AXT INC Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-K)

In addition to historical information, the following discussion contains
forward-looking statements that are subject to risks and uncertainties. Actual
results may differ substantially from those referred to herein due to a number
of factors, including but not limited to risks described in the section entitled
Item 1A. "Risk Factors" and elsewhere in this Annual Report on Form 10-K. This
discussion should be read in conjunction with Item 6. "Selected Consolidated
Financial Data" and our consolidated financial statements and related notes
included elsewhere in this Form 10-K.

Significant Accounting Policies and Estimates

We prepare our consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America ("U.S. GAAP").
Accordingly, we make estimates, assumptions and judgments that affect the
amounts reported on our consolidated financial statements. These estimates,
assumptions and judgments about future events and their effects on our results
cannot be determined with certainty, and are made based upon our historical
experience and on other assumptions that are believed to be reasonable under the
circumstances. These estimates may change as new events occur or additional
information is obtained, and we may periodically be faced with uncertainties,
the outcomes of which are not within our control and may not be known for a
prolonged period of time.

We have identified the policies below as critical to our business operations and
understanding of our financial condition and results of operations. Critical
accounting policies are material to the presentation of our consolidated
financial statements and require us to make difficult, subjective or complex
judgments that could have a material effect on our financial condition and
results of operations. They may require us to make assumptions about matters
that are highly uncertain at the time of the estimate. Different estimates that
we could have used, or changes in the estimate that are reasonably likely to
occur, may have a material impact on our financial condition or results of
operations. We also refer you to Note 1 to our consolidated financial statements
included elsewhere in this Form 10-K.

Recognition of income and returns on sales

We manufacture and sell high-performance compound semiconductor substrates
including indium phosphide, gallium arsenide and germanium wafers, and our
consolidated subsidiaries sell certain raw materials, including high purity
gallium (6N and 7N Ga), pyrolytic boron nitride (pBN) crucibles and boron oxide
(B2O3). After we ship our products, there are no remaining obligations or
customer acceptance requirements that would preclude revenue recognition. Our
products are typically sold pursuant to purchase orders placed by our customers,
and our terms and conditions of sale do not require customer acceptance. We
account for a contract with a customer when there is a legally enforceable
contract, which could be the customer's purchase order, the rights of the
parties are identified, the contract has commercial terms, and collectibility of
the contract consideration is probable. The majority of our contracts have a
single performance obligation to transfer products and are short term in nature,
usually less than six months. Our revenue is measured based on the consideration
specified in the contract with each customer in exchange for transferring
products that are generally based upon a negotiated, formula, list or fixed
price. Revenue is recognized when control of the promised goods is transferred
to our customer, which is either upon shipment from our dock, receipt at the
customer's dock, or removal from consignment inventory at the customer's
location, in an amount that reflects the consideration we expect to be entitled
to receive in exchange for those goods.

We have elected to account for shipping and handling as activities to fulfill
the promise to transfer the goods. As such, shipping and handling fees billed to
customers in a sales transaction are recorded in revenue. Shipping and handling
costs incurred are recorded in cost of revenue. Sales taxes and value added
taxes in foreign jurisdictions that are collected from customers and remitted to
governmental authorities are accounted for on a net basis and, therefore, are
excluded from revenue.

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We do not provide training, installation or commissioning services. We accrue
for future returns based on historical data, prior experience, current economic
trends and changes in customer demand at the time revenue is recognized. We do
not recognize any asset associated with the incremental cost of obtaining
revenue generating customer contracts. As such, sales commissions and other
related expenses are expensed as incurred, given that the expected period of
benefit is less than one year.

Accounts receivable and allowance for doubtful accounts

Accounts receivable are recorded at the invoiced amount and are not interest
bearing. We review at least quarterly, or when there are changes in credit
risks, the likelihood of collection on our accounts receivable balances and
provide an allowance for doubtful accounts receivable for any expected credit
losses primarily based upon the age of these accounts. We evaluate receivables
from U.S. customers with an emphasis on balances in excess of 90 days and for
receivables from customers located outside the U.S. with an emphasis on balances
in excess of 120 days and establish a reserve allowance on the receivable
balances if needed. The reason for the difference in the evaluation of
receivables between foreign and U.S. customers is that U.S. customers have
historically made payments in a shorter period of time than foreign customers.
Foreign business practices generally require us to allow customer payment terms
that are longer than those accepted in the United States. We assess the
probability of collection based on a number of factors, including the length of
time a receivable balance has been outstanding, our past history with the
customer and their credit-worthiness.

We exercise judgment when determining the adequacy of our reserves as we
evaluate historical bad debt trends, general economic conditions in the United
States and internationally, and changes in customer financial conditions.
Uncollectible receivables are recorded as bad debt expense when a credit loss is
expected through the establishment of an allowance, which would then be written
off when all efforts to collect have been exhausted and recoveries are
recognized when they are received. As of December 31, 2021 and 2020, our
accounts receivable, net balance was $34.8 million and $24.6 million,
respectively, which was net of an allowance for doubtful accounts of $130,000
and $217,000 as of December 31, 2021 and 2020, respectively. During 2021, we
decreased the allowance for doubtful accounts by $87,000 due to the write-off of
accounts receivable for a customer. During 2020, we increased the allowance for
doubtful accounts by $183,000 due to the poor financial condition of a few
customers. If actual uncollectible accounts differ substantially from our
estimates, revisions to the estimated allowance for doubtful accounts would be
required, which could have a material impact on our financial results for the
future periods.

Warranty Reserve
We maintain a warranty reserve based upon our claims experience during the prior
twelve months and any pending claims and returns of which we are aware. Warranty
costs are accrued at the time revenue is recognized. As of December 31, 2021 and
2020, accrued product warranties totaled $743,000 and $609,000, respectively.
The increase in accrued product warranties is primarily attributable to two
customers who claimed certain wafers did not meet their specifications. If
actual warranty costs or pending new claims differ substantially from our
estimates, revisions to the estimated warranty liability would be required,
which could have a material impact on our financial condition and results of
operations for future periods.

