

 

12,129

 

 

9,878

Income from operations

 

 

4,523

 

 

2,295

 

 

8,454

 

 

3,666

Interest income, net

 

 

139

 

 

114

 

 

281

 

 

212

Equity in earnings (loss) of unconsolidated joint ventures

 

 

307

 

 

(188)

 

 

(27)

 

 

(1,121)

Other expense, net

 

 

(51)

 

 

(102)

 

 

(266)

 

 

(54)

Income before provision for income taxes

 

 

4,918

 

 

2,119

 

 

8,442

 

 

2,703

Provision for income taxes

 

 

367

 

 

321

 

 

701

 

 

480

Net income

 

 

4,551

 

 

1,798

 

 

7,741

 

 

2,223

Less: Net (income) loss attributable to noncontrolling interests

 

 

(650)

 

 

132

 

 

(965)

 

 

372

Net income attributable to AXT, Inc.

 

$

3,901

 

$

1,930

 

$

6,776

 

$

2,595

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

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.10

 

$

0.05

 

$

0.17

 

$

0.07

Diluted

 

$

0.10

 

$

0.05

 

$

0.17

 

$

0.07

Weighted-average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

39,001

 

 

38,306

 

 

38,970

 

 

36,238

Diluted

 

 

40,216

 

 

39,706

 

 

40,289

 

 

37,645

 

 

See accompanying notes to condensed consolidated financial statements.

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Table of Contents

 

AXT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME 

(Unaudited, in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2018

    

2017

    

2018

    

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

4,551

 

$

1,798

 

$

7,741

 

$

2,223

 

Other comprehensive (loss) income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

(5,018)

 

 

847

 

 

(2,202)

 

 

1,322

 

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

 

 

40

 

 

(2)

 

 

(77)

 

 

(125)

 

Total other comprehensive (loss) income, net of tax

 

 

(4,978)

 

 

845

 

 

(2,279)

 

 

1,197

 

Comprehensive (loss) income

 

 

(427)

 

 

2,643

 

 

5,462

 

 

3,420

 

Less: Comprehensive (income) loss attributable to noncontrolling interests

 

 

(346)

 

 

30

 

 

(921)

 

 

215

 

Comprehensive (loss) income attributable to AXT, Inc.

 

$

(773)

 

$

2,673

 

$

4,541

 

$

3,635

 

 

See accompanying notes to condensed consolidated financial statements.

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Table of Contents

 

AXT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30, 

 

 

    

2018

    

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

7,741

 

$

2,223

 

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

2,207

 

 

2,250

 

Amortization of marketable securities premium

 

 

81

 

 

75

 

Impairment charge on equity investee

 

 

 —

 

 

313

 

Stock-based compensation

 

 

931

 

 

622

 

Realized gain on sale of available-for-sale securities

 

 

 —

 

 

(77)

 

Gain on disposal of equipment

 

 

(13)

 

 

(1)

 

Loss from equity method investments, net

 

 

27

 

 

808

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

61

 

 

(3,683)

 

Inventories

 

 

(11,923)

 

 

(119)

 

Prepaid expenses and other current assets

 

 

(2,075)

 

 

(264)

 

Other assets

 

 

59

 

 

(28)

 

Accounts payable

 

 

2,833

 

 

1,368

 

Accrued liabilities

 

 

(414)

*  

 

21

*

Other long-term liabilities, including royalties

 

 

24

 

 

(302)

 

Net cash (used in) provided by operating activities

 

 

(461)

 

 

3,206

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(21,920)

 

 

(1,831)

 

Proceeds from sale of equipment

 

 

11

 

 

 —

 

Purchases of available-for-sale securities

 

 

(9,936)

 

 

(23,763)

 

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

 

 

17,870

 

 

10,170

 

Repayment of related party notes receivable

 

 

 —

 

 

53

 

Net cash used in investing activities

 

 

(13,975)

 

 

(15,371)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from issuance of common stock and options exercised, net of issuance costs

 

 

178

 

 

32,746

 

Considerations paid in cash to repurchase subsidiary shares from noncontrolling interests

 

 

(163)

 

 

 —

 

Dividends paid by joint ventures to their minority shareholders

 

 

 —

 

 

(465)

 

Net cash provided by financing activities

 

 

15

 

 

32,281

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(233)

 

 

215

 

Net increase (decrease) in cash and cash equivalents

 

 

(14,654)

 

 

20,331

 

Cash and cash equivalents at the beginning of the period

 

