Table of
Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
for the quarterly period ended September 30, 2010
Or
o
Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
for the transition period
from to
Commission File Number 000-24085
AXT, INC.
(Exact name of registrant as specified in its
charter)
DELAWARE
|
|
94-3031310
|
(State or other jurisdiction of
|
|
(I.R.S. Employer
|
Incorporation or organization)
|
|
Identification No.)
|
4281 Technology Drive, Fremont, California 94538
(Address of principal executive offices)
(Zip code)
(510) 683-5900
(Registrants telephone number, including area code)
Indicate by check mark
whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes
x
No
o
Indicate by check mark whether
the registrant has submitted electronically and posted on its Web site, if any,
every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes
o
No
o
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of large
accelerated filer, accelerated filer, and smaller reporting company in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
o
|
|
Accelerated filer
o
|
|
|
|
Non-accelerated filer
x
|
|
Smaller reporting company
o
|
(Do not check if a smaller reporting company)
|
|
|
Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). YES
o
NO
x
Indicate the number of
shares outstanding of each of the issuers classes of common stock, as of the
latest practicable date.
Class
|
|
Outstanding at October 28, 2010
|
Common Stock, $0.001 par value
|
|
31,543,087
|
Table of Contents
PART I.
FINANCIAL INFORMATION
Item 1.
Financial Statements
AXT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
|
|
September 30,
|
|
December 31,
|
|
|
|
2010
|
|
2009 (1)
|
|
|
|
(unaudited)
|
|
|
|
Assets:
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
23,393
|
|
$
|
16,934
|
|
Short-term investments
|
|
4,467
|
|
18,469
|
|
Accounts receivable, net of allowances of $475 and
$1,019 as of September 30, 2010 and December 31, 2009, respectively
|
|
18,977
|
|
15,362
|
|
Inventories, net
|
|
33,153
|
|
27,718
|
|
Prepaid expenses and other current assets
|
|
3,451
|
|
2,411
|
|
Total current assets
|
|
83,441
|
|
80,894
|
|
Long-term investments
|
|
13,139
|
|
|
|
Property, plant and equipment, net
|
|
22,709
|
|
20,853
|
|
Other assets
|
|
6,313
|
|
6,199
|
|
Total assets
|
|
$
|
125,602
|
|
$
|
107,946
|
|
|
|
|
|
|
|
Liabilities and stockholders equity:
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accounts payable
|
|
$
|
5,979
|
|
$
|
5,571
|
|
Accrued liabilities
|
|
6,557
|
|
4,566
|
|
Current portion of long-term debt
|
|
|
|
76
|
|
Total current liabilities
|
|
12,536
|
|
10,213
|
|
Long-term debt, net of current portion
|
|
|
|
420
|
|
Other long-term liabilities
|
|
30
|
|
62
|
|
Total liabilities
|
|
12,566
|
|
10,695
|
|
Commitments and contingencies (Note 10)
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
Preferred stock, $0.001 par value; 2,000 shares
authorized; 883 shares issued and outstanding
as of September 30, 2010 and December 31, 2009,
respectively (Liquidation preference of $5.5 million and $5.4 million
as of September 30, 2010 and December 31, 2009,
respectively)
|
|
3,532
|
|
3,532
|
|
Common stock, $0.001 par value per share; 70,000
shares authorized; 31,543 and 30,880 shares issued and outstanding as of
September 30, 2010 and December 31, 2009, respectively
|
|
30
|
|
30
|
|
Additional paid-in capital
|
|
189,110
|
|
187,871
|
|
Accumulated deficit
|
|
(87,376
|
)
|
(101,130
|
)
|
Accumulated other comprehensive income
|
|
4,276
|
|
4,300
|
|
Total AXT, Inc. stockholders equity
|
|
109,572
|
|
94,603
|
|
|
|
|
|
|
|
Noncontrolling interests
|
|
3,464
|
|
2,648
|
|
Total stockholders equity
|
|
113,036
|
|
97,251
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
125,602
|
|
$
|
107,946
|
|
See
accompanying notes to condensed consolidated financial statements.
(1)
The Condensed
Consolidated Balance Sheet at December 31, 2009 has been derived from the
audited consolidated financial statements at that date.
3
Table of Contents
AXT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
26,809
|
|
$
|
16,819
|
|
$
|
68,627
|
|
$
|
37,528
|
|
Cost of revenue
|
|
16,278
|
|
11,281
|
|
42,829
|
|
29,711
|
|
Gross profit
|
|
10,531
|
|
5,538
|
|
25,798
|
|
7,817
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
3,347
|
|
3,323
|
|
9,805
|
|
10,815
|
|
Research and development
|
|
462
|
|
360
|
|
1,428
|
|
1,175
|
|
Restructuring charge
|
|
|
|
|
|
|
|
507
|
|
Total operating expenses
|
|
3,809
|
|
3,683
|
|
11,233
|
|
12,497
|
|
Income (loss) from operations
|
|
6,722
|
|
1,855
|
|
14,565
|
|
(4,680
|
)
|
Interest income (expense), net
|
|
26
|
|
39
|
|
16
|
|
117
|
|
Other income (expense), net
|
|
442
|
|
638
|
|
2,077
|
|
537
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes
|
|
7,190
|
|
2,532
|
|
16,658
|
|
(4,026
|
)
|
Provision for income taxes
|
|
871
|
|
201
|
|
1,677
|
|
513
|
|
Net income (loss)
|
|
6,319
|
|
2,331
|
|
14,981
|
|
(4,539
|
)
|
|
|
|
|
|
|
|
|
|
|
Less: Net income attributable to noncontrolling
interest
|
|
(680
|
)
|
(210
|
)
|
(1,227
|
)
|
(136
|
)
|
Net income (loss) attributable to AXT, Inc.
|
|
$
|
5,639
|
|
$
|
2,121
|
|
$
|
13,754
|
|
$
|
(4,675
|
)
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to AXT, Inc.
per common share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.18
|
|
$
|
0.07
|
|
$
|
0.44
|
|
$
|
(0.16
|
)
|
Diluted
|
|
$
|
0.17
|
|
$
|
0.07
|
|
$
|
0.42
|
|
$
|
(0.16
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares
outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
30,944
|
|
30,475
|
|
30,853
|
|
30,449
|
|
Diluted
|
|
32,509
|
|
30,911
|
|
32,170
|
|
30,449
|
|
See
accompanying notes to condensed consolidated financial statements.
4
Table of Contents
AXT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited,
in thousands)
|
|
Nine Months Ended
September 30,
|
|
|
|
2010
|
|
2009
|
|
Cash flows from operating activities:
|
|
|
|
|
|
Net income (loss)
|
|
$
|
14,981
|
|
$
|
(4,539
|
)
|
|
|
|
|
|
|
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
|
|
|
|
|
|
Depreciation
|
|
2,122
|
|
2,309
|
|
Amortization (accretion) of marketable securities
premium
|
|
174
|
|
(9
|
)
|
Loss on disposal of property, plant and equipment
|
|
1
|
|
|
|
Stock-based compensation
|
|
420
|
|
677
|
|
Restructuring charge
|
|
|
|
507
|
|
Realized loss (gain) on available for sale
securities
|
|
(346
|
)
|
9
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
Accounts receivable, net
|
|
(3,621
|
)
|
(2,495
|
)
|
Inventories
|
|
(5,451
|
)
|
6,410
|
|
Prepaid expenses and other current assets
|
|
(1,046
|
)
|
1,056
|
|
Other assets
|
|
(118
|
)
|
(340
|
)
|
Accounts payable
|
|
416
|
|
528
|
|
Accrued liabilities
|
|
1,997
|
|
(138
|
)
|
Other long-term liabilities
|
|
(25
|
)
|
(219
|
)
|
Net cash provided by operating activities
|
|
9,504
|
|
3,756
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
(4,040
|
)
|
(1,018
|
)
|
Proceeds from sale of property, plant and
equipment
|
|
10
|
|
4
|
|
Purchases of available for sale securities
|
|
(18,982
|
)
|
(13
|
)
|
Proceeds from available for sale securities
|
|
19,846
|
|
440
|
|
Decrease in restricted deposits
|
|
|
|
13
|
|
Net cash used in investing activities
|
|
(3,166
|
)
|
(574
|
)
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
Proceeds from common stock options exercised
|
|
819
|
|
48
|
|
Dividends paid by joint ventures
|
|
(528
|
)
|
(756
|
)
|
Long-term debt payments
|
|
(496
|
)
|
(67
|
)
|
Net cash used in financing activities
|
|
(205
|
)
|
(775
|
)
|
Effect of exchange rate changes on cash and cash
equivalents
|
|
326
|
|
69
|
|
Net increase in cash and cash equivalents
|
|
6,459
|
|
2,476
|
|
Cash and cash equivalents at the beginning of the
period
|
|
16,934
|
|
13,566
|
|
Cash and cash equivalents at the end of the period
|
|
$
|
23,393
|
|
$
|
16,042
|
|
See
accompanying notes to condensed consolidated financial statements.
5
Table of Contents
AXT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1.
Basis of Presentation
The accompanying condensed
consolidated
financial statements
of
AXT, Inc. (AXT, the Company, we, us, and our refer to
AXT, Inc. and all of its consolidated subsidiaries) are unaudited
, and have been prepared in accordance with accounting principles
generally accepted in the United States of America
for interim financial
information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, the year-end condensed consolidated balance sheet
data was derived from our audited consolidated financial statements, but does
not include all disclosures required by accounting principles
generally accepted
in the United States of America. In the
opinion of our management, the unaudited condensed consolidated financial
statements reflect all adjustments, consisting only of normal recurring
adjustments, considered necessary to present fairly the financial position,
results of operations and cash flows of AXT and our consolidated subsidiaries
for all periods presented.
Our management has made a
number of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to prepare
these condensed consolidated financial statements in conformity with accounting
principles
generally accepted in the United States of
America
. Actual results could differ materially from those estimates.
The results of operations
are not necessarily indicative of the results to be expected in the future or
for the full fiscal year. It is recommended that these condensed consolidated
financial statements be read in conjunction with our consolidated financial
statements and the notes thereto included in our 2009 Annual Report on
Form 10-K filed with the Securities and Exchange Commission (the SEC) on
March 22, 2010 and our Quarterly Report on Form 10-Q for the
quarterly periods ended March 31, 2010 and June 30, 2010 filed with
the SEC on May 17, 2010 and August 9, 2010, respectively.
The
condensed consolidated financial statements include the accounts of AXT and our
majority-owned subsidiaries. All significant inter-company accounts and
transactions have been eliminated. Investments in business entities in which we
do not have control, but have the ability to exercise significant influence
over operating and financial policies (generally 20-50% ownership), are
accounted for by the equity method. For majority-owned subsidiaries, we reflect
the noncontrolling interest of the portion we do not own on our Condensed
Consolidated Balance Sheets in Equity and our Condensed Consolidated Statements
of Operations.
Certain reclassifications
have been made to the prior period consolidated financial statements to conform
to current period presentation. These
reclassifications had no impact on previously reported total assets, stockholders
equity or net income (loss).
Note
2
.
Accounting for Stock-Based Compensation
We account for stock-based compensation in accordance with the
provisions of FASB Accounting Standards Codification (ASC) topic 718,
Compensation-Stock Compensation
(ASC 718), which
established accounting for stock-based awards exchanged for employee services.
Accordingly, stock-based compensation cost is measured at each grant date,
based on the fair value of the award, and is recognized as expense over the
employees requisite service period of the award. All of the Companys stock
compensation is accounted for as an equity instrument. The provisions of
ASC 718 apply to all awards granted or modified after the date of adoption
which was January 1, 2006. The unrecognized expense of awards not yet vested
at the date of adoption will be recognized in net income (loss) in the periods
after the date of adoption using the same Black-Scholes valuation method and
assumptions determined under the original provisions of ASC 718.
6
Table of
Contents
We utilized the Black-Scholes valuation model for estimating the fair
value of the stock compensation granted both before and after the adoption of
ASC 718. The following table summarizes compensation costs related to our
stock-based compensation awards (in thousands, except per share data):
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Stock-based compensation in the form of
employee stock options, included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
12
|
|
$
|
8
|
|
$
|
27
|
|
$
|
31
|
|
Selling, general and administrative
|
|
159
|
|
84
|
|
359
|
|
595
|
|
Research and development
|
|
16
|
|
6
|
|
34
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
187
|
|
98
|
|
420
|
|
677
|
|
Tax effect on stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net effect on net income (loss)
|
|
$
|
187
|
|
$
|
98
|
|
$
|
420
|
|
$
|
677
|
|
|
|
|
|
|
|
|
|
|
|
Effect on net income (loss) attributable to
AXT, Inc. per common share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.01
|
)
|
$
|
(0.00
|
)
|
$
|
(0.01
|
)
|
$
|
(0.02
|
)
|
Diluted
|
|
$
|
(0.01
|
)
|
$
|
(0.00
|
)
|
$
|
(0.01
|
)
|
$
|
(0.02
|
)
|
As of
September 30, 2010 the total compensation costs related to unvested
stock-based awards granted to employees under our stock option plan but not yet
recognized was approximately $1,718,000, net of estimated forfeitures of
$290,000. These costs will be amortized on a straight-line basis over a
weighted-average period of approximately 3.10 years and will be adjusted for
subsequent changes in estimated forfeitures. We
elected not to capitalize
any stock-based compensation to inventory as of September 30, 2010 due to
the immateriality of the amount.
