axti_Current_Folio_10Q

Table of Contents

0  

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

(Mark One)

 

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

for the quarterly period ended September 30, 2017

 

Or

 

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
Incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

4281 Technology Drive, Fremont, California 94538

(Address of principal executive offices) (Zip code)

 

(510) 438-4700

(Registrant’s 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 ☒ No ☐

 

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 ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

Large accelerated filer ☐

 

Accelerated filer ☒

 

 

 

Non-accelerated filer ☐

 

Smaller reporting company ☐

(Do not check if a smaller reporting company)

 

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

 

 

 

Class

 

Outstanding at November 8, 2017

Common Stock, $0.001 par value

 

38,891,344

 

 

 


 

Table of Contents

AXT, INC.

FORM 10-Q

TABLE OF CONTENTS

 

 

Page

PART I. FINANCIAL INFORMATION 

 

Item 1. Financial Statements (unaudited) 

 

Condensed Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016 

3

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2017 and 2016 

4

Condensed Consolidated Statements of Comprehensive Income  for the three and nine months ended September 30, 2017 and 2016 

5

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016 

6

Notes To Condensed Consolidated Financial Statements 

7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 

27

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

44

Item 4. Controls and Procedures 

45

PART II. OTHER INFORMATION 

 

Item 1. Legal Proceedings 

47

Item 1A. Risk Factors 

47

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 

65

Item 3. Defaults Upon Senior Securities 

65

Item 4. Mine Safety Disclosures 

65

Item 5. Other Information 

65

Item 6. Exhibits 

66

Signatures 

68

 

 

2


 

Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements (unaudited)

 

AXT, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

 

 

2017

 

2016

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

48,078

 

$

36,152

 

Short-term investments

 

 

20,524

 

 

11,415

 

Accounts receivable, net of allowances of $857 and $1,013 as of September 30, 2017 and December 31, 2016

 

 

20,877

 

 

14,453

 

Inventories

 

 

40,768

 

 

40,152

 

Related party notes receivable – current

 

 

57

 

 

 —

 

Prepaid expenses and other current assets

 

 

5,682

 

 

5,114

 

Total current assets

 

 

135,986

 

 

107,286

 

Long-term investments

 

 

9,685

 

 

6,156

 

Property, plant and equipment, net

 

 

42,255

 

 

27,805

 

Related party notes receivable – long-term

 

 

 —

 

 

157

 

Other assets

 

 

11,696

 

 

12,842

 

Total assets

 

$

199,622

 

$

154,246

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

9,499

 

$

6,691

 

Accrued liabilities

 

 

9,284

 

 

9,260

 

Total current liabilities

 

 

18,783

 

 

15,951

 

Long-term portion of royalty payments

 

 

144

 

 

575

 

Other long-term liabilities

 

 

278

 

 

330

 

Total liabilities

 

 

19,205

 

 

16,856

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Preferred stock Series A, $0.001 par value; 2,000 shares authorized; 883 shares issued and outstanding as of September 30, 2017 and December 31, 2016 (Liquidation preference of $6.8 million and $6.6 million as of September 30, 2017 and December 31, 2016)

 

 

3,532

 

 

3,532

 

Common stock, $0.001 par value; 70,000 shares authorized; 38,891 and 33,032 shares issued and outstanding as of September 30, 2017 and December 31, 2016

 

 

39

 

 

33

 

Additional paid-in capital

 

 

228,516

 

 

194,177

 

Accumulated deficit

 

 

(57,971)

 

 

(64,985)

 

Accumulated other comprehensive income

 

 

2,275

 

 

253

 

Total AXT, Inc. stockholders’ equity

 

 

176,391

 

 

133,010

 

Noncontrolling interests

 

 

4,026

 

 

4,380

 

Total stockholders’ equity

 

 

180,417

 

 

137,390

 

Total liabilities and stockholders’ equity

 

$

199,622

 

$

154,246

 

 

See accompanying notes to condensed consolidated financial statements.

