AXT INC

Previous wording

In September 2018, the Trump Administration announced a list of thousands of categories of goods that became subject to tariffs when imported into the United States. This pronouncement imposed tariffs on the wafer substrates we imported into the United States. The initial tariff rate was 10% and subsequently was increased to 25%. Approximately 5% of our revenue derives from importing our wafers into the United States and we expect the volume to increase. For the six months ended June 30, 2024 and 2023, we paid approximately $197,000 and $701,000, respectively, in tariffs. The future impact of tariffs and trade wars is uncertain.

Current wording

In September 2018, the Trump Administration announced a list of thousands of categories of goods that became subject to tariffs when imported into the United States. This pronouncement imposed tariffs on the wafer substrates we imported into the United States. The initial tariff rate was 10% and subsequently was increased to 25%. Approximately 6% of our revenue derives from importing our wafers into the United States and we expect the volume to increase. For the nine months ended September 30, 2024 and 2023, we paid approximately $569,000 and $768,000, respectively, in tariffs. The future impact of tariffs and trade wars is uncertain.

Previous wording

We have created a vertically integrated supply chain and transfer cash through our corporate structure in three ways. First, we capitalize our investments in our PRC subsidiaries. We licensed to our PRC subsidiaries intellectual property and received from our PRC subsidiaries royalty payments or one-time fees. Second, we use transfer pricing arrangements to buy from our PRC subsidiaries and PRC joint ventures wafers and raw materials. We review the terms of the transfer pricing arrangements annually with our independent registered public accounting firm. In the past, we sold to our PRC subsidiaries capital equipment that we purchased at the request of our PRC subsidiaries and for which we were reimbursed by the applicable PRC subsidiary. In recent years, Tongmei purchases capital equipment from suppliers in Taiwan, Japan, China, Europe or South Korea. Third, our PRC subsidiaries and PRC joint ventures pay dividends to entities within the Company’s corporate structure. For the six months ended June 30, 2024, the aggregate dividends paid to the Company, directly or to an intermediate entity within our corporate structure, by our PRC subsidiaries and PRC raw material joint ventures were $2.1 million. For the year ended December 31, 2023, the aggregate dividends paid to the Company, 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. For the year ended December 31, 2023, the aggregate dividends paid to minority shareholders by our PRC subsidiaries and PRC raw material joint ventures were approximately $0. All of these distributions were paid to our PRC subsidiaries and the minority shareholders. For the six months ended June 30, 2024 and the year ended December 31, 2023, no transfers, dividends, or distributions were made between the Company and its PRC subsidiaries, or to investors, except for the settlement of amounts owed under our transfer pricing arrangements in the ordinary course of business. We have no current intentions to distribute earnings to our investors under our corporate structure.

Current wording

We have created a vertically integrated supply chain and transfer cash through our corporate structure in three ways. First, we capitalize our investments in our PRC subsidiaries. We licensed to our PRC subsidiaries intellectual property and received from our PRC subsidiaries royalty payments or one-time fees. Second, we use transfer pricing arrangements to buy from our PRC subsidiaries and PRC joint ventures wafers and raw materials. We review the terms of the transfer pricing arrangements annually with our independent registered public accounting firm. In the past, we sold to our PRC subsidiaries capital equipment that we purchased at the request of our PRC subsidiaries and for which we were reimbursed by the applicable PRC subsidiary. In recent years, Tongmei purchases capital equipment from suppliers in Taiwan, Japan, China, Europe or South Korea. Third, our PRC subsidiaries and PRC joint ventures pay dividends to entities within the Company’s corporate structure. For the nine months ended September 30, 2024, the aggregate dividends paid to the Company, directly or to an intermediate entity within our corporate structure, by our PRC subsidiaries and PRC raw material joint ventures were $2.1 million. For the year ended December 31, 2023, the aggregate dividends paid to the Company, 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. For the year ended December 31, 2023, the aggregate dividends paid to minority shareholders by our PRC subsidiaries and PRC raw material joint ventures were approximately $0. All of these distributions were paid to our PRC subsidiaries and the minority shareholders. For the nine months ended September 30, 2024 and the year ended December 31, 2023, no transfers, dividends, or distributions were made between the Company and its PRC subsidiaries, or to investors, except for the settlement of amounts owed under our transfer pricing arrangements in the ordinary course of business. We have no current intentions to distribute earnings to our investors under our corporate structure.

Previous wording

In accordance with ASC 326-20’s current expected credit loss impairment model, 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 reasonable and supportable forecasts of future economic conditions. Uncollectible receivables are recorded as provision for credit losses 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 June 30, 2024 and December 31, 2023, our accounts receivable, net balance was $27.2 million and $19.3 million, respectively, which was net of an allowance of $263,000 and $579,000, respectively. If actual uncollectible accounts differ substantially from our estimates, revisions to the estimated allowance for credit losses would be required, which could have a material impact on our financial results for the future periods.