The amortization of
stock compensation under
ASC 718
for the period after our January 1, 2006
adoption is based on the single-option approach.
We
estimate the fair value of stock options using a Black-Scholes valuation model,
consistent with the provisions of ASC 718. There were 379,000 and 300,000
stock options granted in the three months ended September 30, 2010 and
2009, respectively. There were 379,000 and 300,000 stock options granted in the
nine months ended September 30, 2010 and 2009, respectively. The fair
value of
our stock
options granted to employees for the nine months ended September 30, 2010
and 2009 were estimated using the following weighted-average assumptions:
|
|
Nine Months Ended
September 30,
|
|
|
|
2010
|
|
2009
|
|
Expected term (in
years)
|
|
4.0
|
|
4.0
|
|
|
|
|
|
|
|
Volatility
|
|
69.84
|
%
|
68.35
|
%
|
|
|
|
|
|
|
Expected dividend
|
|
0
|
%
|
0
|
%
|
|
|
|
|
|
|
Risk-free interest rate
|
|
1.00
|
%
|
2.00
|
%
|
|
|
|
|
|
|
Estimated forfeitures
|
|
6.15
|
%
|
10.63
|
%
|
|
|
|
|
|
|
Weighted-average fair
value
|
|
$
|
3.06
|
|
$
|
0.84
|
|
|
|
|
|
|
|
|
|
7
Table of Contents
The following table
summarizes the stock option transactions during the nine months ended
September 30, 2010 (in thousands, except per share data):
|
|
Shares
|
|
Weighted-
average
Exercise
Price
|
|
Weighted-
average
Remaining
Contractual
Life
(in years
)
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of January 1, 2010
|
|
2,880
|
|
$
|
2.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
379
|
|
5.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
(541
|
)
|
1.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canceled and expired
|
|
(89
|
)
|
8.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of September 30, 2010
|
|
2,629
|
|
$
|
2.93
|
|
6.43
|
|
$
|
10,121
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest as of
September 30, 2010
|
|
2,524
|
|
$
|
2.91
|
|
6.31
|
|
$
|
9,804
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable as of September 30, 2010
|
|
1,431
|
|
$
|
2.69
|
|
4.16
|
|
$
|
6,075
|
|
As
of December 31, 2009, options to purchase 1,900,000 shares at a weighted
average exercise price of $2.64 per share were vested and exercisable.
The
aggregate intrinsic value in the table above represents the total pretax
intrinsic value, based on our closing price of $6.62 on September 30,
2010, which would have been received by the option holder had all option
holders exercised their options on that date. The total number of in-the-money
options exercisable as of September 30, 2010 was 1,387,277.
The
options outstanding and exercisable as of September 30, 2010 were in the
following exercise price ranges:
Options Outstanding as of September 30, 2010
|
|
Options Exercisable
as of September 30, 2010
|
|
Range of Exercise Price
|
|
Shares
|
|
Weighted-
average
Exercise Price
|
|
Weighted-
average
Remaining
Contractual Life
|
|
Shares
|
|
Weighted-
Average
Exercise Price
|
|
$1.18 - $1.33
|
|
300,342
|
|
$
|
1.27
|
|
4.50
|
|
300,342
|
|
$
|
1.27
|
|
$1.34 - $1.34
|
|
7,500
|
|
$
|
1.34
|
|
5.05
|
|
7,500
|
|
$
|
1.34
|
|
$1.38 - $1.38
|
|
295,400
|
|
$
|
1.38
|
|
2.94
|
|
295,400
|
|
$
|
1.38
|
|
$1.40 - $1.40
|
|
1,094
|
|
$
|
1.40
|
|
4.45
|
|
1,094
|
|
$
|
1.40
|
|
$1.59 - $1.59
|
|
449,899
|
|
$
|
1.59
|
|
8.55
|
|
153,473
|
|
$
|
1.59
|
|
$1.88 - $1.98
|
|
17,000
|
|
$
|
1.93
|
|
4.39
|
|
17,000
|
|
$
|
1.93
|
|
$2.04 - $2.04
|
|
488,700
|
|
$
|
2.04
|
|
9.07
|
|
0
|
|
$
|
0.00
|
|
$2.19 - $2.19
|
|
306,750
|
|
$
|
2.19
|
|
2.15
|
|
306,750
|
|
$
|
2.19
|
|
$3.11 - $5.09
|
|
236,220
|
|
$
|
3.87
|
|
4.66
|
|
230,843
|
|
$
|
3.84
|
|
$5.83 - $39.80
|
|
525,625
|
|
$
|
6.84
|
|
8.59
|
|
118,875
|
|
$
|
10.18
|
|
|
|
2,628,530
|
|
$
|
2.94
|
|
6.43
|
|
1,431,277
|
|
$
|
2.69
|
|
There
were 424,679 and 541,337 options exercised in the three months and nine months
ended September 30, 2010, respectively. The total intrinsic value of
options exercised for the three and nine months ended September 30, 2010
was $1,975,810 and $2,242,484, respectively. Cash received from options
exercised for the three and nine months ended September 30, 2010 was
$652,975 and $819,175, respectively.
There were 6,250 and 36,833
options exercised in the three and nine months ended September 30, 2009,
respectively. The total intrinsic value of options exercised for the three and
nine months ended September 30, 2009 was $433 and $2,298, respectively.
Cash received from options exercised for the three and nine months ended
September 30, 2009 was $8,175 and $48,175, respectively.
8
Table of Contents
Restricted stock awards
A summary of activity related to restricted stock
awards for the nine months ended September 30, 2010 is presented below:
|
|
Shares
|
|
Weighted-Average
Grant Date Fair Value
|
|
Non-vested restricted stock shares outstanding as
of January 1, 2010
|
|
170,660
|
|
$
|
1.21
|
|
Restricted stock shares granted
|
|
121,237
|
|
$
|
5.29
|
|
Restricted stock shares vested
|
|
(48,127
|
)
|
$
|
1.43
|
|
Non-vested restricted stock shares outstanding as
of September 30, 2010
|
|
243,770
|
|
$
|
3.20
|
|
As
of September 30, 2010, we had $697,000 of unrecognized compensation
expense, net of forfeitures, related to restricted stock awards, which will be
recognized over the weighted average period of 2.44 years. During the nine
months ended September 30, 2010 and 2009, 48,127 shares and 7,827 shares
of restricted stock vested respectively.
Note 3.
Investments and Fair Value Measurements
Our
cash, cash equivalents and investments are classified as follows (in
thousands):
|
|
September 30, 2010
|
|
December 31, 2009
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
|
|
Cost
|
|
Gain
|
|
(Loss)
|
|
Value
|
|
Cost
|
|
Gain
|
|
(Loss)
|
|
Value
|
|
Classified as:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
21,125
|
|
$
|
|
|
$
|
|
|
$
|
21,125
|
|
$
|
16,790
|
|
$
|
|
|
$
|
|
|
$
|
16,790
|
|
Cash
equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market fund
|
|
2,268
|
|
|
|
|
|
2,268
|
|
144
|
|
|
|
|
|
144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
cash and cash equivalents
|
|
23,393
|
|
|
|
|
|
23,393
|
|
16,934
|
|
|
|
|
|
16,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates
of Deposit
|
|
3,600
|
|
10
|
|
|
|
3,610
|
|
|
|
|
|
|
|
|
|
US
Treasury and agency securities
|
|
4,935
|
|
8
|
|
|
|
4,943
|
|
|
|
|
|
|
|
|
|
Corporate
bonds
|
|
9,072
|
|
|
|
(19
|
)
|
9,053
|
|
18,298
|
|
171
|
|
|
|
18,469
|
|
Total
investments
|
|
17,607
|
|
18
|
|
(19
|
)
|
17,606
|
|
18,298
|
|
171
|
|
|
|
18,469
|
|
Total
cash, cash equivalents and investments
|
|
$
|
41,000
|
|
$
|
18
|
|
$
|
(19
|
)
|
$
|
40,999
|
|
$
|
35,232
|
|
$
|
171
|
|
$
|
|
|
$
|
35,403
|
|
Contractual maturities on investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due
within 1 year
|
|
$
|
4,474
|
|
|
|
|
|
$
|
4,467
|
|
$
|
18,298
|
|
|
|
|
|
$
|
18,469
|
|
Due
after 1 through 5 years
|
|
13,133
|
|
|
|
|
|
13,139
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,607
|
|
|
|
|
|
$
|
17,606
|
|
$
|
18,298
|
|
|
|
|
|
$
|
18,469
|
|
We
manage our investments as a single portfolio of highly marketable securities
that is intended to be available to meet our current cash requirements. We have
no investments in auction rate securities. For the three and nine months ended
September 30, 2010 we had $150,000 and $346,000 of gross realized gains on
sales of our available-for-sale securities, respectively. For the three and
nine months ended September 30, 2009 we had $9,000 of gross realized
losses on sales of our available-for-sale securities.
The
gross unrealized losses related to our portfolio of available-for-sale
securities were primarily due to a decrease in the fair value of debt
securities. We have determined that the gross unrealized losses on our
available-for-sale securities as of September 30, 2010 are temporary in
nature. We reviewed our investment portfolio to identify and evaluate
investments that have indications of possible impairment. Factors considered in
determining whether a loss is temporary include the magnitude of the decline in
market value, the length of time the market value has been below cost (or
adjusted cost), credit quality, and our ability and intent to hold the
securities for a period of time sufficient to allow for any anticipated
recovery in market value. The following table provides a breakdown of our
available-for-sale securities with unrealized losses as of September 30,
2010 (in thousands):
9
Table of
Contents
|
|
In Loss Position
< 12 months
|
|
Total In
Loss Position
|
|
|
|
|
|
Gross
|
|
|
|
Gross
|
|
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
|
|
Value
|
|
(Loss)
|
|
Value
|
|
(Loss)
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
9,053
|
|
$
|
(19
|
)
|
$
|
9,053
|
|
$
|
(19
|
)
|
Total in loss position
|
|
$
|
9,053
|
|
$
|
(19
|
)
|
$
|
9,053
|
|
$
|
(19
|
)
|
Investments in Privately-held 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 (see Note 9). The investment balances for the two companies
accounted for under the equity method are included in other assets in the
condensed consolidated balance sheets and totaled $4.3 million and
$4.2 million as of September 30, 2010 and December 31, 2009,
respectively. We have investments in three unconsolidated privately-held
companies accounted for under the cost method. As of September 30, 2010
and December 31, 2009, our investments in the three unconsolidated
privately-held companies accounted for under the cost method had a carrying
value of $0.7 million and $0.7 million, respectively, and are included in other
assets in the condensed consolidated balance sheets.
Fair Value
Measurements
On January 1, 2008, we adopted ASC topic 820,
Fair Value Measurements and Disclosures
(ASC
820) which defines fair value, establishes a framework for using fair value to
measure assets and liabilities, and expands disclosures about fair value
measurements. ASC 820 applies whenever other statements require or permit
assets or liabilities to be measured at fair value. ASC 820 applies to all
financial assets and financial liabilities that are being measured and reported
on a fair value basis and requires disclosure that establishes a framework for
measuring fair value and expands disclosure about fair value measurements.
Certain financial assets and liabilities that are not required to be recorded
at fair value, including accounts receivable, accounts payable, accrued
liabilities and term debt, have recorded values that approximate fair value
given their short term nature and relative terms of the agreement.
The following table summarizes our financial assets and liabilities
measured at fair value on a recurring basis in accordance with ASC 820 as
of September 30, 2010 (in thousands):
|
|
Balance as of
September 30, 2010
|
|
Quoted Prices in
Active Markets of
Identical Assets
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Assets:
|
|
|
|
|
|
|
|
Cash equivalents and investments:
|
|
|
|
|
|
|
|
Money market fund - cash
|
|
$
|
2,268
|
|
$
|
2,268
|
|
$
|
|
|
Certificates of deposit
|
|
3,610
|
|
|
|
3,610
|
|
US Treasury and agency securities
|
|
4,943
|
|
|
|
4,943
|
|
Corporate bonds
|
|
9,053
|
|
|
|
9,053
|
|
Total
|
|
$
|
19,874
|
|
$
|
2,268
|
|
$
|
17,606
|
|
Liabilities
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Our
financial assets and liabilities are valued using market prices on both active
markets (Level 1) and less active markets (Level 2). Level 1
instrument valuations are obtained from real-time quotes for transactions in
active exchange markets involving identical assets. Level 2 instrument
valuations are obtained from readily-available pricing sources for comparable
instruments. As of September 30, 2010, we did not have any assets or
liabilities without observable market values that would require a high level of
judgment to determine fair value (Level 3 assets).
Items Measured at Fair Value on a Nonrecurring
Basis
Certain
assets that are subject to nonrecurring fair value measurements are not
included in the table above. These assets include equity and cost method
investments in private companies. We did not record other-than-temporary
impairment charges for either of these investments during the first nine months
of 2010 or 2009.
10
Table of Contents
Note 4.