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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, 

 

 

 

 

2017

    

2016

 

2017

    

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

28,168

 

$

21,872

 

$

72,341

 

$

61,080

 

 

Cost of revenue

 

 

17,035

 

 

14,294

 

 

47,664

 

 

42,222

 

 

Gross profit

 

 

11,133

 

 

7,578

 

 

24,677

 

 

18,858

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

4,484

 

 

3,313

 

 

12,219

 

 

10,106

 

 

Research and development

 

 

1,410

 

 

1,566

 

 

3,553

 

 

4,419

 

 

Restructuring charge

 

 

 —

 

 

 —

 

 

 —

 

 

226

 

 

Total operating expenses

 

 

5,894

 

 

4,879

 

 

15,772

 

 

14,751

 

 

Income from operations

 

 

5,239

 

 

2,699

 

 

8,905

 

 

4,107

 

 

Interest income, net

 

 

122

 

 

105

 

 

334

 

 

303

 

 

Equity in loss of unconsolidated joint ventures

 

 

(266)

 

 

(581)

 

 

(1,387)

 

 

(1,437)

 

 

Other (expense) income, net

 

 

(349)

 

 

164

 

 

(403)

 

 

682

 

 

Income before provision for income taxes

 

 

4,746

 

 

2,387

 

 

7,449

 

 

3,655

 

 

Provision for income taxes

 

 

181

 

 

176

 

 

661

 

 

713

 

 

Net income

 

 

4,565

 

 

2,211

 

 

6,788

 

 

2,942

 

 

Less: Net (income) loss attributable to noncontrolling interests

 

 

(146)

 

 

18

 

 

226

 

 

480

 

 

Net income attributable to AXT, Inc.

 

$

4,419

 

$

2,229

 

$

7,014

 

$

3,422

 

 

Net income attributable to AXT, Inc. per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.11

 

$

0.07

 

$

0.19

 

$

0.10

 

 

Diluted

 

$

0.11

 

$

0.07

 

$

0.18

 

$

0.10

 

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

38,499

 

 

32,110

 

 

36,999

 

 

32,043

 

 

Diluted

 

 

40,095

 

 

33,138

 

 

38,469

 

 

32,615

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

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AXT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 

(Unaudited, in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2017

    

2016

    

2017

    

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

4,565

 

$

2,211

 

$

6,788

 

$

2,942

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in foreign currency translation gain (loss), net of tax

 

 

1,135

 

 

(233)

 

 

2,457

 

 

(1,801)

 

Change in unrealized gain (loss) on available-for-sale investments, net of tax

 

 

27

 

 

(112)

 

 

(98)

 

 

(253)

 

Total other comprehensive income (loss), net of tax

 

 

1,162

 

 

(345)

 

 

2,359

 

 

(2,054)

 

Comprehensive income

 

 

5,727

 

 

1,866

 

 

9,147

 

 

888

 

Less: Comprehensive (income) loss attributable to noncontrolling interests

 

 

(326)

 

 

48

 

 

(111)

 

 

681

 

Comprehensive income attributable to AXT, Inc.

 

$

5,401

 

$

1,914

 

$

9,036

 

$

1,569

 

 

See accompanying notes to condensed consolidated financial statements.

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AXT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30, 

 

 

    

2017

    

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

6,788

 

$

2,942

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

3,361

 

 

3,620

 

Amortization of marketable securities premium

 

 

124

 

 

85

 

Impairment charge on equity investee

 

 

313

 

 

 —

 

Stock-based compensation

 

 

961

 

 

789

 

Realized gain on sale of available-for-sale securities

 

 

(77)

 

 

(429)

 

Gain on disposal of equipment

 

 

 —

 

 

(5)

 

Loss from equity method investments, net

 

 

1,074

 

 

1,437

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(6,206)

 

 

(72)

 

Inventories

 

 

(66)

 

 

(1,092)

 

Prepaid expenses and other current assets

 

 

(587)

 

 

(1,259)

 

Other assets

 

 

64

 

 

435

 

Accounts payable

 

 

2,589

 

 

949

 

Accrued liabilities

 

 

(107)

*  

 

(1,301)

*

Other long-term liabilities, including royalties

 

 

(241)

 

 

(591)

 

Net cash provided by operating activities

 

 

7,990

 