 

44,352

 

 

36,152

 

Cash and cash equivalents at the end of the period

 

$

29,698

 

$

56,483

 

Supplemental disclosure of non-cash flow information:

 

 

 

 

 

 

 

Consideration payable to repurchase subsidiary shares from noncontrolling interests, included in accrued liabilities

 

$

1,192

 

 

 —

 

Reduction of noncontrolling interests in excess of total consideration paid and payable in connection with the repurchase of subsidiaries shares from noncontrolling interests

 

$

196

 

 

 —

 


* Dividend accrued but not paid by one of our consolidated subsidiaries of $524 and $512 was included in accrued liabilities as of June 30, 2018 and 2017, respectively.

See accompanying notes to condensed consolidated financial statements.

6


 

Table of Contents

 

 

 

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.

 

Certain reclassifications have been made to prior periods’ financial statements to conform to the current period presentation. These reclassifications did not result in any change in previously reported net income or total assets.

 

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 for the three and six months ended June 30, 2018 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 2017 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 9, 2018 and our Quarterly Report on Form 10-Q for the three months ended March 31, 2018 filed with the SEC on May 4, 2018.  

 

The condensed consolidated financial statements include the accounts of AXT, our wholly-owned subsidiaries, Beijing Tongmei Xtal Technology Co., Ltd., Baoding Tongmei Xtal Technology Co., Ltd. and Chaoyang Tongmei Xtal Technology Co., and our majority-owned, or significantly controlled subsidiaries, Beijing JiYa Semiconductor Material Co., Ltd., Nanjing JinMei 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. We have seven companies accounted for by the equity method. For subsidiaries that we consolidate, we reflect the portion we do not own as noncontrolling interests on our condensed consolidated balance sheets in stockholders' equity and in our condensed consolidated statements of operations.

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Note 2. Investments and Fair Value Measurements

 

Our cash and cash equivalents consist of cash and instruments with original maturities of less than three months. Our investments consist of instruments with original maturities of more than three months. As of June 30, 2018 and December 31, 2017, our cash, cash equivalents and investments are classified as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

December 31, 2017

 

 

    

 

 

    

Gross

    

Gross

    

 

 

    

 

 

    

Gross

    

Gross

    

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

    

Cost

    

Gain

    

(Loss)

    

Value

    

Cost

    

Gain

    

(Loss)

    

Value

 

Classified as:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

29,698

 

$

 —

 

$

 —

 

$

29,698

 

$

43,610

 

$

 —

 

$

 —

 

$

43,610

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit 1

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

742

 

 

 —

 

 

 —

 

 

742

 

Total cash and cash equivalents

 

 

29,698

 

 

 —

 

 

 —

 

 

29,698

 

 

44,352

 

 

 —

 

 

 —

 

 

44,352

 

Investments (available-for-sale):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit 2

 

 

6,189

 

 

 —

 

 

(43)

 

 

6,146

 

 

7,099

 

 

 —

 

 

(24)

 

 

7,075

 

Corporate bonds

 

 

18,497

 

 

 —

 

 

(127)

 

 

18,370

 

 

25,602

 

 

 —

 

 

(69)

 

 

25,533

 

Total investments

 

 

24,686

 

 

 —

 

 

(170)

 

 

24,516

 

 

32,701

 

 

 —

 

 

(93)

 

 

32,608

 

Total cash, cash equivalents and investments

 

$

54,384

 

$

 —

 

$

(170)

 

$

54,214

 

$

77,053

 

$

 —

 

$

(93)

 

$

76,960

 

Contractual maturities on investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Due within 1 year 3

 

$

18,912

 

 

 

 

 

 

 

$

18,802

 

$

20,056

 

 

 

 

 

 

 

$

20,032

 

Due after 1 through 5 years 4

 

 

5,774

 

 

 

 

 

 

 

 

5,714

 

 

12,645

 

 

 

 

 

 

 

 

12,576

 

 

 

$

24,686

 

 

 

 

 

 

 

$

24,516

 

$

32,701

 

 

 

 

 

 

 

$

32,608

 


1.

Certificates of deposit with original maturities of less than three months.

2.

Certificates of deposit with original maturities of more than three months.

3.

Classified as “Short-term investments” in our condensed consolidated balance sheets.

4.

Classified as “Long-term investments” in our condensed consolidated balance sheets.