Inventory valuation

Inventories are stated at the lower of cost (approximated by standard cost) or
net realizable value. Cost is determined using the weighted average cost method.
Our inventory consists of raw materials as well as finished goods and
work-in-process that include material, labor and manufacturing overhead costs.
We routinely evaluate the levels of our inventory in light of current market
conditions in order to identify excess and obsolete inventory, and we provide a
reserve for certain inventories based upon the age and quality of the product
and the projections for sale of the completed products. As of December 31, 2021
and 2020, we had an inventory reserve of $19.6 million and $17.7 million,
respectively, for excess and obsolete inventory and $66,000 and $162,000,
respectively, for lower of cost or net realizable value reserves. If actual
demand for our products were to be substantially lower than estimated,
additional inventory adjustments for excess or obsolete inventory might be
required, which could have a material impact on our business, financial
condition and results of operations.

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Impairment of Investments
We classify marketable investments in debt securities as available-for-sale debt
securities in accordance with Accounting Standards Codification ("ASC") Topic
320, Investments-Debt Securities. All available-for-sale debt securities with a
quoted market value below cost (or adjusted cost) are reviewed in order to
determine whether the decline is other-than-temporary. Factors considered in
determining whether a loss is temporary include the magnitude of the decline in
market value, the length of time the market value has been below cost (or
adjusted cost), credit quality, and our ability and intent to hold the debt
securities for a period of time sufficient to allow for any anticipated recovery
in market value. We also review our debt investment portfolio at least
quarterly, or when there are changes in credit risks or other potential
valuation concerns to identify and evaluate whether an allowance for expected
credit losses or impairment would be necessary.

We also invest in equity instruments of privately-held raw material companies in
China for business and strategic purposes. Investments in our unconsolidated
joint venture raw material companies are classified as other assets and
accounted for under either the equity or cost method, depending on whether we
have the ability to exercise significant influence over their operations or
financial decisions. We monitor our investments for impairment and record
reductions in carrying value when events or changes in circumstances indicate
that the carrying value may not be recoverable. Determination of impairment is
highly subjective and is based on a number of factors, including an assessment
of the strength of the subsidiary's management, the length of time and extent to
which the fair value has been less than our cost basis, the financial condition
and near-term prospects of the subsidiary, fundamental changes to the business
prospects of the subsidiary, share prices of subsequent offerings, and our
intent and ability to hold the investment for a period of time sufficient to
allow for any anticipated recovery in our carrying value.

For the years ended December 31, 2021 and 2020, we had no impairment charges.
For the year ended December 31, 2019, we recorded an impairment charge of $1.1
million for a germanium materials company in China in which we have a 25%
ownership interest. After receiving such company's preliminary first quarter
2019 financial results in early April 2019 and its projections for significant
losses going forward, we determined that this asset was fully impaired and wrote
the asset balance down to zero.

Fair value of investments

ASC Topic 820, Fair Value Measurement, establishes three levels of inputs that can be used to measure fair value.

Level 1 instruments represent quoted prices in active markets. Therefore, determining the fair value of Level 1 instruments does not require significant management judgment and estimation is not difficult.

Level 2 instruments include observable inputs other than Level 1 prices, such as
quoted prices for similar instruments in markets with insufficient volume or
infrequent transactions (less active markets), issuer bank statements, credit
ratings, non-binding market consensus prices that can be corroborated with
observable market data, model-derived valuations in which all significant inputs
are observable or can be derived principally from or corroborated with
observable market data for substantially the full term of the assets or
liabilities, or quoted prices for similar assets or liabilities. These Level 2
instruments require more management judgment and subjectivity compared to
Level 1 instruments, including:

Determine which instruments are most comparable to the instrument

price requires management to identify a sample of similar securities based on

? coupon rates, maturity, issuer, credit rating and type of instrument, and

subjectively select an individual title or multiple titles that are

deemed most similar to the security being priced.

Determination of model-derived valuations to be used in determining fair value

requires management judgment. When observable market prices for similar products

? securities or similar securities are not available, we are pricing our marketable securities

   debt instruments using non-binding market consensus prices that are
   corroborated with observable


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market data or pricing models, such as discounted cash flow models, with all

significant inputs derived or corroborated by observable market data.


Level 3 instruments include unobservable inputs to the valuation methodology
that are significant to the measurement of fair value of assets or liabilities.
The determination of fair value for Level 3 instruments requires the most
management judgment and subjectivity.

We place short-term foreign currency hedges that are intended to offset the
potential cash exposure related to fluctuations in the exchange rate 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 consolidated balance sheet and classified as Level 3 assets
and liabilities. As of December 31, 2021 and 2020, 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.

Impairment of long-lived assets

We evaluate the recoverability of property, equipment and intangible assets in
accordance with ASC Topic 360, Property, Plant and Equipment. When events and
circumstances indicate that long-lived assets may be impaired, we compare the
carrying value of the long-lived assets to the projection of future undiscounted
cash flows attributable to such assets. In the event that the carrying value
exceeds the future undiscounted cash flows, we record an impairment charge
against income equal to the excess of the carrying value over the asset's fair
value. Fair values are determined based on quoted market values, discounted cash
flows or internal and external appraisals, as applicable. Assets held for sale
are carried at the lower of carrying value or estimated net realizable value. We
had no "Assets held for sale" or any impairment of long-lived assets on the
consolidated balance sheets as of December 31, 2021 and 2020.

Stock-based compensation

We account for stock-based compensation in accordance with ASC Topic 718,
Stock-based Compensation. Share-based awards granted include stock options and
restricted stock awards. We utilize the Black-Scholes option pricing model to
estimate the grant date fair value of stock options, which requires the input of
highly subjective assumptions, including estimating stock price volatility and
expected term. Historical volatility of our stock price was used while the
expected term for our options was estimated based on historical option exercise
behavior and post-vesting forfeitures of options, and the contractual term, the
vesting period and the expected term of the outstanding options. Further, we
apply an expected forfeiture rate in determining the amount of share-based
compensation. We use historical forfeitures to estimate the rate of future
forfeitures. Changes in these inputs and assumptions can materially affect the
measure of estimated fair value of our stock compensation. The cost of
restricted stock awards is determined using the fair value of our common stock
on the date of grant.

We recognize the compensation costs net of an estimated forfeiture rate over the
requisite service period of the options award, which is generally the vesting
term of four years. Compensation expense for restricted stock awards is
recognized over the vesting period, which is generally one, three or four years.
Stock-based compensation expense is recorded in cost of revenue, research and
development, and selling, general and administrative expenses. (see
Note 1-Summary of Significant Accounting Policies-Stock-Based Compensation).