 

5,508

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of equipment

 

 

(16,557)

 

 

(2,200)

 

Proceeds from sale of equipment

 

 

 —

 

 

35

 

Purchases of available-for-sale securities

 

 

(26,093)

 

 

(10,784)

 

Proceeds from sales and maturities of available-for-sale securities

 

 

13,310

 

 

12,316

 

Repayment of related party notes receivable

 

 

108

 

 

 —

 

Net cash used in investing activities

 

 

(29,232)

 

 

(633)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from issuance of common stock and options exercised, net of issuance costs

 

 

33,384

 

 

428

 

Dividends paid by joint ventures to their minority shareholders

 

 

(465)

 

 

(39)

 

Net cash provided by financing activities

 

 

32,919

 

 

389

 

Effect of exchange rate changes on cash and cash equivalents

 

 

249

 

 

(478)

 

Net increase in cash and cash equivalents

 

 

11,926

 

 

4,786

 

Cash and cash equivalents at the beginning of the period

 

 

36,152

 

 

24,875

 

Cash and cash equivalents at the end of the period

 

$

48,078

 

$

29,661

 


* Dividend accrued but not paid by one of our consolidated subsidiaries of $521 and $520 was included in accrued liabilities as of September 30, 2017 and September 30, 2016, respectively.

 

See accompanying notes to condensed consolidated financial statements.

 

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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 this interim quarterly financial report 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.

 

Certain reclassifications have been made to prior periods’ financial statements to conform to the current period presentation. These reclassifications did not result in any change in previously reported net income or total assets.

 

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 for the three and nine months ended September 30, 2017 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 2016 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on February 27, 2017 and our quarterly reports on Form 10-Q for the three months ended March 31, 2017 and June 30, 2017 filed with the SEC on May 8, 2017 and August 4, 2017, respectively.  

 

The condensed consolidated financial statements include the accounts of AXT, our wholly-owned subsidiary, Beijing Tongmei Xtal Technology Co., Ltd., and our majority-owned, or significantly controlled subsidiaries, Beijing JiYa Semiconductor Material Co., Ltd., Nanjing JinMei Gallium Co., Ltd. and Beijing BoYu Semiconductor Vessel Craftwork Technology Co., Ltd. All significant inter‑company accounts and transactions have been eliminated. Investments in business entities in which we do not have controlling interests, 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 partially-owned subsidiaries that we consolidate, we reflect the noncontrolling interest of the portion we do not own on our condensed consolidated balance sheets in stockholders’ equity and in our condensed consolidated statements of operations.

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Note 2. Investments and Fair Value Measurements

 

Our cash and cash equivalents consist of cash and instruments with original maturities of less than three months. Our investments consist of instruments with original maturities of more than three months.  As of September 30, 2017 and December 31, 2016, our cash, cash equivalents and investments are classified as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

 

December 31, 2016

 

 

    

 

 

    

Gross

    

Gross

    

 

 

    

 

 

    

Gross

    

Gross

    

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

    

Cost

    

Gain

    

(Loss)

    

Value

    

Cost

    

Gain

    

(Loss)

    

Value

 

Classified as:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

47,054

 

$

 —

 

$

 —

 

$

47,054

 

$

23,948

 

$

 —

 

$

 —

 

$

23,948

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit 1

 

 

1,024

 

 

 —

 

 

 —

 

 

1,024

 

 

12,204

 

 

 —

 

 

 —

 

 

12,204

 

Total cash and cash equivalents

 

 

48,078

 

 

 —

 

 

 —

 

 

48,078

 

 

36,152

 

 

 —

 

 

 —

 

 

36,152

 

Investments (available-for-sale):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit 2

 

 

6,618

 

 

 1

 

 

(12)

 

 

6,607

 

 

8,999

 

 

 1

 

 

(20)

 

 

8,980

 

Corporate bonds

 

 

23,644

 

 

 —

 

 

(42)

 

 

23,602

 

 

8,479

 

 

 —

 

 

(47)

 

 

8,432

 

Corporate equity securities

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

48

 

 

111

 

 

 —

 

 

159

 

Total investments

 

 

30,262

 