 

 

We manage our investments as a single portfolio of highly marketable securities that is intended to be available to meet our current cash requirements. Certificates of deposit and corporate bonds are typically held until maturity. Corporate equity securities have no maturity and may be sold at any time.

 

We previously held corporate equity securities consisting of common stock of GCS Holdings, Inc. (“GHI”) (previously Global Communication Semiconductors, Inc.), a Taiwan publicly-traded company. 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. During the three months ended March 31, 2017, we sold the remainder of our GHI stock; therefore, there were no GHI transactions in the three months ended June 30, 2017. During the six months ended June 30, 2017, our cash proceeds from sales of GHI stock were $125,000. Our cost was $48,000 and our gross realized gain from sales of GHI stock was $77,000. There were no GHI transactions in the three and six months ended June 30, 2018.

 

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 our available-for-sale securities as of June 30, 2018 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.

 

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A portion of our investments would generate a loss if we sold them on June 30, 2018. 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 June 30, 2018 (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 June 30, 2018

    

Value

    

(Losses)

    

Value

    

(Losses)

    

Value

    

(Losses)

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

$

4,931

 

$

(39)

 

$

1,196

 

$

(4)

 

$

6,127

 

$

(43)

 

Corporate bonds

 

 

11,133

 

 

(82)

 

 

7,237

 

 

(45)

 

 

18,370

 

 

(127)

 

Total in loss position

 

$

16,064

 

$

(121)

 

$

8,433

 

$

(49)

 

$

24,497

 

$

(170)

 

 

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, 2017 (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, 2017

 

Value

 

(Loss)

 

Value

 

(Loss)

 

Value

 

(Loss)

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

$

3,994

 

$

(16)

 

$

2,342

 

$

(8)

 

$

6,336

 

$

(24)

 

Corporate bonds

 

 

25,533

 

 

(69)

 

 

 —

 

 

 —

 

 

25,533

 

 

(69)

 

Total in loss position

 

$

29,527

 

$

(85)

 

$

2,342

 

$

(8)

 

$

31,869

 

$

(93)

 

 

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 $9.7 million and $9.8 million as of June 30, 2018 and December 31, 2017, respectively. As of June 30, 2018, there were seven companies accounted for under the equity method. There were no impairment charges in the three and six months ended June 30, 2018. There were no impairment charges in the three months ended June 30, 2017. The six months ended June 30, 2017 include an impairment charge of $313,000 for one of the gallium companies. During the first quarter of 2017, management determined that it was unlikely that this company would recover from the difficult pricing environment and we had written the investment down to zero.  

 

Fair Value Measurements

 

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

 

The type of instrument valued based on quoted market prices in active markets include our money market funds, which are generally classified within Level 1 of the fair value hierarchy. Other than corporate equity securities which are based on quoted market prices and classified as Level 1, we classify our available-for-sale securities including

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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 June 30, 2018, the net change in fair value from the placement of the hedge to settlement at each month end during the quarter had a de minimis impact to the consolidated results.

 

There were no changes in valuation techniques or related inputs in the three and six months ended June 30, 2018. There have been no transfers between fair value measurements levels during the three and six months ended June 30, 2018.

 

The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis in accordance with ASC 820 as of June 30, 2018 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Quoted Prices in

    

 

 

 

Significant

 

 

 

 

 

 

Active Markets of

 

Significant Other

 

Unobservable

 

 

 

Balance as of

 

Identical Assets

 

Observable Inputs

 

Inputs

 

 

    

June 30, 2018

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents and investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

$

6,146

 

$

 —

 

$

6,146

 

$

 —

 

Corporate bonds

 

 

18,370

 

 

 —

 

 

18,370

 

 

 —

 

Total

 

$

24,516

 

$

 —

 

$

24,516

 

$

 —

 

 

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, 2017 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Quoted Prices in

    

 

 

 

Significant

 

 

 

 

 

 

Active Markets of

 

Significant Other

 

Unobservable

 

 

 

Balance as of

 

Identical Assets

 

Observable Inputs

 

Inputs

 

 

    

December 31, 2017

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents and investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

$

7,817

 

$

 —

 

$

7,817

 

$

 —

 

Corporate bonds

 

 

25,533

 

 

 —

 

 

25,533

 

 

 —

 

Total

 

$

33,350

 

$

 —

 

$

33,350

 

$

 —

 

 

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). There were no impairment charges in the three and six months ended June 30, 2018. There were no impairment charges in the three months ended June 30, 2017. The six months ended June 30, 2017 include an impairment charge of $313,000 for one of the gallium companies. During the first quarter of 2017, management determined that it was unlikely that this company would recover from the difficult pricing environment and we had written the investment down to zero.  Except as mentioned, we did not record other-than-temporary impairment charges for the remainder of these investments during the three and six months ended June 30, 2018 and 2017.