Inventories, Net
The
components of inventories are summarized below (in thousands):
|
|
September 30,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
Inventories, net:
|
|
|
|
|
|
Raw materials
|
|
$
|
15,296
|
|
$
|
12,051
|
|
Work in process
|
|
13,777
|
|
11,947
|
|
Finished goods
|
|
4,080
|
|
3,720
|
|
|
|
$
|
33,153
|
|
$
|
27,718
|
|
Note 5.
Restructuring Charge
In
March 2009, we reduced the workforce at our Fremont and Beijing facilities
by approximately 11 positions that were no longer required to support certain
production and administrative operations. This measure was being taken as part
of our 2009 operating plan. Accordingly, we recorded a restructuring charge of
$507,000 in March 2009 for severance-related expenses from the reduction
in force, all of which were paid during the second quarter of 2009. We expect
to save approximately $1.3 million annually in payroll and related expenses. We
had no restructuring charge in the first nine months of 2010.
Note 6. Net Income (Loss) Per Share
Basic
net income
(loss) per common share is
calculated by dividing net income (loss) available to common stockholders by
the weighted average number of common shares outstanding during the period.
Diluted net income (loss) per common and common equivalent shares include the
dilutive effect of common stock equivalents outstanding during the period
calculated using the treasury stock method. Common stock equivalents consist of
the shares issuable upon the exercise of stock options.
A
reconciliation of the numerators and denominators of the basic and diluted net
income (loss) per share calculations is as follows (in thousands
,
except per share data):
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to AXT, Inc.
|
|
$
|
5,639
|
|
$
|
2,121
|
|
$
|
13,754
|
|
$
|
(4,675
|
)
|
Less: Preferred stock dividends
|
|
(44
|
)
|
(44
|
)
|
(132
|
)
|
(132
|
)
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common stockholders
|
|
$
|
5,595
|
|
$
|
2,077
|
|
$
|
13,622
|
|
$
|
(4,807
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income (loss) per share
- weighted average common shares
|
|
30,944
|
|
30,475
|
|
30,853
|
|
30,449
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
Common stock options
|
|
1,565
|
|
436
|
|
1,317
|
|
|
|
Denominator for dilutive net income (loss) per
common share
|
|
32,509
|
|
30,911
|
|
32,170
|
|
30,449
|
|
Effect on net income (loss) attributable to
AXT, Inc. per common share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.18
|
|
$
|
0.07
|
|
$
|
0.44
|
|
$
|
(0.16
|
)
|
Diluted
|
|
$
|
0.17
|
|
$
|
0.07
|
|
$
|
0.42
|
|
$
|
(0.16
|
)
|
Options excluded from diluted per share
calculation as the impact is anti-dilutive
|
|
471
|
|
2,115
|
|
434
|
|
2,655
|
|
The 883,000 shares of $0.001
par value Series A preferred stock issued on May 28, 1999 are
non-voting and non-convertible preferred stock with a 5.0% cumulative annual
dividend rate payable when declared by the board of directors, and a $4 per
share liquidation preference over common stock, and must be paid before any
distribution is made to common stockholders.
11
Table of Contents
Note 7.
Stockholders Equity and Other Comprehensive Income (Loss)
Consolidated
Statements of Changes in Equity
|
|
Preferred
Stock
|
|
Common
Stock
|
|
Additional
Paid In Capital
|
|
Accumulated
Deficit
|
|
Other
Comprehensive
Income/(loss)
|
|
AXT, Inc.
stockholders
equity
|
|
Noncontrolling
interests
|
|
Total
stockholders
equity
|
|
Balance
as of December 31, 2009
|
|
$
|
3,532
|
|
$
|
30
|
|
$
|
187,871
|
|
$
|
(101,130
|
)
|
$
|
4,300
|
|
$
|
94,603
|
|
$
|
2,648
|
|
$
|
97,251
|
|
Common
stock options exercised
|
|
|
|
|
|
819
|
|
|
|
|
|
819
|
|
|
|
819
|
|
Stock-based
compensation
|
|
|
|
|
|
420
|
|
|
|
|
|
420
|
|
|
|
420
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
13,754
|
|
|
|
13,754
|
|
1,227
|
|
14,981
|
|
Dividend
paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(528
|
)
|
(528
|
)
|
Change
in unrealized (loss) gain on marketable securities
|
|
|
|
|
|
|
|
|
|
(172
|
)
|
(172
|
)
|
|
|
(172
|
)
|
Currency
translation adjustment
|
|
|
|
|
|
|
|
|
|
148
|
|
148
|
|
117
|
|
265
|
|
Balance
as of September 30, 2010
|
|
$
|
3,532
|
|
$
|
30
|
|
$
|
189,110
|
|
$
|
(87,376
|
)
|
$
|
4,276
|
|
$
|
109,572
|
|
$
|
3,464
|
|
$
|
113,036
|
|
The
components of comprehensive income (loss) are as follows (in thousands):
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to AXT, Inc.
|
|
$
|
5,639
|
|
$
|
2,121
|
|
$
|
13,754
|
|
$
|
(4,675
|
)
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
Change in foreign currency translation gain
(loss), net of tax
|
|
628
|
|
19
|
|
265
|
|
(21
|
)
|
Change in unrealized gain (loss) on available-for-sale
investments, net of tax
|
|
121
|
|
518
|
|
(172
|
)
|
1,408
|
|
Total other comprehensive income (loss), net of
tax
|
|
749
|
|
537
|
|
93
|
|
1,387
|
|
Comprehensive income (loss)
|
|
6,388
|
|
2,658
|
|
13,847
|
|
(3,288
|
)
|
Comprehensive income (loss) attributable to the
noncontrolling interest
|
|
(117
|
)
|
|
|
(117
|
)
|
|
|
Comprehensive income (loss) attributable to
AXT, Inc.
|
|
$
|
6,271
|
|
$
|
2,658
|
|
$
|
13,730
|
|
$
|
(3,288
|
)
|
Note 8.
Segment Information and Foreign Operations
Segment Information
We operate in one segment for the design, development, manufacture and
distribution of high-performance compound semiconductor substrates and sale of
materials. In accordance with ASC topic 280,
Segment Reporting,
our
chief operating decision-maker has been identified as the principal executive
officer, who reviews operating results to make decisions about allocating
resources and assessing performance for the Company. Since we operate in one
segment, all financial segment and product line information can be found in the
consolidated financial statements.
Product Information
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Revenue by product type:
|
|
|
|
|
|
|
|
|
|
GaAs substrates
|
|
$
|
19,174
|
|
$
|
13,316
|
|
$
|
48,843
|
|
$
|
28,436
|
|
InP substrates
|
|
956
|
|
688
|
|
2,908
|
|
1,862
|
|
Ge substrates
|
|
2,267
|
|
1,787
|
|
5,509
|
|
3,626
|
|
Raw materials and other
|
|
4,412
|
|
1,028
|
|
11,367
|
|
3,604
|
|
Total
|
|
$
|
26,809
|
|
$
|
16,819
|
|
$
|
68,627
|
|
$
|
37,528
|
|
12
Table of Contents
Geographical Information
The
following table represents revenue amounts (in thousands) reported for products
shipped to customers in the corresponding geographic region:
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Revenue by geographic region:
|
|
|
|
|
|
|
|
|
|
North America*
|
|
$
|
5,224
|
|
$
|
2,975
|
|
$
|
14,472
|
|
$
|
7,139
|
|
Europe
|
|
5,775
|
|
3,115
|
|
13,744
|
|
7,592
|
|
Japan
|
|
3,040
|
|
2,304
|
|
9,322
|
|
5,494
|
|
Taiwan
|
|
3,869
|
|
3,462
|
|
10,470
|
|
6,897
|
|
Asia Pacific
|
|
8,901
|
|
4,963
|
|
20,619
|
|
10,406
|
|
Total
|
|
$
|
26,809
|
|
$
|
16,819
|
|
$
|
68,627
|
|
$
|
37,528
|
|
*Primarily
the United States
Long-lived
assets consist primarily of property, plant and equipment, and are attributed
to the geographic location in which they are located. Long-lived assets by
geographic region were as follows (in thousands):
|
|
As of
|
|
|
|
September 30,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
Long-lived assets by geographic region:
|
|
|
|
|
|
North America
|
|
$
|
597
|
|
$
|
661
|
|
China
|
|
22,112
|
|
20,192
|
|
|
|
$
|
22,709
|
|
$
|
20,853
|
|
Significant Customers
One
customer represented more than 10% of revenue at 19.0% for the three month
period ended September 30, 2010 while two customers each represented more
than 10% of revenue at 16.5% and 10.1% for the three month period ended September 30,
2009. One customer represented more than
10% of revenue at 18.1% for the nine month period ended September 30, 2010
while two customers each represented more than 10% at 15.8% and 10.8% revenues
for the nine month period ended September 30, 2009.Our top five customers
represented 42.6% and 46.9% of revenue for the three month periods ended
September 30, 2010 and 2009, respectively. Our top five customers
represented 40.0% and 42.9% of revenue for the nine month periods ended
September 30, 2010 and 2009, respectively.
We perform periodic credit evaluations of our customers financial
condition and generally do not require collateral. Two customers each accounted
for 10% or more of our trade accounts receivable balance as of
September 30, 2010 at 31%, and 14%, respectively.
Note 9.
Investments in Privately-held Companies
We have made strategic investments in private companies located in
China in order to gain access to raw materials at a competitive cost that are
critical to our substrate business.
Our investments are summarized below (in thousands):
|
|
Investment Balance as of
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
Accounting
|
|
Ownership
|
|
Company
|
|
2010
|
|
2009
|
|
Method
|
|
Percentage
|
|
Beijing JiYa Semiconductor
Material Co., Ltd
|
|
$
|
996
|
|
$
|
996
|
|
Consolidated
|
|
46
|
%
|
Nanjing Jin Mei Gallium Co., Ltd
|
|
592
|
|
592
|
|
Consolidated
|
|
83
|
%
|
Beijing BoYu Semiconductor Vessel Craftwork
Technology Co., Ltd
|
|
410
|
|
410
|
|
Consolidated
|
|
70
|
%
|
|
|
$
|
1,998
|
|
$
|
1,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Xilingol Tongli Germanium Co. Ltd
|
|
$
|
3,398
|
|
$
|
3,367
|
|
Equity
|
|
25
|
%
|
Emeishan Jia Mei High Purity
Metals Co., Ltd
|
|
857
|
|
866
|
|
Equity
|
|
25
|
%
|
|
|
$
|
4,255
|
|
$
|
4,233
|
|
|
|
|
|
Our ownership of Beijing Ji Ya Semiconductor
Material Co., Ltd. (JiYa) is 46%. We continue to consolidate JiYa as
we have significant influence in management and have a majority control of the
board. Our chief executive officer is chairman of the JiYa board, while our
president of China operations and our vice president of China administration
and our vice president of wafer production are also members of the JiYa board.
13
Table of Contents
Our ownership of Nanjing Jin Mei Gallium Co., Ltd. (Jin Mei)
is 83%. We continue to consolidate Jin Mei as we have significant influence in
management and have a majority control of the board. Our chief executive
officer is chairman of the Jin Mei board, while our president of China
operations and our vice president of China administration are also members of
the Jin Mei board.
Our ownership of Beijing BoYu Semiconductor Vessel Craftwork
Technology Co., Ltd (BoYu), is 70%. We continue to consolidate Bo Yu
as we have a significant influence over management and have a majority control
of the board. Our chief executive officer is chairman of the BoYu board and our
president of China operations and our vice president of China administration
are members of the BoYu board.
Although we have representation on the boards of directors of each of
these 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, any capacity expansion and annual capital
expenditures, and decisions concerning sales of finished product, are made by
local management with some input from us.
The investment balances for the two companies accounted for under the
equity method are included in other assets in the consolidated balance sheets
and totaled $4.3 million and $4.2 million as of September 30, 2010
and December 31, 2009, respectively. We own 25% of the ownership interests
in each of these companies. These two companies are not considered variable
interest entities because:
·
both companies 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 either company.
During the three and nine months ended September 30, 2010 the
three consolidated joint ventures had income of $2.0 million and $3.8 million
of which $0.7 million and $1.2 million, respectively, were allocated to
minority interests, resulting in income of $1.3 million and $2.6 million,
respectively, included in our net income. During the three and nine months
ended September 30, 2009 the three consolidated joint ventures had income
of $705,000 and $538,000, respectively of which $210,000 and $136,000 were
allocated to minority interests, resulting in income of $494,000 and $401,000
included in our net income, respectively. Our equity earnings from the
two-minority owned joint ventures that are not consolidated are recorded as
other income (loss), net and totaled $182,000 and $409,000 for the nine months
ended September 30, 2010 and 2009, respectively. Undistributed retained
earnings relating to all our investments in these companies were $
15.2 million and $ 12.4 million as of September 30, 2010 and December 31,
2009, respectively.
Our two minority-owned joint ventures that are not consolidated and
accounted for under the equity method had the following summarized income
information (in thousands) for the three and nine months ended
September 30, 2010 and 2009.
