Redeemable Noncontrolling Interest

6 Months Ended

Jun. 30, 2021

Redeemable Noncontrolling Interests

Redeemable Noncontrolling Interests

Note 18. Redeemable Noncontrolling Interests

As discussed in Note 1, during the quarter ended December 31, 2020, Tongmei entered into the Capital Investment Agreements with Investors that invested approximately $48.1 million in the form of redeemable noncontrolling interests representing 7.06% of the outstanding shares of 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 entire approximately $49 million investment on January 25, 2021, at which time the Investors owned a redeemable noncontrolling interests in Tongmei of 7.28%. The initial carrying amount of the redeemable noncontrolling interests was recorded at fair value on the date of issuance of Tongmei’s common stock, net of issuance costs and presented in temporary equity on the consolidated balance sheets. This classification is due to the existence of certain contingencies that could result in potential redemption at the fixed purchase price as described below. We currently do not believe that this is probable thus no amortization of the issuance costs has been recorded.

Pursuant to the Capital Investment Agreements with the Investors, each Investor has the right to require AXT to redeem any or all Tongmei shares held by such Investor at the original purchase price paid by such Investor, without interest, in the event of a material adverse change or if Tongmei does not achieve its IPO on or before December 31, 2022. This right is suspended when Tongmei submits its formal application to the China Securities Regulatory Commission (“CSRC”). Tongmei currently plans to submit its formal application to the CSRC in the third quarter of 2021 or the fourth quarter of 2021. However, if on December 31, 2022 the IPO application has been submitted and accepted by the CSRC or the stock exchange and such submission remains under review, then the date when such Investor is entitled to exercise such redemption right shall be deferred to a date when such submission is rejected by the CSRC or stock exchange, or the date when Tongmei withdraws its IPO application. The process of going public on the STAR Market includes several periods of review and is therefore a lengthy process. Tongmei does not expect to complete the IPO until mid-2022. The listing of Tongmei on China’s STAR Market will not change the status of AXT as a U.S. public company. There can be no assurances that Tongmei will complete its IPO by December 31, 2022, or at all. In the event that Investors exercise their redemption rights, we may be required to seek additional capital in order to redeem their Tongmei shares and there would be no assurances that such capital would be available on terms acceptable to us, if at all. Any redemptions could have a material adverse effect on our business, financial condition and results of operations.

The components of the change in redeemable noncontrolling interests for the six months ended June 30, 2021 are presented in the following table (in thousands):

Balance as of January 1, 2021	$	47,563
Increase in redeemable noncontrolling interests due to issuance of Tongmei's common stock		1,514
Increase in redeemable noncontrolling interests due to transfer of subsidiary with noncontrolling interests		1,242
Increase in redeemable noncontrolling interests due to formation of new subsidiary with noncontrolling interests		132
Equity issuance costs incurred for the six months ended June 30, 2021		(1,237)
Net income attributable to redeemable noncontrolling interests		165
Effect of foreign currency translation attributable to redeemable noncontrolling interests		704
Balance as of June 30, 2021	$	50,083