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Investments in Privately-Held Raw Material Companies

9 Months Ended

Sep. 30, 2023

Investments in Privately-Held Raw Material Companies

Investments in Privately-Held Raw Material Companies

Note 7. 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 strategy.

As of September 30, 2023, the investments are summarized below (in thousands):


		Investment Balance as of
		September 30,			December 31,			Accounting		Ownership	*
Company		2023			2022			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 ShuoMei High Purity Semiconductor Materials Co., Ltd.			3,122			1,000		Consolidated		**** 75.0	%
ChaoYang XinMei High Purity Semiconductor Materials Co., Ltd.			7,331			7,331		Consolidated		*** 58.5	%
		$	14,211		$	12,089

Donghai County Dongfang High Purity Electronic Materials Co., Ltd.		$	1,716		$	1,887		Equity		** 46	%
Beijing JiYa Semiconductor Material Co., Ltd.			4,004			6,381		Equity		39	%
Xiaoyi XingAn Gallium Co., Ltd.			4,904			5,094		Equity		** 25	%
ChaoYang KaiMei Quartz Co., Ltd.			2,577			827		Equity		***** 40	%
Emeishan Jia Mei High Purity Metals Co., Ltd.			N/A			418		Equity		****** 25	%
		$	13,201		$	14,607

Emeishan Jia Mei High Purity Metals Co., Ltd.			551			N/A		Fair value		****** 10	%
		$	551		$	—

* 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 interest in Tongmei of 7.28%. As of September 30, 2023, 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.

**** In April 2022, ChaoYang JinMei signed a joint venture agreement with certain investor to fund a new company, ChaoYang ShuoMei.

***** In April 2022, Tongmei signed a joint venture agreement with certain investors to fund a new company, ChaoYang KaiMei.

****** In May 2023, we sold 15% of our equity investments in Jia Mei to a third party. We now own 10% of Jia Mei and account for it under the fair value method.

In May 2023, we reduced our ownership in Jia Mei from 25% to 10% by selling a portion of our Jia Mei shares to an unrelated third party for approximately $827,000. Considering our decreased ownership and we no longer have significant influence over its operations and financial policies, we adopted the fair value method of accounting to report Jia Mei’s financial statements. As a result of the share sale, we recognized a gain of $575,000. Additionally, in accordance with ASC 321-10-35-2, we adjusted the investment in Jia Mei to its fair value at the time of electing the fair value method. The gain resulting from the sale and the subsequent remeasurement was incorporated as a component of “Equity in income of unconsolidated joint ventures” in the condensed consolidated statements of operations for the nine months ended September 30, 2023. The gain from the sale and the subsequent remeasurement includes the following:


		Amount
		(in thousands)
Fair value of the consideration received		$	779
Foreign income tax withholding			48
Carrying value of 15% of Emeishan Jia Mei High Purity Metals Co., Ltd.			(252)
Gain recognized on sale of 15% of Emeishan Jia Mei High Purity Metals Co., Ltd.		$	575


		Amount
		(in thousands)
Fair value of the retained investment in Emeishan Jia Mei High Purity Metals Co., Ltd.		$	551
Carrying value of retained noncontrolling investment (10%)			(168)
Gain on retained noncontrolling investment due to remeasurement (10%)		$	383

The Jia Mei investment is reviewed for other-than-temporary declines in value on a quarterly basis. We did not record any other-than-temporary impairment charges for Jia Mei investment during the three and nine months ended September 30, 2023.

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.

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 involved 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 increased the number of customers and employees attributable to Tongmei as well as increased Tongmei’s consolidated revenue.

Although we have representation on the board of directors of each of the privately held raw material 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 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 condensed consolidated balance sheets and totaled $13.2 million and $14.6 million as of September 30, 2023 and December 31, 2022, respectively. As of September 30, 2023, our respective ownership interests

in Dongfang, ChaoYang KaiMei, JiYa, Xiaoyi XingAn Gallium Co., Ltd (“Xiaoyi XingAn”) and Jia Mei was 46%, 40%, 39%, 25%, and 10%, respectively. 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.

In June 2022, we received a $1.3 million dividend from BoYu. In July 2022, we received a $1.5 million dividend from one of our equity investment entities, Xiaoyi XingAn. In August 2022, we received a $125,000 dividend from one of our equity investment entities, JiYa. In April 2023, each of Xiaoyi XingAn and JiYa paid to us a dividend of $1.8 million. We have no current intentions to distribute to our investors earnings under our corporate structure. All of these distributions were paid to the PRC companies and the minority shareholders.

AXT’s minority investment entities are not consolidated and are accounted for under the equity method. The equity investment entities had the following summarized statements of operations information (in thousands) for the three and nine months ended September 30, 2023 and 2022:



		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2023			2022			2023			2022
Net revenue		$	8,834		$	13,658		$	24,486		$	38,491
Gross profit		$	2,620		$	8,687		$	8,174		$	23,412
Operating income		$	1,962		$	8,039		$	7,134		$	21,308
Net income		$	1,449		$	6,088		$	6,307		$	17,039

Our portion of the income and losses from these minority investment entities that are not consolidated and are accounted for under the equity method was an income of $0.4 million and $2.0 million, respectively, for the three months ended September 30, 2023 and 2022. Our portion of the income and losses from these minority investment entities that are not consolidated and are accounted for under the equity method was income of $1.4 million and $5.3 million, respectively, for the nine months ended September 30, 2023 and 2022.