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
|
3,009
|
|
$
|
3,037
|
|
$
|
9,851
|
|
$
|
9,252
|
|
Gross profit
|
|
933
|
|
1,392
|
|
2,723
|
|
3,243
|
|
Operating income
|
|
238
|
|
800
|
|
638
|
|
1,548
|
|
Net income
|
|
400
|
|
1,083
|
|
726
|
|
1,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have investments in three unconsolidated privately-held companies
accounted for under the cost method. As of September 30, 2010 and
December 31, 2009, our investments in the three unconsolidated
privately-held companies accounted for under the cost method had a carrying
value of $0.7 million and $0.7 million, respectively, and are included in other
assets in the condensed consolidated balance sheets.
14
Table of Contents
Note 10.
Commitments and Contingencies
Indemnification Agreements
We
enter into standard indemnification arrangements in the ordinary course of
business. Pursuant to these arrangements, we indemnify, hold harmless, and
agree to reimburse the indemnified parties for losses suffered or incurred by
the indemnified party, generally our business partners or customers, in
connection with any U.S. patent, or any copyright or other intellectual
property infringement claim by any third party with respect to our products.
The term of these indemnification agreements is generally perpetual anytime
after the execution of the agreement. The maximum potential amount of future
payments we could be required to make under these agreements is unlimited. We
have never incurred costs to defend lawsuits or settle claims related to these
indemnification agreements. As a result, we believe the estimated fair value of
these agreements is minimal.
We
have entered into indemnification agreements with our directors and officers
that may require us to indemnify our directors and officers against liabilities
that may arise by reason of their status or service as directors or officers,
other than liabilities arising from willful misconduct of a culpable nature; to
advance their expenses incurred as a result of any proceeding against them as
to which they could be indemnified; and to obtain directors and officers
insurance if available on reasonable terms, which we currently have in place.
Product Warranty
We
warrant our products for a specific period of time, generally twelve months,
against material defects. We provide for the estimated future costs of warranty
obligations in cost of sales when the related revenue is recognized. The accrued
warranty costs represent the best estimate at the time of sale of the total
costs that we expect to incur to repair or replace product parts that fail
while still under warranty. The amount of accrued estimated warranty costs are
primarily based on historical experience as to product failures as well as
current information on repair costs. On a quarterly basis, we review the
accrued balances and update these based on the historical warranty cost trends.
The following table reflects the change in our warranty accrual which is
included in accrued liabilities on the condensed consolidated balance sheets
during the three and nine months ended September 30, 2010 and 2009 (in
thousands):
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Beginning accrued warranty and related costs
|
|
$
|
880
|
|
$
|
1,495
|
|
$
|
1,082
|
|
$
|
1,640
|
|
Charged to cost of revenue
|
|
(17
|
)
|
538
|
|
(163
|
)
|
856
|
|
Actual warranty expenditures
|
|
|
|
(321
|
)
|
(56
|
)
|
(784
|
)
|
Ending accrued warranty and related costs
|
|
$
|
863
|
|
$
|
1,712
|
|
$
|
863
|
|
$
|
1,712
|
|
Purchase Obligations
Through the normal course of business, we purchase or place orders for
the necessary materials of our products from various suppliers and we commit to
purchase products where we may incur a penalty if the agreement was canceled.
As of September 30, 2010, we did not have any outstanding material
purchase obligations.
Legal
Proceedings
From time to time we may be
involved in judicial or administrative proceedings concerning matters arising
in the ordinary course of business. We do not expect that any of these matters,
individually or in the aggregate, will have a material adverse effect on our
business, financial condition, cash flows or results of operation.
Note 11.
Foreign Exchange Transaction Gains/Losses
We
incurred foreign currency transaction exchange gains of $210,000 and $341,000
for the three months ended September 30, 2010, and 2009, respectively. We
incurred foreign currency transaction exchange gains of $372,000 and $88,000 for
the nine months ended September 30,
2010, and 2009, respectively. These amounts are included in Other income
(expense), net on the condensed consolidated statements of operations.
Note 12. Income Taxes
In
July 2006, the Financial Accounting Standards Board (FASB) issued ASC
topic 740,
Income Taxes
(ASC 740). ASC 740
clarifies the accounting for uncertainty in income taxes recognized in an
enterprises financial statements in accordance with ASC 740. This
interpretation prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. ASC 740 also provides guidance on
derecognition of tax benefits, classification on the balance sheet, interest
and penalties, accounting in interim periods, disclosure, and transition. We
15
Table of
Contents
adopted
ASC 740 effective January 1, 2007. We recognize interest and penalties
related to uncertain tax positions in income tax expense. As of
September 30, 2010, we did not have any gross unrecognized tax benefits,
nor any accrued interest and penalties related to uncertain tax positions. As a
result of the implementation of ASC 740, we identified $16.4 million in
the liability for unrecognized tax benefits. Of this amount, none was accounted
for as a reduction to the January 1, 2007 balance of retained earnings.
The amount decreased the tax loss carryforwards in the U.S. which are fully
offset by a valuation allowance. We file income tax returns in the U.S. federal,
various states and foreign jurisdictions. We have substantially concluded all
U.S. federal and state income tax matters through December 31, 2008. There
were no Federal U.S. tax expense during three and nine months ended September 30,
2010 due to the valuation allowance being utilized.
Note 13.
Recent Accounting Pronouncements
With
the exception of those stated below, there have been no recent accounting
pronouncements or changes in accounting pronouncements during the three months
ended September 30, 2010, as compared to the recent accounting
pronouncements described in the Annual Report that are of material
significance, or have potential material significance, to the Company.
In
May 2009, the FASB issued guidance contained in FASB ASC 855,
Subsequent Events
to establish general standards of
accounting for and disclosure of events that occur after the balance sheet date
but before financial statements are issued or are available to be issued. This
guidance was effective for interim or annual financial periods ending after
June 15, 2009. In February, 2010, the FASB issued Accounting Standards
Update 2010-09 Subsequent Events which removed the requirement to disclose
the date through which subsequent events had been considered for disclosure.
This update was effective upon issuance. In accordance with this guidance, we
have evaluated and, as necessary, made changes to these unaudited Condensed
Consolidated Financial Statements for the events.
In
October 2009, the FASB issued ASU No. 2009-13,
Multiple-Deliverable Revenue Arrangements a Consensus of the FASB
Emerging Issues Task Force
an update to Accounting Standards
Codification (ASC) Topic 605,
Revenue Recognition
. This
update requires the allocation of consideration among separately identified
deliverables contained within an arrangement, based on their related selling
prices. This update will be effective for annual reporting
periods beginning January 1, 2011. The Company is currently
evaluating the impact of this update on its financial position,
results of operations, cash flows, and disclosures.
In
January 2010, the FASB issued ASU No. 2010-06,
Improving Disclosures about Fair Value Measurements
an
update to ASC Topic 820,
Fair Value Measurements
and Disclosures
. This update requires an entity to:
(i) disclose separately the amounts of significant transfers in and out of
Level 1 and Level 2 fair value measurements and describe the reasons for the
transfers and (ii) present separate information for Level 3 activity
pertaining to gross purchases, sales, issuances, and settlements. This
update became effective for us in the quarter ended March 31, 2010, except
that the disclosure on the roll forward activities for Level 3 fair value
measurements will become effective for us with the reporting period beginning
January 1, 2011. Other than requiring additional disclosures, adoption of
this new guidance did not have a material impact on the Companys financial
statements.
ITEM 2. MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This
quarterly report on Form 10-Q, including the following sections, contains
forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended, particularly statements relating
to our expectations regarding results of operations, customer demand, our
ability to leverage our manufacturing capabilities and access to favorably
priced raw materials to increase our market share, our ability to drive future
business, industry trends, our progress in our penetration of the solar cell
market, our ability to expand our markets and increase sales, gross margins,
our reserve balances, our expected savings from our the workforce reduction
implemented in 2009, the impact of the adoption of certain accounting
pronouncements, our investments in capital projects, and our belief that we
have adequate cash and investments to meet our needs over the next 12 months.
These forward-looking statements are based upon managements current views with
respect to future events and financial performance, and are subject to certain
risks and uncertainties that could cause actual results to differ materially
from historical results or those anticipated in such forward-looking
statements. Such risks and uncertainties include those set forth under the
section entitled Risk Factors below and in our Annual Report on Form 10-K
for the fiscal year ended December 31, 2009, which identify important
factors that could cause actual results to differ materially from those predicted
in any such forward-looking statements. We caution investors that actual
results may differ materially from those projected in the forward-looking
statements as a result of certain risk factors identified in this
Form 10-Q and other filings we have made with the Securities and Exchange
Commission. Forward-looking statements may be identified by the use of terms
such as anticipates, believes, estimates, expects, intends, and
similar expressions. Statements concerning our future or expected financial
results and condition, business strategy and plans or objectives for future
operations are forward-looking statements.
16
Table of Contents
These
forward-looking statements are not guarantees of future performance. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date hereof. This discussion should be read in conjunction
with Managements Discussion and Analysis of Financial Condition and Results of
Operations included in our Annual Report on Form 10-K for the year ended
December 31, 2009 and the condensed consolidated financial statements
included elsewhere in this report.
Overview
We
are a leading worldwide developer and producer of high-performance compound and
single element semiconductor substrates comprising gallium arsenide (GaAs),
indium phosphide (InP) and germanium (Ge). We currently sell the following
substrate products in the sizes and for the applications indicated:
Product
|
|
|
Substrates
|
|
Diameter
|
|
Applications
|
GaAs
(semi-insulating)
|
|
2, 3, 4, 5, 6
|
|
·
Power
amplifiers and radio frequency integrated circuits for wireless handsets
(cell phones)
|
|
|
|
|
·
Direct
broadcast television
|
|
|
|
|
·
High-performance transistors
|
|
|
|
|
·
Satellite communications
|
|
|
|
|
|
GaAs
(semi-conducting)
|
|
2, 3, 4
|
|
·
High
brightness light emitting diodes
|
|
|
|
|
·
Lasers
|
|
|
|
|
·
Optical couplers
|
|
|
|
|
|
InP
|
|
2, 3, 4
|
|
·
Broadband and fiber optic communications
|
|
|
|
|
|
Ge
|
|
2, 4
|
|
·
Satellite and terrestrial solar cells
|
|
|
|
|
·
Optical applications
|
We manufacture all of our semiconductor substrates using our
proprietary vertical gradient freeze (VGF) technology. Most of our revenue is
from sales of GaAs substrates. We manufacture all of our products in the Peoples
Republic of China (PRC or China), which generally has favorable costs for
facilities and labor compared to comparable facilities in the United States or
Europe. We also have three majority-owned and two minority-owned joint ventures
in China which provide us favorable
pricing, reliable supply and enhanced sourcing lead-times for key raw materials
which are central to our final manufactured products.
These joint ventures produce products including 99.99% pure
gallium (4N Ga), high purity gallium, arsenic, germanium, germanium dioxide,
paralytic boron nitride (pBN) crucibles and boron oxide. AXTs ownership
interest in these entities ranges from 25% to 83%. We consolidate the three
ventures in which we own a majority or controlling financial interest and
employ equity accounting for the two joint ventures in which we have a 25%
interest. We purchase portions of the materials produced by these ventures for
our own use and the joint ventures sell the remainder of their production to
third parties
. We use our direct sales force in the United States
and independent sales representatives in Europe and Asia to market our
substrates. We believe that, as the demand for compound semiconductor
substrates is expected to increase, we are positioned to leverage our PRC-based
manufacturing capabilities and access to favorably priced raw materials to
increase our market share.
While
the volatile business and financial markets are prompting us to continue to
take a conservative approach to our business, we remain optimistic about our
business. Positive industry trends in the first half of 2010, coupled with our
competitive manufacturing and cost advantages give us confidence in our ability
to continue to drive future business in 2010. Following very challenging
industry conditions in the first half of 2009, we began to see stronger sales and
improved gross margins in the second half of 2009. Our qualification efforts in
both gallium arsenide and germanium substrates have been successful and we are
pleased with our increasing diversification in these areas.
As
of September 30, 2010, our principal sources of liquidity were $41.0
million in cash and cash equivalents and short and long-term investments. This
increased by $5.6 million compared to cash and cash equivalents and short-term
investments of $35.4 million at December 31, 2009.
Critical Accounting Policies and Estimates
We
have prepared our condensed consolidated financial statements in accordance
with accounting principles generally accepted in the United States of America.
As such, we have had to make estimates, assumptions and judgments that affect
the amounts reported on our financial statements. These estimates, assumptions
and judgments about future events and their effects on our results cannot be
determined with certainty, and are made based upon our historical experience
and on other assumptions that are believed to be reasonable under the
circumstances. These estimates may change as new events occur or
additional information is obtained, and we may periodically be faced with
uncertainties, the outcomes of which are not within our control and
may not be known for a prolonged period of time. The discussion and
analysis of our results of operations and financial condition are based upon
these condensed consolidated financial statements.
17
Table of
Contents
We
have identified the policies below as critical to our business operations and
understanding of our financial condition and results of operations.