 

 1

 

 

(54)

 

 

30,209

 

 

17,526

 

 

112

 

 

(67)

 

 

17,571

 

Total cash, cash equivalents and investments

 

$

78,340

 

$

 1

 

$

(54)

 

$

78,287

 

$

53,678

 

$

112

 

$

(67)

 

$

53,723

 

Contractual maturities on investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Due within 1 year 3

 

$

20,549

 

 

 

 

 

 

 

$

20,524

 

$

11,325

 

 

 

 

 

 

 

$

11,415

 

Due after 1 through 5 years 4

 

 

9,713

 

 

 

 

 

 

 

 

9,685

 

 

6,201

 

 

 

 

 

 

 

 

6,156

 

 

 

$

30,262

 

 

 

 

 

 

 

$

30,209

 

$

17,526

 

 

 

 

 

 

 

$

17,571

 


1.

Certificates of deposit with original maturities of less than three months.

2.

Certificates of deposit with original maturities of more than three months.

3.

Classified as “Short-term investments” in our condensed consolidated balance sheets.

4.

Classified as “Long-term investments” in our condensed consolidated balance sheets.

 

 

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. Certificates of deposit and corporate bonds are typically held until maturity. Corporate equity securities have no maturity and may be sold at any time. Our holding of corporate equity securities consists of common stock of GCS Holdings, Inc. (“GHI”) (previously Global Communication Semiconductors, Inc.), a Taiwan publicly-traded company. We began classifying GHI as an available-for-sale security in the second quarter of 2015 when we determined that there was sufficient trading volume in the exchange for the stock to be deemed readily marketable.

 

During the three months ended March 31, 2017, we sold the remainder of our GHI stock; therefore, there were no GHI transactions in the three months ended September 30, 2017.  During the nine months ended September 30, 2017, our cash proceeds from sales of GHI stock were $125,000. Our cost was $48,000 and our gross realized gain from sales of GHI stock was $77,000. As of September 30, 2017, we no longer hold any GHI stock.

 

During the three months ended September 30, 2016, we sold some of our GHI stock and our cash proceeds from sales of available-for-sale-investments were $113,000. Our cost was $29,000 and our gross realized gain from sales of available-for-sale-investments was $84,000. During the nine months ended September 30, 2016, we sold some of our GHI stock and our cash proceeds from sales of available-for-sale investments were $581,000. Our cost was $152,000 and our gross realized gain from sales of available-for-sale investments was $429,000.  

 

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The gross unrealized losses related to our portfolio of available-for-sale securities were primarily due to changes in interest rates and market and credit conditions of the underlying securities. We have determined that the gross unrealized losses on our available-for-sale securities as of September 30, 2017 are temporary in nature. We periodically review 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.

 

A portion of our investments would generate a loss if we sold them on September 30, 2017. The following table summarizes the fair value and gross unrealized losses related to available-for-sale securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of September 30, 2017 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In Loss Position

 

In Loss Position

 

Total In

 

 

 

< 12 months

 

> 12 months

 

Loss Position

 

 

 

 

 

 

Gross

 

 

 

 

Gross

 

 

 

 

Gross

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

As of September 30, 2017

    

Value

    

(Losses)

    

Value

    

(Losses)

    

Value

    

(Losses)

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

$

2,564

 

$

(6)

 

$

2,344

 

$

(6)

 

$

4,908

 

$

(12)

 

Corporate bonds

 

 

23,602

 

 

(42)

 

 

 —

 

 

 —

 

 

23,602

 

 

(42)

 

Total in loss position

 

$

26,166

 

$

(48)

 

$

2,344

 

$

(6)

 

$

28,510

 

$

(54)

 

 

The following table summarizes the fair value and gross unrealized losses related to available-for-sale securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2016 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In Loss Position

 

In Loss Position

 

Total In

 

 

 

< 12 months

 

> 12 months

 

Loss Position

 

 

    

    

 

    

Gross

    

    

 

    

Gross

    

    

 

    

Gross

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

As of December 31, 2016

 

Value

 

(Loss)

 

Value

 

(Loss)

 

Value

 

(Loss)