Current wording

In accordance with ASC 326-20’s current expected credit loss impairment model, 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 reasonable and supportable forecasts of future economic conditions. Uncollectible receivables are recorded as provision for credit losses 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 September 30, 2024 and December 31, 2023, our accounts receivable, net balance was $28.0 million and $19.3 million, respectively, which was net of an allowance of $263,000 and $579,000, respectively. If actual uncollectible accounts differ substantially from our estimates, revisions to the estimated allowance for credit losses would be required, which could have a material impact on our financial results for the future periods.

Previous wording

We maintain a product warranty 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 June 30, 2024 and December 31, 2023, accrued product warranties totaled $421,000 and $703,000, respectively. The decrease in accrued product warranties is primarily attributable to decreased claims for quality issues experienced by customers. 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.

Current wording

We maintain a product warranty 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 September 30, 2024 and December 31, 2023, accrued product warranties totaled $392,000 and $703,000, respectively. The decrease in accrued product warranties is primarily attributable to decreased claims for quality issues experienced by customers. 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.

Previous wording

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 valuation allowance for certain inventories based upon the age and quality of the product and the projections for sale of the completed products. As of June 30, 2024 and December 31, 2023, we had an inventory reserve of $23.1 million and $21.9 million, respectively, for excess and obsolete inventory and $161,000 and $78,000, 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.

Current wording

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 valuation allowance for certain inventories based upon the age and quality of the product and the projections for sale of the completed products. As of September 30, 2024 and December 31, 2023, we had an inventory reserve of $23.2 million and $21.9 million, respectively, for excess and obsolete inventory and $68,000 and $78,000, 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.

Previous wording

For the year ended December 31, 2023, one of our PRC joint venture raw material companies assessed one of its equity investments was fully impaired. We also divested our equity investment in a PRC joint venture. The impairment and divesture resulted in a total of $1.9 million in impairment charges in our financial results for the year ended December 31, 2023. Except as mentioned above, there were no impairment charges for the remainder of these investments during the three and six months ended June 30, 2024 and 2023.

Current wording

For the year ended December 31, 2023, one of our PRC joint venture raw material companies assessed one of its equity investments was fully impaired. We also divested our equity investment in a PRC joint venture. The impairment and divesture resulted in a total of $1.9 million in impairment charges in our financial results for the year ended December 31, 2023. Except as mentioned above, there were no impairment charges for the remainder of these investments during the three and nine months ended September 30, 2024 and 2023.

Previous wording

There have been no transfers between fair value measurement levels during the three and six months ended June 30, 2024 and 2023.

Current wording

There have been no transfers between fair value measurement levels during the three and nine months ended September 30, 2024 and 2023.

Previous wording

In March 2020, the World Health Organization declared the outbreak of COVID-19 to be a pandemic, which continues to be an ongoing pandemic. In March 2020, the President of the United States declared the COVID-19 outbreak a national emergency. For much of the three months ended March 31, 2020, our manufacturing facilities in China were operating at reduced staffing levels to limit the risk of COVID-19 exposure for our employees. The Chinese government mandates have evolved, allowing us to return to full staffing levels at all three manufacturing locations in China. We are unable to accurately predict the full impact of the COVID-19 pandemic due to numerous uncertainties, including the severity of the disease, the duration of the outbreak, the potential resurgence of the outbreak as a result of variants in countries that had previously contained the outbreak, the availability of COVID-19 vaccines and the number of people who are vaccinated, the effect of the outbreak on transportation, such as reduced availability of air transport, port closures, and increased border controls or closures, the impact of the outbreak on our customers and additional actions that may be taken by government authorities to contain the outbreak, such as lockdowns in China that may require the temporary closure of one or more of our manufacturing facilities in China and travel restrictions between China and the U.S. that have disrupted our normal movement to and from China and impacted our efficiency. As a result of these factors, we believe that the COVID-19 pandemic has had and may continue to have a material adverse impact on our business, condensed consolidated results of operations and financial condition until the COVID-19 pandemic subsides and related public health measures are reduced or eliminated.** **