Income taxes

We account for income taxes in accordance with ASC topic 740, Income Taxes ("ASC
740"), which requires that deferred tax assets and liabilities be recognized
using enacted tax rates for the effect of temporary differences between the book
and tax bases of recorded assets and liabilities. ASC 740 also requires that
deferred tax assets be reduced by a valuation allowance if it is more likely
than not that a portion of the deferred tax asset will not be realized. Our
deferred tax assets have been reduced to zero by valuation allowance.

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We provide for income taxes based upon the geographic composition of worldwide
earnings and tax regulations governing each region, particularly China. The
calculation of tax liabilities involves significant judgment in estimating the
impact of uncertainties in the application of complex tax laws, particularly in
foreign countries such as China.

See Note 12-“Income taxes” to the consolidated financial statements for more information.

Change in Accounting Estimate – Useful Life of Equipment and Plant

From time to time we review our estimates of the useful lives of our property,
plant and equipment. As a result of the review, we determined a portion of our
manufacturing equipment was lasting longer than the estimate previously
established for the respective useful lives. Where appropriate, we extended the
useful life of the manufacturing equipment in our accounting records. In
addition, the useful life of our buildings located in China was extended to
better align with industry standards. The changes in our estimate of the useful
life, effective January 1, 2020, were made in order to remain consistent with
U.S. GAAP regarding management estimates. The effect of the change in the useful
lives decreased our manufacturing costs for the year ended December 31, 2020 by
approximately $1.4 million and increased our basic and diluted net income per
share by approximately $0.03, respectively, as a result of lower depreciation
expense.

Results of Operations

Overview

We were founded in 1986 to commercialize and enhance our proprietary VGF
technology for producing high-performance compound semiconductor substrates or
wafers. We have one operating segment and two product lines: specialty material
substrates and raw materials used to make such substrates or other related
products. We recorded our first substrate sales in 1990 and our substrate
products currently include indium phosphide (InP), gallium arsenide (GaAs) and
germanium (Ge) substrates used to produce semiconductor devices for use in
applications such as fiber optic and wireless telecommunications, light emitting
diodes (LEDs), lasers and for solar cells for space and terrestrial photovoltaic
applications. Our two raw material companies sell, among other items, purified
gallium and pBN crucibles.

Operating Results

We manufacture all of our products in the People's Republic of China (PRC or
China), which generally has favorable costs for facilities and labor compared
with comparable facilities in the United States, Europe or Japan. Our supply
chain includes partial ownership of raw material companies in China (joint
ventures). We believe this supply chain arrangement provides us with pricing
advantages, reliable supply and enhanced sourcing lead-times for key raw
materials which are central to our final manufactured products.

Our annual revenue increased in 2021 from $95.4 million in 2020 to $137.4
million in 2021 an increase of 44.1%. Our annual revenue increased in 2020 from
$83.3 million in 2019 to $95.4 million in 2020 an increase of 14.5%. Our annual
revenue decreased in 2019 by 18.7% to $83.3 million. For the years ended in
2018, 2017 and 2016 our revenue grew each year. Our revenue increased in 2018 by
3.8% to $102.4 million, in 2017 by 21.2% to $98.7 million and in 2016 by 5.0% to
$81.3 million. In 2021, our gross margin increased from 31.7% of total revenue
in 2020 to 34.5% of total revenue in 2021. In 2020, our gross margin increased
from 29.8% of total revenue in 2019 to 31.7% of total revenue in 2020. Our gross
margin declined in 2019 to 29.8% of total revenue from 36.2% of total revenue in
2018.

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Revenue


                            Years Ended Dec. 31                2020 to 2021                  2019 to 2020
                                                           Increase                      Increase
                     2021         2020         2019       (Decrease)     % Change       (Decrease)     % Change
Product Type:
Substrates         $ 103,026    $  75,587    $  67,849   $     27,439        36.3 %    $      7,738        11.4 %
Raw materials
and other             34,367       19,774       15,407         14,593        73.8 %           4,367        28.3 %
Total revenue      $ 137,393    $  95,361    $  83,256   $     42,032        44.1 %    $     12,105        14.5 %


Revenue increased $42.0 million, or 44.1%, in 2021 from $95.4 million in 2020.
The $27.4 million increase in wafer substrate sales was led by strong demand for
InP wafer substrates for 5G applications and data center upgrades (silicon
photonics). GaAs revenue also grew as the result of increased demand for LED
products, industrial lasers and other applications requiring low defect
densities in the wafer substrate. Revenue from Ge wafer substrates increased
modestly, primarily as a result of higher demand from our customers in China.
The $14.6 million raw materials revenue increase as compared to the same period
in 2020 was primarily the result of increased revenue from sales of purified
gallium and favorable pricing. In addition, increased demand for pBN crucibles
and pBN-based OLED manufacturing tools resulted in increased revenue for BoYu,
one of our consolidated raw material companies.

Revenue increased $12.1 million, or 14.5%, in 2020 from $83.3 million in 2019.
The $7.7 million increase in wafer substrate sales was the result of stronger
GaAs demand in LED sensors used in the automobile industry and the industrial
sensor market. In addition, GaAs sales into wireless applications increased.
Revenue from InP sales also increased. The InP revenue increase was driven by 5G
infrastructure and data center upgrades (silicon photonics). Revenue from Ge
wafer substrates increased, primarily as a result of higher demand from our
customers in China. The $4.4 million raw materials revenue increase as compared
to the same period in 2019 was primarily the result of increased shipments of
purified gallium due to stronger market demand and higher demand for pBN
crucibles and OLED manufacturing tools using pBN sold by our consolidated
subsidiaries.

Revenue by Geographic Region

                                   Year Ended Dec. 31,                 2020 to 2021                 2019 to 2020
                                                                   Increase                     Increase
                              2021         2020        2019      

(Decrease) % change (Decrease) % change

                              ($ in thousands)
  China                     $  67,394    $ 35,150    $ 26,796    $     32,244        91.7 %   $      8,354        31.2 %
  % of total revenue               49 %        37 %        32 %
  Taiwan                       16,841      16,485      16,204             356         2.2 %            281         1.7 %
  % of total revenue               12 %        17 %        19 %
  Japan                        10,112       7,624       6,258           2,488        32.6 %          1,366        21.8 %
  % of total revenue                7 %         8 %         8 %

Asia Pacific (excluding

  China, Taiwan and
  Japan)                        7,540       5,458       7,592           2,082        38.1 %        (2,134)      (28.1) %
  % of total revenue                6 %         6 %         9 %
  Europe (primarily
  Germany)                     23,069      19,673      18,178           3,396        17.3 %          1,495         8.2 %
  % of total revenue               17 %        21 %        22 %
  North America

(mainly USA

  States)                      12,437      10,971       8,228           1,466        13.4 %          2,743        33.3 %
  % of total revenue                9 %        11 %        10 %
  Total revenue             $ 137,393    $ 95,361    $ 83,256    $     42,032        44.1 %   $     12,105        14.5 %

Sales to customers outside of North America represented approximately 90% of our revenues in 2021, 2020 and 2019, respectively.

