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Investments in Privately-held Raw Material Companies

12 Months Ended

Dec. 31, 2023

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		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

Beijing JiYa Semiconductor Material Co., Ltd.		$	3,806			6,381		Equity		39	%
Xiaoyi XingAn Gallium Co., Ltd.			5,516			5,094		Equity		** 25	%
ChaoYang KaiMei Quartz Co., Ltd.			3,154			827		Equity		***** 40	%
Emeishan Jia Mei High Purity Metals Co., Ltd.			N/A			418		Equity		****** 25	%
		$	12,476		$	12,720

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

Donghai County Dongfang High Purity Electronic Materials Co., Ltd.			—			1,887		N/A		******* 0	%
		$	—		$	1,887

* 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 their 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 December 31, 2022, 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 the equity ownership of Jia Mei and account for it under the fair value method.

******* In November 2023, we completed the sale of our entire 46% equity ownership interests in Dongfang to a third party.

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 that we no longer have significant influence over its operations and financial policies, we adopted the fair value method of accounting to report on the investment in Jia Mei. As Jia Mei's equity interest is without a readily determinable fair value, we elected to use the measurement alternative to measure at cost, less any impairment, plus or minus fair value changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer. 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 the sale. 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 consolidated statements of operations for the twelve months ended December 31, 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 twelve months ended December 31, 2023.

In November 2023, our 46% equity ownership interest in Dongfang was sold to a third party for consideration valued at approximately $0.6 million, including raw materials, equipment, and vehicle. As a result, our equity ownership interest of Dongfang decreased from 46% to 0%. The loss resulting from the sale was incorporated as a component of “Equity in income of unconsolidated joint ventures” in the consolidated statements of operations for the twelve months ended December 31, 2023. The loss from the sale includes the following:


		Amount
		(in thousands)
Fair value of the consideration received		$	585
Carrying value of 46% of Donghai County Dongfang High Purity Electronic Materials Co., Ltd.			(1,710)
Loss recognized on sale of 46% of Donghai County Dongfang High Purity Electronic Materials Co., Ltd.		$	(1,125)

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 consolidated balance sheets and totaled $12.5 million and $14.6 million as of December 31, 2023 and 2022, respectively. Our respective ownership interests in ChaoYang KaiMei, JiYa, Xiaoyi XingAn and Jia Mei was 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.

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, including its PRC subsidiaries and PRC joint ventures, to the Company and its investors as well as the ability to settle amounts owed by the Company to its PRC subsidiaries and PRC joint ventures. 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, 2023, 2022 and 2021, 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 $4.3 million, $2.9 million and $774,000, respectively. In June 2021, we received a dividend of $774,000 from Xiaoyi XingAn. In June 2022, July 2022 and August 2022, we received a dividend of $1.3 million from BoYu, $1.5 million from Xiaoyi XingAn and $0.1 million from JiYa, respectively. In April 2023, Xiaoyi XingAn distributed a dividend of $1.8 million to us. Additionally, in both April 2023 and November 2023, JiYa distributed dividends to us, totaling $2.0 million and $0.5 million, respectively. For the years ended December 31, 2023 and 2022, there were no dividends paid to minority shareholders by our PRC subsidiaries or PRC raw material joint ventures.

AXT’s minority investment entities are not consolidated and are accounted for under the equity method. The equity entities had the following summarized income information (in thousands) for the years ended December 31, 2023, 2022 and 2021, respectively: (The 2023 income information includes results of Jia Mei for Q1 and Q2.)


											Our share for the
			Year Ended								Year Ended
			December 31,								December 31,
		2023			2022			2021			2023			2022			2021
Net revenue		$	32,544		$	48,139		$	35,939		$	10,033		$	15,031		$	11,424
Gross profit			11,698			27,000			17,465			3,365			8,229			5,482
Operating income			10,115			24,987			14,293			2,724			7,532			4,495
Net income			8,681			19,104			12,560			1,884			5,957			4,409

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, 2023 and 2022, respectively: (The 2023 balance sheet information excludes Jia Mei.)


		As of December 31,
		2023			2022
Current assets		$	31,636		$	43,091
Noncurrent assets			19,751			12,520
Current liabilities			7,367			10,552
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 an income of $1.9 million, $6.0 million and $4.4 million for the years ended December 31, 2023, 2022 and 2021, respectively. Undistributed retained earnings relating to our investments in these minority investment entities amounted to $8.1 million and $9.2 million as of December 31, 2023 and 2022, respectively.