Current wording

In March 2020, the World Health Organization declared the outbreak of COVID-19 to be a pandemic, which continues to be an ongoing pandemic. In March 2020, the President of the United States declared the COVID-19 outbreak a national emergency. For much of the three months ended March 31, 2020, our manufacturing facilities in China were operating at reduced staffing levels to limit the risk of COVID-19 exposure for our employees. In addition, the Chinese government authorities took a number of actions, which included, among others, lockdowns in China which reduced availability of air transport, port closures, and increased border controls or closures, travel restrictions between China and the U.S. to contain the spread of COVID-19. As of 2023, China has lifted all COVID-19 restrictions, allowing us to return to full staffing levels at all three manufacturing locations in China. On May 5, 2023, the World Health Organization declared that COVID-19 no longer constitutes a public health emergency of international concern. However, the extent of the impact of COVID-19 on our results of operations in the future will be dependent on future developments such as, among others, the potential resurgence of COVID-19, the frequency, duration and extent of outbreaks of COVID-19, future actions we or the authorities may take in response to these developments, all of which remain highly uncertain and unpredictable. There is no assurance that we will be able to adjust our business operations to adapt to such developments in the future.

Previous wording

Revenue increased $9.3 million, or 50.2%, to $27.9 million for the three months ended June 30, 2024 from $18.6 million for the three months ended June 30, 2023. The substrate revenue increase for the three months ended June 30, 2024 as compared to the same period in 2023 was primarily the result of higher demand for GaAs wafer substrates due to increased demand across a number of applications and higher demand for InP wafer substrates reflecting strong growth from data center applications and continued improvement in passive optical networks and higher demand for Ge wafer substrates in China. Raw materials sales increased $0.6 million, or 8.1%, to $8.2 million for the three months ended June 30, 2024 as compared to the same period in 2023. The increase in raw materials revenue for the three months ended June 30, 2024 as compared to the same period in 2023 was primarily the result of an increase in sales of pBN crucibles and refined gallium resulting from stronger market demand.

Current wording

Revenue increased $6.3 million, or 36.2%, to $23.6 million for the three months ended September 30, 2024 from $17.4 million for the three months ended September 30, 2023. The substrate revenue increase for the three months ended September 30, 2024 as compared to the same period in 2023 was primarily the result of higher demand for GaAs wafer substrates due to increased demand across a number of applications and higher demand for InP wafer substrates reflecting strong growth from data center applications and continued improvement in passive optical networks and higher demand for Ge wafer substrates in China. Raw materials sales increased $1.7 million, or 23.7%, to $8.6 million for the three months ended September 30, 2024 as compared to the same period in 2023. The increase in raw materials revenue for the three months ended September 30, 2024 as compared to the same period in 2023 was primarily the result of an increase in sales of refined gallium and pBN crucibles resulting from stronger market demand and from the sale of recycled materials.

Previous wording

Revenue increased $12.6 million, or 33.2%, to $50.6 million for the six months ended June 30, 2024 from $38.0 million for the six months ended June 30, 2023. The substrate revenue increase for the six months ended June 30, 2024 as compared to the same period in 2023 was primarily the result of higher demand for GaAs wafer substrates due to increased demand across a number of applications and higher demand for InP wafer substrates reflecting strong growth from data center applications and continued improvement in passive optical networks and higher demand for Ge wafer substrates in China. Raw materials sales increased $0.5 million, or 3.6%, to $14.0 million for the six months ended June 30, 2024 as compared to the same period in 2023. The increase in raw materials revenue for the six months ended June 30, 2024 as compared to the same period in 2023 was primarily the result of an increase in sales of refined gallium and pBN crucibles resulting from stronger market demand.

Current wording

Revenue increased $18.9 million, or 34.1%, to $74.3 million for the nine months ended September 30, 2024 from $55.4 million for the nine months ended September 30, 2023. The substrate revenue increase for the nine months ended September 30, 2024 as compared to the same period in 2023 was primarily the result of higher demand for GaAs wafer substrates due to increased demand across a number of applications and higher demand for InP wafer substrates reflecting strong growth from data center applications and continued improvement in passive optical networks and higher demand for Ge wafer substrates in China. Raw materials sales increased $2.1 million, or 10.4%, to $22.6 million for the nine months ended September 30, 2024 as compared to the same period in 2023. The increase in raw materials revenue for the nine months ended September 30, 2024 as compared to the same period in 2023 was primarily the result of an increase in sales of refined gallium and pBN crucibles resulting from stronger market demand.

Previous wording

Revenue in China increased $10.1 million for the six months ended June 30, 2024, primarily due to higher demand for our GaAs, InP and Ge wafer substrates and refined gallium sold by one of our consolidated subsidiaries. Revenue in Taiwan increased $4.1 million, primarily due to higher demand for our GaAs and InP wafer substrates, partially offset by lower demand for our Ge wafer substrates. Revenue in Japan decreased $1.1 million primarily due to lower demand for our GaAs, InP and Ge wafer substrates and refined gallium and pBN crucibles sold by two of our consolidated subsidiaries. Revenue in Asia Pacific decreased by $0.3 million, primarily due to decreased demand for our InP, Ge and GaAs wafer substrates, partially offset by higher demand for refined gallium and pBN crucibles sold by two of our consolidated subsidiaries. Revenue in Europe increased by $1.8 million primarily due to higher demand for our GaAs, InP and Ge wafer substrates and pBN crucibles sold by one of our consolidated subsidiaries. Revenue in North America decreased by $2.0 million primarily due to lower demand for our GaAs, InP and Ge wafer substrates and pBN crucibles sold by one of our consolidated subsidiaries.