 

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Note 3. Inventories

 

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

 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

 

    

2018

    

2017

 

Inventories:

 

 

 

 

 

 

 

Raw materials

 

$

29,379

 

$

23,554

 

Work in process

 

 

25,281

 

 

20,135

 

Finished goods

 

 

2,378

 

 

2,151

 

 

 

$

57,038

 

$

45,840

 

 

As of June 30, 2018 and December 31, 2017, carrying values of inventories were net of inventory reserves of $13.7 million and $13.3 million, respectively, for excess and obsolete inventory and $26,000 and $291,000, 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):

 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

 

 

2018

 

2017

 

Property, plant and equipment:

 

 

 

 

 

 

 

Machinery and equipment, at cost

 

$

47,536

 

$

44,549

 

Less: accumulated depreciation and amortization

 

 

(41,419)

 

 

(40,845)

 

Building, at cost

 

 

32,058

 

 

32,461

 

Less: accumulated depreciation and amortization

 

 

(11,908)

 

 

(11,501)

 

Leasehold improvements, at cost

 

 

5,488

 

 

5,539

 

Less: accumulated depreciation and amortization

 

 

(4,447)

 

 

(4,288)

 

Construction in progress

 

 

37,866

 

 

20,615

 

 

 

$

65,174

 

$

46,530

 

 

As of June 30, 2018, the balance of construction in progress was $37.9 million of which $26.8 million was related to our buildings in our new Dingxing and Chaoyang locations, $4.1 million was for manufacturing equipment purchases and $7.0 million was from our construction in progress for our other consolidated subsidiaries. As of December 31, 2017, the balance of construction in progress was $20.6 million, of which, $14.8 million was for our buildings in our new Dingxing location, $3.6 million was for manufacturing equipment purchases not yet placed in service, and $2.2 million was for our construction in progress at our other consolidated subsidiaries. 

 

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Note 5. Accrued Liabilities

 

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

 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

 

    

2018

    

2017

 

Preferred stock dividends payable

 

$

2,901

 

$

2,901

 

Accrued compensation and related charges

 

 

2,580

 

 

3,205

 

Payable in connection with purchase of subsidiary shares from noncontrolling interests

 

 

1,192

 

 

 —

 

Advances from customers

 

 

927

 

 

924

 

Dividends payable by consolidated joint ventures

 

 

524

 

 

533

 

Accrued professional services

 

 

409

 

 

570

 

Accrued income taxes

 

 

341

 

 

270

 

Current portion of royalty payments

 

 

288

 

 

575

 

Other personnel related costs

 

 

221

 

 

230

 

Accrued product warranty

 

 

178

 

 

133

 

Other tax payable

 

 

85

 

 

395

 

Accrual for sales refund liabilities

 

 

82

 

 

 —

 

Other accrued liabilities

 

 

2,065

 

 

1,413

 

 

 

$

11,793

 

$

11,149

 

 

 

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.  In December 2016, we determined that this receivable was in substance an investment and began re-classifying this long term loan from “Related party notes receivable – long-term” to “Other assets” in our consolidated balance sheets. As of June 30, 2018 and December 31, 2017, we included $1.1 million and $1.2 million in “Other assets” in our condensed consolidated balance sheets, respectively.

 

JiYa also purchases raw materials from one of its equity investment entities for production in the ordinary course of business. The general manager of JiYa has a family member who has a 10% ownership position in this equity investment entity. As of June 30, 2018 and December 31, 2017, amounts payable of $2.0 million and $2.1 million were included in “Accounts payable” in our condensed consolidated balance sheets, respectively.  

 

JiYa also sells raw materials to one of its equity investment entities for production in the ordinary course of business. As of June 30, 2018 and December 31, 2017, amounts receivable of $328,000 and $334,000, respectively, were included in “Accounts receivable” in our condensed consolidated balance sheets. During the three months ended December 31, 2016, we deemed the collection of the outstanding amount to be improbable and established an allowance in full. There have since been no additional sales made on credit to the customer and, as of June 30, 2018, the existing outstanding amount continues to be fully reserved.