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Revenue from customers in China increased in 2021 by 91.7%, primarily due to
higher demand for refined gallium and pBN crucibles sold by our consolidated
subsidiaries. In addition, revenue from InP, GaAs and Ge wafer substrates
increased. Revenue from customers in Taiwan increased in 2021 by 2.2%, primarily
due to an increase in demand for wireless applications using GaAs wafer
substrates, partially offset by a decline in InP revenue in Taiwan that was
transferred to North America. Revenue from customers in Japan increased in 2021
by 32.6% as a result of increased demand for InP wafer substrates, partially
offset by lower demand for pBN crucibles sold by one of our consolidated
subsidiaries and GaAs used in wireless applications. Revenue from customers in
Asia Pacific increased by 38.1% as a result of increased demand for GaAs used in
wireless applications and InP wafer substrates, partially offset by lower demand
for pBN crucibles sold by one of our consolidated subsidiaries. Revenue from
customers in Europe increased in 2021 by 17.3%, primarily due to GaAs used in
LED applications, InP wafer substrates and pBN crucibles sold by one of our
consolidated subsidiaries, partially offset by lower demand for Ge wafer
substrates. Revenue from customers in North America increased by 13.4% primarily
due to increased demand for our InP and Ge wafer substrates, and pBN crucibles
sold by one of our consolidated subsidiaries.

Revenue from customers in China increased in 2020 by 31.2%, primarily due to
higher demand for refined gallium and pBN crucibles sold by our consolidated
subsidiaries. In addition, revenue from GaAs wafer substrates increased. Revenue
from customers in Taiwan increased in 2020 by 1.7%, primarily due to an increase
in demand for wireless applications using GaAs wafer substrates, partially
offset by a decline in InP revenue in Taiwan that was transferred to North
America. Revenue from customers in Japan increased in 2020 by 21.8% as a result
of increased demand for InP wafer substrates and GaAs used in wireless
applications, partially offset by lower demand for pBN crucibles sold by our
consolidated subsidiary. Revenue from customers in Asia Pacific decreased by
28.1% as a result of lower demand for pBN crucibles sold by our consolidated
subsidiaries. Revenue from customers in Europe increased in 2020 by 8.2%,
primarily due to pBN crucibles sold by our consolidated subsidiary and Ge wafer
substrates. Revenue from customers in North America increased by 33.3% primarily
due to increased demand for our InP wafer substrates partially offset by lower
demand for wireless applications using our GaAs wafer substrates.

Gross Margin

                                                                 2020 to 2021              2019 to 2020
                             Year Ended Dec. 31,             Increase                  Increase
                         2021        2020        2019       (Decrease)     % Change   (Decrease)     % Change

                         ($ in thousands)
Gross profit           $ 47,414    $ 30,275    $ 24,825    $     17,139        56.6 % $     5,450        22.0 %
Gross Profit %             34.5 %      31.7 %      29.8 %


Gross profit increased $17.1 million in 2021 as compared to 2020. Gross margin
in 2021 was 34.5% as compared to 31.7% in 2020. The increase in gross profit is
attributed to higher revenue resulting in fixed costs being spread over more
units and a favorable change in product mix.

Gross profit increased $5.5 million in 2020 as compared to 2019. Gross margin in
2020 was 31.7% as compared to 29.8% in 2019. The increase in gross profit is
attributed to higher revenue resulting in fixed costs being spread over more
units and a favorable change in product mix.

Selling, general and administrative expenses

                                                                2020 to 2021               2019 to 2020
                             Years Ended Dec. 31            Increase                   Increase
                         2021        2020        2019      (Decrease)     % Change    (Decrease)     % Change

                         ($ in thousands)
Selling, general and
administrative
expenses               $ 24,189    $ 19,200    $ 19,305    $     4,989        26.0 %  $     (105)       (0.5) %
% of total revenue         17.6 %      20.1 %      23.2 %

Selling, general and administrative expenses increased $5.0 millioni.e. 26.0%, at $24.2 million for 2021 compared to $19.2 million for 2020. The increase in selling, general and administrative expenses is mainly explained by

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personnel expenses, stock compensation expenses, license fees and fees, and an increase in external commission expenses due to higher sales volume in 2021, partially offset by lower bad debts.

Selling, general and administrative expenses decreased $0.1 million, or 0.5%, to
$19.2 million for 2020 compared to $19.3 million for 2019. The lower selling,
general and administrative expenses were primarily from lower travel-related
expenses driven by the COVID-19 pandemic, reimbursement of certain expenses from
the local government in China for relocating our manufacturing line to its
province, lower license, tax and registration related expenses and lower
professional service-related expenses partially offset by higher
personnel-related expenses and increase in our bad debt expenses due to the poor
financial condition of a few customers as a result of the COVID-19 pandemic.

Research and development costs

                                                                   2020 to 2021              2019 to 2020
                                 Years Ended Dec. 31           Increase                  Increase
                             2021        2020       2019      (Decrease)     % Change   (Decrease)     % Change

                             ($ in thousands)
Research and development   $  10,328    $ 7,135    $ 5,834    $     3,193    44.8     % $     1,301        22.3 %
% of total revenue               7.5 %      7.5 %      7.0 %


Research and development expenses increased $3.2 million, or 44.8%, to
$10.3 million in 2021 from $7.1 million in 2020. The increase in research and
development expenses in 2021 was primarily due to higher development expenses
for 8-inch GaAs and 6-inch InP wafer substrates and development of new features
for certain of our GaAs and InP wafer substrates, new product testing and
personnel-related expenses.

Research and development expenses increased $1.3 million, or 22.3%, to
$7.1 million in 2020 from $5.8 million in 2019. The increase in research and
development expenses in 2020 was primarily due to higher development expenses of
new features for certain of our GaAs and InP wafer substrates, product testing
and personnel-related expenses.

