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Investments in Privately-Held Raw Material Companies | 12 Months Ended
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Dec. 31, 2021
Investments in Privately-Held Raw Material Companies |
Investments in Privately-Held Raw Material Companies | Note 6. Investments in Privately-held Raw Material Companies We have made strategic investments in private companies located in China in order to gain access at a competitive cost to raw materials that are critical to our substrate business. These companies form part of our overall supply chain. The investments are summarized below (in thousands):
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | Investment Balance as of | ​ | ​ | ​ | ​ | ​
​ | ​ | December 31, | ​ | December 31, | ​ | Accounting | ​ | Ownership | *
Company |  | 2021 |  | 2020 |  | Method |  | Percentage | ​
Nanjing JinMei Gallium Co., Ltd. | ​ | $ | 592 | ​ | $ | 592 |  | Consolidated |  | **85.5 | %
ChaoYang JinMei Gallium Co., Ltd. | ​ | ​ | 1,820 | ​ | ​ | 1,820 | ​ | Consolidated | ​ | **85.5 | %
Beijing BoYu Semiconductor Vessel Craftwork Technology Co., Ltd. | ​ |  | 1,346 | ​ |  | 1,346 |  | Consolidated |  | **85.5 | %
ChaoYang XinMei High Purity Semiconductor Materials Co., Ltd. | ​ | ​ | 1,814 | ​ | ​ | — | ​ | Consolidated |  | ***58.5 | %
​ | ​ | $ | 5,572 | ​ | $ | 3,758 | ​ | ​ | ​ | ​ | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Donghai County Dongfang High Purity Electronic Materials Co., Ltd. | ​ | $ | 2,053 | ​ | $ | 1,651 |  | Equity |  | **46 | %
Beijing JiYa Semiconductor Material Co., Ltd. | ​ | ​ | 3,760 | ​ | ​ | 1,418 | ​ | Equity | ​ | 39 | %
Xilingol Tongli Germanium Co., Ltd. | ​ |  | — | ​ |  | — |  | Equity |  | 25 | %
Xiaoyi XingAn Gallium Co., Ltd. | ​ | ​ | 4,095 | ​ | ​ | 2,822 | ​ | Equity | ​ | **25 | %
Emeishan Jia Mei High Purity Metals Co., Ltd. | ​ |  | 258 | ​ |  | 485 |  | Equity |  | 25 | %
​ | ​ | $ | 10,166 | ​ | $ | 6,376 | ​ | ​ | ​ | ​ | ​
​ * These percentages reflect the ownership currently in effect upon the completion of the reorganization in China and the ownership in effect upon the completion of the new capital funding by private equity investors in January 2021. ​ ** In preparation for Tongmei’s application for a listing of shares in an IPO on the STAR Market, in late December 2020 we reorganized our entity structures in China. JinMei and BoYu and its subsidiaries, previously organized under AXT, Inc., were assigned to Tongmei and effectively merged with Tongmei although they retained their own respective legal entity status and are wholly owned subsidiaries of Tongmei. The 33% minority interest stakeholders of BoYu converted their ownership to a 7.59% minority interest in Tongmei. The 8.5% minority interest stakeholders, employees of JinMei, converted their ownership to a 0.38% minority interest in Tongmei. Further, a number of employees, key managers and contributors, purchased a 0.4% minority interest in Tongmei. In 2020, the Investors transferred approximately $48.1 million of new capital to Tongmei. An additional investment of approximately $1.5 million of new capital was funded in early January 2021. Under China regulations these investments must be formally approved by the appropriate government agency and are not deemed to be dilutive until such approval is granted. The government approved the approximately $49 million investment in its entirety on January 25, 2021 at which time the Investors owned a redeemable noncontrolling interests in Tongmei of 7.28%. As of September 30, 2021, Tongmei’s noncontrolling interests and redeemable noncontrolling interests totaled approximately 14.5%. AXT remains the controlling stakeholder of Tongmei and holds a majority of the Board of Director positions of Tongmei. ​ *** In February 2021, Tongmei signed a joint venture agreement with certain investors to fund ChaoYang XinMei. ​ Effective as of March 11, 2019, we reduced our ownership in JiYa from 46% to 39% by selling a portion of our JiYa shares to our investor partner, which is also JiYa’s landlord. Based on an independent third-party valuation analysis, we sold these shares for $366,000. Previously, we were the largest shareholder and, as such, we had the right to appoint the general manager of JiYa and the ability to exercise control in substance over JiYa’s long-term strategic direction. Further, our Chief Executive Officer was the chairman of JiYa’s Board of Directors and our Chief Financial Officer was a member of JiYa’s board of financial supervisors. As a result of this transaction, our investor partner, Shanxi Aluminum Industrial Co., Ltd., became the largest shareholder and assumed the right to appoint the general manager and thereby exercised greater control over JiYa’s long-term strategic direction. Further, although our Chief Executive Officer remains on the board, as of March 11, 2019 he was no longer the chairman of JiYa’s Board of Directors and our Chief Financial Officer was no longer a member of JiYa’s board of financial supervisors. ​ Previously we accounted for JiYa’s financial performance under the consolidation method of accounting. As a result of the changes we began to account for JiYa’s financial performance under the equity method of accounting. Therefore, we deconsolidated JiYa from our consolidated financial statements as of March 11, 2019 in accordance with ASC 810. As of March 12, 2019, we accounted for our investment in JiYa under the equity method of accounting as we continue to have board representation and