 

Beginning in 2012, our consolidated joint venture, Nanjing JinMei Gallium Co., Ltd. (“JinMei”), is contractually obligated under an agency sales agreement to sell raw material on behalf of its equity investment entity. JinMei bills the customers and remits the receipts, net of its portions of sales commission, to this equity investment entity. For the three months ended June 30, 2018 and 2017, JinMei has recorded $1,000 and $0 income from agency sales, respectively. For each of the six months ended June 30, 2018 and 2017, JinMei has recorded $1,000 income from agency sales which were included in “Other (expense) income, net” in the condensed consolidated statements of operations.

 

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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 31st of each year.

 

Tongmei has paid certain amounts on behalf of Donghai County Dongfang High Purity Electronic Materials Co., Ltd. (“Dongfang”), its equity investment entity, to purchase materials. The original agreement was signed between Tongmei and Dongfang in 2014 and the date of repayment was set as December 31, 2015. In 2015, both parties agreed to delay the date of repayment to December 31, 2017. During 2017, the repayment of the full amount of principal and interest totaling $114,000 was received by our wholly owned subsidiary. 

 

In April 2014, Tongmei loaned an additional $46,000 to Dongfang. The loan bears interest at 6.15% per annum and was due on December 31, 2017. During 2017, the repayment of the full amount of principal and interest totaling $55,000 was received by our wholly owned subsidiary.  

 

Tongmei also purchases raw materials from Dongfang for production in the ordinary course of business. As of June 30, 2018 and December 31, 2017, amounts payable of $295,000 and $0, respectively, were included in “Accounts payable” in our condensed consolidated balance sheets.

 

Tongmei also purchases raw materials from one of our equity investment entities, Emei Shan Jiamei Materials Co. Ltd. (“Jiamei”), for production in the ordinary course of business. As of June 30, 2018 and December 31, 2017, amounts payable of $123,000 and $370,000, respectively, were included in “Accounts payable” in our condensed consolidated balance sheets.

 

Tongmei also purchases raw materials from one of our equity investment entities, Xilingol Tongli Germanium Refine Co. Ltd. (“Tongli”), for production in the ordinary course of business. As of June 30, 2018 and December 31, 2017, amounts payable of $238,000 and $219,000, respectively, were included in “Accounts payable” in our condensed consolidated balance sheets.

 

In July 2017, Tongmei, provided an inter-company loan to JinMei in the amount of $768,000 in preparation for the acquisition of the land use rights and the construction of a new building. The inter-company loan carries an interest rate of 4.9% per annum and is due in three installments between December 2021 and December 2023.  JinMei is in the process of relocating its headquarters and manufacturing operations to an alternative location. Currently, JinMei has identified a site as a possible candidate and the estimated costs for the land use rights acquisition and facility construction are expected to be in the range of $2 million to $4 million.  

 

In April 2016, our consolidated joint venture, BoYu, provided a personal loan of $177,000 to one of its executive employees. 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. During the three months ended June 30, 2017, the repayment of the principal and interest totaling $180,000 was received by our consolidated joint venture. In November 2017, BoYu provided another personal loan of $318,000 to the same executive employee. The loan bears interest at 2.75% per annum. Principal and accrued interest are due on November 30, 2020. As of June 30, 2018 and December 31, 2017, the balances, including both principal and accrued interest, were $308,000 and $307,000, respectively, and included in “Other assets” in our condensed consolidated balance sheets.

 

On November 2, 2017, our consolidated joint venture, BoYu, raised additional capital in the amount of $2 million in cash from a third-party investor through the issuance of shares equivalent to 10% ownership of BoYu. This third-party investor is an immediate family member of the owner of one of BoYu's customers. For the three months ended June 30, 2018 and 2017, BoYu has recorded $530,000 and $51,000, respectively, in revenue from this customer. For the six months ended June 30, 2018 and 2017, BoYu has recorded $1.3 million and $388,000, respectively, in revenue from this customer. As of June 30, 2018 and December 31, 2017, amounts receivable of $550,000 and $635,000, respectively, were included in “Accounts receivable” in our condensed consolidated balance sheets.

 

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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. We have six direct investments. Our consolidated subsidiaries have also made investments in private companies. We have four indirect investments. These companies form part of our overall supply chain.

 

The six direct investments are summarized below (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment Balance as of

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

Accounting

 

Ownership

 

Company

    

2018

    

2017

    

Method

    

Percentage

 

Beijing JiYa Semiconductor Material Co., Ltd.

 

$

3,331