A
critical accounting policy is one that is both material to the presentation of
our financial statements and requires us to make difficult, subjective or
complex judgments that could have a material effect on our financial condition
and results of operations. They may require us to make assumptions about
matters that are highly uncertain at the time of the estimate, and different
estimates that we could have used, or changes in the estimate that are
reasonably likely to occur, may have a material impact on our financial
condition or results of operations. We
believe that the following are our critical accounting policies:
Revenue Recognition
We
manufacture and sell high-performance compound semiconductor substrates and
sell certain raw materials including gallium, germanium dioxide, and pBN
crucibles. After we ship our products, there are no remaining obligations or
customer acceptance requirements that would preclude revenue recognition. Our
products are typically sold pursuant to a purchase order placed by our
customers, and our terms and conditions of sale do not require customer
acceptance. We recognize revenue upon shipment and transfer of title of
products to our customers, which is either upon shipment from our dock, receipt
at the customers dock, or removal from consignment inventory at the customers
location, provided that we have received a signed purchase order, the price is
fixed or determinable, title and risk of ownership have transferred, collection
of resulting receivables is probable, and product returns are reasonably
estimable. We do not provide training, installation or commissioning services.
We may provide discounts or other incentives to customers in order to secure
business.
We
provide for future returns based on historical experience, current economic
trends and changes in customer demand at the time revenue is recognized.
Accounts Receivable and Allowance
for Doubtful Accounts
We
periodically review the likelihood of collection on our accounts receivable
balances and provide an allowance for doubtful accounts receivable primarily
based upon the age of these accounts. We provide a 100% allowance for
receivables from U.S. customers in excess of 90 days and for receivables from
customers located outside the U.S. in excess of 120 days. We assess the
probability of collection based on a number of factors, including the length of
time a receivable balance has been outstanding, our past history with the
customer and their creditworthiness.
As
of September 30, 2010 and December 31, 2009, our accounts receivable,
net, balance was $19.0 million and $15.4 million, respectively, which was net
of an allowance for doubtful accounts of $0.1 million and $0.2 million,
respectively. If actual uncollectible accounts differ substantially from our estimates,
revisions to the estimated allowance for doubtful accounts would be required,
which could have a material impact on our financial results for the period.
The allowance for sales returns is also deducted
from gross accounts receivable. As of September 30, 2010 and
December 31, 2009, our allowance for sales returns was $0.4 million and
$0.8 million, respectively.
Warranty Reserve
We
maintain a warranty reserve based upon our claims experience during the prior
twelve months. Warranty costs are accrued at the time revenue is recognized. As
of September 30, 2010 and December 31, 2009, accrued product
warranties totaled $0.9 million and $1.1 million, respectively. If actual
warranty costs 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.
Inventory Valuation
Inventories
are stated at the lower of cost or market. 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. Given the nature of our substrate products, and
the materials used in the manufacturing process, the wafers and ingots
comprising work-in-process may be held in inventory for up to two years
and three years, respectively, as the risk of obsolescence for these materials
is low. 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, 2010 and December 31, 2009, we had an inventory
reserve of $8.4 million and $10.1 million, respectively, for excess and
obsolete inventory. The majority of this inventory has not been scrapped, and
accordingly, may be sold in future periods. 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.
18
Table of Contents
Impairment of Investments
We classify our investments in debt and equity securities as
available-for-sale securities as prescribed by ASC topic 320,
Debt and Equity Securities.
All available-for-sale
securities with a quoted market value below cost (or adjusted cost) are
reviewed in order to determine whether the decline is other-than-temporary.
Factors considered in determining whether a loss is temporary include the
magnitude of the decline in market value, the length of time the market value
has been below cost (or adjusted cost), credit quality, and our ability and
intent to hold the securities for a period of time sufficient to allow for any
anticipated recovery in market value.
In addition to our five joint ventures, we have in the past invested in
equity instruments of privately-held companies for business and strategic
purposes. These investments are classified as other assets and are accounted
for under the cost method as we do not have the ability to exercise significant
influence over their operations. We monitor our investments for impairment and
record reductions in carrying value when events or changes in circumstances
indicate that the carrying value may not be recoverable. Determination of
impairment is highly subjective and is based on a number of factors, including
an assessment of the strength of the investees management, the length of time
and extent to which the fair value has been less than our cost basis, the
financial condition and near-term prospects of the investee, fundamental
changes to the business prospects of the investee, share prices of subsequent
offerings, and our intent and ability to hold the investment for a period of
time sufficient to allow for any anticipated recovery in our carrying value.
Fair Value of Investments
In the current market environment, the assessment of the fair value of
debt instruments can be difficult and subjective. The volume of trading
activity of certain debt instruments has declined, and the rapid changes
occurring in todays financial markets can lead to changes in the fair value of
financial instruments in relatively short periods of time. ASC 820 establishes
three levels of inputs that may be used to measure fair value.
Level 1 instruments represent quoted prices in active markets.
Therefore, determining fair value for Level 1 instruments does not require
significant management judgment, and the estimation is not difficult.
Level 2 instruments include observable inputs other than Level 1
prices, such as quoted prices for identical instruments in markets with
insufficient volume or infrequent transactions (less active markets), issuer
credit ratings, non-binding market consensus prices that can be corroborated
with observable market data, model-derived valuations in which all significant
inputs are observable or can be derived principally from or corroborated with
observable market data for substantially the full term of the assets or
liabilities, or quoted prices for similar assets or liabilities. These
Level 2 instruments require more management judgment and subjectivity
compared to Level 1 instruments, including:
·
Determining which instruments are most
similar to the instrument being priced requires management to identify a sample
of similar securities based on the coupon rates, maturity, issuer, credit
rating, and instrument type, and subjectively select an individual security or
multiple securities that are deemed most similar to the security being priced.
·
Determining whether a market is considered
active requires management judgment. Our assessment of an active market for our
marketable debt instruments generally takes into consideration activity during
each week of the one-month period prior to the valuation date of each
individual instrument, including the number of days each individual instrument
trades and the average weekly trading volume in relation to the total
outstanding amount of the issued instrument.
·
Determining which model-derived valuations to
use in determining fair value requires management judgment. When observable
market prices for identical securities or similar securities are not available,
we price our marketable debt instruments using non-binding market consensus
prices that are corroborated with observable market data or pricing models,
such as discounted cash flow models, with all significant inputs derived from
or corroborated with observable market data.
Level 3 instruments include unobservable inputs
to the valuation methodology that are significant to the measurement of fair
value of assets or liabilities. The determination of fair value for
Level 3 instruments requires the most management judgment and
subjectivity. As of September 30, 2010, we did not have any assets or
liabilities without observable market values that would require a high level of
judgment to determine fair value (Level 3 assets).
Impairment of Long-Lived Assets
We
evaluate the recoverability of property, equipment and intangible assets in
accordance with ASC topic 360,
Impairment of Disposal of
Long-Lived Assets.
When events and circumstances indicate that
long-lived assets may be impaired, we compare the carrying value of the
long-lived assets to the projection of future undiscounted cash flows
attributable to these assets. In the event that the carrying value exceeds the
future undiscounted cash flows, we record an impairment charge against income
equal to the excess of the carrying value over the assets fair value. Fair
values are determined based on quoted market values, discounted cash flows or
internal and external appraisals, as applicable. Assets held for sale are
carried at the lower of carrying value or estimated net realizable value.
19
Table of Contents
Employee Stock Options
We
grant options to substantially all management employees and believe that this
program helps us to attract, motivate and retain high quality employees, to the
ultimate benefit of our stockholders. Effective January 1, 2006, we
adopted the fair value recognition provisions of ASC 718, using the modified
prospective application transition method. Under this transition method,
stock-based compensation cost was recognized in the condensed consolidated
financial statements for all share-based payments after January 1, 2006.
Compensation cost recognized includes the estimated expense for the portion of
the vesting period after January 1, 2006 for share-based payments prior
to, but not vested as of January 1, 2006, based on the grant date fair
value estimated in accordance with the original provisions of ASC 718. We
recognize these compensation costs net of an estimated forfeiture rate over the
requisite service period of the award, which is generally the vesting term of
four years for stock options. Results for prior periods have not been restated,
as provided for under the modified prospective application transition method.
Income Taxes
We account for income taxes in accordance with ASC 740 which requires
that deferred tax assets and liabilities be recognized using enacted tax rates
for the effect of temporary differences between the book and tax bases of
recorded assets and liabilities. ASC 740 also requires that deferred tax assets
be reduced by a valuation allowance if it is more likely than not that a
portion of the deferred tax asset will not be realized.
We provide for income taxes based upon the geographic composition of
worldwide earnings and tax regulations governing each region, particularly
China. The calculation of tax liabilities involves significant judgment in
estimating the impact of uncertainties in the application of complex tax laws,
particularly in foreign countries such as China.
Effective January 1, 2007, we adopted ASC 740. See Note 12Income
Taxes in the notes to condensed financial statements for additional
information.
Results of
Operations
Revenue
|
|
Three Months Ended
September 30,
|
|
Increase
|
|
|
|
|
|
2010
|
|
2009
|
|
(Decrease)
|
|
% Change
|
|
|
|
|
|
($
in thousands)
|
|
|
|
|
|
GaAs
|
|
$
|
19,174
|
|
$
|
13,316
|
|
$
|
5,858
|
|
44.0
|
%
|
InP
|
|
956
|
|
688
|
|
268
|
|
39.0
|
%
|
Ge
|
|
2,267
|
|
1,787
|
|
480
|
|
26.9
|
%
|
Raw materials and other
|
|
4,412
|
|
1,028
|
|
3,384
|
|
329.2
|
%
|
Total revenue
|
|
$
|
26,809
|
|
$
|
16,819
|
|
$
|
9,990
|
|
59.4
|
%
|
Revenue
increased $10.0 million, or 59.4%, to $26.8 million for the three months ended
September 30, 2010 from $16.8 million for the three months ended
September 30, 2009. Total GaAs substrate revenue increased $5.9 million,
or 44.0%, to $19.2 million for the three months ended September 30, 2010
from $13.3 million for the three months ended September 30, 2009. The
increase in revenue was primarily due to the improved demand environment during
the quarter positively affecting sales of all diameters of substrates.
Sales
of 5 inch and 6 inch diameter GaAs substrates, which are mainly used in
wireless devices, were $7.6 million for the three months ended
September 30, 2010 compared to $5.9 million for the three months ended
September 30, 2009. The increased demand for large diameter substrates was
fueled by strong sales of wireless devices.
Sales
of 2 inch, 3 inch and 4 inch diameter GaAs substrates, which are mainly used in
LED applications, were $11.6 million for the three months ended
September 30, 2010 compared with $7.5 million for the three months ended
September 30, 2009. Similar to the increase in revenue from larger
diameter substrates, the increase in revenue from smaller diameter substrates
was due to strong sales of wireless devices as well as the increasing worldwide
adoption and investment in LED technology in many applications.
20
Table
of Contents
InP
substrate revenue increased $0.3 million, or 39.0%, to $1.0 million for the
three months ended September 30, 2010 from $0.7 million for the three
months ended September 30, 2009 as demand from customers in the optical
networking industry increased. We continued to see renewed demand for these
substrates as investment in high-speed optical communications increased
worldwide.
Ge
substrate revenue increased $0.5 million, or 26.9%, to $2.3 million for the
three months ended September 30, 2010 from $1.8 million for the three
months ended September 30, 2009. Our Ge substrate revenue increased as
demand from our customers increased for concentrated photovoltaic solar
applications. We continued to make progress in our penetration of the solar
cell market, particularly in satellite applications.
Raw
materials revenue increased $3.4 million, or 329.2%, to $4.4 million for the
three months ended September 30, 2010 from $1.0 million for the three
months ended September 30, 2009. Raw materials revenue was low in the
prior year primarily due to the worldwide drop in demand for 4N gallium. We
have seen an increase in the demand for 4N gallium in 2010 as the market
recovers from the worldwide downturn of 2009.
|
|
Nine Months Ended
September 30,
|
|
Increase
|
|
|
|
|
|
2010
|
|
2009
|
|
(Decrease)
|
|
% Change
|
|
|
|
($
in thousands)
|
|
|
|
GaAs
|
|
$
|
48,843
|
|
$
|
28,436
|
|
$
|
20,407
|
|
71.8
|
%
|
InP
|
|
2,908
|
|
1,862
|
|
1,046
|
|
56.2
|
%
|
Ge
|
|
5,509
|
|
3,626
|
|
1,883
|
|
51.9
|
%
|
Raw materials and other
|
|
11,367
|
|
3,604
|
|
7,763
|
|
215.4
|
%
|
Total revenue
|
|
$
|
68,627
|
|
$
|
37,528
|
|
$
|
31,099
|
|
82.9
|
%
|
Revenue
increased $31.1 million, or 82.9%, to $68.6 million for the nine months ended
September 30, 2010 from $37.5 million for the nine months ended
September 30, 2009. Total GaAs substrate revenue increased $20.4 million,
or 71.8%, to $48.8 million for the nine months ended September 30, 2010
from $28.4 million for the nine months ended September 30, 2009. The
increase in revenue was primarily due to the improved demand environment
positively affecting sales of all diameters of substrates.
Sales
of 5 inch and 6 inch diameter GaAs substrates were $19.8 million for the nine
months ended September 30, 2010 compared to $11.6 million for the nine
months ended September 30, 2009. The increased demand for large diameter
substrates was fueled by strong sales of wireless devices.
Sales
of 2 inch, 3 inch and 4 inch diameter GaAs substrates were $29.1 million for
the nine months ended September 30, 2010 compared with $16.8 million for
the nine months ended September 30, 2009. Similar to the increase in
revenue from larger diameter substrates, the increase in revenue from smaller
diameter substrates was due to strong sales of wireless devices as well as the
increasing worldwide adoption and investment in LED technology in many
applications.