substantial ownership. Pro-forma financials have not been presented because we believe the effects were not material to our consolidated financial position and results of operation for all periods presented. JiYa continues to be a related party to us after deconsolidation, whom we may purchase raw materials from for production in the ordinary course of business from time to time. ​ We recorded a gain on the deconsolidation of JiYa of $175,000 as a component of “Equity in loss of unconsolidated joint ventures” during 2019 in the consolidated statements of operations and comprehensive income (loss). On the date of deconsolidation, the fair value of the Company’s investment in JiYa exceeded the Company’s share of the net assets of JiYa, which generated the gain. As of March 12, 2019, we recorded our investment in JiYa at a fair value of $2,040,000, which was based on an independent third-party valuation analysis. The valuation is based on the asset-based approach. The market-based approach is not deemed appropriate due to lack of availability of market data for comparable companies on the open market and the discounted cash flow approach is not deemed reliable because of the difficulty in predicting the future profitability of JiYa due to the volatility of the gallium market, the concentration of customers and the significant accumulated losses of JiYa. The asset-based approach examines the value of a company’s assets net of its liabilities to derive a value for the equity holders. The gain on deconsolidation includes the following: ​
​ | ​ | ​ | ​
​ | ​ | Amount
​ |  | (in thousands)
Fair value of the consideration received | ​ | $ | 366
Fair value of the retained investment in Beijing JiYa Semiconductor Material Co., Ltd. | ​ | ​ | 2,040
Carrying value of noncontrolling interests, net of accumulated other comprehensive income attributable to subsidiary | ​ | ​ | 617
Derecognition of Beijing JiYa Semiconductor Material Co., Ltd.'s net asset | ​ | ​ | (2,848)
Gain recognized on deconsolidation of Beijing JiYa Semiconductor Material Co., Ltd. | ​ | $ | 175
​ | ​ | ​ | ​
​ | ​ | ​ | ​
​ | ​ | Amount
​ | ​ | (in thousands)
Fair value of the retained investment in Beijing JiYa Semiconductor Material Co., Ltd. | ​ | $ | 2,040
Carrying value of retained noncontrolling investment | ​ | ​ | (1,559)
Gain on retained noncontrolling investment due to remeasurement | ​ | $ | 481
​ 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 of JinMei for $1.4 million. The $1.4 million was scheduled to be paid in two installments. On June 15, 2018, we paid the first installment of $163,000. In May 2019, we paid the second installment of $1.2 million as the relocation of JinMei’s headquarters and manufacturing operations was nearly complete, which had been previously included in “Accrued liabilities” in our 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 of JinMei for $252,000. As a result, our ownership of JinMei increased from 95% to 97%. In May 2019, we purchased the remaining 3% ownership interest from retiring members of the JinMei management team for approximately $413,000. The final payment to the JinMei management team was made in October, 2020. As a result, our ownership of JinMei increased from 97% to 100%. Prior to June 1, 2019, we reported JinMei as a consolidated joint venture as we had a controlling financial interest and have majority control of the board. As of June 1, 2019, we referred to it as a wholly-owned subsidiary and reduced the carrying value of the corresponding noncontrolling interests to zero. Before August 1, 2020, our ownership of ChaoYang JinMei was 100%. In August 2020, we sold an 8.5% ownership interest to current members of the ChaoYang JinMei management team for approximately $396,000. As a result, our ownership of ChaoYang JinMei decreased from 100% to 91.5%. As of August 2020, we referred to ChaoYang JinMei as a significantly controlled subsidiary instead of a wholly-owned subsidiary. Our Chief Executive Officer is chairman of the JinMei board and we have appointed two other representatives to serve on the JinMei board. Our ownership of BoYu is 67%. 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%. In December 2020, we purchased shares equivalent to 4% of BoYu from the same third-party investor for $1.6 million. As a result, our ownership of BoYu increased from 63% to 67%. 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. An additional step in the STAR Market IPO process involves certain entity reorganizations and alignment of assets under Tongmei. In this regard our two consolidated raw material companies, JinMei and BoYu and its subsidiaries, were assigned to Tongmei in December 2020. This will increase the number of customers and employees attributable to Tongmei as well as increase Tongmei’s consolidated revenue. Although we have representation on the boards 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 decisions concerning sales of finished product, are made by local management with regular guidance and input from us. For AXT’s minority investment entities that are not consolidated, the investment balances are included in “Other assets” in our consolidated balance sheets and totaled $10.2 million and $6.4 million as of December 31, 2021 and 2020, respectively. Our respective ownership interests in each of these companies are 46%, 39%, 25%, 25% and 25%. These minority investment entities are not considered variable interest entities because:
| ● | all minority investment entities 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.
