Investments in Privately-Held Raw Material Companies

9 Months Ended

Sep. 30, 2024

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, 2024, the investments are summarized below (in thousands):

	Investment Balance as of
	September 30,		December 31,		Accounting	Ownership	*
Company	2024		2023		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		3,122	Consolidated	**** 75.0	%
ChaoYang XinMei High Purity Semiconductor Materials Co., Ltd.		7,331		7,331	Consolidated	*** 58.5	%
	$	14,211	$	14,211
Beijing JiYa Semiconductor Material Co., Ltd.	$	4,681		3,806	Equity	39	%
Xiaoyi XingAn Gallium Co., Ltd.		4,969		5,516	Equity	** 25	%
ChaoYang KaiMei Quartz Co., Ltd.		3,883		3,154	Equity	***** 40	%
	$	13,533	$	12,476
Emeishan Jia Mei High Purity Metals Co., Ltd.		551		551	Fair value	****** 10	%
	$	551	$	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 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 September 30, 2024, 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 a 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 on the investment in Jia Mei. 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 in the second quarter of 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, 2024.

In November 2023, our 46% equity ownership interest in Donghai County Dongfang High Purity Electronic Materials Co., Ltd. (“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 in the fourth quarter of 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 condensed consolidated balance sheets and totaled $13.5 million and $12.5 million as of September 30, 2024 and December 31, 2023, respectively. As of September 30, 2024, our ownership interests in ChaoYang KaiMei, JiYa, Xiaoyi XingAn Gallium Co., Ltd (“Xiaoyi XingAn”) and Jia Mei were 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 and November 2023, Xiaoyi XingAn distributed a dividend of $1.8 million, and JiYa distributed dividends of $2.0 million and $0.5 million, respectively. In May 2024, Xiaoyi XingAn distributed a $2.1 million dividend to us. 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, 2024 and 2023:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2024		2023		2024		2023
Net revenue	$	10,473	$	8,834	$	27,915	$	24,486
Gross profit	$	4,876	$	2,620	$	12,966	$	8,174
Operating income	$	4,135	$	1,962	$	11,541	$	7,134
Net income	$	3,443	$	1,449	$	8,624	$	6,307

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 $1.0 million and $0.4 million, respectively, for the three months ended September 30, 2024 and 2023. 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 $2.5 million and $1.4 million, respectively, for the nine months ended September 30, 2024 and 2023. In the condensed consolidated statements of operations, the "Equity in income of unconsolidated joint ventures" included a gain of $958,000 from the Jia Mei sale, resulting in an income of $2.3 million for the nine months ended September 30, 2023.