Current wording

Revenue in China increased $3.5 million for the three months ended September 30, 2024, primarily due to higher demand for our InP, GaAs and Ge wafer substrates and refined gallium and pBN crucibles sold by two of our consolidated subsidiaries. Revenue in Taiwan decreased $0.4 million, primarily due to lower demand for our InP and Ge wafer substrates, partially offset by higher demand for our GaAs wafer substrates. Revenue in Japan increased $1.1 million, primarily due to higher demand for our InP and GaAs wafer substrates and pBN crucibles sold by one of our consolidated subsidiaries. Revenue in Asia Pacific decreased $97,000, primarily due to decreased demand for pBN crucibles sold by one of our consolidated subsidiaries. Revenue in Europe increased $0.3 million, primarily due to increased demand for our GaAs, partially offset by lower demand for our Ge and InP wafer substrates. Revenue in North America increased $1.8 million, primarily due to higher demand for our InP wafer substrates and pBN crucibles sold by one of our consolidated subsidiaries, partially offset by lower demand for our GaAs and Ge wafer substrates.

Previous wording

Revenue in China increased $6.7 million for the three months ended June 30, 2024, primarily due to higher demand for our InP, GaAs and Ge wafer substrates and refined gallium sold by one of our consolidated subsidiaries. Revenue in Taiwan increased $2.0 million, primarily due to higher demand for our GaAs and InP wafer substrates, partially offset by lower demand for our Ge wafer substrates. Revenue in Japan decreased $0.6 million, primarily due to lower demand for our InP and GaAs wafer substrates and refined gallium sold by one of our consolidated subsidiaries, partially offset by higher demand for our Ge wafer substrates and pBN crucibles sold by one of our consolidated subsidiaries. Revenue in Asia Pacific decreased $25,000, primarily due to decreased demand for our GaAs wafer substrates, partially offset by higher demand for pBN crucibles sold by one of our consolidated subsidiaries. Revenue in Europe increased $1.7 million, primarily due to increased demand for our GaAs and InP wafer substrates and pBN crucibles sold by one of our consolidated subsidiaries, partially offset by lower demand for our Ge wafer substrates. Revenue in North America decreased $0.4 million, primarily due to lower demand for our GaAs and Ge wafer substrates and pBN crucibles sold by one of our consolidated subsidiaries, partially offset by higher demand for our InP wafer substrates.

Current wording

subsidiaries, partially offset by higher demand for pBN crucibles sold by one of our consolidated subsidiaries and for our InP wafer substrates. Revenue in Asia Pacific decreased by $0.4 million, primarily due to decreased demand for our InP, Ge and GaAs wafer substrates and pBN crucibles sold by one of our consolidated subsidiaries, partially offset by higher demand for refined gallium sold by one of our consolidated subsidiaries. Revenue in Europe increased by $2.1 million primarily due to higher demand for our GaAs and InP wafer substrates and pBN crucibles sold by one of our consolidated subsidiaries, partially offset by lower demand for our Ge wafer substrates and for raw gallium sold by one of our consolidated subsidiaries. Revenue in North America decreased by $0.1 million primarily due to lower demand for our GaAs and Ge wafer substrates and pBN crucibles sold by one of our consolidated subsidiaries, partially offset by higher demand for our InP wafer substrates.

Previous wording

Gross profit increased $5.9 million, or 346.2%, to $7.7 million for the three months ended June 30, 2024 from $1.7 million for the three months ended June 30, 2023. The increase in gross profit is the result of higher revenue for our wafer substrates. Gross margin as a percentage of revenue increased due to higher unit volume across all wafer substrate and a favorable shift in product mix.

Current wording

Gross profit increased $3.8 million, or 204.5%, to $5.7 million for the three months ended September 30, 2024 from $1.9 million for the three months ended September 30, 2023. The increase in gross profit is the result of higher revenue for our wafer substrates. Gross margin as a percentage of revenue increased due to higher unit volume across all wafer substrate and a favorable shift in product mix.

Previous wording

Gross profit increased $6.9 million, or 101.4%, to $13.7 million for the six months ended June 30, 2024 from $6.8 million for the six months ended June 30,2023. The increase in gross profit is the result of higher revenue across all product lines. Gross margin as a percentage of revenue increased due to higher unit volume across all product lines, and a shift in product mix had a positive impact on gross margin.