Interest income (expense), net

                                                              2020 to 2021                2019 to 2020
                            Years Ended Dec. 31           Increase                    Increase
                        2021        2020       2019      (Decrease)     % Change     (Decrease)     % Change

                        ($ in thousands)
Interest income
(expense), net        $   (213)    $ (179)    $   217    $      (34)      (19.0) %   $     (396)     (182.5) %
% of total revenue        (0.2) %    (0.2) %      0.3 %


Interest income (expense), net decreased in 2021 as compared to the same period
in 2020, primarily due to lower investment balances in 2021 and increased
borrowings in 2021. Interest income (expense), net decreased in 2020 as compared
to the same period in 2019, primarily due to lower investment balances in 2020
and increased borrowings in 2020.

Equity in profit (loss) of unconsolidated joint ventures

                                                                   2020 to 2021                2019 to 2020
                               Years Ended Dec. 31             Increase                    Increase
                          2021         2020        2019       (Decrease)     % Change     (Decrease)     % Change

                          ($ in thousands)
Equity in income
(loss) of
unconsolidated joint
ventures               $    4,409     $   111    $ (1,876)    $     4,298     3,872.1 %   $     1,987       105.9 %
% of total revenue            3.2 %       0.1 %      (2.3) %


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Equity in income (loss) of unconsolidated joint ventures is the aggregate net
income (loss) from our minority-owned supply chain joint venture companies that
are not consolidated. Equity in income (loss) of unconsolidated joint ventures
increased $4.3 million to an income of $4.4 million in 2021 from an income of
$0.1 million in 2020 as our unconsolidated joint ventures reported better
performance in 2021 as compared to 2020.

Equity in income (loss) of unconsolidated joint ventures is the aggregate net
income (loss) from our minority-owned supply chain joint venture companies that
are not consolidated. Equity in income (loss) of unconsolidated joint ventures
increased $2.0 million to an income of $0.1 million in 2020 from a loss of $1.9
million in 2019 as our unconsolidated joint ventures reported better performance
in 2020 as compared to 2019. The loss in 2019 includes an impairment charge of
$1.1 million from the germanium mining company in our raw material supply chain.

Other Income, Net

                                                                2020 to 2021                2019 to 2020
                            Years Ended Dec. 31             Increase                    Increase
                        2021         2020       2019       (Decrease)     % Change     (Decrease)     % Change

                        ($ in thousands)
Other income, net     $     509     $ 3,200    $   947    $    (2,691)      (84.1) %   $     2,253       237.9 %
% of total revenue          0.4 %       3.4 %      1.1 %


Other income, net decreased $2.7 million to an income of $0.5 million for 2021
as compared to an income of $3.2 million in 2020, primarily due to lower
compensation received from the China government by three of our consolidated
subsidiaries for relocating their facilities to Kazuo in 2021 as compared to
2020.

Other income, net increased $2.3 million to an income of $3.2 million for 2020
as compared to an income of $0.9 million in 2019, primarily due to compensation
received from the China government by three of our consolidated subsidiaries for
relocating their facilities to Kazuo.

Provision for income taxes

                                                            2020 to 2021                2019 to 2020
                           Years Ended Dec. 31          Increase                    Increase
                       2021       2020       2019      (Decrease)     % Change     (Decrease)     % Change

                            ($ in thousands)
Provision for
income taxes          $ 1,093    $ 2,031    $   562    $     (938)      (46.2) %   $     1,469       261.4 %
% of total revenue        0.8 %      2.1 %      0.7 %


Provision for income taxes for 2021 and 2020 were $1.1 million and $2.0 million,
respectively, which were mostly related to our consolidated wafer substrate
subsidiaries in China and our two partially owned consolidated raw material
companies. No income taxes or benefits have been provided for AXT as the income
in the U.S. had been fully offset by utilization of federal and state net
operating loss carryforwards. Additionally, there is uncertainty of generating
future profit in the U.S., which has resulted in our deferred tax assets being
fully reserved. We have accrued approximately $223,000 in federal income tax for
AXT-Tongmei for the year ended December 31, 2021, which has no net operating
loss carryover. Our estimated tax rate can vary greatly from year to year
because of the change or benefit in the mix of taxable income between our U.S.
and China-based operations.

Due to our uncertainty about our future profitability, we have recorded a valuation allowance on our net deferred tax assets of $15.4 million and
$19.8 million respectively for the years 2021 and 2020.

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Net income attributable to non-controlling interests and refundable non-controlling interests

                                                                2020 to 2021                 2019 to 2020

                             Years Ended Dec. 31            Increase                     Increase
                         2021        2020       2019       (Decrease)     % Change      (Decrease)     % Change

                         ($ in thousands)
Net income
attributable to
noncontrolling
interests and
redeemable
noncontrolling
interests              $   1,934    $ 1,803    $ 1,012    $        131         7.3 %   $        791        78.2 %
% of total revenue           1.4 %      1.9 %      1.2 %


The increase in noncontrolling interests and redeemable noncontrolling
interests' share of income for 2021 as compared to 2020 was primarily due to the
structural changes of the legal entities in China (see Note 1 to our
Consolidated Financial Statements) and to a lesser degree, losses generated by
our consolidated subsidiary, ChaoYang XinMei High Purity Semiconductor Materials
Co., Ltd. (ChaoYang XinMei").

The increase in noncontrolling interests and noncontrolling interests' share of
income for 2020 as compared to 2019 was due to higher profitability from one of
our consolidated subsidiaries in China.

Cash and capital resources

                                                                Year Ended December 31,
                                                             2021          2020         2019

                                                                    ($ in thousands)
Net cash provided by (used in):
Operating activities                                      $  (3,305)    $    5,865    $  12,658
Investing activities                                        (38,810)      (16,422)      (8,328)
Financing activities                                           5,725        52,662        6,186
Effect of exchange rate changes                                  551         3,605        (150)
Net change in cash and cash equivalents                     (35,839)        45,710       10,366
Cash and cash equivalents-beginning year                      72,602        26,892       16,526
Cash and cash equivalents-end of year                         36,763        72,602       26,892
Short and long-term investments-end of year                   14,995         5,966        9,427
Total cash, cash equivalents and short-term and
long-term investments                                     $   51,758    $  

78,568 $36,319

We consider cash and cash equivalents, short-term investments and long-term
investments as liquid and available for use within two years in our current
operations. Short-term investments and long-term investments are comprised of
money market accounts, certificates of deposit, corporate bonds and notes, and
government securities. As of December 31, 2021, we and our consolidated joint
ventures held approximately $26.0 million in cash and investments in foreign
bank accounts.

