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Investments in Privately-Held Companies | 9 Months Ended
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Sep. 30, 2018
Investments in Privately-Held Companies |
Investments in Privately-Held Companies | 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 |  |  |  |  |
|  | September 30, |  | December 31, |  | Accounting |  | Ownership |
Company |  | 2018 |  | 2017 |  | Method |  | Percentage |
Beijing JiYa Semiconductor Material Co., Ltd. |  | $ | 3,331 |  | $ | 3,331 |  | Consolidated |  | 46 | %
Nanjing JinMei Gallium Co., Ltd. |  |  | 592 |  |  | 592 |  | Consolidated |  | 97 | %
Beijing BoYu Semiconductor Vessel Craftwork Technology Co., Ltd. |  |  | 1,346 |  |  | 1,346 |  | Consolidated |  | 63 | %
|  | $ | 5,269 |  | $ | 5,269 |  |  |  |  |
Donghai County Dongfang High Purity Electronic Materials Co., Ltd. |  | $ | 1,450 |  | $ | 1,473 |  | Equity |  | 46 | %
Xilingol Tongli Germanium Co. Ltd. |  |  | 2,811 |  |  | 3,190 |  | Equity |  | 25 | %
Emeishan Jia Mei High Purity Metals Co., Ltd. |  |  | 870 |  |  | 915 |  | Equity |  | 25 | %
|  | $ | 5,131 |  | $ | 5,578 |  |  |  |  |
Our ownership of JiYa is 46%. We continue to consolidate JiYa as we are the founding and largest shareholder, appoint the general manager and controller and have the ability to exercise control in substance over the long-term strategic decisions made. Our Chief Executive Officer is chairman of the JiYa board and we have appointed one other representative, Davis Zhang, to serve on the board. Mr. Zhang was an executive officer of AXT for 27 years. Further, our Chief Financial Officer, Gary Fischer, is on the board of supervisors of JiYa. Our ownership of JinMei is 97%. Before June 15, 2018, our ownership of JinMei was 83%. On June 15, 2018, we purchased a 12% ownership interest from one of the minority owners for $1.4 million. The $1.4 million is scheduled to be paid in two installments. On June 15, 2018, we paid the first installment of $163,000. The second installment of $1.2 million is scheduled to be paid after the completion of the relocation of JinMei’s headquarters and manufacturing operations and was included in “Accrued liabilities” in our condensed consolidated balance sheets. As a result, our ownership of JinMei increased from 83% to 95%. In September 2018, we purchased a 2% ownership interest from one of the three remaining minority owners for $252,000. As a result, our ownership of JinMei increased from 95% to 97%. We continue to consolidate JinMei as we have a controlling financial interest and have majority control of the board. Our Chief Executive Officer is chairman of the JinMei board and we have appointed two other representatives to serve on the board. Our ownership of BoYu is 63%. On November 2, 2017, 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. As a result, our ownership of BoYu was diluted from 70% to 63%. We continue to consolidate BoYu as we have a controlling financial interest and have majority control of the board and, accordingly, no gain was recognized as a result of this equity transaction. Our Chief Executive Officer is chairman of the BoYu board and we have appointed two other representatives to serve on the board. Although we have representation on the board of directors of each of these companies, the daily operations of each of these companies are managed by local management and not by us. Decisions concerning their respective short-term strategy and operations, ordinary course of business capital expenditures and sales of finished products, are made by local management with regular guidance and input from us. During the three months ended September 30, 2018 and 2017, the three consolidated joint ventures, before eliminating inter-company transactions, generated income of $1.3 million and an income of $860,000, respectively, of which a gain of $208,000 and a gain of $146,000, respectively, were allocated to noncontrolling interests, resulting in an income of $1.1 million and an income of $714,000 respectively, to our net income. During the nine months ended September 30, 2018 and 2017, the three consolidated joint ventures generated income of $4.8 million and income of $1.1 million, respectively, of which a gain of $1.2 million and a loss of $0.2 million respectively, were allocated to noncontrolling interests, resulting in an income of $3.7 million and an income of $1.3 million, respectively, to our net income. For AXT’s three direct minority investment entities that are not consolidated, the investment balances are included in “Other assets” in our condensed consolidated balance sheets and totaled $5.1 million and $5.6 million as of September 30, 2018 and December 31, 2017, respectively. We own 46% of the ownership interests in one of these companies and 25% in each of the other two companies. These three companies are not considered variable interest entities because:
| · |  | all three companies have sustainable businesses of their own;
| · |  | our voting power is proportionate to our ownership interests;
| · |  | we only recognize our respective share of the losses and/or residual returns generated by the companies if they occur; and
| · |  | we do not have controlling financial interest in, do not maintain operational or management control of, do not control the board of directors of, and are not required to provide additional investment or financial support to any of these companies.
We also maintain four minority investments indirectly in privately-held companies through our consolidated joint ventures. JiYa holds three investments and JinMei holds one investment. These minority investments are accounted for under the equity method in the books of our consolidated joint ventures. As of September 30, 2018 and December 31, 2017, our consolidated joint ventures included these minority investments in “Other assets” in our condensed consolidated balance sheets with a carrying value of $4.4 million and $4.3 million, respectively. There were no impairment charges in the three and nine months ended September 30, 2018. There were no impairment charges in the three months ended September 30, 2017. The nine months ended September 30, 2017 include an impairment charge of $313,000 for one of the joint ventures that produces gallium. During the first quarter of 2017, management determined that it is unlikely that this company will recover from the difficult pricing environment and we had wrote the investment down to zero. AXT’s three direct minority investment entities and the three minority investments of JiYa and the one minority investment of JinMei are not consolidated and are accounted for under the equity method. Excluding one fully impaired entity, the equity entities had the following summarized income information (in thousands) for the three and nine months ended September 30, 2018 and 2017.
|  | Three Months Ended |  | Nine Months Ended |
|  | September 30, |  | September 30, |
|  | 2018 |  | 2017 |  | 2018 |  | 2017 |
Net revenue |  | $ | 8,017 |  | $ | 4,209 |  | $ | 24,366 |  | $ | 15,571 |
Gross profit |  | $ | 2,141 |  | $ | 177 |  | $ | 5,477 |  | $ | 976 |
Operating income (loss) |  | $ | 631 |  | $ | (1,054) |  | $ | 767 |  | $ | (2,685) |
Net income (loss) |  | $ | 315 |  | $ | (1,130) |  | $ | (422) |  | $ | (3,653) |
Our portion, including impairment charges, from these seven minority investment entities that are not consolidated and are accounted for under the equity method was income of $6,000 and a loss of $266,000 for the three months ended September 30, 2018 and 2017, respectively. Our portion, including impairment charges, from these seven minority investment entities that are not consolidated and are accounted for under the equity method were a loss of $21,000 and a loss of $1.4 million for the nine months ended September 30, 2018 and 2017, respectively.

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- Definition The entire disclosure for equity method investments and joint ventures. Equity method investments are investments that give the investor the ability to exercise significant influence over the operating and financial policies of an investee. Joint ventures are entities owned and operated by a small group of businesses as a separate and specific business or project for the mutual benefit of the members of the group. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 323 -URI http://asc.fasb.org/topic&trid=2196965 + Details
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