Current wording

Gross profit increased $10.7 million, or 123.5%, to $19.4 million for the nine months ended September 30, 2024 from $8.7 million for the nine months ended September 30, 2023. The increase in gross profit is the result of higher revenue across all product lines. Gross margin as a percentage of revenue increased due to higher unit volume across all product lines, and a shift in product mix had a positive impact on gross margin.

Previous wording

Selling, general and administrative expenses decreased $41,000, or 0.7%, to $5.8 million for the three months ended June 30, 2024 from $5.8 million for the June 30, 2023. The lower selling, general and administrative expenses were primarily from a decrease in compensation related expenses.

Current wording

Selling, general and administrative expenses decreased $17,000, or 0.3%, to $5.7 million for the three months ended September 30, 2024 from $5.7 million for the three months ended September 30, 2023. The lower selling, general and administrative expenses were primarily from a decrease in compensation related expenses and bad debt expense, partially offset by higher legal and professional service expenses.

Previous wording

Selling, general and administrative expenses increased $234,000, or 2.0%, to $12.0 million for the six months ended June 30, 2024 from $11.8 million for the six months ended June 30, 2023. The higher selling, general and administrative expenses were primarily from an increase in professional service expenses.

Current wording

Selling, general and administrative expenses increased $217,000, or 1.2%, to $17.7 million for the nine months ended September 30, 2024 from $17.4 million for the nine months ended September 30, 2023. The higher selling, general and administrative expenses were primarily from an increase in legal and professional service expenses, partially offset by a decrease in compensation related expenses.

Previous wording

Research and development expenses increased $1.0 million, or 37.2%, to $3.8 million for the three months ended June 30, 2024 from $2.7 million for the three months ended June 30, 2023. The increase in research and development expenses for the three months ended June 30, 2024 was primarily due to higher development expenses for crystal ingot processing.

Current wording

Research and development expenses increased $0.5 million, or 17.5%, to $3.4 million for the three months ended September 30, 2024 from $2.9 million for the three months ended September 30, 2023. The increase in research and development expenses for the three months ended September 30, 2024 was primarily due to higher development expenses for crystal ingot processing.

Previous wording

Research and development expenses increased $0.6 million, or 10.1%, to $7.0 million for the six months ended June 30, 2024 from $6.3 million for the six months ended June 30, 2023. The increase in research and development expenses for the six months ended June 30, 2024 was primarily due to higher development expenses for crystal ingot processing.

Current wording

Research and development expenses increased $1.1 million, or 12.4%, to $10.4 million for the nine months ended September 30, 2024 from $9.3 million for the nine months ended September 30, 2023. The increase in research and development expenses for the nine months ended September 30, 2024 was primarily due to higher development expenses for crystal ingot processing.

Previous wording

Interest expense, net decreased $83,000, or 22.7%, to $282,000 for the three months ended June 30, 2024 from $365,000 for the three months ended June 30, 2023. Interest expense, net decreased primarily due to increased interest income during the three months ended June 30, 2024 as compared to the three months ended June 30, 2023.

Current wording

Interest expense, net increased $10,000, or 2.6%, to $391,000 for the three months ended September 30, 2024 from $381,000 for the three months ended September 30, 2023. Interest expense, net increased primarily due to lower interest income during the three months ended September 30, 2024 as compared to the three months ended September 30, 2023.

Previous wording

Interest expense, net decreased $131,000, or 17.2%, to $631,000 for the six months ended June 30, 2024 from $762,000 for the six months ended June 30, 2023. Interest expense, net decreased primarily due to increased interest income during the six months ended June 30, 2024 as compared to the six months ended June 30, 2023.

Current wording

Interest expense, net decreased $121,000, or 10.6%, to $1.0 million for the nine months ended September 30, 2024 from $1.1 million for the nine months ended September 30, 2023. Interest expense, net decreased primarily due to increased interest income during the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023.

Previous wording

The equity in income of unconsolidated joint venture companies was income of $0.6 million for the three months ended June 30, 2024 as compared to income of $0.9 million for the three months ended June 30, 2023. The decrease in income of $0.3 million is primarily due to a profit decline in one unconsolidated joint venture.

Current wording

The equity in income of unconsolidated joint venture companies was income of $1.0 million for the three months ended September 30, 2024 as compared to income of $0.4 million for the three months ended September 30, 2023. The increase in income of $0.6 million is primarily due to strong performance in unconsolidated joint ventures.