Total cash and cash equivalents, short-term and long-term investments decreased
by $26.8 million in 2021. As of December 31, 2021, our principal source of
liquidity was $51.8 million, which consisted of cash and cash equivalents of
$36.8 million and short-term and long-term investments of $15.0 million. In
2021, cash and cash equivalents decreased by $35.8 million and short-term and
long-term investments increased by $9.0 million. The decrease in cash and cash
equivalents of $35.8 million in 2021 was primarily due to net cash used in
investing activities of $38.8 million and operating activities of $3.3 million
and partially offset by net cash provided by financing activities of $5.8
million and the effect of exchange rate changes of $0.6 million.

Total cash and cash equivalents, short-term and long-term investments increased
by $42.2 million in 2020. As of December 31, 2020, our principal source of
liquidity was $78.6 million, which consisted of cash and cash equivalents of
$72.6 million and short-term and long-term investments of $6.0 million. In 2020,
cash and cash equivalents increased by $45.7 million and short-term and
long-term investments decreased by $3.5 million. The increase in cash and cash

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equivalents of $45.7 million in 2020 was primarily due to net cash provided by
financing activities of $52.7 million, operating activities of $5.9 million and
the effect of exchange rate changes of $3.6 million and partially offset by net
cash used in investing activities of $16.4 million.

Net cash used in operating activities of $3.3 million for 2021 was primarily
comprised of net change in operating assets and liabilities of $30.2 million and
gain on equity method investments of $4.4 million, offset in part by our net
income of $16.5 million, adjustment of non-cash items of depreciation and
amortization of $7.1 million, stock-based compensation of $4.5 million, deferred
tax assets of $2.3 million, return of equity method investments (dividends) of
$0.8 million and amortization of marketable securities premium of $0.1 million.
The $30.2 million net change in operating assets and liabilities primarily
resulted from a $12.4 million increase in inventories, a $9.7 million increase
in accounts receivable, a $6.3 million increase in other assets, a $3.4 million
decrease in accrued liabilities, a $1.2 million decrease in other long-term
liabilities, including royalties, and a $0.8 million increase in prepaid
expenses and other current assets, offset in part by a $3.6 million increase in
accounts payable.

Net cash provided by operating activities of $5.9 million for 2020 was primarily
comprised of our net income of $5.0 million, an adjustment of non-cash items of
depreciation and amortization of $4.3 million, stock-based compensation of $2.6
million, provision for doubtful accounts of $0.2 million, loss on disposal of
equipment of $0.1 million, offset in part by our net change in operating assets
and liabilities of $6.3 million and gain on equity method investments of $0.1
million. The $6.3 million net change in operating assets and liabilities
primarily resulted from a $6.7 million increase in prepaid expenses and other
current assets, a $5.3 million increase in accounts receivable a $0.9 million
increase in inventories and a $0.1 million increase in other assets offset in
part by a $2.3 million decrease in accounts payable, a $1.9 million decrease in
other long-term liabilities, including royalties and a $2.6 million decrease in
accrued liabilities.

Net cash provided by operating activities of $12.7 million for 2019 was
primarily comprised of an adjustment of non-cash items of depreciation and
amortization of $5.5 million, stock-based compensation of $2.3 million,
impairment charge on equity investee of $1.1 million, loss on equity method
investments of $1.0 million, return on equity method investments of $0.4
million, loss on disposal of equipment of $0.1 million, net change in operating
assets and liabilities of $4.0 million offset in part by our net loss of $1.6
million and gain from deconsolidation of a subsidiary of $0.2 million. The
$4.0 million net change in operating assets and liabilities primarily resulted
from a $8.9 million decrease in inventories, a $2.9 million decrease in prepaid
expenses and other current assets, a $0.4 million decrease in accounts
receivable, a $0.1 million increase in other long-term liabilities, including
royalties, offset in part by a $4.0 million decrease in accrued liabilities, a
$3.1 million decrease in accounts payable and a $1.2 million increase in other
assets.

Net cash used in investing activities of $38.8 million for 2021 was primarily
due to property, plant and equipment of $29.6 million in preparation for our new
manufacturing sites, additional equipment for our Beijing site and equipment and
facility costs incurred by our consolidated subsidiaries and the purchases of
marketable investment securities of $9.6 million, which were partially offset
by proceeds from maturities and sales of available-for-sale debt securities
of $0.5 million.

Net cash used in investing activities of $16.4 million for 2020 was primarily
due to property, plant and equipment of $19.9 million in preparation for our new
manufacturing sites, additional equipment for our Beijing site and equipment and
facility costs incurred by our consolidated subsidiaries and the purchases of
marketable investment securities of $6.0 million, which were partially offset
by proceeds from maturities and sales of available-for-sale debt securities
of $9.4 million.

Net cash used in investing activities of $8.3 million for 2019 was primarily due
to property, plant and equipment of $21.8 million in preparation for our new
manufacturing sites, additional equipment for our Beijing site and equipment and
facility costs incurred by our consolidated subsidiaries and the purchases of
marketable investment securities of $8.7 million, which were partially offset
by proceeds from maturities and sales of available-for-sale debt securities
of $22.2 million.

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Net cash provided by financing activities was $5.7 million for 2021 which mainly
consisted of the proceeds of $20.5 million from short-term loan in China, $1.8
million from short-term loan from noncontrolling interest, $1.7 million from the
exercise of common stock options, $1.3 million from formation of new subsidiary
with noncontrolling interests and $0.5 million from sale of Tongmei shares to
noncontrolling interests, which were partially offset by payments on short-term
loans of $19.1 million and $1.1 million of issuance costs in connection with
issuance of Tongmei common stock to redeemable noncontrolling interests.

Net cash provided by financing activities was $52.7 million for 2020 which
mainly consisted of the proceeds of $47.6 million from issuance of common stock
to noncontrolling interests net of issuance cost, $10.4 million from short-term
loan in China, $2.5 million from the exercise of common stock options, $0.4
million from sale of Tongmei shares to noncontrolling interests partially offset
by payments on short-term loans of $6.0 million and dividends paid by joint
ventures to their minority shareholders of $2.2 million.

Net cash provided by financing activities was $6.2 million for 2019 which mainly
consisted of the proceeds of $5.8 million from short-term loan in China, $0.3
million from the exercise of common stock options, $0.4 from sale of previously
consolidated subsidiary shares partially offset by the considerations paid in
cash to repurchase subsidiary shares from noncontrolling interests of $0.3
million.