InP
substrate revenue increased $1.0 million, or 56.2%, to $2.9 million for the
nine months ended September 30, 2010 from $1.9 million for the nine months
ended September 30, 2009 as demand from customers in the optical
networking industry increased. We continued to see renewed demand for these
substrates as investment in high-speed optical communications increased
worldwide.
Ge
substrate revenue increased $1.9 million, or 51.9%, to $5.5 million for the
nine months ended September 30, 2010 from $3.6 million for the nine months
ended September 30, 2009. Our Ge substrate revenue increased as demand
from our customers increased for concentrated photovoltaic solar applications.
We continued to make progress in our penetration of the solar cell market,
particularly in satellite applications.
Raw
materials revenue increased $7.8 million, or 215.4%, to $11.4 million for the
nine months ended September 30, 2010 from $3.6 million for the nine months
ended September 30, 2009. Raw materials revenue was low in the prior year
primarily due to the worldwide drop in demand for 4N gallium. We have seen an
increase in the demand for 4N gallium in 2010 as the market recovers from the
worldwide downturn of 2009.
21
Table of
Contents
Revenue by Geographic Region
|
|
Three Months Ended
September 30,
|
|
Increase
|
|
|
|
|
|
2010
|
|
2009
|
|
(Decrease)
|
|
% Change
|
|
|
|
($ in thousands)
|
|
|
|
|
|
North America *
|
|
$
|
5,224
|
|
$
|
2,975
|
|
$
|
2,249
|
|
75.6
|
%
|
% of total revenue
|
|
19.5
|
%
|
17.7
|
%
|
|
|
|
|
Europe
|
|
5,775
|
|
3,115
|
|
2,660
|
|
85.4
|
%
|
% of total revenue
|
|
21.5
|
%
|
18.5
|
%
|
|
|
|
|
Japan
|
|
3,040
|
|
2,304
|
|
736
|
|
31.9
|
%
|
% of total revenue
|
|
11.3
|
%
|
13.7
|
%
|
|
|
|
|
Taiwan
|
|
3,869
|
|
3,462
|
|
407
|
|
11.8
|
%
|
% of total revenue
|
|
14.4
|
%
|
20.6
|
%
|
|
|
|
|
Asia Pacific (excluding Japan and Taiwan)
|
|
8,901
|
|
4,963
|
|
3,938
|
|
79.3
|
%
|
% of total revenue
|
|
33.2
|
%
|
29.5
|
%
|
|
|
|
|
Total revenue
|
|
$
|
26,809
|
|
$
|
16,819
|
|
$
|
9,990
|
|
59.4
|
%
|
*Primarily the United States
Revenue from
customers in North America increased by $2.2 million, or 75.6%, to $5.2 million
for the three months ended September 30, 2010 from $3.0 million for the
three months ended September 30, 2009 as the demand for substrates
increased by $1.7 million and the demand for raw materials increased by $0.5
million due to the stronger demand environment compared to the economic
slowdown we experienced in the prior year
.
Revenue
from customers in Europe increased by $2.7 million, or 85.4%, to $5.8 million
for the three months ended September 30, 2010 from $3.1 million for the
three months ended September 30, 2009. This increase came primarily from
increased substrate sales of $1.2 million to customers in Germany due to
increased demand, as well as $0.5 million increased raw material sales to
customers in Germany as the demand for 4N gallium increased.
Revenue
from customers in Japan increased by $0.7 million, or 31.9%, to $3.0 million
for the three months ended September 30, 2010 from $2.3 million for the
three months ended September 30, 2009. Substrate sales increased by $0.7
million, particularly in large diameter wafers, and raw material sales of 4N
gallium increased by $0.1 million as demand increased.
Revenue
from customers in Taiwan increased by $0.4 million, or 11.8%, to $3.9 million
for the three months ended September 30, 2010 from $3.5 million for the
three months ended September 30, 2009. The increase came mainly from
demand for both semi-insulating and semi-conducting substrates.
Revenue
from customers in Asia Pacific (excluding Japan and Taiwan) increased by $3.9
million, or 79.3%, to $8.9 million for the three months ended
September 30, 2010 from $5.0 million for the three months ended
September 30, 2009. Sales to customers in Singapore increased by $1.3
million, as demand for large diameter wafers increased, while sales to
customers in China increased by $2.5 million, primarily from sales of raw
materials.
|
|
Nine Months Ended
September 30,
|
|
Increase
|
|
|
|
|
|
2010
|
|
2009
|
|
(Decrease)
|
|
% Change
|
|
|
|
($ in thousands)
|
|
|
|
|
|
North America *
|
|
$
|
14,472
|
|
$
|
7,139
|
|
$
|
7,333
|
|
102.7
|
%
|
% of total revenue
|
|
21.1
|
%
|
19.0
|
%
|
|
|
|
|
Europe
|
|
13,744
|
|
7,592
|
|
6,152
|
|
81.0
|
%
|
% of total revenue
|
|
20.0
|
%
|
20.2
|
%
|
|
|
|
|
Japan
|
|
9,322
|
|
5,494
|
|
3,828
|
|
69.7
|
%
|
% of total revenue
|
|
13.6
|
%
|
14.6
|
%
|
|
|
|
|
Taiwan
|
|
10,470
|
|
6,897
|
|
3,573
|
|
51.8
|
%
|
% of total revenue
|
|
15.3
|
%
|
18.4
|
%
|
|
|
|
|
Asia Pacific (excluding Japan and Taiwan)
|
|
20,619
|
|
10,406
|
|
10,213
|
|
98.1
|
%
|
% of total revenue
|
|
30,0
|
%
|
27.7
|
%
|
|
|
|
|
Total revenue
|
|
$
|
68,627
|
|
$
|
37,528
|
|
$
|
31,099
|
|
82.9
|
%
|
*Primarily the United States
22
Table of
Contents
Revenue from customers
in North America increased by $7.3 million, or 102.7%, to $14.5 million for the
nine months ended September 30, 2010 from $7.1 million for the nine months
ended September 30, 2009 as the demand for substrates increased by $5.8
million and the demand for raw materials increased by $1.5 million due to the
stronger demand environment compared to the economic slowdown we experienced in
the prior year
.
Revenue
from customers in Europe increased by $6.2 million, or 81.0%, to $13.7 million
for the nine months ended September 30, 2010 from $7.6 million for the
nine months ended September 30, 2009. This increase came primarily from
increased substrate sales of $3.8 million to customers in Germany and $0.9
million to customers in France, due to increased demand, as well as $1.1
million increased raw material sales to customers in Slovakia as the demand for
4N gallium increased.
Revenue
from customers in Japan increased by $3.8 million, or 69.7%, to $9.3 million
for the nine months ended September 30, 2010 from $5.5 million for the
nine months ended September 30, 2009. Substrate sales increased by $2.8
million, particularly in large diameter wafers, and raw material sales of 4N
gallium increased by $1.1 million as demand increased.
Revenue
from customers in Taiwan increased by $3.6 million, or 51.8%, to $10.5 million
for the nine months ended September 30, 2010 from $6.9 million for the
nine months ended September 30, 2009. The increase came mainly from demand
for both semi-insulating and semi-conducting substrates.
Revenue
from customers in Asia Pacific (excluding Japan and Taiwan) increased by $10.2
million, or 98.1%, to $20.6 million for the nine months ended
September 30, 2010 from $10.4 million for the nine months ended
September 30, 2009. Sales to customers in Singapore increased by $4.3
million, as demand for large diameter wafers increased, while sales to
customers in China increased by $5.4 million, primarily from substrate sales,
and substrate sales to Korea increased by $0.5 million as demand increased.
Gross Margin
|
|
Three Months Ended
September 30,
|
|
Increase
|
|
|
|
|
|
2010
|
|
2009
|
|
(Decrease)
|
|
% Change
|
|
|
|
($ in thousands)
|
|
|
|
|
|
Gross profit
|
|
$
|
10,531
|
|
$
|
5,538
|
|
$
|
4,993
|
|
90.2
|
%
|
Gross Margin %
|
|
39.3
|
%
|
32.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin increased to 39.3% of total revenue for the three months ended
September 30, 2010 from 32.9% of total revenue for the three months ended
September 30, 2009. Sales product mix, process improvements in production
such as longer ingots, first pass yield improvements in wafers and improved
slicing methods contributed to higher gross profit for the three months ended
September 30, 2010. During the three months ended September 30, 2010,
our manufacturing facility in Beijing was operating at a higher utilization
capacity compared to the same period in the prior year, which resulted in
higher absorption rates. The lower 32.9% gross margin for the three months
ended September 30, 2009 was primarily due to the low absorption rates as
a result of reduced sales and hence lower production volume.
|
|
Nine Months Ended
September 30,
|
|
Increase
|
|
|
|
|
|
2010
|
|
2009
|
|
(Decrease)
|
|
% Change
|
|
|
|
($ in thousands)
|
|
|
|
|
|
Gross profit
|
|
$
|
25,798
|
|
$
|
7,817
|
|
$
|
17,981
|
|
230.0
|
%
|
Gross Margin %
|
|
37.6
|
%
|
20.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin increased to 37.6% of total revenue for the nine months ended
September 30, 2010 from 20.8% of total revenue for the nine months ended
September 30, 2009. Sales product mix, process improvements in production
such as longer ingots and first pass yield improvements in wafers and improved
slicing methods contributed to higher gross profit for the nine months ended
September 30, 2010. During the nine months ended September 30, 2010,
our manufacturing facility in Beijing was operating at a higher utilization
capacity compared to the same period in the prior year, which resulted in
higher absorption rates. The lower 20.8% gross margin for the nine months ended
September 30, 2009 was primarily due to the low absorption rates as a
result of reduced sales and hence lower production volume.
23
Table of Contents
Selling, General and
Administrative Expenses
|
|
Three Months Ended
September 30,
|
|
Increase
|
|
|
|
|
|
2010
|
|
2009
|
|
(Decrease)
|
|
% Change
|
|
|
|
($ in thousands)
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
$
|
3,347
|
|
$
|
3,323
|
|
$
|
24
|
|
0.7
|
%
|
% of total revenue
|
|
12.5
|
%
|
19.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses at $3.3 million for the three months ended
September 30, 2010 was comparable to $3.3 million for the three months
ended September 30, 2009. We had an increase of $0.1 million in legal fees
for patents, a $0.1 million increase in sales commissions as a result of
increased sales volumes, a $0.1 million increase in consumable supplies and
office supplies to support the increase in business operations, and offset by a
$0.4 million decrease in China health benefits as a result of a refund from the
China government as a stimulus incentive.
|
|
Nine Months Ended
September 30,
|
|
Increase
|
|
|
|
|
|
2010
|
|
2009
|
|
(Decrease)
|
|
% Change
|
|
|
|
($ in thousands)
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
$
|
9,805
|
|
$
|
10,815
|
|
$
|
(1,010
|
)
|
(9.3
|
)%
|
% of total revenue
|
|
14.3
|
%
|
28.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses decreased $1.0 million, or 9.3%, to $9.8
million for the nine months ended September 30, 2010 from $10.8 million
for the nine months ended September 30, 2009. The $1.0 million decrease
was from $0.5 million in reduced legal fees, since in the prior year we had
higher legal fees as a result of matters relating to the change in management
in March 2009, in addition to $0.3 million in severance pay for our former
chief executive officer, $0.2 million is related stock compensation expense for
his stock option acceleration, $0.3 million in severance pay for our former
chief operating officer, and $0.3 million decrease in China health benefits as
a result of refunds from the China government as a stimulus incentive, which
was partially offset by a $0.3 million increase in bad debt expense, since in
the prior year first quarter we had a large recovery from an account we had
provided for at the 2008 year end, and a $0.3 million increase in sales
commissions due to increased sales.
Research and Development
|
|
Three Months Ended
September 30,
|
|
Increase
|
|
|
|
|
|
2010
|
|
2009
|
|
(Decrease)
|
|
% Change
|
|
|
|
($ in thousands)
|
|
|
|
|
|
Research and development
|
|
$
|
462
|
|
$
|
360
|
|
$
|
102
|
|
28.3
|
%
|
% of total revenue
|
|
1.7
|
%
|
2.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development expenses increased $0.1 million, or 28.3%, to $0.5 million for
the three months ended September 30, 2010 from $0.4 million for the three
months ended September 30, 2009. The increase was primarily due to $0.1
million in increased labor costs from engineers hired and new products testing
costs as we develop and improve our products.
|
|
Nine Months Ended
September 30,
|
|
Increase
|
|
|
|
|
|
2010
|
|
2009
|
|
(Decrease)
|
|
% Change
|
|
|
|
($ in thousands)
|
|
|
|
|
|
Research and development
|
|
$
|
1,428
|
|
$
|
1,175
|
|
$
|
253
|
|
21.5
|
%
|
% of total revenue
|
|
2.1
|
%
|
3.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development expenses increased $0.3 million, or 21.5%, to $1.4 million for
the nine months ended September 30, 2010 from $1.2 million for the nine
months ended September 30, 2009. The increase was primarily due to $0.2
million in new products testing costs as we develop and improve our products
and $0.1 million increased labor costs from engineers hired.