Previous wording

The equity in income of unconsolidated joint venture companies was income of $1.5 million for the six months ended June 30, 2024 as compared to income of $2.0 million for the six months ended June 30, 2023. The decrease in income of $0.5 million is primarily due to a profit decline in one unconsolidated joint venture’s Gallium sale.

Current wording

The equity in income of unconsolidated joint venture companies was income of $2.5 million for the nine months ended September 30, 2024 as compared to income of $2.3 million for the nine months ended

Previous wording

Other income, net decreased $286,000, or 36.8%, to an income of $491,000 for the three months ended June 30, 2024 from an income of $777,000 for the three months ended June 30, 2023. Other income, net decreased primarily due to a decline in government grants.

Current wording

Other income, net increased $306,000, or 137.2%, to an income of $529,000 for the three months ended September 30, 2024 from an income of $223,000 for the three months ended September 30, 2023. Other income, net increased primarily due to an increase in government grants.

Previous wording

Other income, net increased $464,000, or 43.8%, to an income of $1.5 million for the six months ended June 30, 2024 from an income of $1.1 million for the six months ended June 30, 2023. Other income, net increased primarily due to higher government grants received in the first quarter of 2024, which was partially offset by a decrease in the second quarter of 2024.

Current wording

Other income, net increased $770,000, or 60.1%, to an income of $2.1 million for the nine months ended September 30, 2024 from an income of $1.3 million for the nine months ended September 30, 2023. Other income, net increased primarily due to an increase in government grants.

Previous wording

Provision (benefit) for income taxes increased $260,000, or 187.1%, to a provision of $121,000 for the three months ended June 30, 2024 as compared to a benefit of $139,000 for the three months ended June 30, 2023. The tax expense recorded for the three months ended June 30, 2024 is the result of foreign taxes and certain state taxes. Provision for income taxes increased $386,000, or 4,288.9%, to $395,000 for the six months ended June 30, 2024 as compared to $9,000 for the six months ended June 30, 2023. Additionally, there is uncertainty of generating future profit in the U.S., which has resulted in our deferred tax assets being fully reserved. 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.

Current wording

Provision (benefit) for income taxes increased $727,000, or 719.8%, to a provision of $626,000 for the three months ended September 30, 2024 as compared to a benefit of $101,000 for the three months ended September 30, 2023. The tax expense recorded for the three months ended September 30, 2024 is the result of both foreign taxes and domestic taxes. Provision for income taxes increased $1,113,000, or 1,209.8%, to $1,021,000 for the nine months ended September 30, 2024 as compared to a benefit of $92,000 for the nine months ended September 30, 2023. Additionally, there is uncertainty of generating future profit in the U.S., which has resulted in our deferred tax assets being fully reserved. 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.

Previous wording

Net (income) loss attributable to noncontrolling interests and redeemable noncontrolling interests decreased $581,000 or 220.1% to a loss of $317,000 for the three months ended June 30, 2024, from an income of $264,000 for the three months ended June 30, 2023, primarily due to higher profitability from our PRC subsidiaries as sales increased.

Current wording

Net (income) loss attributable to noncontrolling interests and redeemable noncontrolling interests increased $642,000 or 108.4% to a gain of $50,000 for the three months ended September 30, 2024, from a loss of $592,000 for the three months ended September 30, 2023, primarily due to higher profitability from our PRC subsidiaries as sales increased.

Previous wording

Net (income) loss attributable to noncontrolling interests and redeemable noncontrolling interests decreased $934,000, or 160.5%, to a loss of $352,000 for the six months ended June 30, 2024, from an income of $582,000 for the six months ended June 30, 2023, primarily due to higher profitability from our PRC subsidiaries as sales increased.

Current wording

Net (income) loss attributable to noncontrolling interests and redeemable noncontrolling interests increased $1.6 million, or 134.2%, to an income of $402,000 for the nine months ended September 30, 2024, from a loss of $1.2 million for the nine months ended September 30, 2023, primarily due to higher profitability from our PRC subsidiaries as sales increased.

Previous wording

As of June 30, 2024, our principal source of liquidity was $43.3 million, which consisted of cash and restricted cash of $41.6 million and investments of $1.7 million. In the six months ended June 30, 2024, cash and restricted cash decreased by $8.5 million and investments decreased by $0.5 million. The decrease in cash and restricted cash of $8.5 million inthe six months ended June 30, 2024 was primarily due to net cash used in operating activities of $8.0 million and net cash used in investing activities of $4.5 million, partially offset by net cash provided by financing activities of $3.7 million and the effect of exchange rate changes of $0.2 million. As of June 30, 2024, we and our PRC subsidiaries held approximately $35.6 million in cash and investments in foreign bank accounts.