On October 27, 2014, our Board of Directors approved a stock repurchase program
pursuant to which we may repurchase up to $5.0 million of our outstanding common
stock.  These repurchases can be made from time to time in the open market and
are funded from our existing cash balances and cash generated from
operations. During 2015, we repurchased approximately 908,000 shares at an
average price of $2.52 per share for a total purchase price of approximately
$2.3 million under the stock repurchase program. No shares were repurchased
during 2021, 2020 and 2019 under this program. As of December 31, 2021,
approximately $2.7 million remained available for future repurchases under this
program. Currently, we do not plan to repurchase additional shares.

Dividends accrue on our outstanding Series A preferred stock, and are payable as
and when declared by our board of directors.  We have never paid or declared any
dividends on the Series A preferred stock.  By the terms of the Series A
preferred stock, so long as any shares of Series A preferred stock are
outstanding, neither the Company nor any subsidiary of the Company shall redeem,
repurchase or otherwise acquire any shares of common stock, unless all accrued
dividends on the Series A preferred stock have been paid.  During 2013 and 2015,
we repurchased shares of our outstanding common stock.  As of December 31, 2015,
the Series A preferred stock had cumulative dividends of $2.9 million and
we included this amount in "Accrued liabilities" in our consolidated balance
sheets. At the time we pay this accrued liability, our cash and cash equivalents
would be reduced.  We account for the cumulative year to date dividends on the
Series A preferred stock when calculating our earnings per share. See Item 5,
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities in Part II.

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

For the years ended December 31, 2021, 2020 and 2019, the aggregate dividends
paid to us, directly or to an intermediate entity within our corporate
structure, by our PRC subsidiaries and PRC raw material joint ventures were
approximately $774,000, $0 and $362,000, respectively. In June 2021 and May
2019, we received a dividend of $774,000 and $362,000, respectively, from one of
our equity investments, Xiaoyi XingAn Gallium Co., Ltd. For the years ended
December 31, 2021 and 2020, the aggregate dividends paid to minority
shareholders by our PRC subsidiaries and PRC raw material joint ventures were
approximately $0 and $89,000, respectively. All of these distributions were paid
to the PRC companies and the minority shareholders.

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We currently have no intention of distributing profits to our investors as part of our corporate structure. We settle amounts due under our transfer pricing agreements in the normal course of business.

As one of the first steps in the process of listing Tongmei on the STAR Market
and going public, we sold approximately 7.28% of Tongmei to private equity
investors for approximately $49 million in the aggregate. Pursuant to the
Capital Investment Agreements with the Investors, each Investor has the right to
require AXT to redeem any or all Tongmei shares held by such Investor at the
original purchase price paid by such Investor, without interest, in the event of
a material adverse change or if Tongmei does not achieve its IPO on or before
December 31, 2022. This right is suspended when Tongmei submits its formal
application to the Shanghai Stock Exchange and is accepted for review. Tongmei
submitted the application in December 2021 and it was formally accepted for
review on January 10, 2022. If the Shanghai Stock Exchange approves the formal
application, then they will forward it to the CSRC for further review. The
process of going public on the STAR Market includes several periods of review
and is therefore a lengthy process. Tongmei does not expect to complete the IPO
until the second half of 2022. If, on December 31, 2022, the IPO application
remains under review, then the date when such Investor is entitled to exercise
such redemption right shall be deferred to a date when such submission is
rejected by the CSRC or stock exchange, or the date when Tongmei withdraws its
IPO application. If the application is approved and Tongmei completes an IPO the
redemption right is canceled. The listing of Tongmei on the STAR Market will not
change the status of AXT as a U.S. public company.

We believe we have sufficient cash and investments to meet our operating needs and capital expenditures over the next twelve months. If our sales decline, however, our ability to generate cash from our operations will be adversely affected, which could adversely affect our future cash, require us to use our cash at a faster rate than expected, and require us to seek additional capital.

On October 24, 2016, we filed with the SEC a registration statement on Form S-3,
pursuant to which we may offer up to $60 million of common stock, preferred
stock, depositary shares, warrants, debt securities and/or units in one or more
offerings and in any combination. On November 4, 2016, the SEC declared the
registration statement effective. On November 4, 2019, the registration
statement expired.

On July 27, 2021, we filed with the SEC a registration statement on Form S-3,
pursuant to which we may offer up to $60 million of common stock, preferred
stock, depositary shares, warrants, debt securities and/or units in one or more
offerings and in any combination. The SEC has not yet declared the registration
statement effective.


Cash flow from operations could be affected by various risks and uncertainties, including, but not limited to, those set forth below in point 1A. “Risk Factors” above.

Bank loans and line of credit



On August 9, 2019, Tongmei entered into a credit facility (the "Credit
Facility") with the Bank of China with a $5.8 million line of credit at an
annual interest rate of approximately 0.4% over the average interest rate quoted
by the National Interbank Funding Center. Accrued interest is calculated monthly
and paid quarterly. The annual interest rate was approximately 4.7% as of
December 31, 2019. The Credit Facility is collateralized by Baoding Tongmei Xtal
Technology Co., Ltd.'s land use rights and all of its buildings located at its
facility in Dingxing. The primary intended use of the Credit Facility is for
general purposes, which may include working capital and other corporate
expenses.

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

In September 2020, the August 2019 borrowing was renewed and funded against the
credit facility with an interest rate of 3.85%. The interest owed during the
term of the loan was deducted prior to funding. The repayment of the loan was
due on March 22, 2021, however the credit facility contains an option to renew
for an additional six

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months, which was exercised in March 2021 for approximately $3.1 million. In
September 2021, Tongmei repaid $3.1 million of the credit facility, including
all outstanding accrued interest, and simultaneously applied to renew the credit
facility. In September 2021, the credit facility was renewed for approximately
$2.7 million with an annual interest rate of 3.85%. As of December 31, 2021 and
2020, $2.8 million and $8.9 million, respectively, was included in "Bank loan"
in our consolidated balance sheets.

In October 2020, the September 2019 borrowing was renewed and funded against the
credit facility and an additional $2.7 million was approved and funded against
the credit facility with the annual interest rate of 4.7%. Accrued interest is
calculated monthly and paid quarterly. The combined loan totaled $5.6 million.
In April 2021, Tongmei repaid the full amount of the credit facility, including
all outstanding accrued interest, of approximately $5.6 million and
simultaneously applied to renew the credit facility. In June 2021, the combined
loans were renewed for approximately $5.8 million and funded against the credit
facility with an annual interest rate of 4.7%. In November 2021, Tongmei repaid
the full amount of the credit facility, including all outstanding accrued
interest. As of December 31, 2021, $0 was included in "Bank loan" in our
consolidated balance sheets.