One of the minority investment entities in which we have a 25% ownership interest is a germanium materials company in China. This company provides results to us only on a quarterly basis. We received its preliminary first quarter 2019 financial results in early April 2019 as well as its projections for significant losses going forward. Such projected losses would fully deplete our asset investment balance for this company in 2019. The Company is experiencing significant disruptions due to upgrades and repairs required to comply with stronger environmental regulations in China. As a result, we determined that this asset was fully impaired and wrote the asset balance down to zero. This resulted in a $1.1 million impairment charge in our first quarter 2019 financial results. ​ AXT’s minority investment entities 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 years ended December 31, 2021, 2020 and 2019, respectively:
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | Our share for the |
​ | ​ | ​ | ​ | Year Ended | ​ | Year Ended |
​ | ​ | ​ | ​ | December 31, | ​ | December 31, |
​ |  |  | 2021 |  | 2020 | ​ | 2019 |  | 2021 |  | 2020 |  | 2019 |
Net revenue | ​ | ​ | $ | 35,939 | ​ | $ | 20,049 | ​ | $ | 18,991 | ​ | $ | 11,424 | ​ | $ | 6,252 | ​ | $ | 5,458 | ​
Gross profit | ​ | ​ |  | 17,465 | ​ |  | 4,907 | ​ |  | 2,013 | ​ |  | 5,482 | ​ |  | 1,504 | ​ |  | 558 | ​
Operating income | ​ | ​ |  | 14,293 | ​ |  | 1,957 | ​ |  | (2,266) | ​ |  | 4,495 | ​ |  | 504 | ​ |  | (700) | ​
Net income (loss) | ​ | ​ | $ | 12,560 | ​ | $ | 1,014 | ​ | $ | (3,000) | ​ | $ | 4,409 | ​ | $ | 111 | ​ | $ | (1,876) | ​
​ Excluding one fully impaired entity, these minority investment entities that are not consolidated, but rather are accounted for under the equity method, had the following summarized balance sheet information (in thousands) as of December 31, 2021 and 2020, respectively:
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | As of December 31, |
​ |  | 2021 | ​ | 2020 |
Current assets | ​ | $ | 27,503 |  | $ | 24,136 | ​
Noncurrent assets | ​ |  | 11,707 | ​ |  | 11,339 | ​
Current liabilities | ​ |  | 5,799 | ​ |  | 12,502 | ​
Noncurrent liabilities | ​ |  | — | ​ |  | — | ​
​ Our portion of the income and losses, including impairment charges, from these minority investment entities that are not consolidated and are accounted for under the equity method was a gain of $4.4 million and $0.1 million for the years ended December 31, 2021 and 2020, respectively, and a loss of $1.9 million for the year ended December 31, 2019. Dividends received from these minority investment entities were $774,000 and $362,000 for the years ended December 31, 2021 and 2019, respectively, and $0 for the year ended December 31, 2020. Excluding one fully impaired entity, undistributed retained earnings relating to our investments in these minority investment entities amounted to $5.0 million and $1.3 million as of December 31, 2021 and 2020, 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://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 323 -URI http://asc.fasb.org/topic&trid=2196965 + Details
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