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

$

5,211

 

$

(20)

 

$

1,200

 

$

 —

 

$

6,411

 

$

(20)

 

Corporate bonds

 

 

5,037

 

 

(35)

 

 

3,395

 

 

(12)

 

 

8,432

 

 

(47)

 

Total in loss position

 

$

10,248

 

$

(55)

 

$

4,595

 

$

(12)

 

$

14,843

 

$

(67)

 

 

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 7). The investment balances for all of these companies, including minority investments indirectly in privately-held companies made by our consolidated subsidiaries, are accounted for under the equity method and included in “Other assets” in the condensed consolidated balance sheets and totaled $10.1 million and $11.3 million as of September 30, 2017 and December 31, 2016, respectively. As of September 30, 2017, there were seven companies accounted for under the equity method. There were no impairment charges in the three months ended September 30, 2017.  The nine months ended September 30, 2017 include an impairment charge of $313,000 for one of the gallium companies. During the first quarter of 2017, management determined that it is unlikely that this company will recover from the difficult pricing environment and we had written the investment down to zero.  We had no impairment charges for the three and nine months ended September 30, 2016.

 

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Fair Value Measurements

 

We invest primarily in money market accounts, certificates of deposits, corporate bonds and notes, and government securities. Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), establishes three levels of inputs that may be used to measure fair value. Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets of the asset or identical assets. Level 2 instrument valuations are obtained from readily-available, observable pricing sources for comparable instruments. Level 3 instrument valuations are obtained from unobservable inputs in which there is little or no market data, which require us to develop our own assumptions. On a recurring basis, we measure certain financial assets and liabilities at fair value, primarily consisting of our short-term and long-term investments.

 

The type of instrument valued based on quoted market prices in active markets include our money market funds, which are generally classified within Level 1 of the fair value hierarchy. Other than corporate equity securities which are based on quoted market prices and classified as Level 1, we classify our available-for-sale securities including certificates of deposit and corporate bonds as having Level 2 inputs. The valuation techniques used to measure the fair value of these financial instruments having Level 2 inputs were derived from bank statements, quoted market prices, broker or dealer statements or quotations, or alternative pricing sources with reasonable levels of price transparency.

 

We place short-term foreign currency hedges that are intended to offset the potential cash exposure related to fluctuations in the exchange rate between the United States dollar and Japanese Yen. We measure the fair value of these foreign currency hedges at each month end and quarter end using current exchange rates and in accordance with generally accepted accounting principles. At quarter end any foreign currency hedges not settled are netted in “Accrued liabilities” on the condensed consolidated balance sheet and classified as Level 3 assets and liabilities. As of September 30, 2017 the net change in fair value from the placement of the hedge to settlement at each month end during the quarter had a de minimis impact to the consolidated results.

 

There were no changes in valuation techniques or related inputs in the three and nine months ended September 30, 2017. There have been no transfers between fair value measurements levels during the three and nine months ended September 30, 2017.

 

The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2017 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Quoted Prices in

    

 

 

 

Significant

 

 

 

 

 

 

Active Markets of

 

Significant Other

 

Unobservable

 

 

 

Balance as of

 

Identical Assets

 

Observable Inputs

 

Inputs

 

 

    

September 30, 2017

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents and investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

$

7,631

 

$

 —

 

$

7,631

 

$

 —

 

Corporate bonds

 

 

23,602

 

 

 —

 

 

23,602

 

 

 —

 

Total

 

$

31,233

 

$

 —

 

$

31,233

 

$

 —

 

 

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The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2016 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Quoted Prices in

    

 

 

 

Significant

 

 

 

 

 

 

Active Markets of

 

Significant Other

 

Unobservable

 

 

 

Balance as of

 

Identical Assets

 

Observable Inputs

 

Inputs

 

 

    

December 31, 2016

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents and investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

$

21,184

 

$

 —

 

$

21,184

 

$

 —

 

Corporate bonds

 

 

8,432

 

 

 —

 

 

8,432

 

 

 —

 

Corporate equity securities

 

 

159

 

 

159

 

 

 —

 

 

 —

 

Total

 

$

29,775

 

$

159

 

$

29,616

 

$

 —

 

 

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 investments in privately-held companies accounted for by the equity or cost method (See Note 7). There were no impairment charges in the three months ended September 30, 2017.  The nine months ended September 30, 2017 include an impairment charge of $313,000 for one of the gallium companies. During the first quarter of 2017, management determined that it is unlikely that this company will recover from the difficult pricing environment and we had written the investment down to zero. Except as mentioned, we did not record other-than-temporary impairment charges for the remainder of these investments during the three and nine months ended September 30, 2017 and 2016.