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

In March 2020, BoYu borrowed $0.4 million against the credit facility. In
December 2020, BoYu repaid the outstanding loan amount of $0.4 million and
renewed the credit facility with a $1.5 million line of credit at an annual
interest rate of approximately 0.07% over the loan prime rate. Accrued interest
is calculated monthly and paid monthly. In December 2021, BoYu repaid the
outstanding loan amount of approximately $1.6 million and renewed the credit
facility with a $1.6 million line of credit. Accrued interest is calculated
monthly and paid monthly. The annual interest rate was approximately 3.92% as of
December 31, 2021. As of December 31, 2021 and 2020, $1.6 million and $1.5
million, respectively, was included in "Bank loan" in our consolidated balance
sheets.

In September 2021, Tongmei entered into a credit facility with the Bank of
Communications with a $3.1 million line of credit at an annual interest rate of
4.0% as of September 30, 2021. Accrued interest is calculated monthly and paid
quarterly. The credit facility is collateralized by ChaoYang Tongmei's land use
rights and all of its buildings located at its facility in Kazuo, China. The
primary intended use of the credit facility is for general purposes, which may
include working capital and other corporate expenses. In November 2021, the Bank
of Communications increased the line of credit, under the same terms as the
September 2021 line of credit, by $1.6 million for a total line of credit of
$4.7 million. As of December 31, 2021, $4.7 million was included in "Bank loan"
in our consolidated balance sheets.

In December 2021, Tongmei entered into a credit facility with China Merchants
Bank for $1.6 million with an annual interest rate of 3.55%. Accrued interest is
calculated monthly and paid quarterly. The repayment of the loan and any accrued
interest is due on December 6, 2022. The loan is guaranteed by Beijing Capital
Financing Guarantee Co., Ltd. In exchange for the guarantee, Tongmei paid
Beijing Capital Financing Guarantee Co., Ltd. a fee of 1.5% of the

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loan amount or approx. $24,000. From December 31, 2021, $1.6 million was included in the item “Bank loan” in our consolidated balance sheets.

In December 2021, Tongmei entered into a credit facility with China Merchants
Bank for $1.6 million with an annual interest rate of 4.22%. Accrued interest is
calculated monthly and paid quarterly. The repayment of the loan and any accrued
interest is due on December 7, 2022. The credit facility is not collateralized.
As of December 31, 2021, $1.6 million was included in "Bank loan" in our
consolidated balance sheets.

Off-balance sheet arrangements

We had no off-balance sheet financing arrangements and never created special purpose entities as defined in SEC SK Item 303(a)(4)(ii). We have not entered into any options on non-financial assets.

Contractual obligations

We lease certain office space, warehouse facilities and equipment under
long-term operating leases expiring at various dates through July 2029. The
majority of our lease obligations relate to our lease agreement for a nitrogen
system to be used during the manufacturing process for our facility in Dingxing,
China. The equipment lease became effective in August 2019 and will expire in
July 2029. There are no variable lease payments, residual value guarantees or
any restrictions or covenants imposed by the equipment lease. The remainder
relate to our lease agreement for our facility in Fremont, California with
approximately 19,467 square feet, which expires in 2023. There are no variable
lease payments, residual value guarantees or any restrictions or covenants
imposed by the facility lease. All other operating leases have a term of 12
months or less. Total rent expenses under these operating leases charged to
selling, general and administrative were approximately $431,000, $322,000 and
$306,000 for the years ended December 31, 2021, 2020 and 2019, respectively,
primarily related to our Fremont facility. Total rent expenses under these
operating leases charged to cost of revenue were approximately $296,000,
$266,000 and $112,000 for the years ended December 31, 2021, 2020 and 2019,
respectively, primarily related to the nitrogen system at our facility in
Dingxing.

In 2020, we and a competitor entered into a cross license and covenant agreement
(the "Cross License Agreement"), which has a term that begins on January 1, 2020
and expires on December 31, 2029. The Cross License Agreement is a fixed-cost
cross license and not a variable-cost cross license that is based on revenue or
units. Under the Cross License Agreement, we are obligated to make annual
payments over a 10-year period. For the years ended December 31, 2021 and 2020,
the royalty expense under the Cross License Agreement was not considered
material to our consolidated financial statements.

Land purchase and investment contract

We have established a wafer processing production line in Dingxing, China. In
addition to a land rights and building purchase agreement that we entered into
with a private real estate development company to acquire our new manufacturing
facility, we also entered into a cooperation agreement with the Dingxing local
government. In addition to pledging its full support and cooperation, the
Dingxing local government will issue certain tax credits to us as we achieve
certain milestones. We, in turn, agreed to hire local workers over time, pay
taxes when due and eventually demonstrate a total investment of approximately
$90 million in value, assets and capital. The investment will include cash paid
for the land and buildings, cash on deposit in our name at local banks, the
gross value of new and used equipment (including future equipment that might be
used for indium phosphide and germanium substrates production), the deemed value
for our customer list or the end user of our substrates (for example, the end
users of the 3-D sensing VCSELs), a deemed value for employment of local
citizens, a deemed value for our proprietary process technology, other
intellectual property, other intangibles and additional items of value. There is
no timeline or deadline by which this must be accomplished, rather it is a good
faith covenant entered into between AXT and the Dingxing local
government. Further, there is no specific penalty contemplated if either party
breaches the agreement, however the agreement does state that each party has a
right to seek from the other party compensation for losses.  Under certain
conditions, the Dingxing local government may purchase the land and building at
the appraised value. We believe that such cooperation agreements are normal,
customary and usual in China and that the future valuation is flexible. We have
a similar agreement with the city of Kazuo, China,

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although on a smaller scale. The total investment targeted by AXT in Kazuo is approximately $15 million in value, assets and capital.

Purchase obligations with cancellation penalties



In the normal course of business, we issue purchase orders to various suppliers.
In certain cases, we may incur a penalty if we cancel the purchase order. As of
December 31, 2021, we do not have any outstanding purchase orders that will
incur a penalty if canceled by the Company.



Recent accounting pronouncements

Recent accounting pronouncements are detailed in Note 1 to our consolidated financial statements included in this Annual Report on Form 10-K.

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