Current wording

As of September 30, 2024, our principal source of liquidity was $38.8 million, which consisted of cash of $24.9 million and restricted cash of $13.9 million. In the nine months ended September 30, 2024, cash and restricted cash decreased by $11.3 million and investments decreased by $2.1 million. The decrease in cash and restricted cash of $11.3 million inthe nine months ended September 30, 2024 was primarily due to net cash used in operating activities of $13.4 million and net cash used in investing activities of $4.0 million, partially offset by net cash provided by financing activities of $4.5 million and the effect of exchange rate changes of $1.6 million. As of September 30, 2024, we and our PRC subsidiaries held approximately $33.8 million in cash and investments in foreign bank accounts.

Previous wording

As of June 30, 2023, our principal source of liquidity was $49.6 million, which consisted of cash, restricted cash and cash equivalents of $40.9 million and investments of $8.7 million. In the six months ended June 30, 2023, cash, restricted cash and cash equivalents decreased by $0.5 million and investments decreased by $2.7 million. The decrease in cash, restricted cash and cash equivalents of $0.5 million in the six months ended June 30, 2023 was primarily due to the effect of exchange rate changes of $1.8 million and net cash used in investing activities of $3.1 million, partially offset by net cash provided by operating activities of $2.8 million and financing activities of $1.7 million. As of June 30, 2023, we and our PRC subsidiaries held approximately $38.1 million in cash and investments in foreign bank accounts.

Current wording

As of September 30, 2023, our principal source of liquidity was $43.6 million, which consisted of cash, restricted cash and cash equivalents of $39.3 million and investments of $4.3 million. In the nine months ended September 30, 2023, cash, restricted cash and cash equivalents decreased by $2.0 million and investments decreased by $7.2 million. The decrease in cash, restricted cash and cash equivalents of $2.0 million in the nine months ended September 30, 2023 was primarily due to net cash used in investing activities of $4.8 million and the effect of exchange rate changes of $1.4 million, partially offset by cash provided by financing activities of $2.2 million and net cash provided by operating activities of $2.0 million. As of September 30, 2023, we and our consolidated joint ventures in China held approximately $30.2 million in cash and investments in foreign bank accounts.

Previous wording

Net cash used in operating activities of $8.0 million for the six months ended June 30, 2024 was primarily comprised of a net change of $11.3 million in operating assets and liabilities, a net loss before income attributable to noncontrolling interest and redeemable noncontrolling interests of $3.2 million, and income from equity method investments of $1.5 million, partially offset by the adjustment for non-cash items of depreciation and amortization of $4.4 million, return of equity method investments as dividends of $2.1 million and stock-based compensation of $1.5 million.

Current wording

attributable to noncontrolling interest and redeemable noncontrolling interests of $6.1 million, and income from equity method investments of $2.5 million, partially offset by the adjustment for non-cash items of depreciation and amortization of $6.7 million, stock-based compensation of $2.3 million and return of equity method investments as dividends of $2.1 million.

Previous wording

Net cash provided by operating activities of $2.8 million for the six months ended June 30, 2023 was primarily comprised of a net change of $3.9 million in operating assets and liabilities, the adjustment for non-cash items of depreciation and amortization of $4.2 million, return of equity method investments (dividends) of $3.7 million, stock-based compensation of $1.8 million and deferred tax assets of $0.1 million, partially offset by a net loss before income attributable to noncontrolling interest and redeemable noncontrolling interests of $9.0 million and income from equity method investments of $2.0 million.

Current wording

Net cash provided by operating activities of $2.0 million for the nine months ended September 30, 2023 was primarily comprised of a net change of $6.8 million in operating assets and liabilities, the adjustment for non-cash items of depreciation and amortization of $6.4 million, return of equity method investments (dividends) of $3.7 million, stock-based compensation of $2.7 million and deferred tax assets of $0.1 million, partially offset by net loss before income attributable to noncontrolling interest and redeemable noncontrolling interests of $15.4 million and income from equity method investments of $2.3 million.

Previous wording

Net cash used in investing activities of $4.5 million for the six months ended June 30, 2024 was primarily from the purchase of property, plant and equipment of $4.7 million, and investment in non-marketable equity investments of $0.3 million, partially offset by proceeds from sales and maturities of available-for-sale debt securities of $0.5 million.

Current wording

Net cash used in investing activities of $4.0 million for the nine months ended September 30, 2024 was primarily from the purchase of property, plant and equipment of $5.6 million, and investment in non-marketable equity investments of $0.6 million, partially offset by proceeds from sales and maturities of available-for-sale debt securities of $2.2 million.

Previous wording

Net cash used in investing activities of $3.1 million for the six months ended June 30, 2023 was primarily from the purchase of property, plant and equipment of $6.8 million, partially offset by proceeds from sales and maturities of available-for-sale debt securities of $2.9 million and proceeds from sale of equity securities of $0.8 million.