24
Table of
Contents
Restructuring Charge
|
|
Nine Months Ended
September 30,
|
|
Increase
|
|
|
|
|
|
2010
|
|
2009
|
|
(Decrease)
|
|
% Change
|
|
|
|
($ in thousands)
|
|
|
|
|
|
Restructuring charge
|
|
$
|
|
|
$
|
507
|
|
$
|
(507
|
)
|
NM
|
|
% of total revenue
|
|
0.0
|
%
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM
= % not meaningful
During
the first quarter of 2009, we reduced the workforce at our Fremont and Beijing
facilities by approximately 11 positions that were no longer required to
support certain production and administrative operations. This measure was
taken as part of our 2009 operating plan. Accordingly, we recorded a
restructuring charge of $507,000 in March 2009 for severance-related
expenses from the reduction in force, all of which were paid in the second
quarter of 2009. We expect to save approximately $1.3 million annually in
payroll and related expenses as a result of the restructuring. We had no
restructuring charge for the first nine months of 2010.
Interest Income (expense), net
|
|
Three Months Ended
September 30,
|
|
Increase
|
|
|
|
|
|
2010
|
|
2009
|
|
(Decrease)
|
|
% Change
|
|
|
|
($ in thousands)
|
|
|
|
|
|
Interest income (expense) , net
|
|
$
|
26
|
|
$
|
39
|
|
$
|
(13
|
)
|
(33.3
|
)%
|
% of total revenue
|
|
0.1
|
%
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income (expense), net decreased $13,000 to $26,000 income, net, for the three
months ended September 30, 2010 from $39,000 interest income, net for the
three months ended September 30, 2009.
Interest income, net for the three months ended September 30, 2010
was lower due to lower interest rates, in addition to higher interest income
earned in nine months ended September 30, 2009 due to higher accrued interest
on principal protected notes.
|
|
Nine Months Ended
September 30,
|
|
Increase
|
|
|
|
|
|
2010
|
|
2009
|
|
(Decrease)
|
|
% Change
|
|
|
|
($ in thousands)
|
|
|
|
|
|
Interest income (expense), net
|
|
$
|
16
|
|
$
|
117
|
|
$
|
(101
|
)
|
(86.3
|
)%
|
% of total revenue
|
|
0.0
|
%
|
0.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income (expense), net decreased $101,000 to $16,000 expense, net, for the nine
months ended September 30, 2010 from $117,000 interest income, net for the
nine months ended September 30, 2009.
Interest income, net for the nine months ended September 30, 2010
was lower due to lower interest rates, as well as in the nine months ended
September 30, 2009 which had higher interest income due to higher accrued
interest on principal protected notes.
Other Income (Loss), net
|
|
Three Months Ended
September 30,
|
|
Increase
|
|
|
|
|
|
2010
|
|
2009
|
|
(Decrease)
|
|
% Change
|
|
|
|
($ in thousands)
|
|
|
|
|
|
Other income, net
|
|
$
|
442
|
|
$
|
638
|
|
$
|
(196
|
)
|
(30.7
|
)%
|
% of total revenue
|
|
1.6
|
%
|
3.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income, net was $0.4 million for the three months ended September 30, 2010
primarily due to unrealized foreign exchange gains of $0.2 million and
investment income of $0.2 million mainly from marketable securities and the two
minority-owned joint ventures that are not consolidated. Other income, net was
$0.6 million for the three months ended September 30, 2009 primarily due
to unrealized foreign exchange gains of $0.3 million and investment income of
$0.3 million from the two minority-owned joint ventures that are not
consolidated.
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
Increase
|
|
|
|
|
|
2010
|
|
2009
|
|
(Decrease)
|
|
% Change
|
|
|
|
($ in thousands)
|
|
|
|
|
|
Other income (loss), net
|
|
$
|
2,077
|
|
$
|
537
|
|
$
|
1,540
|
|
286.8
|
%
|
% of total revenue
|
|
3.0
|
%
|
1.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
Table
of Contents
Other
income, net was $2.1 million for the nine months ended September 30, 2010
primarily due to a $1.2 million sales tax refund, unrealized foreign exchange
gains of $0.3 million and investment income of $0.6 million from the two
minority-owned joint ventures that are not consolidated. Other income, net was
$0.5 million for the nine months ended September 30, 2009 primarily due to
investment income of $0.4 million from the two minority-owned joint ventures
that are not consolidated and unrealized foreign exchange gains of $0.1
million.
Net Income attributable to
noncontrolling interest
|
|
Three Months Ended
September 30,
|
|
Increase
|
|
|
|
|
|
2010
|
|
2009
|
|
(Decrease)
|
|
% Change
|
|
|
|
($ in thousands)
|
|
|
|
|
|
Noncontrolling interest
|
|
$
|
680
|
|
$
|
210
|
|
$
|
470
|
|
223.8
|
%
|
% of total revenue
|
|
2.5
|
%
|
1.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling
interest increased $0.5 million to $0.7 million for the three months ended
September 30, 2010 from $0.2 million for the three months ended
September 30, 2009 indicating higher profitability in our China joint
ventures, and hence higher noncontrolling interest portion, as raw materials
sales increased due to a stronger demand environment.
|
|
Nine Months Ended
September 30,
|
|
Increase
|
|
|
|
|
|
2010
|
|
2009
|
|
(Decrease)
|
|
% Change
|
|
|
|
($ in thousands)
|
|
|
|
|
|
Noncontrolling interest
|
|
$
|
1,227
|
|
$
|
136
|
|
$
|
1,091
|
|
802.2
|
%
|
% of total revenue
|
|
1.8
|
%
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling
interest increased $1.1 million to $1.3 million for the nine months ended
September 30, 2010 from $0.1 million contribution for the nine months
ended September 30, 2009 indicating higher profitability in our China
joint ventures, and hence higher noncontrolling interest portion, as raw materials
have increased due to a stronger demand environment.
Provision for Income Taxes
|
|
Three Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
Increase
|
|
|
|
|
|
2010
|
|
2009
|
|
(Decrease)
|
|
% Change
|
|
|
|
($ in thousands)
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
871
|
|
$
|
201
|
|
$
|
670
|
|
333.3
|
%
|
% of total revenue
|
|
3.2
|
%
|
1.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We
provided for income taxes of $0.9 million for our China operations for the
three months ended September 30, 2010 compared to $0.2 million for the
three months ended September 30, 2009. The increase in tax provision was
primarily due to increased sales and increased net income in the third quarter
of 2010 compared to the same period last year. No income taxes have been
provided for U.S. operations based upon available net operating loss
carryforwards.
|
|
Nine Months Ended
September 30,
|
|
Increase
|
|
|
|
|
|
2010
|
|
2009
|
|
(Decrease)
|
|
% Change
|
|
|
|
($ in thousands)
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
1,677
|
|
$
|
513
|
|
$
|
1,164
|
|
226.9
|
%
|
% of total revenue
|
|
2.4
|
%
|
1.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We
provided for income taxes of $1.7 million for our China operations for the nine
months ended September 30, 2010 compared to $0.5 million for the nine
months ended September 30, 2009. The increase in tax provision was
primarily due to increased sales and increased net income for the first nine
months of 2010 compared to the same period last year. No income taxes have been
provided for U.S. operations based upon available net operating loss
carryforwards.
Liquidity and Capital Resources
As
of September 30, 2010, our principal sources of liquidity were $41.0 million
in cash and cash equivalents and short and long-term investments. We consider
cash and cash equivalents and short-term investments as liquid and available
for use. Short-term investments are comprised of government bonds and
high-grade commercial debt instruments. In December 2008 during the global
financial crisis we disclosed that we had a substantial portion of our
investments in principal protected notes in Citigroup. As these notes matured
over time we decreased our exposure to Citigroup and placed the underlying
assets into other diversified securities. As of September 30, 2010 we no
longer have any investments in Citigroup guaranteed instruments.
26
Table of Contents
Cash
and cash equivalents and investments of $41.0 million increased by $2.1 million
in the third quarter of 2010 compared to the second quarter of 2010.
Net
cash provided by operating activities of $9.5 million for the nine months ended
September 30, 2010 was primarily comprised of our net income of $15.0
million, adjusted for non-cash items of depreciation of $2.1 million,
amortization (accretion) of marketable securities premium of $0.2 million, stock-based
compensation of $0.4 million, partially offset by a realized gain on sale of
investments of $0.4 million, and offset by a net increase of $7.8 million in
assets and liabilities. The $7.8 million net increase in assets and liabilities
primarily resulted from a $5.5 million increase in inventories, $3.6 million
increase in accounts receivable, a $1.0 million increase in prepaid expenses, a
$0.1 million increase in other assets, partially offset by a $0.4 million
increase in accounts payable and a $2.0 million increase in accrued
liabilities.
Accounts
receivable, net increased by $3.6 million as of September 30, 2010
compared to December 31, 2009 due to higher sales volume. Our days sales
outstanding (DSO) was 65 days as of September 30, 2010 and was 79 days as
of December 31, 2009.
Net
cash provided by operating activities of $3.8 million for the nine months ended
September 30, 2009 was primarily comprised of our net loss of $4.5
million, adjusted for non-cash items of depreciation of $2.3 million, stock-based
compensation of $0.7 million, and a restructuring charge of $0.5 million,
partially offset by a net decrease of $4.8 million in assets and liabilities.
The $4.8 million net decrease in assets and liabilities primarily resulted from
a $6.4 million decrease in inventory, a $1.1 million decrease in prepaid
expenses and a $0.5 million increase in accounts payable, partially offset by a
$2.5 million increase in accounts receivable, a $0.3 million increase in other
assets, a $0.2 million decrease in other long-term liabilities, and a $0.2
million decrease in accrued liabilities.
Net
cash used in investing activities of $3.2 million for the nine months ended
September 30, 2010 was primarily from the purchase of property, plant and
equipment of $4.0 million and by the purchase of investments totaling $19.0
million offset by the sale of investments totaling $19.8 million
Net
cash used in investing activities of $0.6 million for the nine months ended
September 30, 2009 was primarily from the purchase of property, plant and
equipment of $1.0 million partially offset by the proceeds on sale of
marketable securities of $0.4 million.
We expect to invest up to approximately $4.0 million in capital
projects at our China facilities for the remainder of 2010, having delayed
certain expansion activities as a result of the impact of the 2009 worldwide
economic conditions.
Net
cash used in financing activities of $0.2 million for the nine months ended
September 30, 2010 consisted of dividend payments of $0.5 million by our
joint ventures, and fully paying down our tenant improvement loan of $0.5,
partially offset by net proceeds of $0.8 million on the issuance of common
stock pursuant to stock option exercises.
Net
cash used in financing activities of $0.8 million for the nine months ended
September 30, 2009 consisted of $0.8 million dividends paid, and payments
of $67,000 related to our tenant improvement loan, partially offset by net
proceeds of $48,000 on the issuance of common stock.
We believe that we have adequate cash and investments to meet our needs
over the next 12 months. If our sales decrease, however, our ability to
generate cash from operations will be adversely affected which could adversely
affect our future liquidity, require us to use cash at a more rapid rate than
expected, and require us to seek additional capital. There can be no assurance
that such additional capital will be available or, if available it will be at
terms acceptable to us. Cash from operations could be affected by various risks
and uncertainties, including, but not limited to those set forth below under
Item 1A Risks Factors.
Outstanding
contractual obligations as of September 30, 2010 are summarized as follows
(in thousands):
|
|
Payments due by period
|
|
Contractual Obligations
|
|
Total
|
|
Less than 1
year
|
|
1-3
years
|
|
3-5
years
|
|
More than
5 years
|
|
Operating leases
|
|
$
|
1,509
|
|
$
|
287
|
|
$
|
563
|
|
$
|
607
|
|
$
|
52
|
|
Total
|
|
$
|
1,509
|
|
$
|
287
|
|
$
|
563
|
|
$
|
607
|
|
$
|
52
|
|
We lease certain office space, manufacturing facilities and property
under long-term operating leases expiring at various dates through
November 2013. On July 2, 2008, we entered into a new lease agreement
with the landlord of the facility at 4281 Technology Drive, Fremont, California
with approximately 27,760 square feet. The new lease commenced December 1,
2008 for a term of seven years, with an option by us to cancel the new lease
after five years, upon forfeiture of the security deposit and payment of
one-half of the fifth years rent. Total rent expenses under these operating
leases were approximately $0.3 million and $0.3 million for the nine
months ended September 30, 2010 and 2009, respectively.
27
Table of Contents
Recent
Accounting Pronouncements
With
the exception of those stated below, there have been no recent accounting
pronouncements or changes in accounting pronouncements during the three months
ended September 30, 2010, as compared to the recent accounting
pronouncements described in the Annual Report that are of material
significance, or have potential material significance, to the Company.
In
May 2009, the FASB issued guidance contained in FASB ASC 855,
Subsequent Events
to establish general standards of
accounting for and disclosure of events that occur after the balance sheet date
but before financial statements are issued or are available to be issued. This
guidance was effective for interim or annual financial periods ending after
September 15, 2009. In February, 2010, the FASB issued Accounting
Standards Update 2010-09 Subsequent Events which removed the requirement to
disclose the date through which subsequent events had been considered for
disclosure. This update was effective upon issuance. In accordance with this
guidance, we have evaluated and, as necessary, made changes to these unaudited
Condensed Consolidated Financial Statements for the events.