 

Note 3. Inventories

 

The components of inventories are summarized below (in thousands):

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

    

2017

    

2016

 

Inventories:

 

 

 

 

 

 

 

Raw materials

 

$

21,000

 

$

17,485

 

Work in process

 

 

17,178

 

 

20,410

 

Finished goods

 

 

2,590

 

 

2,257

 

 

 

$

40,768

 

$

40,152

 

 

As of September 30, 2017 and December 31, 2016, carrying values of inventories were net of inventory reserves of $12.9 million and $12.0 million, respectively, for excess and obsolete inventory and $263,000 and $254,000, respectively, for lower of cost or net realizable value reserves. 

 

Note 4. Property, Plant and Equipment, Net

 

The components of our property, plant and equipment are summarized below (in thousands):

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

 

2017

 

2016

 

Property, plant and equipment:

 

 

 

 

 

 

 

Machinery and equipment, at cost

 

$

42,970

 

$

41,254

 

Less: accumulated depreciation and amortization

 

 

(40,017)

 

 

(37,311)

 

Building, at cost

 

 

31,327

 

 

29,600

 

Less: accumulated depreciation and amortization

 

 

(10,951)

 

 

(9,654)

 

Leasehold improvements, at cost

 

 

5,351

 

 

4,942

 

Less: accumulated depreciation and amortization

 

 

(4,093)

 

 

(3,608)

 

Construction in progress

 

 

17,668

 

 

2,582

 

 

 

$

42,255

 

$

27,805

 

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As of September 30, 2017, the balance of construction in process was $17.7 million of which $13.6 million was from our buildings in our new Dingxing location, $1.5 million was for manufacturing equipment purchases and $2.6 million was from our construction in process for our other consolidated subsidiaries.

 

 

Note 5. Accrued Liabilities

 

The components of accrued liabilities are summarized below (in thousands):

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

    

2017

    

2016

 

Preferred stock dividends payable

 

$

2,901

 

$

2,901

 

Accrued compensation and related charges

 

 

1,449

 

 

2,610

 

Advance from customers

 

 

771

 

 

238

 

Current portion of royalty payments

 

 

575

 

 

575

 

Accrued professional services

 

 

541

 

 

583

 

Dividends payable by consolidated joint ventures

 

 

521

 

 

499

 

Accrued income taxes

 

 

330

 

 

203

 

Accrued product warranty

 

 

138

 

 

251

 

Other accrued liabilities

 

 

2,058

 

 

1,400

 

 

 

$

9,284

 

$

9,260

 

 

 

Note 6. Related Party Transactions

 

In August 2011, our consolidated joint venture, Beijing JiYa Semiconductor Material Co., Ltd. (“JiYa”), entered into a non-interest bearing note agreement in the amount of $1.6 million for a loan to one of its equity investment entities. The original term of the loan was for two years and ten months with three periodic principal payments required.  After various amendments to the terms of the note, in December 2013, the parties agreed to delay all principal repayment until December 2017.  In December 2016, we determined that this receivable was in substance an investment and began re-classifying this long term loan from “Related party notes receivable – long-term” to “Other assets” in our consolidated balance sheets. As of September 30, 2017 and December 31, 2016, we included $1.2 million and $1.4 million in “Other assets” in our condensed consolidated balance sheets, respectively.

 

JiYa also purchases raw materials from one of its equity investment entities for production in the ordinary course of business. As of September 30, 2017 and December 31, 2016, amounts payable of $1.8 million and $1.8 million, respectively, were included in “Accounts payable” in our condensed consolidated balance sheets.