Current wording

Net cash used in investing activities of $4.8 million for the nine months ended September 30, 2023 was primarily from the purchase of property, plant and equipment of $11.2 million and investments in non-marketable equity investments of $1.9 million, partially offset by proceeds from sales and maturities of available-for-sale debt securities of $7.4 million and proceeds from sale of equity securities of $0.8 million.

Previous wording

Net cash provided by financing activities was $3.7 million for the six months ended June 30, 2024, which consisted of proceeds from short-term loans of $26.5 million, long-term loan of $5.8 million and common stock options exercised of $25,000, partially offset by repayment of short-term loans of $28.3 million and repayment of long-term loan of $0.3 million.

Current wording

Net cash provided by financing activities was $4.5 million for the nine months ended September 30, 2024, which consisted of proceeds from short-term loans of $41.6 million, long-term loan of $5.8 million and common stock options exercised of $28,000, partially offset by repayment of short-term loans of $42.3 million and repayment of long-term loan of $0.6 million.

Previous wording

Net cash provided by financing activities was $1.7 million for the six months ended June 30, 2023, which consisted of proceeds from short-term loans of $28.8 million, capital increase in subsidiary shares from noncontrolling interests of $0.5 million and common stock option exercised of $10,000, partially offset by repayment of short-term loans of $27.7 million.

Current wording

Net cash provided by financing activities was $2.2 million for the nine months ended September 30, 2023, which consisted of proceeds from short-term loans of $42.2 million, a capital increase in subsidiary shares from noncontrolling interests of $0.7 million and common stock options exercised of $10,000, partially offset by repayment of short-term loans of $40.7 million.

Previous wording

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 could be made from time to time in the open market and could be 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. Since 2015, no shares were repurchased under this program. During the six months ended June 30, 2024, we did not repurchase any shares under the approved stock repurchase program. As of June 30, 2024, approximately $2.7 million remained available for future repurchases under this program. Currently, we do not plan to repurchase additional shares.

Current wording

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 could be made from time to time in the open market and could be 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. Since 2015, no shares were repurchased under this program. During the nine months ended September 30, 2024, we did not repurchase any shares under the approved stock repurchase program. As of September 30, 2024, approximately $2.7 million remained available for future repurchases under this program. Currently, we do not plan to repurchase additional shares.

Previous wording

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.

Current wording

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.

Previous wording

For the six months ended June 30, 2024 and 2023, 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 $2.1 million and $3.7 million, respectively. For the six months ended June 30, 2024 and 2023, there were no dividends paid to minority shareholders by our PRC subsidiaries or PRC raw material joint ventures. For the six months ended June 30, 2024, no transfers, dividends, or distributions have been made to date between the Company and its PRC subsidiaries, or to investors, except for the settlement of amounts owed under our transfer pricing arrangements in the ordinary course of business.

Current wording

For the nine months ended September 30, 2024 and 2023, 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 $2.1 million and $3.7 million, respectively. For the nine months ended September 30, 2024 and 2023, there were no dividends paid to minority shareholders by our PRC subsidiaries or PRC raw material joint ventures. For the nine months ended September 30, 2024, no transfers, dividends, or distributions have been made to date between the Company and its PRC subsidiaries, or to investors, except for the settlement of amounts owed under our transfer pricing arrangements in the ordinary course of business.

Previous wording

On January 30, 2024, the Company secured a new line of credit amounting to $9.7 million, structured as a five-year bank loan. The credit facility bears interest at a rate of 6.5% per annum on the amount drawn from the line of credit. The credit facility is collateralized by the real estate properties owned by ChaoYang Tongmei. In January 2024, the Company borrowed $5.8 million against the credit facility. The intended use of the credit facility is for construction of fixed assets. As of June 30, 2024, $5.5 million is included in “Other long-term liabilities” and $275,000 is included in “Short-term loans” in our consolidated balance sheets.

Current wording

On January 30, 2024, the Company secured a new line of credit amounting to $9.7 million, structured as a five-year bank loan. The credit facility bears interest at a rate of 6.5% per annum on the amount drawn from the line of credit. The credit facility is collateralized by the real estate properties owned by ChaoYang Tongmei. In January 2024, the Company borrowed $5.8 million against the credit facility. The intended use of the credit facility is for construction of

Previous wording

repurchase the production line and related equipment for $14.00. As of June 30, 2024, $1.2 million is included in “Other long-term liabilities” and $550,000 is included in “Short-term loans” in our consolidated balance sheets.

Current wording

fixed assets. As of September 30, 2024, $5.4 million is included in “Other long-term liabilities” and $428,000 is included in “Short-term loans” in our consolidated balance sheets.