In
October 2009, the FASB issued ASU No. 2009-13,
Multiple-Deliverable Revenue Arrangements a Consensus of the FASB
Emerging Issues Task Force
an update to Accounting Standards
Codification (ASC) Topic 605,
Revenue Recognition
. This
update requires the allocation of consideration among separately
identified deliverables contained within an arrangement, based on their related
selling prices. This update will be effective for annual
reporting periods beginning January 1, 2011. The Company is
currently evaluating the impact of this update on its financial
position, results of operations, cash flows, and disclosures.
In
January 2010, the FASB issued ASU No. 2010-06,
Improving Disclosures about Fair Value Measurements
an
update to ASC Topic 820,
Fair Value Measurements
and Disclosures
. This update requires an entity to:
(i) disclose separately the amounts of significant transfers in and out of
Level 1 and Level 2 fair value measurements and describe the reasons for the
transfers and (ii) present separate information for Level 3 activity
pertaining to gross purchases, sales, issuances, and settlements. This
update became effective for us in the quarter ended March 31, 2010, except
that the disclosure on the roll forward activities for Level 3 fair value
measurements will become effective for us with the reporting period beginning January 1,
2011. Other than requiring additional disclosures, adoption of this new
guidance did not have a material impact on the Companys financial statements.
In various areas, including revenue recognition, stock option
accounting, accounting standards and practices continue to evolve.
Additionally, the SEC and the FASBs Emerging Issues Task Force continue to
address revenues, stock option accounting related accounting issues. We believe
that we are in compliance with all of the rules and related guidance as
they currently exist. However, any changes to accounting principles generally
accepted in the United States of America in these areas could impact the future
accounting of our operations.
ITEM 3
.
QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Risk
A significant portion of our business is conducted in currencies other
than the U.S. dollar. The functional currency for our foreign operations is the
renminbi, the local currency of China, where our operating expenses are
predominantly in the local currency. Since most of our operations are conducted
in China, most of our costs are incurred in Chinese currency, which subjects us
to fluctuations in the exchange rates between the U.S. dollar and the Chinese
renminbi. We incur transaction gains or losses resulting from consolidation of
expenses incurred in local currencies for these subsidiaries, as well as in
translation of the assets and liabilities of these assets at each balance sheet
date. Our financial results could be adversely affected by factors such as
changes in foreign currency exchange rates or weak economic conditions in
foreign markets, including the revaluation by China of the renminbi, and any
future adjustments that China may make to its currency such as any move it
might make to a managed float systems with opportunistic interventions. In the
future we may experience foreign exchange losses on our non-functional currency
denominated receivables and payables to the extent that we have not mitigated
our exposure utilizing foreign currency forward exchange contracts. Foreign
exchange losses could have a material adverse effect on our operating results
and cash flows. The U.S. is currently pressuring China to devalue the renminbi,
which could adversely affect our operation costs and results of operations. If
we do not effectively manage against these risks, our cash flows and financial
condition may be adversely affected.
We do not currently use short-term forward exchange contracts for
hedging purposes to reduce the effects of adverse foreign exchange rate
movements. We had previously purchased foreign exchange contracts to hedge
against certain trade accounts receivable denominated in Japanese yen. The
change in the fair value of the forward contracts was recognized as part of the
related foreign currency transactions as they occur. As of September 30,
2010, we had no outstanding commitments with respect to foreign exchange contracts.
28
Table of Contents
During the third quarter of 2010, we recorded a net realized foreign
exchange loss of $52,000, included as part of other income in our consolidated
statements of operations. We incurred foreign currency transaction exchange
gains and losses due to operations in general. It is uncertain whether these
currency trends will continue. In the future we may experience foreign exchange
losses on our non-functional currency denominated receivables and payables to
the extent that we have not mitigated our exposure utilizing foreign currency
forward exchange contracts. Foreign exchange losses could have a materially adverse
effect on our operating results and cash flows. During the third quarter of
2010, we recorded unrealized foreign currency gain of $262,000, included in the
balance of accumulated other comprehensive income on our consolidated balance
sheet.
In July 2005, China agreed to a shift in Chinese currency policy.
It established a 2% revaluation of the renminbi and referenced the renminbi to
a basket of currencies, with a daily trading band of +/0.3%. Depending on
market conditions and the state of the Chinese economy, it is possible that
China will make more adjustments in the future. Over the next five to ten
years, China may move to a managed float system, with opportunistic
interventions. This may negatively impact the United States dollar and U.S.
interest rates, which, in turn, could negatively impact our operating results
and financial condition. The functional currency of our Chinese subsidiary,
including our joint ventures, is the local currency; since most of our
operations are conducted in China, most of our costs are incurred in Chinese
currency, which subjects us to fluctuations in the exchange rates between the
U.S. dollar and the Chinese renminbi. We incur transaction gains or losses
resulting from consolidation of expenses incurred in local currencies for these
subsidiaries, as well as in translation of the assets and liabilities of these
assets at each balance sheet date. These risks may be increased by the
fluctuation and revaluation of the Chinese renminbi. If we do not effectively
manage the risks associated with this currency risk, our revenue, cash flows
and financial condition could be adversely affected.
Interest Rate Risk
Cash and cash equivalents earning interest and certain variable rate
debt instruments are subject to interest rate fluctuations. The following table
sets forth the probable impact of a 10% change in interest rates (in
thousands):
Instrument
|
|
Balance as of
September 30,
2010
|
|
Current
Interest
Rate
|
|
Projected Annual
Interest
Income/(Expense)
|
|
Proforma 10%
Interest Rate
Decline
Income/(Expense)
|
|
Proforma 10%
Interest Rate
Increase
Income/(Expense)
|
|
Cash
|
|
$
|
21,125
|
|
0.50
|
%
|
$
|
106
|
|
$
|
95
|
|
$
|
117
|
|
Cash equivalents
|
|
2,268
|
|
0.50
|
|
11
|
|
10
|
|
12
|
|
Investment in debt and equity instruments
|
|
17,606
|
|
3.77
|
|
664
|
|
598
|
|
730
|
|
|
|
|
|
|
|
$
|
781
|
|
$
|
703
|
|
$
|
859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The primary objective of our investment activities is to preserve
principal while maximizing income without significantly increasing risk.
Financial instruments that potentially subject us to concentration of credit
risk consist primarily of cash and cash equivalents, short-term investments,
and trade accounts receivable. We invest primarily in money market accounts,
commercial paper instruments, and investment grade securities. We are exposed
to credit risks in the event of default by the issuers to the extent of the
amount recorded on the consolidated balance sheets. These securities are
generally classified as available-for-sale and consequently are recorded on the
balance sheet at fair value with unrealized gains or losses reported as a separate
component of accumulated other comprehensive income (loss), net of estimated
tax. Our cash, cash equivalents and short-term investments are in high-quality
securities. We have no investments in auction rate securities. In December 2008
during the global financial crisis we disclosed that we had a substantial
portion of our investments in principal protected notes in Citigroup. As these
notes matured over time we decreased our exposure to Citigroup and placed the
underlying assets into other diversified securities. As of September 30,
2010, there were no remaining investments in Citigroup, and all our investments
were placed into diversified securities.
Accounts Receivable Risk
We perform periodic credit evaluations of our customers financial
condition and generally do not require collateral. Two customers each accounted
for 10% or more of our trade accounts receivable balance as of
September 30, 2010 at 31%, and 14%, respectively.
Equity Risk
We maintain minority investments in three privately-held companies
other than our strategic investments in private companies located in China.
These minority investments in two privately-held companies are reviewed for
other than temporary declines in value on a quarterly basis. These investments
are classified as other assets in the consolidated balance sheets and are
accounted for under the cost method as we do not have the ability to exercise
significant influence over their operations. We monitor our investments for
impairment and record reductions in carrying value when events or changes in
circumstances indicate that the carrying value may not be recoverable. Reasons
for other than temporary declines in value include whether the related company
would have insufficient cash flow to operate for the next twelve months,
significant changes in the operating performance and changes in market
conditions. As of September 30, 2010, the minority investments totaled
$0.7 million.
29
Table of Contents
ITEM 4
.
CONTROLS AND PROCEDURES
Disclosure Controls and
Procedures
Under the supervision and
with the participation of our management, our Chief Executive Officer and Chief
Financial Officer have evaluated the effectiveness of the design and operation
of our disclosure controls and procedures, as such terms are defined under
Rule 13a-15(e) and 15d-15(e) promulgated under the Securities
Exchange Act of 1934, as amended. Based upon that evaluation, our Chief
Executive Officer and our Chief Financial Officer concluded that our disclosure
controls and procedures were effective as of the end of the period covered by
this quarterly report in ensuring that information required to be disclosed on
SEC reports is (i) recorded, processed, summarized and reported within the
time periods specified in the SECs rules and forms, and
(ii) accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosures.
Changes in Internal
Control Over Financial Reporting
No change in our internal
control over financial reporting was made in the three months ended
September 30, 2010 that has materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting.
PART II.
OTHER INFORMATION
Item 1.
Legal Proceedings
From time to time we may be
involved in judicial or administrative proceedings concerning matters arising in
the ordinary course of business. We do not expect that any of these matters,
individually or in the aggregate, will have a material adverse effect on our
business, financial condition, cash flows or results of operation.
Item 1A.
Risk Factors
There are no material changes from the risk factors
set forth under Part I, Item 1A. Risk Factors in our Annual Report
on Form 10-K for the fiscal year ended December 31, 2009.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Reserved
Item 5.
Other Information
None
30
Table of Contents
Item 6.
Exhibits
a. Exhibits
Exhibit
Number
|
|
Description
|
|
|
|
3.1(1)
|
|
Restated
Certificate of Incorporation
|
|
|
|
3.2(2)
|
|
Certificate
of Designation, Preferences and Rights of Series A Preferred Stock.
|
|
|
|
3.3(3)
|
|
Second
Amended and Restated By Laws
|
|
|
|
3.3(4)
|
|
Certificate
of Amendment of By Laws
|
|
|
|
4.2(5)
|
|
Rights
Agreement dated April 24, 2001 by and between AXT, Inc. and
ComputerShare Trust Company, Inc.
|
|
|
|
31.1
|
|
Certification by Chief
Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
31.2
|
|
Certification by Chief
Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
32.1
|
|
Certification by Chief
Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32.2
|
|
Certification by Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
(1) Incorporated
by reference to the exhibit as of the same number as filed with the SEC in our
Annual Report on Form 10-K for the year ended December 31, 1998.
(2) Incorporated
by reference to Exhibit 3.1 to our Form 8-K as filed with the SEC on
June 14, 1999.
(3)
Incorporated by reference to Exhibit 3.4 to our
Form 8-K as filed with the SEC on May 30, 2001.
(4) Incorporated by reference to Exhibit 3.1
to our Form 8-K as filed with the SEC on October 26, 2010.
(5) Incorporated
by reference to the exhibit of the same number as filed with the SEC in our
Form 8-K on May 30, 2001.
31
Table of Contents
SIGNATURES
Pursuant to the requirements
of the Securities Exchange Act of 1934, the registrant has duly caused this
Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
|
AXT, INC.
|
|
|
|
|
Dated:
November 9, 2010
|
|
By:
|
/s/
MORRIS S. YOUNG
|
|
|
|
Morris S. Young
|
|
|
|
Chief
Executive Officer
|
|
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
/s/
RAYMOND A. LOW
|
|
|
|
Raymond
A. Low
|
|
|
|
Chief Financial Officer
|
|
|
|
(Principal
Financial Officer and
Principal
Accounting Officer)
|
32
Table of Contents
EXHIBIT INDEX
Exhibit
|
|
|
Number
|
|
Description
|
|
|
|
3.1(1)
|
|
Restated
Certificate of Incorporation
|
|
|
|
3.2(2)
|
|
Certificate
of Designation, Preferences and Rights of Series A Preferred Stock
(which is incorporated herein by reference to Exhibit 2.1 to the registrants
form 8-K dated May 28, 1999).
|
|
|
|
3.3(3)
|
|
Second
Amended and Restated By Laws
|
|
|
|
3.4(4)
|
|
Certificate
of Amendment of By Laws
|
|
|
|
4.2(5)
|
|
Rights
Agreement dated April 24, 2001 by and between AXT, Inc. and
ComputerShare Trust Company, Inc.
|
|
|
|
31.1
|
|
Certification by Chief
Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
31.2
|
|
Certification by Chief
Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
32.1
|
|
Certification by Chief Executive
Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32.2
|
|
Certification by Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
(1) Incorporated
by reference to the exhibit of the same number as filed with the SEC in our
Annual Report on Form 10-K for the year ended December 31, 1998.
(2) Incorporated
by reference to Exhibit 3.1 to our Form 8-K as filed with the SEC on
June 14, 1999.
(3) Incorporated
by reference to Exhibit 3.4 to our Form 8-K as filed with the SEC on
May 30, 2001.
(4) Incorporated by reference to Exhibit 3.1
to our Form 8-K as filed with the SEC on October 26, 2010.
(5) Incorporated
by reference to the exhibit of the same number as filed with the SEC in our
Form 8-K on May 30, 2001
33
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